jonathan: jonathan: from new york, this is "bloomberg real yield." 30 minutes dedicated to fixed income. ♪ jonathan: coming up. a weak payrolls headline offset by solid revisions and a 48-year low unemployment rate. treasury bears having their moment and some. yields breaking out for multiyear high and junk bonds looking rock solid. spreads grinding down to fresh post-crisis heights. we begin with a big issue, the hot u.s. economy. >> this is a report that's consistent with being pretty close to full employment. >> the wage numbers are continuing to point in the right

direction, so to me this is a perfectly good number. >> you have a 130 something and 80,000-plus revision. this is actually, the increase in the love for september is, what, 211, 215,000. that's an awful good number. >> what i see is a continued strong job growth. we saw pretty positive revisions to previous months and we are seeing the unemployment rate come down. continuation of a really strong u.s. economy. >> the economy is running hot. why? because of a trillion-dollar deficit and because, you know, corporate tax cuts, etc., etc. >> ultimately to the extent we're using these figures to read the tea leaves around the race and what will happening to them and the rest of the market in the u.s. and globally, and was always, frankly, and irrelevant number. just one in a stream of really strong data points. >> take a lot of risk when you get 90% of the yield in the front end and not the duration, why do it? >> you take the duration in the

next downturn, it may be three, four, five years out, i think rates will be significantly lower than where they are today and you will have the most bang for your buck by having some duration. >> it takes some time, 12, 18 months for the long end to actually react, so i don't think we have seen that yet. 3.40 on the 30-year, no thank you. jonathan: joining me is bob miller, victoria fernandes, and coming to us from atlanta is sean newman. great to catch up with you. the jury a, i would like to go to you is this the long end of first. the yield curve aligning with a really strong economy in america? victoria: that is absolutely what is driving the market. we have had these uncertainties that have been holding us down. i have a friend over at raymond james who says, think of it as holding a ball underwater for a long period of time and then when you let it go it spikes higher. i think that's what we're seeing. we have really strong economic numbers with the ism that came

out, we have some trade issues that have come to pass with the usmca that we have, and i think we are finally seeing the strong growth flow through to yields. jonathan: bob miller, do you see the same thing? bob: yeah. what is different about this rise in yields relative to the rise earlier this year or earlier in 2017, the curve hasn't flattened in the last four, five weeks. it has not steepened a lot but it has steepened. they way we think about that, i think what is different about it is that the market is pricing a higher term structure of rates. it is not pricing an acceleration and the pace of fed tightening or change in the magnitude of incremental tightening, but a higher implied terminal rate and we're waiting for that to unfold. as you know, we like the front end. we have not liked the back end for a while. it has been a long while coming, but i am encouraged to finally see some steepening of the curve. jonathan: i asked whether you liked the long end.

now i will ask you that in a moment. sean, is this how you would characterize the move we've seen this week, would you characterize it in the same way as the other panelists? sean: yeah. you have to think of cholesterol levels, right? this is a good cholesterol that the body needs. rates are going up because growth is strong. not because there is a big inflation concern. but even further than that, looking out in the next three, six months, we should expect the growth impetus start to roll off and this is good for the emerging markets. jonathan: where does the demand come from? does more demand start to come around the 10 year? around does blackrock like it 3.40. now? bob: we are approaching levels have said for year were kind of fair. we had a 3/4 market. yield, 2.25 inflation break even. my is 3.25 is a reasonable expectation for the long end of the next six months. jonathan: i am trying to understand where the biases around this table are right now.

when sellers start to become buyers, when you like the price at the long end, do you like it now, or do you need to see more? victoria: i know no one wants to talk about the neutral rate. all day today, we have been talking about that, but -- jonathan: carry on. victoria: i think you're getting close. you have the 3.01 level that was a benchmark you want to bypass and you have to look at the range of where you were before that, move that much higher to where your limit should be. if our range was about 20 basis points, we move about that, we are right where we should be. but i think we also have to look and see that the move we saw this week was mainly due to term premium moves, not necessarily to growth expectations, which is what we had been seeing previously. that shifts your outlook on the longer part of the curve. jonathan: i think you agree on that situation. john williams, the new york fed president, this is what he had to say. john: neutral is just one piece of information that we think about when we think about monetary policy. we talk about wage data, inflation, job growth, g.d.p. growth. we look at a lot of indicators

, both of the u.s. economy and abroad, to think about policy. neutral is just one of those. it's an important one, one i follow closely. but to me, it is just one piece of the puzzle. jonathan: increasingly the communication coming from the federal reserve is, don't worry about the neutral rate, it is unobservable, we don't think we are near it. what do you think of the communication coming from the reserve on something that was quite important? sean: i think what was hard from the federal reserve is in line with what we are thinking. it's not ahead of what market is pricing in at this point. way thatok at the spreads have reacted in the last three to four weeks, markets have taken the comments from the fed in stride. we are seeing spreads tighten in the back of the fed's comments. i think the market has fully priced in the current fed rates. nominalization factor we've seen in our markets for quite sometime. i don't think it is a new phenomenon at this jonathan: point. bob, do you agree with that? that we have fully priced in the

path of rates? bob: i think the front end has a fair amount of risk premium in it relative to the most likely path for the fed. i think the risk in the back end is that we could overshoot a bit. we had a flat curve for a long time. the structural bull flattener has been a popular trade for a couple years. as victoria said, we are only now starting to reintroduce term premium, a tiny bit, and it is still not sufficiently positive, in my opinion. i can see some overshoot as we unwind some of the longer term, long-held views that real rates and nominal rates can't go higher. they can go higher. we do have a growth and an inflation impulse that's likely to get better before it gets a bit worse. at least the inflation impulse will get better before it gets worse. jonathan: what we see on the screen right now is where we were 12 months ago on the yield curve, compared to where we are right now. victoria, what does the picture look like 12 months out? can we do this again? victoria: i don't think we'll do it to the same extent. but yes, i think you will see

the whole curve shift a little higher. it takes about 18 months for rate changes to flow through to the economy. so we still got about five rate hikes we have not truly made our way through on the economic numbers. so yes, we will see rates continue to move a little bit higher. but again, closer to the 3.25, 3.30 neutral rate, you are getting close to that right now. jonathan: you don't like it when rates go up. you don't like when the curve flattens or steepens. there will always be a reason in the equity market not to like. it is sounding for the fixed income. but for the fixed income market, i'm just wondering, how much more of this can go forward without the economy coming under pressure? what's the data point you'd be looking for to say, this is going to far. victoria: you haven't seen it flows through on a wide basis but there are a couple sectors. we've seen it in autos. we've seen it in housing. six straight months of existing sales coming down. autos, you have to look at them from a different perspective, from the sheer fact that we had the hurricane hit, and that will

affect it. when harvey hit houston a year ago, half a million cars destroyed and so that, you know, kind of changed the way you look at the auto sector for the last 12 months. look at those. look at credit card delinquencies, let's see how that will be coming through. we will be watching. jonathan: any sign that this economy can't stomach high rates? sean: i think from a leveled perspective, some of your hosts mentioned earlier, there is probably a little risk we do overshoot from here. in terms of key rates, we're watching the 3.40 or 3.50 on the 10 year, those are levels we want to reassess whether or not the pressure from higher rates will lead to a tightening in financial conditions. that is going to make it to all risk assets, not just emerging markets. jonathan: sean newman, bob miller, victoria fernandez. coming up on the program, the auction block. comcast pulling off one of the biggest corporate debt sales ever in the u.s. this is "bloomberg real yield." ♪

♪ jonathan: i am jonathan ferro. this is "bloomberg real yield." we want to head to the auction block. comcast has the second biggest deal of 2018 and the fourth largest u.s. debt sale on record. the company selling $27 billion of unsecured bonds in 12 parts, in order to finance its $39 billion acquisition of sky. offering a portion, 40-year security yielding 1.5 percentage points above treasuries. till rate announcing to raise $450 million through a private placement of convertible bonds. the notes for the world's largest publicly traded merry when a company would be due you in in europe, a little

2023. nerve showing up in the market. two euro bond sales were reported and russia cancelled short-term debt due to lack of acceptable bids. a lack of issuance squishing issuance on u.s. junk bonds, the lowest level since july, 2007. high yield sales are about 30% lower than the same period of 2015. on pace for the slowest year since 2009. still with me to discuss is bob miller from blackrock, victoria fernandez from crossmark and sean newman from invesco. sean, what are your thoughts on what's happening at credit at the moment? this really interesting dynamic taking place where investment is really soft and high yield is really solid. what do you make of it? sean: there has certainly been a big trend toward domestic markets overall, whether you are at equities or u.s. credit. if you look at u.s. credit indices, especially on the high yield side, my colleagues are

telling us that it is at the tightest levels may have seen for several years. i think it reflects the lingering policies in the global marketplace. uncertainty around trade and tariff policy has led to more on shoring off dollars and that has benefited the domestic markets so far this year. jonathan: do you wonder how much room for error there actually is? sean: i don't think there's a lot more. one of the trades we've been pushing this year is we believe you should take advantage of the massive compression we've seen in his some of the domestic credit market to actually go along on a select parts of the sovereign or corporate side. take advantage of these valuations. jonathan: victoria? victoria: if you look, h.y.g., we had $2 billion come out in from them, the largest amount in two and a half years. i think there is some nervousness that's building when it comes to credit but the spreads just aren't moving. i think it comes to the fact that we have a strong economy.

normally you see spreads widen when you have a weak economy and we're not seeing that. we are looking at strong economic numbers. that's why spreads are staying tight. jonathan: bob miller? bob: i think the growth piece is critical to the difference of ig and high yield. the ig market is by definition, more rate-sensitive. we have had a decent move in rates. it's not a shock your higher grade, more duration sensitive bond market, corporate market has suffered relative to high yield, which has a much greater growth sensitivity. if you look at the decomposition of high-yield returns by rating, the highest quality, double b, which would be the most rate-sensitive, is actually flat on the year. come at least rate-sensitive, has been all about performance. that strikes me as fair given the growth impulse that's going through the economy right now. , which is leased

rate-sensitive has been all about performance. that strikes me as fair given the growth impulse that's going through the economy right now. i do think it's critical to keep in mind some of this -- no doubt some is organic growth. some is fiscal impulse that will start to fade, likely peaking in the fourth quarter. and decelerate through next year. jonathan: how do you allocate over the next 12 months, bob? bob: less willing to allocate in high yield. i think the asymmetry is clear, it is more negative they are. you are likely to earn your coupon if everything goes well. there is more downside price risk. in ig, some of the sectors that have traded poorly look a little more interesting as long -- given our view the fed will keep going a bit that not likely to meet the rising expectations for 3% to 3.5% funds rate. there are parts of the ig market in the shorter end of the curve that look reasonable now. jonathan: victoria, it's interesting in ig, it's a big discussion being a lot of risk. just look at the triple b's. morgan stanley writing a note that got a lot of attention to riyadh follow the money and look where the issuance is. ig, has grown to $2.5 trillion. a 27% increase since 2009. along those lines we see elevated downgrade activity as a stress point when the cycle eventually turns.

you have to worry about the worst type of credit within investment grade, perhaps more so than what is happening in junk right now? victoria: you have to be concerned about downgrades and the leverage that these companies are generating. there is always a place for this within your total portfolio allocation. a few months ago when we were speaking, we have been reiterating to our clients, look, you can have the fixed income component but you have to be careful where you're positioning yourself. i think you can do the same thing with corporate's. shorter duration corporate, coupons, high liquidity, those will bode you well. jonathan: are you doing the same thing, bob? bob: yes, we have the same bias. shorter duration, until we get to levels that represent better valuation for, you know, medium term adjusts returns. jonathan: what about you, sean, the liquidity factor has not been discussed so far. how much of a critical element is that right now? sean: it's a critical element, jon. it's one of the factors that we spend time analyzing. assets that are liquid from two

perspectives. one, your the colleagues on the mentioned in terms of issuance. issuance has been down 35% on the corporate side as well as on the sovereign side this year. and, fund flows, which are tracking at about negative $2.5 billion give or take yesterday's number. this in turn feeds to liquidity environment in our market. so we do have a strategy, we would probably put on at this point. we want to stay up in quality in places like the middle east, where they should be benefiting from higher oil prices. but we are also looking for some idiosyncratic opportunities in our markets whether it's looking at turkish debt or select points on the argentine credit curve. we think they offer some value and equity is a factor. jonathan: we will have a chance to talk em in a moment. sticking with me, bob miller blackrock, victoria fernandez from crossmark global investments and shauna newman from invesco.

coming up, a market check. the yields are up seven basis points on the two-year, and there is your move on 10 and 30. a wow move. still ahead, the final spread. a fresh round of data on u.s. inflation and more comments from the fed's john williams. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. coming up in the next week, we have the first round of the brazilian presidential election and the first round of u.s. nash plus a fresh round of u.s. inflation data. bank earnings and the fed's john williams will be speaking. still with me is bob miller, victoria fernandez and sean newman. fast-forward to the brazilian election. here is your chance to talk em. i know you have been itching to do it. tell me what we should be looking for.

sean: jon, it's a classic election. we have never seen an election like this in brazil. i know it is somewhat of a cliché statement, but what we , the supporters of both candidates. elections are this sunday. we'll have a contested election. polls released overnight suggest it will likely end in a second-round runoff between these two candidates even though the field has 13 candidates that are contesting the election. we believe it will be a race between the two individuals. one of them has a slight edge going into the first round. jonathan: how are you positioned in terms of capital, allocation exposure to that? sean: we are somewhat flat right now, jon. we think the market is somewhat overpricing the possibility of a good result. i think looking at b.r.l. right now, maybe a 5% move here.

balsenaro isif elected. we see actually more as a 15% move in the b.r.l in the event this goes to the second round and the p.t. candidate looks like they have better odds. given this risk tradeoff will be on the sideline here. best we prefer to be on the sideline here. jonathan: we talked about credit and quality. what about emerging markets? what are you thinking right now in e.m.? bob: e.m. stays similar to what we said for a while. there is no broad e.m. index anymore. there is, but it requires a very clear disaggregation into each of the countries. there are few places. we have some argentina risk, brazil risk. it is important to note, brazilian currency has rallied 10% in the last 10 days. the market is pricing a higher

probability of a good outcome or more favorable outcome than it was a month ago. nonetheless, the challenges remain. if u.s. rates are going to press a bit higher, u.s. growth starts to decelerate a bit next year. the key question for the em basket is the degree to which the chinese deceleration has been a bit of a surprise this year, which has impacted european growth expectations, stabilizes. that stabilizes, u.s. decelerates a bit but maintains a good level, e.m. probably does pretty well. without that, i think you got some legitimate questions. jonathan: i know you but you wanted a word on italy? bob: the italian budget processes, the new government has taken a fairly confrontational approach with the european commission annual budget process. our expectation is that it will get a bit noisier before it calms down. jonathan: yeah. bob: the market has moved a lot, but i would expect further volatility in italy over the next couple of weeks, creating some overall vol in european bond market. jonathan: final word, victoria? victoria: you have to take a

longer-term look in the fixed income market right now. you will see quantitative numbers. we have seen jgb's move up, then bunds. there is a lot of things going on but i think you have to take that 12-month outlook. let things calm down a little bit in e.m. they do have better fx reserves as a whole than they did before. obviously, we have brazil, turkey, a few countries specifically to look at. but look at the general 12-month plan. just like what we were seeing a moment ago, where to invest in order to reduce your risk. jonathan: that is a good place to wrap this up. let's get to the rapidfire round. three questions. you know the drill. three quick answers. the 10-year, 3.23. as i ask this question, do we see 3.50 before we see 3% again? 3.50 before we see 3% again, yes or no, bob miller? bob: yes. victoria: no. sean: 3.50. jonathan: 10 year bund and u.s. treasury spread, narrower or wider by year and from here?

bob? bob: wider. victoria: narrower. sean: is low. jonathan: how many hikes left in the cycle? i am going to say, fewer or more than 4? bob? bob: fewer. victoria: i am going to go more. sean: fewer. jonathan: at least you have a market. [laughter] great to catch up with all of you. bob miller, victoria fernandez, sean newman, thank you for joining us. that is it for us from new york. we will see you next friday at 1:00 p.m. new york time, 6:00 p.m. in london. this was "bloomberg real yield"" this is bloomberg tv. ♪

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