We are starting to create jobs but not treating enough decent jobs. Wages are a little weak. 2. 5 is moving in the right direction. This is another example of positive real growth where inflation remains tepid. What people havent talked about is once again the employment to population rate went down with three Percentage Points below where we were in 2008. That is why there is no wage growth. Full employment is a long way away. There is lots of slack in the economy. I think there is some hidden labor out there. The Participation Rate is down significantly from where it was 4, 5, 6 years ago. We need to allow workers to keep more of what they earn, but more importantly, we need to be able to drive more wages to our hardworking citizens of this country. We very firmly believe tax reform will drive to wage growth. Jonathan joining me in new york is Oksana Aronov from j. P. Morgan asset management, Richard Clarida at tempo, and Colin Robertson from Northern Trust asset management. Good to have you with me. Rich, when will be break out of this story of decent momentum on payrolls for wage growth not doing much . Richard goldilocks has stayed at the party a long time. Rates are low. But surprising on the upside. You pointed out the possible risk for the current scenario that we do get a pop in inflation above the market what expects. On that scenario, depending on how the fed reacts, to get some repricing. We are always from that. Jonathan no matter where it comes from, it informs the goldilocks story. Growth is solid and stable, inflation is low and it doesnt seem to be accelerating. Do you see a regime shift anytime soon . Oksana there are a lot of factors stacked on one side of the boat. Meaning obviously Economic Data is all around positive on every front, whether you look at china or the u. S. Or europe. The one missing piece, if the investors are waiting for the piece, inflation to accelerate, for the fed to accelerate, i think that is a precarious position to be in to not be prepared for that. One thing Central Banks are focused on is asset inflation. Jonathan will this change . Is it like a cold spring or something that will creep up slowly . Colin i think it will creep up slowly. Actually, i am more concerned with the fact inflation could be less than the market might think or investors may believe. Jonathan what will get us there . Considering how we are already priced in the market. Colin i think it is a structural situation with inflation across the globe. If it is a situation where we continue to have employment report after employment report , groundhog day with Inflation Expectations there but not coming to fruition, i think im more worried about the fed wanting to raise rates three times next year and inflation not supporting them. Jonathan what will happen to the yield curve . Its been a big story once again this week. At one point, it was going to test 50 basis points. What does this look like next year, this relentless flattening of the yield curve . Can anything turn that around . Richard what i would say is i dont think the yield curve is all that much of a mystery. The slope is comparable to where it was in the last cycle. Once you adjust for the decline of neutral rate. People talk about inverted curve. I agree, if we get an inverted curve, i start to worry, but i think of the fed gets the funds rate up and we get the data we are thinking we are likely to get, i dont see the curve inverting. Where you get an inversion if the fed overshoots neutral. If we get a big overshoot in neutral, we will get an inversion. I think i dont see it. Jonathan if we can stick with this chart, its an example of a example of where the pressure of the yield curve is coming from. Its pushing up much higher over the last 12 months. As you look at that break down, 10s have not done a lot. It has all been on the twos. What will that look like next year . Oksana lets talk about the pressure on the 10s. Potentially, investors view banks as inflation fighters. People view the ecb as the easiest place in the world. That is creating demand for the longer and. What you should not be doing is inferring that bonds are telling us something we dont know, that the stock market doesnt know. You have to be realistic. The only thing the bonds are telegraphing it is an artificially prized asset class. Until the artificial demand is out of that part of the market we should not be inferring , anything about the forecasting powers. Jonathan lets be clear, the artificial demand is not coming out of the market anytime soon. Oksana it is going to peak around the midpoint of next year. Somewhere between now and then, the market will have to reckon with that unless guidance changes dramatically. Lets not forget, this is what the issue i have with the bond price rationalistas and the people coming up for reasons why bonds are priced rationally. Getting increased treasury supply because the fed Balance Sheet is shrinking and we have a fed chair coming in whos talking less about their revision we are looking at strong Economic Growth and looking at centralbank concerns about inflation, and we are looking at a late cycle fiscal stimulus. That is likely to go through. What is that going today to the what is that going to do to the Inflation Expectations . Jonathan to her point, at the start of that comment, it was about treasury issuance. It could be frontloaded at the front and and less along the back end. Is that going to put more pressure on what the yield curve looks like . I think it is a factor for the following reason. One big difference from the precrisis period is banks have the whole a lot of socalled highquality liquid assets for regulatory purposes. Right now, the path of least resistance is to hold those excess reserves. As the fed drains those, there will be a demand for treasuries. Some of that is essentially going to be absorbed under the current regime. But you are right. Deficits are projected to go up and there will be issuance hitting markets for the first time. The other thing our like to point out, the feds Balance Sheet reduction plan, which they very bondctober, is market friendly. They are still buying treasuries and mortgages each month. From now,ly a year according to the current plan, when it starts to roll off more rapidly jonathan i want to get to what we will probably call the powelldraghi spread. Twoyear treasuries. Earlier this week it was approaching 260 basis points. I keep asking the same thing over and over again, and then we go higher. How much oxygen is left up here . Can we go much wider from where we are at . 250something on twoyear boom versus treasuries . Colin i think we can. We have a lot of things going on. I will bring up a chart if i can really quick. The world bond markets. You mentioned twoyear. I have two years here. This is just in the data range on the righthand side over the last three months. If you take a look, everything is virtually near the low for the threemonth period. In the u. S. , where we are seeing pressure of the yield curve coming from the twoyear side of the equation, in the u. S. That level is 181, at the high of the threemonths. I think that will continue unless there is a change to the growth trajectory and Inflation Expectations in europe, that the spread actually widen can actually widen further. Jonathan we have a question from a viewer. Given the low supply dynamics, them booms are continuing to rally. How low can the 10year bund bond yield go . Oksana the most overpriced Asset Classes the world, possibly beaten by bitcoin. [laughter] jonathan this is a bitcoinfree zone. Oksana in the shortterm, the technicals can do whatever it is they will do. Over the medium to longer term, neither the inflation data in europe nothing at the ecb is guiding lead us to believe it should has a tremendous amount of rally here. I am looking at a screen here, a much simpler one in water you one. Have 9 trillion in negative yielding securities of the world. This is potentially an interesting point in time to be short and get paid for being short, which none of the other people present here are sitting at the terminals right now have experience doing or ever faced this kind of reality. There is a differentiated thinking about opportunities. It is warranted. Jonathan how do we address this right now . How will this change dramatically anytime soon . This is staggering. Historically, look at it. On the left side, unheardof. Richard this would be my take on it. The u. S. Baseline twoyear will continue to go up, not excessively but gradually under powell. Meanwhile, the front end in eurozone is basically pegged out to at least midpoint of 2019. Where it gets interesting is you will have a transition. Draghis term is up in november of 2019. It cannot be extended as in the u. S. We cannot have him forever. There will be a postdraghi ecb. At that point, if the european economy is humming, the markets will start to romance a higher rate path in the eurozone. I think that is a 2019 story. For 2018, this chart can even be wider. Jonathan everyone is sticking with me. Oksana aronov, Richard Clarida and Colin Robertson. Coming up the Auction Block and , potentially a record month for Municipal Bond issuance. And they are outperforming. That is next. This is bloomberg real yield. Jonathan from new york city, on i am jonathan ferro. This is bloomberg real yield. I want to head to the Auction Block. The tax discussion in washington continues to reshape the money market. It is appellees are rushing to sell tens of billions of dollars of securities before congress and ask legislation. December supply may eclipse the record for the month setback in 1985. Next years issuance is projected to follow. Sales are strong in junk bonds. They usually tail off after thanksgiving. Not this year. Bombser saw thousands of bonds double compared to last year. A little push back from investors. Mcgrawhills 250 million pay in kind sale was pulled. It is focused on the doubledigit coupons in a market starved for yields. Still with me, Oksana Aronov, Richard Clarida and Colin Robertson. So, the market does have some standards. Oksana the market does have standards after all, although you would not know it. I am looking at a screen right now or you can see the bottom line item. That will be rated European Utility issuer with a 1000year maturity bond. Jonathan you told me about this and i had to double check it. Is that really 3017 . Oksana a whopping 2 yield. That is the power of quantitative easing globally. I want to bring up another interesting contestant. This is a bond from pressure, doubleb maturing next year. This one is yielding 39 basis points. 39 basis points. This one is a different issue. 39 basis points. Jonathan my question to you, is how does this make sense . Why are we still doing this when the ecb is talking about pulling back why are we still in the , highyield market . Planning for capital returns and not for yield . Does it make sense . Colin the first thing i would say as i never thought i would say this. I think i would buy bitcoin versus the 1000year. But i do think it makes sense. The Central Banks are going to reduce their accommodation slower than investors think. When i look at the highyield market right now, overall with an option adjusted spread around 350 basis points, over the next year, that could give is a total return of 6 . I like the fact with respect to the picks, there is some discretion with the types of highyield investors might buy. I still think it is a very positive market for the next 12 months. Oksana one thing to be aware of with respect to the highyield market is it is structurally a different market than it was nine or 10 years ago, with etfs playing an enormous role. Today, etfs comprise Something Like 4 to 5 of the market. In 2007. Sentially zero you have very dramatic price discovery, prophecies or gaps up and down. That should inform a much more tactical approach to buying and selling. We were extremely positive on the highyield space. In 2015 and 2016 when most people hated it. I was on the record saying cccs will outperform and they have. At this point in time, outside of some very selective pockets, and lower rated parts of the market, we are taking, reducing our exposure significantly. Jonathan how are you reducing highyield . Your allocations to highyield . You take pick notes. The question i keep answer, whether you have been compensated for the additional risk. On a total return basis, over the last year, picks outperformed all the highyield. This year they have underperformed broader highyield. You are not really being compensated on a total return basis to take the additional risk and go for the junkiest debt. Does this story accelerate that if you do take risks you will , not be compensated in the way you hoped you will be . Oksana whether you talk about Interest Rate risk or credit risk, i think that is the story, you are not compensated for taking on additional risk. This becomes a part of the cycle where security selection matters tremendously. Again, it is very specific to certain pockets. Broadly, you are not compensated. Are 200 spread. You are not compensated for the risks. Selling it broadly and buying it very selectively, looking for floating rate structures and where we can find them, although that market is no bargain as well. Definitely, i think there is no substitute for optionality. That means being hedge so owning credit on a hedge. It means having liquid structures you dont need to be selling when come around. Big opportunities jonathan weve had immense spread compression in credit markets. Forcing people to places maybe they would not like to go. As it get late in the cycle you think about late cycle behavior. Im thinking more about illiquidity and where they may be should not be . Richard that has been the focus at pimco for several years. A lot of good news is priced in. We think investors, especially in fixed income, should have a keen eye on liquidity. Use rallies and spread tightening to adjust the portfolios out of less liquid positions. When new money comes and have a higher fraction in cash, absolutely. Jonathan you guys are sticking with me. Oksana aronov, Richard Clarida and Colin Robertson. We want to get a check on where the market has been this week. It looks a little Something Like this. Yields up at the front end by two basis points. The u. S. 30year. Of a single point atthe u. S. 30year. Some very marginal corporate flattening if you account for those things right there. Compared to the last few weeks, price action pretty muted. Still ahead, the final spread for the week ahead featuring rate decisions for the federal reserve, the ecb and the bank of england. That is next. This is bloomberg real yield. Jonathan from new york city, im jonathan ferro. This is bloomberg real yield. Time for the final spread. Coming up over the next week it will be pretty busy. U. S. Tax talks. Bitcoin futures. We begin and end our bitcoin. Conversation on bitcoin. You have talks in washington, three Key Central Bank decisions and an eu summit. A brexit breakthrough came this week. A lot of things to look out for over the next week. Around the table, Oksana Aronov, Richard Clarida and Colin Robertson. Rich, as you look across the three central bank decisions, if you had a focus on one, which is the most important . You have richard to focus on the fed. The fed will do something. Unless we get hit by a meteor, the fed will be hiking rates next week. Even powell in his here he more in his hearing his desire to more or less signaled his desire to do that. It is fully priced in. We will have Janet Yellens presumably last press conference. We will get a new edition. In terms of the ecb and the bank of england, draghi laid out the game plan at a prior meeting. I think it will be little news of this meeting. The bank of england, no decision but we will see if there is any dissent. Jonathan you just assume the News Conference is the same but with jay powell there instead of janet yellen . Oksana i think because everyone assumes that is going to be the case, that powell will be a continuation of yellen. I think it could happen very quickly, or she will step down as soon as he is approved. Very likely he will be at the january meeting. He may be viewed as a dove and a continuation of yellen, but he is very outspoken on deregulation. That can have some ramifications for the market that are not necessarily being priced in right now. Jonathan yellen 2. 0 or different this time . Colin i think it is 2. 0. Clearly some decisions could be different. The fact powell came in and was very similar in conversation with respect to how yellen spoke to the markets, no change or shift with the expectation that has been sent out that they would like to raise rates three times next year, i think that is basically how the First Quarter will look. I think the real issue for me and where we can have something with respect to the market that could change the course of the fed, as we talked about yields today, if the 10year rate continues to contract, powell will have a real issue staying to the markets if they want to raise rates three times in 2018. Jonathan lets get to it. Shall we wrap up the program . Time for the rapid fire around. Rapid fire round. A series of quick questions and keep the answers really short. First question, as we going to 2018 and everyone looks at a flattening treasury yield curve , will we get an inversion at some point next year on the Treasury Curve . Yes or no . Oksana no. Richard no. Colin no. Oksana boring. Jonathan that is easy. Credit and highyield. Picks or broader highyield . Through next year, total return, which will get the most outperformance . Oksana broader highyield, but. You have to be selective. Richard agreed. Colin broader highyield. Jonathan next looking to next one. Week with the Central Banks on that come up the fed to one side and think about this. Who hikes next, the ecb or the boe . Oksana the boe. Richard the boe. Colin ecb. Jonathan there we go. We have a market. Oksana aronov, thank you very much to Richard Clarida and Colin Robertson. And of course, pimco the official sponsor of bloomberg real yield. From new york city, that does it for us. We will see you next friday at 12 30 new york time. This is bloomberg real yield. This is bloomberg tv. He has been dubbed the geek chic. He is a tech entrepreneur in the world of luxury fashion, founding the online retailer eubank is an online marketplace. 15 years later, he merged it with its biggest competitor netaporter creating the Biggest Online shopping giant. Joining me is federico marchetti. Thank you for joining
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