♪ jonathan: i am jonathan ferro with 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, treasuries dropping, payrolls beating forecasts. wages accelerating. the president readying another round of tariffs on chinese imports, leaving emerging markets on edge and policymakers struggling. we begin with the big issue, another solid jobs report. >> i think this is one of the best numbers ever. i'm an equity guy, i like good

growth. >> if this continues, the fed will have to go two more times this year. >> that will be the market reaction and that is appropriate reaction to these numbers. >> everyone is expecting for the job growth to start to moderate. >> i think if it to solid, the market starts to ask the question. >> 180,000 to 200,000 jobs a month and when you don't, that is when the cycle is probably ending. >> the reason why it is one of the best numbers ever, is we are so late and to still be averaging 200,000 jobs. >> there's a moment where you want to say slow down a little, please. jonathan: joining me are my guests. where is the jobs growth coming from? how do we keep doing this every single month?

>> and seems to be that business services area has been pretty strong. finance has done well recently. we are seeing pick up in construction. that has helped boost the wage numbers because those are still pretty good wage producing jobs. services area has been pretty it continues to tick away steadily. jonathan: there is this nervousness that wage growth is around the corner. there is no business from the treasury market today. your view on whether you think the trend that can begin or a trend that can last? >> i think the trend has begun. you see the lows of a wage growth in 2015. if you look at the trend in average hourly earnings or employment cost indexes, we have been trending steadily higher.

we are nowhere near the highest of 2008 or 2007 which had the average earnings closer to 4%. but the trend is a steady pick up in wage growth. >> thank you for having me back. i think it's interesting, we felt for quite some time the phillips curve is not dead. we think it is flat. it is pretty clear if you do any statistics. as we get low and unemployment rates and keep creating jobs, it is no surprise that wages are starting to pick up. we think that will continue to do so. the risk is, no one has any confidence about how this will translate to broader market inflation. the relationship between inflation and wages has also flattened quite a bit. it is not clear that companies will be able to pass through higher wages to higher prices. jonathan: i think most people will come out of this payrolls report and believe that the september rate hike is now on. what is interesting is the dovish rate pricing through this year and the end of 2019. can you reconcile the trend for the data in the u.s. with market prices going up there next year? >> if you look at the forward rates, they level off early next year. the thinking is, and we agree with this, we are getting a

boost from fiscal stimulus that will give us this growth. we are getting late cycle pickup in inflation. we are looking for inflation numbers to flatten out. the year-over-year comparison is likely to come back down and the pace of growth is likely to slow once the fiscal stimulus has worked its way through. the global economy is softening and that is a headwind for us going forward. jonathan: seemingly the consensus is that yields will go lower, despite all of this, that yields will go lower. pretty much anyone around this table says that to me. i know when speaking with your colleagues, that's not what jpmorgan as a house is looking for. walk me through what you guys are looking for in terms of the direction of treasury yields and the dynamic that takes us there. >> we expect yields to trend higher. i think perhaps there is a short-term dynamic which is yields have been anchored by the trade concerns and growth elsewhere looking somewhat softer. that is one side of the equation. when you look at the strength of the u.s. economy and factor in

the fact that the fed is reducing its balance sheet, we are getting to the point where nets supply by central banks will start becoming a drag on the market, and you factor in the fact that the fed is increased corporate issuance, it is easy to see how we can get the yield pickup. into the end of this year, we think yields will be trading above 3% and we see further upside as 2019 progresses. when you start pricing in what the ecb is likely to do in the boj exiting control. jonathan: yields were close to 2% on a u.s. 10 year, the first week of september. we have a one-month bill that is short of that. we have had a big turnover the last 12 months. >> we have. i would agree with diana. looking backwards we have been short on duration. we remain moderately short. we think the fed will tighten twice this year. i don't think december is a pause. there is a risk of a pause next year. we think the macro and monetary policy factors all point to still higher rates from here.

watching the show, it is interesting to see how many of my colleagues and other firms are getting more bullish on rates. i think they might be a little early. that said, i am not expecting the 10 year to hit four or five anytime soon. it is a question of how high do you go in the threes and when does the rate cycle peak out? jonathan: what is interesting is how comfortable the fed appears to be to invert the yield curve. the new york fed president came out this week and essentially suggest it is not something that would stop him from rising interest rates in inverted the yield curve. if you have a fed that is saying guess what we are comfortable interest rates in inverted the doing this, don't you have to stay with the trade? >> yes, you do. we are also short duration and we are looking for a flattening yield curve. apparently perhaps, an inverted yield curve.

where i tend to watch is the very short end of the curve. i keep an eye on the one-month t-bill rate and the forward market, and if you look at that, it has been holding at 2.6, 2.7. if that stays flat and the fed raises two more times we are almost at an inverted curve. i don't think it is different this time. that is important. jonathan: is that your trade, too? we think there is more risk that we see some slight steepening. but not in a meaningful manner. i think the key thing is when you look at what is happening with the supply side of things, the issue with the yield curve and the reason why markets and the fed have been so focused, is in the past, an inverted curve has been a good indicator of a recession. when you overlay that with things like the isn, it is less of a concern for markets at this point because historically when

the curve is inverting you have all the leading indicators looking quite soft. as far as the u.s. yield curve goes, more pressure on the back end because of the supply coming to the market. but not in a meaningful manner. jonathan: what is the biggest drag to high term premium and where does it come from? >> i would say the biggest drag is that global term premium is low. that is keeping the u.s. back end anchored. it is encouraging that european growth is starting to bottom out and we are starting to see the pickup on growth. we expect europe to be above trend, allowing the ecb to move in the next year or so. similar to japan, that is quite encouraging. when you start to see other developed banks adjusting their policy rates or exiting the easing of monetary policy, then you get their pricing in global term premiums. >> i want to point out, the curve has a track record of predicting recessions.

it is very clear. but if you go back and look at the track record, when it inverted every other time, term premiums were sharply positive. it flattened and overwhelmed the positive term premiums. flashing red signal, recession. now we have negative term premia. by anyone's estimation. as a result, it is hard to say that the new york fed president should look at the nominal curve and say, i have to stop. i just think that might be going little too far. jonathan: if you were looking for a 12 to 18 month indicator on an inverted yield curve, on a nominal curve, it would have to be deeply negative. >> exactly. there was a fed paper -- jonathan: to give you any kind of indication. >> there was a fed paper that was suggesting if you adjust for the term premium, it is a better predictor when you adjust for the term premium. jonathan: thank you to our guests. coming up, the auction block. volatility and uncertainty in emerging markets wreaking havoc

on russia's debt market. that conversation is around the corner. you are watching "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield." i want to head to the auction block, we start in the united states. it was the most active week of 2018 for investment grade issuance. supply was at the high end of estimates, leading to more than $53 billion in sales. cigna carried the heavy lifting. selling $20 billion worth of bonds across 10 tranches to fund its takeover of express scripts, the second-largest high-grade deal of the year. in emerging markets, russia had its second auction in as many weeks.

the finance ministry was due to offer 15 billion ruble notes, but they cited "heightened market volatility for the cancellation." still with me, rj gallows from -- our guests are still with us. i've been asking through the week, does anyone want to dip their toes in e.m. yet? rj: it is probably a question being asked in a lot of committee meetings across the industry. we feel that the contagion risks, which are real and largely being transmitted across em through portfolio channels, sell what is easier to sell because they have to reduce what is overweight, they explain a lot of what has happened so far. there are opportunities being created. you look at certain pockets like mexico or middle grade italy eastern countries where you might actually have an opportunity. it is hard to assert valuation with a lot of confidence because there are other potential shoes to drop. but we are looking for opportunities.

jonathan: diana, how active have you been? diana: we have been cautiously engaging in markets. mexico has been quite surprising how underwhelming been after reaction has been. but we see a lot of upside on that trade if things normalize and stabilize, and we are long-term investors. we are dipping back to the stories that we like. some areas in the cis we are looking to add risk there. also we are selectively buying. but again, not broad-based beta yet. jonathan: how do you feel about the china proxy right now, especially considering the -- considering more tariffs on hundreds of millions of dollars more of tariffs? that decision has not come just yet, as far as when we recorded this program, but how do you feel about chinese proxies with that in the background? diana: i think the chinese proxies will remain under pressure, especially in the context, we are not seeing a

de-escalation in the narrative around trade. if anything, with the latest headlines, it does seem a safe likelihood of escalation is higher than de-escalation. the policy response from china will likely be to let the currency depreciate. that will mean that the proxies will also suffer from that slight depreciation to keep their terms of trade attractive. we are not putting on long china proxies. what we are looking at our opportunities. in trade wars, everyone loses but there are relative winners and losers. you have seen companies starting to announce shifting manufacturing out of the u.s. into parts of asia or out of china into other countries in asia just to avoid the tariffs. we are watching closely to see how those stories develop and a market like thailand looks like a potential relative winner in this trade war but it is how you

find that long thailand trade. jonathan: that is true. the other thing is getting in and getting out of the trade without making too many waves. i spoke with rick rieder from blackrock who basically said the liquidity from em is terrible right now. can you walk me through the times you have been active this week, how difficult has it been to execute the trade? diana: this week has been better than two weeks ago. when all of our correlation went to one in mid august. i think liquidity conditions are marginally better as more people come back from holidays. the interesting thing is, it is illiquid if you are trying to buy or sell. it is not necessarily a one-way market. it just seems like a market where the street investors have decided to take a step back and see how the dust settles, which makes it hard to execute both ways. within sectors it varies. local markets are the most liquid sector because you have the local backstop.

so when foreign investors are worried about dollar strength, a local south african investor is thinking i don't want to be in equities, i am going to buy our local bond market. you have that natural support. in the dollar space, it has been more challenging but certainly not as bad as it was a few weeks ago. jonathan: and your view is it is still too early? kathy: yes. we are not getting enough yield yet to compensate for the risks. we still have the risks of the tariffs, what china does in reaction to that. we are seeing global trade volumes shrink or turn down, negative on a year-over-year basis. that is not a good sign for em, which is very trade dependent. i guess i have been through too many of these. i remember 1997 and 1998 very well. usually there is an event at the bottom. it doesn't feel like we have hit that event. jonathan: i want to give our audience a flavor of what you are talking about when you say things like this is not the price to really clear the

problem. this chart comes from you. it comes from charles schwab. it is where em spreads are relative to treasuries and where we have been in previous issues. the taper tantrum, the china hard landing phase, the eu sovereign debt crisis, that is where we are on the bottom right there. your view on where we are and where we need to be to get you you encouraged to get back in the game? kathy: i would prefer to be over 400 basis points on that spread. and that is just the recent history. that does not include the great financial crisis and a few other things that are not analogous now. i would like to see closer to 100 basis points from here before i get comfortable. jonathan: rj? rj: that level has been talked about internally with us as well. when you look at the broad em marketplace, you have a variety of stories. we have a world where

idiosyncratic has morphed into systemic. we are not totally confident that will remain the state of nature. if the situation with china gets worse, i agree. more of a challenge for em. but widening in good markets deserves reviewing those opportunities. generally speaking, the spread still has to go wider. jonathan: the upside is that the chinese market in terms of foreign exchange has stabilized. there might be some people watching this who say 100 basis points is greedy. the opportunity might be there right now. what would you say to that? kathy: i agree that selectively there is probably some opportunities, but broadly speaking, i would rather not try to catch the falling knife or whatever cliche you want to use. i would rather sit back and be greedy in this as a class. jonathan: thank you to our guests. i want to get a market check. where bonds have been this week. yields higher through the curve. from two through 30, up by eight basis points at 3.1%. that year yield curve in the treasury markets. still ahead on this program, the final spread and the week ahead.

central bank decisions from the ecb and bank of england. that is next. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield." time for the final spread. coming up over the next week, i look out for meetings of leaders from japan and china. at the eastern economic forum. the fed base book coming out wednesday and we get rate decisions from the ecb and bank of england on thursday. still with me are my guests. looking ahead to the ecb, i want to get the view from london. what are you looking for from president draghi through the next 12 months?

diana: we expect that given the forward guidance, we think they have given themselves very little wiggle room in terms of there's not as much excitement around the ecb as there used to be. exiting qe is telegraphed on its way out. what is interesting is we will see to what extent they take into account italy on their periphery in changing the tone of the statements. also if the language around growth, given we had a pretty soft start to the year sounding a little more bullish, making the end of summer more likely than later down the year. kathy: i would agree. i think it is mostly about the balance sheet decisions going forward, and forward guidance. next year with the ecb, someone new will be in charge. that is a wildcard as well. jonathan: it might not be a german. kathy: which is surprising. we all thought we were going to get a german and now it is up in

the air. it is less predictable. jonathan: that might be positive for risk. rj: i think so. the concern that a german might be too tight. that is obviously a big event. the ecb has a huge footprint. jonathan: there is a feeling that ecb policy is on autopilot. do you share that feeling? >> i was almost going to say that they endeavor to be boring for the near term. i think they took a lesson from our taper tantrum. it was not fun for the marketplace. it was a change that was not anticipated and you had a stark market reaction. the ecb has invested in avoiding such an outcome. they don't want to destabilize the market. jonathan: can they keep it boring? kathy: they can for a while, but as italy runs into big political problems, outside offense could force them to have to soften their stance going forward. jonathan: that's where i want to leave this conversation. i want to do the rapidfire round and get some quick final questions with quick answers as well. do we round out the year with a

fourth rate hike? yes or no? rj: yes. kathy: yes. diana: yes. jonathan: is the path of least resistance for 10 year treasury yields higher or lower? the path of least resistance for 10 year treasury yields, higher or lower? rj: higher. kathy: longer-term lower. diana: higher. jonathan: final question. buy argentina or turkey, dollar debt for 12 months you have to sit and hold, sell in 12 months. do you by argentina or turkey? rj: argentina. kathy: can i pass? jonathan: pick one. kathy: argentina. diana: argentina. front end, though. jonathan: there we go. that conviction makes me think you have done that already. great to have you with us. it is been great to get your thoughts on a week of fixed income.

some tremendous news flow once again. from new york, that does it for us. we will see you next friday at 1:00 p.m. new york time. that is 6:00 p.m. in london. from new york for our audience worldwide, this was "bloomberg real yield." this is bloomberg tv. ♪

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