jonathan: from new york city for our viewers worldwide, i am jonathan ferro. "bloomberg real yield" starts right now. ♪ jonathan: coming up, another monster payrolls report. u.s. hiring topical forecast. solid data and 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, and we are proud of

it. >> this is a number great for the fed. for now, i think they can ride this out and 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 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 coming to us from atlanta is matt toms. let's begin with you, jim. are we underestimating the strength of the u.s. economy? jim: i don't know about

underestimating. the market moved on expectations that the fed was going to slow the economy significantly. the economy has been pretty stable throughout. there is some softening because financial conditions have tightened. conditions are good, businesses are in good shape. although it is rolling off, you have substantial fiscal stimulus last year. jonathan: manufacturing really hot to close out the week. what are your thoughts? matt: the risks are abroad. the strength of the u.s. consumer the u.s. manufacturing , base looks strong. just because there are external risks doesn't mean they will be materialized. i think the market is back to its central narrative, strength with external risks, but the -- but that does not ensure recession by any stretch. 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 and they stuck to two more 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, but not as good as last year. jonathan: talk about the data, and then we can work out what it means for the federal. a couple of economic debates taking place. a former member of the white house saying this morning, following the numbers, that the gdp growth is interesting, the gdp is rolling over to some extent, yet payroll growth is accelerating. at the same time, inflation is rolling over to some extent, wage growth is still accelerating. what are your thoughts on that and what is underpinning that? matt: we can count jobs, we can count spending. looking at those 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. clearly the risk is which came

kinks 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. as you saw stimulus come in, both fiscal and monetary, all of that contributes to stabilizing economic data or growing economic data, but it really flowed down to corporate profits. now the labor slack is much tighter, the labor participation rate jumping up so that there is a little slack in there. what you are seeing now, the percentage growth of gdp is going to flow into labor income at the expense of corporate profits. that does not necessarily mean a negative from an economic standpoint. it means you will mark c 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. if you think about that there is , a lot you can debate how tight the labor markets are, but labor participation is down significantly from its highs a decade ago. if you look at it right now, if i am the fed, i will look at it and 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. to say they were still going to tighten twice, they reversed. are they going to reverse again? if they remain truly data dependent and patient, i think consumers are doing 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 and europe, those are going to be headwinds from the economy. 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 tightening from hiking interest rates. , do you anticipate the data coming in in such a way that perhaps they have to step back in or are inclined to step back in? matt: i think they are inclined to step back in. , expect thatnote to move higher overtime. the fed needs to step back in if this benign growth is realized. you have this 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, wall street might not like that. the fed has two masters to serve and 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 has done a retreat, that they bought

stability but once again they will be injecting 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 comes into the market that could accelerate growth, at that point, maybe they start to tighten. if they stay this consistent, i think they 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 said the fed is at the right place, but the way we got here was an absolute mess. does that tell you anything about where we are going the future? you 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 later in the year, but they will not 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 good framework for how the federal reserve may be. how do you apply 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 would push rates up. the story should be a patient fed allows growth to percolate. inflation with it. look for a steepening of twos, 10, near 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. i could see some modesty through the year. i don't think the fed will be as aggressive.

the market has priced out 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, globally we don't 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. that is why i think the fed will not only 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 whole cycle. >> you are going to stick with me. tony rodriguez, jim keenan, and matt toms. coming up, issuance taking off in 2019 with investment grade and high-yield making a big comeback. that is next. this is "bloomberg real yield." ♪

♪ jonathan: i'm jonathan ferro, this is "bloomberg real yield." i want to head to the auction block, where we wrapped up the busiest month for high-yield since september. january pricing more than $17 billion. the highlight of the week posting the biggest jump bond offering since 2016. meanwhile, the u.s. treasury announced plans to issue another record-breaking amount of debt, it is raising its long-term debt issuance refunding auctions to $84 billion. $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 last year, with sovereign deals pulling in massive order books. still with me to discuss is jim keenan, tony rodriguez, and matt toms.

your thoughts on the insatiable demand for european debt at a time when the economy is looking worse and not better? matt: i think ultimately with global rates looking to stay low, people are looking to stop up any rates 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 looks to be back. jonathan: the periphery behaved like credit and not a sovereign. are we starting to witness a slow change, or is the periphery still trading like credit? matt: i think the periphery still trades like credit, without a fiscal union and the ability to print, as soon as you have any credit fear, it will trade like a credit bond. italy showing that with widening of some 15, 20 basis points. i still think credit, not government bonds. jonathan: do you agree with that, tony? tony: it is not nearly to the extremes we saw in the crisis.

is still trades with credit and i think it will continue. 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 equity markets and other assets. you start to see people coming back for safety, other times for income. the demand is still there, and that is global. it is not just europe. jonathan: let's talk about the u.s. and the global backdrop. what we witnessed through december was not the deterioration of fundamentals in the united states, it the fear that they would deteriorate in the coming year. it was a massive sentiment in america through december. 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 credit was a bit of a follower in this. you hit it with regards to -- it was a fear of a fed mistake that was going to create a recession. the credit markets basically sold off. there wasn't an enormous amount of volume in that and from an issuance standpoint, fundamentally, no one had to come to the market because there was no real maturity. i think it is about 10% of the high-yield bond market comes due from an maturity standpoint in the next three years. fundamentally speaking, earnings are good. 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 those 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?

doesn't really tell me about what 2019 has in store? tony: i think the volumes are still going to be challenged. 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, so you have seen a shift. jonathan: is that what you expect to happen through 2019? because as you know and have been speaking to me about it, there is a massive appetite for floating rate through 2018. do you see a turn taking place where the issuer doesn't see the same demand in terms of the high-yield market? jim: i think it will be more balanced this year. each company will be different about what they need with

regards to their own protection or their ability to grant security in some of the issues. it will be more balanced. jonathan: do you expect the same thing, and can we get anything like the performance at the latter end of the year? we had 4.5% gains for high-yield through january. do you think you can replicate it in the next 11 months, not to mention the next month. matt: is has been a good year within one month. you have seen flows which are key. 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 part of the debt structure back in place through 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 the balance, so 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. 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 through december and are looking at great returns through january. the debate they are now having is whether they should 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 there is a risk rally. we like owning high-quality carry as opposed to earnings risk. tony: i agree about being up in liquidity. i do not think we need to go to cash. i don't know 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 earn 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 ig credit gets below 125 and high-yield gets below seven. to play that tactically, you

need to start getting some chips to be reloaded. jonathan: great to have you with us. keenan, tony rodriguez, and matt toms. a check on where the markets have been through the week. yields coming in big-time on a two-year following the fed retreat, down nine basis points on the week. yields coming in at the longer end at three basis points. still ahead, the final spread. the week ahead featuring comments from powell, trump, and carney. this is "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 it is 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 fed chair 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. 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 to them? 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 get warnings, whether sales from china or otherwise, how those sectors are doing now that the rates have come back off? you want to see if that stability is 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 the second part of the year. anything that pulls them in sooner is bad news. the market has 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 that hangs over everyone's asset class 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 in december. tony: the only thing that flip-flops faster than the fed is investor sentiment. to the extent's that you get a bad print on the metric, you will possibly get everyone to shift to the other side of the boat again to a risk off 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 in america from december through january.

it was sentiment that flipped so aggressively. is this 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. i don't know how things work around here anymore. let's get to rapidfire questions. is the last rate hike of the cycle already behind us? yes or no? jim: yes. tony: yes. matt: no. jonathan: interesting. would you fade january rebound in high-yield, or do you stay with it? fade or stay? 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: there we go. 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. that is 6:00 p.m. in london. for our audience worldwide, this was "bloomberg real yield," this is bloomberg tv. ♪

alix: venezuela in crisis. the u.s. issues oil sanctions on the country, throwing regional oil differentials in disarray. brazil's mining catastrophe. vale shuts in 40 million tons of iron ore production a year. it's the aftermath of the dam rupture sending shock waves. the next era of technology. i sit down with the ceo of baker hughes. the company is a revolutionary in the oil and gas industry. we look at the next generation of technology. ♪ alix: i'm alix steel. welcome to "bloomberg commoditi