sonali: from new york city for our viewers worldwide, i'm sonali basak "bloomberg real yield" starts right now. ♪

sonali: coming up, fed officials preach patients on rate cuts. investors are breathing a sigh of relief after modest revision to u.s. inflation. key treasury yields are reaching 2024 highs as the economy stands strong. first a big issue. the fed pushing back on rate cuts. >> you've got a number of fed commentators really pushing back. >> pushback. >> pushback -- >> pushback on the right cuts. >> the fed has signaled they are done raising interest rates. >> locked and loaded to cut rates if needed. >> await and see. >> wait until inflation gives them the data they want to see. >> the committee is struggling to catch up how quickly the data have moved. >> one variable the fed is looking at is core cpi. what we have seen over the last

few months has been core cpi coming down. >> we have scar tissue from this inflation. >> the economy has been strong. we have the luxury of waiting. >> we need to see more data before we can decide when exactly they are likely to cut rates and by how much. >> there is really no rush for the fed to come in and cut rates soon. sonali: with those changing expectations about rate cuts, i wanted to point out a point of the curve. i wanted to talk about the 10 year. treasury issuance happening at the longer end of the curve. a lot of volatility along the way. what are we seeing exactly? about six month ago, the tenure breached the 4% level and ride much higher, hitting 5% in october of 2023. you have marched down significantly since. hitting below 380. you have seen the march higher yet again.

standing nearly 419. higher than levels six months ago. that comes on the heels of changing expectations for rate cuts. what are the changing expectations? let's flip up the board and talk about how the march expectations are pretty much off the table according to what you see traders bet on. may gets interesting. you are seeing a coin toss in what traders expect in terms of them a rate cut. will we get five rate cuts? there is dispute. but where traders place their bets heading into the uncertainty is a critical question in the money they make or lose along the way. tom barkin added to the discourse on the rate cuts. >> gratified to see inflation coming down, hope it continues to come down. we have time to be patient. if i can get these kind of numbers sustained and even better broadened, that's what i'm looking for. sustained and broadening. sonali: joining us is katie

kaminski and leslie falco ne-yo. you talked about the may rate cut being a 50-50 chance looking at the markets. how psychologically important is the may meeting now given that we are seeing the rate cut expectations starting to subside? >> i think what has happened is people have shifted focus from march to may. that is why it is such an important point. you will see more data before then. getting good cpi numbers. it is a question of having more confirmation. the market frankly got ahead of itself after what happened at the end of last year. sonali: when you think about the data we are seeing next week, when you look at inflation, how can what we see start to change the story of what we are thinking in markets in the future? >> given the fact how much we have moved this year, our

expectation was the first cut would not be until may. we still think may will be the first cut. the market is putting a lower probability on that and moving to june. does may/june matter to any of us? not really. one thing the market is complacent with is the fact cpi will continue downward. a lag with oer and housing. auto prices will probably fall. the fed looks at pce. while we have the three and six month below 2%, 12 month is still 2.9%. that is what we thought a march cut was way too soon. sonali: how do you think about where you reassess wagers given the volatility we have seen? katy: this has been one of the biggest things we are watching. stock bond correlation is still persistently high and positive. everyone is feeling this. there is a back-and-forth in the fixed income markets. buyers on one side ready to get higher yields.

there's also push towards we are going to get cuts at some point. you are really seeing a lot of mixed signals. that is resulting in a lot of intraday volatility and a lot of back-and-forth in the fixed income market. sonali: how do you play that volatility, leslie? are you comfortable getting out on duration with that kind of volatility seeped in? leslie: we are. katy made a point, 2024 versus 2023, investors have the buy the dip mentality. but i do think investors are fairly confident, at least with the data we have, that the fed will cut. whether it is may or june is not relevant. the fact, in our opinion, we expect growth to slow around the 2% level. we think inflation comes down. we are more in the soft landing camp. we believe locking in these yields, taking that for the long term, whether it is 4.25 or

4.5%, will be the total return. sonali: when you think about piling into duration, do you think past the 10 year into the 30 year? katy: yes, i think we have seen long signals across the whole curve. less on the short end. but you are definitely seeing people starting to say if i do believe things are going to go back down and we see lower rates, maybe it is not so bad to lock in some of these rates today and get that carry and get a higher yield and hold onto it. sonali: leslie, if you think about the thinking rates will fall, these are good entry points to buy in, what is the biggest risk to people piling into duration? leslie: geopolitical risk, if we see some re-inflation, that is a risk. there is no question. that is one of the reasons one of the things we hold our tips. we want long tips and real yields where -- five real yields

are around 2.25, acceleration inflation is a risk. geopolitical concerns are a risk. even if i think, and the fed stated this, even if the labor market remains relatively tight and gdp remains relatively strong, as long as there is not a re-acceleration of inflation, they would still be willing to cut. that is an important point. sonali: when you think about reacceleration of inflation, what are you looking at most given the volatility around oil prices or around shelter prices and wages in addition to all that? katy: what we have seen from a cross asset perspective is downward pressures in the raw commodities sector with the exception of energy. you look at things like wheat, corn, a lot of those raw commodities have seen a major drawdown, in terms of prices. what i think is the worry from our side is watching the role of china in that particular demand

story and how much of that could be eradicated if we start to see china come back online and have some sort of stimulus. it is really watching the commodity prices and how they are connected to the inflation narrative and watching energy, which has been on the upswing because of a lot of geopolitical uncertainty. there is definitely room for that to happen. that would put a damper on this disinflation narrative we have seen in the data. sonali: if you see any signs of reinflation, leslie, you have seen the two-year start to drift higher. has not been drastically swinging in the same ways we saw one-day moves last year. we have seen some of that. if we see signs in next week's report, how much can the market start to be priced? >> it would have to be more than the reports. but we see home price, which we need to monitor in regards to inflation.

i don't think these one-month are going to be an issue. fortunately the market is pricing in about 117, 120 basis points of cuts in 2024. it has come a long way. we feel there will be about 100. if it comes out stronger, could you move towards the sep production of 75 basis points the fed has been dictating? probably. it is more about the sustainability. 75, 100 is where the market would go. so you will see the two-year rise. but i don't think materially. nor do i think will it be sustained. sonali: a lot of people have been talking about trading steepeners given we have seen a prolonged inversion. how long is that opportunity and how fruitful is it to get into the steeping trade? >> this is a good question. at the end of last year, as soon as everyone thought we are at

the end of the hiking cycle, it was all this talk about steepeners. i think those positions have not really realized that opportunity. it has to do with the fact it is a very different scenario. it is not clear the fed will cut any time soon. at least later this year. that type of steepener trade will be profitable at some point. but it may not be the right entry point yet. sonali: if you think rates might stick higher for a little longer, the idea we may not see as many cuts as the market initially expected. we see issues coming to the surface, issues with commercial mortgage maturities, even some fallen angels really becoming of concern. what else breaks this year if rates do not see the type of cuts the market initially expected? leslie: cre is a big one. if the curve stays inverted higher for longer, that could be a problem in terms of some of

these loans coming due, the amend and extend. i think issues with commercial real estate. we came into the year, the market came into the year from november expecting the fed will go from pause to pivot and it priced that in. there was a lot of tailwinds to risk and performance assets. the issue and the headwind would be if the curve stays inverted, it stays higher for longer. when some of these loans start to come due, it can create problems. simply from the higher cost of capital. sonali: a lot of questions about that inversion. we have to leave it there, thank you for your time. up next, talking about the auction block. fresh off its ipo, amer sports joining the parade. this is "bloomberg real yield." ♪

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sonali: i'm sonali basak. this is "bloomberg real yield." it is time for the auction block. the story remains the same. sales happening at a blistering pace. in europe, ubs was able to draw in high demand for a sale of a t1 notes. they pulled in nearly 12 billion of orders. the offering came shortly after the bank outlined a plan to raise as much as $2 billion of this type of debt this year. in the u.s., investment grade over $41 billion sold. those sales blow away estimates for as much as $30 billion. big names from citi group, cigna, to morgan stanley. borrowers taking advantage of funding costs. wynn resorts and amer sports

driving the sales volume. from wells fargo talks about why banks are a big issuance. >> what you saw in january was a lot of bank supply. they are rushing into the market at a time when spreads are trading at cyclical tights. taking adventure of these strong dynamics and frontload some of your issuance plans for 2020 four. especially considering the catalysts with volatility over the horizon of this year. you also want an environment -- remember where we were in october last year, yields were 100 basis points higher than they are now. even our with funding plans and getting in before they change, especially on the spread front, where there will be more downside to upside potential. sonali: let's bring in the chief credit strategist at goldman sachs. you think about the issuance we have seen. you think about what we've heard from wells fargo, front running, more economic data. how much are issuers trying to get ahead of potential trouble? >> a lot of it is paid funding.

but we've had a very impressive start to the year in terms of primary market activity. we had the biggest january ever with close to 200 billion of supply. there has been really two takeaways for me. to a very large extent, that is a natural response to lower yields. we were at 5% on 10 year treasuries in late october. we are lower today. i think it reflects a much more predictable path of monetary policy and more comfort vis-a-vis the durability of the cycle. those things have played a big role. it is also a very positive development with regards to the low end of the quality spectrum. the high-yield companies that have to address upcoming maturities. that appetite is quite strong on the issuer side. second take away to me, that has been met with very strong demand. you see it in the performance of the secondary market of spreads, but you also see the new issue

concessions. those bonds typically come at a slight discount relative to the secondary market. that discount has narrowed dramatically. spreads.let's ta are investors getting compensated for the risks they are taking? lotfi: spreads are tight. they are at the tight end of the historical range. go back a decade or two of history. are they being compensated? it depends on your view. they are not pricing in a recession. they are pricing in what i would describe as cycle extension. mid to late cycle type of environment. but spreads are tight. there is one difference. yields are higher. you have to look at credit certainly as a spread product but in all in product. sonali: let's talk about where the higher yields matter the most. the riskier end of the market. you are watching investors feast on high yields like there is no problem. even if you don't see a recession, they are faced with higher costs of interest. can they all survive through

those higher borrowing costs? are investors perhaps just counting the idea that things could go wrong? lotfi: for the high end of the quality spectrum, the answer is probably yes if you are a vv or v rated credit. you have debt service and capacity even if you factor in some kind of a long-run equilibrium level of 4% on 10 year treasuries. for the low end of the quality spectrum, the answer is it depends. you really have to look at it on a case-by-case basis sector by sector, sometimes issuer by issuer. yields have come down, the market has opened for triple ccc rated issuers which is a big change relative to last year. but dispersion within the low end of the market is likely to remain. sonali: it is worth talking about messier parts of the low end of the market. you talk about the last couple of weeks with newer community bank, as well as commercial real estate issues. how do you parse through the

noise in those very messy areas? lotfi: great reminder that the challenges in the u.s. commercial real estate market are going to linger for quite some time and will have an impact on lenders not just in the u.s., but also europe. i think it is important to keep in mind the commercial real estate market is a very diverse asset class. there's office properties, i think the rest of the market by and large has strong fundamentals. i also think the bar is still very high for the u.s. commercial real estate market to become a catalyst for an escalation of systemic concerns. i know we have used the word idiosyncratic ad nausea him the last couple of months. but there's a big element of it secrecy and some of these headlines we are seeing. sonali: how do you think of a headline that crossed the terminal about fallen angels? the debt load is spiking. among them globally to $400 billion.

do you think investors are really not calculating the credit quality starting to worsen for these issues? lotfi: credit quality did inflect a year and a half ago. the base of the deterioration has been very manageable. a lot of that speaks to the fact that going into the hiking cycle, corporate fundamentals are in very good shape. we are actually not that worried about a potential leave of fallen angels in 2020 four. a lot is predicated on a positive macro view, robust growth, continued disinflation, and easing starting in may. last year was a very impressive e year in terms of rising stars dramatically outpacing fallen angels. i think we will normalize a bit this year. we are not concerned about a wave of fallen angels. sonali: it is interesting, i'm hearing a lot of sanguine tones about the economy and these issuers from you. is it a reflection of being the year for credit? being the year of fixed income outperforming?

lotfi: on a risk-adjusted basis, yes. one of the big differences between 2024 and 2023 is the vol in the rate markets should come down dramatically. last year, everyone had a wide range of outcomes as to where fed policy was going to go. this year, that range is a lot lower. the only uncertainty is the timing of the first cut and the magnitude. the risk of another large monetary policy shock has declined dramatically. that is a big boost for risk-adjusted returns. absolute returns will be lower. the starting level for spreads is tighter than last year. sonali: most mispriced opportunity in your view? lotfi: the low end of the quality spectrum in high-yield. the analog would be small caps in the equity market. you have to look at pockets of the market where the soft landing premium is still there. it is not there at the index level. the index is tight. you have to scratch under the surface and look at the low end of the market.

there is value in those ccc credits in our view. sonali: wall street putting analysts to work. that is lotfi karoui of goldman sachs. stick with us, the final spread. a big week ahead. all eyes on the latest cpi print. this is really yield on bloomberg -- this is "real yield" on bloomberg. ♪

sonali: i'm sonali basak. this is "bloomberg real yield." it is time for the final spread. the week ahead. coming up monday, a lot of fed beat from tom barkan and neel kashkari. and tuesday, all eyes on the latest cpi print. all eyes on inflation. wednesday, hedge funds set to disclose their quarterly 13 etf

filings. hedge funds have been more by etf's tied to that bond market. more in the pipeline later in the week with austan goolsbee and michael far. thursday, u.s. retail sales. friday, we get u.s. cpi data. for my final thought, a closer look at those cpi estimates. we are getting closer, according to investor expectations at least, to the 2% level. the last read we got was 3.4%. really starting to barrel down. the estimate of 2.9% is meaningfully lower than that. year-over-year, core cpi expected to come in at 3.7%. core cpi month over month coming in at .3% according to expectations. we know there is a lot of concern about a reacceleration of inflation. and we may have some interesting moves in the bond market if we don't see either meeting those expectations. or more signs of areas that might see room for issues.

that does it from new york. same time, same place next week read this is "bloomberg real yield." this is bloomberg. ♪ hey! sarah! if you had to choose would you listen to elevator music all day or deal with payroll compliance? payroll compliance, for sure. gusto automatically calculates and files my taxes for me. hold up, compliance? easier? choose payroll compliance without the ups and downs.

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analysis from bloomberg's washington headquarters. get the latest from and about politics biggest power players at the end of every trading day. "balance of power" live around the world every weekday at 5:00 p.m. eastern on bloomberg television. context changes everything. ♪ >> welcome to "bloomberg markets ." i'm sonali basak. let's get a check on the markets. the s&p ending the week on a green note. s&p 500 is now the s&p 5000. u.s. benchmark on track to finish above 5000 for the first time ever. if it closes above that level, it will have taken only 719 sessions to get to that milestone. let's check on the rest of the markets. with the s&p 500 cracking 5000,