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coming up, cpi topping estimates for the third month in a row. markets and the fed re-think -- geopolitical tensions complicate the direction for treasuries. we start with the fed's inflation problem. >> the sound was the door slamming on the june rate cuts. >> inflation. >> there is more inflation that people would like. >> too much for the fed. >> it really complicates things for the fed. >> a very stubborn situation. >> no one is expecting june. >> still holding onto the june call. it is a close call. >> you will have some rate cuts but it will not be what people expected. >> a rate cut in june seems to me would be a dangerous and egregious error. >> right now, looking forward,

we do not see any rate cuts. >> the fed is not going to be making any moves anytime soon. >> it really is a fascinating moment. sonali: it seems like just yesterday we were talking about june or july for the first moment for the rate cut you saw by the federal reserve but you can see by the chart we are looking at that the odds are quickly diminishing. this is a look at the pricing meta-markets. to keep on pushing that idea out, june, july, there are almost no rate cuts expected. if you look at september, november, you see the market still pricing it in. overall the idea of less than two cuts by the end of the year. we take a look at just how yields have been behaving you see a ton of volatility in the market on many levels of the curve. you have this kind of pressure on the 10 year yield that you have not seen since going back

to late 2023. you're looking at a 10 year yield above 4.5. you did see a 22 basis point move over the course of this period. boston fed president susan collins has been penciling into rate cuts this year. >> i do not see urgency. i see a lot of reason for patience. over the longer term i expectation is inflation interest rates will be at lower levels. my baseline would still have us starting to ease later this year. sonali: joining us now is brian rehling and noelle corum. if we start here on the idea that inflation has been coming in hot, how has that changed your thinking about how you play the bond market? brian: going into the year we

were early looking for three rate cuts even though the fed and the markets were looking for six or seven. obviously we have to dial that back even more. we are still expecting a couple. we continue to kick the can down the road on rate cuts and it would not surprise me if we do not see any this year. we would have a much bigger problem is folks at the fed start talking about potential rate hikes. i do not anticipate we will be there anytime soon but that would be more upsetting to the markets. sonali: how do you think about the idea we could see fewer rate cuts to the idea that there might not be any this year? noelle: it certainly takes the risk to reward benefits for having a strong rates position either way off the table, which is why we are taking our hedge for a risk off scenario. . in terms of our fed view, they

did have june on the table. we still think the fed will keep that stance this year. they will want to have the rhetoric that it will be some type of insurance cuts. athe end of the day, they do want to stick the soft landing. sonali: how risky is that landing today? if you think about what we have seen in terms of strong economic data coming into this moment but they are paring that with the idea that rates are staying higher longer than many expected. brian: the economy is clearly doing better than we and most expected. there is no question about that. that is why inflation is running hotter. keeping rates higher for longer, the economy up to this point has absorbed it ok. i do not necessarily think that is a huge issue. the economy has shown it can

tolerate it. you have to see evidence of inflation at least moving back closer to the fed's goal before we see the fed follow-through on the rhetoric on cutting. sonali: i want to point back to an interview with larry summers seeing the cpi print has raised chances the next fed move is actually a hike. larry: this confirms the idea that the neutral rate is way above the 2.6% level that the fed has been using as a northstar. in my view, it puts back on the table -- it is still not what i would expect. sonali: obviously this is not being priced into the markets right now. how do you see the wrist moving forward? noelle: that is definitely a risk but one thing we have not talked a lot about in terms of

market participants is the influx we have seen from non- u.s. persons into the u.s. and how that has changed potential growth. we expect that arise a little bit this year. growth above consensus. it will not hit the ball out of the park in terms of growth but we expect potential to rise and that will keep inflation contained. we will see some disinflationary trends which takes the risk off the table. it is something we have to be watching and you definitely want to watch wages. if you take a look at the data points we do not see an overheating of the economy which ultimately plays into inflation over the long-term. sonali: this week alone has been telling. you watch the yields of the two-year move past 4.95, you have a seven basis point move to 4.88. a lot of that can be attributed to a safe haven, a geopolitical

risk. how do you think about the cross current as inflation is still under the surface? brian: what we are seeing today in terms of the market, this geopolitical bid. nobody wants to be exposed going into the weekend with potential military action in the middle east. i expect that tends to be not a long-term market reaction. i would expect us as we head into next week that we will start to see some of that safe haven bid move back out onto the markets. sonali: this is not the only time we have seen a safe haven bid. there is a lot of geopolitical rest that has been tipping into the markets although this week is certainly one of them. how do you think about this as you are investing geico noelle: we try to -- investing? noelle: it is a hard year to time the market.

we have been all over the place in terms of what market participants things will happen along the market cycle. we like having a position. instead of taking interest rate positions, we like having a tilt that will provide some stability in your portfolio over the long-term. sonali: there is another cross current and that is the idea of issuance. when you saw the 10 year week there were concerns about the direction of travel and the propensity for more investors snapping up new issuance. how do you think about the issue and cycle giving the financing needs of the united states in this rate environment? brian: it is a concern. there will always be someone to step in and buy, it might just be at a higher level. it puts an upward bias into rates. you have a cross current where you have the fed start to taper

things like that later this year. i think it goes into the bigger picture. it is a longer-term concern. i am not overly concerned in the near term. we will continue to have buyers. sonali: what do you think about the idea of the cross currents with the tenure in particular. on one hand you could have tapering at a time when the fed cuts less or does not cut. you heard susan collins tell mike mckee that these two things are separate. how do you keep control around the longer ends of the curves? noelle: going back to this being a tough year for timing rates, we will not take significant race bets -- rates bets here. in terms of outright rates positions, it will be tough and you will end up -- sonali: i have only been anchoring this show for the last six months and in the first

three or four months all i have heard his investor after investor telling me this is the time for duration. they are going longer out on the curve. do you think a lot of investors are rethinking that position? brian: it depends on your belief. my belief is in the long-term the fed will achieve its to percent objective or something close to that. our target for the 10 year has been 4.5%. when we get around the 4.5% or above level, if you believe the fed will, in the long run, hit that 2% inflation target or something close to it you get an attractive real return. investors locking in that real return, dollar cost averaging makes sense. there would probably be a decent chance of retesting those october, november highs in yield in the 10 year that were close to 5%. i would not be pushing all my chips into the middle of the

table by any means. sonali: what would cause you to have more conviction to put more money into work in treasuries? noelle: our potential growth view is a little bit higher than what i think the market is pricing right now. if we see that continue to come in and do not see the overheating of the economy, we would expect rates to move higher because growth is expected to be higher without inflation. that is a scenario where you have the fed may be doing an insurance cut or two and then we meddle along and clipped the coupon for credit and rates are pushed higher long-term. that is a good entry point to go along. we probably have about 50 basis points more. sonali: brian rehling and noelle corum come along come along week for bond investors. a lot of surprise data. up next we will talk about the auction block as there was a check on credit issuance. this is "real yield" on

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sonali: i am sonali basak and this is "bloomberg real yield." this week's ecb data affected data. volume coming in just past 40 billion euros. that was even with today being the fourth zero sale session this year. here in the u.s. with treasury auctions. we saw weak demand with the 10 year seeing the lowest bid to cover since december of 2022. hot cpi numbers.

the total still met the low end of dealer estimates. a notable sale from diamondback energy drove sales to over $20 billion. even with this week's volatility, premiums continue to sink. spreads for corporate never to levels that have not been seen since 2007. let's bring in our roundtable. will, let's talk about the risky stuff. we had a lot of change in sentiment this week when we got the new inflation data. how did that impact your market? will: spreads continue to grind tighter. markets are focused on that yield number. a lot of investors just view that as an attractive opportunity to buy high yield outside of the recessionary

period. it is rare to get this. high yield spreads continue to grind tighter. in our view that should be your base case because the economy is in really good shape and credit fundamentals are starting from a point of a lot of strength. the reality is there is not enough high-yield bonds for the amount that investors want to own. there has not been a big change in narrative. we continue to see more of the trend we have seen this year. sonali: do you see a real catalyst for investment grade or high yield to selloff order yield based buyers remain all year despite the market pricing out four of the six hikes. thank you so much for the viewer questions coming in for "real yield" today. matt: we have a model that

argues strong fundamental backdrop, limited increase in default risk on a basis for corporate's and volatility is supporting valuations. certainly toward the bottom of the last 10 or 20 years. i would agree in the sense but i do nothing fundamentally there is a lot of weakness in consumer or corporate balance sheets but there is a component we are watching closely. in particular the inflation expectations this morning as alluded to, the cpi data in the middle of the week does raise more volatility and uncertainty around areas of inflation particularly around rents and transportation services. we certainly have tilted the ship incrementally after the data this week arguing there is a greater risk at the margin of no landing.

if you really start to get inflation to pick up, we are watching two-year breakevens, it could get a little bit of a selloff but it is a volatility driven selloff and may an opportunity to step in as opposed to the actual fundamental deteriorations leading to a more sinister deterioration or downturn in the cycle. sonali: sinister. something you said about supply is that artificially keeping spreads at the level they are? if you are supposed to see more issuance would it be as well received if the market were to start adding more? is there a sense from the banks and investors that less is more? will: supply is a tricky element. the market talks about the supply numbers. they seem like big numbers. the net supply we have seen is quite small.

the reason why is companies are reducing the amount of leverage on their balance sheet because the cost of debt is much higher. that is what they should be doing. if companies are reducing the amount of debt on the balance sheet, there is less need for net issuance in the marketplace. as we see it, the market itself is shrinking and has been shrinking for some time. as we see more demand creep into the marketplace there is not enough bonds for investors to buy. we do not think that is artificial. especially if you are a believer in the higher for longer argument. companies will continue to reduce the stock of debt on their balance sheet because their balance sheet leverage was constructed in a very different rate environment. now that we have moved into a totally different rate regime, the amount of leverage is a lot lower than it has been.

because companies continue to pay down debt we think it is very constructive for credit investors. sonali: i understand the yields are compensating for the lack of any boost from spreads but, matt, at what point is that not enough? will it always be the case when you are sitting at yields this high that taking on risk is worth it? matt: i think with higher yields you have greater margin for error. you have higher breakevens. as part of the subtle shift this week we have realigned to have investors spend more time not just soft landing but no landing. looking at other markets where you set aside the interest rate volatility that earlier speakers have flagged. you are clipping a coupon that we think default adjusted looks pretty attractive. the bottom line is there are

always areas of the market that add value. single loans is the core area of focus for us with yields at these levels. there will come a point where volatility or a growth shock or systemic shock will cause widening, even if it is short-term or tactical in nature. you can see that all the way back into the 1990's or the 1980's, where we had levels of interest rates that were similar to where we are today. sonali: will, you have a lot of optimism in the riskier parts of the market. what would cause you to start to worry? will: if we started to see real evidence that the economy was actually sensitive to fed policy and the tightening of conditions, that would be a bigger worry for us and that is what matters as high-yield investors. it is much more about gdp growth

and companies' abilities to expand earnings to grow into balance sheets that matters more in terms of the default cycle and were spreads will eventually shake out. much more important than the rate side of the equation. i want to push back on what matt said about loans. we would argue the loan market is arguably one of the most rate sensitive parts of credit markets today. loan issuers really need rates to be cut by the fed in quick succession in order to start to cash flow again. if you are a company that has a lot of floating-rate debt, very quickly during the 2022-23 rate cycle, your cash flow evaporated in those companies did not have the same ability to reduce debt let we saw in the bond space. we would caution investors to

not think about lever loan markets in the same way. they really need rates to come down in order to work. sonali: matt, we have to leave it there. looking forward to having this conversation with you as we experience this higher for longer environment. we will talk about the final spread for the week ahead. big bank earnings season in full swing. this is "real yield" on bloomberg. ♪ it should be called wiffle tennis. pickle! yeah, aw! whoo! ♪♪ these guys are intense. we got nothing to worry about. with e*trade from morgan stanley, we're ready for whatever gets served up. dude, you gotta work on your trash talk. i'd rather work on saving for retirement. or college, since you like to get schooled. that's a pretty good burn, right? got him. good game. thanks for coming to our clinic, first one's free.

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>> welcome to "bloomberg markets ," i am sonali basak. a warning that this could be a choppy earnings season. we are seeing a flight to the safest corners of the market. we will get a check on these markets. we are watching the s&p 500 near session lows at 1.2% lower. the nasdaq 100 also lower, about 1.5%.