jonathan: from new york city, i for our viewersrs worldwide, 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 says next meeting. we begin with the big issue, a mixed reception for payrolls. >> a goldilocks number. >> pretty good in the details. >> a slowing economy. >> still well above what you

would expect at this late cycle. >> fears about a u.s. recession are just not showing up in this report at all. >> very hard to get a recession in the next 12 months. >> you got higher wages and 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 enormous on many fronts. >> maybe there are some budding signs of some weakness in the employment sector at the fringes. >> the question is where it goes the uncertainty goes from here. jonathan: joining me around the table, my guests. for me, the biggest problem with , it doesn't report i change what you sour carless of what you thought going into the payrolls report, not a game changer, is it? >> it is basically confirming status quote for the fed. they're 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 start pressing? there is really no fear of that. is the pacenoticing of job creation is declining. 220,000 jobs per month last year and now the pace is more like 160 per month. jonathan: we have to understand if that's a structural shift, it's natural, with had 200,000 we have had 200,000 per month for years, it has to come down 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 real 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 really defend their 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 start pulling back on hours first. hours ticked back up. is that encouraging to you? mike: the wage increase is the single biggest thing. i do agree with the point that it is kind of a meh report. but still, the wage uptick is probably a good thing. president trump must love it. jonathan: 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 out sustainably. gregory: 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 the bears 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 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 is taken out. say the premium is 50 basis points or so. when you get 60, 70 basis points away from fair value, you have to question if it makes any sense. mike: the answer new premium is simple with orange hair, his name is donald trump. if you look at where the 10 year treasury closed after the fed ease, 201. that seems to be the big factor

out there. jonathan: what does it tell you that we get a rate cut from the federal reserve and yields of that the long end kept going lower? a lot of people watching this program believe that the fate of curve and thee can b shape of it can be shaped to some degree by the federal reserve the more aggressive at the front end. i'm trying to work out if that is still true. gregory: 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. at 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 even more capacity to move lower, not a steepener. jonathan: mike? mike: interesting, we think there are three basic factors driving yield -- trade, brexit, hong kong. yes, they are global. reg's pointt of g

point. . . but is it honestly and 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 yields take tick up. jonathan: respond to the point greg is making, the fed cuts 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, 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 big $750maybe as

are we to $1 trillion, hoping it goes to 120? or is there the risk that the ecb delivers and there's a potential for the curve to steepen? that is the exact 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: traditionally 10 years , ago when we first started to see qe in a bigger way following the financial crisis, qe and the was to gettive of it 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 is what happened of that is what happened when draghi spoke and said, we will do all it takes. the five-year break even in

europe went up by 10 basis points. two weeks later it was back down. five-year inflation breakevens in europe have stayed between 120 and 130. the market is not actively pricing in the impact of easing coming from europe feeding into higher inflation expectations. i think it's a proved statement the qe doesn't work. the idea is to increase inflation and increase growth through consumer spending through indirect channels and so forth. so on and so forth. it hasn't worked. the reason the markets are pushing back on the notion of qa qe moving up yields is the market knows qe is not effective. jonathan: so the view for you, you would question the efficacy of central bank monetary policy. the more cuts you get, the more stimulus you get. you won't unlock high growth expectations and you won't unlock higher data.

the markets right now, you would be fading into government bonds? is that what you would recommend? gregory: yes, for the most part. nothing happens in a straight line. a 10 basis point move 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? so basically i don't see , capacity for yields to move up in a meaningful way. jonathan: mike? mike: i think when there is a greg peters biography, it will be "raging bull 2." i can see it right now. but i agree that central banks are about done. it's not a monetary policy question right now. probably has not been for a while. 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 with europe, were not questioning the efficacy of policy. we are questioning whether 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. mike, your call on that, your thoughts on that? deeper into negative territory in europe right now. how much will it help? mike: zero. terrible policy. i'm sure it will launch phd theses over the next couple decades, but it won't work. crazy idea. jonathan: i think where an agreement. everybody will stick with me. 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, this is bloomberg "real yield." i want to begin with the auction block. i want to head over to europe for the auction block am a we start with france according its biggest ever debt sale rating. the average yield on all four tranches fell to record lows. incorporates berkshire hathaway ever fromiggest deal 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. with me are my 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. well, gosh. welcome back, right? normally we wade into the pool and this is 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 moving treasuries, which was somewhat interrelated, the stronger kind of numbers that we saw in terms of tweets and whatnot. the market really took advantage of that. but 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, 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. this is not about investing in the business, that's what you're saying? gregory: that's absolutely right. on a net basis you are seeing very little change. what companies are doing is they are turning out their debt and locking in these low yields. that is imported from avon perspective because direction dollars are coming into the market place. 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. how concerned are you about one more than the other? which one is if you are more concerned about currently? am more concerned about credit risk. if you think about an impending recession, whatever your personal probability is, duration will protect you, all else being equal.

credit will not. you're looking at leverage at an extremely high levels. investors have been pulled in for the extra yield. i worry about credit much more than duration. jonathan: mike? mike: let's to a compromise, 3-6 six months six monthssk. duration risk. the reason why is if you get a shift in global factors, it takes the whole 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 near-term people have? i'm a little uncomfortable with massive swings like we saw the one we saw earlier this week. gregory: the thing about duration, when you're out to curve, it is volatile. so it is a wake-up call but honestly think investors are forced into it because are not a lot of options. the negative rate environment that we are talking about, it highlights that investors don't have a lot of alternatives.

you are seeing those moves not only in treasuries but credit as well. jonathan: subadra? subadra: it's the global guilt grab, right? this is what central bankers want to come up 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 is typically 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 this to start widening out. that is when given the amount of leverage in the system, it might turn ugly quickly. jonathan: in a short-term, do you like high-yield, greg. greg: i do. jonathan: why?

gregory: i do. jonathan: why? gregory: it is all relative. the high-yield borrower has been different the 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. the goal of identifying the most attractive relative value is subverted by jurisdictional or self-imposed rules, regulations , and constraints. gregory: yes. jonathan: how important is that line right now and how important is it to be nimble? gregory: it is absolutely what drives the fixed income market. the fixed income market is so fragmented. you have non-augmented pockets of capital all over that don't really relate to each other. if you are an investor they can go across, which we think we are, there are real opportunities.

but there are some a disco dislocations. jonathan: where are the dislocations right now? gregory: 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? gregory: well, i'm more seeing it on the credit side than the duration side. but you try to kind of manage the seams. if you're indifferent to the various constraints, you can take advantage from an investor standpoint. jonathan: subadra? subadra: the pension funds have gone down because of the rally, the long end, the flattening of the curve. this is a big problem. 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 to match liabilities because yields are so extraordinarily

low. from that perspective, i think the rally in the long end will is going to be a huge problem. jonathan: guys, you are going to be sticking with me. coming up, the final spread and the week ahead featuring an ecb rate decision and 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," ." it's time for the final spread. the next week, a lot of data out of china. tuesday, the bank of england director mark carney speaking in will be speaking in new york. wednesday, ppi numbers. 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 and subadra.dad subadr

as we record this program, chairman tell is including his remarks in zurich. nothing really new here. he declined to go beyond the following quote "act as appropriate to sustain the expansion." what are you looking from the federal reserve in the next couple of weeks? subadra: a 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 characterize this rate cut as a midcycle adjustment, which is somewhat at odds with what the market is pricing in, which is for cuts 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 we are at the beginning of a rate cut cycle, or continuing to characterize this is a midcycle adjustment. jonathan: is this the market saying we are facing the end of the cycle? are we there yet?

gregory: no, i don't think so. 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's what a worry about, each meeting is met with more priced in cuts. at some point, it doesn't wash away. i think the second half of this year and into next year is about all 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. gregory: yes, it's all very confusing and circular and i agree. they have to push back at some point. the fact and not pushing back gives the market confidence they right and 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, gimme a break. that's a crisis level. jonathan: what is the circuit breaker for that? manye heard it come up so times on this program and others. what is the circuit breaker to break the circular argument? mike: how will talks tough, but will he do it? that is the circuit breaker right there. we will do one more and see. jonathan: final comments. subadra: you need uncertainty in the markets to go away, you need certainty on the trade front and business spending and capex spending. i would argue a lot of what we've seen in the last 68 months months isght because of tweets and uncertainty. once we get past that, you could see a pop. we are tracking 2.5% despite tariffs for growth. this might be a 0.2% to 0.3% decline in growth because of tariffs, but doing ok. jonathan: we have the rapidfire round, trying to do that. we have one minute left. 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? have we already seen it, yes or no? mike: yes. gregory: no. subadra: yes. jonathan: does the ecb restart qe next week? gregory: no. subadra: yes. mike: yes. jonathan: does the governing council deliver tiering with a rate cut next week? subadra: yes. mike: no. gregory: no. jonathan: that's the important one for 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." ♪ we call it the mother standard of care.

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