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

sonali: coming up, economic data starting to weaken. u.s. consumer sentiment falls for the first time in months. another big investor warns of no rate cuts this year. we begin with the big issue. the fed's handle on inflation. >> january is a bad month. >> a lot of january effects in the data. >> the overall story is still the same. >> we are moving in the right direction on inflation. >> it is coming down, aching progress. >> we are on track to get cuts. >> we know the fed will get cut. >> it is how many we get. >> we are in this process of capitulation. >> the market thinks the average will be more like three cuts. >> the fed is continuing to tell us data dependency and we are watching that data. >> we won't be surprised to see march and april core inflation come in weaker. >> how q2, we will see all of those beginning of the year effects. >> talk to me in the spring.

>> let's start by looking at the two-year yield. massive movements. more than 20 basis point move from peak to trough over the course of this week. beginning the week looking at inflation data coming in hotter than expected. driving yields passed 470 on the week. falling now below 453 on the day. now around 455. you saw it dropping off even more when we saw some data cooling from the u.s. consumer. a sentiment low according to university of michigan expectations. more sentiments from fed governors warning about the world off. watching the pace of the yield dropped even quickening. let's look at u.s. inflation data. the rubber hits the road on expectation for rate cuts and how much lower rates can go. we looked at the consumer price index. that sent the initial jitters into the market. then you see the gauge, the pce

deflator. personal consumption indexes meeting expectations but rising at the fastest levels in a year. you can see why the fed is not in a rush to lower interest rates. san francisco fed president mary daly spoke with bloomberg and said the fed is at the ready but there is no urgent need to cut rates. >> we want to avoid holding on all the way to 2%. they are putting policy very tight, and then causing unnecessary downturn. we are agile, and we are sitting in what i call the ready position. we are ready to make moves and adjust as the data demand is to do. i think the economy and policy are in a good place to do that. sonali: joining us is george bory and peter of exotic capital. you are looking at softer data in some areas of the economy. how much does data need to weaken for the fed to cut rates? >> you make a great point.

it is kind of the lead up to the discussion that hits the nail on the head. it is about pace and confirmation. in terms of pace, the fed has pushed out expectations. they are telling us in no uncertain terms they need some validation that the trend, the downward trend of inflation is still in place. it will tell you that inflation has kind of stalled in here. and we are going to need to see further true evidence that while there might be a pause or a stall as we roll into the new year, that the disinflationary trends are actually reinserting themselves. so we think whether it is going to be labor, housing, the endgame in terms of the actual inflation data itself we think that pushes the realistic point in time, getting out to that june timeframe.

about three months of data to sort of reinforce the trend is clearly in place. that is what a lot of the rhetoric tells us. they are not stepping away from the notion of the next move is most likely to be down, not up. but they want to see evidence the structural downtrend has been confirmed. even just this week, you had david solomon saying investors should see some uncertainty around soft landing expectations. there is data that could start to soften, but there's a question on how much the data will soften. can it get worse than people will expect when you look at something like fed funds futures and what was implied in terms of cuts versus what is now being currently implied, 160 basis points to now 80 basis points,

january versus now. the real question is not whether the fed cuts, it is the reason the fed feels like it must cut. we are starting to see a weakening in employment. if the subcomponent was about 45 for manufacturing, we got a services employment print at 43. the print before last bounced out just back above 50. that said, the data has been rolling over. especially in employment. continuing claims are picking up. it can happen very quickly all at once. especially when you see the complacency we have right now. there can be concerted market reactions versus expectations. i think that is where we are. i believe it is the second half.

i think we will see the data weakening quickly in the second half of the year. >> you have the greater portion of investors believing rate cuts will cut this year and will come as early as this summer. but you are writing on the reality that the u.s. economy has not simply been slowing down, and a tailwind to growth since december. as a result, the fed will not cut rates and they will stay higher for longer. how caught off guard would investors be if they do not see the rate cut this year? >> not only investors, but the fed has clearly signaled they intend to cut rates. there's a very valid point it takes both time and effort to get inflation back down to target and the move much lower from here. we have expected a sticky, stubborn inflation trajectory that is moving lower slowly and

organically. but if we truly need to get down to target, that is probably going to need slower growth or weaker growth as well to accompany that. the economy is doing better than expected and showing signs of strength and has been doing reasonably well. there is an argument to say they may not do anything this year. the trajectory would suggest perhaps that is a strong statement. but it is possible. i think the market would get caught off guard if the fed had to pivot back towards neutral or back towards a tightening policy. that would certainly catch the market off guard. but an extended pause in our opinion, that would be uncomfortable. there would be volatility, not convinced it would necessarily truly shop the market. >> there's a nearly 40% chance

they do not cut this summer. if you look at financial conditions and where they stand, we are still talking about a week of record cut issuance. there are plenty of investors who would say there is no discipline in this market and it could send all sorts of prices higher. how do you feel about that view? >> i'm not going to pull any punches. for months, chairman powell had been talking about financial conditions, easing at successive meetings last year prior to december. he pushed back on looser financial conditions as a reason to stay on course to get the job done, invoking his inner paul volcker. for some reason in december, perhaps on the heels of janet yellen saying real rates were high enough to tighten financial conditions, he completely punted during that press conference and

-- when he was asked about financial conditions. as a result, we have seen a concerted loosening of financial conditions, a rally and risk asset markets, and the reflexive consequence of that is inflation , which was on a real disinflationary trend, seems to have picked up a bit. in addition, there are things that happen like cola adjustments. if we look at the income data from january, i believe it was 1%. so there are still inflationary forces at play, stronger financial conditions and asset markets and looser financial conditions aren't going to help. sonali: i'm going to offer one reason, i spoke with alix waxman about the fed balance sheet and managing the 10 year. let's look at what he had to say. >> the fed has done a very good

job. they have been smart with respect to the 10 year treasury. if you look at their balance sheet, they have made been inching down the risk, but 10 year which finances a lot of the investment-grade companies, which they have all fixed rate debt, they have gone up. in the fed shrinking balance sheet, that is one part where they have cut the balance sheet -- have actually grown the balance sheet. sonali: we talk about high interest rates, but not the fed's balance sheet. is it the fed balance sheet that is keeping conditions loose? >> we think it is more of a coincidence factor, that they continue to drain liquidity out of the system to absorb excess liquidity. largely driven by the balance sheet reduction. i think there is a lot of fine-tuning we are talking about and very specific points along the curve. the fed has some degree of

control from that perspective. balance sheet management in our opinion has gone reasonably well. it could create some pressure points as we have seen in the past. it may do so again in the future. by and large to the extent that economy holds up, liquidity conditions hold up, the fed is rebuilding its own reserves as it draws down the balance sheet. quite simply, the economy doesn't need it. and there is no reason to kind of push that excess liquidity into the system. sonali: do you think if the fed starts to really get their pedal on the balance sheet reduction to a greater degree that we can see a tantrum? >> i don't think that is likely. my view is for a weaker economy later in the year. a reflective quality will keep the long end in check. moreover, the big difference we have not touched on this time and this cycle is fiscal policy. and of course, coupon issuance would argue for higher long

yields. that is certainly a risk. all of that said, at the end of the day, what will control the long end of the curve is a slower economy into the end of the year and a bit for duration. george bory and peter cecchini, duration has been a big thing. we will talk about the auction block. investment grade u.s. companies have borrowed around $400 billion this year. we will dig into this red hot market. stick with us, this is "real yield" on bloomberg. ♪ investment opportunities are everywhere you turn. do you charge forward? freeze in your tracks? or, let curiosity light the way. at t. rowe price, we ask smart questions about opportunities like advances in healthcare and how these innovations will create a healthier world tomorrow.

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sonali: i'm sonali basak, this is bloomberg "real yield." it is time for the auction block. bond sales off to a historic

start of the year. the primary bond market was senior today volume passing 500 billion euros in the shortest time ever. investors putting in a record 2.6 trillion euros of orders creating the highest ratio ever. u.s. high-grade sales from names like aeon, honeywell smashed records. there was nearly 200 billion dollars sold for the month. the record streak could stop as the numbers were set during the pandemic and will be hard to break. u.s. high yield, with a full month ago, we have topped the first quarter volume we saw in 2022 and 2023. issuance at $58 billion year to date. sticking with credit, when he sees or weighs in on where spreads are heading. >> credit spreads are still super resilient. that speaks to the technical backdrop where investors have been under invested, and are now holding their nose and playing catch-up.

you can assume high-yield spreads will widen at least some. i don't know the magnitude. there would be cash coming out of the front end out of money market funds and into the fixed income markets. you would assume defaults would rise. sonali: let's bring in the portfolio manager for high-yield and multifactor credit at pimco, and daniel pauly, managing director and portfolio manager for credit strategy at oaktree capital. when you see how tight spreads have been, where do you find value? >> spreads have been tights in yields. there is an opportunity for double-digit yields. thinking from spread to yield makes a lot of sense. especially when you consider some of the other factors in the high-yield market. like the fact bonds are trading at a decent price today, well below par. there is potential upside. and generally, it is a higher

quality market than it was. where we are in this cycle, i think we are seeing defaults have been relatively low. borrowers have been able to weather the storm. if you are a credit picker, we think there is ample performing companies that will pay us back on those loans. sonali: how do you feel as the economic data starts to weaken? do you get worried about some sectors? particularly the ones more leveraged to the consumer? >> that is right. overall for high-yield, we are constructive. we think there is opportunity as yields have risen to generate that income, predictability, and resilience. as we look at the lower quality portions, even though the asset class has improved and it is looking relatively strong, there are some areas where we are concerned. for example -- in some of the very cyclical issuers where interest coverage is starting to shrink. especially in the bank loan market, or in sectors which are

in secular decline. areas like wireline, retail, where there is less resilience and it may be more difficult with low multiples and low margins to weather any disruptions. sonali: the risk rally in triple c bonds have been the best performing asset class in february. but interestingly, you look at hyg, you see outflows which were quite meaningful. how do you handle that? do you also take chips off of the table in places where you see lower credits, or do you start to be greedy where others are fearful? >> that is the right question to be asking. a lot of investors reached into risk in the fourth quarter. ccc's really rallied. we are more conservative and don't feel we need to stretch for that risk. especially in a multi-asset contract -- construct. our global strategy has a mix of not only height bonds and senior

loans, but we can reach into seal lows. those are an interesting investment opportunity because it is a diversified pool of loans where you are getting paid a premium of of similarly rated debt. we think those yields are quite attractive. they are also a stable borrower base for loans. instead of taking ccc rated high-yield risk, why not increase in quality, go into the clo market, and get something more loss remote over a cycle? sonali: when you think about how excited banks are to get from the record insurance to investment grade over to high-yield, even leverage loans, the bank market you are talking about, do you think new issuers should expect the same sort of rosy reception for the next few months? especially as we may not see rate cuts as quick as expected? more things breaking a little. >> it depends on how much is coming to market, so what are the options investors can choose from?

and the quality of what is coming to market. there are many times at pimco we are providing dual track pricing for our public deal and private deal. and the terms we would like to see on those. it really increases the ability to be selective and active in our selection of which new issues will participate, what format would participate, and the multisector diversified income approach. we have the ability to go across asset classes so we are not segmented by market structure. we can look at where the best relative value is globally. sonali: are the banks able to really start to outbid the private markets? there was a strong bid when you think about the private credit markets. now the banks starting to compete. sonali: absolutely. more people are looking at private credit as an area to compete in. what is important, the credit quality. the due diligence aspect. two, the expertise you are bringing.

for example, when we look at it, i think the overall, the leverage financed asset class across high yields, bank loans, private credit, has grown. that is good for issuers and investors standing at over 4.5 trillion today. it is structure, covenants, where we think that credit is going and where we want to invest our incremental dollars. sonali: when you look at the financial sector, people are thinking about new york community bank and the troubles it has seen. you saw a bond here that was trading at par fall to about $.74 on the dollar, jumped above 80, now below that level. i'm wondering for your perspective where you see these jitters and property market, and regional banking system. how do you view that opportunity, and is it even an opportunity? >> i think the pockets of

volatility can create opportunities. especially going in to buy credit, quality at discounted prices. the banking crisis spreading in terms of volatility and other credits previously when that happened. it might create a more favorable market for investors like more contrarian and going into these times with the expectation to get good bargains and hold for the long term. i do feel like the market has been pricing in this unexpected scenario that there will be significant rate cuts in the face of a strong economy and growth. there will probably be volatility ahead as it may not materialize and you do have flareups and regional banks or other geopolitical aspects. sonali: we have to leave it there, sonali pier, and danielle poli. but there is a question on where spreads go. still ahead, the final spread. the week ahead.

another key payrolls report coming out. big moment for investors. we will talk about those expectations. this is "real yield" on bloomberg. ♪ it's easy to get lost in investment research. introducing j.p. morgan personal advisors. hey david. connect with an advisor to create your personalized plan. let's find the right investments for your goals okay, great. j.p. morgan wealth management. how am i going to find a doctor when i'm hallucinating? what about zocdoc?

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sonali basak i'm sonali basak, this is bloomberg "real yield." a big week. fed president patrick parker kicking off another busy week of fed speak. voters hitting the polls for super tuesday. global pma finds rollout. chair powell testifies in the house followed by the senate on thursday. and ecb decision and a read on the u.s. labor market with the latest payrolls report. let's look at the data expectations. there is an expectation the data market is pulling with an estimated 190 k additions in jobs. softer than what we saw of the prior print of 350 three k, but above what jerome powell said would be the neutral pace of

payrolls. the unemployment rate expected to stay unchanged. that does it from new york. same time, same place next week. this was "real yield" on bloomberg. this is bloomberg. ♪ thanks to avalara, we can calculate 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 i think he's having a midlife crisis

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sonali: welcome to "bloomberg markets." i'm sonali basak. let's look at how stocks are finishing the week. in the green, but a big move in bonds after comments from fed officials. let's check on the markets. the s&p 500 now higher about 1.5%. nasdaq 100 up about 1% on the day. and we are watching a divergence when we look at the regional banking index. s&p regional banking index now down about 1.3 percent. that