jonathan: from new york city for our audience worldwide, bloomberg real yield starts right now. ♪ coming up, bond market volatility. looking for a narrative. another covid outbreak raising questions about the outlook. we begin with the big issue, pushing ahead to chair powell. >> the markets will be focused on next week. >> what is the fed going to do next week. >> i think you will hear still a

very subtle message. >> i am in the camp that inflation will not be transitory, that the fed should ease it's foot slowly off of the accelerator. >> i'm afraid no matter what they do, you'll see market volatility. >> they will try to condition the market to a gradual qe reduction. i think the market will accept that to begin with, and then it will sink in, they should go faster. >> if you ignore inflation here, as the fed is doing, it could be harder to rip off the band-aid later. low rates now should not confuse people. the fed is in control of the curve. >> i understand why the market is doing what it is doing. my concern is, is what the fed is doing good for the economy? jonathan: the fastest 25 minutes of your life. greg peters is with us.

let's start with the question, lisa. is what the fed doing good for the economy? lisa: it depends on your time horizon. that that has made it clear they have a new framework. that new framework is fundamentally about maximum employment. so if you believe in that as a social good, as some people do, over the intermediate term for the economy, then holding rates at these levels may make some sense until we understand the pace at which the labor market is going to cure. if, on the other hand, you believe that financial market stability actually has an implication for the economy, which we do, then i think it's very hard for the fed to justify using emergency levels of qe,

which again, to remind people, is two to three times the pace that we saw in several of the qb episodes we saw in the great financial crisis. to persist at those levels of qe, when clearly the emergency has passed, it really threatens financial stability. jonathan: what is your take, ashok? >> i don't think the fed will be panicking or getting too worked up about what the underline looks like. the big change since the covid period is fiscal and military policy pointing in the same -- monetary policy pointing in the same direction. from the fed's perspective, we are getting jobs coming back, some issues about labor supply that the fed will have to keep working through. inflation is finally getting back above the 2% target. the fed and the market, and us,

have good expectations that there is a big element of this that is transitory. above trend growth, inflation hitting its target. from the fed's perspective, that is what they have been shooting for for the year since the financial crisis. i agree with lisa's point, this is a lot of balance sheet purchases, but compared to previous episodes, the fed has experience navigating and unwind. you would expect the reduction, which will be an ongoing issue in 2022, is not going to be market disruptive. jonathan: greg peters, your reaction? greg: the fed is doing exactly what they're supposed to be doing. the narrative around financial stability is a red herring. they have to talk about it but they have no control over it. this has been a shock to the system in a way that we have

never seen before and they responded in kind. we come out of this from an economic standpoint much stronger than anticipated. i think it has been the absolute correct response. the real question on the table is how you get out of it. i am sure we will talk later about peak growth, peak inflation, perhaps, and then a scenario where the fed is possibly tightening, whether through reducing purchases or actually raising rates. jonathan: let's do that now. what do you think will happen? greg: they are going to lay out a path of taper. i expect that to be, if not at jackson hole, then immediately thereafter. by the end of this year, early next year, they will start to do it. then the question is, when economic activity looks like it is slowing from this peak level,

while they continue on that path? i think they have somewhat painted themselves into a corner here. it is a much more difficult narrative to say we have this flexible inflation targeting program now. inflation is coming down, yet we are raising rates into that. i think that is a tough challenge they have ahead. the easy part has been the past 12 months. the hard part is next. jonathan: do you think the bond market is taking this conversation appropriately, given what we have seen this week alone? lisa: that is hard to say, hard to fight the tape, the markets. our perspective is that the bond market has way overbought, the levels that we are seeing on the 10 year don't reflect economic reality at all, but they do reflect a lot of

the game theory about exactly what the fed will say, both in the upcoming fomc meeting and coming out of jackson hole, about their pace of tapering. as has been alluded to, this idea that the fed may be out of sync with the economy right now, where economic indicators, corporate profit earnings, growth indicators may be peaking . the peak of fed accommodation is in front of us. that does set up some potential for dissonance next year. jonathan: the idea that we won't get any resolution to the supply side issues before the end of the year, late q4, may be signs of it in september, ashok, what is the argument to move before then? ashok: i don't think there's an

argument to move on rates. i think the move to tapering -- and we think they will move on that, if you are the fed and are forward-looking, we have concluded, if the u.s. job market is creating 400,000 jobs a month, that is sufficient to start closing the output gap over the next couple of years. when the output gap is closed, the fed should not, won't want to be purchasing the same amount. so the fed needs to start tapering in advance of that crossover point on the outlook gap. 400,000 jobs plus or minus is not a very high target for the fed, for the economy to hit in this environment. i think the argument boils down to if you want to skate to where the puck is, the fed needs to start tapering because the trends are going in that direction into 2022. jonathan: is there an argument

to say we have seen the peak? i have had a yes from menu life, yes elsewhere from robert to pappy jim. -- pgim. greg: we think we are in this range of 1% to 1.60%. our target for year-end was 1.20. things have moved in a more violent matter -- manner then we thought but the direction is spot on. the bond market, like it or not, is sussing out this peak growth/inflation story. jonathan: this is where i sense

some daylight between you and greg peters, lisa. lisa: absolutely. our perspective is, we have to differentiate between rates of change, sure. but we knew a year ago that the rate of change in growth and probably for corporate profits, many other metrics were really going to roll over. i don't think that is what is going on here. i think we have unbelievable amounts of excess liquidity holding rates down. once we start tapering and the economy moves up, there is just no way that you can justify -1% real rates on the 10-year, in an environment where gdp growth, even at half of what we are doing right now, would be 5%. that is just a level that i don't think the economy will

price rates, once the distorted behavior of the fed gets out of the way. jonathan: ashok, final word? ashok: i am on team lisa here. i think the market is forecasting growth, but what comes next is multiple years of above trend growth driven by a tail and impacts of fiscal spending. the market, 3, 4 months from now, we'll be looking at an outlook that is north of 2% gdp for the u.s., north of 1% gdp for europe, with inflation in the u.s. at 2% and not going a lot higher but above those levels. that will then be the narrative of durable above trend growth. we think that support something like a 2% 10 year note. not getting out of hand but also not 1.20. jonathan: we will continue the

conversation. coming up, the auction block. high yield auctions showing no signs of slowing down. that conversation is next. this is bloomberg. ♪

jonathan: live from new york city, i'm jonathan ferro. this is bloomberg real yield. we begin with things in europe. primary issuance slowing to a crawl this week, with just $9.5 billion through markets, the quietest week so far this year. $10 billion in high-grade sales falling short of estimates. vmware reason $6 billion in its

offering. finally in high yield, carnival returning to the market, pricing new bond yielding at 4% coupon down from 11.5% last year at the height of the crisis. lisa shalett, greg peters, ashok bhatia are with us. 4% coupon for 11.5% last year. after all the talk happening with the market, fears of overgrowth, what does that tell you? greg: what a difference 12 months make. there are a billion reasons to be positive on credit. the challenge ultimately is one of valuation. we are in this credit repair phase, coming out of the lockdowns. that is quite positive for corporate credit writ large. the challenge, ultimately, is are you getting compensated for the quality and default risk. that gets more challenging.

ti lisa -- to lisa's point, that is where the excess liquidity is going. it is not being forced in the u.s. treasury market as much as it is being placed in the corporate credit market. i think that is an accelerator where spreads are going, where they've been. jonathan: lisa? your take. lisa: i think i would agree with all of that. the problem that i have for our clients is there is just not much spread left. the problem is, since our call is we think underlying rates move up, there is just no cushion, if you will, to preserve capital. do i think we have default risk? no. do i think balance sheets are

healthy and cash flows are great? absolutely. are my clients going to repay their coupon? yes. do they face underlying rate risk because spreads are tight? yes. that is the conversation we are having with folks. after any risks you have to your capital, what are your total returns? they might be razor thin. jonathan: asha, talk to me about that. ashok: it is a great point, with where credit spreads are, the outlook for credit spreads, demand is range browned, you will not see a lot of capital appreciation from credit markets based on spreads. particularly with these levels, some interesting things to look at are moving out of intermediate or longer duration credit into shorter duration credit. an investment grade investor could move out of investment grade into shorter, bb

maturities. for noninvestment grade, investors moving out of not investment grade high-yield bonds to loans or clo's, some of those types of things, where you are effectively taking less duration, getting similar or in some cases above income levels, effectively saying the growth environment and corporate balance sheet environment is strong enough to take that incremental credit risk. that is generally our investment posture. jonathan: shorten up duration, take more risk outside of high yield and go over to loans. what would your take be? greg: i think it is important. you need to bifurcate the risk. you need to separate those two things. we can head out easily the duration risk and monetize spread risk. that is how you should think about it.

if you are worried about duration risk and the spread risk portfolio, you can have more of a floating rate type of fund or bond, loan. i do take some exception to the fact that putting those two things together because you are supposed to separate them out. at the same time, we do see value in clo's, loans is an error that has outperformed our expectations. i think the best place to be in credit right now is this crossover divide, bb, where we will see unprecedented rising activity, and the bbb part of the market that is continuing to see balance sheet repair. it is a relative value opportunity that we like a lot. but the large beta game is over, it's all about relative value. jonathan: when you talk about the golden era credit, is that

the statement of credit quality that captures that story for you, bbb, bb? greg: it does. historically, that has been the best place to be over time. i think that is an area -- you went on both sides of the aisle, so to speak. you have these bb companies that were hit during the covid crisis that are repairing and getting back to investment grade, so you benefit on that as an investor. and then you still have these bbb companies that arguably are over levered, but they don't want to default to high-yield, so they will work hard to maintain their reading -- rating. i think that continues to be the sweet spot. frankly, normally the sweet spot in the credit markets. jonathan: final word, do you agree with that, ashok? some might be surprised that that story has not already largely paid out -- played out.

ashok: i would just comment on the rising star activity being pretty extreme in this cycle. we see maybe 20% of the highest quality segments of the high-yield market being investment grade when all is said and done. there are a lot of positive fundamental credit tailwinds in this environment. i don't think it has played out. i think it will play out, it will not be immediate. you will capture this improvement in tighter spreads being upgraded. for a longer horizon, there is still some spread tightening on the table there. jonathan: final word, lisa? lisa: i don't know if i'm the final word on this particular issue, but what i would say is, we are using credit but we are using it selectively on a security, focusing on picking

securities, not owning beta. jonathan: we will continue the conversation. still ahead, the week ahead featuring a federate decision and chairman powell news conference. that is next. this is bloomberg. ♪

jonathan: live from new york city, i'm jonathan ferro. this is bloomberg real yield. time for the final spread. u.s. home sales kicking off the week on monday. consumer confidence on tuesday. then it is the main event on wednesday, fed rate decision. u.s. gdp on thursday. rounding out the week with u.s. personal income and spending on friday. final comment from lisa shalett, greg peters, ashok bhatia. going to chairman powell, lisa, you have an outstanding question

that you think will get answered this week? lisa: i think he will have to use the word taper in his comments. i think he is going to stick to his view that inflation is transitory. i think he get a lot of push on that. fundamentally, i think he will have to start signaling a timetable for tapering of qe. i do think the shape of the yield curve is getting his attention. jonathan: greg peters? greg: i go back to where i started, i would continue to ask the question, how does he reconcile the transitory nature of his inflation forecast versus tapering and ultimately raising rates? i think that is a challenge that will continue to be not only at this press conference but increasingly so going forward. ashok: i would love to hear more on how the fed is thinking about the practical implementation of

flexible average inflation targeting. i would expect him to be vague on that, but defining the fed's reaction function will be important. jonathan: one word answer, do you go to lunch or watch this news conference? which one, lisa? lisa: i will watch. jonathan: greg? greg: both. [laughter] jonathan: ashok? ashok: i will watch but low expectations for a lot of new developments. jonathan: i think a lot of people are with you. appreciate you catching up. from new york city, that does it for us. this was bloomberg real yield. this is bloomberg. ♪

so... i know you and george were struggling with the possibility of having to move. how's that going? well... we found a way to make bathing safer with a kohler walk-in bath. it has the lowest step-in of any bath. it has handrails, a wide door, and textured surfaces. so it gives you peace of mind. and you would love the heated backrest - and the whirlpool jets - and the bubblemassage. and, it was installed quickly and conveniently by a kohler-certified installer.

a kohler- authorized dealer walked us through every step in the process and made us feel completely comfortable in our home. and, yes, it's affordable. looking good, george! we just want to spend as much time as possible, in our home and with our grandkids. they're going to be here any minute for our weekly spa day. ooh, that bubblemassage! have fun! stay in the home and life you've built for years to come. call 1-800-986-5068 to receive fifteen-hundred dollars off your kohler walk-in bath. and take advantage of our special offer of no payments for eighteen months.

amber: this is bloomberg markets. i'm amber kanwar. matt: i'm matt miller. we welcome both our bloomberg and bnn bloomberg audiences. we have a lot to talk about, from carmakers to marijuana to the markets. a lot going on in social media today. let's kick it up with magna, the company $3.8 billion takeover. we will discuss that with the ceo, swamy kotagiri. and we will discuss what cannabis legalization would mean for an industry long crimped by federal restrictions. len tannenbaum is with afc gamma. and shares of snap jump on a blowout second-quarter earnings report. we will look ahead to big tech earnings, giant tech earnings next week. amber, there is a