sonali: i am sonali basak. "bloomberg real yield" starts right now.

♪ sonali: coming up, top fed officials say they will wait for rate cuts. short term rates move higher moving closer to 5%. we begin with the big issue, the data backs up higher for longer. >> we have so many fed speakers talking about higher for longer. >> higher for longer. >> we are going to see higher for longer. >> the fed is on hold for the foreseeable future. >> the reality is the fed is highly data dependent. >> they came across more hawkish then expected. >> inflection data is starting to look at her -- inflation data is starting to look better. >> not having urgency will change if we see more weakness

in the labor market. >> you are starting to see softness in the labor market. they would have every indication to cut. >> as long as consumers continue to work, i think the fed can focus on inflation print >> what the fed is doing will eventually work. the fed probably will see the slowing inflation it wants to see. >> do the fed need to act and do they need to fully start acting? sonali: i want to look at short-term rates because the two-year yield looks like it is approaching the 5% level again. if you look at how far we have come this year, it has been a significant ride higher but we had some relief in the middle of may when you saw the bid in the bond market come in with hopes of rate cuts and caution from fed officials about when the data will say they are ready to cut.

you have an interesting dynamic when you look at financial conditions because you would not see that reversal in yields the way financial conditions have stayed loose. you have seen at the loosest since the middle of 2021. there are questions about why this is when rates are expected to stay higher for longer, when we start to tighten materially and if this is getting in the way of the fed's job. raphael bostic spoke with michael mcgee the state of rates. >> i think the new status is likely to be higher than what we have people have known over the last decade. we will have to see. sonali: you were the one early this year, late last year, that started to pitch the idea of

going out on the curve more. if you were an investor short-term and long-term, you felt that whiplash. what is the recommendation today? >> i think the recommendation is over the rest of the year we will see the upside surprises we have gotten in the inflation data begin to get worse. we think inflation will be steadily decreasing for multiple reasons. we will start seeing shelter inflation coming down. there is a good case to be made to between now and the end of the year, we will see it happen. we think the fed will be data driven and the market will begin to expect more rate cuts coming. we have three cuts penciled in for this year.

the market and the fed needs more data. we expect the data will show distillation in the pace of inflation. that would be the signal for the fed to begin to move towards normalizing policy. sonali: what is the move for you? with the two-year getting closer to 5%, where is the buying opportunity? >> this will be fun because we have a different view. our base case is for growth to be higher than consensus. that is largely underpinned by the consumer. of course, there are risks we have to watch. inflation will be boring. we expected to continue to come down. policy we think is largely priced in. the fed will go one or two times. that leads us with growth as the main driver. we could see continued volatility in rates throughout the summer. we are likely to see the curve

steepen in the long and move higher. sonali: i'm glad you talked about the curve steepen or. that has been a popular trade. when you see returns from the steepening play? >> we do not think we are that different. our view is three cuts. i think there is a good case for that. i would not be shocked with two cuts. i think over the next 12 months, we will see it begin to work. we think there are better ways of expressing the underlying duration long than just outright steepeners. if you look ahead in the second quarter of 2025, our expert patient is the two-year will be at 360 -- our expectation is the

two-year will be at 360. we expected to go away over the course of the next 12 months. sonali: i will force you both to make the case. the market is pricing in at least one cut barely. there is a lot of diversions on where the cut will come from and if it will come at all. what is the biggest risk? >> we have to watch inflation. that is probably our next biggest risk probability wise. we start to see cuts priced out and that increases the likelihood of cracks in the economy. that is something we would have to be concerned about as risk asset managers. sonali: why do you believe three is possible? what gives you conviction to think we could get that far when one is barely on the table for

many question requests from the beginning of the year to now, a lot of pricing has changed. all of this has been driven by inflation data. inflation data in the first quarter surprised to the upside. the biggest driver has been shelter as a major driver of that. we think there is a six-month time lag between growth and when it shows up in the inflation data. ours is driven by how we expect the data to pan out. our models are flicking all the forward indicators which show

decelerating inflation. we have one slight difference of opinion. we think inflation is more of a driving factor behind the fed policy than growth. i think the fed cares much more about inflation than growth. sonali: i want to ask about the idea of duration. do you feel comfortable going out on the curve at this point? >> no, in short. we think inflation will be a big driver this year. that is something we are watching. at least for the summer months, we think a lot of the dependence on data, they surprises in growth will pressure yields higher.

if we see rates near 5% on the 10-year, that is when i would look to go along. sonali: what do you think is the most under-loved trade? where do you think there is opportunity moving forward? >> people going long-duration. clearly, people are not willing to go long-duration. that is under-loved. i think the best state of play is positive. trades within fixed income. a number of products have positive carry. our counter is there are better ways of playing this than just that pocket. the best opportunity is in the spread pocket etc. there are better opportunities

driven by this but have the effect of being positive. >> how do you feel about this? you have seen tremendous investor interest in different types of credit products. you also have to wonder. the higher we stay at this level, windows does that start to bite? >> we think about fundamental risks or risk assets in three buckets. the fundamental for two valuation, and technicals. in the near term, fundamentals, longer-term as well, fundamentals are strong. we saw a strong earnings season. on the technical side, supply is expected to follow this summer. that should provide a small -- strong technical bid to clip the coupon for the summer. lastly on valuations, this is the most concerning part. you have the high-yield market that has 60% of issues with spreads below 200 basis points. that is where the

bread-and-butter of the way we invest comes in. we really stress diversification. do not have all of your eggs in one basket, as well as having a tilt to higher-quality, shorter duration bonds. this is not going to be the year where you hit the home runs with a name because valuations are so tight. sonali: we have to leave it there. we thank you so very much. very complicated market to navigate right now. up next is auction block -- auction block. they rush to price new debt ahead of the memorial day holiday. stick with us. this is "bloomberg real yield" on bloomberg. ♪

sonali: i am sonali basak and this is "bloomberg real yield" time for the auction block were global debt sales remain on a strong pace. alibaba sold $4.5 billion worth of convertible bonds. a record for dollar-denominated sales by an asian company. the deal aims to secure capital needed to increase sales. comcast and ups highlighted a week that saw over $26 billion in sales. it was a frontloaded week with no deals the last two days. in high yield, the week volume coming in over $11 billion, the third-highest this year. staples had more than $2.5 billion of sales to go along with the $1.6 billion leveraged loan. earlier this week, we spoke to

the achilles management cio who says he sees issues ahead for credit. >> small cracks are starting to show if you look at the pickup in default rates. i think they are likely to be higher on the private side. a lot of companies with risky credit ratings have migrated from public markets into private markets. i think those cracks are starting to show. you see emerging dispersion. it is not quick. it is not going to break tomorrow. but i think if you are paying attention, it is hiding in plain sight. it is important to put a spotlight on this now ahead of when we could see more general problems, especially if we are in an elevated rate environment which appears to be more likely the case. sonali: joined us now is the high-yield portfolio manager and the head of u.s. investment grade strategy.

you heard small cracks starting to form in the market. where are those cracks in your view? >> specifically in the world of high-yield bonds, we see those in cable media, telecom, satellite space. overall, it has been a lot of landmines to navigate. we have had multiple large capital structures in the process of liability management exercises pretty those were tricky to navigate. a lot of those names are averaging more like 10%, 12%. you are seeing that segment of the market that is quite wide. i thought some of the comments were interesting around leveraged loans in particular. when you look at that whole market, on average, about 80% of all names in the loan world are

trading over $.98 on the dollar. yes, there are some cracks but they are modest overall. when you look at high-yield, the distress ratio is around 5%. this capital structures have already priced in -- those capital structures have already priced in the risk. at those levels, it does still feel manageable overall. sonali: i will ask both of you this question. this idea of people not worried about downgrades or deterioration in credit. money flowing in to both indexes, high-yield and investment-grade. where does that leave you on valuation for every dollar you put in? >> great question. right now, we have market weight allocations to both investment-grade and high-yield. we downgraded that with our q2 outlook thinking while spreads have tightened, we are looking for them to drift wider.

when you think about the elevated care you get from high-yield even though you have typed spreads, that looks pretty attractive. from our perspective, it does not merit an overweight allocation. we are not looking for further spread compression. we are not seeing signs we will have a huge spread widening this year. we are looking for high-yield to finish the round -- around 350. sonali: where does that leave you on valuations? do you have investors trying to look for the extra dollar, trying to search for the extra yield, going into riskier debt instead? >> you definitely continue to see inflows into the market. yield buyers are continuing to step in. when you look at high-yield in particular, we remain short duration over all. i think we are about 3.5 years in the u.s., lower threes in europe. that works pretty well in a

higher for longer rate environment with more concerns about timing future rate cuts. yes, spreads look pretty tight relative to historical standards but the yields and duration are continuing to bring people in. we spend a lot of time with investors discussing breakeven returns. for the next 12 months to give you 0% in high-yield, spreads would have to gap out more than 200 basis points. it is hard for us to see the market getting there absent some larger event that is unforeseen because we are not sitting in a recessionary environment at all. spreads have been a trigger for buyers to come in in a large way in the asset class. sonali: where is the risk? you both seem generally sanguine. is part of the duration play in case things to get worse in the

future? >> i think in our market it is very idiosyncratic at this point. it is being cognizant of the companies that are over levered. as they are having to come to the market to shore up maturities and refinance, right now, the market has been wide open. but the market has also sniffed out the more troubled credits or concerns about longer-term risks to the valuations of those companies. we recently had a couple of larger transactions that have been difficult to get across the finish line. they have had to give concessions in a bigger way on pricing or documentation changes. there is a bit of a push-pull. the easy credits are wide open and easy to get done. otherwise, there has been more work to get the trickier situations across. it is more credit by credit picking than a broad statement on the market overall. sonali: as rates stay higher for longer, how much of that will

start to bleed into other parts of the credit world? this idea there are more maturities slowly coming to the surface. kelly had given us examples of places where there were stresses starting to show up. as the rate environment stays elevated, where else could you see stresses? >> i think the big concern is down the ratings spectrum. when you look at elevated leverage within those names in the triple seaworld, -- c world, that becomes more concerning. you are starting to see more issuance. kelly highlighted some deals we have been keeping an eye on showing some difficulty getting through the market. when we think about the balance of risk and how much issuance we have had this year and how much cash is on the sidelines, it comes down to the idea that technicals still looked strong. you mentioned we are still seeing inflows into the asset classes, both i.g. and high-yield.

when we think about how much cash is left on the sidelines, in our base case, we have a sanguine economic outlook. i think the focus will remain on elevated yield. we take a different approach. we are more comfortable extending duration. we like being in the 7-10 year bucket in i.g. as the spread curve is steep and we think there will be more rate cuts than currently priced. sonali: we have to leave it there. have a great long weekend both of you. still ahead, the week ahead. the fed's preferred inflation game in focus. this is "real yield" on bloomberg. ♪

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sonali: i am sonali basak and this is "bloomberg real yield." it is time for the final spread. the week ahead, coming up, markets are closed monday for the memorial day holiday. u.k. markets also closed for springbank holiday. tons of fedspeak next week. the cleveland fed president and the minneapolis fed president speaking. on wednesday, the beige bump. jobless claims on thursday and bpce number friday as well as eurozone cpi. we want to show you the expectations before we let you go. the expectations are essentially flat. it shows you how hard the last mile has been to get the fed on course to the preferred set of

inflation measures. of course, there is still growth expected and silly while to go to the 2% exactly -- still a wild to go to the 2% exactly. from new york, that does it for "bloomberg real yield." this is bloomberg. ♪ 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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sonali: bloomberg markets, i am sonali basak. we have green on the screen to end of the week into a long holiday. s&p 500 about three fourths of 1%. the philadelphia semiconductor index feeling love this week. of almost 2% on the day. every stock in the index is in the group -- in