jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. coming up, another jobs report delivering solid gains, taking the jobless rate to a 49-year low. not enough to put rate cut bets to bed as there remains uncertainty. treasuries looking resilient. we begin with the big issue. one more goldilocks jobs report. >> kind of feels a little bit goldilocks. >> goldilocks is the best description i've heard. >> still seeing strong growth.

>> you cannot argue with the numbers. >> inflation has been muted. >> we are having a really great job growth. super good job growth. >> the recovery looks like it has legs to it. >> the business cycle is in good shape, no inflation. the fed is staying away. >> we are calling it a nirvana. jonathan: we could cut that opening sequence and play it every month for the next two months. let's bring in our guests. kathleen, how long have we been doing this goldilocks business with payrolls report? kathleen: forever. it is getting old. jonathan: will it change? kathleen: we are close. everything is poised to jump. >> goldilocks for the economy, not the bond market. the only value is at the front end.

>> i think it will go on for a long time. we will find out a lot of the business cycle was a combination of the fed being hyper aggressive in their rate movements and not aggressive enough in tapping down aggressive lending. jonathan: why can this go on much longer than many people think? >> the boom and bust we had from the 1980's going forward was driven by these rate cuts. every time you would see a blowup. what was that from? a thrift crisis. bank lending crisis. the internet, y2k, that was a more legitimate business cycle not driven by financial. most of it was financially driven. they were allowing too much debt to build up during the cycles, they would wait and wait, and that was greenspan's hands-off attitude, then they would crush it. then they would save it on the way down by aggressive cuts. then the lending would explode. now we are on the far side of that.

there is a lot of debt, running out of new impetus for borrowing. the business cycle is waning. central banks now are really cautious and that will make all the difference in the world. kathleen: they are cautious because i think they are really stuck. it is hard to move lower or higher. you have a good economy so they were hoping it would gradually take rates higher and we could have a flat curve, but the market is just entrenched and there are two pockets. liquidity at the short end, hedging at the long end for increased volatility, and nowhere else to go. jonathan: let's talk about the bond market and where it is priced now, then we can talk about the inflation. the fed has backed away from cutting rates, at least pulled the market away from it. data coming in ok with the emphasis on ok, but yields are not backing up on treasuries.

why? andy: the fed showed they are more concerned about market volatility. the market needs that rate cut to come through, otherwise it will be disappointed. i agree with kathleen, there is too much froth in the market generally. the way this liquidity boom that we have had the last 10 years or so has completely distorted prices and risk-taking. it will be a real concern at some stage. robert: i look at the interest rates as an input. there are other places that you can look better in the lead compared to the u.s. our cycle is holding up and our rates are higher because we had this aggressive fiscal stimulus, and we have a strong underlying economy. but it is not just japan and europe where the rates are at zero or slightly below, and they are stuck there. if the rates were too low, you would see aggressive borrowing, the balloon getting pumped up and the need for higher rates to slow it down. you don't see that. you also don't see it in

australia, new zealand, where they have strong population growth. stable, maybe heading lower all around the world. u.s. rates are really at the top of the heap. in the long run, the fed fund rate will average between zero and three, i don't think you'll have 10-year treasuries averaging 2 or higher, and that is why we are stuck here. kathleen: that sounds like a very logical argument but we are talking about all of the developed markets. china is stimulating, they are growing, we are doing ok. i think it is that competition between em and dm that will require some currency adjustment. the dollar is weaker today, even though it looks like there is a cut, lower for longer. it looks to me as if there are more reasons for the dollar to go down and adjust, which will also fuel growth.

jonathan: kathleen, this rate cut idea, why haven't we put that to bed? kathleen: it soothes the market, they want to believe there is no inflation. it is late cycle recession. i think they are looking in the wrong area. the risk not being priced in is inflation. jonathan: some people like -- some people think chairman powell had a go about putting that to bed when he said this about inflation. >> core inflation fell. we suspect that some transitory factors may be at work. thus, our baseline view remains that with a strong job market and continued growth, inflation will return to 2% over time, and then be roughly symmetric around our longer-term objective. jonathan: everyone is sick to death of hearing that word, transitory, but was that a message to the market? andy: i think that is a message that the fed is on hold.

robert brought up the situation in europe. having zero rates, massive liquidity injections have not helped to correct those imbalances. the fed wants to stay with as much dry powder as possible so that when the time comes, it has room to maneuver to cut rates prematurely, reducing their ability when they need to react. you will see transitory data, goldilocks numbers like we saw this morning, but you don't need to do anything. there is lots of market expectation, lots of noise, various tweets coming out. things can take as long as they are and we don't have to do anything. jonathan: do you expect the 10-year to remain in a tight trading range over the coming months? andy: i think so. you struggle to see it moving too aggressively until the data turns. when it does, we will see what happens. robert: i would agree. i think the transitory is on the high side.

inflation is a lagging indicator. we didn't just pop below 2%. we have been below 2% for most of the last decade. inflation went above 2% for one month. 6-8 months where we are averaging 1.5, 1.6. the chairman is highlighting we want expectations to be around 2, so if something bad happens and we cut to zero, people perceive real rate. i think he sees value in speeding the economy up. by running policy in a way that persistently keeps inflation below 2%, that could be dampening growth. if they did not have this pop in growth , some hint that this payroll number was coming, i would not have been surprised if they cut 25. jonathan: but they haven't, and the data is still ok, and you want to buy the backups in the treasury yield? robert: if the data is hot and unemployment is still dropping,

they have all the reason to keep the distance from where they are and zero to make sure excess is not building up in the market. but the fed does not run the show. the economy runs itself. this idea that the government will run the market, run it through the fed, i think, misses what they knew 70 years ago when they said the job of the central bank is just to lean a little bit into the wind. you will get the signal from the market which direction it will be. jonathan: we got that signal at the end of 2018. there was a belief among certain investors and economists that a few more hikes is a policy mistake. i want to test the extreme end of the conversation now and reverse engineer it. are we in a situation where the markets start to test the fed the other way? if you don't cut, that is a policy mistake. or are we way off of that situation?

andy: it would not surprise me if the market tries it, but we mention the booms and bust of cycles in the past. asset cycles are going through that cycle. q4 last year versus q1, fundamentally nothing has changed, but we have a difference of 20%. we are seeing severe volatility, that is not helping anybody. i think the fed is showing some true independence and doing what is the right thing, not what satisfies the likes of us, which is the important thing. kathleen: i think andy is right. if they move to cut, it is a very bad message. negative rates, january 16, everything went down. that is not where we want to go. jonathan: everyone is staying with me. coming up, the auction block. tesla back in the market. that conversation is next. this is bloomberg "real yield." ♪ jonathan: i'm jonathan ferro.

this is bloomberg "real yield." i want to go to the auction block heading into the u.s., the treasury keeping its nominal coupons of debt steady at a record high amid a growing budget deficit. the u.s. will be selling $84 billion in 3, 10, and 30-year notes. strong demand in the high-grade market. boeing selling $3.5 billion in senior unsecured bonds. finally, tesla tapping the debt market yet again, raising $1.6 billion in convertible notes. bonds pricing at the high end of the initial range indicated to investors allowing tesla to boost the size of the offering. let's get to the broader story.

global monetary action weighing on interest rates worldwide, keeping investors on the hunt for yield. bob michael of jpmorgan believes central bankers are bullying investors into buying. >> the ecb has bullied us and the rest of the market into it. they are not going to raise rates, so that leaves us scrambling for yield. they will maintain the balance sheet so it ends up backstopping countries like spain. as long as there is no drama that is erupting either through the trade war or brexit, you are supposed to grab the yield. jonathan: to discuss, we have robert tipp, kathleen gaffney, and andy chorlton. you feel bullied into buying in europe? robert: i think the ecb has underscored a point that the bank of japan has made, which is you can go too far with qe. they went into these banks and pulled all of their high coupon

yielding assets of the balance sheet and force them into -40 basis points excess reserves to . it was very punishing for the banks, punishing for the markets. going below zero has demonstrated to be a mistake. qe, unless you are in there for a short shock, can be damaging. i think they have caused problems, not intentionally, but to me that is the lesson. jonathan: let's talk about what that means for markets. through april we had a massive month for eurozone investment credit. we also had a couple of big months for the periphery. spain over germany, less than 100 basis points on a 10-year maturity. i know you have been running this story. are you still chasing that? robert: still hanging on. a fantastic story. a country like spain, along with the other countries that have gone through their programs are having their best growth profiles, whether it is cyprus -- ireland was in the lead in terms of this. on paper, their numbers are as

good as the u.s. in terms of debt to gdp, but their debt to gdp will be stable or falling. it is a pro-european country, they have their political ups and downs, but they have a rulebook. 100 basis points over a 0 area bund. as it rolls into that negative 40 rate, things will be powerful. jonathan: there is the chart. how tight can we get, what are we looking for? robert: a longer time goes on, the more it will go through corporate bonds. they will be 50 over in five years, plus or minus. that would be my guess, based on a reasonably good outlook for europe. jonathan: kathleen, your thoughts? kathleen: if i was in those markets, i think that is the right tack to take. it's all about reaching yield. on total return, where can you get the best upside?

it is really upside i'm looking for. income, coupons are not enough long-term. jonathan: where'd you get that total return right now? kathleen: i would say cashless -- i would say cash looks pretty attractive with no downside. currency is where your upside is. there is lots of upside there. andy: i agree that cash at 2.5% is probably the best thing. jonathan: after the year we have had so far in high yield, the returns we have had? to hear people say that i like cash. andy: the returns we have had, you don't get them looking forward. if you have some em, you take a little bit down. that bounce was solely predicated by the fed. the only reason the market has done what it has done in 2019. the european story, i agree that is a credit story with the peripherals. the challenge is, as we know as

brits, european politics can be tricky, change quickly. that is the trade you are making. jonathan: interesting call coming out of alliancebernstein. u.s. high-yield over equities for the next three to five years. take a listen. >> most equity strategists are calling for 6, 7, 8% returns. high-yield historically over rolling five-year periods tend to come back. 6.5% to 7% today, more if you go global. that will compete with equity returns. if we are wrong about this bullishness, high yield always goes down a lot less than equities. jonathan: robert, your view on that call? robert: i think this is a good investment environment, has been for the last handful of years. these underlying risk re-rates have been falling, volatility of the business cycle is down. when i look at the market and equity valuations, they are attractive. i also think credit valuations are reasonable.

tighter than average, but usually at this point in the cycle they stay tighter than average until you get to the actual downturn. i think that downturn is a long way off. i think investors are supposed to be at their strategic allocations. high yield is a very efficient way. jonathan: the basic argument is that you have to sacrifice a little bit of return potential but you get to tamp down volatility. over a five-your time horizon, your returns will be pretty decent, about 6% annualized. going forward year after year after year after year. what do you say back to that? kathleen: if you are relying on how everything was done in the past, it makes sense. you mentioned just a few moments ago the growing deficit. i think that will be a problem. you have rates at zero or below fair value. that cannot last forever. credit has a lot more interest rate risk in it than we expect.

the fiscal policy, the spend, uncertainty about where we are geopolitically around the world, low probability events are likely to pop up. i think that makes the downside, whether it is equities or fixed income, much tougher. there is less ability in high-yield and equity. -- in high-yield than equities. jonathan: the argument is if you hold to maturity, that is your base case. if you hold to maturity of five years, this will be a return potential. kathleen: i don't know any investor that holds to maturity. if you are an investor and you can stand it with the volatility, i would be shocked. for active institutional managers, you will never hold to maturity. andy: i agree. look at mutual fund flows. clearly, people are always in and out. herd mentality is probably more likely the reaction. the problem with high-yield, you could argue from a multi-asset

investor, it is a defensive investment, but in and of itself, i don't see it as attractive. you have got to pick your poison about it. for me, high-yield is a risk on position. if you are a multi-asset investor, it is used for a different reason. kathleen: liquidity is important. we noticed this week there was less liquidity in the markets. banks are stepping away, we are buying on the bid side. jonathan: everyone is staying with me. next, we are getting you the final spread. i want to get a market check right now. in the bond market, 2, 10, 30, yields up. up next in the program, the final spread.

after a strong jobs report, we get another read on the u.s. economy with inflation numbers next week. that is coming up next. this is bloomberg "real yield." ♪ jonathan: i'm jonathan ferro.

this is bloomberg "real yield." time for the final spread. the european commission publishing their spring forecast ahead of a meeting with eu leaders. the chinese vice premier returning to d.c. for trade talks. important data out of the u.s. with ppi and cpi readings this week. to discuss next week, robert tipp, kathleen gaffney, and andy chorlton are still with me. what are we looking for next week? kathleen: probably more of the same. jonathan: exciting. kathleen: [laughter] staying positioned just as i am. andy: if the markets continue running, keep taking risk off. jonathan: you really believe that.

andy: if you look at where spreads are across the board, we are at the bottom quartile, almost regardless of the timeframe. spreads, leverages, everywhere. particularly ig. everyone says liquidity is fine, until they need it. we saw in q4, when people need liquidity, it is not there. jonathan: let's get to the final round, rapid fire. three quick questions, three quick answers. i begin with the first question, i keep asking this. i want to know how it changes as the year grows older. struggling to put rate cuts to bed. is the next move a right hike or a rate cut over at the fed? robert: cut. kathleen: hike. andy: cut. jonathan: resilience through the week despite a fed not leaning into the rate cut story. have we seen the high on the 10-year yield in the treasury market for the year already? robert: yes.

kathleen: no. andy: there or thereabouts. jonathan: that does not count. andy: no. jonathan: third question. high-yield. looking resilient. take profit or stay on for the ride? robert: stay on. kathleen: take profit. andy: take profit. jonathan: always great to catch up with all of you. thank you very much. from new york, we will see you next friday at 1:00 new york time, 6:00 in london. i hope you are doing something better in hong kong. from new york, this is bloomberg "real yield." this is bloomberg tv. ♪

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