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coming up, inflation shows signs of cooling. the latest data being promising. jay powell on hold saying the fed is awaiting more evidence before cutting. investors move on keeping bets for at least one rate cut this year. can the fed achieve nirvana? >> u.s. economy is chugging along pretty well. we have had good health for quite a while. >> there are thousand things that can go wrong but right now everything is in pretty good shape. >> it is necessary to make sure we in a fiscally sustainable path. the higher interest rate path makes that more difficult. >> where it will be in six months, how much of the slowdown we see in the bottom quartile, we have to watch the data carefully. >> whenever the world's person in for a soft landing, it is half that. >> we have a 2% growth rate.

>> the cost of living in mary areas is very high. it is a concern to americans. >> there are a lot of inflationary forces in front of us that may keep it higher than people expect. ? what the fed is doing with the rate structure is having the impact they one. you have to be careful we don't overshoot the other way. >> they are doing the right thing to be patient right now. sonali: let's look at the u.s. inflation picture because a measure of underlying u.s. inflation cooled in april and it snapped a streak of three above forecast readings with a year-over-year measure cooling to the slowest pace in three years. you do see progress but we are still above the fed's 2% target and we had producer price indexes that were on the rise. complicated story when you look at inflation. let's flip the board and look at one component of inflation, the housing and rent part of cpi.

shelter prices is the largest category within services and it climbed .4% for a third month. owners equivalent rent, a subset of shelter which is the biggest individual component of the cpi rose by a similar amount and the housing costs are one part of the inflation picture staying so sticky in america and abroad. one big debate on wall street right now is whether cutting interest rates will actually bring down some of these housing and rental costs. we will talk about that in the show. blackrock's rick rieder argues the best way for the fed to temper inflation will be to lower interest rates. >> i'm not certain raising interest rates brings down inflation. i would lay out an argument if you cut interest rates, you bring down inflation. to your point, look at what is happening. interest expense is growing. it has eclipsed mortgage payments. lower income. much higher percentage of the net worth is in the debt.

edit cards, student loans, auto finance. what you have -- what has happened is you have raise the rate and the has traded a real impact. the other side of it is you have an economy because of this massive transfer from the public sector from the government to the private sector. people are middle to higher income and are getting a big benefit from these interest rates. that is flowing into -- those of the people who would spent on aggregate with services. there is an ironic thing no one has ever seen in history. sonali: joining us now is all spring's george bory and ed howe who say meet of columbia needle. when you take a look at this wishful thinking on wall street, this hoping we will see at least one rate cut, you see the reaction in yield significantly. the two-year holding the line at 480 by the end of this week after being above 5% a couple weeks ago. do we keep holding the line? >> i think so.

the case for the fed to start this normalization process this year is getting stronger. the labor market is seeing a lot less churn and some of the dynamism is leaking out. the inflation story is 50 basis points away from when this process can start. when you look at next year, the case for normalizing rates is getting stronger and that is with the two year yield is trying to capture. sonali: we were talking about the sticky inflation story. do you worry housing or other parts of inflation will not come down fast enough to achieve the first rate cut yet >> that is a great point and it is fair to say inflation is stalling out. it is the best way to define it. it is not going up which is good from the fed's perspective. the strong downtrend is yet to be truly affirmed. our expectation is that he inflation continues. it will come down over time but

it comes down at a slow pace and it is unlikely to get all the way down to the fed target without some economic weakness behind that. the economy is doing pretty well as many of the commentators you mentioned highlighted. the economy is doing pretty well. the fed does not need to move. at least they don't need to move rates overall. we would highlight the fact they did moderate the pace of quantitative tightening. the slow incremental move toward a slightly easier policy you could argue has started. the data would need to confirm that. the expectation for a rate hike we think is much further out and is at best close to the end of the year. sonali: i like the word you used, sticky inflation.

how do you see that playing out here? >> let me pointed two components of inflation. there is a cyclical element which response to demand and/or elements which are sticky that are the ghosts of inflation past. they are a function of the dislocation of the economy two or three years ago. most of the inflation we see today is the ghost of inflation past which is important to are talking about odor -- of inflation past which is important. we are talking about auto insurance, housing richard those are functions of the dislocation we saw in 2020 and 2021 should good news is the cyclical pickup of the economy -- the economy is growing under 3%. it has not translated to new inflation. sonali: i want to ask you a question i just asked ed. do we hold the line at 4.8%? what is the risk if rates don't move materially higher on the short end given the tremendous bid we have seen at the short

end of the curve and the bond market? >> that is a very good point. you are talking about the two-year part of the curve. so there is a good case to be made. the fed is stuck at the very least on hold for an extended time so the two-year not a terrible spot to be. on balance, the bias would be to cut rates rather than hike rates . from that perspective, there is some argument to be made there is some value. 280 or 480 is in the middle of the range. we are happy to put money to work in and around the two-year. certainly we were going to add some credit risk in portfolios, that adds extra yield to the portfolio. that is not a bad spot. we feel pretty comfortable in and around the two-year point on the curve.

sonali: where else on the curve? are you looking further out given you have seen such an investor move into the long ends and they do have more uncertainties and other factors that would influence the price moves. >> i would agree with the other speaker did the front end of the curve is pretty attractive and we are trying to build confidence to the extent -- to extend our duration up. the fed strategy at the moment is biased toward easing. the fact we are starting to see churn in the labor market come down. the liver market on the margin is showing us some flags of weakness. these are great precursors to moving duration further out. sonali: how do you feel about duration? you think there is to much risk to get in the further you get out? >> our central message around duration is diversified duration. dear dexter are attractive spots around the curve. we look at pure value where we

are trying to establish long core or long duration positions. there are different types of duration. long and corporate credit particularly on the high-quality side has been a great spot to allocate money or in the intermediate part of the curve, mortgages have had a lumpy ride in the first half of the year. sticking with that trade as comes down can be attractive. our main message is don't get too wed to one point on the curve. picture the duration is a line with a type of risk you want to be aligned with your portfolio. the curve is fairly flat. you can take some duration extension. it does not cost you all that much. if it is a funded position, it can get expensive become sick -- because it becomes negative carry. there are different ways to

position duration. sonali: so don't lever up on a 10 year. >> not yet. sonali: what about the yield curve inversion? you look at where we are today. have a lot of happy talk in the market and you still have a 210 curve that is inverted to the worst levels we have seen in the last seven weeks. how do you read that? >> it is consistent with the fact we saw a surge of inflation come through in the first quarter. some of that is starting to dissipate. it is consistent with markets expecting the fed to bring rates down over the next couple of years. it is consistent with longer rates being higher than they were pretty covid -- they were pretty covid. inversion process can be driven in a couple different ways. the fed cuts aggressively. the odds of that are increasing. we have brief periods where the curve inverts were long end

rates go up. physical risk premium is a key catalyst. at the moment i would say where you place your chips is likely where the curve will invert. we need to see more weakness in the economy to drive it. until we see that weakness, the front end is going to yield much better. sonali: a long time for those steepeners to play out. up next, the auction block. johnson & johnson becomes the latest woodchip firm to seize on thriving debt markets driving u.s. high-grade sales nearly passed $700 billion. details a held -- details ahead. this is real yield on bloomberg. ♪

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sonali: this is bloomberg real yield. it is time for the auction block were global issuance remain strong. you're going to start in europe. weekly sales are 70 billion making it the third busiest week of 2024. included mark which sold the longest data corporate bond i the common currency since 21 and it sold more than 3 billion euros over four parts including a 30 year. any the u.s., blue-chip names like j&j, goldman, ford and mcdonald sold debt this week. there were more than $20 billion worth of sales driving the yearly total to $720 billion. also of note, is in its development companies are getting in borrowing spree. the morgan stanley direct lending fund and blue l credit both was sales this week, bbc's invest in small and midsize firm typically too risky or small for the bank should goldman-s christina minnis remains positive.

>> credit has been a good place and people have made good money in credit. we have a reasonably strong economy. people's earnings are reasonably strong. it feels like a good time to be investing in credit. things look decent. if we look at the forward calendar, it is manageable. if you look at inflows into high-yield funds and loan funds from last time, this time last year to today, we are up 19 and 16 million to there's a lot of money that has flown into credited sonali: joining us -- into credit. sonali: joining us as the head of credit strategy at ubs and the global head of high-grade debt syndicate at wells fargo. giving you the first word because of this insurance calendar -- this issuance calendar running red hot. how does that continue as you see the deer going forward?

we have had an extremely robust demand environment since the start of the year which have driven spreads down to whatever two-year tights and cycle tights in investment grade companies are taking advantage of strong market conditions and pre-funding some of their upcoming maturities. you saw a lot of m&a supply in the first quarter. you had tanks rushing to market to fund ultra tight spreads. we expect some moderation under the calendar going forward. some of that is just seasonal. first half of the year tends to be 60% of our total volume. we are in an election year. that can influence behavior. it will be the economics of the trade as we get closer to the election as to whether or not you see borrowers moving forward . there is some anxiety around volatility on the go forward. we are not expecting to end the year of 30% which is where we are from an issuance perspective we are expecting a good entity -- a good 10 to 15% above last year.

sonali: it is interesting that you definitely see strong demand from investment grade issuers. you have seen incredible demand for much weaker borrowers. for some money the market, it is a healthy sign of strong demand. for others, there are a lot of worries about the risks gang taken at these rates. how do you feel? >> i think the demand picture remains firm. even less so on the fund and mutual funds side. spending a lot of time globally with clients in the last few weeks, it is foreign demand. it is yield buyers, places like europe and asia, demand coming because the absolute yield is attractive. in general, we have written recently there are i would say a few signs that are starting to suggest higher for longer is starting to bite but it is very early stages. i point to sme or private firm bankruptcy filings picking up

leveraged loan default rates have picked up over the last two or three months. the picture i would say is relatively constructive. we think you are setting up for a slowdown in growth there are a few signs i would say we are entering more of a sinister downturn or recessionary-type conditions and very limited on aggregate limited deterioration in credit fundamentals. sonali: you see certain parts of the market choosing between debt and equity raises. what is the investor psychology in terms of who is getting into what at this point? >> as far as credit markets, we are seeing cash come in from all different angles. matt mentioned some of the fund flows he is seeing on the mutual fund side should definitely true under the high-grade asset class as well. you're up 40% in terms of inflows into etf's and virtual funds by 2024 -- in -- and mutual funds.

we are seeing a deep good from our liability investor base. folks that are attracted to elevated yields. the index is sitting at 5.5% for investment grade peer that is usually an entry point that has been attractive in the past to it is the level of yields keeping spreads at these ultra tight valuations. we have foreign demand for asset class. that will wax and wane with the cost of hedge dollars. at the end of the day, fixed income and credit has been such a rocksolid place to stay invested and to pick up some incremental yield in an environment where well growth is slowing, it is still strong. from our perspective, we see spreads and investment grade being range bound in the near term. sonali: you do hear a lot of investors complaining about not being compensated at least when it comes to spreads even if you're getting the yields. when you see spreads, high

yields so tight, do you think they are right to be pouring in at this set of valuations? >> i think it depends on the asset class but if you take high-yield, we generally are looking for default rates to increase about 50 basis points. to just about 1.5% for the full year. that is still several percentage points below the average. you can justify what optically looks like a tight spread around 300 basis points. every market as you get mid to late cycle and you have to get more selective in credit selection, every market is different but overall the answer is fundamentally you can justify the aggregate level of spreads to a large extent. i do think things are at the tighter end. i think you will stay here. the two biggest risks in the market. one was at the margin this week

which was another fed hiking cycle. we have seen the weakness in data surprise. the second would be a mild recession. we think those two are fairly remote possibilities. the market fundamentally looks like it is holding up and there is a lot of strength and resilience at these higher yields. sonali: if we stay range bound, what is the trading theory here when you're thinking about how investors are planning to get into this market given that you say there is a window here? >> in your last segment you heard a lot about diversification and that probably still holds here. the trade most investors are looking at in terms of alpha generation for 2024 sits in two different pockets. one is continued compression across the rating spectrum. you are seeing triple bees compressed into what are now multiyear tights to single a's. double be spreads to triple b

spreads have compressed near decade tight. data compression is very real. borrowers able to access sub debt, jr. sub debt, preferred shares at premiums over senior levels are the tightest we have seen in cycle. you are seeing investors get more comfortable reaching down the credit spectrum to pick up more yield. that is a trade that will continue to get focus this year. the compression between financials and corporate's. there are still some value in that trade especially when you look at wear spreads trade relative to corporate names. there is still a 25% or 25 basis point differential on the five-year part of the curve. there is room for further compression. that is where investors are focusing their attention in the near term especially as we move into this perfect soft landing scenario. sonali: 20 seconds, favorite trade. >> i would say in investment grade we like the three to five-year part of the curve and

we like financials so we like compression. high-yield we have taken off. hide data. double and single be trade we like areas that benefit from lower inflation. areas like noncyclical zantac and we really like europe versus the u.s. you can express that in yankee banks. you can look at subordinated debt and tear two or a t-1 should those who be three quick ideas from our side. sonali: thank you so much for your time. still ahead, the final spread. the week ahead, fed minutes, nvidia earnings and more. this is real yield on bloomberg. ♪

nelly: this is bloomberg real yield. it is time for the final spread. week ahead coming up monday, the

atlanta fed kicking off its financial markets conference. we will have michael mckee speaking to raphael bostic and beretta master. the health of the consumer will be in focus. macy's and lows earnings on tuesday and pmi's on thursday. a lot of news ahead to for us that does it for now. same time same place real yield next week. this is bloomberg. safari? hot air balloon ride? swim with elephants? wait, can we afford a safari? great question. like everything, it takes a little planning. or, put the money towards a down-payment... ...on a ranch ...in montana ...with horses let's take a look at those scenarios. j.p. morgan wealth management has advisors in chase branches and tools, like wealth plan to keep you on track. when you're planning for it all... the answer is j.p. morgan wealth management.

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>> from the world of politics to the world of business, this is balance of power. live from washington, d.c. joe: as we make a run for the border on the festa show in politics, welcome to the friday edition of balance of power on bloomberg tv and radio. standing by for a critical interview on bloomberg today that gets to one of the most

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