>> i am sonali basak and "bloomberg real yield" starts now.

coming up, powell pushes back against rate cuts the markets are still preparing for them. and it is the biggest bond rally since the 1980's. we start with the performance of global bonds. we are going to talk about just how well things have been going on the back of expectations. if you look at the total return index, the bloomberg ag, global bonds have their best month since 2008 and that after the worst performance the last several months. you have seen them go downward between 1% and 2.5%. this bounce back has been significant. i want to show you what that means on the heels of rate hike expectations. the market has continually said cut and that has been more drastic as of late. expectations have been moving toward more of a rate cut. the white line is this idea they will cut at least one time by

may, and a second in june. even with powell speaking today you see that trajectory continues. it is worth taking a listen to what fed chair powell had to say. chair powell: it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance or speculate on one policy might ease. we are prepared to tighten policy further if it becomes appropriate to do so. sonali: joining us now is jamie patton of tcw group and blake gwinn of rbc capital. when you listen to powell today what was new, if anything? jamie: nothing was new. what is new is the market expects to hear new things. governor waller's comments this week were played up a lot in the markets. the markets started pricing in the chance of a cut as soon as march and our view is that powell reiterated most exactly

what he said at the. . november press conference he still has a strong bias to continue fighting inflation. this feeds into the view that the fed is likely to keep rates too high for too long. powell reiterated today that he is not entirely confident that the fed has done enough or held rates high enough for long enough to get inflation down to that 2% target sustainably. powell has been very clear all along that his bias is to ensure inflation gets down at the risk of over tightening, at the risk of hurting the economy. so, we heard the same thing we have been hearing from powell. we are long-duration and happy about the move, but we think the market is misinterpreting some kind of enormous fed pivot when powell has been consistent. sonali: do you think the market is getting ahead of itself? blake: i completely agree with jamie. when you look at what he said it was fairly balanced. i thought it was in line with what he said previously.

even back to waller. it is interesting to hear him talk about these cuts. but it came up in a q&a. it was not something that was prepared or strategic communication, in my view. i think we might disagree -- i think this move has come in the direction of what we are expecting. i think they do some adjustment. what the market is pricing might be too early for that, but we are more in agreement with waller that it gives them more latitude to start responding to potential slowdown in growth or labor markets. sonali: i want to talk about the market views. you had bruce richards saying this week on x but the fed is unlikely to cut rates anytime soon and market expectations continue to be wrong, inflation remains above the target. he does not expect the fed to cut rates until seeing material weakness which will likely not be confirmed prior to june 2024.

you compare that to bill ackman who had an earlier timeline. bill: i think there is a risk of a hard landing if the fed does not start cutting rates soon. i think the market expects some time middle of next year. it is more likely as early as q1. sonali: all of this begs the question, blake, is timing everything? blake: it is. i think where i see the reaction function developing -- when that inflation comes down it will be more reactive to the other side. the other thing i would say -- and this is where we are in agreement with waller -- if inflation continues to fall, they are going to get passively tighter on real basis. that real rate will continue to tick up. it is hiking in real terms. that is the reason we think they will scale back. i think the rate setting that is appropriate when inflation is at decades highs and on

employment at historic lows is not the right setting when inflation is closer to target and you have some upward pressure on the unplanned rate. sonali: you start to feel the market starting to declare victory for the fed's behalf. you have tcw positioning for a hard landing. jamie, how much are you fighting back against the notion of a soft landing? jamie: we still find long-duration positions attractive and expect a hard landing. this market is priced for perfection. we have interest rates implying a 4% policy rate at the end of next year and a round a 360 policy rate at the end of the year. four years after the start of the hiking cycle we still have restrictive territory. that is one of the reasons we find tremendous value in owning duration and owning treasuries. combine that with the fact that

historically bonds have rallied when the fed enters their on hold and cutting cycle, and the price action with what you are seeing in equity markets, it screens goldilocks, which is a fairytale, literally. when we put this all together we just do not see a scenario where we will get this immaculate landing. but even if we do that is what we are priced for. the risk/reward in being long-duration is hugely valuable. sonali: you have written recently to clients, blake, that a soft landing is achievable. at what point do you think a soft landing would become a hard landing? what are you looking for? blake: to be honest, like she said, the positioning works either way. in some respects, i don't care that much. if we are positioned for a soft landing -- which we are -- if we are wrong and that starts to tip into the hard landing, those are

the right positions. i think if you are long, you do not really have to worry that much about whether it is hard landing, soft landing. there are nuances but overall, bonds should rally. sonali: be more specific. where do you start to buy along the curve and what do you lighten up on in your exposure? blake: we recommended being long fives, 30's. and if you look at those historically, they tend to lead into the cutting cycle. sonali: for you too ,jamie. where are the most attractive buying points? jamie: we are already long and we were adding to those longs until mid-october. we are long across the curve but concentrated in two's and five's . we agree the curve should

steepen in bull market duration that is skewed toward the front end. as the fed keeps rates too high for too long and has to correct, we should see two's and five's outperform. sonali: we are seeing an important job ahead of us next week. what are you looking for in the data? blake: any weakness. what changed around the last cpi print when that came in soft it flipped the lens through which the market was looking at markets. july into mid-october the markets had a bearish lens. they were latching onto any positive data. latching onto any hawkish fed speak. i think the effect of that cpi print coupled with announcements from treasury has flipped the way markets are looking at things. they are looking for any kind of week data. they are going to latch onto the dovish fed speak. they are looking for something to grab onto on the dovish side.

i think we are looking for weakness. any kind of signs there is any wobbles in the labor markets, markets argan to push the rally further. sonali: how are you viewing this, jamie? there are still critical events into the end of december. what is the set up heading into 2024? jamie: individual data points are noisy and volatile. what we are looking for is longer-term fundamental value and we try and look past the noise. one good or bad data print is knocking good to change our fundamental view. where we see value, blake mentioned soft landing and hard landing, and we hear the same thing over and over. all landings look like they are starting out soft. while that might be true when you are a passenger in the back of the plane, that is not true in the pilot seat. what we are looking through next year's indicators from the cockpit -- year is indicators

from the cockpit. for example, if you are sitting in the back of the plane and enjoying iran,, having a glass of wine, everything feels great. what if the flight attendant said, hey, fyi, the pilots are coming in for landing but they do not have any real-time indicators. we are not totally sure where we are. you might start to think, this landing might not be just as smooth as it feels. that is what we see over the course of 2024 where the fed is looking at lagging indicators, they are going to keep rates too high for too long, and the curve is going to have to rally and steepen much more than what is priced in. sonali: as somebody who hates flying, it is all a scary thought. [laughter] we have to leave it there but jamie patton, blake gwinn, thank you for your time. next, november is a strong month for high rate issuance and this

year was no different. details on that ahead. this is "real yield" on bloomberg. ♪ ( ♪ ♪ ) ( ♪ ♪ ) ♪ (when the day that) ♪ ♪ (lies ahead of me) ♪ ♪ ( seems impossible to face) ♪ ♪ (a lovely day) ♪ ♪ (lovely day) ♪ ♪ (lovely day) ♪ ♪ (lovely day) ♪ a bank that knows your business grows your business. bmo. you got this. let's go. gobble gobble. i've seen bigger legs on a turkey! rude. who are you? i'm an investor in a fund that helps advance innovative sports tech like this smart fitness mirror. i'm also mr. leg day...1989! anyone can become an agent of innovation with invesco qqq,

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sonali: i am sonali basak and this is "bloomberg real yield". it is time for the auction block where we wrap up the month of november ahead into december. we are good start in europe because we saw a revival of at1 bond issuance with the biggest sale level in almost a decade. it was believed to be in trouble after the credit suisse and ubs merger that has not been the case. the u.s., sales this week by the likes of citigroup and home depot helped to drive ig sales to nearly $100 billion. that ranks in the middle of the pack when compared to the past 10 years.

looking at high-yield, november sales surpassed $19 billion. while the month saw higher sales volumes compared to last year it ranks second to last in the data going back last five years. laura goodwin is weighing in on the bond market. laura: even if we see recession -- which i expect -- you can still gain meaningful yield uptick. what is interesting about high-yield is we see investors and we are doing the same. -- and we are doing the same, taking high risk. you can still acknowledge fed programs early in the pandemic made the credit quality of the sector much more interesting relative to past economic cycles. sonali: u.s. bonds have racked up the largest monthly gain since july 2022. we are going to bring in alberto

gallo of andromeda capital management who runs a global credit fund and is the perfect person to talk about what type of risks to take on in this market. when you think about heading into 2024 one of the best buying opportunities going into credit? antonio: there is definitely a consensus trade which is long-duration and lung investment high-quality credit. so, we are actually looking at the niches of the market where they are still valued. we like high-yield bonds. we like europe. we like energy. we like banks. we like greece or italy or spain. these are areas where investors took off risk in october, in part because of geopolitical advance, and slightly lower growth in europe. these are the areas we have where investors are not exposed. in some cases investors are

short and trying to cover. but there is very limited paper available. we see more and more of this rally in european energy, credit, and banks continuing over the coming weeks into january. but we have come along way. it is time to trim that risk. we were pretty bullish in october and now we are more balanced. sonali: talk more about that. we remember the late charlie monger this week. following the herd is always a dangerous debacle. where you think about consensus has bought the market that has not make sense to you, what does that look like? antonio: there is this song that says "one more time." just like last year the expectations for fed policy and ecb policy are pricing in a lot of cuts. it is true there has been a disinflationary process. the supply bottlenecks have

eased but we still have a very solid labor market. we still have consumer spending leveraging despite higher rates in the u.k. the property market has rebounded. it does not look led policy is extremely restrictive and we might see a trough in the disinflation process. on the other hand, markets are pricing in 1.3% cuts between now and january 2025 in the u.s. there was a discussion about the ecb starting issuance through the second quarter of next year. i find that very bizarre considering until a few weeks ago the ecb was discussing quantitative tightening. our view is that there will be cuts but perhaps in the second half of the year. central banks will want to get a high degree of confidence on the disinflationary process before starting a cutting process. it is also not great to forget

the boj. sonali: you talk about something that a lot of people are not considering. this idea that inflation could re-accelerate. where could that become a problem and how quickly could that throw current thinking off guard? antonio: that is not our base case but as a credit investor we are always dealing with tails. there is discussion about the left tail recession scenario. that is well priced in rates, not equities. you could say the bad tail is not priced. but what if something goes right? the consumer in the u.s. continues to spend. black friday data was positive. yes, there is softening. financial conditions should help the consumer rebound. corporate spreads are at record lows. this effectively works as an easing.

if something goes right and the economy re-accelerates and we get closer to 2% in the u.s. next year, we might see, you know, maybe only a cut at the end of the year. maybe not 100 basis points of cuts. i do not think markets are pricing the right tail. we are in this goldilocks, this narrow path, where there is low inflation, strong growth, high equity prices, and unemployment is not go up. sonali: right. antonio: it is very tight. sonali: speaking of, it is worth bringing in another thing you have been talking to investors of and that his geopolitical how do you navigate that as an investor in the more sensitive parts of the market? you said you are willing to dive into high-yield. how does high-yield start to break or perform in these scenarios? antonio: one of the

characteristics of the past decade between 2009 and 2020 was absence of tail events. banks were in the driver seat. now we have deglobalization, inflation, rates volatility, and what happens is asset returns following periods of geopolitical risk tend to be higher than falling periods of calm. it is not that we like geopolitical risk but we have to be mindful of the environment we are living in. china and russia posing threats to the u.s. two proxy wars, ukraine and the middle east, and when there are moments of fear there can be buying opportunities. the flipside is because of geopolitical risks governments tend to support their industrials more. they cannot afford defaults of strategic industries. we see there is more fiscal spending, more taxes -- which

does not make shareholders happy -- but there is also more spending and support to companies. companies like hotel chains or holiday makers getting sovereign aid between 2020 and today. that brings us to the default rate that we can see next year. that is going to be higher we know but not much higher than this year. we are gradually moving up and that is why high-yield is still promising. pretty good return to investors and better than investment grade. sonali: what about not just public market. you have warned online when it comes to private credit -- which has perhaps been the hottest word of 2023 -- that some thing has got to give. what gives? antonio: when we look at data and the premium that you as an

investor can get compared to public debt market, that premium has narrowed. there has been a lot of money going into private debt from the firms that are specialized in the asset class to those who have gone into the class for the first time. data shows $1 trillion of assets deployed in private debt but 50% more money on the sidelines. the yields that are available are 1% or 2% higher than what you can get in public debt market with the downside of locking in those yields and not being able to trade, not being able to generate alpha, or reallocate. we do not think that a sufficient. on the other hand having all of these money on the sidelines means when a company goes from performing to being in distress there is always a competition across private debt funds to offer financing.

that reduces the default rate in high-yield and provides a buffer for companies that are in trouble to refinance in good conditions. that almost makes the liquid market more attractive in our view. sonali: a lot of pain under the surface. alberto gallo, thank you for your time. still ahead, the final spread, the week ahead. another u.s. payrolls report around the corner. this is "real yield" on bloomberg. ♪ ♪ the biggest ideas inspire new ones. 30 years ago, state street created an etf that inspired the world to invest differently. it still does. what can you do with spy? ♪

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3.9% for unemployment. big week ahead for you. from new york, that has across. same time, same place next week. this was "real yield." ♪ a few years ago, i came to saona, they told me there's no electricity on the island. we always thought that whatever we did here would be an emblem of what small communities can achieve. trying to give a better life to people that don't have the means to do it. si mi papá estuviera vivo, sé que él tuviera orgulloso también de vivir de esta viviendo una vida como la que estamos viviendo ahora. es electricidad aquí es salud.

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and you want people to be saved and to have a better life, then you don't stop. the idea that we have saved five million people's lives, it's overwhelming. it's everything. jon: i am jon erlichman. welcome to "bloomberg markets". sonali: and i am shelley bassett. we have green on the screen today. we needed that. we are looking at the s&p 500 up half of 1%. if it holds throughout the day, you're looking at an s&p back in the green for the week. that would be the fifth straight week in a row. the nasdaq 100 only up 0.2% and what does that mean? we are about flat on the week. a little negative, but it still has the chance. we are also looking at the two-year yield. we are watching