jonathan: from new york city, bloomberg real yield starts right now. sanctions piling up on the russian economy, investors preparing for a potential default, and inflation keeps the fed on track to hike. we begin with the big issue, dark clouds over the fed's path forward. >> substantial market stress. >> higher commodity prices, higher input costs. >> not only is it not slowing,

it continues to accelerate. >> the fallout from the invasion of ukraine. >> this makes a very difficult situation worse. >> they have yet to stop expanding their balance sheet. >> you look at dislocations in the treasury curve. >> this is a tricky time for the fed. >> they have to be careful here and they cannot over hike. jonathan: joining us now are our guests. whether we are really fully engaging with the prospects of a potential sovereign default in the next few months. >> i think most investors have begun to anticipate a sovereign default. the question is is this going to be a default that is based on more geopolitical posturing or the true inability for the russian sovereigns to service their debt. those will have different signals for the market,

different outcomes for investors as well. jonathan: what is your take on the same question? >> the way investors are thinking about it is we will have more volatility ahead. the meetings between the foreign ministers between russia and ukraine this week doesn't show much progress, so it will be a prolonged issue. the longer these sanctions are in place, the bigger of a problem it becomes. >> the market is pricing it already with a high probability. with a recovery rate of 35%. a plunge to the low 20's which is where most of these bonds are was painful, did inflict a lot of damage to performance but markets have done what they do all the time, brace before things happen. another key area of focus is the

exposure of the system is more in europe than in the u.s. i also don't think this has the scope to morph into something more systemic for the banking system. jonathan: earlier today we heard from the russian president who said the following. we have had certain positive shifts. at the same time, that is only one half of the story. take a listen to what the ukrainian foreign minister had to say. >> there was zero progress in talks, so it is hard for me to understand what kind of progress president putin is referring to. the russian army is still in ukraine, killing children, civilians. it speaks for one side only. even if we continue talking with russia, that does not have an impact on the behavior of the russian army on the ground. jonathan: we are lucky to have anne-marie with us in d.c. this

morning did that interview. hard to reconcile positive movement, the ukrainian foreign minister same zero progress. >> he said pointblank we cannot take president putin at his words because the rhetoric and signaling coming from the kremlin does not match what is happening on the ground. he says there is zero progress on the diplomatic path forward. two other points we should note from that interview on things that he wants to see the west continue to do. hours ago, the president announced a number of sanctions and penalties against the russian economy. but what he wants is the loopholes to be closed, for those companies who say they are halting sales or positions in russia. also he does not want a single vessel leaving a russian port. that says he wants direct impact and sanctions on oil. jonathan: great to catch up, annmarie hordern. we try to avoid the politics but

i saw this line from the president saying, make no mistake, inflation is largely the fault of putin. zach, can i come to you on that? your thoughts on that line, that inflation is largely the fault of putin? >> certainly a part of it, jonathan, but not the whole story. it creates a more difficult situation for the fed. it was difficult before that. we have had years of fiscal and monetary stimulus, supply chain issues in place for almost two years now. that has driven inflation everywhere. it is more than just a commodities story. that is why the fed will be moving forward at a fairly aggressive pace. we don't think 50 basis point is on the table but the fed will be watching that index closely. jonathan: that is what the fed will be responding to next week, not the story of the last couple

of weeks in ukraine and the consequences of that, arguably nine months or so. a call to downgrade the u.s. gdp forecast. three reasons for it. tighter financial conditions. the second one is soccer consumer sentiment. the third is a slowing european economy. they dropped their gdp forecast from 2% to 1.75. is there any reason to slow the fed down? tighter financial conditions, softer sentiment. a slower european economy? >> i think the consumer sentiment aspect will be key for the next 12 months. so far we have seen consumers fighting inflationary pressures as being particularly negative on sentiment, but we have not seen that translate into a changing consumer behavior. we are still seeing pretty

strong growth in terms of retail sales, demand, but that may change over the coming months. the direct impact of the u.s. consumer which for now is still in very good shape could change pretty significantly. that will be the linchpin for the fed. jonathan: consumer sentiment today tumbling in march to the lowest since 2011. is that a reason to slow the fed down? >> we expect the fed to deliver seven hikes this year, we have not changed our forecast for the path of monetary policy. there are new risks that emerge. the hawkish side, we would keep a close eye on the risk that inflation expectations start becoming unanchored. until now we have seen a lot of pressure in terms of wage inflation, goods prices. inflation expectations have remained well-behaved. if that were to change, i think the fed could go faster and

deliver 50 basis points increment hikes over the next couple months. the dovish side, i also think we should keep attention to the risk of a more rapid deterioration of the cyclical outlook, particularly if it is coupled with tighter financial conditions. if i away those two forces, i would say the risk is slightly skewed toward a slower exit than originally anticipated. jonathan: zach, you disagree. citi believes that we can get 200 basis points hikes in 2022. i know that you believe this market is still under pricing the ultimate endgame of how far this fed will take things. how far do you think it would take things, and why do you disagree with so many people? zach: we think the terminal rate is being underpriced. that will come off to 2.5% or

even higher as the fed deals with more persistent inflation. as far as several 50 basis point rate hikes in the near term, we don't think that is likely especially when you look at how markets have behaved in the past couple of weeks. you have the situation in russia and ukraine. inflation is a bigger concern at this time but the geopolitics of it would take out room for 50 basis point in our view, at least the first couple of hikes. the fed will want to see what kind of impact it has. in the testimony, they indicated they could do 50 basis points if the data supports that. it really comes down to core inflation. if it comes in above be our thinking, it could be on the table in the second have. jonathan: help me understand that with regard to the curve. 2's/10s, difference is 25 basis

points. you anticipate a fed that will keep on hiking into an inverted yield curve? which one is it? zach: i wouldn't say yield curve inversion is off the table this year but that is driven by elevated inflation and the central bank. one of the things the fed can do is a more aggressive qt policy. if they allow the runoff to happen more quickly, flattening pressure will be more intense with policy hikes. that is something that we expect, more flattening going forward. jonathan: the curve is flatter today. 2's up for basis points. just short of 2%. coming up on the program, at&t

raising $30 billion in one of the biggest corporate debt offerings on record. that conversation is next. ♪

jonathan: live from new york city, i'm jonathan ferro. this is bloomberg real yield. in europe, a flurry of midweek deals pushing debt sales above 23 billion euros. weekly volume topping estimates despite estimates going quiet after the ecb decision. in the u.s., bond sales surpassing. the junk bond market remaining quiet. one deal this week setting up

for the slowest first quarter since 2009. when he, zach griffiths, lofti karoui are still with us. how much damage has been done in credit? investment grade through high yield, take us through it. winnie: from a returns perspective, an off a lot of damage has been done. ig is having the worst performance start on record. high yield is on the second worst performance on record. from a spirit perspective, the move has been big but not quite as large as those return losses would indicate. it all comes down to the starting point of broader yields. everything was so low and so tight, but the sensitivity of portfolios to a rising yield is driving outside total return losses. jonathan: are there particular dislocations in investment grade that you want to take advantage of? winnie: yes.

we are now seeing a large number of investment grade bonds traded at a discount to par. this is in part because of higher yields overall, coupons being out of the money. in general, we like to see investors capitalize on those lower dollar priced bonds. securities in the five to 10 year part of the market are looking much more attractive. we also think the front end of the curve, which has sold off a lot in the past couple of weeks, on a yield basis is now looking attractive. jonathan: lofti, what about you? lotfi: from a spreadslotfi: standpoint, credit has been moving in an irrational way. we added some after that but over all you look at the index, we are at levels consistent with an economy that is still in early stage of the business cycle. midcycle.

credit has been outperforming the equity market in risk-adjusted terms, certainly true in high yield. a couple of reasons for that. you have a favorable sector mix in credit relative to the equity market. 20% of the u.s. high-yield market is energy and metals and mining. you are positioned to perform well in this environment. number two, credit is still well anchored by the strong liquidity positions on corporate balance sheets. keep in mind the bulk of the proceeds from the massive amount of debt raised in 2020 and 2021 is actually still sitting comfortably on corporate balance sheets as a line of defense in case you see an adverse shock. talk to price credit risk materially wider given the strength of liquidity positions. last thing i would say, this is a young cycle, a year and a half. we have not had time to

misallocated capital. for those reasons, credit has been pretty rational in my view. jonathan: you went through the sector mix with high-yield, giving a heavy weighting toward energy. i wonder what brent and wti does to the rest of the index? lotfi: that is the right way to think about it, which is over time, the longer these commodity shocks exist, you'll see a bifurcation in the market between commodity producers on the one hand, oil, gas, metals and mining, and commodity consumers on the other hand, industrials, airlines, home products, consumer and beverage. it would be the opposite from 2015 where you have two markets in one, with energy putting on pressure and then rest of the market doing well. that is reflected in our sector recommendations right now even

though energy has performed well. there is room to run. we would stay away from sectors vulnerable to the confluence that we are facing right now of higher energy prices, more pressure on the supply chains. airlines is a good example of that, consumer products is another one. jonathan: zach, i wonder if that resonates with you. a colleague of ours wrote, you risk a stagflation outcome which could be a crusher for corporate profits. does that resonate with you? zach: that is something we have been looking at, have gotten more concerned with margins. prices have been able to pass on to the consumers. they are probably running out of room for that. when you think of the oil price shock more broadly, our team took down the forecast for personal income expenditures. definitely concerning.

jonathan: everyone will be sticking with us. still ahead, the week ahead featuring a fed rate decision and german powell's news conference. that conversation is around the corner.

jonathan: live from new york city, i'm jonathan ferro. this is bloomberg real yield. this week really picks up from wednesday. russia do to pay more than $100 million worth of coupons. and a busy week from global central banks. a fed rate decision, chairman powell news conference. thursday, bank of england, and then the bank of japan with its own rate decision on friday. earlier this week, the ecb had to cut its growth outlook and raise the inflation outlook. does the fed have to do the same

thing on wednesday? winnie: i think that they do. i don't think that megan to needs to be quite the same as the ecb given the much more direct impact of energy commodity prices in the euro zone. the u.s. has more in play in terms of that inflationary pressure versus the deceleration in growth, but i expect a modest uptick in terms of the near term inflation expectations, slight downgrade in terms of growth. jonathan: zach, the former new york fed president bill dudley caught up with us and went through the forecast and said they are in fantasyland. do you think they are in fantasyland? i know that you do with the dot plots. zach: a lot has happened since their last summary of economic projections, so we look for a pretty materially increase in their inflation expectations for q4 this year, bring down the gdp

forecast maybe half a percentage point. it is a difficult situation for them to be in. inflation is here to stay for at least the foreseeable future, so they will need to adjust policy soon. jonathan: the 22 forecast for core pce is 2.2 percent. will they be lucky if it has a three handle? zach: we are at 4.4% at wells, maybe they will not take it that high, but there are pressures everywhere, even just looking at the cpi figures which are not exactly the same as pce, but every other major subcategory contributes to growth in february and january. you have the stickier inflation components like shelter rising, something that we think will be here to stay. we see inflation forecast coming up quite a bit.

interesting to see what that means for the dot plots, how aggressive they will be in 2022, what it means for 2024. jonathan: that was the story of the ecb, inflation forecasts up, gdp forecast down. if the fed repeats that, you'll hear people throw around the stagflation word. in a world where we are raising inflation forecasts and dropping growth forecasts, like goldman did overnight, how does credit perform in that kind of world? lotfi: i think it is a stagflation war, the question is how persistent it will be. the more it persists, the greater the erosion in margins. if you see erosion in margins, you are the bridging balance sheets in a passive way. credit, like equities, would

perform pretty poorly if we had a prolonged period of a stagflation environment which we would define as elevated inflation and weak growth. zach made the point earlier. i would take things one step at a time. for the time being, we are in good shape. jonathan: three quick questions, three quick answers. i will make it all about the federal reserve. next week, 25 or 50 basis points? winnie: 25. zach: 25. lotfi: 25. jonathan: i anticipated that. how many hikes through 2022? zach: six. lotfi: seven. winnie: four. jonathan: the difference between four and seven, big margin. zach gave a nod toward this, and

this is the important one for risk sentiment, here in the states and worldwide. where this all ends, the peak in the fed funds rate. where is the peak in this rate hiking cycle? zach: two point 75%. lotfi: 2.5. winnie: 1.75. jonathan: that is a big spread. fantastic to catch up with the three of you. when he sees zach griffiths, lofti karoui. see you same time, same time next week. this was bloomberg real yield. this is bloomberg. ♪

>> welcome to the bnn bloomberg audience. i'm mark crumpton with bloomberg first word news. president biden is calling for

an end of normal trade relations with russia. he also announced a ban on russian-made vodka and caviar. speaking from the white house, the president explained what the steps will accomplish. president biden: this will make it harder for russia to do business with the united states, and doing it in unison with other nations will make up half of global economy, another crushing blow to the russian economy which is already suffering badly from our sanctions. mark: the president cannot unilaterally change russia's trait status because that lies with congress but the move has support from democratic and republican lawmakers. russia plan to send thousands of local fighters from the middle east along with weapons to join its forces in the ukraine. vladimir putin told the security council today, we need to help them to get to the conflict zone. the russian defense minister told the