jonathan: from new york city, i am jonathan ferro. "bloomberg real yield" starts right now. coming up, the data in america leaving the fed on the sidelines. a record-breaking week of debt issuance in europe, and the biggest inflows ever into u.s. high-grade credit funds. we begin with a big issue -- a middle-of-the-road payrolls report. >> this report was mixed. >> middle-of-the-road. >> right down the middle of the fairway. >> different people will see different things in it. >> moderating but still good economy. >> pretty good given where we are in the business cycle.

>> a pretty solid report that still checks a lot of boxes. >> it does not change any expectations about economic prospects. >> the trends will continue. >> we are now we were before the employment report. in terms of those expectations. >> wage growth may be a little slower, but it is still right around 3%. which is where we have been. >> we are in an extended period of exceptional mediocrity. >> an economy that's slowing gradually. >> we are stuck in this world for the time being, but maybe it's not a bad world. jonathan: joining us around the table is priya misra, george rusnak and gershon distenfeld. can we begin with that quote from mike collins. a period of extended mediocrity. are we? priya: the labor report is a little weak, but in our view, it is a lagging indicator. i am struck by the fact that aggregating income continues to accelerate. if we hang our hat on the consumer, that is the engine of growth. we are in this mediocrity

aspect, but if there is no engine of growth -- i don't think this changes the fed, the fed is on hold. we need something here to boost growth. that is not coming from the labor market. that's why i think this year will be a little difficult. we are going to be in this narrow range. we have to stay in that range because this was not enough to move the needle. it is not giving me a lot of comfort. gershon: it comes on the heels of a gang busters number last month. had it only been good last month, average it out, we would be doing better. we will not get a lot from these payroll numbers going forward. if you look in the medium-term or long-term rolling averages, we are 175,000 to 200,000 over any of those time periods. that's enough to create jobs in the workforce. to spur consumption. it is not gangbusters. hourly wages were a little weak on the margin. that will give the fed comfort we will not see inflation.

that will put them on hold. it is a ho-hum number. george: i agree. the average hourly earnings number ticking down is something to watch. not something concerning right now. we are thinking it is more of a two cubed environment. 2% growth, 2% inflation and roughly 2% yield. jonathan: i keep hearing this. george: you will have to trade in between those ranges. jonathan: variations of it anyway. we had rick reed of blackrock on the program. he said it will be 1.8%-ish inflation. gdp and 10 year as well. priya: there are a lot of risks out there. i think the treasury market should price in this risk. treasuries are pricing in a fed on hold. they are not really pricing all the risks. i would say business uncertainty. just a week ago we were dealing with u.s.-iran. the middle east is still pretty unstable. we have an impeachment, an election. i think treasuries have room to rally.

i would say tens can get below 1.8%, can get below 2%. we have taken out the hiking scenario so there is a gap on the 10-year. if risks increase, it's an attractive risk hedge to any asset. jonathan: you also think the fed comes back in at some point this year? priya: we do. jonathan: how do they come back in this year? pretty much everyone thinks the fed is done. nothing brings them back in. priya: if you tell me growth is indeed 2% and there is no growth, i think the fed is on the sidelines. our view is a combination of slowing business investment in manufacturing is pretty weak. that does affect the consumer through the course of the year. plus, i'm concerned that when the fed stops buying treasuries, which i don't think is happening for the next six months, but at some point they will put enough reserves into the system and take a step back and you get a tightening in financial conditions and the market says qe help is behind us. the fed says we don't see inflation and we see tightening, maybe we need to put in a little

more accommodation. there is no inflation fear, so what is the cost of adding more accommodations? we think the fed comes back in. jonathan: a couple of points to unpack there. the fed comes back in. let's begin with one. the fed could come back this year and cut interest rates. does that resonate with you? gershon: i think it does, and that's what the equity markets are banking on. to us, it is the dichotomy between the two markets is staggering. two weeks ago, was anyone talking about iran? it was not on the list. there are a lot of risks out there. brexit is still unresolved. rising populism in the world. we can go on and on with the risks. equities seem to be taking it in stride. people are sitting there, comfortable. we will not have inflation. we will be at low rates for a while. people still think there will be a fed put. i'm not sure how we will resolve this. we look at manufacturing

business confidence. not the same thing as the employment numbers and consumption are telling you. history will tell you you have to have one of those two revert to some type of mean. which one will it be? if we do start to see a trend where we get more ho-hum numbers on the employment side, it starts to rollover, the fed will come back into play. should they is a different story, but clearly they are going to. george: they want to be accommodative here, and they have been clear about that. there is a huge hurdle for them to raise rates. to lower rates though, i don't think it is quite as huge. i think they want to remain on the sidelines and watch things as they go along. i think right now, if they were given their druthers and information declines and starts going down, they will step in. jonathan: i think many people agree with you all that the risk is skewed asymmetrically to cuts over hikes. what people struggle with is trying to establish a threshold for material reassessment of the outlook.

a little downside to price does not to me translate to material reassessment of the outlook. are you saying we don't need a material reassessment or we will end up getting one in some point this year? priya: i argue you will get the material reassessment. what we have heard from the fed is expansion of the recovery. they have continued in the last few months. i think they have changed the reaction function here. they are telling us that because they want to get inflation up to target and beyond, they will overshoot. material is subjective, but if you get payroll growth closer to 100, they will cut rates. gershon: they will allow inflation to run a little hot here. they want it, in fact. the challenge is if liquidity starts drying up and they run into the challenge, they might need to do that. but the reaction function is the markets themselves. they will be watching the markets dictate somewhat what they need to do going forward.

george: i don't think there's a catalyst as much as there are secular trends going on that are just going to end up slowing growth in the long-term. it is easy to point to president trump being the cause of the trade war. there are bipartisan tendencies, not just in the u.s. but around the world. much more protectionist, more populism. regardless of who wins in the white house in november of this year, there will be more volatility around trade. it is not only in the u.s. australia, we're seeing it. we are seeing it in the u.k. it is not just about brexit. there is populism and more protectionist instincts around. that will put a damper on growth worldwide. at some point it will slow growth, and central banks have probably mistakenly thought their job is to control economies and prevent downturns and recessions from ever happening. the laws of economics have not been repealed yet. there are still shocks, and there will be cycles and they can't always save it.

jonathan: it is not about what they should or should not do, but what they will or won't do. you make two points, the one is the debate over rates and the second is about the balance sheet and the communication problem they could bump into in the middle of this year. put all of that into all of that. the balance operation around the conversation we just had the last five minutes. priya: the fed has been essentially injecting a lot of liquidity in the system to prevent another repo spike. they have been successful. we have been hoping for this. the fact they put as much as $500 billion available allowed repo rates not to spike. now what? they have to keep buying bills to offset the repo operations. even though the fed continues to tell us this is not qe, it looks like qe. the balance sheet is growing. our forecast says they will be buying bills at $60 billion all the way up until the second half. june or july when they are buying, the market loves that. there is more liquidity in the

system. when the fed steps back, i think they are in a little bit of a trap. how do they stop liquidity injection for a market that thinks this is qe? they will say that is one form of injection that is gone, easing, and financial conditions need to tighten. i am worried the fed will not buy more bonds but ease. jonathan: what is the weight on top of real yields at the moment? priya: a net supply issue. remember we were talking about deficits forever? we still have a lot of deficit. last year, u.s. treasury debt to the private market was around $1 trillion. this year we are estimating about $600 billion. even if you have unchanged demand with my supply of debt to the market is just 40% less. that will keep real rates really low. it is good for risk assets as long as the economy stays ok. george: the technicals are definitely favoring a fixed income right now.

i think that is very true. right now the market is operating on liquidity, on optimism and on momentum. it is not operating on fundamentals. that can happen for a short period but not for the long-term. that will have to turn around. jonathan: we will carry this conversation over to the credit market. you guys are sticking with us. coming up, the auction block. europe's bond market wrapping up its biggest week on record. that conversation up next. this is "bloomberg real yield." ♪

jonathan: i'm jonathan ferro. this is "bloomberg real yield." i would like to head to the auction block and begin in the united states and the treasury market where demand for the treasury's $16 billion, 30-year bond issue dispelled fears after

wednesday's soft 10 year auction. what a week. wrapping up the biggest week ever with over $100 billion of new debt sales. underscoring its status as a major global funding vehicle. the window is wide open for risky energy companies in the u.s. to rush back in. seven companies offering high-yield debt this week alone. sticking with high-yield, invesco's tim horsker weighing in on the credit markets. tim: if anything will go, it is the lowest quality credit first. seeing the rally since october has been another good signal for us about the durability of the rally. jonathan: back with me, priya misra, gershon distenfeld, george rusnak. that last line, the lower quality credit starting to underscore the durability of the market and the rally. your thoughts? gershon: this is what we talked about last month, high-yield managers are in a quandary. last year was kind of free money. it was only the second time

where high-yield did well and triple c did not lead. it was double b. you did not have to take risks to get return. now do the math and realize your double b's are yielding less than 4% today. that is not where you will get returns, the only way is the triple c's. however, a lot of the yield is in the energy space, where investors realize a lot of these companies, even in the best of times, don't generate a lot of free cash flow. however, since we don't know where the price of oil is going to go, or rational people don't, who knows? what if we go to $80? these companies will be ok for a while. they are chasing things. that is working so far. it is working the short-term. but the reality is a lot of these companies don't work at $50 or $60 oil. you will see a lot of restructuring unless we see the price of commodities climb. jonathan: you seem quite skeptical of the rallies we have had.

the parallels between now and then, was that a stronger set up, what does that look like compared to what we have right now? george: dispersal was a lot less. you could get the yield without taking on excessive risk. you had to take a lot of risks. if you're not willing to buy a lot of those emp companies from the other kinds of distress -- you could have gotten close to 5%. that is not the case today. george: the framework from the fixed income market is pretty strong from a technical perspective. you have roughly half a trillion dollars less in supply coming out this year. from a global markets perspective, specifically for high-yield, you are seeing a liquidity challenge. the liquidity challenge we had back in september with the repo market coincided exactly when triple c's started gapping out. now all of a sudden they are figuring that out and spreads

are coming down. they moved from 8.5% up to 10% and now they are back to 8.5%. for us, it is not underlying fundamentals improving, it is technical factors. in the long haul, that will be tough for them to work through. priya: from a macro standpoint i would agree. fundamentals are telling you there should be more dispersion. i think we should be looking at the credit of these companies a lot more. but you look how tight the spreads are, it tells me the reach yield is dominating everything else. treasury people are looking for yield elsewhere, but i'm worrying for a sign of default or downgrades picking up. it is making certain sectors of the credit markets extremely the vulnerable. you have to be smart and get out early or hedge the situation. jonathan: this theme of not enough debt, does that carry over to some of the dynamics in europe at the moment? we have had a record week of issuance. the belief it will be starved as the year grows older. is that the dynamic you are

thinking of? priya: yes, it is. the ecb is doing qe. they are taking paper out of the market. on a net basis, the numbers are not that high. in terms of net issuance. i think this global reach for safe bonds or not so safe but high positive yielding bonds is still out there. george: but it is the other side of the equation, too. it is not only the supply but the demand is up dramatically. the demand for corporate debt domestically. last year, the record year of inflows. you're seeing that across. that's the thing you will see right now play out as institutions start getting demand. you are getting a lot of pensions moving to the point where they have to move from their equity exposure into fixed income. you will see flows that way. individuals 65 plus, we see them moving that way. from a supply standpoint and demand standpoint it is favoring moving. jonathan: what is the biggest driver of these inflows in the high grade credit funds in the united states? a record week of inflows. what is the biggest driver behind that? george: a combination of the institutional side and the individual side. i am telling you, 65 plus, $1.3

trillion a year for the next 10 years flowing from individuals. we are hearing that from clients. gershon: this is why active management is here to stay in fixed income. we are just great at chasing what the theme was in a previous period we were dead wrong on. three months ago no one would touch an energy bond. now people can't get enough of it. six or nine months ago, people are, oh my god, triple b's will get downgraded. now people can't get enough of them. there are opportunities to go against the grain. we don't always do it 100% successfully, but that is what active management doesn't fixed income. people are somewhat chasing ig. they do need yield. one thing we are hearing from our clients outside united states -- you talk to european and the japanese investors, the cost to hedge has come down somewhat. it still is somewhat costly relative to history, but since the fed has cut a number of

times now, the cost to hedge has come down, making a lot of investors on the sidelines come back a little bit. jonathan: i want to pick up one point, going against the grain. what is going against the grain in 2020? what is the contrarian call at the moment? what is that trade? coming into 2019, everybody hated this triple b story, especially those of us outside of fixed income looking in saying that looks like a scary place. fantastic year. what is the triple b for 2020? gershon: one is chasing the weaker emp credit. we think it's a very big mistake. how could we be wrong? if oil goes to $80 or $85, we will be wrong. jonathan: what about leverage loans? gershon: it looks more interesting to us than they have in quite some time. for 10 years we were negative on

it. we have more exposure in our portfolio today than we have had in some time. some better opportunities than we have seen. jonathan: still ahead, the final spread. the week ahead, featuring a big gathering at the white house. the u.s. and china preparing to sign phase one of the trade deal in washington, d.c. that is next. this is "bloomberg real yield." ♪

jonathan: i am jonathan ferro. this is "bloomberg real yield." time for the final spread. coming up next week, a slew of fed presidents will be giving their outlook on the u.s. economy. the big banks kicking off earnings season on tuesday. the big event on wednesday, the u.s. and china scheduled to sign the first phase of the trade deal at the white house. final thoughts. i want to pick up on a quote from gershon. i think it is interesting.

when you have yields as low as they are right now, people will be thinking about, where do i get my returns and fixed income? you pointed out the following stat. the 10-year japanese government bond began the last three years with the yield near zero. 11 of the last 12 years with the yield below 1%, but the annual return averaged more than 2%. how important is that dynamic in the market we have at the moment? gershon: most times yield curves were fairly steep. you get roll down. as bonds get shorter in maturity, they traded lower yields and you can capture that. yields are not nearly as steep today. yield does not necessarily equal return in fixed income. that is something investors don't always appreciate. the main reason to own high-quality fixed income is to serve as an offset to your portfolio. the risk part, equities or assets. we forget pretty quickly we had a 30% return in the s&p last year, but we had a 20% drawdown toward the end of 2018.

that will happen again at some point. you want to have duration in your portfolio. george: we think moving out the curve is a good move at this point. we are not favorable on the intermediate part of the curve. we don't want to go too far out. the concept of total return versus true yield is an important one to have a conversation with clients. unfortunately sometimes they are not as accepting of the conversation. jonathan: the rapidfire round now. three quick questions and quick answers. it's a little troublesome in this particular segment, so i left more time to do it. 2% inflation, 2% gdp, 2% u.s. 10-year dynamic. realistic or wishful thinking? priya: wishful thinking. george: realistic. gershon: i don't even know what that question means. wishful thinking. jonathan: the rally in triple c, does it underline the complacency or highlight the durability of the high-yield rally?

priya: complacency. gershon: complacency. george: complacency. jonathan: finally, the rally. the record supply in europe we have seen. can the market take it, or is indigestion brewing? can the market take the supply or is indigestion brewing? george: i think you can take it. gershon: take it. priya: i think it can take it for now. jonathan: thoughtful stuff as always. special thanks to priya misra, george rusnak and gershon distenfeld. from new york, that does it for us. see you next friday. for our audience worldwide, this was "bloomberg real yield." this is bloomberg tv. ♪

♪ erik: stan, how do you feel going into 2020? stanley: about the markets or my health? erik: about the markets, the economy. we can talk about your health, too, if you'd like. stanley: let's not. well, you have very low unemployment here. you have fiscal stimulus in japan. you have fiscal stimulus and a lot of confidence coming to britain. we're running a trillion dollar deficit at full employment. apparently we're going to have some sort of green stimulus in europe. and we have negative real rates

everywhere and negative au