877-sell-easy. 877-sell-easy, and sell your policy. you can sell all or part, live your life and play it smart. 877-sell-easy, and sell your policy. if you've had a change in health, or you're over 65, and paying for $100,000 or more in a life insurance policy you don't need, get paid for it instead. then take the money that you get, go to live it up, you bet. call 877-sell-easy. 877-sell-easy. 877-sell-easy, and sell your policy. >> i'm sonali basak and this is the last show of the year for

bloomberg real yield and it starts right now. coming up, fed officials are pushing back against expectations for rate cuts in 2024, and the latest data points to a soft landing for the u.s. economy pushing credit spreads to around two year lows as we enter the new year. we begin with the issue of a goldilocks market heading into 2024. >> we are in a sweet spot. >> inflation has come down rapidly. >> strong economic growth. >> the soft landing opportunity has increased. >> the inflation data support the idea that the fed can start in march. >> the fed has signaled that they are willing to start to ease rates. >> you saw some pushback. >> fed speak pushback on some of the markets. >> it's difficult when you have the chair with a dovish message

and members of the committee walking it back. >> the markets are being presumptuous. >> it has been an absolutely enormous rally. >> they have started to trim the tree. they have popped the champagne cork. they have booked a ticket for summer vacation. >> too much easing and financial conditions could mean inflation is stickier to come down. >> don't get ahead of yourself expecting a huge number of rate cuts in the first half of 2024. sonali: today, we got pce numbers. when you look at the six month annualized basis, the core metric rose 1.9%, and it's the first time in more than three years that the measure is below the fed's target. it's an amazing turnaround story for a preferred measure for the fed and is causing markets to recalibrate their expectations in line with where they have been around the pivot story. let's flip of the board because the pivot story is significant when you think about the round-trip we have seen and

treasuries. the 5% mark around the 10 year seemed so long ago. we have seen yields shoot up and back down to where we started the year. you have seen the same across different parts of the curve. you think about the two year and 10 year at about 3.9%. joining us now is robert tip of peach and and barry. let's start with you because when we look at this round-trip we had in such a volatile year, it begs the question, even at the short end of the curve, do you expect that volatility going into 2024? robert: i do. i think the market has entered a normal range but that can be very wide and, as soft as the data has been with inflation the last couple months, it's been volatile. the headline level, three or four months back, you had a period of high prints, so next year could be a lot like this year in the sense that the average was productive for bonds, up 6% most of the year,

but now with yields dropping, pushing 10% from the market, but it was 5% higher or lower at another point in time. there were five major moves in the market. i think we could see that pattern next year as the market sees a couple good months, a couple bad months, and moves from one extreme to the other. sonali: i want to read you something from the philadelphia fed president. he said it's important that we start to move rates down. we don't have to do it too fast. we are not going to do it right away. yet you see the market recalibrating quickly, expecting rates to be cut as early as march. do you think the market will be disappointed? barry: at the expense of sounding like a curmudgeon, i do -- in my view, even prior to that surprising december pivot, was that the fed needed to diss

inverted the yield curve in the first half of 2024 to absorb government supply. the multifamily real estate units that were under construction that would be created -- completed and would need to be refinanced. but they have added what i would consider -- the way i was framing the fed policy reaction function after the september meeting was disinflation was the necessary condition for them to ease policy but the sufficient condition was additional labor markets lack and unemployment rates through 4% would be a great manifestation of that. they sort of changed the rules in december so i believe they will begin in march. however, they probably need the policy rate to go down to 4% to really start to loosen the bad credit channel and i'm not sure that inflation numbers will be that cooperative. they are leaning very heavily now on core goods disinflation

over the last six months in the cpi measure. that's as deep as the inflation that occurred in the early 2000's, when china's global market share of trade was going up. i doubt that will persist. things like problems in the red sea cra case against that. so i think we are headed for a crackup between the six cuts the market things we will get and the three the fed thinks they will deliver. sonali: what do you think? if you think about what the fed in the market is expecting, where is the disconnect most pronounced? robert: the markets have gone to extremes. there's no doubt about that. but on the inflation side, it's worth keeping in mind that a lot of prices are up spectacularly over the last few years, and when that happens -- it's very unusual that it does, but in the aftermath, it's difficult to not

have prices come down in a number of categories. the other thing to keep in mind is the significance of housing and we have had a bizarre situation where the increase in rates crimped the supply of existing homes coming into the market, and there's a lag on multifamily supply coming onto the market, so we have had firm rent inflation coming through the cpi. now that supply is coming in, rates are down. that may loosen some of the existing home sale market. and so some of the rent data is coming indistinctly soft. so there are not a lot of things that could keep the disinflation story on track. the fed has been unstable. in july, they went with that story that we could cut as inflation comes down to avoid being too tight. they abandoned that in september. they re-embraced it in december. i would guess, you know, the two out of three, i would go with

that. i think the scope will be there for them to cut whether the inflation numbers are cooperative enough for them to deliver 200 basis points, that's what it will take to keep the markets happy. you know, it's an open question. but i would not rule it out. two, the market pricing is not just looking at a base case. it is looking at the fed, you s near the peak, and much lower rates cannot be ruled out if there's a slowdown in the economy. sonali: so there is some nuance in what you and barry are saying. you believe that maybe not hire for longer as much as we had thought before, but somewhat higher for somewhat longer. it begs the question, and your view, then, what are the lag effects still to be felt? barry: i liked robert's characterization of that,

particularly being an old derivatives guy. if that skew is leading towards potentially having weaker growth or disinflation, meaning we could get more rate cuts versus little probability that we get higher rate cuts, that would move that skew down, so i thought that was a great point. yeah. there are still some lingering risks. i agree with robber that housing inflation will put that through, which it's integral to my forecast that they will cut in march. as i intimated, we still have this big supply of multifamily units under construction, some one million units that were financed as construction loans but, when those are completed, they have to be refinanced as multifamily loans. the small banking system owns those liabilities or assets for the banks but they will have to refinance it and credit is

contracting at a rate that it's only contracted more than one time in the last 50 years, and that was during the global financial crisis, so that is why i mentioned that bad credit channel. there is still room for a crackup. that's one of those risks that could skew it. sonali: we spoke earlier to lael brainard, u.s. economic council, former fed vice chair. she's looking back at where we started the year and where we are now. let's take a listen. >> if you look back over the course of the year, it is stunning how much progress the economy has made. inflation has come down faster than even the more optimistic forecasts and growth has remain very resilient along with strong employment. if you recall year ago, consensus projections were that getting inflation down would require a spike in unemployment and a recession. sonali: to both of you, starting with robert, do we get through this cycle without a recession? robert: yeah, i think so.

i think what we have seen over the past year is that this expansion is pretty resilient to the high interest rates. it has a lot more going for it. one aspect of that. hi immigration. it has boost to growth. but i think just intrinsic growth has been very firm. and so i think this moderating environment has been super for the bond market on average. i think it's going to be very dangerous for individuals, but tremendous for professional investors, in that, one day, individuals will wake up and cash rates will be cut, if the fed stays on their path. cash will be trash. and it will be critical for investors to be in the bond market, which is the only -- is the only market that is revalued here. they will have a great time with this, i think, and around that

base case of moderating economic growth and moderating inflation, we will see these big ranges for economic expectations, and that will result in big trading ranges. sonali: how hard is the slowdown? do we make it through without a recession? barry: i think characterizing the economy as in an unstable equilibrium for six months now. i did not think we were going in recession a year ago. where i'm going with that unstable equilibrium label is that, if you look at duration, the large nine financial corporate sector has extended duration in some seven years. they are not particularly sensitive to higher rates. you could look at the mortgage index as a manifestation of what that household sensitivity is. they have turned out their mortgage debt. the effective mortgage rate is below 4%. those sectors are not vulnerable but the duration of a high-yield index is falling.

i saw a note from a former colleague today about the issuance of high-yield over the last several years. only 18% was fixed rate. so highly leveraged companies are sensitive. small banks are sensitive to the deeply inverted yield curve, the deepest inversion since the voelker regime, which wiped out the savings-and-loan industry eventually. small businesses have primarily floating-rate debt so they are sensitive to this. we don't have good data on small businesses, including employment, so i think there's parts of the economy that are struggling with this. i don't believe they will declare this to have been a recession even if the unemployment rate goes through 4%. we will muddle through. but there are parts of the economy that are struggling mightily with a deeply inverted curve and the aggressive rate policy. sonali: still inverted. we will talk about the trade with them and we have the auction block. we will highlight the year end

for issuance as investors look ahead to 2024. this is real yield on bloomberg.

sonali: i optionality bostick and this is bloomberg real yield. it is time for the auction block. we will look at some numbers for the year end. bank of america sold the most bonds by volume while jp morgan issued the most by number of deals. morgan stanley, wells fargo and goldman and citigroup are among the top. supplies expected to finish around $23 million. looking at the cost to borrow, u.s. hybrid spreads hit their lowest level since early 2022. this comes after a year that saw

the spreads jumped to 1.63% in march, a level rarely seen over the last five years. investors were fearful over how rate hikes would hurt companies but those concerns have mostly dissipated. in high yields, the rally powered by the fed's rate decisions pulled our hours into the market to capitalize on a risk on mood. year-to-date volume is up around 176 billion dollars, up 73% year-over-year, but still trails what we saw in years prior. when it comes to high yields, matt brill lays out his outlook for next year. >> i think the high-yield double b market looks good. the triple b market, the fundamentals are sound. overall, i think you can go down. the triple c sector is still challenged. it has had good returns but there are some landmines there. overall, i think there's a lot of good opportunities. sonali: still with us is peach -- is barry knapp and

robert. if you think about the types of risk you can take on in fixed income, finally, again, do you take on duration risk at that point or credit risk? robert: i think duration will be a tactical game. like i said about this year around that base case return, we are a handfuly in the duration t year. i think on the credit side, it's likely to be a positive year but not as positive as 2023. 2023 started with spreads at that value point. now we are starting off at a tight level. this is going to require a fine toothed comb to avoid problems. there will be rising defaults. it will be important for

investors, especially in certain sectors like levered finance, the floating-rate borrowers that were less sophisticated, smaller capital structures will have problems. those will have knock on impacts or structured products like clo's. there will be important to know your issuer risk in those kinds of layered structures. also in commercial mortgage-backeds, the office space may have some opportunities but there's definitely a lot of risk there. and then there will be a lot of differentiation even in the vanilla sectors, so i'm balance, these moderating economic environments, moderating growth, inflation environments are positive for credit. valuations do have room to move on average but it's going to require more discrimination among the individual issuers this year than the coming year, 2024. sonali: it is the job of a

credit investor not to lose money. barry, if you look at the areas next year that could still be choppy. that could still lead to defaults. where do you start to avoid? barry: well, i mentioned multifamily real estate, commercial real estate a little bit earlier. i will move on, if i may, to stuff that i like, which is -- all my comments have implicit -- have implicitly been negative bank equities. the banking sector is contracting in terms of assets, shrinking, and we have this big regulatory overhang. we have what looks like a pretty good battle royale going on within the fed where michelle bowman is against the capital suggestions, the cra requirements, that additional countercyclical buffer they want to put on the big banks, but

barr is all in on it, so in that environment where we had this capital overhang, bank equities unattractive, but the credit part of the structure would look much more attractive. they should perform pretty well, particularly in an environment where you will last them to have even less leverage in credit risk -- and credit risk. we are pushing that out to the nonbank sector if these proposals go through but that notwithstanding the bank part of the structure should be pretty good. we are talking about credit specifically. i like the mortgage market quite a bit as well. if the curve does not do some bird, if the fed cuts enough, most of the buyers for mortgages are leveraged one way or another. that could improve demand there, tighten those spreads, so mortgages over credit is one of my favorite macro trades. sonali: to the extent you are

willing to take on a little bit of credit risk, where do high-yield spreads need to be to provide an attractive entry point? robert: i think that high-yield is like would have positive access return.it's likely to outperform governments this coming year and i think that will be true for most of the credit sector but the counterintuitive point here is that it will do so in the face of rising defaults. but a lot of those levered finance defaults will come from the smaller companies. it will be coming from those that have excessive exposure to floating-rate financing as opposed to fixed-rate. i think a lot of the companies that made it through covid have consolidated in their industries. they tend to be larger players, more sophisticated. the issuance that scum to the fixed coupon high-yield -- that

has come to the fixed coupon high-yield market has been higher-quality. so that has been quite high. another feature going for the high-yield markets as well as for the muni market is the fact that, compared to other markets, supply is quite limited. for high-yield, there's a shrinking aspect to the market that, all else equal, keeps the supply quite limited. so i think high-yield is likely to be a solid performer despite the fact that we are starting off with spreads not at particularly high levels. sonali: complicated times. robert tipp and barry knapp, thank you for your time and wish you a happy holiday. still ahead, the final spread. the week ahead. the final data points ahead. this is really yield on bloomberg. ♪

sonali: it is time now for the final spread, the week ahead, coming up in the final week of the year. monday, remember u.s. markets are closed for the christmas holiday. tuesday, we have boxing day in some countries. we get a read on the housing market. we are not done with that economic data yet. thursday, another round of jobless claims, looking for further signs of cooling. and for my final thought, really, this is the last show of the year for real yield. it has been a round-trip in yields as we have been talking about setting up for another volatile year ahead. i hope you will write to me and watch the show every friday next year as we watch for whether rate cuts will meet the market as expected. happy holidays, everyone, and have a happy new year. from new york, that does it for us. this is bloomberg real yield and this is bloomberg. ♪

>> i'm john ehrlichman. >> we have stocks pulling back from session highs but remaining on track for an eight week bull run after inflation readings have reinforced the conviction of rate cuts going in next year. we are looking at a nasdaq 100 just less than that. the russell 2000 i wanted to look at because that is up still more than 1.2% on the day.