sonali: bloomberg real yield starts right now.

coming up from a heart inflation dense fed rate cut expectations and yield search as traders will just positioning. bruce richards joins us to discuss the state of the credit market. first the fed's inflation fight. >> inflation is taking its time coming down. >> inflation is a sticky animal. >> perhaps inflation will remain high. >> february was better than january but not go. >> the bigger picture. >> 2% target. >> the broader trends in inflation are moving down. >> i do not think the said it takes a lot of signal from one or two inflation prints after a series of very good inflation prints. >> shifting focus from month-to-month gyrations on the data. >> the fed is likely to cut three times this year. >> the first cuts in june. >> june. >> june. >> june/july.

>> don't expect huge statements from next week or what chair powell says in his press conference relative to what they have said recently. sonali: head of a major fomc meeting traders aren't thinking about cuts earlier in the year and pushing expectations out. but how far? two months ago we were looking at about four rate cuts priced in by july 21 and that has already gone down to one. when you look at fed futures the probability has declined meaningfully. it was priced into nearly 100% two months ago and now you are looking at it like a flip of a coin. let's look at moves in the treasury market. the 10 year has had drastic moves this year seeing the biggest gain in yields since october. think about how much that has been. it has been one of the more drastic moves we have seen over the past six months. there are a lot of influences to that move at the longer into the curve and we will talk about it.

joining me is teresa mcdonough of community bank. when you think about the data we have seen and how far yields have gone higher on the two-year and the 10 year and at the data we will get ahead before july when traders are expecting a cut finally, how do you view the data and the uncertainty around it? >> thank you so much. i want to step back and paint a bigger picture for viewers. if there are two cuts in 2024, 3 cuts, six cuts, even six months ago. the biggest picture is the fed engineered a masterful exit from a tight policy. inflation is 50% of what it had been. certainly there is a degree of uncertainty about what is going to happen in the next six months or so. we think possibly two to three cuts. that's missing the bigger picture.

these types of gyrations in yields is what you see during an inflection point in the market and has a lot to do with a tighter liquidity and the fact that it is the marginal trader making rate cut bets. most people seem already positioned. we think the logical positioning is, yes, there will be rate cuts. maybe they will be shallower and quicker than what we otherwise expected. the logical positioning remains long-duration in anticipation of a steeper yield curve. sonali: i'm curious about your thoughts on this. my beard is unfair given the volatility we have had. where do you think fed funds end in 2025? >> probably in the mid three range grid next week we get updated projections. there might be a change in 2024 but i don't think there will be much of a change in 2025. when you look at data we have seen lately it has been noisy

and harder than expected. we think the trend will ultimately continue and for us it's more about the timing of rate cuts and whether it is two or three this year is to be determined as we get inflation readings over the next few months but we think it will continue. there is plenty of slowing down under the surface. inflation was a hot topic this week i'm a but along with that we had relatively weak retail sales and weak retail sales in january. surveys continue to decline and we see more balance in the labor market with the unemployment rate getting to 3.9%. looking ahead, i think made three -- mid threes is the best approximation but it comes down to the data. sonali: can griffin said earlier this week that pausing then changing direction towards higher rates quickly would, in my opinion, be the most devastating course of action to

pursue. i think they will be a bit slower than people were expecting. carissa, when you think about what can griffin is saying, the idea of what causes the fed to cut, do you think it will be meaningful progress on inflation or to the point collin is making, the idea that the data, the economic data is getting weaker and potentially could get much weaker? karissa: excellent set up for sure. it is not just one or two data points. it's not just inflation. though, certainly the 2% target is their primary target. they are walking a tightrope between making sure they bring inflation down to a normalized long-term level that we can live with economically while making sure we are not setting the -- sending the economy into recession. we are not sure if we will see a slowdown or outright recession. but that is the tightrope the

fed is looking at. they are just like -- just looking at inflation data. they were looking at a range of data. for that reason, chair powell will be really careful about how he proceeds. that is why the rate cut expectations continue to be pushed out. he has been very deliberate and rightfully so. sonali: talk about the data we are seeing and the gentle weakening. do you think things can get worse? you think there is a longer horizon here given expectations for elevated rates? collin: we aren't in the camp we will see recession soon. soft landing seems most likely. look at the fed's reaction function and how the markets and economy is handling that. we see that consumers and corporations have handled the rise really well mainly of how they -- because of how they manage balance sheets with corporations pushing back maturities and homeowners that have locked in low rates the rise in rates have not impacted them. you are looking at a more

gradual slowdown. we do still subscribe to the idea that a high real rate will weigh on activity. we focus on the real rate. the idea of cuts coming up is not necessarily to stimulate, more maintain. if inflation keeps coming down and the real rate rises to 3%, 3.5% it's a challenge for consumers and corporations. we think the slowdown should eventually come, but not as sharp recession. sonali: you have pointed to inflation data we have already seen. what about future inflation data? do you worry about risk to upside for inflation? collin: bostick last week addressed the idea of a premature cut that stimulates demand and fuels we acceleration of inflation. that's not our base case now. we think worst case is it levels off your. but we think it should continue. i agree with the quote you lead with before about the risk of inflation may be re-accelerating and the need to begin hiking

rates again. i think that would be bad for the economy and risk assets and i think the fed is very tuned into that idea and it goes with the idea that they want to take a patient, thoughtful approach rather than risking prematurely cutting rates. sonali: almost gives credence to slower for longer. talking about potential softening of the economy what is your view of how bad things can get if we don't get to rate cuts this year? karissa: back to the point about the real rate being restrictive and causing the economy to slow. i think it's a real risk. the fed is very tuned into that. the last thing they want to do is go too far afield on fighting inflation so they fear the economy into recession. that's a real concern. there are a couple things i am sure they are looking at. the labor market. it continues to be solid.

but there are signs of weakening there as well. bank balance sheets are very impacted by higher rates. banks are not quite as able to make money with the inverted curve. these are things they are all looking at. it would be helpful to have at least one if not two cuts this year. we are not in the camp where we think inflation will meaningfully reaccelerating there. sonali: you mentioned the ration might be the play. how far do you go out on the ration at this point given uncertainty in the market? karissa: anywhere outside of say the 10 year treasury. maybe north of five years. anything longer than that, we don't expect you would see a significant additional move upwards in yields here, even with a couple more, say, hot inflation headline numbers.

we think, again, the coupons, you wont be able to source those north of 4% coupons for too much longer with a cutting fed. this will be the time to load up your portfolios. that is how we are advising clients to invest. the natural shape of the curve over time with the policy coming into place will be a bullish steepener and we will see the rates come down. sonali: carissa mcdonough and collin models think you for your time. next the auction block. automakers like dw and aston martin at speed to issuance while the global place of issuance remains red hot. and we talk about treasury markets with bruce richardson chair and ceo of marathon asset management next on will yield on bloomberg. bloomberg. l posts... in minutes! -how? -a.i. (impressed) ay i like it!

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sonali: i'm sonali basak and this is bloomberg real yield. on the auction block on a record quarterly pace for she went in europe and the u.s.. this week that u.k. helped fuel a record selling a 4 billion pound offering of a 30 year inflation linked debt note that saw orders of more than 56 billion pounds, an all-time high for that class of securities. there was a british realtor u.s. high-yield sales this week with aston martin selling debt in pounds and dollars to refinance existing notes. the 960 million five year tranche saw over five times covered. automakers helping fuel u.s. high-grade weekly sales with names like volkswagen and hyundai and goldman sachs banks usa for sale since 2019 driving the total to over $27 billion.

king streets brian higgins seeing a lot of rate financing that needs to happen. i spoke with him yesterday. brian: going into the end-of-the-year you will see slowing. i think it will ultimately be looked at as no landing, soft landing, progressing into a harder landing. a lot of refinancing needs to go on on the reef -- real estate side and corporate credit side. if new issuance is up like it has been the first couple months of the year investors will say, why do i own this in more -- my portfolio? this is more attractive. better leveraged, better industry, more cyclic i leave. it will toss out more marginal credits. sonali: bruce richardson is ceo of marathon asset management and watches all markets closely in and out of them every day. when you think about the idea interest rates could stay higher for longer, the reality now is that even a summer rate cut is at the flip of a coin, really. how do you think through the uncertainty and how it impacts

the way you are investing? bruce to: fed meets next week and sunday is march madness. the march madness next wednesday will be real. we will be looking at the mean, the median, where the dots are, what the fed does, talking about the bump. is the bump really a bump? bump up means it is coming back down and right now for the last couple months looks like it is just smoothed out and plateauing, now moving sideways at the three point 5% cpi, 3% ppi. what the fed move come june? you are right. i think it is 50-50. the higher for longer israel. brian is right. i think your implication of the question you ask it is right. i think it will be higher for longer and will have a major impact on a bunch of different cohorts in the marketplace. sonali: that's talk about those. others you think will be most drastically impacted. what you think most of the pain will be? bruce: there are four cohorts.

number one, the very top, most levered to rates. number two, companies. three, banks. fourth, the consumer. you want to unpack each one? sonali: let's start with one specific part, companies. look at the market today. spreads are supertight. look at the market. you think from high-grade to investment grade here, or junk bonds, you are looking at people that believe nothing will go wrong in the economy. you agree? bruce: absolutely not. an ig market is pretty tight. it is pushing up against all-time tights. high-yield bond spreads are also very tight. they are too tight for the risk i think in the marketplace. they are vulnerable. with the higher spreads and easing of financial conditions, maybe not the fed funds rate, but an easing of financial conditions. it is the year of refinancing. it will be huge volume all your long for ig and high-yield

companies. within that, there is a mix. 90% will do well. they companies will do very well in the environment because high rates and low financing costs allow them to make a really nice return on their cash. it is the 10% of the tale of two cities that is the other side of the equation that is struggling. take a look at some of the software buyout companies and health care buyout companies and some retailers. i just came on a minute ago before i was checking my emails. the s&p just released a report that i will have my team print when i get back showing 29 companies this calendar year already, the fastest pace of defaults since 2009. this calendar year. we don't read about it. we don't talk about it. i recently posted about a company that just filed for bankruptcy a great company that is not so green, blank cash. lots of companies are over levered. anthology. .

two big software companies in the buyout space that were supposed to be leveraged 8-10 times, positive ebita, did not grow into their models. for weather forecast, levered about 15 times. sonali: we have not really seen her real distress cycle. do think one is still coming? bruce: there is $5 trillion of debt between high yield and loans u.s. and europe and we think there is around $5 billion-$4 billion of that will be restructured. you would say there was no cycle because there has not been recession but last year was pretty decent for distressed and dislocation with about $180 billion that went through restructuring. this year we think that number going into next year, the next two years could be 350 billion dollars or double that. we are calling for $500 billion. that will be bigger or just as big as what happened in 2008 and 2009. maybe not in percentage terms because markets have grown fincen, but in absolute volume.

we are seeing that with software and retail and health care companies and across industries. that are too levered. sonali: it is incredible when you are drawing out the idea that we will see more bankruptcies, more coveting my face restructuring. the idea that more of corporate america slang off more individuals. you think the data can get much softer for economic data or that it is masking some of the problems we are already seeing in the economy? as part masking -- bruce: masking is coming from big government spending and huge deficits we are running. a lot of growth is coming from that part of the equation. corporate america again it is a tale of two cities with the s&p up 8%. rwm, the russell 2000, flat on the year. and a lot of companies are levered that are burning cash just of service their debt. look at the moody's report. look at the be three rated companies. there is a big cohort come around 35 percent-50% of

companies have to burn cash just to service their debt and that is a tale of two cities that exists. we see it in cre as well and with the banks. big banks are really safe. fortress balance sheets, jp morgan, bank of america, city wells. big trust banks led more than president state street, bank of new york. they are fortress balance sheets, really safe. but there are 4400 tanks in the country and about 10% of those have really high funding costs in the double digits and in addition to that have balance sheets that are really troubled because they have 40%-50% in real estate. i think they are already solvent -- insolvent or moving towards insolvency and the industry will continue to consolidate. it is happening in the banking sector and corporate sector. it is happening in real estate. it is also happening with consumers. we see delinquency rates among consumers for both autos" of cards having surged from less than 2% to over 6% today in the last 12 months. you are seeing a tale of two

cities play out at higher rates. sonali: i want to talk about real estate because you have very divergent views. some people are saying that you don't really have a floor yet when it comes to property values, when it comes to commercial real estate more broadly. blackstone is saying real estate prices have bottomed and it is an opportunity to buy. on that spectrum where you stand? bruce: i would not argue with jonathan gray. he is brilliant and blackstone has a lot of good on ground data. let me share the data we have. there are $21-$22 trillion of real estate in the market and a lot of companies owned their own real estate as they finance it on balance sheets as opposed to putting that on it. they trillion dollars of property that is financed with 5.6 trillion dollars of debt, a lot of it is upside down. how much is upside down? barry starbucks as $1 trillion. we agree with him. we think it is about $1 trillion upside down. the equity is basically depleted. we are at the 100 million dollar

property, $70 million loan, only worth $70 million. so you have to come up with more money to all that or they will have to flip the keys or lose their property. here is the punchline. this year it is a record. look at the record wall. $900 billion of debt coming due this year when there is only supposed to be $540 billion of debt due this year. because, a lot of the loans, hundreds of billions, were extended and amended or kicked the can down the road into this year because they could not refinance. the markets are open. the big question is, can they refinance? take the $100 million property, the $70 million loan with no equity left. it's a class b or c office building. what is the alternative use? it is raising the building, taking down the land value. that means it's probably worth only $.30 on the dollar. sonali: that's a note to leave it on, bruce. we will have you back soon as we

had in that direction. wall street has become pretty expert here at kicking the can down the road. ahead, the final spread. a big week ahead for monetary policy. a pivotal week. we talk about all the data coming up next. this is real yields on bloomberg.

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ugochi: i'm sonali basak and this is real yield. it's time for the final spread. we got coming up a lot of economic data of china. industrial production and retail sales and a bank of japan decision tuesday. wednesday the fed stern with a big fed decision with a lot of eyes on the dot plot plus we hear from fed chairman jerome powell. the boe decision is out thursday as well as an ipo. let's talk how much we will see in the wild central bank's monetary policy for 40% of the world's gdp coming out next week. the boj, boe and fed are highly watched for their -- and of course there are many others and

we will keep an eye on all that throughout next week. from new york that is it for us time same place next week. this was bloomberg go yields. -- this was bloomberg real yield. this is bloomberg.

♪ sonali: welcome to bloomberg markets. we are looking at stocks falling with tech selling off and we are hitting session lows. benchmarks tumble in the last hours a let's check on the markets. the s&p 500 is on track to have the second week in a rollover. weeds -- it's now down 0.7% and the nasdaq is down more than 1.2% and semiconductors are down almost 0.3%. volatility is inching slightly higher but we are watching the second da