jonathan: from new york city for our viewers worldwide, i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, another solid jobs report in line with the federal reserve's outlook for gradual hikes. trade tensions building. larry kudlow says the president will not back off china. and china stepping in to support its currency, closing in on a record weekly losing streak. we begin with the big issue, another solid jobs report. >> this truly is solid as a rock. >> you had a good jobs report today. >> the big surprise this year is that the amount of jobs added

per month on average is accelerating. the whole theme over the past few years was as you get later in the cycle, that job growth will go down towards 100,000. and it has jumped from last year. that is the big surprise this year. >> we are eventually going to have to see a ratcheting down of job growth to around 100,000, 125,000 a month given our demographics and what we are doing with the immigration policy, given aging of the workforce. >> we are continuing to see folks pulled from the sideline. if you look at the underemployment rate, it has dipped down to 7.5% but there is still some slack. >> at some point, we will start to downshift to 120,000 jobs. you are just running out of available labor force. >> there are still a lot of americans out there who could come back into the labor force. i like that. i think our potential to grow is very strong. and with the right incentives, i think we will get them back working. jonathan: joining me around the table is mary bowers,senior portfolio manager at hsbc global asset management, krishna

memani, chief investment officer at oppenheimer funds, plus, coming to us from minneapolis is bryce doty, senior portfolio manager at sit investment associates. mary, i want to begin with you and get your thoughts on the payrolls report. it feels like a bit of a snoozefest. not because it is bad, but because it is good and we are used to that. mary: the whole week has felt like a bit of a snoozefest. everything kind of seemed to come in line. krishna: that has been the case for quite some time. the economy continues to do well, employment is doing well. it is all because of the stimulus that we have had through the system. if there was not trade, there would not be much exciting in the markets to begin with. jonathan: we will get to the trade story in a moment. bryce, your opinion on what's happening? data supports the theory there is some slack out there. this is an economy that can generate 200,000 payroll growth every single month thereabouts, and there is no real sign of inflation pressure. bryce: i think the slack story is the big thing. and the big surprise in the number, for me, was the drop of

the underemployment rate. it came down from 7.8% to 7.5%. the last time it was that low we were at the height of the tech boom. that's an indication maybe the slack is running out. that number includes people that are part-time, wish they were full-time, or people -- they want a job but have given up looking. now that has come down so much, we might actually start to see some wage inflation. the last time it got this low, wage inflation accelerated to 4%. we are nowhere close to that but maybe now we will start to see some uptick in the wage growth. jonathan: that hawkishness is a lot lower than people believe it to be. krishna: yes, but i think this whole concept of the slack in the system, there is a case to be made that may not be true. just look at the case of japan, where they don't have that much slack in the system. despite that, the unemployment rate is lower than what it is in the u.s.

with that, wages are not going up. there may be something slightly different this time around. jonathan: we have to plug all of this into the treasury market. does this change anything for the team at hsbc? mary: not so far. in terms of credit and high-yield, when i came on last time, we talked about how well u.s. high-yield have held up. we haven't been changing too much of what we have been doing. if anything, maybe a little bit on the emerging markets side, but for the u.s., not seeing too much to move us. jonathan: just as it relates to trade, bryce, once again we have a week dominating the news flow. it is the trade story. i have asked several investors on the buy side, will it really change anything they have done this year in terms of allocating base capital in terms of how the story has evolved? have you? bryce: i think the trade story is the gift that keeps on giving. every time there is rhetoric out there and bonds falter, corporate bonds falter, you can take advantage of that. it seems like the bark is worse than the bite.

when you actually find details, it is not as big a deal economically as what maybe people would like you to believe. so i think this volatility has actually created some trade opportunities for us. while i am not really a fan of it and wish we did not have to worry about the next tariff tweet, it is still something you have to be aware of and can take advantage of. jonathan: bryce, talk to me about the trading opportunities. what are they? it will be a flight to quality. you will see the 10 year yield go down. it was in the 2.80's. that is a great spot to short 10 year treasury futures. we have been primarily shorting two and five-year futures and hedging with arise etf and things like that, and it has worked out very will. you can be nimble in those types of trades. the corporate spreads seem to widen out when that happens as the curve flattens from these

different little tantrums that come out between us and china. you can take advantage of that and see some sort of breakthrough. any kind of breakthrough or relief on the trade front and you can see the curve steepen back out. it creates a trading range. jonathan: do you see a catalyst for sustainable steepening in the yield curve at all? krishna: no, sustainable steepening will come after the recession or just before the recession, when people expect the federal reserve to get into a substantial easing mode. until then, nothing has really changed. i think in terms of trading opportunities, the thing that has cheapened the most is basically emerging market assets across the board. so the contrast between u.s. high-yield or u.s. equities is relative to emerging-market equities or emerging-market fx or credit. it's extraordinary. and if you have any bit of faith that the trade issue will get resolved without too much trouble, the value of these assets is extraordinary.

jonathan: mary, the way people are thinking about it the last few months, the u.s. was the best house on the street. the economy look strong and everything else looks weak. buy america. do you see as entering a bit of an inflation point where you can get a policy tailwind from everywhere except the united states? mary: exactly. when i came on the show, we saw a decent amount of spread widening in a june in emerging markets versus u.s. high-yield. we haven't been jumping up and down about valuations in u.s. high-yield. they have been in quite a tight range this year and we expect that to continue. when emerging-market high-yield bonds widened out close to 150 basis points versus u.s., we started to cover some of that underweight. now, we have not gone fully to neutral because besides trade, there are a couple of other things in emerging markets where we see some potential for volatility, but we tend to agree there is possibly some value in emerging markets. jonathan: i'm trying to work out

china, they face two sets of forces. internally, deleveraging, externally, the trade story is hitting them. can they absorb those or do they capitulate on the domestic story? are we seeing signs of that already? krishna: they are desperately trying to balance both of those stories. the real challenge is to support the domestic economy without getting the yuan depreciating or getting labeled as a currency manipulator. and they have tools to deal with it, they are trying to. but i think when the push comes to shove, if they have to choose between external aspects and maintaining economic growth, i think they will take economic growth. they are not there just yet fully. for that, growth has to slow down somewhat. if it gets closer to 6%, we will see all of that play out quite nicely. jonathan: i spoke to larry kudlow earlier today and he was quite clear that he thinks signs suggest that china is a lousy investment.

>> they have stopped defending the yuan, and they think it is going to help offset the u.s. effort to get rid of unfair trading. some of the currency though i think is just money leaving china because it is a lousy investment. and if that continues, that will really damage the chinese economy. jonathan: what you think of that? bryce: i think he needs to keep along that line of rhetoric. you know, you have to play -- if you are going to play hardball, you have to stick with it. i think china is in a difficult spot. you know, we have -- they have a lot more to lose than we do. if the eu kind of joins us in ganging up on them, they could get even worse. so i understand larry's view and the way he is communicating. in the end, they really do want trade barriers reduced everywhere and increased trade everywhere. so it comes down to this rhetoric that will sound tougher and tougher and tougher.

trump escalates everything. he wants focus on issues. it reminds me -- it makes me think of a politician, what would they do if they were not really concerned about getting reelected? so it kind of catches investors off guard and they don't expect this really hard talk, for especially larry to come out and be that strong on china. but i think that will just continue. jonathan: krishna? krishna: i would say larry kudlow and the administration are wrong on all points. let me elaborate. first, if you want to reduce trade deficit, first you have to reduce your fiscal deficit. that is the primary source or the primary driver of the trade deficit widening. that is one. two, in terms of pressuring china, china is a controlled economy. they can get it down a stimulus path. they have a lot of flexibility on that. they did that in 2015, 2016, and can do it again. the u.s., we just shot our wad with respect to fiscal stimulus, so our flexibility has gone down

and our growth rate is relatively modest. so we have more to lose on that front then them. so we just have to be very careful. i understand why they would want to do that, but tariffs are the worst thing you can do to address your trade issue. jonathan: that's the view from krishna memani from oppenheimer funds. you are sticking with me alongside mary bowers from hsbc global asset management and bryce doty from sit investment associates. coming up, the auction block. u.s. treasury boosting long-term debt sales to the highest level since 2010. that conversation is next. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now, where we start in japan amid a volatile week. a 10-year debt auction saw an average bid to cover ratio and pricing that was weak. the difference widens to the most in two years. elsewhere over in europe, daimler injected life into the region for the sleepy primary bond market with a 3 billion euro deal a week after reporting sales that missed the lowest estimates. it tighten prices across the three branches by as much as 17 basis points. and finally, here in the united states, the treasury said it will raise long-term debt issuance to $78 billion this quarter. it is also launching a new two-month bill. it is the third consecutive quarterly increase. with me to discuss here in new york is mary bowers from hsbc global asset management, krishna memani from oppenheimer funds, and bryce doty from sit investment associates. guys, we caught up with scott minerd with guggenheim. take a listen to what he has to say about increased treasury refunding and what it meant for

crowding out other assets. take a listen. >> i think we are getting to the point where we are getting a crowding out effect, where treasury borrowings are becoming so large it is making it more and more difficult for other borrowers to get access to capital. jonathan: mary, are we at that point? mary: we have an opposite issue. the strong technical we have had, frankly, has been the dearth of supply. we have not seen an issue with issuers coming to market yet, and that is one of the reasons we think u.s. high-yield has done such a good job this year. jonathan: to mary's point, supply is supporting high-yield? we have not seen a crowding out effect from the treasury yet. krishna: he saw a bit of crowding out effect in the investment grade market in the first half of this year where spreads widened meaningfully. but i would go back to things i have said on this show before. figuring out where rates are

moving based on just treasury supply is looking at one driver in the market. it really has a lot to do with growth, it has to do with trade deficit and corresponding capital flows that are coming into the u.s. so i think focusing just on one number does not make much sense. i think scott's point is a good one, which is the risk of treasury yields going up is substantial. you know, part of it might be supply but a lot of it has to do with the fact that the u.s. economy is doing much better and in the near term, it might go up. longer-term, the structural issues that we have faced in the past, we still face them today. jonathan: i was speaking to blackrock earlier, to get there with you on this -- to get their view on this concept. the idea they put forward to me with the treasury issuance on the front end, we might be reaching the point of exhaustion where you can only stomach so much.

do you think we are close to that point? bryce: i think we are getting there. this next week, the fed will be participating in the auctions, but they will only be buying $10 billion of reinvestment off the balance sheet versus $18 billion the previous time we had three 10's and a 30 year auction. the next two months, the fed will be buying zero treasuries in the auctions. that is going to add some more pressure. the t-bills, the market will start choking on the volume. i think what could solve the issue is if the fed was not paying such a high rate of interest on excess reserves. so the t-bill rate stays just below the 1.95% that banks are earning because otherwise they would naturally move into t-bills rather than hold onto cash. so that is the exit strategy, or the bailout, the treasury's problem of finding a place for all of these t-bills. but until they do that, the market will continue to choke on them.

this huge almost $1 trillion issuance of t-bills this year makes me think of trying to bail out your boat but moving water from one end to the other. it doesn't seem sustainable. jonathan: the treasury has not had a problem coming to market. the other dynamic is the competition for capital. i keep asking the question, a lot of people come on this program and say, we have a real competition for capital now. cash has become an asset class. does 2% really get it done? mary: i mean, if you think about the inflation rate and holding cash, it is not unattractive to hold to your treasuries here versus some parts of the market. but if you are going to try to earn an income and earn something off your investments, you probably still need to try to reinvest at a higher rate than that. jonathan: krishna? krishna: 2% does not sound a lot, but you are not investing in treasuries to get rich.

that is point one. point two, 2% is not high relative to 3% for locking in your money for 10 years, is meaningfully higher. so the flatness of the curve certainly gets people attracted to the front end of the market. jonathan: and there's a lot of other people that are parked in the front-end of the market because want to be in a highly liquid security, ready to allocate capital when things turn over. i have been hearing that argument for a long, long time. and things are not turning over. high-yield credit looks really strong, i am looking at a load of funds being raised to allocate capital into distressed debt when the time comes. no problem rate in the money. how long are these people going to be waiting? krishna: that tells you where the markets are going. because of that cash waiting on the sideline, waiting for markets to correct in a significant way, that is why we are where we are. the assets are relatively rich, this money is waiting to be invested. but they will wait for a long time.

jonathan: krishna memani alongside mary bowers from hsbc global asset management and bryce doty from sit investment associates. still ahead, the final spread, the week ahead, featuring the latest round of data featuring u.s. inflation and china trade. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." it is time for the final spread. coming up in the next week, the first phase of u.s. sanctions on iran are scheduled to take effect. plus, we get the summary of opinions from the boj meeting, another round of earnings and economic data including a reading u.s. inflation, u.k. gdp, and china trade and foreign reserve numbers will be very much in focus. everyone around the table is still with me. mary bowers from hsbc global asset management, krishna memani from oppenheimer funds, and bryce doty from sit investment

associates. krishna, on your radar next week? krishna: ppi, cpi. effectively learning about the u.s. inflation outlook. don't expect anything new on that front, but it would be a confirmation that despite relatively good growth, inflation is not picking up measurably. mary: we are watching a lot of the same you are. as well, we are right in the heart of high-yield earnings, which so far have been pretty well received. we will continue to watch that. jonathan: as you look at what is happening in high-yield right now, to what extent has the outperformance over the last couple of months come from the scarcity of supply and the fundamentals, the earnings of some of these companies? mary: it is both, really. and the technical with the low supply, that does feel kind of like a weak reason to hold high-yield. if we were to see a return to supply, given we have not seen a return of inflows, they could see some spread widening. but as we just alluded to earlier in this show, everyone is waiting to buy the debt. so the spreads continue to be pretty range bound. jonathan: it is funny. i hate the cliched terms, cash

on the sidelines. but in fixed income, the risk is a lot of cash sitting there and waiting for a downturn that has not come for quite a while. bryce: right. i think there is a lot of nervousness there. this year has been pretty terrible for bonds. you can understand their skittishness. as far as the data next week, we might actually be focusing on the ppi more than cpi. that isn't typical, but the ppi number in food and energy has risen all the way up to 2.8% year-over-year. so if you combine that with loss of slack in the labor market and those are the two components you need in order to see translation accelerate again. it has almost moved up from no inflation years ago to 2% now. we need to see the manufacturing prices and labor costs go up before cpi goes up and it will probably not be significant until year-end. maybe after that, all the cash on the sidelines will come back in if we see the 10 year yield

get up a little higher. that will be what it takes to entice them to come back into the market. jonathan: krishna, really quickly, that focus on ppi over cpi? krishna: the point that bryce is making is a good one. having said that, i think the -- our expectation remains that inflation is very subdued. jonathan: guys, you know what time it is. it is time for the final round, the rapidfire round, where i ask quick final questions and get some quick answers. who will blink first in the $1 trillion trade war emerging between the united states and china? the u.s. or china? mary: china. krishna: both. bryce: china. jonathan: the bank of england's -- we did not even mention it this week -- we have a rate hike. is the next move from the bank of england a rate hike or a rate cut? mary: a rate hike, but next year. krishna: nothing. jonathan: stay neutral forever? krishna: they should not have raised rates this time.

bryce: they have to go higher. they need some cushion in case brexit goes poorly. jonathan: really, really, quickly, what do we see first on the 10-year treasury? haven't done this for a while. around 3%, 3.5%, or 2.5%? mary: 2.50. krishna: 2.50. bryce: 3.50. jonathan: i did not expect a consensus, and we almost did. great to catch up with you. mary bowers, krishna memani and bryce doty. from new york for our audience worldwide, that does it for us. see you next friday. this was "bloomberg real yield." this is bloomberg tv. ♪

alix: fuel standards under attack. the trump administration wants to freeze miles per gallon targets at 2020 levels and wipe out california's electric vehicle mandate. the tariff effect. companies from steel to hogs to grain suffer from potential trade wars. the impact on producers and industrials. u.s. to iran, it's your move. iran preps for renewal of u.s. economic sanctions, opec plus ramps up production, and violence erupts between yemen and saudi arabia. ♪ alix: i'm alix steel, and welcome to "bloomberg commodities edge." it's 30 minutes focused on the companies, the physical assets , and the trading behind the hottest commodities with