>> from new york city, this is bloomberg real yield. >> coming up, another jobs report in line with the federal reserve outlook. trade tension building. the president will not back off china. china stepping in to support a currency closing in on a record weekly losing streak. we begin with a big issue, another jobs report. this truly is a solid report. the big surprise is that the

amount of jobs added per month on average is accelerated. the whole theme was over last years later in the cycle. the job growth would go down toward 100,000. it jumped from last year. that is the big surprise. are going to have to see a ratcheting down of job growth to round 125,000 a month. given our demographics. given what we are doing with our policy. we are continuing to see folks who are being pulled in from the sidelines. theou take a look at underemployment rates, down to 7.5%. >> at some point, we will downshift to 120,000 jobs. >> there are still a lot of americans who could come back into the labor force. i like that. i think our potential to grow is very strong. with the right incentive, we will get them back working. jonathan: joining me is the senior portfolio manager.

plus, from minneapolis, senior portfolio manager. i want to begin with you. it feels like ace news fast. snooze fest. >> it is a heavy macro week. everything seemed to continue to come in line. >> that has been the case for some time. the economy continues to do a lot of unemployment. it is doing well. it is because of the stimulus that we have had passing through the system. trade, therenot would not be much excitement in the market to begin with. opinion on what is happening right now. the data supports the idea, the theory that there is still some slack. there is no real sign of inflation pressure. >> i think this lack story is a

big thing. a big surprise in the number was the drop of the underemployment rate. it came down from 7.8 to 7.5. the last time has gone that low. the height of the tech boom. that is an indication the flak is running out. that number includes the ball that are part-time. full-time. people who want a job but have given up looking. down so much, we might actually see some wage inflation. low, wageit got this inflation accelerated to 4%. we are nowhere close to that. seee now, we will start to some uptick in the wage growth. jonathan: that is a whole lot lower than people believe it to be. >> yes. i think the whole concept of the slack in the system, there is a case to be made that there may not be true. look at the case of japan. they don't have that much slack in the system. despite that, their employment

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: does is change anything? >> not so far. no. in terms of credit and about how, we talked well u.s. high-yield has held in the rehab not been changing too much what we have been doing. if anything, maybe a little bit on the emerging markets side. related to the u.s., not really too much. jonathan: as it relates to trade, we have a weak dominating the news flow. the trade story. several investors on the bright side. would it change anything they have done this year? based on how the trade story has evolved. story isk the trade the gift that keeps on giving. anytime there is some rhetoric out there and it is on fault or a corporate bond fault, you can

take advantage of that. it seems like the bark is always worse than the bike. when you find details, it is not as big of a deal economically as what people would like you to believe. i think the volatility has created some train -- trading opportunities. i'm not a fan of it. still something you have to be aware of. you can take advantage of. jonathan: talk to me about the opportunities. >> flight to quality. the 10 year yield go down in the two 80's. that is a great spot to short 10 year treasury futures. we primarily shorting to and five-year futures. hedging with a rise etf. it has worked out very well. you can be very nimble in those types of trades. the corporate spreads seem to widen out when that happens. 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, or relief on the trade front. is great trading range. >> did you see a catalyst for sustainable yield curve? >> i think this sustainable steepening in the yield curve 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 changed. in terms of trading opportunities, the best thing -- the thing that is cheap and the most is emerging-market assets across the board. the contrast between u.s. high-yield or u.s. equities relative to emerging-market equities or emerging-market fx emma or emerging-market credit is extraordinary. if you have any bit of faith that the trade issue is going to get resolved, without too much

trouble, the value in these assets is extraordinary. arethan: the way people thinking about it is the u.s. was the best house in the street. see it centering a bit of an inflation point where you could get a policy tailwind from everywhere else except the united states? >> exactly. when i came on the show, we saudis and amount of spread widening in june in emerging markets versus u.s. high-yield. been jumping up and down about valuations in u.s. high-yield tiered they have been in a -- a tight range this year. we expect that to continue. widenedh-yield bonds out to close to 150 basis point versus u.s., we started to cover some of that underweight. tohave not gone fully neutral. besides trade, there are a couple of other things in emerging markets to see some potential for volatility, we do tend to agree that there is some value possibly in emerging markets.

jonathan: i'm trying to work out what is happening with china. the phase two sets of forces. hitting, atory is the same time, can they absorb those two thrushes? think they are desperately trying to balance both of those stories. the real challenge is to support the domestic economy without getting the depreciating significantly. and getting labeled as a currency manipulator. they have tools to deal with it. they are trying desperately. when push comes to shove, if they have to choose between one external aspects and maintaining economic growth, i think they will pick economic growth. they are not there just yet fully. slow down to somewhat. if it gets closer to 6%, we will see all of that flair out quite nicely. jonathan: i spoke to larry earlier today. he was quite clear that he

thinks the science suggest china is a lousy investment. >> they think is going to help offset the u.s. effort to get rid of their trading. ise of the currency fall, it just money leaving china. it has allowed the investment. if that continues, that will really damage the chinese economy. >> what do you think of that? >> i think he needs to keep along that line of rhetoric. you have to stick with it. china is in a difficult spot. they have a lot more to lose than we do. us in getting up on them i think it can get worse. view andand larry's the way he is communicating it. in the end, they do want trade barriers reduced everywhere and increased trade everywhere. it comes down to this rhetoric, it will sound tougher and tougher. trump escalates everything.

he wants focus on issues. it makes me think of a politician that, what would they do if they were not concerned about getting reelected. it catches investors off guard. they don't expect this hard talk or larry to come out and be that strong. yet, i think that is going to continue. i think, i would say larry and trump administration are wrong on all points. if you really want to reduce trade deficit, the first thing you have to do is reduce your fiscal deficit. --t is the primary source of the primary driver of the trade deficit. of pressuringms china, you have to remember, china is a controlled economy. stimulusget it down a path. they have a lot of flexibility on that. they have done that in 15 and 16. a can do that again. the u.s., we just shot our wide

with fiscal stimulus. our flexibility has gone down. we have more to lose on that front then them. we just have to be very careful. i understand why they would want to do that. tariffs is the worst thing that they can do to express your trade issue. jonathan: sticking with me. and bryce. coming up, the auction block, u.s. treasury boosting the highest level since 2010. the conversation next. this is bloomberg real yield. ♪

jonathan: this is bloomberg real yield. to the auction block now. we start in japan. amid a volatile week. 10-year debt auction. pricing that was weak. the difference between the average and low's price widened for the most in two years. elsewhere, in europe, live into that region. sleepy market with a euro triple crunch deal. they missed the lowest estimate. as much as 17 basis points. finally, in the united states, treasury said it will raise long-term debt issue into $78 billion this quarter. new two-month a bill. the third consecutive quarterly increase. with me is married. christian. and bryce. scott earlierith this week. take a listen to what we has to say about increased treasury

refunding. that we are getting to the point where we are getting to a crowding out effect here it where treasury barns are it isng so large that making it more and more difficult for other borrowers to get access to capital. jonathan: are we at that point? .> we have an opposite issue the strong technical we have had as supply.n tourist we have not seen an issue with issuers coming to market. yet. that is part of why we think u.s. high-yield has done such a good job. jonathan: supplied scarcity has supported high-yield. >> i have not seen a high crowding effect come. you saw a bit of crowding out effect in the investment rate market. in the first half of this year. think that ick to

have set on this show before, figuring out where rates are moving based on treasury supply is just one driver in the market. it really has a lot to do with growth. to do with trade deficit. and corresponding capital flows that are coming into the u.s.. i think focusing just on one number does not make sense. i think scott's point is a good one. the risk of treasury yields going up. part of it may be supplied. a lot of it has to do with the fact that u.s. economy is doing much better. it may go up. longer-term, the structural issues that we have faith in the past, we still face them today. jonathan: i was speaking to blackrock to get their view. the idea that they put forward to me is the treasury, the issuance, we might be reaching the point of exhaustion where you can only stomach so much. do you think we are close to that point? getting there.re

this next week, the fed will be participating in the auction. buyingey will only be $10 billion of investment off their balance sheet. versus 18 billion in the product -- previous time we have three tens in 30 years. the next two months, the fed will be buying zero treasuries in the auctions. that is going to add some more pressure. the market is going to start choking on that volume. i think what could solve that issue is if the fed was not paying such a high rate on interest and excess reserves. the key bill rate stays just below the 1.95% that banks are earning. woulde otherwise, they move into t-bills rather than hold onto cash. the is the exit strategy or treasury'sthe

problem of having to try and find a place for all these t-bills. until they do that, the market is going to continue to choke on them. huge trillion dollar issue -- makes me trying to think of bailing out your boat but just moving the water from one end of the book to another. it is not seem sustainable. jonathan: so far, the treasury has not had a problem coming to market. the other dynamic as the competition for capital. i keep asking the question, they will say we have a real competition for capital. does 2% really get it done? >> if you think about the inflation rate and holding cash, it is not unattractive to hold to treasuries versus maybe some parts of the market. 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. not sound a lot.

you are not investing in treasuries to get rick -- rich. 2% is not high. relative to 3%, locking your money for 10 years, it is meaningfully high. the flatness of the curve, gets people attracted to front end of the market. peoplen: a lot of other who are part in the front end of the market because they want highly liquid security. ready to allocate capital when things turn over. i have been hearing that time.nt for a long, long things are not turning over. high-yield credit looks really strong. a load of funds being raised. to allocate capital. no problem raising the money. when does the time come? you wherert of tells the markets are going to because of that cash that is waiting on the sidelines, waiting for markets to correct, i think that is why we are where we are. assets are relatively rich.

this money is waiting to be invested. it will wait for a long time. still ahead, the final spread. the week ahead featuring the latest round of data on u.s. inflation. and china's rate. this is bloomberg real yield. ♪

jonathan: this is bloomberg real yield. time for the final spread. the first face of u.s. sanctions on iran. the summary of opinions from the meeting. another round of meetings. including a reading on u.s. inflation. u.k. gdp and china trade and foreign reserve numbers will be very much in focus through the week. everyone around the table still with me. global asset management. and bryce.

on your -- ? is pbi. learning about the outlook, don't expect anything new. that would be a confirmation that, despite the growth, inflation is not picking up. watching a lot of the things that you are. we are right in the heart of high-yield earnings. which so far has been well-received. we will continue to watch the bottom up. jonathan: as you look at what is happening, to what extent has the outperformance come from the stick -- scarcity of supplies? it does, really. the technical with a low supply weak reason to a hold yield, that if we were seeing a return to supply come again we have not seen a return of inflows, that could see some spread widening. as we alluded to earlier, everyone is waiting to buy the debt. the spreads continue to be pre-range bound. jonathan: i hate the cliche

onms on broadway, but cash the sidelines. we have a lot of cash sitting there waiting for a downturn. it has not come for quite a while. >> i think there is a lot of nervousness there. this year has been pretty terrible for bonds. you can understand they are skittish. as far as the data next week, we might be focusing on that more than the cpi. which is not typical. the ppi number, it has risen up to 2.8% year-over-year. lossombine that with some of slack and the labor market. those are the two components you need to see inflation react seven rate again. it has not moved up from a must no inflation to 2%. for it to accelerate again, we need to see the manufacturing prices as well as labor costs go up.efore cpi goes even then, it probably won't be significant until the year and.

after that, all the cash off the sidelines will come back in and we see the 10 year yield get up higher. that will be what it takes to entice them to come back into the market. the point is a really good one. having said that, i think if our expectation remains that inflation is very subdued. jonathan: time for the final round. rapidfire round. i ask you quick questions and get quick answers. who will blink first and the trillion dollar trade war, u.s., or china? >> china. >> both. >> china. jonathan: the bank of england, a rate hike. -- rate hike. is the next move a rate hike or a rate cut? >> rate hike, but next year. >> nothing. >> yes. >> they raise rates this time.

they have to go higher. they need some cushion in case russia goes poorly. jonathan: what do we see first on a 10 year treasury? 350 or 250? >> 250. >> 250. >> 350. jonathan: great to catch up with you. from new york, that does it for us, cnn friday. this was bloomberg real yield, this is bloomberg tv. ♪

>> iran preps for renewal of sanctions. opec ramped up production and violence erupted between yemen and saudi arabia. >> i'm alix steel. welcome to bloomberg commodities edge. the