jonathan: from new york city for our viewers worldwide, i am jonathan ferro. "bloomberg real yield" starts now. ♪ jonathan: coming up, another month for the payrolls report. u.s. hiring top and all forecasts. solid data and a fed retreat helping junk bonds deliver the best general worry 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 and 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 -- i still don't think they will 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. 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. -- coming to us from atlanta, matt toms.

are we underestimating the strength of the u.s. economy? jim: i don't know about underestimating. i think the markets moved on the fourth quarter of last year on expectations that the fed was going to slow the economy significantly, but the economy has been pretty stable throughout. consumers are really good, businesses are in good shape, and you still have although it is rolling off, a substantial fiscal stimulus last year. jonathan: manufacturing also really coming hot last week. what are your thoughts. >> the risks are from abroad. just because there was an external risk, doesn't mean it will be materialized. i think the market is back to its narrative, strength with material risks. tony: i don't think were 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 slowing in they stuck to two

more tightening this year that may have driven it into the ground, but i think this report gives him a lot of cover because the inflation number is fine. growth is ok. they can be patient, but i think the economy will have a decent year, but not as good as last year. jonathan: a couple of economic debate taken place. the white house saying this morning, following the members, gdp growth isthe pretty interesting, because gdp is rolling over in some extent butt payroll growth -- payroll growth is accelerating. gdp is rolling over to some extent yet the payroll growth is accelerating, inflation is -- inflation is rolling over to some extent, wage growth is still accelerating. what do you think about that, and what is under that? matt: we can count jobs, we can count spending. looking at the tangible inputs as opposed to a gdp number and inflation numbers, which are massaged through a lot of mechanics, we would take that as a secondary indicator. which came first, consumer

confidence or inflation? the phillips curve? neither have kinks yet. that is the 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 stimulus, it a to stabilizing economic data, but it really slowed down corporate profits. now you're at a point in time about labor slack is much tighter. the labor participation rate jumping up shows a bit of slack. what you're seeing now is that the percentage growth of gdp will flow into labor income at the expense of corporate profits. not negative from an economic standpoint, it just means that you will not see the same earnings growth from the corporate side may still have a very healthy consumer. jonathan: at the moment there are people seeing the data as vindicating the fed's current monetary policy stance. does it?

>> i think it does. from a policy perspective, there are looking for price stability. there is a lot you can debate about how tight the labor market is, but labor growth participation has gone down significantly from the highs of a decade or half ago. if you look at it right now, if i am the fed, i will look and say, wages have increased over the last 15 years. just the fact that they start increase should mean that they all of a sudden start to tighten. i think it is a healthy environment for the consumer. tony: i think the big thing is the fed admitted they made a mistake in december. to say that they would still tighten twice. they have now reversed. but if they truly remain dated dependent and patient, i think consumers are doing really well. 70% of the economy, and that's why we will not have a recession in 2019. but we won't have robust growth because of the external impulses from china in europe, they will be headwinds for the economy. jonathan: i want to pick up on

this point and what would bring the federal reserve back into the game. perhaps the most i important question right now, matt. it has to away from hiking interest rates. dataou anticipate the coming in will be in such a way that they are inclined to step back in? matt: i think they are inclined to step back in. we expect the two-year yield to go up higher overtime. the fed needs to step back in if the nine growth outlook is realized. we also have the tension between wall street and main street. main street raises better inclusion in the economic expansion as inflationary, but in a good sustainable way for main street, and wall street might not like that. so the fed has two masters to serve, so it might choose inflation and maybe back in the second half of the year. jonathan: there is worry building already even though the federal reserve is on a full retreat, that they bought short-term stability, and they

will inject volatility again in the back half of the year. does that resonate with you? tony: it does. i think everyone's trying to understand the consistency of the fed. they have certainly reestablished the put. but being said, if their economy is healthy and more stimulus comes into the market and that service growth, they could start to tighten. if they stay consistent, it will hold volatility down. jonathan: how confident are you that they will stay consistent, 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. and does that tell you anything about where we are going in the future? you might be in the right place now, but wherever the be in six months? tony: it is concerning. i am in the camp that they may be back in the market later on in the year, but they will be

saying things like the balance sheet is on autopilot. they will continue with the mantra of data dependency, flexibility, and patience, and that is a good environment for the next couple of quarters for the fixed income market. jonathan: we have a decent backdrop for the data. 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, believing that the fed with push rates up. the story here is that the fed allows growth to percolate. the 10.30's is foreshadowing that. look for steepening of twos, something at the 50 basis points. 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 risk would be the inflation side. the inflation dynamics as we see them globally, and particularly with the impulses from china and europe, find it hard to believe that in the next six to 12 months we will see in inflation scare. less i think the fed will be patient and if they are back in the second half of the year, my view is that they will not be back and have two or three more in a 2020. it will be one in 2019 and of of the the last one of the cycle. jonathan: guys, you going to stick with me here in new york. tony rodriguez, jim keenan, and met tom's. 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. we ramped up the busiest month for high-yield since last january pricing more than $17 september. billion. the highlight of the week, trans time, the biggest jump on this biggest 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 -- one billion more -- $1 billion more than three months ago. in europe, what a month. the primary bond market racking up a record $255 billion in sale in january. issuance jumping 18% versus january of last year, with sovereign deals pulling in massive order books. still with me is jim keenan, from blackrock, tony rodriguez,

and matt toms. your thoughts, mass, on that insatiable demand for european debt at a time when the economy is looking worse and not utter? globalltimately with rates looking low, people are trying to prop up in the yields they can. the risk of the ecb not being able to move this year, which looks a short, means you need to get away from negative rates. that is the demand we saw the last few years and it looks to be back in. jonathan: for a long time, the third for he behaved like credit and not a sovereign. tradinghe periphery like credit or are we starting to see a change? matt: i think it still traits 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. -- tony: i think so.

it is not nearly to the extremes that we saw in the crisis. yielde point about the for incomes and yields, that 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 relative to last year, it has 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 equity markets and other assets. you will see people coming back i for safety and for income. demand is global, not just europe. 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 was the fear that they would deteriorate in the coming year. january was just the polar opposite. is that what we are witnessing 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. i mean, in many cases, sometimes people look to the credit markets as a leader in this. i would say credit was a bit of a follower in this. there was a fear of a fed mistake that would ultimately create a recession. the credit markets basically sold off. there wasn't an enormous amount of volume, and from an 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. so fundamentally speaking, earnings are good, debt levels are ok, these earnings levels. 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 through the secondary market were decent as well. the look at the situation and think, that is just the who are

very, very hungry for new issues? doesn't really tell me about what 19 has in store? tony: from an issuance there ist, i think still going to be a challenge for volumes. 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 it loan form. because of the demand is more for high-yield right now and moving into more duration assets, that is way have seen a shift. 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. do you see a bit of a turn taking place where is issuance did not see the same demand in do you thinks, and

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. jonathan: we had 4.5% gains in high-yield regenerative. can you replicate that within the next 11 months? >> it has been a good year within one month. but i think you're seeing flows, which are key. the high-yield market has been desolate the last year and a half as bank loans have ramped up. putting is subordinate part of that debt structure back in place for the high-yield market, giving the market something to feed upon, offsetting the bank outflows, it is a good long-term structural story that keeps bank loans in the balance. look for bank loans as a surprise later in the year. jonathan: i would like to wrap up this segment by getting your thoughts on an important topic. those who heeded the advice to

keep cash allocation and deploy it when things got messy, they deployed it through december and are looking at great returns through january. but a bit they are having is whether they should fade the general are removed and use of the strength to raise cash again and wait for volatility in the coming months. is that the right approach? jim: i don't think you should go back into cash. i think you see a risk rally. we like owning high-quality carry as opposed to earnings risk. tony: i agree about being up and -- being up in a liquidity. i don't think you need to go to cash at all. i don't know that we will go back to the low levels of the beginning of the fourth quarter. . we might get positive news on trade, for example, but i think it is a carry year. you can comfortably earn the carry that is available. matt: hold on to those core risks near the consumer securitized. they would be looking to fade some of this rally as ig credit gets below 125 and high-yield

gets below 7. you need to start getting some chips back to be reloaded with. jonathan: jonathan: great to have you with us on the program, you are sticking with me. jim keenan, tony rodriguez, and matt toms. a check on where the market have been through the week. 2's, 10's and 30's on the treasury curve. yields up. coming in at the longer end, the 30 year yield coming in at three basis points. still ahead, the final spread. the week ahead featuring comments from paul, trump and mark carney. still ahead on bloomberg "real yield".

♪ ♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield," and time for the final spread. coming up over the next week, a reminder that it is the chinese new year, so 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 the fed 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. matt, a final word from you going into next week, what are you looking for as things progress? the u.s. economy looks solid. the rest of the world is looking soft. people are increasingly looking to deploy capital and take on more risk. what is your message? jim: 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 company earnings.

if you can get warnings come out whether it is from sales to china, or otherwise, how are the interest rate sectors doing now that the rates have come back off? you want to see that stability is actually occurring. jonathan: i'm just wondering, even if it did pick up, could the fed think about getting in. just from a credibility standpoint? don't they have to stand pat for a little while? matt: they can't move back yet in our opinion, but it will set the stage for the eventual moving back in in the second half 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 is, and what that means for business investment or whether are seeing for their companies, that will be

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? the biggest thing hanging over every asset class is there is too much debt in the world. but by its nature is deflationary. as you see inflation pick up or rates pickup, that is ultimately going to slow down growth globally. i think that is always going to be the question. and yes, in all of our asset classes, policy and the potential for recession is going to be where you will see severe moves like he saw in a 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 f market. that is why you need to see data that is consistent with moderate stability and inflation in the economy. jonathan: talk to me about that. more broadly, the data was

consistent in america from december through it was january. 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 a week and a half are two weeks so a another potential government shutdown. as the year rolls on and we get closer to the election cycle, 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. i don't know how the economy works anymore. let's go through some final questions. is the last rate hike of the cycle already behind us? yes or no? jim? jim: yes. tony: yes. matt: no. jonathan: interesting. will you fade january rebound -- januaryeld, rebound in high-yield, or do you stay with it?

fade or stay? jim? jim: stay. tony: stay. matt: fade. jonathan: he's very contrarian. away from new york there we had, going into patriots or rams? sunday. jim: rams. tony: patriots. matt: patriots. jonathan: great to catch up with you all. jim keenan from blackrock, matt toms from boyer investment management, tony rodriguez from newbie. 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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