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sonali basak and bloomberg real yield starts right now. ♪ >> coming up, hot jobs and higher wages. it's pushing yields higher and volatility in the bond market while hopes for a large rate cut are disappearing. we begin with a big issue. an upside payroll surprise. >> wow. >> this is a strong rapport in a strong labor market. >> the economy is strong. >> the fed is now thinking that march is going to be too soon. >> the market got super overzealous. >> the market got carried away. >> he sounded cautious. >> he was right to be more hesitant. >> with activity still resilient, it makes sense to air on the side of caution. >> all inflation needs to do is do what it's been doing.

they are going to start cutting. >> watch the data, see how it comes through. >> they can hold off truth they can wait and see. >> i worry that the fed is going to just not move and wait until something really unravels in the job market. sonali: on the back of that jobs report, you have the market dramatically repricing. take a look at the two year yield alone. by 1:00 p.m. on friday, you saw it shot up about the basis points. not only is it higher during the day, you are looking at a full round trip in that two year yield since the beginning of the month. in over a 30 day timeframe, you have the two year, about seven basis points higher in that time. not only is the market recalibrating their expectations for when the cut might happen, we have pricing moving around in real-time. i want to flip the board. there are some ramifications for this higher for longer thinking. this is a broader metric here on health and we are looking at

global credit spreads across indices, wider than they have been since october. for example, the white line is tied more closely to the financial industry. of course this week, you have seen a widening of spreads here. credit quality tied to the commercial real estate sector. the question is are there other sectors that will be more immune to that higher for longer dynamic? fed chair jay powell was signaling caution on cutting rates. >> based on the meeting today, i would tell you that i don't think it is likely the committee will reach a level of confidence by the time of the march meeting to identify march as the time to do that. but, that is to be seen. sonali: joining us now is debbie cunningham and pimco's tiffany. when you look at the volatility

in the two-year alone, let alone in the curve, how much risk is there? >> in our recent outlook piece, we titled it navigating the dissent. inflation has come down from peak levels. eventually, the federal reserve and other central banks will be cutting. the path to getting there and ultimately the pace thereafter is probably going to be a bumpy road. i think that the recent volatility you have seen in the front end is a clear example of that. sonali: deborah, how do you think about moving along the curve here? you saw just a couple of days ago, the five-year really took a draft the -- drastic leg down in terms of the yields you were seeing. is that a portion -- is that still a place you would be buying or how much risk do you see as you move along duration? >> i think there is more risk than the market is willing to accept at this point.

i agree with tiffany. what that means is volatility is going to continue to abound. i'm not quite sure why the market rallied post the fomc. chair powell seemed clear that march was off the table. now, the numbers that support that from an economic perspective are coming to fruition. finally, the market is hitting -- it's like getting cold water thrown on it. it was overzealous for a good portion of the month of january already. my expectations would be for the rest of this quarter and probably the rest of the first half, you are going to see some ups and downs that are substantial in the market. sonali: deborah, double down. how do you navigate? where do you buy or sell to position for that reality? >> you have to look at the time frame. if you are looking at true cash, things from an operating basis, that stays in short-term securities and money market funds. that stays in liquid available

funds on a given day without support risk associated with them. if you are talking about something from a strategic or core cash pay basis, that will likely not be needed until maybe the end of this year, the second half at some point or into 2025, then i think you are safe navigating out into the next aspects of the curb. whether it is ultrashort, 1-2 your type of space. i would not do it with cash that you are worried about from a prince will perspective over the next couple of months. sonali: when you think about how shocking and conflicting some of the data has been, just how strong jobs have been today alone in its report, do you reposition to capitalize on the direction of travel as market expectations change? >> so, i think that any good risk manager has to think in terms of scenario planning. although the rhetoric has been that a soft landing, the

probability of that has increased and we don't necessarily disagree with that, chair powell himself said the balance of risks are looking more balanced. but nevertheless, there are still risks out there. i think that growth in the united states has been so strong, relative to its past history in the second half of this year but also relative to its market peers, which have stagnated, and you are still seeing strong trends within the labor market. a labor market that is maybe inflecting a little higher here, then you have to be a little bit worried that inflation could re-accelerate. in 2023, you had good supply-side news that resulted in inflation coming down, despite the demand that we had. that might not be the case in 2024. as we have argued, you can't go to heaven twice. you have to be cognizant of acceleration risks. the issues with new york

community bank and what we know with cre markets, you have to be cognizant of the downside risks as well. sonali: follow-up on this idea of re-acceleration of inflation. how much does that pose a risk into the coming months as the market calibrates the potential for a rate cut? >> i think wage inflation and housing inflation, those are things that continue to run very hot. they come down. the acceleration has slowed but they are still rising. they are not decelerating at this point. i think there is substantial concerns that those will offset what have been gains from an energy sector, from a supply-side perspective in 2023, as we go out into the first half of 2024 and the reacceleration is quite possible. the confidence level that chair powell continued to emphasize at

his press conference this week needs to be addressed. sonali: you think about the recalibration of expectations, not just about a large rate cut, the idea pretty much going away in markets. even a may cut, you had the odds drop from more than 90% down to 66%, 65% in the market today. how likely do you think, tiffany, a may cut will be at this point? tiffany: i think the thing that we have been saying is we always saw march as a bit too early. but nevertheless, there is a lot of data between now and may. we do think that inflation will continue to, on a year-over-year basis, decelerate. we think it will get into the to point something zone that the fed would eventually become to but with cuts. taking everything into consideration, the baseline view is the midyear is a reasonable expectation, which is consistent

with where we think the federal reserve officials are at this point. and kind of an every other meeting type of pace. after that, it's reasonable. as i suggested, as i emphasized, there are certainly scenarios on either side of that case. it's something that the markets are going to be trading. markets are all about the balance of risks. not just the base cut, baseline. i mentioned navigating from here until may will not be an easy journey. at least that is our baseline, more of a midyear type of, kind of june timeframe. sonali: there is a lot of discussion about cuts and a question about the fed's own balance sheet and what it looks like, the impact on the markets. how much will the fed be able to take their gas off the quantitative easing cycle into the quantitative tightening before you would see a taper or tantrum, rather. -- rather? >> i'm not sure it would be considered quantitative tightening to reduce the amount.

if you look at when the process began, they kind of ramped it up over the course of six months. there is, you know, the likely potential and possibility that they do the same thing on the downside. i think the fact that it was emphasized that they really have not had the discussion on qt yet, that they would be looking at the march meeting for a more fulsome overview of how it was impacting the market and whether or not it truly was having any kind of impact on the liquidity and the treasury markets. certainly, that would be at odds to what they are looking to achieve. i think we are looking at something that is a first half, beginning of second-half item. but i don't think it's something that will happen with immediacy. sonali: how do you think, tiffany, that this would start to impact the market? we are seeing this push-pull

between tighter and looser financial conditions. if you think about tightening and the way he could impact the banking system, you yourself mentioned earlier, are there more strings to be had with the advent of a tightening cycle? tiffany: i certainly think, our take on the community bank issue is they were under reserved for the potential losses that could occur within their cre portfolio. and, they wanted to sure that up. i think there are other, smaller regional banks that are probably under reserved. this is probably not the first piece of bad news that we could get on the regional banking sector. i think you have to be cognizant of those kinds of risks. we know there is a recession happening within the cre market and the office market. it's just a question of, you know, the broader spillovers into the economy, which we think will be manageable. many of these banks, the properties are still paying. they don't have to work to

market unless they have to roll over the debt. i guess overall, what we would say is from that perspective, certainly, we could see tighter financial conditions. we think it will be manageable. on the qt angle, the thing i would emphasize his two points. the first is i think the fed has been very clear, even if they start cutting interest rates, they could continue qt because they are normalizing balance sheets and the rate to a neutral level. the second thing is it's interesting people are talking and focused on tapering when you look at bank reserve levels, they have not tightened at all, lately, despite the fact that the fed is reducing its balance sheet because it has come out of the rp. i think there is more the fed can do here. maybe they do it more slowly. my expectation would be that they are not -- qt is going to continue at least throughout this year. sonali: more risks to keep an

eye out for. we thank you very much for your time. up next, the auction block. ibm is helping to drive u.s. hybrid emissions to a record. we are watching yields sore. stick with us. this is "real yield" on bloomberg. ♪ get help with j.p morgan personal advisors. hey, david! ready to get started? work with advisors who create a plan with you, and help you find the right investments. so great getting to know you, let's take a look at your new investment plan. ok, great! this should have you moving in the right direction. thanks jen. get ongoing advice; and manage your investments in the chase mobile app. gusto is easy, modern small business payroll. starting at just $46 a month. but it's so much more than that. with gusto, paychecks are deposited in just a few clicks.

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sonali: i am cinelli bushong. this is "bloomberg real yield." it's time for the austrian -- auction block were issuance is still hot. sovereigns led the way with large deals from italy, spain and germany. in the united states, blue chip

firm ibm sold nearly 190 billion bonds in january. ibm, capital one and morgan field sales this week. it was the busiest month since september of 2021. it was the busiest january in three years. sticking with credit, jeffrey rosenberg sees -- off the back of the fed's decision. >> the credit market, that's particular to commercial real estate. that is something we have to keep an eye on. you look at the corporate side and the consumer side, it's strong. the credits are strong pray there is not a huge price appreciation opportunity. but you can capture one without the risk of recession and that is still the story here. sonali: let's bring in gene and

matt. listen, you have a time where people are pouring into credit. clearly, issuance has been very hot. you are seeing spreads locally starting to widen just a bit. what was fascinating to me is how much they widened this week. off the bat, also, of some strings starting -- strains starting to be seen in the financial sector. where is the risk hidden? >> the widening you are referring to is a bit of a correction from what happened in the fourth quarter and the tremendous rally that we had. in the bigger picture sense, there is a tug-of-war going on between yields, which are elevated and spreads, which have been continuing to tighten. in the end, yields are winning. we are seeing continued, strong demand. particularly from mention funds and insurance company from the long end of the curve. in a strong economic environment

like we saw with the data this morning, that is poised to continue. sonali: how do you think about it when you see high yield markets and leverage markets trying so hard to break open? how much risk would you be willing to take on? >> we are not looking to take excessive risk at the moment. at the same time, to be fair, we are focused on the economy. our asset allocation decisions are primarily based on where do we think we are on the business side? chair powell delivered a very important pivot this week. not the pivot people are talking about, the pivot toward rate cuts. that was about what are the important pivots chair powell made this week? they said strong growth, the strong labor market, we welcome that. we think we can get disinflation without causing any pain in the economy. that's a difference from 2023. they said we want to bring

inflation down and that might cause a pain. our credit spreads are a little bit tighter than you expect right now. are they pricing a lot of risk? no. to be fair, -- that does not mean we see a widening opportunity any time soon. in the mid-1990's, when the fed correctly pivoted, they kept expansion going. >> i get the point you are making. gene is making it too. our spreads really telling a story of not getting compensated enough for the risk they are taking on? >> you are asking the right question. i think spreads are telling us something about the rearview mirror right now. a year ago, most economists were calling for a recession at some point in 2023. we did not have that. we had a soft landing for the last 12 months and that's what

spreads reflect. on a go forward basis, we need to be a bit more careful. it's not to say that there was anything wrong with the labor market in this morning's report. the current period data looks pretty good. -- looked ready good. if we look at certain areas of the market like long-duration and industrial bonds, they are not just the tightest in the last six months, they are the tightest in the last 20 years. there is tremendous dispersion. i think that is the key here to be able to navigate. you mentioned concerns in the banking sector. that's true on a micro level. if you look at a bigger picture, what we see is larger banks, those systemically important banks in a tremendous position from a credit perspective to navigate the regulatory environment. they are trading exceptionally cheap, relative to those industrial bonds. industry by industry, sector by sector, company by company, the diversion remains pre-large. the risk is not attractive on

the whole but there are opportunities within it for sure. sonali: today we reported at bloomberg that there was a $1.7 billion leveraged loan deal pulled in the market. that's tied to a specific deal. the leverage finance markets are trying to break back open. is there too much risk there still? >> we don't see a lot of tremendous credit risk at the moment. we agree with what gene is saying and the points you are making. spreads and valuations are slightly tight for us at the moment. we are slightly underweight in both investment-grade and high-yield based on those valuations. but you are talking about record issuance. that's on the back of record demand. there is tremendous demand for fixed income right now. again, although we were cautious on the economy, we are getting a little bit more bullish on the macro environment. so, while we would welcome some widening to take advantage of that, i'm not sure we will see

that anytime soon. the trouble becomes, we are still underway, you get approximately 1% extra on corporate bonds then you do university -- universal treasuries. over time, you only get about five basis points. as we know, the majority of their premiums you get is not for credit risk. it's for the liquidity risk. the longer you hold that slight underway, the less yield. we are carefully slightly underweight. sonali: thank you for your time. wall street hoping for another record issuance. still ahead, the final spread and the week ahead. stick with us. this is bloomberg. this is bloomberg. ♪

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sonali: i am sonali basak. it's time for the final spread. we have the banks fed lending survey, the latest u.s. services, pmi. earnings continue to roll out tuesday. thursday, all eyes will be on janet yellen testifying in the senate. friday, we get the u.s. cpi revisions. for my final thought, let's look at the fed speak coming up next week. a lot of people setting out to read the tea leaves. rafael kicks it off on monday. followed by loretta and neil. it's a very busy week ahead. a lot of divergence on what we might see in terms of expectations for rate cuts, quantitative tightening and the impacts on the market all around. especially the banking system where we are starting to see

some fragility once again trade this comes after we have seen a round trip in two year yields, 20 basis points higher on the day. a lot of economic data ahead. from new york, that does it for us. same time, same place next week. this is "bloomberg real yield." and this is bloomberg. ♪

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♪ sonali: welcome to "bloomberg markets." i'm sonali basak let's talk about that u.s. jobs report because employers are add the most workers in a year and wages are jumping a surprise reacceleration in the labor market solidifying that the fed will hold off on rate cuts any time soon. we have a market here really reacting. we have s&p and nasdaq 100 that