jonathan: from new york city, i am jonathan ferro. bloomberg "real yield" starts right now. ♪ jonathan: coming up, payrolls friday, another sign the u.s. labor market remains resilient. china providing extra support for the economy, giving investor sentiment another boost, and chairman powell getting the final word ahead of the fed's next meeting. we begin with the big issue, a mixed payrolls. >> it is decent. >> data is not bad. >> a goldilocks number. >> the general picture is of a

slowing economy. >> still well above what you would expect at this late cycle. >> fears about a u.s. recession are not showing in this report. >> very hard to get a recession in the next 12 months. >> you have got higher wages, hours trending up. >> the labor market is holding in. >> we were worried about manufacturing hours worked and we saw the numbers are hanging fine. >> the jury is out in the manufacturing sector. >> uncertainty is on so many fronts. >> maybe there are some budding signs of some weakness in the employment sector at the fringes. >> the question is where the uncertainty goes from here. jonathan: joining me around the table, my guests. the payrolls report does nothing to change what you thought regardless of what you thought going into the payrolls report, not a game changer, is it? subadra: is basically confirming status quote for the fed.

they are on track to cut 25 basis points at the september meeting. the real question for me this morning, if it turns out to be weak after the manufacturing data earlier this week, will the market press for a 50 basis point cut? there is no fear of that. the pace of job creation is declining. 220,000 jobs per month last year and now that pace is coming down $160,000 --e 160,000 per month. jonathan: we have to understand if that's a structural shift, it's natural, with had 200,000 per month for years, it has to come down to 100,000 or $150,000, or is it a deceleration in the trend will get away from them? greg: it is the concept of terminal velocity. things are slowing down. i think it's expected to slow down. the question is how it will form going forward? that's the open question. i think the trend is what matters and you're seeing slowing, but what is important to watch is what's happening on the corporate side with margins and whether you will see

companies defend margins by laying off people or slowing down hiring. jonathan: the good news of this report many people came into the , jobs report looking at the hours. average weekly hours. trying to see, if things start to slow down, corporate will not lay people off first, they will pull back on hours. hours ticked back up. is that encouraging to you? mike: i would point to the wage increase. that is the single biggest thing. i do agree with the point that it is kind of a meh report. the wage uptick is a good thing. president trump must love it. jonathan: treasury yields starting to bounce for the week. trying to work out whether the treasuries are a head fake or if we are seeing an inflection point where the treasury yields are starting to break a sustainably. greg: i don't think so. it's a massive move lower in one direction. you have one day with a violent move for sure but it doesn't change the overall trend in my mind, and so i find it somewhat humorous that all of a sudden

the bears are declaring victory after one day of 10 basis points. i think today is instructive in that we've had a mixed report, the data is clearly mixed and treasuries kind of stabilized. subadra: if you are a bond investor, you have to ask yourself, how low can yields go? if you look at bond yields at -80 basis points and the 10 year treasury yield at 145, you look at the fundamentals in the economy, it should be trading close to 2%. there is some level of uncertainty premium the bond market has taken out. the uncertainty premium is about 50 basis points are so. when you get 60, 70 basis points away from fair value, you have to question if it makes any sense. mike: the uncertainty premium we think is simple. he is about 6'3" with orange hair. his name is donald trump. if you look at where the 10 year treasury closed after the fed ease, 201. jonathan: what does it tell you

that we get a rate cut from the federal reserve and yields of the long end kept going lower? a lot of people watching this program believe that the fate of the yield curve and the shape of it can be shaped to some degree by the federal reserve the more -- being more aggressive at the front end. i'm trying to work out if that is still true. greg: i disagree with that and i disagree with mike to a certain degree. i think it's a global bond market and we are tracing what is happening in bunds and elsewhere. i think as long as the u.s. rate market continues to be the best yield around, money will continue to flow, and i think rates will continue to move lower, and if the fed cuts rates, i think that gives the long end more capacity to move lower, not a steepener. mike: interesting, we think there are three basic factors driving yield -- trade, brexit, hong kong. yes, they are global. that is partg's point.

bunds leading treasuries? i don't think so. these three things. we think the markets will be a mess the next couple of months. once you clear a couple of them out, you will see yield tick up. jonathan: to the point greg is making, the fed cuts rates in the whole curve comes in. mike: as long as you have a quality mentality, people will look around and say i need risk off, i don't want to buy bunds at -60 or -70, and forget dealt, -- forget gilt so i will buy , treasuries, but does it mean they offer value? not really. but do you want to hold this position for a month or the next six to 12 months? we think it's the former. subadra: going back to the bond curve, bunds are extraordinarily priced. and for the ecb to do a decent qb package, maybe as much as a trillion.to

what happens after that? are we hoping it goes to 120? or is there the risk that the ecb under delivers and there's a potential for the curve to steepen? that's a market move with on -- that is a market move we saw on thursday and that ultimately is my fear, that i do want to deliver and there is the potential impact that the bund curve will steepen. jonathan: there is concern how the market will react to this. 10 years ago when we first started to see qe in a bigger way following the financial crisis, qe and the objective was to get inflation and growth expectations up, to shake you out of the 10 year and the 30 year. in fact what you see is yields , should be going up when you restart qe. has that changed? subadra: it has. a good example of that is what happened after sentra said we will do all it takes.

the five-year break even in europe went up 10 basis points. two weeks later it was back down. five-year inflation breakevens in europe have stayed between 130 and 140. the market is not actively pricing in the impact of easing coming from europe feeding into higher inflation expectations. greg: i think it's a proved statement the qe doesn't work. the idea behind qe is to increase inflation and increase growth through consumer spending through indirect channels and so forth. it hasn't worked. the reason the markets are pushing back on the notion of qe moving up yields is the market knows qe is not effective. jonathan: so you would question the efficacy of central bank monetary policy. the more cut to get, the more stimulus to get. you won't unlock high growth expectations and you won't

unlock higher data yields. the markets right now, you would be fading into government bonds? greg: for the most part. nothing happens in a straight line. a 10 basis point move on that. we added risk on that. i see mike smiling. we think the general trend is for lower yields. it might not happen the next month or three months but i think over the next cycle you will see yields lower. just think about all of the stimulus that has been thrown into the system globally to get growth up. this is all you've got? basically i don't see capacity , for yields to move up in a meaningful way. mike: i think when there is a movie, its biography will be "raging bull 2." but i agree that central banks are about done. it's not a monetary policy question. maybe in the u.s. in europe, could they spend more money? yes, in theory. will they? probably not.

i suspect you have this dire situation in europe as far as stimulus. jonathan: what is interesting about europe is we are not questioning the efficacy of policy, we question whether his -- it is counterproductive. it's a different conversation with europe. the ecb next week, there are calls from people not doing qe, when the most controversial thing they could do next week is cutting into deeper negative territory. your thoughts on that, deeper into negative territory in europe right now. how much will it help? mike: zero. negative rates, terrible policy, does not make any sense. i'm sure it will launch phd theses but it won't work. crazy idea. jonathan: i think we are in agreement. coming up, the auction block. what a week for issuance it has been. $150 billion in corporate bonds coming to market. a record-breaking week in u.s. investment grade issuance. that conversation is coming up next. this is bloomberg "real yield." ♪ ♪

jonathan: i'm jonathan ferro,

♪ jonathan: i'm jonathan ferro, this is bloomberg "real yield." i want to begin with the auction block and hid over to europe, where we start with france, according its biggest ever debt sale rating. the average yield on all four tranches fell to record lows. in corporate's, berkshire -- yen ofricing in notes in the biggest from a non-japanese dealer. finally, apple joining a flood of investment grade issuance. the longest portion of the five-part deal with a 30 year

security yielding just over one percentage point above treasury. table are myd the guests. i would love your insight into the huge week we have just had for credit issuance and your thoughts on what motivates the move beyond where yields are currently. mike: welcome back, right? normally we wade into the pool and this time we dove straight in. august was extremely slow. a lot of that is catch-up. then there was a window of opportunity. the corporate market has benefited from the move in treasuries, which was somewhat interrelated the stronger , numbers we saw in terms of tweets and whatnot. the market really took advantage of that. i think it's important to note that year-over-year, we are still negative off a very high level in terms of issuance. the trend is slightly lower but this has been an eye-opening experience. it tells you that companies still want to borrow -- not

invest, but borrow at these low levels. jonathan: what is behind the move is not just price, turning out debt. not about investing in the business, is that what you are saying? greg: that's right. on a net basis you are seeing very little change. companies are turning out there -- turning out their debt and locking in low yield. duration dollars are coming into the market place, so the investment grade market is getting longer, which matters, it means there is more risk. that has been tossed aside this week for a feeding frenzy. jonathan: credit risk versus duration risk. as you sit with your colleagues now how concerned are you about , one more than the other? which one are you most concerned about currently? greg: more concerned about credit risk. if you think about an impending recession, whatever your personal probability is from 20% to 40%, duration well protect

you all else being equal. , credit will not. you're looking at leverage at an extremely high level. investors have been pulled in for the extra yield. i worry about credit much more than duration. mike: let's put a time horizon on it, three to six months duration risk. the reason why is if you get a factors, itbal takes the whole i.t. complex with it. i take the point, high yield is a different story, but for ig, that is a big risk. jonathan: did you see the move earlier this week? dozen that highlight concerns -- doesn't that highlight concerns near-term people have? i'm a little uncomfortable with massive swings like we saw earlier this week. greg: the thing about duration, when you're out to curve, it is volatile. so it is a wake-up call but i honestly think there are not a lot of other opportunities out there, so investors are forced into it because are not a lot of options. the negative rate curve that we are talking about, it highlights that investors don't have a lot of alternatives.

you are seeing those with the moves -- those moves not only in treasuries but credit as well. subadra: it's the global gilt grab, right? this is what central bankers want you to,, they want you to go into the spectrum and take on more risk, it's become more duration risk as well as credit risk. if you look at the next year or so, we spoke earlier about corporate profit margins compression, that's to agree how a recession plays out. if we go into a recession by the middle of next year, which is our expectation, there is the potential for spreads to start widening out. given the amount of leverage in the system, it might turn ugly very quickly. in the short term, you like high-yield. why? greg: i do. it is also relative. the high-yield borrower has been

different this cycle than previous cycles. all of the risk in leveraged finance has been pushing into the loan market. i dislike loans, but high-yield bonds i do like. that still is the case. the high-yield market looks much better today than it has in previous points of the cycle. i think it is ok. i feel more comfortable owning high-yield that i do investment grade bonds. jonathan: you sent me a note earlier this week. i want to bring out a line for our viewers. fixed income markets -- is subverted by jurisdictional or self-imposed rules, regulations, and constraints. how important is that line right now and how important is it to be nimble? greg: that's absolutely what drives the fixed income market. the fixed income market is so fragmented. you have non-economic pockets of capital all over that don't really relate to each other. if you are an investor that can go across, and we think we are, there are real opportunities.

there are so many dislocations because of these constraints put on. thosean: where are dislocations right now? greg: the long end of the curve. you're seeing it notably on the pension side, where the pension community is forced to buy more duration as duration rallies. that is something that is one aspect. jonathan: how do you take advantage of it? greg: i'm more seeing it on the credit side than the duration side. but you try to manage the seams. if you're indifferent to the various constraints, you can take advantage of that from an investor standpoint. jonathan: thoughts on the? subadra: the pension funds have gone down because of the rally, the long end, the flattening of the curve. this is a global problem. it's a big problem especially for pension funds overseas, where they just don't have as many assets that they can source in case -- to match liabilities

because yields are so extraordinarily low. from that perspective, i think the rally in the long end will be a huge problem. jonathan: you can be sticking with me. coming up on the program, the final spread the week ahead , featuring an ecb rate decision and president mario draghi preparing for his the project in -- departure in october. that is next. this is bloomberg "real yield." ♪

♪ jonathan: i'm jonathan ferro, this is bloomberg "real yield," and it's time for the final spread. coming up over the next week, we will get a load of data out of china. tuesday, the bank of england mark carney speaking in new york. wednesday, ppi numbers and cpi on thursday. plus, we hear from president mario draghi following an ecb rate decision. on friday, more u.s. data with the august retail sales report in focus. with me for final thoughts are my guests.

as we record this program, chairman powell is concluding his remarks in zurich. as i see things nothing really , new here. the chairman declined to go --ind -- the following quote "act as appropriate and sustain the expansion." what are you looking from the federal reserve in the next couple of weeks? subadra: 25 basis points rate cut i think is all the market is pricing in and what we expect. for the most part, i would say that he is probably going to continue to say this is a midcycle adjustment, which is somewhat at odds with what the market is pricing in, which is about four cuts between now and the middle of next year. i would be looking to see how they square the circle on market pricing, if or at the beginning of a rate cut cycle, or continuing to characterize this is a midcycle adjustment. jonathan: the market saying, you are facing the end of the cycle? are we there yet?

greg: no, but the market continues to push the fed. there's all this rhetoric around trump tweeting but really the markets are pushing the fed. that is what i worry about each , meeting is met with more priced in cuts. at some point, it doesn't wash . i think the second half of this year and into next year is about fed volatility in terms of what the market is pricing and what they are saying and doing. jonathan: you think at some point they have to push back? at the moment people would argue they are almost hijacked by the counterfactual. if they don't move, conditions tighten and if they do move, nothing happens. greg: it's all very confusing and circular, so i agree. they have to push back at some point. the fact they are not pushing back gives the market confidence they are right in the continue to push. there's a circular reference problem there as well. mike: circularity but we have fed funds price at 1% at the end

of next year, give me a break. that's a crisis level. jonathan: what is the circuit breaker to break that circular argument that is happening now? mike: all talk is stuff. that is the circuit rager. jonathan: final comments. subadra: you need uncertainty in the markets to go away, you need certainty on the trade front and business investment and capital spending. i would argue a lot of the business entrenchment we have seen in the last six to eight months is because of tweets and uncertainty. once we get past that, you could see a pop. we are tracking 2.5% despite tariffs. % declinet be a .3 because of tariffs, but we are doing ok. jonathan: we have the rapidfire round, trying to do that. looking ahead to the ecb next week, have we seen the low in

the german ten-year yield? so far, have we seen the low, -74 basis points? have we already seen it yes or no? mike: yes. greg: no. subadra: yes. jonathan: does the ecb restart qe next week? greg: no. subadra: yes. mike: yes. jonathan: does the governing council deliver tiering within any rate cut next week? subadra: yes. mike: no. greg: no. jonathan: that's the important one next week. thank you very much. that does it from new york city. we will see you same time and same place. this was bloomberg "real yield." this is bloomberg tv. ♪ - my family and i did a fundraiser walk in honor of my dad,

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