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We are starting to create jobs, but we are not creating enough decent jobs. Wages are a little weak. But 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, and that is why there is no wage growth. Full employment is a long way away. There is lots of slack in the economy. Bill i think there is some hidden labor out there. The Participation Rate is down significantly from where it was 4, 5, 6 years ago. Gary we need to allow workers in this country 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. And we very firmly believe tax reform will drive to wage growth. Jonathan joining me in new york is Oksana Aronov, alternative fixed income strategist at j. P. Morgan asset management, Richard Clarida at tempo, and Colin Robertson, head of fixed income at Northern Trust asset management. Good to have you with me. Rich, when will be break out of this goldilocks story of decent momentum on payrolls for wage growth not doing much . Richard goldilocks has stayed at the party a long time now. Scarlet jonathan yeah. Richard it is good, very supportive for markets. Rates are low. Data is decent but surprising on the upside. Inflation below target. You pointed out what is the plausible risk for the current scenario is that we do get a pop in inflation, above what the market expects. On that scenario, depending on how the fed reacts, to get some repricing. Right now we are a ways from , that. Jonathan oksana, 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 i think there are a lot of factors stacked on one side of the boat. Many obviously, the Economic Data is all around positive on every front, whether you look at china or the u. S. Or europe. This one missing piece, if the investors are waiting for the missing 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 is this going to change . Is it like a coiled 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 and what will happen to the yield curve . Rich clarida, it has been a big story once again this week. Early this week at one point, twos and tens were going to test 50 basis points. What does this look like next year, this relentless flattening of the yield curve . And can anything turn that story around . Richard what i would say is i dont think the yield curve is all that much of a mystery. Indeed the slope right now is , comparable to where it was in the last cycle. Once you adjust for the decline in neutral rate. People talk about inverted curve. I agree. If we get an inverted curve, i start to worry, but i think if 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 is if the fed overshoots neutral. If we get a big overshoot in neutral, yeah, we will get an inversion. But i think under the baseline i dont see it. Jonathan if we can stick with this chart, its an example of where the pressure of the yield curve is coming from. Its coming on the front end with the twoyear note pushing up much higher over the last 12 months. Oksana, as you look at that breakdown, 10s have not done a lot. It has all been on the twos. What will that look like next year . Oksana lets think about why all the pressure on the 10s. Potentially, investors view Central Banks as inflation fighters. Potentially people view the ecb as the easiest place in the world. That is creating demand for the longer end. What you should not be doing is inferring that bonds are telling us something we dont know, that the stock market doesnt know. Because i think you have to be really realistic. The only thing the bonds are telegraphing is it is an artificiallypriced asset class. And until the artificial demand is out of that part of the market, we should not be really inferring anything about its forecasting powers. Jonathan and lets be clear the , artificial demand is not coming out of the market anytime soon. Oksana the artificial demand regardless of how the banks are right now it is going to peak around the midpoint of next year. So 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, lets call them, and the people trying to come up with reasons for why bonds are priced rationally. We are getting increased treasury supply because the fed Balance Sheet is shrinking and we have a fed chair coming in whos talking less about their less about deregulation and Bank Balances are enormous. We are looking at strong Economic Growth and looking at centralbank concerns about inflation, asset inflation, and we are looking at a late cycle , fiscal stimulus that is likely to go through. What is that going to do to the Inflation Expectations . To the feds pass, etc. Jonathan to oksanas point, at the start of that comment, it was about treasury issuance. Now the treasury issuance story could be frontloaded at the front end, unless along the back end. Is that going to put more pressure on what the yield curve looks like as well . Richard i think it is a factor for the following reason. One big difference from the precrisis period is banks have to hold 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 bank 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 i would like to point out, the feds Balance Sheet reduction plan, which they began in october, is very bond marketfriendly. Even though the Balance Sheet is shrinking, they are still buying treasuries and mortgages each month. It is really a year from now, according to the current plan, when it starts to roll off more rapidly. Jonathan i want to get to what we will probably call next year the powelldraghi spread. [laughter] scarletjonathan it is twoyear s versus 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 than where we are already at . 250something on twoyear bunds versus treasuries . Colin i think we can. Richard i do, too. Colin we have a lot of things going on. I will bring up a chart if i can really quick. It is the world bond markets. If you take a look at it, you mentioned two years. 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, certainly for this one, everything is virtually near the low for the threemonth period. As you mentioned also 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 three months. I think that will continue. I think unless there is a change to the growth trajectory and Inflation Expectations in europe, that the spread actually can widen further. Jonathan we have a question from a viewer on the bloomberg terminal. I will give it to you, oksana. Given the low supply dynamics, bunds are continuing to rally. How low can the 10year bund yield go . Oksana the most overpriced asset class in the world, possibly beaten by bitcoin. [laughter] jonathan this is a bitcoinfree zone. [laughter] oksana that sounds good to me. Look, in the shortterm, the technicals can do whatever it is they will do. But when we look medium to longer term, neither the inflation data in europe i mean, nothing at the ecb is guiding lead us to believe that bunds have a tremendous amount of rally here. I am looking at a screen here, a much simpler one than the broader one. You 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 chart right now, rich . How will this change dramatically anytime soon . This is staggering. Historically, look at it. On the left side, its unheardof. Richard this would be my take on it. The u. S. Twoyear, according to my baseline, 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 draghi 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. I think for at least 2018, this, if i come back again in several months, this chart can even be wider. Jonathan everyone is sticking with me. Oksana aronov from jpmorgan, Richard Clarida from pimco, and Colin Robinson from Northern Trust asset management. Coming up on the program, the Auction Block and potentially a record month for Municipal Bond issuance, and they are outperforming, too. That is next. This is bloomberg real yield. Jonathan from new york city, for our audiences worldwide, i am jonathan ferro. This is bloomberg real yield. I want to head to the Auction Block now. The tax discussion in washington continues to reshape the money market. Municipalities are rushing to sell tens of billions of dollars of securities before Congress Enacts legislation. December supply may eclipse the record for the month set back in 1985. Next years issuance is projected to fall. Sales are strong in junk bonds. They usually tail off after thanksgiving. Not this year. November saw sales of bonds double compared to last year. But a little pushback from investors. Mcgrawhills 250 million pay in kind sale was pulled. Buyers focused on the doubledigit coupons in a market starved for yields. Still with me, Oksana Aronov from j. P. Morgan asset management, Richard Clarida from pimco, and Colin Robertson from Northern Trust asset management. So, all caps on the market does 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 where you can see the bottom line item. Thats a bb rated European Utility issuer with a 1000year maturity bond. Jonathan so hold up, 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 peugot, doubleb maturing next year. This one is yielding 39 basis points. Jonathan 39 . Oksana 39 basis points. This one is a different issue. 39 basis points. Jonathan on one of the securities. Oksana that is right. 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 to you . Colin it makes sense to me. The first thing i would say as i never thought i would say this. I think i would buy bitcoin versus the 1000year. Jonathan i am sure oksana might consider that as well. Colin 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 us 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 of course playing an enormous role. Today, etfs comprise Something Like 4 to 5 of the highyield market. It was essentially 0 in 2007. What does that mean . 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 think i am even on the record early this year saying cccs will outperform, and they have. At this point in time, outside of some very selective pockets, in lower rated parts of the market, we are taking, reducing our exposure significantly. Jonathan the question i am thinking about, oksana, is how are you reducing your allocation to highyield . The question i keep answer, the question i keep asking is 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 actually if you do take risks, you will not be compensated in the way you hoped you will be . Oksana that is the story generally the story, frankly, whether you talk about Interest Rate risk or credit risk. You are not compensated for taking on additional risk. This becomes a part of the cycle where security selection matters tremendously. But again, it is far a specific to certain pockets. Broadly, you are not compensated. Doublebs are 200point spread. You are not compensated for the risks. Jonathan so what are you selling . Oksana highyields. [laughter] oksana 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. And optionality means being hedged, so owning credit on a hedge. Optionality means having liquid structures that you dont need to be selling when a buying opportunity comes around. Jonathan just to wrap things up, we have had a meant spread compression in credit markets, forcing people to places maybe they would not like to go. As it gets late in the cycle, you think about late cycle behavior. Are you thinking more about illiquidity and where they may be should not be . Richard absolutely. That has really been the focus at pimco now for several years. As we say, a lot of good news is priced in. We think investors, especially in fixed income, should have a keen eye on liquidity. To be frank, use rallies and spread tightening to adjust the portfolios out of less liquid positions. As new money comes in, have a higher fraction of it in cash, absolutely. Jonathan you guys are sticking with me. Oksana aronov from jpmorgan asset management, Richard Clarida from pimco, and Colin Robertson from Northern Trust asset management. 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. Up a single point at some very marginal corporate flattening if you account for those things right there. But compared to the last few weeks, price action pretty muted. Still ahead, the final spread for the week ahead featuring rate decisions from the Federal Reserve, the ecb, and the bank of england. That is next. This is bloomberg real yield. Jonathan from new york city for our audience worldwide, im jonathan ferro. This is bloomberg real yield. It is time now 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. You have massive talks in washington three key central , bank decisions, and an eu summit as well. Now that a bit of a brexit breakthrough came this week. A lot of things to look out for over the next week. Around the table with me, Oksana Aronov from jpmorgan asset management, Richard Clarida from pimco, and Colin Robertson from Northern Trust asset management. Rich, as you look across the three central bank decisions, if you had a focus on one, which is the most important . Richard you have to focus on the fed. The fed will actually do something. Unless we get hit by a meteor, the fed will be hiking rates next week. Even powell in his hearing, more or less, signaled his desire to do that. It is fully priced in. We will get a fed hike. We will have Janet Yellens presumably last press conference. We will get a new edition of the dots. In terms of the ecb and the bank of england, draghi laid out the game plan at a prior meeting. I think very little news at this meeting. The bank of england, no decision, but we will see if there is any dissent. Jonathan oksana, do you just assume the News Conference after the next News Conference is the same, but with j. Powell sitting there instead of janet yellen . Oksana i dont necessarily assume that. 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. Yellen said she will step down as soon as he is approved. Very likely he will be at the january meeting. As i said, he may be viewed as a dove, and may be viewed as 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 colin, yellen 2. 0 or different this time . Colin i think it is 2. 0. I think that clearly some decisions could be different. The fact that powell came in and was very similar in conversation with respect to how yellen spoke to the markets, no change or shift yet 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, is if, as we talked about yields earlier today, is if the 10year rate continues to contract and refuses to go up, powell will have a real issue saying to the markets if they want to raise rates three times in 2018. Jonathan lets get to it. Shall we wrap up the program . It is time for the rapid fire round. The three of you go into your boxes, and i ask a series of very quick questions. We keep the answers really short. The first question, as we going as we go into 2018 and everyone looks at a flattening treasury yield curve, will we get an inversion at some point next year on the Treasury Curve . Oksana, inversion next year, yes or no . Oksana no. Jonathan richard . Richard no. Jonathan colin . Colin no. Jonathan that is easy. Oksana boring. Jonathan that is easy. Were going to go to credit and highyield. Picks or broader highyield . Picks or broader highyield . Through next year, total return, which will get the most outperformance . Oksana . Oksana broader highyield, but you have to be selective. Richard agreed. Colin broader highyield. Jonathan ok,. As we look to next week with the big Central Banks on deck, the Federal Reserve and the ecb, put the fed to one side and think about this. Who hikes next, the ecb or the boe, oksana . Oksana the boe. Jonathan richard . Richard the boe. Jonathan colin . Colin ecb. Jonathan there we go. We have a market. Oksana aronov from jpmorgan asset management, thank you very much. Richard clarida from pimco and Colin Robertson from Northern Trust asset management. 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 was bloomberg real yield. This is bloomberg tv. Retail. Under pressure like never before. And its connected technology thats moving companies forward fast. Ecommerce. Real time inventory. Virtual changing rooms. Thats why retailers rely on comcast business to deliver consistent Network Speed across multiple locations. Every corporate office, warehouse and store near or far covered. Leaving every competitor, threat and challenge outmaneuvered. Comcast business outmaneuver. Or a little internet machine . [ phone rings ] it makes you wonder. Shouldnt we get our phones and internet from the same company . Thats why Xfinity Mobile comes with your internet. 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