jonathan: from new york city, to our viewers worldwide, i am jonathan ferro. "bloomberg real yield" starts now. coming up, another month for the payrolls report. u.s. hiring topping all forecasts. a fed retreat helping junk bonds deliver the best january in a decade. coming off a record-breaking month of european issuance. $255 billion in bond sales. we begin with the big issue, another solid jobs report. >> this is a blockbuster jobs report. >> it is impressive. >> another strong number.

>> the virtuous cycle continues. >> we are the hottest economy in the world. we are proud of it. >> this is a number great for the fed. for now, i think they can ride this out and they still will not make another move until the second half of the year. >> are they really data dependent? are they stock market dependent? is inflation ultimately going to become the only thing that pushes them off of this? >> i think people continue to underestimate the strength of the economy. by the way, it is not inflationary. >> their mandate is a full employment price stability. we are not at full employment if we are still creating this and price stability is fine. there is no rush. i think they are making the right call. >> the market completely pricing out any hikes for this year is a position that will be revised. jonathan: joining me around the table in new york city, jim keenan and tony rodriguez, and in london, matt toms. -- in atlanta, matt toms. are we underestimating the strength of the u.s. economy? jim: i don't know about

underestimating. the market moves on expectation that the fed was so the economy significantly. the economy to slow significantly. the economy has been pretty stable throughout. there is some solving that financial conditions have tightened. conditions are good, businesses are in good shape. you had substantial fiscal stimulus last year. jonathan: manufacturing really coming in hot closing the week. what are your thoughts? matt: the risks are abroad. the u.s. manufacturing base looks strong. just because there are external risks doesn't mean they will be materialized. the market is back to its strength. tony: i don't think were going -- we are going into recession. i think we are slowing down to a 2.5% pace. i think there was a risk that the fed did not know there was

and theying happening stuck to two tightenings this year. but i think this report gives them a lot of cover because the inflation number is fine, growth is ok. they can be patient. i think the economy will have a decent year. jonathan: we can work out what it means for the federal. some economic debates taken place. the white house saying this morning, following the members, that the gdp growth is interesting, the gdp is rolling over to some extent yet the payroll growth is accelerating. at the same time, inflation is rolling over to some extent, but wage growth is still accelerating. what you think about that and what is underpinning that? matt: we can count jobs, we can count spending. looking at the tangible inputs as opposed to a gdp number and inflation number, which are massaged through a lot of mechanics, we would take that as a secondary indicator.

which kinks risk is first. consumer confidence or inflation? neither have kinked yet. that is good news. jim: i would say, if you thought about the last 10 years, there's been an enormous amount of labor slack. fiscal and monetary, all of that contributes to stabilizing economic data or growing economic data, but it really slow down to corporate profits. now the labor slack is much tighter, the labor per participation rate jumping up so that there is a little slack in there. the what you are seeing now, the percentage growth of gdp is going to flow into labor income at the expense of corporate profits. that is not a negative from an economic standpoint you want see the same earnings growth on the corporate side but you can still have a healthy consumer. jonathan: what does that mean for the federal reserve? a lot of people see the data in front of them to close out the week, as vindicating the fed's current monetary policy stance. jim: i think it does.

they're looking for full employment and price stability. think about that, there is a lot you can debate how tight the labor markets are, but labor participation is down significantly from highs decade ago. if you look at it right now, if i am the fed, i will look at it in say we have not increased over the last 15 years, just the fact they start to increase shouldn't mean they start to tighten. i think it's a healthy environment for the consumer. tony: i think the big thing is the fed admitted they made a mistake in december. the center still going to -- they said they were still going to tighten twice, they reversed. are they going to reverse again? but if they truly remain dated

a dependent, i think consumers are doing well, 70% of the economy, and that's why we won't have a recession and 2019, but we won't have robust growth because of the external impulses from china in europe, they will be headwinds. jonathan: i want to pick up on this point and what would bring the federal reserve back into the game. it's perhaps the best question right now, because they have stepped away from hiking interest rates. do you anticipate the data coming in in such a way that perhaps after step back and or are inclined to step back and? matt: i think they are inclined to step back in. expect this to move higher over time. the fed needs to step back in this benign growth is realized. you also have the tension between wall street and main street. main street raises better inclusion in the economic expansion as inflationary, but in a sustainable way for main street and wall street might not like that. the fed has two masters a servant we think it will choose inflation and maybe back in the second half of the year. jonathan: there is worry building already even though the federal reserve system a retreat, that they bought stability and they will inject

volatility again in the back half of the year. tony: i think everyone's trying to understand the consistency of the fed. they have reestablished that they would come back and if the economic data weakened. if the economy is healthy or there are other stimulus that come into the market that could accelerate growth, at that point, maybe you start to tighten. they could hold volatility down and that is a pretty good market. jonathan: how confident are you constant,will remain that you have a good idea of the reaction function of the federal reserve? i think a lot of people would sit around this table, and they have done, saying the fed is at the right place, but the way we got here was absolute mess. does that to you anything about where we are going the future? it might be the right place

right now but what about in six months? tony: it is concerning. i'm in the camp that they may be back in the market leader in the year but they may be saying things like the balance sheet is on autopilot. i think they will continue with the mantra of data dependency, flexibility, and patience. that is a good environment for the next couple of months, maybe couple of quarters for the fixed income argument. jonathan: we have a decent backdrop with the data, a for , for how the federal reserve may be. how do you parse that for how the treasury curve will develop as the year progresses? matt: continue looking for a steepening most of the market is looking for a flattening. look for steepening of twos, , something there, 50 basis points, and there is foreshadowing for that. tony: i agree you will see some steepening, i might not be that aggressive. i think the 10 year will be

range bound and we will get back into the 3% range. we could see some modesty in the year. and all think the fed will be that aggressive. jonathan: the market price at rate hikes and inflation to a great extent as well. i am wondering what you see optionality to get inflation protection? tony: i think the risk is the inflation side. i think the inflation dynamics as we see them, particularly with impulses coming from china and europe, i find it hard to believe in the next 6-12 months we will see an inflation scare. i think the fed will be patient -- if they are back in the second half of the year, my view is they will not be back and have two or three more in 2020, it will be one in 2019. that might be the last one of the cycle. jonathan: guys, you going to stick with me here in new york. tony rodriguez, jim keenan, and -- coming up, issuance taking off in 2019 with investment grade and high-yield making a big comeback. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block. january pricing more than $17 billion. the highlight of the week, trans time, the biggest jump on junk-bond offering since 2016. meanwhile, the u.s. treasury with plans to issue another record-breaking amount of debt, its long-term debt issuance refunding auctions to $84 billion. $1 billion more than a month ago. in europe, what a month. the primary bond market racking up a record $255 billion in sale in january. sovereign deals pulling in massive order books. still with me is jim keenan, tony rodriguez, and matt toms. your thought on the insatiable

demand for european debt at a time when the economy is looking worse and not better? matt: i thinking with global rates looking to stay low, people are looking to stop up any deal they can. the ecb not being able to move, it means you need to get away from negative rates and you will buy anything with a positive rate. that's the demand for a bid the last three years, it is back in. jonathan: the periphery behaved like credit and not a sovereign. are we witnessing a slow change orders the periphery still changing like credit? matt: i think it still traits periphery still trades like credit, without a fiscal union and the ability to credit, any credit will trade like a credit bond. italy showing that with widening of some 15, 20 basis points. i still think credit, not government bonds. jim: it's not nearly to the

extremes we saw in the crisis. in the past years, but the point about that need for yield and income when you have negative rates and income, the demand will continue, especially now that the ecb is on the sidelines. jonathan: regardless of the data? regardless that the ecb has backed away the last year? it's not providing additional stimulus, it just stopped. the data is worse. tony: not only do you have the fact that they will stop, you're not going to get yields anywhere else, but there is less confidence in a queen and other -- in equity markets and other assets. you see other people coming back for safety, other times for income. the demand is still there, and that is global. jonathan: let's talk about the u.s. and the global backdrop. what we saw in december was not the deterioration of fundamentals in the united states, it the fear that they -- it was the fear that they would deteriorate in the coming year. massive sentiment turn. january was just the polar opposite. is that what we are witnessing in high-yield at the moment? rapidly improving sentiment and not really anything to do with

the fundamentals, just about taking out that move we experienced in december. jim: no doubt. in many cases, people look to the credit markets as the leader. i would say they were a bit of a follower in this. there was a fear of a fed mistake that would create a recession. the credit markets basically sold off. there was an enormous amount of volume in that and from issuance standpoint, fundamentally, no one had to come to the market because there was no real maturity. about 10% of the high-yield bond market comes due from an maturity standpoint in the next three year. debt levels are ok. interest coverage is pretty high. jonathan: if you look at the buildup of the primary market as it rebuilds through january and the performance of this issues -- those issues in the secondary market as well, do you look at that situation and think, that is just people who are very hungry for new issues?

does it really tell me what 2019 has in store? tony: i think the volumes are still going to be challenge. i think what you are seeing is the maturity of the markets between private credit, public high-yield, and the loan market, from an issuer standpoint, you can access any one of those. if you look at some of the deals that have come into the high-yield market this year, last year, they would have come in loan form. because the demand is more for high-yield right now and moving into more duration assets, high-yield had a greater demand for it this year. jonathan: is that what you expect to happen through 2019? because as you know and have spoken to me about it, there is a massive appetite for flowing rate through 2018. is there a turn taking place for that's where the issuance doesn't see the same demand for flowing rate and the terms of the high-yield market might be more than last year? jim: i think it will be more balanced this year. each company will be different with what they need with regards

to production or the ability to grant each issue. it will be more balanced between high-yield and loans. jonathan: can we get anything like the performance of the latter end of the year? do you think you can replicate it in the next 11 months, not to mention the next month? matt: it was a good year and one month. the high-yield market has been nearly desolate for the last year and a half as bank loans have ramped up. this is healing for both markets. putting the subordinate part of the debt structure back in place in the high-yield market, giving the market something to feed on. this is a very good longer-term structural story that gets bank loans in balance. look for bank loans to surprise later in the year. jonathan: i want to wrap up this

segment by getting your thoughts on an important topic. pre-much everyone i spoke to -- pretty much everyone i spoke to through this week, those who heeded the advice to keep cash allocation and deploy it when things got messy, they deployed it in december and are looking a great returns and generate. the debate now happening is whether they should fade the generate move and use the strength to raise cash again and wait for volatility again in the coming months. is that the right approach? jim: i don't think you should go back into cash. i think you need a risk rally. we like owning high-quality carry as opposed to earnings risk. tony: i agree about being up and liquidity. and a bikini to go back to cash. -- and liquidity to go back to cash. i don't know that we will go back to the low levels we saw at the beginning of the fourth quarter. we might get more positive news on trade, for example, but i think it is a carry year. you can comfortably on the carry available. matt: hold on to those core risks near the consumer securitized. we would be looking to fade some of this rally as i do credit gets below 125 and high-yield gets below seven.

jonathan: great to have you with us on the program. jim keenan, tony rodriguez, and matt toms. on the treasury curve, yields coming in big-time on a two-year following the fed retreat, down nine basis points on the week. yields at the longer in, and -- longer end. still ahead, the final spread. the week ahead featuring comments from pal, trump, and carney. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." time for the final spread. coming up, a reminder it is chinese new year. some markets in asia will close for part or all of the week. in the u.s., we have the state

of the union address, comments from jay powell, and fresh readings on the u.s. economy, and don't forget, there is a bank of england decision taking place with governor carney. still with me, my guests. a final word from you going into next week. what are you looking for as things progress here? the u.s. economy looks solid and the rest of the world looks soft. increasingly people are looking to deploy capital and take on more risk. what is your message? matt: we need to look at inflation numbers next week. we need to ensure there is no reason for the fed to come back any sooner than necessary. also, look for the senior loan officer survey coming out in the coming weeks to see if there is any lending impairment or pulling back from december. not likely, but those would be the risks to look out for. tony: i agree on the inflation data but also we want corporate earnings and consumer related

companies and their earnings. how are the interest rate sensitive sectors doing now that the rates have come back off? you want to see of stability is occurring. jonathan: i'm just wondering, even if it did pick up, could the fed think about getting in. don't they have to stand pat for a little while? matt: they can't move back yet but it will set the stage for the eventual moving back in the second part of the year. anything that pulls them in sooner is bad news. the market loved the pause. jim: i would focus more on earnings. i don't think the inflation data is as meaningful. the trend over the next several months i would agree with. but there is a substantial amount of earnings. trying to understand what these companies are seeing, what their response to the volatility in

the market and what that means is important. jonathan: this inflation risk that people are grappling with every day, the increasing prospect of a recession as the year progresses, is that something you see hanging over your asset class for the time being? jim: the biggest thing is there is too much debt in the world. i think that by its nature is deflationary. as you see inflation pick up or rates pickup, that is ultimately going to slow down growth globally. that is always going to be the question. yes, in all of our asset classes, policy and the potential for recession is going to be where you will see severe moves like you saw this summer. -- saw in december. tony: the only thing that flip-flops faster than the fed is investor sentiment. if you get some other metric, you will possibly get everyone to shift to the other side of the boat again to a risk of market. we need to see data that is consistent with some moderate stability. jonathan: talk to me about that. more broadly, the data was consistent and america from -- in america from december

through january. it was sentiment that flipped so aggressively. is the market vulnerable to that happening again? matt: it can be. trade is still important. political stability in the u.s. specifically is important. we are only two weeks away from another potential government shutdown. as the year rolls on, look for that to reemerge as a risk. jonathan: given how well the economy did in january, maybe that is a green light for another government shutdown. let's go through some final questions. is the last rate hike of the cycle already behind us? jim: yes. tony: yes. matt: no. jonathan: interesting. would you fade january rebound in high-yield or do you stay with it? jim: stay. tony: stay.

matt: fade. jonathan: he's very contrarian. final question. going into sunday, patriots or rams? jim: rams. tony: patriots. matt: patriots. jonathan: great to catch up with you all. from new york, that does it for us. 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. ♪ place, the xfinity xfi gateway.

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