>> i'm lisa abramowicz. bloomberg "real yield" start right now. ♪ lisa: coming up going u.s. treasury yields humbling, prompting traders to pair back their bets after a disappointing cpi report. the fed is under pressure. >> the fed has to get inflation under control, the question is what are we willing to do? >> inflation is a problem. >> this is a tricky game.

>> the messaging has been incredibly hawkish. >> we had a huge selloff in the bond market. >> the demand for bonds is evaporating. >> this job of orchestrating a soft landing. >> the elusive soft landing. >> it will require fancy footwork. >> the messaging is clear. >> they need to normalize as quickly as possible. >> slow the economy, have a soft landing without a crazy recession. >> that is the question. lisa: joining us right now is brian weinstein of morgan stanley. michael collins. subadra rajappa, managing director at society generate. and with the declining yields, do we have a sign that we have reached peak hawkishness? subadra: it feels that way because the market was priced for a rate hike, getting the

country to 3% by the middle of next year. that to me, especially in the context of an aggressive path or runoffs from the portfolios, seemed like it was aggressive market pricing for rate hikes. so i am not surprised that we are seeing a pair back. we did see a very high cpi number, ppi was also very high. but we were looking for nuances to pay back the very hawkish market pricing because i felt like the market had gotten ahead of itself. lisa: michael, is that how you interpret this insight of relief after very hot cpi and ppi numbers? michael: this is typical. once the markets are pricing in a a lot of hikes, you tend to see a peak in the overall level of interest rates. it's not that big of a move, the markets were pricing in a funds

rate that in a half year from now it would be 3%, now they are at under 3%. personally, i would take the under. they will hike until something breaks or until they get inflation down. but i will still take the under on the fed being able to get to 3%. lisa: brian, is this what people are coming to the realization of, that something will break sooner than previously thought? brian: i think there is another question, which is raising the feds funds rate the best way to fight headline inflation? we saw some aspects of course softening. we have seen energy in food prices continue to stay high. forcing the issue and trying to break something is not what the fed is going to do. they have the fed funds rate and balance sheet and i do not think they need to do as much in the front end. lisa: but what happened to

underscore that? let's talk about cpi, for example. if you look at the main components, rent and major issues that people are focused on, they are skyhigh. yes, auto prices have come down, but is that enough to see inflation come down for consumers? brian: no. and i think that the fed has changed its tune. we have more focus on the balance sheet now. so what michael said before, that we priced in as much as we could for a while, that is standard, by think the problem is the same, the fed has to stop the psychology of inflation from getting more ingrained. that's difficult to do when everything seems to be getting more expensive and it is still way too easy. lisa: they st. louis fed president came out and highlighted the pressure, saying there is fantasy in policy and a

neutral is not putting downward pressure on inflation, it's just keeping things from putting upward pressure on inflation. how to get the sense that we are seeing a response, even the perceived tightening of fed policy, to give us confidence that we cannot go up that far when there are many signs of sticky inflation? michael: you are starting to see some signs, may be prices rolling over so much, but the demand side starting to push back a little bit on these high prices, whether it is used cars, new cars, housing, food or energy, airfares or lodging, you're starting to see a sense that consumers have probably had enough and they are getting to their limit of the price increases. you have seen mortgage refinancing and mortgage activity plummet in the face of higher mortgage rates. that is obviously a very interest rate sensitive sector

and i think that we are already starting to see a reaction function from the consumer. so maybe that is the delta you are seeing. i always thought the range on the funds rate would be between 0% and 3% for the rest of our lives and maybe 1.5% is neutral. i think that they percent is tight policy -- the 3% is tight policy and will slow things down. subadra: i think the story from here on will be the consumer and what happens to demand. you are seeing a sharp rise in gas prices from $3 to $4.50 around the country on average. you will see higher food prices. and like brian was a saying, it is a lot more of headline inflation that the consumer has to deal with. and raises are -- wages are rising, but not as fast as the costs the consumer have to bear.

so the demand is really going to be the key. the other metrics we will be tracking is consumer sentiment. the michigan survey, we had a sharp correction in consumer sentiment, so i think the ultimately the retail sales, those will be the leading indicators of how far the fed can go on the policy front. once they start seeing an entrenchment, it will make it hard for the fed to continue to raise rates. jonathan: but the conundrums we have seen, it's been measured by the university of michigan, we have seen it deteriorate and yet people are still buying. they say we do not feel good but we will shop and make ourselves feel better. at what point are we starting to see that and how much are you looking for signs of that pushback from consumers and the earnings reports that we started getting out today? brian: i think that we saw it in

other parts of the world first, where inflation has actually been a bigger problem. you're has seen a decent slow down. and china. the emerging markets are really seeing a big challenge in the face of higher food prices. they cannot afford to pay or they cannot even find the food. so problems are bubbling up around the world and it is difficult for the u.s. to be isolated here. but i still think that you are getting to a point where inflation is becoming much more of a problem than it is the tale il end. lisa: the question of the haven trade when inflation is hurting the world more than the u.s., which has a great degree of -- still in the economic momentum. have you ratcheted back emerging markets at this point? is that where you are focusing your move away from, rather, and seeking haven in assets in the

u.s.? brian: that has been the trade of the year. i think a lot of it is in the price. so we are starting to go the other way now. if you look at the u.s. high yields versus emerging-market creditors, there's opportunities to go the other way. you have to be selective, there are problems out there and the problems could get worse, but i think the u.s. as a safe haven trade has come close to running its course. lisa: so where would you go? brian: there's opportunities in credit in emerging markets, there are higher yields and then in the u.s. if you look at emerging markets probably, they have been fighting inflation i think more actively than the fed, so i think that they are ahead of the curve. so we continue to like to find places where we can buy. we like bank loans where you

have no duration. there are plenty of places to hide that are not the generic u.s. names that i think have done well because of the circumstances. lisa: what has been a haven trade for you, subadra? subadra: it is hard to hide anywhere given the fact that all bond yields have risen quite dramatically. ultimately, i think that -- you know, the other haven currencies have not worked out well either. like we have seen the yen start to weaken. so, ultimately it is the dollar, as well as gold, and treasuries win the market starts to -- when the market starts to settle down a little bit. you will see the demand come back to the market. lisa: hold on. where in the treasury curve

would you be buying? subadra: um, that is a good question. i would say that ultimately it's going to have to be in the long end, because the curve is still -- it has steepened out and the trajectory over the next seven months will be it will continue to flatten as the fed tightens policy. i'm skittish on the front end because he could see in overshoot towards 3% in two year yields, but the curve is going to, i think over the next several months, continue to flatten. but i would prefer the long end. lisa: mike? michael: on the treasury curve, then i will, make a comment on emerging markets. the curve is really flat, then it jumps up.

there is a relative value trading opportunity to buy those on a hedge basis because they are structurally undervalued. but generally, when the curve gets flat, the knee-jerk reaction, especially for retail investors, is to buy the shortest maturity bonds with the same yield. so why would you own a 10 year when you could own a two year, but the right thing to do is to go out in duration, the five-year part or 10 year part of the curve, those of the parts that do the best. the curve will probably continue to flatten in the near term but the next big move over the next three years will be a steepener, when the fed has to cut rates and realize they have gone too far. so you want to be in the immediate part of the curve. lisa: interesting that the idea on betting on rate cuts. you are all sticking with us as

we go through some of the credit story that we have seen, which is up next. investors are turning more cautious. that conversation is coming up next. this is bloomberg. ♪

lisa: this is bloomberg "real yield." time now for the auction block, where we kick things off in europe with the first forum bonds in since russia invaded ukraine. croatia's offering and pushing weekly value above 7 billion euros. in the u.s., bond sales hitting $17 billion, leaving weekly estimates with amazon's jumbo

deal. banks are struggling to sell the only high-yield offering of the week with investors getting increasingly selective. we are so lucky to have with as ryan, michael and -- brian, michael and subadra. i was looking at the amazon deal and wondering why they are raising money right now. is this a good time for companies to lock in financing costs because they will only arise from here? brian: it is funny to look at the issuance coming out. it's a good reminder that for a company like amazon and others, that they have a good rate to borrow at. you cannot take the risk, you issue when you can. you can always find ways to refinance it. so i was thinking the same thing when they issued it, but at the end of the day the 100 basis points for amazon is not a big concern. lisa: this is a great test case. if amazon needs the money,

obviously for an opportunistic bond tale that could possibly go towards buybacks, what could their thinking possibly be other than they just see yields going higher? brian: my for every question people ask me is should i refinance my mortgage? the answer is always yes. as rates fall, if they continue to fall, you could do it. borrow the money if you're amazon and if you know you are growing you can use that money for buybacks or anything productive, because if you are wrong and rates are at 3.75 next month, it could be expensive to be wrong. lisa: this logic would seem to make sense if in a company actually needed money, but they have been borrowing like maniacs over the past three years so who is left or do you see issuance falling off of a cliff? michael: you are seeing capital investments picking up again a little bit, not only in energy and commodities, but in general. they need to rely more on

technology in robotics. so we have seen an uptick in capex, that could be funded by debt, but you are also seeing a reliance on the debt markets to refinance all the debt that has been issued over the last decade. you will see the activity regularly. the other point about amazon, with credit spreads, when they went from 80 to 140, then back down to 115, they hedge the interest rate risk, these companies, and they are looking at spreads. so maybe from a spread prospective they are being opportunistic and trying to access the market before the spreads widened. . they will probably widen a little bit rather than tighten from here. lisa: that means he would not necessarily buy at this point. michael: we used at the last rally we had of the last couple weeks, in high-yield and investment-grade, and even in

emerging markets, to sell into that strength. now spreads are starting to bounce a little bit wider. lisa: is there dueling issues? the fact that favorite companies may be selling at this point because it is not as cheap as it used to be and they already sold so much debt they do not really have to and they are not getting cheaper rates but on the flipside you are seeing signs that consumers are starting to push back and not buying like they once data, which would be a credit negative eventually. which is the main driver of your thesis? subadra: so, i think that -- i agree with michael, eventually you will see the spreads widened as the fed raises rates. but for now if you look at corporate profit margins, they are looking healthy and there is really no serious risk of default or any sort of concern

towards bond investors. that could eventually come down the line but it is not a concern for now. there is still a lot of cash to put to work and you want to put your cash to work where you are getting your best returns, and that is in the corporate bond market, broadly speaking. so i think the demanded dynamic is pretty much going to be here to stay, at least early in the cycle. and like michael pointed out, the spreads have narrowed, so a lot of that has to do with demand. and for the next few months you will see that dynamic as we get towards the latter half of the cycle, when you will see the spreads start to widen. lisa: there has been an 11% selloff this year, where we calling this a taper tantrum? michael: it is all due to rates. the credit spreads have been range bound, they are wider than they were at the beginning of the year but it is really a

rates story. it is a total repricing of expectations for inflation, high inflation expertise and have gone up a little bit, and the terminal funds rate. that is what is driving it. the corporate market is a longer duration index than like the high-yield market or the bank loan market, for sure, so that is where you have seen the run to the pain. the longer durations have done the worst. i would not call it a taper tantrum. i think once the fed ratchets down their balance sheet in an effort for slow growth and controlled inflation, we they that will signal more of a -- in rates and then a reason to selloff more. lisa: olivia -- all of the are sticking with us. still ahead, the week ahead featuring central bankers, including lagarde of the ecb. that conversation is coming up

next. this is bloomberg. ♪

lisa: this is bloomberg "real yield." it is time for the final spread. coming up, the bank of america rounding out earnings for banks on monday and we will get u.s. and china pmi. the beige book on wednesday and then the fed will speak. and chair powell and the ecb president christine lagarde will be speaking on thursday. still with us, ahead of the ecb meeting is brian, michael and subadra. how much pressure is the ecb under? do think the market has gotten ahead of itself? michael: you can see that they are under pressure in some of the things they have said, bailing out spreads if they widen, and the inflation kind of

in their backyard, but then the energy prices and pipelines in geopolitical risks. so at the that the market has held itself with the ecb, although the pendulum has swung back toward fighting inflation and not letting it get out of control. i think it is harder for the ecb to get this one right. the fed has a difficult job and the ecb's might be that much harder. lisa: do not want to miss my favorite part of this show, the rapidfire around. we will start with three questions and we need three quick answers. will the terminal fed rate for closer to 2% or closer to 4% this cycle? subadra: 2%. michael: 2%. brian: 2%. lisa: wow, what is a better value, investment-grade or high-yield corporate bonds? brian: investment-grade. michael: high-yield.

subadra: probably high-yield. lisa: what is worse, to be long german or long u.s. two-year bonds? michael: probably u.s.. there are a lot of hikes in the german curve that will probably not happen. brian: german. subadra: german. lisa: thanks to all of you. i want to elaborate on all of that, which we will do at a later time. real yield will be returning next week at its usual date and time, 1:00 p.m. on friday with a jonathan ferro. this was bloomberg real yield. this is bloomberg. ♪

mark: i am mark with first word news. the men who police have

identified as a person of interest in the new york city subway shooting is now a suspect. frank james is still a large. the mayor spoke with bloomberg television today. >> based on the briefing of my law enforcement officials and based on the evidence we were able to accumulate, he has been updated to a suspect. we are asking you to assist in the apprehension. please do not approach him. if you see him or know about his whereabouts, please notify law enforcement. mark: police say keys found at the scene of the attack belonged to a u-haul van rented by james. lee say the suspect set off two smoke grenades on a manhattan bound train and then fired a nine millimeters handgun at least 33 times. ukraine's president is proposing

to swap a tycoon wos