sonali: bloomberg real yield starts right now. quirks of the fed has a tough job threading the needle. >> cpi telling different stories. >> you fincen starts. >> economic data may compel the fed to >> do the opposite. >>it is important for the fed to addressed policy. >> >> they will deliver cuts soon. >> the market might be too optimistic looking for the first rate cut in march. >> a big risk for markets is inflation is effectively stuck. >> i suspect we will see inflation at the cpr level stuck at 3%. >> we aren't out of the woods.

>> we need more data. >> the key is the course of inflation. >> the market believes the fed will ease and i do not think a lot will change that view. sonali: five straight days of two gear yield declines, the lowest level since may. the simmer -- consumer price data came out and the yield has fallen so dramatically even today. a web signing of 17 basis points on monday alone and a 30 basis points on the week. a dramatic repricing at the short end of the curve. let me pull up the board to talk about expectations for the rest of the year, just as dramatic. traders are pricing in based on fed futures more than six rate cuts through the end of the year, almost seven before the first fed meeting in 2025. will those expectations stand as economic data comes in? we have a lot to see before the next meeting comes around. i want to get to our guests.

if we think about those expectations, six rate cuts in 2024 alone, based on the data, does not make sense to you. sonal: no. i think the market is running way ahead of the fed. as of today, closer to seven then six. the fed said three. i think that is probably ok in the second half of the year. here is the thing. cpi does matter. the fed has two alluded to cpi because cpi is what people effectively see. both cpi and core cpi are kind of stuck. they aren't coming down. we always anticipated this last stretch getting back towards two would be a longer and harder slog than a move from around 9% to 4%. then things start getting trickier.

i think the market is really running here. given the dovishness of chair powell during the last press conference, to some extent, the fed has itself to blame. sonali: do traders get burned or given the rally in the bond market more recently. do you think perhaps people are getting ahead of themselves? jamie: absolutely. we think the duration move especially in two year notes is exactly what we expected. we talked about this the last time you and i spoke. to think that the fed will do all the cuts preemptively before they see inflation sustainably heading towards the target is we think the market is ahead of themselves from that perspective. sonali: on the long end of the curve we have seen significant steepening watching the 210 occur -- to 10 curve steepen to

the steepest level since the end of last year or the year before. does that sustain itself? is there risk in the yield curve here? sonal: there is risk in the yield curve in that sense i think shorthanded rates have proved too much and long dendrites also rallied a little too much. i see the long and it's selling off closer to 425 450 as we go through the year and i think the shortened moves too. yes, steepeners has a place. i think how they have been placed is probably not correct. sonali: how much pain it does that mean? you are looking at the 10 year hitting 395 right now. if you think it goes as far as 450 in yields, how much pain does that mean for the bond market and bond investors today? sonal: over the last three months we have gone from 5% to where we are now on the long end of the yield curve.

bond markets have had to live with substanti volatility. i think what the fed has done is reinsert itself in the game in a way that i have to believe was not intentional. but, it has clearly had a massive impact. it loose and financial conditions enormously and today's moves will do even more. sonali: how do you feel about the long end risk given so many investors are pitching duration today? jamie: that is where we might disagree with sonal in that we are bullish across the curve was -- with much higher conviction in bullish duration front end. we think the curve may steepen. we think at this point in the fed cycle the fed will keep rates too high for too long and it will drive a larger than expected downturn. market rates are currently priced for absolute perfection.

so, being long-duration with forward implying a perfect soft landing has incredibly positive risk reward. we have already gotten a lot of the moves. we were max long in october and we are less long now. but we remain long across the curve. we think there is still a lot of value in bonds. sonali: how do you feel about recession risk? at tcw your ceo has been bearish than many in the market about a soft landing. you pitched a hard landing on this program before. do you think the rate cut cycle speeds should economic data soften and if so, when? jamie: yes. that is still absolutely our view. we think the fed may not do as many proactive cuts, march or may as of the market might have priced in. but, we think the logs are longer.

when the economy does take that turn we think the fed will have to cut much more than markets expect. we are in the hard landing camp. never in the history of modern economic policy has the fed been able to raise rates by over 500 basis points, kept rates in there for years and years, and been able to accomplish all that without any sort of recession. that does not seem plausible to us that that would be the outcome. sonali: sonal do you think economic data hardens more from here -- softens, rather? sonal: actually, here i think jamie is right. i would disagree somewhat with that view. in part because of the financial conditions chart you just showed. we are, effectively, in a situation where financial conditions are at the point they were when fed funds were just 1.75%.

look at what the bond markets are doing. look at what the equity markets are doing. it has a very positive and that on the consumer, who had begun to start showing sometimes -- signs of softening. this will have a material impact on how the consumer feels about the outflow. that is one piece event. the other piece, the elephant in the room, his fiscal policy. it's incredibly loose. again, i would add it to what it jamie said regarding the fed rate hikes that never, i would say, in modern history, have we seen this level of fiscal expansion at a time when the economy has zoomed right through employment and continues to do rather well on the labor market side even as monetary policy was not effectively that tight. because i would note, it is a tight relative to the time poster global financial crisis

but it is not massively tight relative to the 50 years we had pre-global financial crisis. so i am not saying we will not have a slowdown. if i think a seriously hard landing is not our base case. sonali: i want to play this from loretta mester. the idea that fed is still -- inflation is not showing enough signs for the fed to move you >> march is probably too early in my estimation for a rate tech line. because i think we need more evidence. i think the december cpi report shows more work to do. that work will take restricted monetary policy. angela: we --sonali: we have all been talking about how we thought six might be too much already. thinking about the data at of us including the cpi print that already came in above expectations, what are you looking for in the pc before the next fed meeting is tomorrow

jamie: we have really gotten one data print since the fed put up updated projections in december. we have december inflation. we have two more months of inflation data before the march fomc when markets are pricing in the 80% chance of a cut. more importantly, loretta mester is illustrating exactly what our view is at tcw. which is that powell and the fomc want to err on the side of stamping out inflation. they will err on the side of keeping rates higher for longer. if we get one softer print, we do not think that changes their ammo. --mo. >> today jamie dimon was talking about the potential for higher rates. the idea that deficit spending as well as spending on military, supply chains, and the green economy could lead to higher

inflation and a stickier rates than markets expect. how much risk is there for re-inflation before markets start to turn? >> reinflation ics potentially and externally driven stock in the sense of something coming from geopolitics, oil prices, etc.. sticky inflation i think israel and a longer-term underlying inflationary push rather than a deflationary or disinflationary push is also real for many reasons jamie spoke about. sonali: there is a lot of data ahead before big decisions by the central banks. sonal desai and jamie patton, thank you for your time. next the auction block. a record week for issuance in europe and strong demand in the u.s.. this is real yield on bloomberg.

♪ sonali: i'm sonali basak. this is bloomberg real yield. it's time for the auction block. there is a healthy appetite for issuance, record week for europe with sales topping 120 billion euros with more than 50% coming from public sector offerings like the u.k. and spain seeing record demand. in the u.s. demand is just as strong. borrowers like mercedes, micron, and t-mobile are seeing robust order books with more than 70 borrowers tapping the high-grade market so far this year. in the u.s. high-yield after a slow start to the year with companies raising around $5 billion this week. hilton grand vacations giving the market r and r with $900 million of the sale. pg ims michael collins lays out his current playbook. michael: clips a coupon in fixed income, and you are still

earning attractive yields. interest rates across all sectors of fixed income will be lower in a couple years from now than they are today. i think you clipped the coupon for now. it's rates back up by them. his credit spreads widen, by them. you have a fed backstop you have sonali: not had in a long time. sonali:joining us is mike best of high-yield and all springs george bory. if you expect six or seven rate cuts this year what is attractive in terms of risk-taking? mike: we had bearings done expect six rate cuts or expect them very quickly. but, what we do see that is this -- consistent with others earlier, is we see the path lower for rates overall area that should be, generally speaking, pretty good for the high-yield market overall.

additionally i think investors have isolated distressed and stressed parts of the market. we live in a high-yield market now that is double berated and provides some discount and we think there are attractive yield opportunities out there probably not pricing in opportunities that will come sonali: about. sonali:george, even if you see rate cuts you see rates above zero. you had a lot of issuer starting on the basis point for fed funds come in next to nothing. if you are seeing rates generally higher than in the next -- last decade, how does that impact the bottom part of the credit structure here? george: refinancing into higher rates will be challenging for some. we have seen that over the course of 2023 loan borrowers who have seen their loan the cost of funding go up dramatically absorbing those interest costs. as we march forward, as debt

comes due and those bond costs are reified, interest costs goes up. for public companies with bonds outstanding they are in good shape. balance sheets are well-financed in investment grade and high-yield. it is deep down in the credit spectrum where you will see the biggest challenges, companies very highly levered that will absorb significantly higher interest costs in the double-digit range. f they have a business plan that can absorb that, that's great. if they do not, they will clearly have a lot of pressure. it is a double-edged sword. the absorption of higher interest costs will be problematic for some. but, for most of corporate america, in by and large the lions share of corporate america and are actually in very good shape. not a lot of debt comes due immediately. it will take several years to erode very high quality balance

sheets. it is the gradual erosion of financing cost companies can pivot. they can reduce debt. they can decrease dependency on high-cost borrowing. they can securitize assets. they can do things to manage their interest costs. that will be the world we live in. data, on balance, could prove to be credit friendly rather than a meaningful credit headwind. sonali: how do you avoid severe distress? we are still seeing defaults higher than in prior years. how do you avoid the trouble? mike: it comes buck -- back to what we do at bearings, bottoms up fundamental analysis on these companies preview can't paint anything with too broad of a brush. triple c's and single. if they have been improving credit quality, operations, revenue, and ebita, i think those are eminently finance a bull and can sustain a lot of that.

there are a lot of companies in the market now that probably cannot sustain their capital structures. default rates are higher. certainly everybody is expecting that. we are coming off one to 0% default rates. i think reverting back towards the mean is something we expect. we think that has been mostly isolated in terms of the market just picking on the leveraged loan market now. there is about 10% of the leveraged loan market that trades well below $.80 on the dollar on the market where most everything trades at par. those names all trade at $.60, $.65 on the dollar. they are already indicating stress and that peace has by and large been isolated. >> gorge, what do you like better, duration george: or credit risk? george:we like --. george: we like duration. we are in a bond friendly environment where policy is tight and that tendency is to

get inflation lower. from that perspective we like interest-rate risk. to go to michael's point, at every rating level there are quality borrowers. it ultimately comes down to balance sheet strength. good security selection will drive your portfolio. it is not as easy as just credit or duration. you should have some duration and some credit. if you do your homework and look at the balance sheet structure and earnings cash flows these companies are throwing off, we can find very attractive companies from aaa all the way down to triple seem that are appropriate for different kinds of fixed income portfolios. there's a lot in the world of fixed income. yields are high. spreads are clearly tight. as michael mentioned, there will be multiple opportunities for refinancing opportunities as well as very attractive securities selection opportunities. sonali: given spreads are so

tight, mike, what you think the entry point as? do you expect spreads to widen at any point? mike we certainly saw spreads at the end of last year at a point where we scratched our heads and said they don't feel appropriate here. we have seen a good bit of widening to start the year within the high-yield market overall. i think we are getting much closer to fear -- fair value on a spread basis. it's more nuanced than an absolute spread of the index argument. in my opinion, we tended to be more global in nature. when we look around the world, we see a lot of opportunities and a lot of them are very yield to call centric where we do not have to necessarily decided between credit or duration. we can just pick the yield and think they are pretty attractive. i think there will be more opportunities that post spreads could dip out in the next 12 months.

by and large i did not expect wide gaps. i think we will stay fairly range bound from here on out given some of the positive momentum in the u.s. economy in particular and in resilience globally. sonali: what is the most missed priced opportunity in the market today? george: to go back to what michael just said, when high-yield yields are up around 8%, you forward-looking returns for the asset class are favorable. when investment grade is between five and six again, those forward-looking returns look pretty attractive. the one area that tends to look fairly interesting, a little away from corporate credit is just volatility in the interest rate market that has been very high and remains fairly high. mortgage-backed securities or other volatility driven opportunities ra great way to

monetize the macro surrounding fixed income markets without taking bigger directional bets, having yields have to go up or down. they are just going up and down a lot very quickly. or, you don't have to be super cyclical as it relates to credit. when we take a nice selection of credit, add rate strategies, then try to monetize rate volatility, rate volatility to us is the most attractive risk return opportunity that we see in fixed income markets today. sonali: we thank you for your time monetizing the macro. everyone is a macro trader today. ahead, earnings season still in full swing. this is real yield on bloomberg.

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sonali: one final thought. $90 billion is how much jp

morgan expects to make in net income this year alone and m six rate cuts this year alone. there could be more. from new york that does it for me.same time same place next we. that was real yield on bloomberg.

>> welcome to bloomberg markets. >> let's check the markets. we are trying to hold on to some green on the screen but we are roughly flat on the day, investors pouring out o the market even with the pair down in the yield, five days straight that yields moving lower, and eight-point move on the day, does not show you the volatility, 17 basis points on the two