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>> i'm sonali basak and real yield starts now. coming up, a hot u.s. jobs report blows past expectations and iso numbers throw coldwater on payrolls. the back and forth with data and where it leaves the fed with yield. the big issue is reading economic signals. >> the jobs report was hotter across the board. >> the market is still strong. >> the economy is still doing well. >> we are concerned about what this means for the fed. >> it reinforces the notion the fed won't be in a rush to cut rates. >> it likely means the fed does not cut rates. >> it is clear the fed will wait a while before it cuts rates. >> you are seeing a clear deceleration in the labor market. >> there are other developments on the macro front freak -- we

got this week that to me suggests a rebalancing. >> part of it is looking in a lot of mirrors. >> i think the fed is frustrated that the market always wants to be more dovish than the fed wants. >> the fed is looking at the market on the market is looking at the fed. >> what the fed it does determines where markets will end up. sonali: joining us is a jordan brooks of hq are capital management. i'm excited to have you. you taught me how to bootstrap the yield curve. you did not teach me how to read the macroeconomic data we are seeing today. look at this morning. we had striped -- such a strong payrolls and such confusing data coupled with ism numbers. how do you read the macro today to trade? jordan: on net, labor markets remain very tight. from a trajectory perspective, the level consistent with disinflation. from a level prospective, not consistent with 2% sustained

inflation. reading between the numbers you see conflicting data. that's not new. i think the only certainty for 2020 his continued uncertainty. throughout 2023 we saw extraordinary macroeconomic volatility. think about how many times we oscillated between euphoria over the potential of disinflation and on the other hand, the harsh reality of higher for longer interest rates. back and forth. we are seeing that into the beginning of this year. one other data point on this is what bond markets are telling us now. i believe they are pressing in some softness in the economy. it conflicts dramatically with what equity markets are telling us, firmly in the camp of a soft landing. you had that combination of data , that combination of market pricing, high volatility is a foregone conclusion for 2024. sonali: do you believe equity or

bond markets thinking about what the economy looks like the rest of this year? jordan: i always trust bond markets a little more when it comes to dissecting the macro landscape. i think at the end of the day, the most important thing for investors is to recognize their portfolios need to be resilient to a wide range of outcomes and against that backdrop, diversification will be paramount. particularly, investment that can do well across a wide range of different economic scenarios. trend following, global equity neutral is one thing they have proven over the last two years. they can generate money in different economic environments. sonali: let's go through those environments. you came into this year with an investor expectation of steep rate cuts at the end of the year. on one hand volatility makes a traders market. on the other hand, volatility can mean bets go wrong really quickly.

is this market offsides? jordan: to an extent. you know my enthusiasm when it comes to this subject. the beauty of fixed income markets is it is probably the most place to observe investor expectations. look at an inverted yield curve. people assign it almost a mystical power to forecast the future, inverted yield curve signals recession. an inverted curve tells us markets expect interest rates to decline, nothing more nothing less. why? it could be because stacy economic weakness. it could be because they see disinflation. right now prices have been fluctuating through the day, somewhere between 130-140 basis points of rate decline over 2024. that seems aggressive and inconsistent with underlying data on the economy. there is little wedge there. having said that, compare that to history. it is nothing like what we saw in the summer of 22 where

markets were pricing rate cuts in six months despite inflation was printing at 9%. there's a little wedge between how fundamentals are likely to progress, verses, where the markets are pricing. but it is not as pronounced as what we saw through the inflation cycle. sonali: a few guests on our programs are starting to talk about not just less rate cuts, but rate hikes. is that reasonable? jordan: anything is reasonable. the underlying message of volatility is we do not know what the future will hold. i think on balance, you are probably looking more towards normalization then towards further rate hikes. all that can change. all that will be dependent on incoming data. one thing we learned from the federal reserve, if you remember the beginning of the inflation cycle, equities were very resilient until the second quarter of 2022. they did not buy that the federal reserve would hike interest rates because that will

hurt the economy. sometimes this goes by the fed put. i think they crushed that logic. they will do what it takes to tackle inflation to read the labor market remains strong. these inflationary embers start to make the fire flare up again. then i think you could see the fed. but i think you would need to see a change in the trajectory of the data. the data has pointed towards disinflation, if not mission accomplished, soft landing. sonali: let's get really tactical. you work at a large hedge fund firm thinking about this day in day out. you are able to make changes quickly. what do you put on today given the data? jordan: look at the front end of the yield curve. you see about 100 40 basis points of rate cuts priced in for 2024. i do think that's a little bit on the aggressive end. that is something i would personally fade. you could do that by being outright short duration. i think a more prudent way to play that would be the curve continuing to flatten, particularly at the front. that makes the belly of the curve attractive relative to the

wings. both of those are positive positions from a trader perspective. it is always nice. i will caution that these mispriced things are nowhere near as large as what we have seen march-may 2023, summer 2022. curve diversification should still be the first rule of thumb for investors. sonali: you mentioned a short duration. what is interesting if you hear more and more people pitching duration. there's a lot of risk at the longer end of the curve thinking about the fiscal position of the united states, treasury issuance, quantitative tightening. much control is there over the long end of the curve by the fed? is duration a smart play now? jordan: when you look at the long end of the curve, my assessment is that there is not a pronouncements valuation there. the first -- pronounced miss valuation there. the first thing i do is look at the level of yields and say, what should short-term interest rates average over the next 10

years if you are thinking about 10-year gilts? where-year-olds are today, in the range of 4%, seems like a reasonable expectation with a little risk premium baked in. i don't think there is a large valuation cap at the long end. near-term, it will depend on how economic conditions develop. from an economic catalyst perspective, it has been continued strong data, strong risk sentiment. a little bit of a catalyst pushing yields up at the long end of the curve. but, i don't see the opportunity there that i do see at the front end of the curve. in particular, fading the market rally at the front. sonali: as we sit here today, you still start 2020 24 with the 210 curve looking at a 35 basis point differential. it's been inverted for almost 1.5 years. when does it does invert? jordan: the biggest

misconception investors have is an inverted yield curve means recession. it means investors expect interest rates to decline. that might be because of economic weakness. it might be because of disinflation. right now, it is a little of both. when does that normalize? when investor expectations are that yields are temporarily high. i think the way that happens is gradually over time inflation settles closer to 2%, probably, on a trajectory a little slower than what the markets are pricing. monetary policy gets to a more neutral setting. then we see more normal curve shapes. as long as interest rates remain high, relative to what the fed would consider neutral, expect a flight to inverted yield curve. sonali: you can be as outspoken as your very outspoken boss. if there is anything outspoken you have to say, misconceptions you want to knock down in markets today, what are they? jordan: the number one thing, when i am talking to investors

and other market participants, is i think there is under appreciation for how dramatically good equities has been despite a tough 2022. over the last decade, equities have beaten cash by about 12%, that is the s&p 500. that's extraordinary. that is one of the best 10 year periods we have ever seen. if you will see a repeat performance for equity markets, you are looking at the best ever earnings growth. and valuations popping above tech bubble extremes. of course, that can happen. it's not impossible. but, a wise man once taught me years ago to never forecast something you have not seen before. most investors would say, hey, i am not extrapolating. i do not believe that equity markets will beat cash by 12%. but their behavior is different. we are seeing investors who, on the basis of the relative

outperformance of equities, are very over allocated to public equities, private equities, private credit. ultimately, those three things have the same growth engine. i think that is something investors need to face up to. if you see even average equity market performance, then diversification across asset classes, diversification to lowly correlated alternatives, like trend following global macro, those things will be very valuable. if you see, and i hope we don't, really -- a really tough decade coming up, it will be a situation where the tide comes out and it won't be a pretty sight. sonali: we are still waiting on the tide for 2024 to show its face, whether it is pretty or ugly. thank you for your time jordan brooks of a qr. next, the auction block. 2024 off to a strong start for sales. this is real yield on bloomberg. stick with us.

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sonali: i'm sonali basak and this is bloomberg real yields. it was hectic for europe and the united states this week. a strong lineup of sales saw volume top 704 billion euros in europe. notable names included credit agricole and hyundai. it was not just corporate issuance at was busy. you had sovereign sales from mexico and indonesia. mexico's was the largest deal on record for the country. u.s. high yields off to a slow 2024. annual projections are different. bloomberg intelligence forecasts full-year volume to approach $250 billion. when talking about credit

blackrock's amended item talks about the reversal so far in 2024. amanda: this is a course correction from what was perhaps over exuberance in the last part of 2023. corporate credit spreads tightened significantly to levels that were likely unsustainable. this is probably a healthy correction for 2024. the narrative of credit is all about the cost of capital and refinancing activity. we can have a pretty supportive set up for credit risk especially for yield based buyers. sonali: jp morgan's oksana renault predicted a credit reckoning for 2024. is the credit reckoning here yet? arcs honor: like -- oksana: like all reckonings we cannot pinpoint the catalyst, but we know where the vulnerabilities are.

the interest rate reckoning took its time but arrived in 2022 and even 2020 328 large extent. high-yield will face significant challenges. you had a number of companies that should probably have not made it past 2020 but did because the fed supported a wide range of companies. that won't be the case. these businesses will have to stand on the merit of their fundamentals and it will be challenging. in 2022 and 2023 as the cost of capital went up, we saw those two years being the lowest issue years since 2008. how this year will play out, you have a maturity while coming up in 2025. it will be interesting. we have seen defaults quadruple in high-yield bonds going up to something like 6%, close to 6% in leveraged loans for you you have low recoveries. there is definitely a drumbeat of the default cycle underway. sonali: megan, you see so many

investors talking about a soft landing now, almost starting to ignore the risk in the junk markets. do you think they are ignoring back to their peril? there is risk capital loss at this point. megan: as you point out, we are trading the last 10 months tide in high yields. we have seen spreads wider over the past week as investors have appreciated valuations came in a little too tight. they recognized the probability of a bull case for credit, credit soft landing with high for shorter rates. that's a possibility. with that you have seen refinancing penalties. splits by about 50% for the median high-yield issuer since october. there is still looming risk especially for lower quality. look at the median triples the issuer. the penalty to revise is still 500 basis points. that is something we will face later this year that is a risk

not currently priced on it high-yield. sonali: oksana, how do you think of the leveraged loan rises high-yield conundrum here? is one place safer than the other? oksana: given the structure, leveraged loans is where you will see a lot of struggle. i recall 2008, and how there was so much lament around the fact that 25% of loan issuance was kind of life. all issuance of late was light. that means by the time a company is actually pushed into default or restructuring there is less valuable because lighter covenants allow it to survive a bit longer. you will see low recoveries. we have already seen that in that own space. -- the loan get in high-yield bonds, you will see struggle around the fact the cost of capital is much higher compared to when most companies had to last refinance. i think both of them will see great opportunities for investors.

by the way, these do not have to arrive against a backdrop of a recession. that is where our view differs, perhaps, from some other less positive outlooks on credit, lower rented -- rated credit trade at 350-360 basis points, high-yield is not a bargain but repricing does not have to arrive against the backdrop of recession, but you may be focused specifically on lower rated issuers that can't survive with a higher cost of capital. sonali: that's not to say so many banks are looking for the resurgence of the leveraged loan market. well that amanda be there at the end of the day when banks go to market? garfield: so far we have seen bifurcation in supply. as you pointed out, at the beginning, a surge in supply this week, 57 billion. high-yield supply has been very muted. i think there is still more selection in terms of high-yield investors and what deals they would like to see.

we can see higher quality issuers come to market quite easy. there is still a question of lower quality. investors are more selective when it comes to those types of deals. sonali: how do you think about returns possible and safer assets? oksana: safer assets is something we have been emphasizing in our strategy. as i was backstage, there is so much going on between our rates going higher -- our rates going higher? are they going lower? the fed has a huge communication problem. they threw the logs on the fire of markets already expecting a lot of cuts. they through fire on that at the end of last year, yet, the data is not supporting it. the data is supporting them being patient at best. what they have done may re-accelerate the easing of financial conditions. that may reaccelerate inflation. then they may have to hike. i think the range of outcomes is significant. we have emphasized optionality in portfolios and high-quality floating rates.

to your question around the prospects for higher quality, you can earn a 6.3% co-bond in investment grade corporate flow rates today. why would i buy the 10 year at 3.9% or 4% when i can clip a high-quality coupon that will be there for me even if the fed decides to cut? that does not change unless and until the fed actually does something. it does not change what they say on what markets expect. sonali: the range of outcomes is meaningful. megan, to you, what is the biggest downside risk that inflation reaccelerate and the fed has to hike or the economy crashes too hard and has to cut too much because of a very weak economy? meghan: great question. i think markets will be more sensitive to a growth so down. when you look at the right market for today for example we saw a rates ultimately lower, more sensitive to the weaker services print. i think something that has gone under appreciated is, last year,

we did see very positive revenue and even a growth. if gp -- gdp growth comes in worse than expected some investors are not repaired for that to inflect into negative territory, which would be a challenge for issuers, and we would see a pickup in a rise in leverage and coverage to struggle. sonali: favorite trade of 2020 for quest -- 2024? oksana: we favor the high-quality floating rate orientation. wherever we can find it. whether it is the ultra short end of the investment rate corporate floaters. we will see brush fires as 2024 progresses. opportunities will arise. we seem to be stuck in a bad news is good news good news is bad news estranged dichotomy because the markets are so wedded to the idea of dramatic cuts from the fed. just like we were at the top of

2023, i think they want to materialize and some repricing's will come from that reality. whatever it is, we are ready. meghan: we like high-yield over loans. typically after the last fed rate hike, you will see high-yield start to outperform, exactly what we have seen so far for the credit quality issues and is alone loan market that was just highlighted. it is also hitting a higher for longer environment that also justifies it overweight to high-yield. sonali: ahead, the final spread. another big week on economic data with another read on u.s. inflation. this is real yield on bloomberg. stick with us.

sonali: i'm sonali basak and this is bloomberg real yield. it's time for the final spread for the week ahead. coming up we have thursday the december u.s. cpi report.

investors watch to see if data validates rate cut expectations for yet another indication of how the u.s. labor market, initial jobless claims and friday, ppi data. stick with us. a lot of big bank earnings next week. this time, same place, real yield. how am i going to find a doctor when i'm hallucinating? what about zocdoc? so many options. yeah, and dr. xichun even takes your sketchy insurance. xi-chun, xi-chun, xi-chun! you've got more options than you know. book now.

amber: i'm amber kanwar. welcome to bloomberg markets. sonali: i'm sonali basak. on the s&p 500. more gains in the nasdaq 100. the dollar spot index does not know what to do. a lot of economic data today with payrolls and ism data and we were all looking at the dollar down on the day. now it's pretty much unchanged. the two year yield also unchanged.