>> from new york city and viewers worldwide. i'm sonali and on "bloomberg real yield" starts right now. sonali: and fed initials boost investor confidence with the

rate cut. but bitting on -- betting on september. >> three fed is planning and gearing up to cut rates in september. >> don't call for september. >> september cut. >> september seems to a lock. >> won't move in july. >> there is a good case that the fed should be easing policy. >> the top priority right now is inflation. inflation's coming down better than the fomc expected. >> you have inflation that is cooling. >> it's coming down in conjunction with the economy. but simultaneously, the economy hasn't collapsed. >> it's not just inflation that's driving cuts now. it's the broader -- >> the market is well under the fed. >> the labor market can turn very quickly. >> they're going to have to recalculate as we move away from

restrictive policy. sonali: economists surveyed by bloomberg trimmed their u.s. inflation projections as they expect the fed to start lowering interest rates. the fed's preferred wage of inflation is expected to end at 2.6% and that's lower than last month's trajection. it is expected to end at 2.4%. the direction of travel is lower. let's look at the board here and take a look at another favorite trade of the market. one that just went wild earlier this week. that is that 230 curve that people were betting on into monday with the betting odds of a trump presidency increasing. you see over here, the curve disinverted. we are back to being in inverted territory. a lot of questions about what the u.s. fiscal situation really means for that longer end of the yields curve. earlier this week, fed chair

powell spoke with bloomberg host and co chairman dave rube steen. take a listen. >> on inflation, we didn't make any more process at the second quarter, actually, we did make some more progress we've had now three better readings and if you average them, that's a pretty good pace. if you take a look at what happened, you saw those odds of a rate cut increasing. do you believe in that, ian? ian: we have enough signaling from the fed. we will get the up dated s&p to justify a move.

sonali: karissa, how do you feel? do you now reposition in any form with more conviction? karissa: oh, we definitely feel like two cuts is absolutely correct, possibly, you know, there's plenty of maybe another one in january. but this is absolutely the time to be positioning for that trade. and it's not just the bull steeper but it's the positioning in longer term securities to take advantage of rates across the curve over time. so yes, high conviction trade. the data is all there to support it. sonali: and ian, is this more about what is happening with the fed or what's happening in the political sphere? some of the sharpest moves came off the heels of this idea that trump could be the next u.s. president. ian: i would say the bearish aspect of any steepening is going to be a function of what's

going on in washington the bull steepening is a classic end of the cycle trade and that's the trade that everyone's been looking for this year. so the fact that we now have an added steepening impulse the form of politics, i think is really accelerated the move and i still think that we get back into positive territory for two tense. it just might be a bumpy ride. sonali: if you think about the bumpy ride it took to get here to begin with, how much conviction do you have in the long end given that there still could be worries particularly about the u.s. fiscal situation? karissa: excellent question. i think so much of that rests on what happens politically. and that is a bit of a wild card. i think we have a fair degree more conviction of, again, fed policy. you've had even not risking that golden path where gold inflation unemployment are at these places that are going to allow the fed

to execute on policy. so long yields, yes, there's going to be some degree of volatility but you can trade the steepener in that the fed is set on its path. some degree of volatility and we may have -- we would expect to be in positive territory as well by year end. sonali: ian, we've talked a little bit about some of that trade has reversed, that trump trade, particular lay liv in the 230 curve. how do you read that? ian: the knee-jerk reaction made a lot of sense. it was a bearish form. we priced in more term premium. and if you think about the long end of the curve and a third-year sector, sector, trump will probably bring in gnaw treasury secretary and every one of them revisits issuing an ultra long bond. so there should be some type of conversation about that.

now, the flattening that is being subsequently transpired is more interesting because that's the market saying that they have confidence in the fed that if we do have a reflationary spike in 2025, 2026, they will stop cutting rates and recalibrate higher. sonali: it's interesting. ultra long bond is what makes your imagination start to perk up especially when you have seen so much issuance. do you think the treasury could be successful in pursuing an ultralong bond? ian: i don't think this is the cycle for it given where longer data yields are at the moment. if one were to issue a 50 or 100-year bond, it would need to be when rates are the the lows, not at the highs. sonali: karissa, how much risk is there? another part of this trade has been worries on inflationary impulse that could occur under future trump administration, what tariffs would mean, what

lower taxes could mean once again for the bond market. do you worry about that and do you position accordingly? karissa: you know, that is a secondary concern for us. that's certainly something that investors should keep in mind that there may be some degree of reflationary pressure. but we feel very strongly that, you know, again, the fed has been fairly masterful here in terms of managing this cycle to the extent that they are able to kind of offset initial policy decisions on the fiscal side. i think they've done that before. they can do it again. there's nothing wrong with kind of keeping your duration neutral, but we're not necessarily positioning for that to be the likely outcome. what we do think is when you're in this kind of inflectionry environment, like the market is at a point where it can go either way, really position for

a whole set of varied outcomes. safe yield is more important than high yield. those are the kinds of things that we're looking at. sonali: you think about, for example, just over the last couple of days, the worries we've seen from jason furman and you have increasing worries also about the threatened independence of federal reserve. ian, how do you think about that risk and what it would mean for markets? ian: the first thing i'll say is that it's very unlikely that powell resigns before the end of his term which is may of 2026. we will have some continuity. recall in 2015-2016, there was an effort for the congress to audit the fed, revamp of whether the decision was correct, how it

might have been done differently and that would materially undermine the fed's appearance. we hope and don't think that is going to be the outcome regardless of who ends up in the white house but that's something that needs to be on the radar, especially given all the uncertainties globally in terms of central bank independence. sonali: what would it mean for the treasury market in particular if that were to be a bigger self-inflict. ian: if it were to be a significant risk, we would have to look at the rest of the world's confidence the dollars as a reserved currency and if the stances came into question, that would mean higher rates, that would mean more difficult time financing the federal deficit. and no one wants that. sonali: yeah, we've been talking about the long term here. but even in the short term, let's go back a little bit here and talk about the consumer, the resilience of the u.s. consumer, the job market. any signs of weak seasoning and the remaining strength there is.

how much do you read into in the economic data at this point in the cycle when certainty on inflation has come to the surface more? karissa: yeah. well, i think the data, the top line data does mask some variation. underneath, the theme that we're looking at is bifurcation, whether you're looking at the bifurcation of the consumer or bifurcation of corporate borrowers. the data can tell you one thing in terms of general health, but there is a wide variety of actual health of the consumer underneath the surface. and i think that that has real implications for kind of longer term economic growth, you know, a majority of the consumers are actually in a weaker spot. and similar to that, you've had a fair amount of corporations term out their debt at favorable reads but that doesn't mean that the majority of borrowers are able to do that and that could

mean issues for the credit market down the road. so, again, when you have this bifurcation, this variation, you really need to position for potential volatility of outcomes. and that's what we're recommending to clients. sonali: we'll talk about that bifurcation. you mentioned, ian, some serious concerns down the line. we didn't ask you how you felt about the longer end of the curve. ian: so longer term, i'm constructive on thens and 30's e didn't get to 10%. so that means that over the course of the next few cycles, assuming there's not pandemic high inflation, that's going to be an upper bound. and that gives the market a reasonable amount of confidence to know where policy rates are going to be. sure, we're going to get a little bit of pods term premium but at the end of the day, the

range emerges over the course of the next couple of years, it will resemble in 2018 and 2019. sonali: it is certainly a relief. that is kamilla cardoso and ian relief. up next we're going to look at the credit markets next. this is "real yield" on bloomberg. ♪ did you ever worry we wouldn't get to enjoy this? [jeff laughs maniacally] (inner monologue) seriously, look at these guys. they are playing great. meanwhile, i'm on the green and all i can think about is all the green i'm spending on 3 kids in college. not to mention the kitchen remodel, and we'd just remodel the bathrooms last month. with empower, i get all of my financial questions answered. so i don't have to worry. so you're like a guru now? oh here it comes— join 18 million americans and take control of your financial future with a real time dashboard and real live conversations.

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you don't have to worry about things like changing tax rates or filing returns. avalarahhh ahhh sonali: i'm sonali basak and this is "bloomberg real yield." time for the option block where we kick things off in europe.

widespread outages is keeping issuers on the sidelines this friday, capping weekly issuance in europe at about 18 billion euros. fur of the four of the six major bank marking the busiest weeks in two months. a different story in high yields. four different borrowers raising $3 billion as the summer lull takes hold. and tony rodriquez weighing in on where he sees credit spreads going from here. >> credit spreads are going to wind a bit. you have volatility from the election and economy slowing down. we've been in a golden age of credit in terminate terms of default. we don't see a recession like environment for credit. defaults will rise. that means you should see some widening in credit spreads because we may be overpriced here. sonali: let's bring in matt brill, head of north american investment grade credit at

invesco. the first half was flushed with issuance. what do you expect for the second part of the year? matt: this has exceeded everybody's expectations. every month all year long, it's come in more than what the forecast for supply. but we're up about 30% overall. but most of that has been financial. so financials as you stated had a really big week this week. i thought it could have been even bigger but year-to-date, you're up about 50% year-over-year for financials. and given where we were last year, i think banks just saw the opportunity they didn't know if we would go back into a mini banking crisis from a capital standpoint so they borrowed as much as they could and now, i think spreads are very, very tight or not very tight but have come in a lot for banks. and think they're at the end of borrowing. so going forward, you should see the financial issuance be reduced and you should see

industrial issuance come down significantly as well. sonali: what do you chew on? matt: so negative net supply is the term that is being thrown around out there. and that means coupons, maturities, and we think there will be pleasant fly than all the coupons and maturities that are out there. so it creates can hard possible this, but it creates a scarcity value for bonds and for high quality credit. that will be dictated though on what the demand is going to be. so retail demand, we expect to pick up considerably the back half of the year, particularly when the fed does cut for the first time. and the demand is trickier for us to forecast because yields were so attractive for institutional investors, annuities, insurance companies that we saw massive demand all first half of the year. that could slow a little bit in the second half of the year but at the end of the day, it's till

attractive. there will be demand but certainly less supply. sonali: it is hard to believe this idea that things could become part of a scares si -- scares city value but when the valuation doesn't work out for a lot of investors and you have this scarcity value that could draw more money into parts of the credit market here do. people really start stretching for risk? matt: it is a concern for sure. if you see people do more aggressive purchases, you start to see companies be more concern to me do have a more aggressive financial policy due to tighter spread. what we're seeing is still very balanced for today. but they're selling part of

their assess and they will not have to borrow as much debt. so we're not seeing corporations to say i'm going to be aggressive. i'm going to go all in due to the cheap financing that's out there. if we see that, that would be a concern. but we're still seeing prudent companies and the risk taking by investors, yes, there's money flowing into high yield but prominently, it's in the -- prom developmentally, they are fairly muted. sonali: how firmly do you feel about this economy? they're already reaching for risk. and if you think about just where credit ratings stand, a lot of people are so season wan. how do you see it?

matt: i think there will be a time here as the economy continues to slow that we're going to see a little bit more balance there. but overall, the economy is very good. and the banks, yeah, this week are issuing essentially a derivative of the economy we need to see a strong economy in order for banks to do well but we don't need to see 6% nominal growth. we need to see positive real growth and that's the difference in the market going forward is that you're going to see growth but it's not going to be the level that you saw the last several years. and that's not what you need for the fixed income market. the equity market needs material grow. and the muddle along economy is not bad for overall fixed income. if we see hard landing and our projections have been for the of the landing, credit spread is not compensating you.

win fundamentals are still very good. we're relatively constructive still at this point. sonali: what is the risk, matt, at investing when credit spreads are still this tight? matt: well, the risk is quite simply that you're wrong and that the economy hits the hard stop. as i stated, credit spreads are not compensating for it the quality of the investment grade market, the quality the high yield market has improved considerably. so you're down to about 10% of the investment grade market. so that's the lowest we've been in about 15 years. your portion of triple beat credit is the lowest since 2015. it's down nearly 10% from its highs. so you don't own or the market doesn't have the lower quality credit that it had in the past. so if you go into a recession or if the economy were to have a worse period of time and

expected, credit spreads will go wired but i still -- wider but just the overall credit quality is at such a high quality startling point that you're set up for a buffer even if you do get things to be worse than expected from here. sonali: matt, 30 seconds here. favorite trade in this market. matt: favorite trade. we love the energy space. we've loved the bank space. at this point, you got to go more into the big six. i'm going be long banks but i think the regional bank that we've been such a fan of has come quite a distance and has played itself out. i don't see the upside here at this point. sonali: matt, thank you so very much for your time. happy friday. happy weekend to you. still ahead, stick with us the final spread, the week ahead. investors are waiting for the fed's preferred gauge on inflation. this is "real yield" on bloomberg. bloomberg. ♪ can't believe you corporate types are still at it.

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sonali: i'm sonali basak and this is "bloomberg real yield." and it's time now for the final spread, the week ahead. coming up, the fed is entering its blackout period after today and monday, verizon kicking off a very busy week of earnings. tuesday, results from alphabet and tesla. wednesday, u.s. p.m.i.'s rolling out followed by g.d.p. on thursday. plus american and southwest airlines reporting earnings. and friday, the fed's preferred inflation gauge. and let's take a look at those pce estimates we are watching a market expecting to come in year-over-year at 2.6%. essentially flat from the prior estimate. direction of travel, economists believe is still lower. that deflator month over month only expected to be about .2% higher. and from new york that, does it from us. same time, same place next week. this was "bloomberg real yield" and this is bloomberg. ♪

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sonali: welcome to "bloomberg markets." i'm sonali basak. president biden says he will be on the campaign trail. biden is absolutely determined to remain in the presidential race and will resume campaigning next week even as allies have begun seeking his exit from the race as inevitability. we will bring you more on that in just a moment. i want to say also, this comes on the heels of an nbc report earlier today that was refuted by the white house, the idea that his family is also considering ways to breach the discussion with the president. also comes on the heels of a closure of a republican national convention as well. we will bring you more as we get it let's get a quick check of the markets. s&p 500 still down on the day. now down about .4%. and a nasdaq 100 even steeper losses there about .7%. tech having a really difficult