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coming up, the debate on the timing of a fed rate cut rages on, while the data shows strains in the economy. we will discuss how this may play out in the credit world. we begin with the data driving the fed's decision. >> the market this week once better data. it wants to be assured the economy really is strong. >> the economy is moderating, but very slowly. >> we are getting the modest slowing in the economy. >> they'll be music to the fed's ears. >> looking at this holistically, it is really going the way the fed would like it. >> what fed speakers need to do is double down on their commitment to inflation stability and targeting inflation. >> i think it is less what the fed speakers themselves say. i think it will come down to the data. >> the market recognizes what the fed is trying to do. the fed recognizes the fed will be data-dependent. >> retail sales supports the

consumption side being weaker than we have seen. >> and with later, it shows a different picture when it comes to retail sales. >> the market more concerned that maybe the fed is more backwards looking and not interpreting, not fully appreciating some of the recent slowing of some of the data. >> backward-looking can be very dangerous in an environment where you have a lot of noise in the data. sonali: there are a lot of questions out there about how the current level of interest rates are starting to impact the economy moving forward. let's take a look at insisting home sales data to begin with, because the redline here is a month over month decline that you have seen recently in existing home sales. they have fallen for the third straight month in may, particularly as prices hit yet another record. yet mortgage rates have fallen to the lowest rate since early april. reclining for the third consecutive week, which can show you exactly what it means for investors to start taking their foot off the pedal in terms of how high interest rates are and that ripple effect through the

economy, particularly the mortgage market. let's take a look at the consumer. red cards in particular. according to bloomberg intelligence, delinquency rates could be reaching a peak, and this is profitable major issuers, amex, discover, capital one. you did see delinquencies start to come down by april. though they have started to fall, there is a question, as banks start to report earnings, just how much they will continue to fall as interest rates may indeed remain higher than expected this year. now there is a question of when that first rate cut would be. lazard's ceo spoke earlier about the fed's path ahead. >> i do not think it matters how money cuts happen this year. what happens is that first rate cut is indeed a light switch. what that signals is the fed believes it has won the war on inflation, so it is all downhill

from there in terms of rates. sonali: joining us now is allspring's george bory and jpmorgan's oksana aronov. you have this idea that it does not necessarily matter when that rate cut will be. do you believe that? oksana: the fed has kind of back themselves into a quarter where the how to deliver it some point, because i've been talking about it for so long to it really does not matter, because we are in the -- in a world where the yield curve is so deeply inverted. what is that going to do when the 10 is already in the low 4's ? furthermore, you have to study history. you see that, in the late 1980's, the second half of the 1980's, the fed did execute a couple cuts, then they kind of held off. you had elevated rates between 4.5% and 6% for a number of years. i do not think the fed cutting for the first time really is a long-term signal of anything. they are going to have to be data-dependent.

they tried not to be at the end of last year, did not work out so far -- so well. they will tread carefully. sonali: where do you think the first cut will be and when do you think we can reasonably achieve it this year? george: as oksana mentioned, the fed really has painted itself into a box by trying to preempt its move at the end of last year, and now they are acutely data dependent, which means we need several months of data to validate both a downtrend in inflation and a sub degree of moderation. our view is they will have that level of data. it will come at somewhat of an awkward time, given the upcoming election, the upcoming presidential election. so that may influence timing. but we think, by the end of the year, they will have air cover to cut rates at least once.

the question of whether or not this is a cycle shift, in that they are actually going to be moving rates down systematically over an extended period of time, as my colleague just mentioned, it really will depend on where the economy sits. if it is purely in reaction to moderating inflation, then a few rate cuts might occur. if it is in response to both moderating inflation and weaker data, that is showing a downtrend in activity, then we can excite a rate cutting cycle. that is -- we are more in the latter camp and in the former, but we, like the fed, as they made clear last week, the crystal ball is a little cloudy at the moment. so we do have to wait to see what kind of data ultimately emerges over the next couple months. for clarity, we do expect the

fed to cut rates at the very end of this year, and then we will see if that is an actual -- if we will see many more. sonali: george is definitely speaking to something many investors are struggling with, the mixed economic data. if you had to cut through the noise, how do you really start to piece together how much room there really is for the fed to cut, given where inflation is and given the weakening you're starting to see in the economy? oksana: i would contest that you are seeing a dramatic amount of weakening in the economy. what is a fed cutting cycle really telling us? when we looked at past cutting cycles, we saw significant lower inflation, we would see issues with pettit cards delicacies, which are actually starting to trend down and which never impacted the top 50% of income spenders, and that is really where the services and other kinds of consumption are being driven by a peer we saw consumption expand again, the

largest number in two years. i would contest we are seeing anything really breaking. a fed cutting cycle is really meant to address meaningful breakages. outside of something breaking here, i do not think there is any impetus for the fed to do anything. i think investors should tread carefully around what is priced in. when they looking at the 10 year at 4.2 or wherever it is today, really still priced for a 2% inflation world, is that really the world we live in? what is priced in? when they're looking at credit spreads that are spread thin, you guys write about high-yield investors buying credit debt because -- bonds are sitting within 1%, so what are priced in when you are buying these junk bonds? why are you taking this risk, and will it really reward you in a world where rates may move up if there is a continuation of strong growth or if there is a

falling off a cliff and the fed has to cut. credit is equally vulnerable to both of those scenarios. that is the important question, what is priced in? sonali: you brought up this interesting thought about the inverted yield curve. the 210 curve is more inverted today than it was to start the year. what is it telling you? george: it is telling you that, as we mentioned, there is signs of a slowdown starting to emerge, and the fed is kind of foxed in by sticky inflation, so they just have not had the air cover to be able to follow through on the expectations of rate cuts. and the longer -- the higher for longer mantra is starting to affect the real economy. you are seeing signs of it. it is not broad-based, it is not -- it is not extensive across the entire economy, but the most interest-rate sensitive parts of

the economy are starting to show signs of strain. the relatively high, real cost of debt capital, for borrowers with on the public side, the private side, individuals, operations, is starting to change activity. we think the market, the bond market in particular, starting to get anxious or a little bit concerned about those growth expectations going forward, particularly as we get towards the end of the year and if we get through our own election cycle. sonali: going back to that higher for longer narrative, what would cause interest rates to move higher from here? oksana: if you look at where unemployment is, warehousing is, where a lot of these sort of standard economic indicators are, where the stock market is, because we know that fed is watching it, even though it is not really part of their mandate -- none of these things are really making for a start of a cutting cycle. if anything, perhaps the conditions for hike are in

place. i am not saying the fed is going to hike. i think the bar for hiking is quite high. but certainly, basing a strategy in a bond full-year for aggressively lower rate here, side from something breaking dramatically, is really not going to be successful. the curve has been inverted how many years now? it is hard to talk about the forecasting capabilities of a curve when you have $7 trillion in bonds still on the fed's balance sheet. we only had 2 billion -- $2 trillion or $3 trillion on the back of the financial crisis, and now we are many times that. i think the predictive functionality or the pretty date -- edited function of the curve is in question here. sonali: that is oksana aronov and george bory of allspring. now breaking news crossing the wire in the last couple minutes. four of the biggest banks on wall street must improve their blueprints for a hypothetical

wind down after the top u.s. regulators found weaknesses in their plans. the fbi see on the fed reviewed the most recent resolution plans, also called living wills, which are mandated following the 2008 financial crisis. regulators did not identify specific weaknesses in the plans. the finding of a shortcoming does not result in bank penalties necessarily. they need to come up with new plans by july of 2025. this is jpmorgan, bank of america, goldman sachs, and citigroup, all found with shortcomings by regulators, just days ahead of a federal reserve stress test. stick with us. this is "bloomberg real yield" on -- this is "real yield" on bloomberg. ♪

sonali: i'm sonali basak.

this is "bloomberg real yield." time now for the auction block. issuance all around saw strong demand. we start with treasuries, focusing on the 20 year reopening sale, which saw the primary dealer rewarded the lowest on record since the tenor -- tenner was introduced in 2020. home depot sold $10 billion. the deal saw as many as $47 billion in orders. in high yields, hertz works to restore its balance sheet with a $1 billion capital raise as part of a price offering. when it comes to credit, kkr's cris sheldon spoke to us earlier this week discussing the potential of a wave of defaults. >> we do envision increased defaults, increased downgrade

spirit however, it is not armageddon terms of a big spike. not seeing dramatic for selling. i would say, when things are going into a default or things are really dire, you see more for selling, but right now, it is not armageddon for selling right now. sonali: joining us now is ken monaghan, managing director and cohead of high-yield at amundi asset, and still with us, oksana aronov. you hear kkr's propensity to lean into triple c's. the question is, do you buy the spreads you are seeing now? ken: spreads are clearly tight. it is hard to say go out and buy the entire market. i think you need to be very selective. chris is an old friend. i have known him a long time. i agree there is credit risk in the marketplace. i don't, however, see a likelihood of increased default

in the next 9 to 12 months. sonali: you may this point earlier about how you're not really getting much bang for your buck over treasuries, so why go into credit risk at this point in time? oksana: that is my question. b's, the highest quality of junk, have a 6 handle on -- our base case is the economy will continue to do fine, will continue to do ok. these rates obviously are not super restrictive. however, if we continue to see growth, the higher for longer environment, which will make it more difficult to refinance -- that 12.6% rate hertz financing. that was not the case even three years ago that will continue to fight. furthermore, if strength somehow accelerates and you have higher rates, that is going to take a

bite out of credit. we have seen come on dates when rates move up significantly or even looking back at 2022, when rates caused all those losses, they crossed -- cost them across the board. you just do not have a cushion there. sonali: how do you think about this in terms of potential rate cuts? if you see one this year, what does that mean for the money that may flow into different part of the credit market? ken: i think, as oksana pointed out earlier, one of the issues you point out and say, if i get one rate,, where my getting value? if you look at the 10 year treasury, we pretty much already priced in k that is why, when we're looking at fixed income markets, we are taking to ourselves are three key watchwords. one is to stay active, because there is very little differentiation in the market at the moment. two is to stay selective, which i commented on regarding high-yield. i would say the third thing is to stay at the shorter end of the curve, because i think there

is more value at the shorter end of the curve. going out long is not necessarily going to get you a big pop when rates start coming down, when the fed eventually moves. sonali: how do you feel about the idea of taking on credit risk versus duration risk at this time? oksana: like trying to choose between two foes, which is the better foe? when we see the two-year part of the curve hit 5%, that is a great entry point, and we like that, even though we do not really like taking on duration, for all the reasons i described. our tenure is will not really priced for what we are expanding as an economy, and i think the fed will reevaluate their 2% target, which is an arbitrary number to begin with. having said that, you have to really change your lens, perhaps. when we think about investing, we aim to generate positive returns irrespective of whether or not the environment is benevolent for a bond or not. that is a very different prism

than trying to lose less money than in the index goes down, such as the barclays or the high-yield. so my answer comes from that point of view, which is do not lose money, first, then what is the best return i can deliver? when looking at the market through that prism, where has there been value? it has been at the high end floating-rate. so that very short end of the curve, investment grade corporate floaters have been good for a while. you could earn even above 6% just a short time ago. people did not really like the floating-rate nature, because of unexpected rates to go lower, and they are not. where has there been value? it has been very in excessive to hedge credit risk. to the extent we believe credit risk will be repriced, because default rates are going up, because some of these lower quality operators will struggle, it is very an extensive to hide yourself against that credit is, and we have been taking

advantage of that, so there are definitely things to do, but you do not need to be a hero now. i kind of take exception with this consensus view right now that everything is great in bond land, extend duration, by credit, everything is great. sonali: everything has seemingly been great in bond land. we went through the one rate cut scenario. what if you see no rate cuts or even a hike in the next 12 months? ken: i am not sure a hike is in the cards. it is clearly a possibility, but i think the fed has got a very itchy trigger finger to move the other direction. if there were no hikes at all, the point is a valid that that probably says something about the strength of the economy. in theory, oksana's correct and spreads should be tightening. on the other hand, it is hard to see spreads tightening a lot from where we are.

high-yield spreads and investment corporate spreads are pretty tight. that implies there is not a lot of value there at the moment, which gets back to the point about needing to be very selective in this environment. sonali: in this environment, favored -- favorite trade? ken: there is no sectors would point to at the moment where we would say everything is sweet. so you need to be selective. we like the airline sector in general, but it is not exactly cheap. but if i'm looking at emerging-market airlines, in particular latin america, there is great value there. we happen to like the casino industry from a fundamental perspective. u.s. casinos tend to be trading at a tight level we happen to like some of the ones in macau right now. those are two good examples of places where we see a bit more value and yet we see good protection at the same time. sonali: favorite trade? oksana: that is such a stock oriented question. come on. [laughter] sonali: there has to be

something you like. oksana: so again, looking at the market through that wisdom of, as bond investors, it is do no harm first. then what is the best return i can deliver? i think there's going to be a significant dislocation -- credit, by the way, does not need to occur in the backdrop of a recession. you just have had so many companies that made it through 2020 that probably should not have and probably will not in their next refinancing cycle. so i think it does make sense to have a lot of optionality in the portfolio by staying shorter duration, ultrashort, clipping that nearly 6% coupon than helicoptering out to a high-quality floating-rate, buying that insurance on credit exposure, trading the curve. where has there been volatility? it has been in macro peer we love volatility, so trading the curve is another area we have been active at their are many things to do, but the bigger returns are out there. sonali: ken monaghan and oksana aronov, we thank you so much.

complicated credit pickers environment. still ahead, investors waiting the fed's preferred inflation gauge, and a whole bunch of fed speak x week. this is "real yield" on bloomberg. ♪

sonali: i'm sonali basak. this is "bloomberg real yield." time for the final spread, the week ahead. a week ended by fed speak. you have mary daly speaking monday. new home sales, the two-year option, gdp, jobless claims throughout the week. thursday and friday, you have pce data. thursday night, the u.s. presidential debate. starting tuesday, that bloomberg invest conference paid a lot of talk about that bond market pay looking at the final estimates of pce data coming next week, the estimate for the deflator month over month is a flat come up from a 0.3% rise in the prior

reading. of course, it will be a busy week ahead. we have a lot of inflation data and a lot of economic data. that does it for us here. same time, same place next week. this is "bloomberg real yield," and this is bloomberg. ♪

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sonali: welcome to bloomberg markets. i'm sonali basak. there are more than 5 billion's of option set to expire today threatening to trigger sudden price swings in the market. let's check the markets and how they are reacting. if we had the s&p 500 earlier this week touching $5,500. now we are well below that. at the market is looking to hang onto gains. really flat on the day. the nasdaq 100 seeing a similar story. flat on the day. the s&p 500