sonali: from new york city for viewers worldwide, i am sonali basak, and "bloomberg real yield " starts now. coming up, cooling inflation data is adding to the case for

fed easing, but strong spending and gdp points to a soft landing and keeps the rate debate alive. red-hot issuance continues around the world. we begin with the big issue, the soft landing chorus grows. >> there is improving prospects for a soft landing. >> soft landing. >> soft landing. >> this goldilocks scenario, perhaps. >> this perfect all the locks scenario growing stronger and more resilient. >> inflation is still coming down. >> the u.s. economy is quite robust. >> we are looking at the data, and the data looks strong. >> we expect >> growth to remain positive. >>we do think inflation is when it come down. >> inflation is coming down decisively. >> to get inflation at 2%, you need everything to behave really well. >> everyone believes the next move i the fed is a gut. >> the question is when and how much. >> you need the economy to call to get a cut. >> the catalyst for the fed in

cutting rates is you have real rates heading towards levels that are really restrictive. >> they are going to be taking a read on the macro outlook to figure out when to cut rates. sonali: let's take a look at the latest inflation data we got this morning, and that is the pce. when we are looking at the fed's preferred gauge of inflation, you are looking at it cool to levels almost as low as it has been in three years. and you just to see the massive jumper you have seen from the highs to the lows, and it does build the case for this idea that the fed can start to get nearer to potentially declaring victory and then bring rates lower along with it. the question is how much, especially with the strong economic data. i do want to pull up the board here, because you see the push-pull enforces, and you see it in the difference between the two-year and 10-year yields. look at the two-year. this blue line really cooling. yes, it is off the lows, but you

are meaningfully lower than where we were six month ago and certainly from the highs. the 10-year computer looking at a rise higher. it is an interesting conundrum when you think of other forces -- for example, treasury issuance that we will see the schedule for in the coming days just ahead. this week i caught up with the blackstone president and he gave his take on the fed's path ahead. >> my gut is they will cut rates. the question is will they do it as quickly and deeply as the market wants. that is hard to say, but i think the direction of travel is pretty clear because there is good news on the inflation front. sonali: joining us is e ter of excellent capital and ira from bloomberg intelligence. when we look at the fed meeting going into next week, that dot plot and expectations for the pound forward, ira, set us up on bloomberg intelligence's expectations on how the market might diverge from the fed.

>> i think the market is almost front running the fed a little bit thinking that there is going to be more than 100 basis points of interest-rate cuts during the course of this year, and that will continue until and unless the federal reserve actually skips a meeting when it finally starts itws round of cuts. our expectation is that the federal reserve will start cutting interest rates in may but then will skip june. if it goes, and skips june, that is the time when the markets start to say maybe they are not going to go 25 basis points every meeting, it is going to be on a different cadence than that, and then the market will readjust pretty dramatically. until then, i think the market is likely to think that once they start cutting, they are going to keep going, at least at some slope pays like 25 basis points a meeting. sonali: let's get tactical. if you are an investor, how do you think of positioning along the curve heading into serious data points? >> i think the biggest question that everyone needs to answer going into this year is why is

the fed going to cut rates. there is a consensus that the fed will cut. fed funds futures our pricing 135 basis points of cuts this year. is that because the fed is going to manage to a soft landing, or is that because there will be an economic slowdown later in the year/ for us, it feels like the latter. the average number of cuts in a recession year, about 200 basis points. we almost got there a few weeks ago. and so no one should really be surprised that inflation is cooling, either. that is a great thing. the question is is inflation cooling because the economy is slowing. but frankly, i think people's read on the economy is being influenced by asset prices quite a bit, because indeed, i can read in a number of different cracks in the data as the year

has progressed, and i think the consumer has been spending well above what it has been earning, and that is not sustainable either. sonali: ira, if you think about the strong economic data we have seen in spending and gdp, do you think that holds, and does it hold enough to have the markets declare victory on the idea of a soft landing, or even know recession?-- no recession? ira: the issue with the data right now is going into the year we had a pretty decent fourth-quarter, but as peter mentioned, if we do start to see a slowing in things like the spending growth because people have paid down their savings and are not borrowing more money because of higher interest rates or too much leverage themselves, then clearly you can get the slower economic activity. nonetheless, the reason why -- my view is that we might be able to avoid a technical recession, maybe not. but that is a little bit less important than ultimately the pace and how the federal reserve

used that. i think the federal reserve is going to be very beholden to inflation data. and if inflation data holds where it is, and in your pre-roll you mentioned -- someone mentioned the idea that real fed funds rate is getting very high now, and that's true. that is the way the fed looks at it, so that is one reason why even if we don't go into a recession and inflation remains low, the fed will cut incrementally just to get that real fed funds rate. the fed funds rate minus the pce deflator, move that lower instead of having that continue to be 250 basis. maybe they only wanted 200 basis points. they can move it down and calibrate it is the operative word that you want to listen for jay powell next week to say, which is echoing what waller said last weekend, and is a little bit different than what powell said at the december meeting. sonali: i want to bring in a point you were making, peter, this idea that asset prices are not quite responding to any of

the potential issues ahead. guggenheim was weighing in on the impact of that policy, writing that investors "should bear in mind a committed lift impact of the change in interest rates since the fed started training, because even if they fall from here, we do not see them returning to the lows of the prior cycle, and the markets exuberant response must be balanced against downside risks." where do you find those downside risks? peter: well, that's an interesting take. i tend to agree with that. one of the things we have to keep in mind is we really have come to the end of a 40-plus-year secular bull market in bonds, and it is going to be very hard for the fed to accommodate quickly enough in the case of a slowdown in the way it has in past cycles, where the fed has typically cut more and cut below the lowest fed funds rate in the previous cycle. that cushion no longer exists.

as is often the case to some of ira's points, which are often on point, there was a piece from deutsche bank recently that said everything points to a soft landing... except history. the risks are there relative to history. the fed has generally speaking not been able to august rate soft landings, and the average recession comes about 14 months after a three-month 10-year. we failed to appreciate the impact of fiscal policy coming out of the pandemic. but certainly it would seem sort of premature to throw in the towel on at least the possibility of a slowdown that history suggests is going to happen in the near future. sonali: speaking of the curve, as we have been at the beginning here, ira, you think about auction sizes, record auction sizes. two-year and five-year

hitting peak records. and you think of the announcement on monday from the treasury department and the future issuance schedule. how does that have potential to impact the longer ends of the curve here? ira: i think there is multiple pieces to that discussion and how the market may react to the information that is going to come in. first you remember monday afternoon we get the amount that the treasury department expects the fund this current quarter. they have two more months of the quarter to fund, plus what they expect to have to do in the next quarter. the april through june quarter. more important to them, what will be market-moving and what has been market-moving the last couple of funding announcements is wednesday morning, 8:30 a.m., how they are going to find the deficit. if the treasury department decides it is good issue more long-term debt -- it is going to issue more long-term debt, increased 30-year, 20-year,

10-year issuance the next couple months -- that could have a knee-jerk steepening of the yield curve pretty dramatically. the treasury department, because of how high the deficits are, they have to continue to increase coupon issuance. either that or they are going issue so many bills that it will overwhelm the market, i think. it is definitely a mix of bills and coupons. the question is which coupons are they going to favor. i think they are going to still favor trying to issue more in the short term in the belly of the yield curve, so more twos to sevens as opposed to tens to 30's. sonali: draws through asset classes if rates stay higher for longer, rates to what investors don't expect them to do. where do you see the areas of most risk right now? peter: sure. i will start by addressing ira's points. i agree, we are likely to see a steepening of the curve. the fed it does not want to see

any disruption in the funding markets and doesn't want to overdo bill issuance. it is really in a tough spot. all of this present a challenge, frankly, to risk assets. we have seen this five-days in a row of new highs on the s&p 500. there is a i and there is everything else, because we don't see it in the russell 2000, certainly. that is 20% below its 2021 hi. interestingly enough, high yield, we have seen yields float on the high-yield index at 350 basis points from 106 on price. that is interesting to me because when we look at speculative rate loan defaults, at about 3.6 or 3.7%, they have been creeping up very quickly. there is underlying on the

default side some underlying signs that some of the more highly levered, economically expose companies are at risk. lastly, i will say that even in earnings reports, when you look at dupont or intel or name your industrial company, 3m, it's a very different tone and tenor than the companies that are telling ai story, like ibm. i think that is a very important thing to keep in mind, and whether or not ai-related names continue to drag the indices higher is an important thing to consider relative to sentiment across all asset classes. sonali: peter cecchini and ira jersey, we have to leave it there. we are going to talk about issuance. it remains hot even amid all of these risks. procter & gamble, corporate sales set spread record. png. we will talk about the next.

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sonali: i'm sonali basak, and this is "bloomberg real yield." it is time for the auction block, the block of the month. issuance remained strong across the globe to start the year. in europe, bond sales set a new record for january as they broke past the 300-billion-euro mark. the search was led by governments across the region. monthly sales hit near an all-time record, short of the all-time january high at $170 billion yearly. notable names include lockheed martin and p&g, would have the tightest 10-year corporate spread on record. in high yields, after getting

off to a slow start this year, the market is now on a tear, selling nearly $7 billion fresh that this week. thursday was the busiest session in three months for the citigroup -- busy session in three months. citigroup's tyler dixon describes the hot year in sales. >> with rates where they are, with spreads where they are, and with pricing acting the way it is working right now, we are seeing primary new issues come through secondary prices, that is going to pull forward a calendar that is going to make sure that the first quarter is very busy on tcm. sonali: let's bring in the perfect panel. maureen o'connor, wells fargo head of high-grade gets in cap. maureen, set the state chair. that cap set by wells fargo, we might have broken it. how can this exuberance continue in the investment-grade market? >> i mean, at this point it

feels like the floodgates are open. all of the stars have aligned in january as far as investment-grade market technicals are concerned. we have this environment to where you had really frothy returns right at the end of the year that broad and all of this new cash into the system. all of these total rate-of- return accounts have been chasing very strong performance the asset class right to the end of last year, but you also have an elevated yield environment continuing to encourage the ldi buying, pension funds and insurance companies continuing to lean into our market. you have this demand dynamic that is overwhelming. even though, yes, we are looking at a record supply month of january, it still feels like an undersupplied market. one metric i would point to is even though we are going to have record volumes in january, new-issue concessions trended tighter over the month and secondary spreads trended tighter over the month. right around 93 on the bloomberg

index. some of religious stuff is trading at the all-time -- tightest ever 10-year print going back almost 30 years. we are in very rare air in our market, and issuance is going to continue to come to this window until we see something break down it seems like we are not up against a remote sense of market saturation or fatigue. sonali: it begs the question, how much conviction is there for investors to step out of the purview of investment-grade into riskier areas now that we are seeing spreads so tight on the safe stuff? >> this is a risk-on type of environment and we are seeing capital coming in from a variety of different sources domestically and international into the market, particularly given where high-yield is focused on the front end of the curve and we have an inverted yield curve. base rate plus low-default type of environment means we are

seeing capital coming in, and we think it is a reasonable time to deploy capital into high-yield, especially relative to the evaluations we see in the equity markets. we anticipate defaults to remain very low in fixed-rate debt over the coming year. it is a very supportive marketplace. we don't have a maturity wall, we don't have any particular sectors exhibiting meaningful default risks. the names that are stressed are well-known. there is not a lot of jump risk, we think, in the market today. sonali: where do spreads go from here if you think about the future? if you think of compensating investors investing in the safer part of the structure, particularly thinking things will start to transouth, how can they see towards the next couple months? maureen: yeah, it's a good question, one that investors are really struggling with right now, given how lofty evaluations are. it is not a market that is pricing in anything that is suggesting recessionary headwinds are down the pipe.

one of the things that is interesting is if you look at how investment-grade credit from a dollar price perspective has traded the last three years, we have a lot more discounted debt in the broader market then we had two years ago because we went through this rate stock over the last 24 months. when you think about spreads being at their all-time highs, discounted bonds dragon spreads tighter. there is more value at these ultra tight spread levels on an absolute basis than what meets the eye. said another way, even though we are getting into very rare air and spreads aren't tighter on an absolute basis less than 10% of the time if you look over history, there is still some more room for this rally to kind of run or grind a little bit tighter from here. the downside scenario we think is somewhat limited, because we do still have an elevated yield environment even if rates trend gradually lower over the course of the year. it is going to be a good entry point for fixed income as a whole. that is going to keep a lid on how much wider spreads can go if we had the economic slowdown. a long-winded way of saying

spreads are likely to be pretty range-bound, and where there is value, much like john was highlighting, is in beta compression and buying the lower rated names on trying to play the compression trade, which we saw through much of last year but we expect to continue through the first quarter and maybe into the second quarter of this year. sonali: that conversation i had with tyler dixon a little earlier, he wen yu to be examined about investment-grade but a lot of excitement about leveraged finance. when it comes to leveraged finance, you have private credit markets looking to dive into that space as well. i caught up with stock -- blackstone's john gray and he spoke about the default rate. >> default rates and credit across our noninvestment grade borrowers are less than 30 basis points. we see a very healthy market out there. what we do expect is that transaction activity will pick up and that folks like us in the private credit space are in a really great position to deliver for borrowers.

sonali: just a minute here, john, are you convinced that the default rates can continue to state outflow, particular when you see s&p global saying they will tikc up-- tick up this year? john: i think they stay low and the private credit space for the next 12 months or so. we like to think about this as a three-stage type of market place where we are in stage one right now, covenant really. we are seeing lenders working with borrowers modifying covenants, giving time to potentially improve cash flowa nd balance sheet, given that interest expenses move materially high because it is a floating-rate marketplace. stage two, though, comes in the next 12, maybe 18 months, which is loan modifications. we are going to extend out the period of time to get paid, given the fact that we are dealing with private markets,

you got a little bit more flexibility from a lender's perspective. but after we go through all of the financial engineering, we will see stage three, which is a meaningful uptick in default. we think there is real stress brewing in private credit. it is going to come very quickly. you are not going to see it, hence the fact it is private in nature, but it is going to be delayed for a period of time. the other thing investors and the public market have missed is in terms of default rates, it continues to provide -- sonali: john, we actually have to leave it there now, but we will have you guys back and talk about both markets, particularly a flush market for issuance heading into february. still had, the final spread, the week ahead, another payrolls report coming out. this is "real yield" on bloomberg. ♪

sonali: "real yield" same time next week. this is bloomberg. ♪ t and track your goals, big and small... and see how changes you make today... could help put them within reach. from your first big move to retiring poolside - and the other goals along the way. wealth plan can help get you there. ♪ j.p. morgan wealth management. sales tax automatically. avalarahhhhhh what if tax rates change? ahhhhhh filing sales tax returns? ahhhhhh business license guidance? ahhhhhh -cross-border sales? -ahhhhhh -item classification? -ahhhhhh does it connect with acc...? ahhhhhh ahhhhhh ahhhhhh

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>> welcome to "bloomberg markets ." i'm sonali basak. let's get a quick check on the markets, because you have the s&p on a winning streak. it has been a winning week for the s&p 500, up .1%. we are flirting with the 4900 level. semiconductor index not having the same kind of day. it is way down by intel shares. you have the yield cure feeling arise across the curve here. two-basis-point change, and the 10-year yield standing at 4.13, not preaching the 4.15