>> from new york city, i am sonali basak. "bloomberg real yield" starts right now.

♪ coming up, markets dialed back. fed cut expectation, making marge a tossup. big-time investors are starting to make calls on a steeper yield curve. and long-term yields are still on the rise. we begin with the big issue, rate, optimism is fading. >> the market may be a little bit ahead of itself. >> the market is being a little exuberant. >> the market pricing in excessive interest rate cuts in the u.s. >> the market is calling for a 170 basis point cut by the fed. really? no way. >> six rate cuts is a pipe dream. >> our team has four cuts, four cuts in 24, 25. >> they are going to start lowering at some point. >> i have no doubt we will get to rate cuts at some point. >> they will have to start

cutting because they have the room to cut. >> they will be prudent, thoughtful. >> if they get it wrong, they will get it wrong by staying longer and higher. sonali: i want to bring into a function on the terminal that i've been using a lot lately and traders have been using, the wirp function, the probability of rate cuts that you'll see through the end of the year. this march expectation has fallen to 40%, less than a flip of a going. earlier this week, much higher than that with many traders expecting a march rate cut. not only that, you had expectations of more than six rate cuts into the end of the year. the number of rate cuts expected by the market has dropped to 5.3 nearly. let's see how this keeps changing as more economic data comes in. i want to show you what the rapid repricing of expectations has meant for the two year yield

in particular. look back, past 5%, if you can remember in october. the rapid decline we have seen in the two year yield. we have dropped fairly meaningfully by more than 80 basis point from peak to trough to where we are today, but when you look at the most recent repricing, we have taken a small bump higher by more than 20 basis points, now standing at 4.41 to end the week. joining us now is krishna memani and kelsey berro. when you look at this rapid repricing that we are seeing in the market, how much more repricing do we have to go? krishna: i think given the strength of the data we may have more on the march cut. having said that, the key point to remember is markets tend to over think this. if you look at the inflation data and growth data, growth is stable, perhaps slowing a tad in my judgment, but that remains up

for discussion. more importantly, inflation is coming down. that is a well-established trend. the fed will cut. whether it cuts in march or may, unless you are a short-term interest rate, doesn't matter much. more importantly, those rate cuts will be more than three or four, at least more than three, even if they are not six. don't over think this. the fed will cut rates. that will probably be good for the markets if you have an investment horizon, even if it is not hot in the first half of the year. sonali: when does the fed start cutting? kelsey: that is the debate and i think march was too soon. you are seeing the market start to price out that probability but i don't think the market is going to move all the way to the fed. i think the market is going to continue to expect more rate cuts than what the market is priced in. for us, we are looking at may or

june as more likely for the first rate cut. it will be driven by the improvement in inflation. i will say, what you are hearing less talk about is this probability of a 50 or 75-basis rate cut. waller really walk that back, i think he was strong in communicating that things will be gradual. you are not going to be looking at 50 or 75 basis rate cuts unless there is an external shock to growth or two, there is some real deceleration in the labor market. so far what we saw with initial jobless claims this week, the labor market is still rocksolid. sonali: have much risk is there that you start to see a material fall off in the economic data, particularly labor? krishna: i think the risk is relatively mild. what is more interesting is the market's expectation for that risk. if you look around things, you

look at the various commentators, the conclusion and positioning as well, the conclusion has to be that we are expecting kind of a gradual deceleration in inflation. , growth remaining reasonably robust and rates remaining very well behaved. in that scenario, the pain trade doesn't mean it will come about, but the thing that the markets are most il--positioned for our 10--- that is once and there were not priced into the market. we should pay more attention to that potential scenario than we are doing at the moment. sonali: 3% 10-year. we are at 4.15 today. kelsey, what brings the 10-year down to 3% and how fast? kelsey: you would need to see a material shift in the economic outlook, both inflation coming down but also you need to see

the pickup in layoffs, increase in unemployment that gets the fed moving faster. but i think krishna brings up a good point. we think the risk reward in the fixed income market is really attractive right now for that reason. right now we don't expect a recession near-term, but you get to collect the carry as you hold your fixed income because yields are much higher than in the past. and you get that capital appreciation, if we do fall into that scenario that markets are not priced for, your core high-quality fixed income could return let's say high single digits in a scenario like krishna is describing which the market is not prepared for. sonali: krishna, how far out on duration do you go if you have an expectation of the 10-year hitting that at any time soon? krishna: i don't have an expectation of the tell yaya -- 10-year being at 3% in the first half of the year, but the markets are so positioned to that, they will react far more

violently than we are expecting. to balance out the risk in case things don't work out that well, the 10-year is an ideal part of the yield curve to position with that sort of potential outcome. sonali: it's interesting, because on this program we have had a lot of investors pitching duration, the 10-year, but as of late it's been a pretty painful trade the last couple weeks. how much pain are investors feeling right now, putting money to work, particularly in duration? kelsey: any backup you get in yields is a buying opportunity. a lot of people at the end of last year, client included, worry that they miss the opportunity to get into the fixed income markets. you saw the u.s. ag and global ag return eight and 9% pay those are massive numbers. i don't think it is really surprising to see someone of a pullback, some indigestion this year, but when i look at the markets so far this year -- and

i will take invest in great credit as an example. the supply being issued is being taken down so well. we are seeing demand come in from all corners of our universe, looking to get invested in fixed income. you are seeing it in regional banks, for instance, a place that nobody wanted to touch last year. those bonds are being issued today. no concession. 3, 5, 7 times oversubscribed. the tone has shifted and people are still looking to get in, and these backups are an opportunity for them. sonali: krishna, two really harp on this more, the idea of buying opportunities at this moment, what do you think are some of the most mispriced opportunities in the treasury market? when i think about the long and, i wonder about the ramifications of things that are not rate cuts, things like quantitative tightening. krishna: for fixed income investors, that is the biggest

challenge. the markets are priced quite nicely for the outcome of a soft landing. there are not really too many mispricing's. if you are going to take a punch, you have to take a punt with a particular viewpoint. coming back to kelsey's point that she was making earlier. if the inflationary trends remain the way they are, the upside in yield -- we have certainly gone up from 4 to 4.2 0 --but a meaningful upside in rates is pretty limited. then again, if there is any softening, the downside will be massive because we are in position for that. i think her point was extraordinarily good. that is, the risk-reward is pretty convex at this point going for rallying rates than it is for a backup in rates.

however painful that trade is today. sonali: how about the non-rate cut elements to the story here? what about also bank balance sheets, think about treasury issuance coming up? what are the hiccups we could see along the way? kelsey: quantitative tightening is probably coming to a conclusion at some point this year. i don't think it will happen immediately but this is something we have heard more from the fed recently. it seems that their view is tapering is actually closer than many people appreciate it is. with the quantitative tightening side, it will help demand on the margins. things like liquidity between on the run and off the run treasuries, swap spreads, and for banks, if deposit growth is no longer shrinking, eventually they will rebuild their hold to maturity books. that could be good for things like agency treasuries and mortgages.

the q2 story on the margins is a net positive for 2024 because it should start to be tapered out over the course of the year. sonali: we have to leave it there. krishna memani and kelsey berro. thank you for your time. we also want to mention the s&p 500 has risen to a new intraday record high. it was a moment we were waiting for all of last year. almost 20 days into the first month of the year and we are back standing at the top. next, we will talk about the auction block. bank of america, j.p. morgan, and other banks drive the record sales. we will talk about that next. this is "real yield" on bloomberg. ♪

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sonali: i am sonali basak. this is "bloomberg real yield." it is time for the auction block where we are seeing issuances at a blistering pace. debts were led by the big banks, all with offerings this week. it wasn't just the big names. regional banks are joining the rush. pnc, u.s. bancorp, citizens with over 7 billion in combined sales. with all of this action and still only two weeks left to go, this month is already the second busiest january on record. bankers have been busy. there's been nearly $150 billion in sales. double line's jeff sherman lays out his playbook. >> you want to be in the middle in terms of credit quality. being good enough in this market with credit is the place to be. spreads are relatively tight on these levels. i don't think it is time to be a hero and be dumbing down the

respect. use this as a way to trim those exposures and try to write up a little bit in the quality. sonali: we are bringing in oaktree's david rosenberg to talk about this landscape. if you think about the time when oaktree was just a tiny asset manager once upon a time, you know have $10 billion in the global credit strategy alone. how do you put that to work in this environment? david: there is a lot to do and it's been a fun time but when you look at fixed income, it is in the name, fixed income, but for years nobody had been talking about the income because it was not very high. now we are getting high single digit, low double-digit yields, not difficult to do, especially you have a multi-strategy platform and you have lots of assets to look to. sonali: investors are looking around and saying how much do you take on? questions about whether we are in a soft landing, the risk that

that soft landing turned into a hard landing. what do you think of risk? david: there was a massive risk rally at the end of last year, everybody was excited about convexity, just a fancy word for upside. the riskier things found a bid. i tend to be a conservative guy, i'm a bond investor at heart. i like to say professional pessimist. right now when you look at the markets, the market is pricing in this amazing scenario, soft or no landing, at least five rate drops in spite of the fact of a software no landing. it sounds great but it has got to the point to me, the market is pricing in this amazing scenario, and if it turned out to just be pretty good, there will be repricing of risk. for me, we are being prudent right now. sonali: what does it mean to be prudent in this environment right now? you saw the defaults, bankruptcies last year rising to pretty significant levels.

this year, the jury is out on how fast that could turn. do you think this year is better or worse than last year? david: i think this you will be a little bit better. when you think about the default rate, one of the things we had in our market, usually you have the recession as the cleansing event. we had covid before the recession. all weak companies defaulted during covid and cleanse. the market. if covid had not happened, those companies would have stumbled along until the next recession and the defaulted. you pulled forward a lot of that impact. so i think there will be less of a default impact in 2024. sonali: you think about what oaktree has done on the private side, record-breaking fundraising. a lot of fund managers have raised a lot of money. how much competition is there to put assets at work in this environment? david: when you think about it simply, especially on the private side, over the past couple of years, from over $300

billion to trillions. it's amazing. whenever you have a market that grows that quickly, you buy what you can. when it comes to competition, to me, it comes down to the ability to pick credits. i think we have found ourselves in a credit pickers market. i tell people i'm a credit picker, so i am rooting for a credit pickers market. it feels like we are in a credit pickers market now. if you can do a good job picking credit, there are good yields to earn. if you have lots of capital to deploy, you'll find you have some hiccups along the way. sonali: people think about oaktree, kkr's of the world as private credit giants but the reality is you do a lot of liquid, too. how do you think about opportunities public versus private? david: a lot of due on the public side. liquidity has become a popular thing again. a lot of people put them to the private credit side because you were getting paid extra because you need that extra because

yields were not that high. now that yields on the public side get higher, that will become interesting, too. there is this love affair in the market with private credit. mark to market. if it doesn't mark to market, that means that you always have to buy at par. on the public side, there are times when you can buy on $.80, $.90 on the dollar, you are buying on the discount, and that gives you upside. you are going to earn more than your yield. i think there has been interesting opportunities on both sides of the fence today. sonali: how do you feel about how people foresee returns public versus private? qr did a study that said high-yield would get you 3%, robert credit, 3.6%. not much of a difference, but does that mean taking more of a risk in public markets? david: i don't think it has to mean taking on more risk. depending on the sectors,

there'll be some more risk on the private side, some more risk on the public side, but i do think that the returns will be different. on the private side, it will be all income. the reality is when you see, depending on where markets are, there is a pickup in liquidity going back and forth, whether or not you are getting paid a liquidity premium. people say to me, i don't need a liquidity premium. i have a big portfolio. i always tease people, it is the wrong question. the question is are you getting paid to bear the risk of liquidity risk? you should get paid for every risk that you bear. there are periods where you get paid handsomely, tag where they converge, and it is better to look at the public markets. being flexible in these types of environments will be key to success. sonali: you mention cautioned earlier, the possibility that things could turn. what do you avoid in this market? david: right now when i think about the market, to me, it

comes down to this concept of the pivot. the market is very focused on this fed pivot. over the last few years, that is the most common question i got. talking to people about fundamentals, market technicals. that's fine, i just want to know when the fed will pivot. i t people, the fed doesn't know. i said i cannot tell you when the fed will pivot and why, but when you think about risk in the markets, the markets have lost sight as to why. the fed is not in the business of propping up the stock market as much as people want that to be true. that is not in the mandate. the fed is in the business of propping up the economy and those are not always the same thing. if you think we are going to be in a market with over five cuts this year, there needs to be some crisis. if you believe we are in a soft or no landing, no reason to have five cuts. you cannot have both. but if you believe that i do, that borrowing a crisis, rates stick around where they are, a

little bit lower but certainly not five cuts lower, that means companies will have to pay this interest for longer. sonali: quick question. most crowded trade you are most concerned about today? david: what i most concerned about is everyone piling into duration quickly, hoping that rates will drop and bail them out. sonali: thank you so much for your time, david rosenberg of oaktree. the s&p has risen to a new intraday record high. it is extending those gains in the session despite all of that change around rate expectations. we will be covering it all for you this afternoon into the close. first, the week ahead. the fed's preferred gauge of inflation in the pipeline next week. that is coming up on "bloomberg real yield." ♪

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sonali: i am sonali basak. this is "bloomberg real yield." time for the final spread, week ahead. tuesday, bank of japan decision, plus netflix kicks off a busy week of her earnings. wednesday, it is tesla's turn to report results. thursday, ecb decision and christine lagarde's new conference along with a key u.s. gdp data point. ryan day, a read on the fed is preferred gauge of inflation, pc deflator. we will see the pc deflator may be flat payment 2.6%, but the court is expected to drop to 3% from 3.2%. we will keep our eyes on that month over month changes of .2%. remember, this is the last big data point that we will see before that big fed decision. a lot riding on what is happening over here. from new york, that does it for us. tune in next week for a new time, noon eastern. that is where you can find us every friday. for now, this is "bloomberg real

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>> welcome to bloomberg markets. sonali: let's get a quick check on the markets. the s&p 500 in record territory. 4825 up on the day. 10 year yields. higher this week. we see the pace increases