jonathan: from new york city, i am jonathan ferro. bloomberg real yield starts right now. jonathan: coming up, a payroll shocker, competing with a solid wage growth picture. chinese exports fueling worries about the global economy. the latest central-bank u-turn. stimulating concerns much more than it stimulates markets. we begin with the big issues, the february payrolls number. >> i am a bit surprised. >> big surprise. >> a little surprised. >> the market was surprised. >> it is a one-off, but it is a shock.

>> this is a very odd jobs report. >> i do think this is a shutdown effect with some bad weather sprinkled in. >> people are looking at the weather and the government shutdown. >> there was always going to be noise as a result of the shutdown. >> if you average out the two, the trend is still very much intact. >> we should look at the trend and that is largely why you should this come to this. >> not unreasonable that we will have a pullback in february. >> it is a jobs report that the fed should feel good about. >> it is not so bad. jonathan: joining me around the table here in new york, marilyn watson, head of global fixed income strategy at blackrock, henry peabody, portfolio manager from eaton vance, and kevin giddis, head of fixed income at raymond james. let us begin with you, marilyn. how do you read that payroll report? marilyn: i agree that it was not that bad. when you look at the three months numbers, it was averaging about 186,000. over 12 months, north of 200,000. for an economy that has a very

tight labor market, you are seeing an increase in hourly wages, which is great. it is good to see that come through. i actually feel it is a positive thing. it is something to be happy about. henry: i believe the wage pressure comment. whether you're talking politics or the economy, the takeaway is that we are bipolar. you are seeing the good data and bad data. that number was fantastic, but we are seeing most of the oecd leaders and leading indicators start to rollover. there is this period where the lack of clarity is striking. the market is in a challenging spot, and you have to look through that. that is a challenging job these days. kevin: in golf, they say every shot makes someone happy. today, if you are the bond bull, you have a 20,000 jobs. if you are a bear, you're got plus .04% in hourly average earnings. it will take a few more months to sort out which one matters. i doubt there will be another $.11 increase in wages in the next month, but i would be

longer than shorter. jonathan: it has been difficult to know what to do with treasuries. we have had such a range bound market. last week, a total head fake where yields broke out. we talked about how we would drift high, and then we rolled over. your thoughts? marilyn: we like treasury and diversified portfolio. decent yield in treasuries. we think the fed will be patient for the first half of the year if not beyond. inflation will remain contained. we like the liquidity, the yield, and it offers a good hedge. in a risk-off environment. i think we like treasury. jonathan: it is interesting, the inflation expectations and there is an inflationary impulse over the last couple of weeks, even though the data has not been great. what do you read into that? henry: i read into the market that is looking through this

period of noise, and we have to think about a push higher in wages and oil. in the back half of the year. touching on this treasury comment, it is important to mention that with our trade dynamic, sending fewer dollars overseas and desires to do less, the treasury market is in the process of crowding out the u.s. consumer, something we really need to pay attention to. the increase of the u.s. savings rate. and perhaps, the pressure of consumption. it is very important. kevin: i think that marilyn is right. where inflation is currently, where yields currently are, i will be the first to admit that i missed that big move last week in yields. i was looking at the data going, that is december is data. a move that i thought certainly wouldn't take us to .75 did. i am less surprise and what is happened since then, anything that is a trend. we are closer to 2.25 than we are to three, and in the range

of 2.60 and 2.70 is where we live. jonathan: the other big debate is this man right here, ecb president mario draghi, delivering a dreadful assessment of the euro zone economy. take a listen. >> compared with the december 2018 euro system microeconomic projections, the outlook for real gdp growth has been revised down substantially. in 2019 and slightly in 2020. jonathan: what was really interesting about the price action in the row over in bond yields, i was trying to discern to what degree that was about the policies that were announced, and what degree that was about the bond market. which one was it? marilyn: potentially a bit of both. the market had been expecting the additional yields and that they would push out the forward guidance. i think the market was expecting this. i think the timing was unusual,

but i think when you look at the growth forecast, when you look at everything mario draghi was saying, the eurozone is weakening. it doesn't have the growth that you see especially in this stage in the cycle that you saw in the u.s., so i think the market is not pricing in anything anytime soon. i think the market found it more dovish than they are expecting. jonathan: i struggle with the idea that you need to cut your growth forecast. there being a massive shock, and they say it has been because they were so far behind the curve. why do they always get dragged kicking and screaming and are the last ones the party? henry: but haven't we seen that with central banking? abrupt about faces and polishes -- policy shifts? what caught my eye in this was that we had whatever it takes and now as long as necessary.

they got really dovish, and more so than the market is appreciating. northern european banks don't want the negative deposit rate, southern banks want term financing. to balance that will be a challenge. they have a lot of wood to chop, but let us also bear in mind that out of every region in the world, they actually have had room to do something, to make structural change. and don't know if the will is there, but they have the headroom. jonathan: from a monetary policy side, there is certainly no room to do anything. you saw how limited the options were by watching what they did do. for me, the takeaway, and for a lot of others, is how limited the policy options are and how much lower the equilibrium rate

might be on a global basis, dramatically lower. we were joking around, and it is bad joke, couple of years ago, about normalization. there is no prospect of rates going up in europe for the rest of this year and very few think it will happen next year. what does it say about the global economy? kevin: it does not give you great confidence in central bankers, especially in europe. i laugh because you guys were the last of the party -- it is their party that they came in at the latest point. so from here, you had to convince the ecb that they didn't need to tighten, then, not just sit there and wait, and now, you have to be

accommodative. i think it will be very difficult since most of these are starting to turn over now and they can never catch back up with any kind of rate movement. how much negative can you go? jonathan: pimco told us this week about the japanification of the euro zone market. is that what is happening in europe, given that the ecb is stuck where they are currently? henry: to an extent. we are setting up a lot like the 1950's and 1960's where we had yield caps and we got highly expansionary policy. you need to have monetary and fiscal policy, whether by hook or by crook coordinated to some extent. we are learning that lsu does not work, and this gets us to a higher inflationary environment, whether in six months, two years, or five years. i think the coordination of policy and expansion of balance sheets has to happen at the government level. it might happen after a crisis on the corporate side, it might happen first, but it has to happen. otherwise, we are in a really tough spot. jonathan: until then, buy treasuries, is that right? marilyn: that's right, buy treasuries. at the moment we are looking at assets that offer more income. it is hard to find that in large parts of europe. we like italian bonds. jonathan: we had a massive win for italian government bonds. marilyn: it has to be from the bottom of perspective. you have to really pick which one you like. we like income, it is just

finding the ones that offer you a risk adjusted return. jonathan: we will talk more about that a little later. marilyn watson, head of global fixed income strategy at blackrock, henry peabody, portfolio manager from eaton vance, and kevin giddis, head of fixed income at raymond james. all will be sticking with us. coming up in the auction block, the rally in emerging markets. they are continuing, fueling concerns that the market could be overheating. that conversation is coming up next. from new york, this is bloomberg real yield. ♪

jonathan: i am jonathan ferro. this is "bloomberg, real yield." with the auction block, we go to europe and start with greece, returning to the market again. the country agreeing to sell $2.8 billion of 10 year bonds. pricing to yield 3.9%, less on the initial target of about 4.13%. this is boosting demand in emerging markets. qatar returning to the market, raising $12 billion with its three-part offering and the gulf state attracting $50 million in demand as it took advantage of a u.s. interest rate. finally, in corporate, dow technologies tapping the investment grade market and selling $4.5 billion of secured debt, as 10-year notes, priced to yield 2.7 percentage points. sticking with corporate credit, another warning come this time from the bank of international settlements. this is the possibility of a corporate bond crash. enough issuers were abruptly downgraded from bbb to junk status. market participants with investment grade mandates could be forced to offload large amounts of bonds and forced to offload them quickly. still with us to discuss this is marilyn watson, head of global fixed income strategy at

blackrock, henry peabody, portfolio manager from eaton vance, and kevin giddis, head of fixed income at raymond james. there are so many people worried about this in fixed income, and also outside of fixed income or word. what is the big concern? marilyn: the biggest concern is that we have had a huge increase in the size of the bbb market. it has increased exponentially. i think the concern is, as you get to the end of the cycle and rates are relatively high compared to before, the concern is you could see more defaults, more default risk, and a downgrade. to your point, that is not the scenario. we have seen huge increases in the sector. i think that statement is a worst-case scenario. we don't think you will see a wholesale downgrade in terms of bbs, it is a matter of looking at the fundamental as you invest. henry: our research team did a fantastic job and the founder of

very large chunk of that market our first and issuers. they pocketed it into upgrades and downgrades. new issuers tend to be underrated. there is a little bit of that there, all that said, this is a proportionately larger story on leverage, which is important to be mindful of. whether it is debt to gdp, or corporate balance sheets, all of those measures have begun to get stretched. this is not an asset class thing, this is a system thing. finally, the concern i have is not the size, and we talk about the size of the market, it is the duration. you are moving a lot of 30-year debt into the high-yield market if it goes. we will learn a lot about the behavior of the high-yield market, when duration most of the market. jonathan: what do you think of

that, kevin? kevin: the quintessential chase for yield is on. you either go up in duration, or you go down in credit. out of the $9 trillion corporate bond market, about one third of it is bbb. when you add back in high yields and leverage loans, that is two thirds of the market. there is reason to be concerned. the flipside is that, since september of 2018, we have seen spreads go from 180, to 260, to 230. the stretch in the last 30 to 40 days indicates that the line is still there and people are not as concerned and the spreads are tightening, not whitening. jonathan: i also think they really there is some optionality. they have an incentive to run a bbb balance sheet, so they did. if they do not have an incentive, they will not. they can flip the switch. i have always thought it is easier to run a bbb balance sheet and go down in credit quality. you can make that decision quickly. it can happen quite fast. it is much harder to do the opposite, isn't it? marilyn: it is harder, but not

impossible. jonathan: do you have that faith, though? i have been told that this could be the year of the debt diet. i'm wondering if it is? henry: you are starting to see some of the largest balance sheets deleverage. you are starting to see equity investors calling for deleveraging. all that said, to have meaningful deleveraging and to be bought into by the credit rating agencies, you need to have a protracted move lower in leverage and to have it be credible. this is not something you can flip a switch and do something overnight. behavior needs to change. capital allocation needs to change, and that does not happen quickly. to your point, much easier to go down. jonathan: you mentioned the equity investor, something important. i wonder if this is a problem more so for the equity investor, who has benefited from the very friendly bbb balance sheet that has been around, been incentivized to run because a lot of that money was used for

the equity investor and the growth-friendly kind of things that the c suite did. do you think it is a bigger problem for stocks than it is for bonds? henry: absolutely. it will put pressure on equities and on the most important thing, liquidity. as a trader, it is easier to sell an investor a aaa bond than to buy one back from them. don't tell anybody that. the liquidity part of this equation is where this market could collapse, much like it did in 1987, and 1994. in other years along the way. that is going to affect equities. i really do think that you have a great scenario for a big potential problem, i don't know if it ever comes to fruition are not, but it is there. jonathan: most people would agree, and i'm sure you do around the table. if this will play out, it will take a much longer time to play

out, and the here and now, the spread between bbb and bb is gotten fairly tight. a lot of people are wondering if it is an opportunity to go long on bbbs. is that the opportunity? henry: i do not think so. i think you are likely to see volatility in both of those sets of markets. we are very much bottom up, so we are not allocating based on the ratings bucket. but i suspect that given a relatively rich, in my opinion bbb market, and bb market, when we do see slowing, it will be areas where investors command liquidity from. you want to stay away from where liquidity will be commanded. as you said, liquidity can be challenged and you can be whipsawed quite easily. jonathan: it is great to have you with me. you guys will stick with me. i want to get you a market check on where bonds have been this week, 2's, 10's and 30's. a look at treasuries, and yields looked like this. we come all the way in by 10 basis points. on a 10 year, rallying as well, down 0.13 to 2.62 and a 30 year flirting with 3%. 3.01% is your 30 year yield. still ahead on the program, the final spread, and the week ahead featuring more important data out of the u.s. including retail sales and cti.

that is up next. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro, this is "bloomberg real yield." time for the final spread. coming up over the next week, by 10 year anniversary of the u.s. equity bull market. this weekend. then, more data out of the u.s. including retail sales. u.k. house of commons voting on the revised exit deal, and elon musk reveals a new model y. and, china's npc wreps up with a closing conference by the premier. still with me around the table, marilyn watson, head of global fixed income strategy at blackrock, henry peabody, portfolio manager from eaton vance, and kevin giddis, head of fixed income at raymond james. can we talk about, 10 years since the bottom of the equity market? it was a couple days ago where we hit that 666 10 years ago. the lessons of that. it is always this moment of time

and it is easy to say that it made a ton of sense to buy then, how difficult is it to apply the knowledge to those events to the growth scares we have had? 2011, 2012, 2015, 2016, and what we are working through now? marilyn: it is difficult to predict when a future will be great. [laughter] i think we have seen so many different idiosyncratic events, on the corporate side and on the macro side. it has been incredibly difficult, and i think also, no one could have predicted that the monetary policy response we have seen, in the u.s. or the ecb, or rather it is japan. they are almost political decisions, and almost impossible to really gauge and to know whether this is the time to buy or whether this is the time to sell. jonathan: henry, the discipline you had to have through 2012, 2015, 2016, to maintain and not freak out. to have faith that things will stabilize.

it is so much easier to say than to execute. to buy the december weakness of a couple months ago. can you learn those things? henry: i think it has to be part of your philosophy and strategy, and you need a good client base that understands that. to your question a moment ago, i would flip it around and say that we may be prone to hyperbole, let's not over apply those lessons and expect the next crisis to be around the corner, that has contributed to one of the biggest problems we have had since been, which is consumers unwilling to borrow again in any substantial fashion, which has hindered monetary policy. the crisis was also a psychological one that had a great impact to consumers and also to the behavior, investing behavior which you just mentioned. jonathan: with a 10 year hangover. discuss, kevin. the scars are still deep. kevin: i think when i entered this business in 1983, i could not sell 16% 10 years because they wanted 21% two years. you couldn't convince anybody to go further out and take the bigger yields. i think what we have maybe misunderstood is how much stimulus it took to get an

economy back, and how much it continues to take. with all the stimulus, you have 2.5% growth, how much more to get to 3%? jonathan: i remember someone from pgim telling me, -- iremember saying to him, what do you think it would take in 10 years? he said forget about it, and 10 years you would have wished that you had bought the 30 year with a 3% because it will work different. i want to get to the final round. some final questions for you, and we begin with this one. whose job would you prefer, mario draghi's or theresa may's? marilyn: draghi. henry: draghi. kevin: draghi. jonathan: have we seen a high of 10 year yield on treasuries for

the year? have we seen it already? marilyn: no. henry: no. kevin: yes. jonathan: have we seen the tight on u.s. high-yield for the year? marilyn: no. henry: yes. kevin: no. jonathan: interesting stuff guys. it has been great to catch up with you all, marilyn watson, henry peabody, and kevin giddis. thank you very much. from new york city, that does it for us. we will see you next friday at 1:00 p.m. that will be 5:00 p.m. in london with the clock change here in the u.s. this is "bloomberg real yield." for our audience worldwide, this is bloomberg tv. ♪ this isn't just any moving day.

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