jonathan: from new york city, bloomberg real yield. starts right now. coming up, foreign policy whipsawed markets, a hot economy keeping the fed on track, president williams talks down a 50 basis point move. we begin with the big issue, whipsawed by geopolitics. >> this is a big air pocket of uncertainty. >> the headlines have been flowing fast and furiously. >> markets are clearly up and

down. >> struggling to connect the dots and understanding how bad this is. >> 50 bps is off the table. >> anything can derail this fed. >> clearly what we are seeing is that the situation is very hard to read. jonathan: joining us now is brian weinstein, tony rodriguez, and amanda lynam. let's start on the fed issue and the geopolitics. how do you think the energy story is influencing the fed's thinking? amanda: thanks for having me. our economists are expecting fed liftoff in march with seven consecutive hikes through the course of 2022, 25 basis points each. their base case is not for a 50 basis point hike. as you can see, a lot of

uncertainty in the geopolitical landscape. leaving that aside, the fed is focused on inflation at this juncture. drilling down under the surface, some of the geopolitical concerns actually have the potential to drive an increase in oil prices. that could move things under the surface. i will defer to our economist for their forecast for this year, but the base case is liftoff in march, seven hikes, 25 basis points each, balance runoff in june. jonathan: the new york fed president spoke moments ago, and it is fair to say that he poured some ice cold water over that perspective. we have opportunities to take policy actions over this year starting in march. personally, i don't see any compelling argument to take a big step at the beginning. that is loud and clear, isn't it? tony: it certainly seems to be.

our review is it will be 25 basis points. when you think about fed speakers, despite hearing from many others, listening to what williams, brainerd, and powell say will be more critical to determining what the actual path will be for the fed. we think they would like to be gradual, be pretty well telegraphed. despite the fact that the market is pricing in a hike probability of 50, we think the more likely path is to start out with 25 and then continue at consecutive meetings throughout the year, although they may end up only doing six hikes this year, rather than seven. jonathan: brian, i think that is a no from president williams. what say you? brian: i think there is just too much going on in terms of

energy, the tax on the consumer. rates are higher. i don't think the fed wants the market to believe that seven is the beginning. between six and seven rate hikes they are happy. the fed is still buying bonds, so this is a gradual process. it is a bit of an experiment how they use them. jonathan: this argument of what happens if they don't do 50 i find interesting. the intuitive response from markets is a rally. they don't do the full 50, they wait, they go gradually. bob michele said this earlier this week, any idea that you can invest in risk on through credit or equities goes out the window because the market will lose confidence in the fed. amanda, can i get your perspective on that? this idea that you get an adverse reaction in the markets, credit if the fed is not seeming to get a hold on inflation. amanda: a lot of what we are

seeing in credit markets has been priced in already. some pretty notable moves in certain duration pockets of the high-yield market. bb's are great indicator of that, underperformed a lower quality spectrum of higher yield as well as their higher-quality bbb counterparts. we would use that as an opportunity to buy risk. let the credit market is seeing some moves on the back of a reaction function of the fed that is very focused on inflationary upside risk. i don't think the credit market, at this juncture, is concerned that there is a recession risk or growth slowdown. if there were, we wouldn't see the outperformance of ccc's like we have been, but it is responding to a less accommodative shift in policy, which we think is appropriate. we are forecasting some additional buildup and risk premium through the end of the year. jonathan: brian, your thoughts

on the same question? brian: i think it depends more on the data. if the march payroll is unusually hot, maybe they did go 50. ukraine matters, geopolitical matters. the yield curve is sending a message. the fed is pushing hard on the front end. we don't expect big risk on or risk off. when you get to six or seven rate hikes over the year, it's more important what happens in 2023. i am not sure that we get a big risk off. jonathan: are we talking about rate hikes or thinking about rate cuts in the future? what is more important? brian: we believe that this is the beginning of something, not be end. they are not raising rates just to ease them back next year. we think the market is sanguine about inflation being sticky.

but the market pricing is pretty clear. they do it all of this year and that the other way. we would disagree with that. jonathan: bank of america saying we remain bearish on tech, stocks, credit. tony, your reaction? tony: i think there is certainly some risk of recession, but we think that is more of a 24 risk than a 2023 risk. if they go 50 and then consecutive hikes after that, then the risk certainly moves forward into 2023. we think the fed will be more gradual than that, maybe six this year, maybe two next year, the terminal rate ends up a little bit lower than projections, and then you just have a moderating growth trajectory as opposed to recession risk. it matters about how much you see this year, and the key to

that will be, do we begin to see moderation in inflation in the second quarter of this year? if we don't see that, then we will see a more aggressive fed, and that will lead to over tightening and a significant slowdown, possibly recession, and the second half of 23. jonathan: bullard is talking about a frontloading of rate hikes, mester is saying let's wait and see we can back load them in the back half of the year. is that where you are at? tony: that is why we think they will end up with only six rather than the seven. we are expecting to see moderation of inflation. we think three point 5% on core pce by the end of the year. williams expecting 3%, we think that is optimistic. but if you see the moderation heading toward 3.5, given the fiscal impulse is declining, and

looking out into 2023, growth moderates further, that is an environment where the fed, we think, can be very patient and gradual and not disrupt the economic growth potential of the economy. jonathan: something you mentioned on the credit side of the story is interesting, that bb's have lagged. you are looking for this evolution in an up in quality trade. talk me through that thinking. amanda: bb's are the highest-quality pocket of the high-yield market, have really underperformed on a bunch of different measures, risk-adjusted, excess return, total returns, you name it. they have underperformed ccc's. when you look at why that is, we believe it is an aversion to the duration risk in the bb pocket

of the market. a big wave of fallen angels move from the investment-grade market to high-yield in 2020. you have some long-duration capital structures and some of the biggest sectors of the market like energy, food, and beverage. we have seen, and an environment where we think default rates will be benign, interest rates are poised to rise, we have had investors prefer either the lower quality pocket of the higher yield market, ccc's over bb's, or prefer the bbb pocket over bb's. they have left this bb pocket by the wayside, and it has underperformed significantly. what we expect as growth moves closer to trend over the next two years, is that investors will move up in quality, back into that bb pocket of the market. that should really favor bb's over the lower quality ccc peers. for the crossover investor that

has the ability to invest in investment grade and high yield prefer bb. we think the risk premiums in that asset class are especially more attractive after the underperformance. we are expecting a big pocket of that market to migrate back into investment-grade over the next three to six months. jonathan: i think what you said they have been lost on them over the last few months. brian, that has been a surprise, that the junk use of junk is where the outperformance has been. brian: our investors are speaking with their feet. they are out of high yield, out of traditional bonds, into short duration. the front end of the curve has a lot of protection. we think the duration trade is not over yet. there will be a time to buy higher duration assets.

we don't think we're quite there yet. jonathan: amanda lynam is sticking with us, along with tony rodriguez and brian weinstein. geopolitical uncertainty keeping the primary market on hold. that is next. this is bloomberg. ♪

jonathan: i from new york city, i'm jonathan ferro. this is bloomberg real yield. in europe, the banks issuing dominance this week. in the u.s., high-grade bond sales topping estimates. volume at more than 31 billion. the junk bond market grinding to

a halt amid surging volatility. monthly sales on pace to record the slowest february since 2009. keep an eye out for that. brian weinstein, tony rodriguez, and amanda lynam still with us. would you push back against that? amanda: we are starting to see i would characterize as flashing yellow signals in market microstructure as we talk about etf's. it's been remarkable. will we some weakness? we are totally on board with the idea of additional tailwinds behind the leveraged loan market. i think high-yield is in a relatively more challenging spot on the technical side because of that. as you know, our forecasts are

calling for a slow. it's anyway this year, forecasting 325 billion, a significant decline from the 20-21 run rate. corporate have done a lot of the refinancing, have significant cash on balance sheets, so there is not the same pressure to tap the debt markets like we saw the past two years. i wouldn't read too much into a slowdown in supply. very would be concerned is if the debt markets were effectively shut. that would be concern to us. we are keeping a close eye on the market micro. jonathan: taking a look at these little cracks, what is happening in this market is happening even if the fed has not hiked yet. these things are happening. what is the signal for you? tony: i think the key is some of

it is happening in the markets. the markets are doing some work in advance of the fed with the rate increase, the widening of the spreads, tightening financial conditions, weakness in equities. the markets are already pressing in quite a bit of this. the pressure right now, amanda mentioned, is not on fundamentals. corporate fundamentals will be in good shape. we think default stay low. upgrades what outnumbered downgrades. what you are running into is a macro economic environment that is weaker, uncertainty on policy and geopolitics is very high right now. therefore risk premium need to be higher. we think we may have already priced in the widening that you will see across some markets, and as things begin to settle

down in the second quarter, third quarter of this year, you could begin to see risk premiums stabilize and tighten from here. jonathan: that is a very constructive point of view. brian: brian, would you agree with that? even though we still don't know how big balance sheet reduction will be. brian: we are not as sure. the balance sheet question is fascinating, the market is pricing and that they will stop easing, but they are still buying bonds. it is a strange concept. the market doesn't like that. if we have inflation problems, why keep buying bonds? what happens if they decide the primary tool is the balance sheet? i don't think we're anywhere close, probably a conversation for june. but if the yield curve gets too flat and they have to sell assets, where do they go? mortgage rates are higher. it is the question that does not

get enough focus. 50 versus 25 gets too much. we think there is more risk premium out there. it is not a fundamental story. we were priced for the credit market to have some defaults, now the question is where all the bonds go. jonathan: cash is becoming an investable asset class. how much of a change is that already? amanda: a very meaningful headwind we think for the front end of high quality ig bond spreads. the return of cash as an investable asset class, which you can see in the two-year over the past two weeks, is causing some pressure on the value proposition of staying in short duration ig high-quality spreads. we think that will cause some curve flattening relative to intermediate maturities. the value proposition of front and ig paper has weakened. at the long and we are more

constructive because we think the structural drivers of demand for long-duration sprint products are more important than the shape of the treasury curve. our work has shown the correlation between the slope of the treasury yield curve and the slope of bond spread curves has broken down in the past few years. we look at things like corporate pension fund ratios which are at exceptionally elevated ratios, demand from insurance companies. all of them both small for the long and to spread curves. we have a flattening bias across the board, expect underperformance in the front and, overweight on 30-year spreads. jonathan: can you weigh in on the loans versus high-yield debate? he talked about the quality trade. what does the trade-off look like, loans versus high-yield? amanda: that yield differential between high-yield and leveraged loans has widened, has become more attractive. the most attractive since 2016.

all of that being said, we are still comfortable with the overweight on the overweight on leveraged loans versus high-yield bonds. if you take our economist forecasts for a iffy hike, half of the leverage known index will start to flow in may. we think that carrie proposition is really what is most valuable about the leveraged loan products, even though the relative valuation between high-yield has become more balanced as high-yield has underperformed in recent weeks. jonathan: brian, your thoughts? brian: we tend to agree. we think the balance sheets are cleaned, you will pick up higher coupons if the duration trade continues. if inflation is sticky, loans over high-yield for a bit longer. . jonathan: tony, final word? tony: we also weber long over high-yield right now. we think the clo market is also

quite attractive at this time. long-duration high-quality assets are probably the least favored by us versus intermediate duration floating-rate assets, mid to lower quality as being outperformance for the rest of the year. jonathan: coming up, the final spread, the week ahead featuring talks between secretary blinken and russia's foreign minister sergey lavrov. from new york, this is bloomberg. ♪

jonathan: live from new york city, i' this is bloomberg real yield. i do not see a compelling argument to take a big step at the beginning. was that a big glass of cold water thrown on top of the 50 basis point argument? maybe it is from here. for others, president buller, they would like to see it.

this meeting will be tense for this federal reserve. can they form a consensus on what to do not just for next month year ahead? do we frontload the rate hikes or do we wait t back load? we still have not talked about balance sheet reduction. let's get to the next week, the week ahead. president biden giving an update on russia and ukraine at 4:00. secretary blinken and sergei lavrov meeting next week. u.s. markets closing for president's day. u.s. pmi and fourth-quarter gdp. rounding out the week with fed speak. still with us are brian, tony, amanda. three quick questions, three quick answers. march meeting, 50 or 25? tony: 25. brian: 25.

amanda: 25. jonathan: how many hikes this year? brian: six. amanda: seven. tony: six. jonathan: 2/10 curve, 40 to 50 basis points? what to be get to first, zero or 100? tony: zero. brian: 100. amanda: zero. jonathan: amanda lynam, tony rodriguez, brian weinstein, fantastic. thank you very much. this was bloomberg real yield. have a fantastic long weekend stateside. this is bloomberg. ♪ bloomberg. ♪

>> we welcome our bnn bloomberg audience. here is the first word. the u.s. estimates russia has

gathered as many as 190,000 personnel in and around ukraine come including troops, national guard units, and russian backed separatists. it is being called the most significant military mobilization since world war ii. defense secretary lloyd austin spoke earlier in warsaw. >> all indications are that he will maintain the capability to launch an attack at almost any time. john: russia told a u.s. it has no plans to attack ukraine and officials have dismissed u.s. warnings about a possible invasion as hysteria and propaganda. vice president kamala harris is calling the situation in ukraine a dynamic moment in time and is going to stay close with allies, checking in hourly if necessary. in her remarks, harris said the u.s.'s diplomacy with russia but also board there