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

coming up, fed officials drawing caution on easing too soon. rates go on arrive higher with strong economic data. credit markets are booming with record issuance. we begin with a big issue. the right time to cut rates. >> it does seem to be more hesitancy than we thought so for the fed to start rate cuts. >> they are sticking to the slower to lower interest rate mantra. >> we are not sure when the fed goes the first time. >> they are not going to pull the trigger in march. >> may, june, july? >> we think june. >> the best way to proceed is gradually. >> the fed is beholden to inflation data. >> the fed has gone all in on it data-driven. >> markets are under appreciating and underestimating the polar opposite risks. >> if inflation moves up --

>> inflation unable to come down -- >> they would attach they were probability to the fact they need to hike -- >> the fed needs to hike rather than cut -- >> by the time june rolls around, we have more data on everything. sonali: for those thinking it would be a rocky path lower for interest rates, they were right. we are lower than about six month ago when there was initial expectations for a fed pivot along the way. in january, we were getting closer to the 4% level in the two-year yield. look how far back we have shot up. roughly 50 basis points, give or take, higher. hitting 4.70 percent here. at least 4.1% at some points in time. on the heels of strong economic data and a lot of fed officials cautioning not to have the rate cuts too soon. we will talk more about that. i want to talk about the expectations. let's look at the wirp screen on

the bloomberg terminal. the expectations for earlier in the year all but wiped out. very little expectation it will happen. june is the pivotal point. look how many people are betting about the first rate cut happening in june. investors believing it would be a mistake not to do so. goldman sachs coming out and saying it is a likely scenario. we have seen the path change meaningfully. we will keep an eye on that. with so many officials cautioning against rate cuts any time soon, you have michelle bowman talking about the idea of not now. philip jefferson saying there was a danger of easing too much. cautioning anyone from looking at it right now and right away. lisa cook looking to have greater confidence inflation is going to 2%.

joining us is megan's wiper. you expect june will be the first set of cuts. the market expecting so much more so much sooner. when you look at the path of inflation, the data we have seen and pce next week, how much risk is there that june will not happen? >> the market has come a long way in meeting expectations for what the fed has laid out in the december summary of economic projections. after the january fed meeting, we were talking about the fact the market had come a long way wanting the cuts earlier, faster, sharper. that was the market sitting with inflation pricing, this sharp pace of inflation falling. on the back of a lot of strong data we had seen, both of them were able to correct. we think june is possible. it is our base case haul at bofa. but they are in no rush, no

hurry to cut rates. it makes sense given how easy financial conditions are sitting. >> some cases would be for cuts of the economy slowing down, inflation coming down to a more comfortable level. we are sitting here in extraordinary market exuberance, record issuance. how much is the easy market feeling going to throw a wrench in the june cut? >> a great question. we heard the fed talk about this in the minutes released this past week. what the fed is focused on is inflation. they got the easy part of the inflation done, goods has converged to where it should be. it should ultimately be not adding to inflation, pressure should be going back to zero. a lot of the inflation story the fed is working on his services. some are more cyclical, more related to financial conditions. what the fed is focused on is

notable easing and financial conditions we have seen. if that persists, it raises questions about how confident the fed can be to cut rates. >> there were some voices debating if a cut was even possible. but there is a possibility. what would make that possibility a reality? >> the possibility of an incremental hike, the fed would siri acceleration of some of these inflationary pressures. the idea that the fed is not making as much progress as expected, certainly not our base case at the markets. base case is not that as well. it would have to come down to expectations inflation has completely stalled, and the fed has to do something to push back on that. not really the base case. it would drive a very notable pivot for the treasury market that i focus so much on. not base case, but a risk.

particularly if the data we will see print for february confirms the strength we got in january. sonali: there is a lot of issuance coming to the market. at what point does it get more difficult for markets to absorb? >> so far, a lot of the supply we have seen has become easy to absorb. so much demand for fixed income at these elevated rate levels. we are seeing better buying in the treasury market. even on the back of fed comments that are relatively hawkish. there is a lot of appetite. the big question for fixed income is what you brought up. as long as the fed is leaning towards cuts, that rates are going to be falling, the dip buying mentality will be prominent. if the macro condition waivers, if we see the market wonder what the point is for the fed to push back on some of these things, that would be one of the big concerns for the demand picture.

sonali: thank you for your time. up next, the auction block. the ad of russia high-grade issuances as companies look to find acquisitions. details next. this is "real yield" on bloomberg. ♪ how am i going to find a doctor when i'm hallucinating? what about zocdoc? so many options. yeah, and dr. xichun even takes your sketchy insurance. xi-chun, xi-chun, xi-chun! you've got more options than you know. book now. that first time you take a step back. i made that. with your very own online store. i sold that. and you can manage it all in one place. i built this.

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sonali: i'm sonali basak. this is bloomberg "real yield." time for the auction block. high-grade u.s. issuance tapping estimates. surpassing the $50 billion level forecasters -- that was forecasted. abbvie, astrazeneca, hca after more than $60 billion.

i want to dig into the abbve -jumbo deals. they look to fund deals. it was in seven parts. the longest portion, a 40 year bond yielding 145 basis point over treasuries. investors placed orders for more than $80 billion of the bonds. i want to mention the 9 billion-dollar auction of 30 year tips did not go as well. it was awarded at a yield of 2.2%, tailing the one issue yield. it marks the highest auction since 2010. amanda lynum weighing in on where spreads go from here. >> we were asked if the risk to spreads was tighter are wider. i think it can be tighter. i would not necessarily say i would be surprised if we saw widening from here. i think that would be a healthy correction. but i don't think it is out of the realm of possibilities spreads could move tighter from here because the yield base demand has brought out. sonali: we will bring in an all-star cast, megan graber at barclays, matt brill, head of

north america invest great credit at inesto, and -- we had it all, buy side, sell side. investment-grade issuance slamming. but how much is left in the pipeline? >> there is a decent amount to go. march will be another incredibly active month. we hit the ground running in 2024. we have yet to lose signs of steam. but if you want any indicator of the outright strength of the meg ryan -- backdrop, the reemergence friday is a viable execution window, that is it. we see that evidence here again. a dear barclays is involved with with jumbo. there is increased expectations the theme will continue into quarter two.

2023, there were maybe five days that were supportive of friday issuance. it gives you a sense of the backdrop we are operating in. sonali: it feels like demand is insatiable. if you see $80 billion, 80 $5 billion coming in for a $15 billion offer, what does it feel like to be sitting on the other side of that? do you like where spreads are out right now? >> can't say i love where they are at, but it is about yield. we have been very busy this week taking it deal after deal. it is incredible how easily it has been absorbed. at the end of the week, here we are on friday. there is this deal out there, i cannot say we are going to buy it or not, but if we were, i would have to beg wolfie at jp morgan for bonds. asking meghan, maybe she can give me more. we have cash still. there has been so much supply and you are not done with being able to buy enough. it is unbelievable.

sonali: if you don't like where spreads are at, but you like yields, will you go further out on the risk spectrum to make your money? >> when you think about trying to generate attractive total return and consistent income, which are our objectives, it has let us focus on the securitized products market. securitized products offer yields and spreads on a relative basis compared to things like investment-grade corporate credit and some of those historical relationships. we office -- we also think securitized products offer a unique opportunity to diversify away some of those concentrations. when you think about where securitized generates its returns, it is housing, the consumer, commercial real estate sectors that really offer differentiated exposures relative to the broader corporate credit markets. final thought from a technical backdrop perspective, securitized product issuance

compared to other parts of the market has been relatively modest. coming off of some of the challenges in commercial real estate and slower origination and lending volumes. as well as on the housing side with lower housing turnover. we are seeing relatively modest amounts of new supply. when you combine it with the relative value on offer in the market, we think it sets up for a favorable backdrop for securitized product performance. >> i'm curious about not only credit risk, but sector risk. when you look at investor appetite for yields, even beyond the orders be on the table, the total around sectors of housing and consumer, anything outside of this seemingly invincible technology world we have been in, health care people are excited about, do they get finicky? >> they don't. it has been pretty broad-based buying. corporate fundamentals are in incredibly great shape.

if we think about what has driven one third of the volumes in february, it has been m&a. borrowers we are talking to from a fundamental perspective are very defensively positioned, even in some of the more storied sectors. in many cases, they have operated as though a recession has already happened. you are looking at the amount of cash on some of these corporate balance sheets. it has increased meaningfully. we have seen share buybacks pared down, capex has grown. there is a comfortability with investment-grade in particular. it is picking and choosing your spots and picking a choosing where on the curve you are deploying cash in some of those names. the overarching yield, the strength in demand continues to astound most of us in the market. sonali: what would cause you to get out on the curve on credit risk a little bit? >> what is interesting is a lot of the extension from a retail

standpoint is in t bills, cds, money market funds. we have been begging people to step out the curve and try and lock it in for longer. it is different on the institutional side where you see annuity sales, pension plans, insurance companies, they are gobbling up as much as they can of the longend. it is hard to say when the retail investor steps out. i don't love the flat curves that are out the curve, you are looking at 10 and 30's. 30 years versus 40 years, some deals have been low as five basis points. it is extremely low. i have to respect the technicals. if you are institutional investor and can lock in for 30 years, quality companies like cisco at 5% plus, they will do that. whether i need that paper or not, i have to understand somebody else does. that is the balance of figuring out maybe there is not great value, but someone else that

does not care about value, they are forced to buy it. how can i get in front of that? sonali: we are thinking about risk. you are talking about more of the beaten-down parts. do you feel prices have bottomed enough to start picking at any pieces? >> absolutely. the number one question we get every day is primarily around commercial real estate. the outlook for it and the implications for the cmbs markets. it has afforded an interesting environment to use credit selection to find good opportunities with low leverage, properties with resilient value characteristics, strong operating income that should allow refinancing, even in an elevated interest rate environment like today. additionally thinking about the overall interest rate environment and lock in effect homeowners have had by virtue of very low rates on existing mortgages relative to prevailing mortgage rates, and record

amounts of home equity homeowners have built into their homes through house price appreciation is creating opportunities in agency, mortgage-backed securities, and second lead mortgages to be able to capitalize on the unique aspects of where we find ourselves today. finally, new sectors emerging. things like telecommunications infrastructure securitizations, data centers, wireless towers, fiber-optic networks. these did not exist in the securitization market five years ago and are creating new opportunities for investment grade fixed income offering incremental yield to other alternatives that we think are an example of some unique areas you can pick up. interesting yields without taking a lot of incremental risk. sonali: searching for spread is interesting. people are looking at that, even with yields where they are. what would cause spreads to widen a little more from here? >> i don't see it happening near

term. by and large, you are seeing the depth and breadth to the underlying investor base underpinning spreads. i think our call is we can see an incremental five basis points of improvement, even off of spreads of the industrial side close to 25 year lows. there are limited headwinds from a macro or fundamental side. the short answer is investors continue to reach for risk, they are nothing if not yield driven. historically, when coupons are high, spread volatility is low. that is what you should expect over the coming months, certainly into the first half of the year. sonali: i want to address a counterpoint. bank of america analysts had been writing, strategists worried about her credit bubble. what are the classic signs of a credit bubble when discipline goes out of the window and markets buy deteriorating credits because of value?

do you think we are in the credit bubble? >> i do not. the key thing was buying deteriorating credits. it is hard to find deteriorating credits. even if you look at the banks that can be challenged as regional banks. are they deteriorating? i don't think so. they are improving from a very big scare in 2023. the loan loss provisions happening, setting up fairly nicely to protect you if and when the commercial real estate losses begin, or exacerbate. but i'm not seeing a downgrade wave lower. i'm not seeing cracks -- i go back to the last 18 months you have been hearing about this big recession that is going to happen. most corporations have prepared for a recession that has never come. in that regard, they are very well set up for this. yes, spreads are tight, but i'm not seeing the massive beta fundamental risks they are

alluding to. sonali: i'm curious about the securitization play. is some of this a reflection of just how things are trading? the return you get? or do you need securitization to protect against some of the potential losses? >> when i think about potential losses, securitization really structure is what is designed to protect you, in addition to underlying collateral quality. when i lived there commercial real estate, no doubt there have been challenges. when we look at the structure of underlying securities, the amount of credit enhancement you get to the investment grade portion of the capital structure in a cmbs transaction, as well as the overall leverage on loans being produced, generally around 50%. if you have a great amount of uncertainty under the underlying path from where values settle or where interest rates end up, you have a lot of built into

structures designed to withstand challenging environments. the same can be said for much of the consumer abs markets as well. you think about where the performance has been on things like auto loans, it is no secret delinquency rates have gone up. that has been a well advertised story. when you look at the underlying transactions themselves, you have a segment -- significant amount of credit built into the deals, designed to absorb losses. additionally what the numbers don't take it to account is many originators have retrenched credit standards for origination. going forward, you are seeing initial positive signs for performance is improving. sonali: better investors as bullish as we see investors. have a great week ahead. you probably need the sleep after a week like this one. thank you all for your time. it still ahead, the final spread. the week ahead. a big week.

the preferred inflation gauge is in focus. this is "real yield" on bloomberg. ♪

sonali: i'm sonali basak. this is bloomberg "real yield." time for the final spread. the week ahead. home data, and tuesday, durable goods. consumer confidence. we will see how they feel. wednesday, a slate of federal speakers coming in. thursday, all eyes on the preferred gauge of inflation that is u.s. pce data. more fed speak on friday. i want to bring you to the pce data before i let you go. we had some optimistic printing in the most recent print. optimism stays in the estimates. a cooling down of the deflator to 2.4% from 2.6 percent. the core deflator to 2.8% from

2.9 percent. we know the markets are sensitive, strong economic data, yields higher this week he see what another week rings. from new york, that does it for us. same time, same place next week. this was bloomberg "real yield." this is bloomberg. ♪ need to know about. constant contact makes it easy. with everything from managing your social posts, and events, to email and sms marketing. constant contact delivers all the tools you need to help your business grow. get started today at constantcontact.com constant contact. helping the small stand tall. 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 when i was your age, we never had anything like this.

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sonali: welcome to "bloomberg markets." i'm sonali basak. we will look at the stock rally. losing steam after a powerful rally driven by artificial intelligence. we will get a quick check on the markets. s&p 500 off of session highs for the day. still near the 5100 level. still up about .1%. that is a hefty rally as we saw just a day ago. nasdaq 100 los