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

coming up, the fed's preferred inflation gauge rising at a mild pace in june, sending treasury yield falling across the curve. and boosting investor executions for that september fed rate cut. we begin with the big issue, the great fed rate debate. >> i do not think the fed is ready to cut in july. >> july is off the table. >> i am taking july off moving to september. >> september is still very much on the table. >> september -- >> september -- >> that is predicated on the consumer flowing pair that has already started to materialize. >> i think the fed has an argument to cut in july. >> the fed is late. they should have started cutting months ago. >> we should probably start to seat rate cut sooner rather than later. >> there is clearly a downshift and economic momentum. >> i do not think the fed would want to appear panicked. >> things are slower.

>> we just hope they do not cut too soon. >> likely going to see the fed cut rates in september, but we do not think they can go very far because of the underlying inflationary pressure. >> inflation is insidious. >> i do not think the inflation drags are fully swayed yet. sonali: the u.s. yield curve has been steepening and gravity how to catch up to the market at some point, because you did see one of the favorite trades across wall street hit a lot of pain. in the majority of the year, frankly -- it is the only steepened back in january. you saw it stay very inverted until recently, when you're seeing the 2's/10's curves significantly steepen. the 2's/30's curve receipt this inflated now. when you put the board, you can see when people expect the rate cut. we can talk about the longer end of the curve, but the short end

of the curve is now pricing in that september rate cut, with full certainty, nearly full certainty. there are other views out there about whether you can the one even sooner. the fed meeting next week. when it comes to bloomberg opinion colonists and warmer fed president bill dudley, at his mind is made up. he is calling for a fed cut next week. >> rate cuts are definitely coming. at this point, there is not a strong state -- taste for cutting. if the fed does not cut in july and wait until september, it will not have a huge effect except the fact when unemployment rate start to deteriorate, their sons to be a reinforcing negative feedback loop. jobs are lost, people pullback on funding, that leads to further cuts in employment. sonali: joining us now, ed al-hussainy of columbia threadneedle, and eric nelson of wells fargo. you heard those comments by bill dudley, and a lot of that was anchored in this idea that if

the fed were to wait, they would risk a recession. do you believe that to be the case? ed: things are starting to shift in that direction for the fed has been acknowledging we have been a focus on inflation close of the over the past two years, it was an appropriate focus, and now we are starting to see downside risk to employment, and we should be acting on them in some point in the fall. sonali: how do you feel about this dynamic? if you have rates stay higher, at least until september, when the market is really exciting the fed to cut, what else starts to weaken? erik: i think if you look at market pricing, we are already there for a september cut. very literally, if they have to wait until september, the market will not necessarily move if they cut when he five basis. it is kind of a semantic point, but the market's already done some of the easing work for the

fed here. in terms of the u.s. economy and where we currently sit, our labor market has certainly softened, but it is not at a point yet where i am really worried about it, like looking at the load level of layoffs. hiring is certainly weak, there is weakness in the underlying unemployment rate, but think of jobs are still ok. a lot of the cyclical parts of the economy are still growing, durable goods spending, so i do not think -- see this as an economy about to fall off the cliff if we do not get a cut next week. sonali: let me ask another thing about the market's expectations. if the economy is still so strong, can you achieve two rate cuts in this market? erik: i think you can. the fed is pretty far above neutral, so they would make the argument, if inflation stays around these levels, and they only cut twice, they are still pretty far above neutral and still in trichet territory, and they are still putting some

downward pressure on inflation, at least in their framework. can you get two rate cuts? absolutely. the bigger question is can you get six or even more than that, and that is what is hanging in the balance. sonali: you look at the steepener we are looking at here. what does it tell you? is it a bull or bear steepener? ed: it has really been driven by the front end so far, and this tension between inflation and unemployment that we really focus on right now becomes a low bit more of a tension between fiscal and monetary policy next year. markets right now are struggling -- how do we prioritize the underlying case for cuts this year versus the possibility of bigger fiscal deficits and potentially higher rates next year? it is correct to focus on the immediate data and downside risks to growth and employment and wait until after the election to get clarity. sonali: another favorite trait has been in inflation. how do you bet on inflation when you do not know what the outlook

looks like? ed: the bottom line is if you are an investor coming into this environment, particularly if you have been in cash over the course of the past couple years, there is an overwhelming case to extend into the curve and increase your duration in portfolios. i think there is also a compelling case on the credit risk side. whether you take an active position in the curve is a secondary question two whether you take duration risk. sonali: so you look at the 10 year, and it slid for a moment friday to below that 4.20 level. how much confidence do you have in the longer end of the curve? erik: we think it is going to continue to be a bit of a grind. i mentioned the u.s. economy, and there are definitely signs of weakness, but again, we are not on the cusp of recession the way we see it, and that is going to continue to be an issue. and of course, there are issues around the u.s. election.

if we get that red wave, that could certainly be another headwind for duration, but we are in a different regime then we were pre-2016. red wave is almost that base case. fiscal deficits are the base case. in that sense, if we get a divided congress, our expectations of a divided congress, that could tilt the balance, at least on the fiscal side, to a better buying environment. sonali: you feel that way? do you feel a congress that is not swept to the red is a benefit to the curve? ed: yeah -- and by the way, it could be a blue wave. the election is a coin toss. but yes, if it is a split government, we lower the odds of frontloaded fiscal policy over the course of the next couple years that will be positive for duration. what i will point to is the starting point for real yields -- long and real yields, right around the 2% level, is very attractive, because,

intuitively, it is very unlikely the economy can handle those rates for a protracted period of time. sonali: given the election uncertainty, both of you have been pointing to fiscal versus monetary. where does the two year end next year under a harris administration and under a trump administration? ed: the correct answer is i have no idea. [laughter] there is a decent easing cycle in the price. this is what i .2 in my mind. we have about 100 basis points of easing in the price right now for next year. i think there will be a more compelling case for cutting more than that if the labor market continues to deteriorate. right now, the deterioration of the labor market has been marginal so far. odds are rising they will be more meaningful next year, and that will warrant deeper cuts. sonali: there is a camp that believes, if trump were to win the election, the tariff policy would create an inflationary for

spare there is a group out there who believe his potential labor immigration policy could do the same. are you one of those investors? erik: that is certainly a risk we want to be careful love, because if we look at the disinflation of the last few months, a lot of it -- yes, there has been oer, but look at core goods inflation. we are back in negative territory the past you months. it is not just tariffs. we also have the red sea disruptions, and that feeds through some of the input cost environments, so there are reasons to be cautious on the goods inflation backdrop of the second half, another one of those risks we have to be mournful of. sonali: where does the 10 year end next year, regardless of who wins the election? erik: well, i will make a quick point on the election. to me, it is us about who is in the white house, it is more about is there a unified government or not? generally speaking, we can break

through 4, certainly by next year, and we are not necessarily in the full hard landing cap. we think we can soften more than we have already seen. but the days of 300 basis points rallies and cutting cycles, i am not sure we will see that this time around. sonali: you think we can break under 4 on the 10 year? erik: idea, by end of next year. it will be pretty choppy, especially at the end of this year. if we are not going to get a significant deep cutting cycle, then you almost need to see rates -- the hard landing at risk gets pushed out to next year, then i will worry about it. sonali: ed al-hussainy and erik nelson, thank you. great perspective on how to make sense of it all. up next, we talk about the auction block. u.s. high-grade sales have exceeded expeditions every month this year, leading the year to date total to the highest level

since 2020. we will talk about that credit rush, next. this is "real yield" on bloomberg. ♪ you know what's brilliant? boring. think about it. boring is the unsung catalyst for bold. what straps bold to a rocket and hurtles it into space? boring does. boring makes vacations happen, early retirements possible, and startups start up. because it's smart, dependable, and steady. all words you want from your bank. for nearly 160 years, pnc bank has been brilliantly boring so you can be happily fulfilled... which is pretty un-boring if you think about it.

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the all new godaddy airo. get your business online in minutes with the power of ai. sonali: i'm sonali basak. this is "bloomberg real yield." time for the auction block. u.s. high-grade sales remained high, even with all the volatility. united and occidental were the high drivers, driving in nearly $30 billion this week. united's $12 billion eight per deal was the fourth-largest this year. with those, high-grade sales is nearly $1 billion, the fastest rate for any july since 2017,

and it is well over the top end for the $85 billion forecasted to be sold this month. new sales next we could challenge the monthly record. and in treasury auctions this week,, 2, 5, 7year offerings. the seven year note auctions are good demand. earlier this week, we caught up with lenny ceaser, who compared the credit market against the recent rally in small-cap equities. >> within the world of corporate credit, there have an a hand -- a handful of issuers where investors basically said we are not willing to bend these capital structures. we think they are overleveraged. we are seeing that rotation into small-cap equities, so it is a bit of a head structure -- head scratcher, those dynamics. ultimately, credit markets tend to get things pretty right.

they are kind of the driver of where liquidity goes within the system, so i am paying close attention to the reality that triple c spreads are wider on the year. sonali: joining us now, kelly burton high-yield investor kelly burton and bryan whalen, fixed income cio at tcw. last time we spoke, you had some worries about the market. even if we see this market softening a bit, the economic environment softening, you are still seeing investors flood into risk. do you just follow the herd at this point, or detail them to cool it? bryan: we don't. we are going the other way. but that is what makes a market. that is what makes opportunities. we are seeing an environment where it seems consensus is that this economy is finally starting to slow down. you can kind of feel it. the next six months will probably the more about how that transpires, so it is kind of like buckle up and let's watch

this thing and it is going to slow down in a way the market anticipates, which the market is pricing in a high likelihood of a soft note landing, and we are kind of leaning the other way. we do not think you are compensated well in an outcome that is anything but soft. sonali: i feel like that is a perfect set up to talk about high-yield. is this ubiquitous? do you invest across high-yield, knowing people are expecting a rate cut, or do you avoid sectors, knowing the consumer is softening? kelly: that is a really good question, and i love i am on after when he caesar, one of my best friends here. -- after winnie cisar, one of my best friend here. we talk about the markets, and i agree certain sectors have been kind of washed out. triple c's are actually outperforming the last 30 days, so some of that can be shown here in high-yield as well.

overall, though, the triple c segment of the market remains quite small. it is only about 11% of people high-yield. a lot of that is trading very wide in these numerous lme transactions. the part of the market in terms of new opportunities we are trying to sift through would be those that are more performing and not at the widest yields and spreads you see on the face of it. in terms of higher quality bands, bb's are 55% of our market or so, so there is a lot of solid lady credits to invest in. yes, spreads are tight, but it is not the whole story. we like the price discounts and overall what we are getting in spread per duration in our market overall. i think all segments are worthy of investing, so the lower you get down the quality spectrum, you have to be very cognizant of those sectors, like cable media, telecom that are really struggling. sonali: how do you think about how to take on risk in this environment?

on one hand, spreads, although we have seen periods of little bit of widening, they have been significantly tighter than what you would expect at this point in the cycle, and there's a lot of blowout there trying to find that extra dollar -- there's a lot of people out there try to find extra dollar. bryan: it kind of depends what kind of investor you are. if you want to set it and forget it, we would tell you high quality, high yield, that single be, double be part of the market is probably just fine, meaning we do not see a lot of systemic risk in the market from leverage and issues from accounting irregularities, nothing like that at all. coverage ratios are coming down given the rising rates, but there is no smoking gun that you need to worry about. however, it is all going to tie back to the macro. it does not matter how good the balance sheet is or how strong a

particular sector is, but if this economy slows further than the market is expecting, and it will not take much to do that, all spreads will widen out. that will be fine, song as you are buying companies that will not default. on the other hand, if you are a more active investor and you are looking or better entry points, we would say the next six months are going to be more volatile than the last six months. you will have a better entry points. there will be wuder -- wider spreads, and you could potentially get a better return if you wait your those are the two different camps. you have to understand which one you are in. are you going to be the investor that, during the volatility, you're going to kind of have the stomach to step in when others are moving the other way? you also have to understand who you are. sonali: i am curious about the stomach to step in. if you thing about the potential of volatility ahead, do you expect it? do you prepare for it?

do you keep powdered dry to step in when spreads widen out? kelly: that is a fair question, and at times, we have had cash in this market a more elevated than historical standards to expand -- for that. we are heading into an election year that can prove to add volatility to the market as well. there has been noise around that in the last month or so. we do think rates on the market will be helpful, including four high yields. we may not be there in terms of how many rate cuts are built into the market at this point in time. maybe one or two or -- our fair pair that will be helpful as we go into the back end of the year, so rates are supportive, but overall, in terms of the economy, that is a focus. right now, with what we are looking at in terms of recent data, whether it be the gdp print, inflation, etc., things seem to be in a good spot.

the consumer tends to be resilient. he lifted by above trend spending, so it goes down to looking credit by credit and making sure companies are healthy, able to withstand their interest. sonali: if you do wait to invest when you see a pullback, what are the areas you are looking to deploy into? bryan: that is a good question. right now, what looks relatively attractive is in areas of the market that have been beaten up due to the rise in interest rates and the interest rate volatility, and the sectors that look rich to us that should come under pressure are more in the corporate bond area. the further down the capital structure you go or the further down you go in credit quality should be where you see the most opportunities. i would add one more thought about the current economic environment. certainly the mix of the last

two months of data would indicate a slowdown, but at least looking over the rearview mirror for the last couple months, it does not indicate a recession, but i heard a guest earlier, before we jump on, say something about looking at the employment market right now and not being really worried. we would contend, the u.s. economy makes the titanic look like a dinghy, meaning when you finally get to the point where you are really worried, it's going to be too late. at that point in time, the fed is going to have to be reacting aggressively, and the psychology, the negative for fact loop you will get at the consumer and corporate level, you will start to see their layoffs, at that point in time, it will be too late, because the fed will be reacting and spreads are much wider. sonali: and at times the economy is a jet ski. that is kelly burton and bryan whalen. happy weekend to both of you. still ahead, the final spread. the latest u.s. payrolls print on deck. we will talk all about those

expectations, next. this is "real yield" on bloomberg. ♪

sonali: i'm sonali basak. this is "bloomberg real yield." time for the final spread. earnings busy once again. mcdonald's kicking us off. tuesday, we get results from micro soft. plus, u.s. jewels consumer confidence. wednesday, a fed decision as well as the bank of japan. thursday, apple and amazon come along with a decision from the bank of england. friday, the latest u.s. payrolls report. because those payrolls are coming after that big fomc meeting, of course, a lot of you literally -- a volatility could be baked in week. the unemployment rate is expected to stay flat, nonfarm payrolls excited to soften to 175,000.

hourly earnings are excited to cool to 3.7 percent. wages being a big part of that inflationary story. we will see how it all comes in the next age of this economy. from new york, that is it or us. same time, same place next week. this has been "bloomberg real yield," and this is bloomberg. ♪ hi, i'm jason and i've lost 202 pounds on golo.

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scarlet: welcome to bloomberg markets. investors have been punishing big tech in favor of small caps this week as we await the fed's decision and critical earnings next week, while the sec targets short solar andrew left. and paris moves along with the olympic games even after an attack on the rail system. let's give you the set up for you in terms of where we stand with equity markets. the s&p 500 and the nasdaq