sonali: from new york city for our viewers worldwide. i'm sonali basak. "real yield" starts now. ♪ sonali: coming up. the data paints a mixed picture as ppi comes in slightly hotter than expected. after soft pci, bolstered bets in a big way on a september rate cut.

treasuries erasing this years declines as traders weigh the fed's next move. we begin with the big issue, the road to september. >> the economy looks as if it is slowing. >> the cpi report. >> a welcome development. >> a welcome surprise. >> there was normalization in very abrupt moves we saw in the main report. >> the negative month over month print was a surprise for the market. >> inflation is a lagging indicator. it is finally starting to catch down to developments in the economy and in the labor market. >> on the ppi, the supply side is not there to help what is happening in the demand. >> this federal reserve has been itching to cut rates. they would be crazy to go in july. they need to be steady. if they rush it, it will look like they are scared about something. >> they will start to cut in september. >> they should go to september. >> labor market looks normal. to meet this is a winning hand.

>> this will be interesting to watch in the next couple of months. sonali: i want to point out how far we have come in 11 days. you are flirting with about 450 on the 10 year yield within that timeframe at a high. you have dropped roughly 30 bases more since then. ending the week at 420 on the 10 year. the brunt came when you saw the labor market looking like it was weakening with an unemployment rate rising. cpi data, consumer inflation print coming in. showing progress on inflation. now you have people betting on duration at a faster speed. when you look at the move index, you do have volatility in the bond market. but you have volatility finally subsiding. we just how levels more elevated than they have been since 2019. back then was the pandemic.

we have gotten to that level of volatility in the bond index. since 2023, we have seen it come down. we have seen spikes of it this year. the direction of travel, even for volatility, is lower. this week in front of congress, fed chair powell spoke about what the central bank needs to see before they start cutting. >> we want to be more confident inflation is moving on a pass sustainably to 2%. on a path sustainably to 2%. that is the task we have articulated. i have some confidence that we are on a downward path. if you look at the data, it is clear. we have not said we have sufficient confidence. that will be a decision our committee makes. sonali: joining us now, marilyn watson from blackrock and jonathan mantilla from aberdeen. we will talk about whether you see the fed rate hike but what

kind of risk is it? >> we have been thinking for a while that september is our best case. they will probably tee things up potentially in july. we know the fed have been very data dependent. the market has been incredibly volatile over recent months. particularly looking at last year when the market was pricing in steep cuts. this year, they were pricing in a hike. now i think we have seen a lot more data. the fed has been very patient. with the labor market in a robust place, but softening. cpi and other data is coming down. we think the fed is very well-placed to cut in september. maybe once more again before the end of the year. july may be the point where they indicate that. sonali: what is interesting as you moved your expectation to september after you saw the cpi data.

do you still see risks around the september cut at this point? >> it is pretty much priced into the markets at this point. i think headed into this week, we were not expecting such cool inflationary data. we did have a december 25 basis point cut. we have since moved it forward to september. i would agree, i think july this deepens will be dovish and it will be leading into the september rate cut. i would also agree that unemployment ticking up to 4%, statements made on capitol hill this week couching things as relatively balanced with fed chairman powell saying one of the things that keeps him up at night is the labor market, rather than what we have heard over the last two years where inflation was front of mind. sonali: do you think 25, do you think 50 will be achieved? >> i think at this .25 is

enough. we have seen a tick in unemployment. the labor market appears to be strong. payroll numbers continue to come in rather strong. not to the strength we have seen over the last six to 12 months. unemployment is still low. growth has not fallen off a cliff either. this is sort of the goldilocks scenario we talked about, the soft landing as they land the plane. i don't think it necessitates over engineering things or big cuts at the front of this cut cycle. sonali: how do you feel here? we have a story on the terminal that is well read. the october fed funds futures began flying off the shelves yesterday. this idea that this supersize rate cut could be more in view. what is the risk to that kind of thinking? >> given the fed communication we have had so far, and the fact they are in a strong position to cut rates now, but they don't

want to make a misstep. they want to be gradual and don't want to be in a position where they have to reverse anything. we think is likely they will cut 25 basis points in september and again in december. when you look at the data we have seen coming out recently, the labor market remains pretty robust. there are more jobs opening. the strength of the labor market resides in the sector. not so much the goods or manufacturing sector. if you look at real rates, they are a lot tighter now than a few months ago given the fact inflation has come down quite considerably. rates have been at an elevated level by the last 10 year standards. a long period of time. i think rates look tight now. sonali: you even have barclays coming out recommending today you should short five year treasuries, setting -- citing election risk. they say the markets are pricing

in two minute cuts cumulatively. not resilient with their economy and inflation risks after the election. have traders gone a little too far? >> absolutely. look at the market pricing, eight cuts by december of next year. we think that is a bit overdone. one of the things you pointed out, between the december and september meeting, we have a large headline risk with the election. we can get change in policy, change in administration. that will have an impact on the overall economy. some of it could be rather swiftly with executive orders. sonali: you can make a ton of arguments whether you get trump tariffs in the future or more spending under the biden administration, that there are inflation risks. if you see the first cut in september, there was talk from the federal reserve -- what is the risk 2025 does not see as many cuts as the market expects or even stays stable toward having a hike?

>> at the moment, the market is pricing in around 150 basis points of cuts. on this current trajectory, we think it is likely the fed will continue to cut rates. but it will be very gradual. whether it is quarterly or potentially short-term. as you say, it is 2025's story with whichever administration we have. and it will be -- it will have an impact on inflation. you may have a difference in expenditure. from there, it is less clear in terms of the path of inflation. also the strength of economy. sonali: when do you think the 10 year ends 2025? >> it is hard to tell. particularly we think it would end up lower. we think inflation would come down for some time. we think the fed will -- this

trajectory continues to cut. i think potentially being around here or lower we would see the base case. sonali: do you have a view on where the 10 year ends? >> personally, this rally has been a bit overdone. between now and september, we could see it continue and see the 10 year with a handle if you will. if you see the election cycle over with anybody's guess based on who is enacting policy as a result of that. i think we are north of 4% come year and. sonali: year end 2025? do you see depending on what administration, and inflation risk greater than one or the other? >> i think a continuation of biden in the white house would be more of a continuation of his policy that he put in place over the last four years. you continue to see inflation subsiding, growth muddling along to percent, 2.5%.

i think the real risk to fixed income markets is probably a trump presidency where some of it his tariffs policy in our view would be very inflationary. and it will put pressure on the treasury market and fixed income yields overall. sonali: the last word on the consumer. you see the michigan data coming in. some concerns moving forward. what are the ripple effects? >> i think we are seeing the economy, it is definitely moderating. continuing to see that and feed through the rest of the economy and the labor market is cooling. i think next week, we get retail sales, a key one to look at. we expect to see the economy moderating somewhat. our positioning on the treasuries we like it still out to the five your part.

a very decent kerry, very good yields. and you don't have the volatility or the risk you get further up the cove. in terms of our positioning, we are duration. >> marilyn watson from blackrock and jonathan mandillo from abrdn. more economic data for next week as well. up next, auction block. saudi aramco pulls in a massive order look for its auction. we look at the credit markets next. this is "real yield" on bloomberg. ♪

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block. high-grade issuance picked up after tallying the slowest week of the year. broadcom led the way with a $5 billion sale as it looks to refinance a portion of the loans secured to pay for the vmware deal. total overall u.s. sales deals passed over and all three of this week's sellers were based overseas. one other corporate sale i want to highlight is saudi aramco. it pulled in more than $31 billion of orders for its $6 billion sale. it was the company's first dollar debt offering in three years and included 10, 30, and 40 your notes. looking at the options of three, 10, and 30 year treasuries, mixed demand with a three year auction drawing the highest bid to cover since january. the 30 year saw the lowest ratio since november. when it comes to credit, pimco is warning the market returns are failing to compensate for the risks. the firm cio of course strategies wrote liquidity

premiums have compressed in both public and private credit markets with a lower quality segment of each facing elevated vulnerability to economic slowdowns and higher interest rates. this week on bloomberg, lauren bass mage and joined from carlisle to speak about those risks in credit. >> default rates, there were high projections. we are at 1% as a market. that is much lower than long-term averages between 2% and 3% depending on the timeframe they are looking at. below market is very bifurcated. most of our companies that trade around part, meaning there are not problems and credits. you have about 4% of the market that trades under 80. i've watched it for more signs of stress. that is the lowest it has been in two years. sonali: joining us now is the portfolio manager and head of high-yield and leverage loans at beach point capital management. it is a really good time to talk about risk.

clearly there's more people in the market who are getting concerned about the slowing economic conditions, weaknesses in the consumer. where are you seeing stresses emerging even more now than when we last spoke a few month ago? >> thank you for having me on. we would agree that stresses are starting to mount. the financial conditions everyone was measuring and trying to pricing when there would be a change in monetary policy are good for a debate around what inflation will do and how economic activity will behave. the leverage credit markets are still having technical tailwinds, which have tightened valuations. and they still have a tail of very levered issuers where 1, 2, or perhaps three rate cuts will not matter a lot in terms of how they dress their balance sheets. that tale of the liver credit

universe is one we are watching. sonali: what does it mean for new issuance moving forward? if new companies are coming to market, the economy is weakening, will there be demand for leverage credit? >> leverage credit overall looks incredibly attractive. spreads are tight. probably in the 10th percentile historically. yields and price are still quite attractive. that coincides with an overall fundamental picture that is still holding and well. leverage is manageable, interest-rate coverage ratios are still very healthy within the leverage credit universe. there should be persistent demand for credit in general. however, it stands to reason when rates were raised above 5% when inflation was running high single digits, now that inflation is around 3%, financial conditions continue to tighten. each month of passing, and we will soon hit the record for the

longest fed pause in history, that transmits through to leverage credit. especially the lower tail in negative ways. sonali: let's talk about high yield. you mentioned the valuation concern. you talk about high yield and the worry in spreads. i think people in the market cannot decide. devaluations justify the risk you are taking on and as a higher yield make up for it? >> in general, yes. the higher yield makes up for it. on the lower end of the quality spectrum, it has underperformed its beta to the market historically. the return profiles while attractive more recently will probably tail off as financial conditions continue to tighten. this calls for greater security selection, raider care in terms of investment picking. in general, it will likely turn into a very attractive market opportunity at some point.

sonali: one question i have is where are the vultures? the reason i ask is you have s&p global coming out earlier this month saying bankruptcies in june have reached the highest monthly level since early 2020, since the pandemic times. even if you are not seeing a wholesale of bankruptcies or the economy drastically, you are seeing pain, which people don't notice in a market flying at record highs. where is the distressed opportunity right now? >> a great question. right now, defaults are indeed low. overall, the faults will remain low given the overall health of the credit markets and strong fundamentals. credits that do need capital and have had trouble accessing a regular market for financing have turned to other creative or aggressive ways. some have turned other asset classes, some have resorted to

what we call liability management which sounds like a new term, but is as old as institutional credit itself trade we see more of these transactions as companies and their sponsors try to address their near-term maturities. sonali: one of the big areas of the market that people are questioning is private equity backed credits. speaking of ways people are extending and trying to get past this era of maturing debt into a higher interest rate environment, it is pronounced in the private equity industry. would you bite on anything that they have to offer? >> right now, m&a transactions are extremely low. volume is low, the multiples are about half of what they used to be, in terms of what sponsors are willing to pay for assets. in portly, the composition of debt is also low. it all basically feeds into a

very strong technical tailwinds for leverage credit and high-yield in particular. to the extent more m&a is on the horizon and particularly sponsor driven deals in the form of lbo's. they can potentially be attractive given the parameters i described in terms of having lower levels of debt and building in a higher margin of safety to those types of transactions. sonali: about a minute left. what is your favorite trade in this market? >> right now, given the events that have transpired over the last couple of days, it is important to start introducing interest rate sensitive securities and interest rates or duration into portfolios. we have lived through a year of this holding pattern where duration and interest rate volatility have been headwinds to especially fixed rate securities within portfolios. we would expect it would turn into a tailwind. at the same time, it is important to have a healthy dose

of floating rate securities simply to gather the carry that those offer as we head into the next chapter of this right cycle. sonali: must have your vegetables with a healthy floating rates. we thank you so much for your time today. jeanne sheehan zaino -- sinjin bowron, have a great weekend. the week ahead, earnings season is in full swing. we will talk about what is next. this is "bloomberg real yield." ♪

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at morgan stanley, old school hard work meets bold new thinking. to help you see untapped possibilities and relentlessly work with you to make them real. sonali: i'm sonali basak. this is "bloomberg real yield." it is time for the final spread. the week ahead a big one. monday, fed chair jay powell speaking at the economic club of washington with david rubenstein. watch it on bloomberg live. more big bang results continuing to rollout. goldman sachs.

tuesday, economic data with u.s. retail sales. morgan stanley and bank of america earnings. very interest-rate sensitive. wednesday, the fed releasing the beige book read per se, ecb decision and christine lagarde's news conference. netflix kicks off tech earnings. friday, fed speak from john williams and raphael bostic. my final thought. a look at the companies reporting earnings. goldman sachs, morgan stanley, bank of america. a lot of eyes on interest rate. a lot of eyes on the consumer. johnson & johnson, united. fascinating after what you saw with delta. what is the consumer doing? particularly after the weakness in the university of michigan data. american express are probably more interested than anyone else to kick off the week. not just because it is at the end of the week, but because the consumer is in hot focus. from new york, that doesn't farm us. same time, same day next week. this is "bloomberg real yield." and this is bloomberg. ♪

sonali: welcome to "bloomberg markets." i'm scarlet fu. we are roughly through halfway of today's trading. the s&p 500 and the nasdaq 100. big stocks in the green once again with both indexes resuming their july advances. they are recovering from yesterday's decline. look at the russell 2000. small caps extending the search. traders convinced the fed will cut rates in september after today's decline in consumers inflation expectations and the new michigan report and yesterday's cpi report. they are more than offsetting a hotter wholesale inflation print. looking at dollar-yen. dollar weakness because of the prospect of lower rates. that is the case against most of the g10 currencies. in particular, versus the japanese