jonathan: live from new york city to our audience worldwide, bloomberg real yield starts right now. coming up, treasury yields surging higher as employment costs climb by the most ever ahead of the fed's next move. we begin with the big issues looking ahead for chairman powell. >> the fed has a difficult job right now. >> you will start to lay out more of the plan. >> we have had a very concerted pivot, shift, lean towards a

hawkish direction, and it is strong. >> how much will you move? >> people are fixated on where rates will be. >> we are expecting 50 point hikes in the next two meetings. >> they are concerned with trying to get to neutral. >> 2.5%, maybe higher. >> the real question is cannot hold down demand enough? >> a soft landing for the fed, the chances are narrowing. >> it is at the top of my investment pyramid today. jonathan: let's get to the panel now, matt hornbach, bob miller and kathy jones. what are you looking for next week? >> i think it is a foregone conclusion that the fed goes to 50 basis points. they have signaled that strongly. i don't think 75 is likely.

they will signal more hawkish in -- hawkishness and rate hikes ahead. but there may be a few surprises. jonathan: where is the potential for surprise? >> the potential is in the press conference. chair powell has been clear that the priority has been to get there policy rate to neutral quickly. if he suggests moving that above neutral is a new priority, that would be a surprise to the market, but otherwise i agree very much with kathy. jonathan: bob miller, you said something that caught my eye. the fed does not have the luxury of being data dependent right now. what did you mean? bob: they realize they are behind and they need a sense of urgency for the next several meetings to get moving and get the funds rate moving with some

sense of urgency and i think that means 50 basis point increments at the next three meetings and if sequential inflation, month over month inflation, starts to annualize something more like 3% instead of 6%, then they have breathing room in the second half of the year. if it isn't decelerating at that type of pace, i think it will become much harder in the second half of the year, so they are in a box now where they need to get moving. i think they will do so. they will leave all the hawkish options on the table for the time being. it is simply to zoom for them to remove -- too soon to remove any of them for consideration. jonathan: this is quite mechanical considering the year-over-year figure and the fact that we will have deceleration year-over-year but when you see that -- but windows does that hit more pronounced? >> already starting.

we will see meaningful deceleration in the year-over-year over the next four or five months. the question is, is the sequential run rate, through the summer into the fall, actually suggesting a durable declined to, you know, 2.5% to 3.5%, or is it still suggesting on an annualized basis that will -- that we will be printing closer to four? that is the question in the market and we simply need time and data to answer that more clearly. jonathan: i think that's a major question on how the fed will respond to this story through the summer. how do you expect them to do that? kathy: i think they will do the best they can to message what they are seeing, but frankly, i don't get the sense they have tremendous confidence in their forecasts now. if you look at the dot plot,

that dispersion next time will be very, very wide, right? so you have james bullard, who wants to go very, very fast, and you have others who want to take a more measured approach, and i don't think in this environment it will be easy to predict where inflation will land by december. we will just have to wait until we see the numbers and they will react to them as they come along. jonathan: bob, what is your read -- matt, what is your read on this? matt: i agree with bob and kathy. those month over month prints will be key. also paying close attention to the trend mean measures of month over month inflation, which have already peaked at the pce index level, the core pce index level, so that is important, and also, just on the 50 basis point versus 75 basis point issue kathy alluded to earlier, i mean, look, a 50 basis point

pace of rate hikes is plenty. 705i think would send a message that the fed is scared and that is not what the central bank wants to make everybody believe at this point. jonathan: matt, we get to what we think is neutral quickly. that is what the consensus is. let's get there. 225, 250. once we are there, in the fomc, what do you think settles the debate about what to do next once you get to what you think is neutral? matt: ultimately i think it is inflation and how the global risks are developing. i mean, we cannot forget that we live in a global economy. the u.s. is insulated to a certain degree but also, going back to what we saw in 2019 with the trade conflict between the u.s. and china, this ultimately did end up having an impact on the u.s. economy so we cannot forget about what is happening outside the u.s.

i think a combination of what is happening with inflation here at home as well as what is going on in asia and europe will factor in to ultimately where the fed comes up -- comes out on the debate. jonathan: at the moment they don't have to choose. they might have to choose between supporting growth and expecting prolonged inflation above target for may be long. of time. do you think they will have to face that in the back half of this year? bob: it is definitely possible, jonathan, and i think that's the direction of travel. almost definitionally, they need to put that on the table. they need to get the funds rate up and they need to have sufficient tightening of financial conditions domestically such that we can test the durability of the labor market, specifically. we think it is going to be pretty durable. we think the underlying dynamics in the labor market remain pretty robust. no doubt the pace of job growth

is going to decelerate some because it has been so high for a while, but you would have to really shake the labor market, you know, push the unemployment rate up .2%, .3%, .4%. if inflation remains broad and it is still annualize and at something like 3% to 4% in the second half of the year, they are going to have to accept some gross -- some growth slowed down to get that down to something more like 2% to 3%. i don't think they are targeting 2%. i think they will be happy if inflation is below 3% in 2023, but it needs to be on that run rate to get some comfort. jonathan: we are having this conversation on a day when yields are surging higher again, approaching their high of the year, and the equity markets are down again. this year has been terrible -- this month has been terrible for equities. on the nasdaq, we are down

as much on a monthly basis since 2008. kathy, is the fed put dead or alive -- the equities put dead or alive? kathy: i think it is dead, but i think the question is not just the fed. equity performance is part of the equation. we have a lot of dynamics already where it looks like the anticipation of fed tightening is actually tightening financial conditions a lot, so the decline in equities, the strength of the dollar, compounded by widening credit spreads, i mean, we have a lot going on already and the fed has only hiked 25 basis points, so if we get into the second half of the year, i don't know that it is a choice between -- you know, if the fed is worried about the market, unless it is illiquid or there's some problem, but the global economy

is slowing down. the tightening of financial conditions worldwide and further rate hikes being signaled will create a real problem for the markets and the fed. jonathan: how would you frame this? the other problem they have is that if they do anything less than what is currently priced in, that will affect conditions. >> i think we see that financial conditions have begun to tighten. there was a period earlier this year where it looked like the equity market was invincible so i do think they probably are satisfied that we are getting some tightening in financial conditions and it is worth noting that, to kathy's point, it is not just the equity market. you are also seeing real interest rates rise in the u.s., the dollar has been on a tear, an absolute tear, the past couple weeks, so we are getting a variety of financial markets contributing to that tightening in financial conditions.

as to whether the fed put his dad, i think it is just in hibernation -- put is dead, i think it is just in hibernation. we are just far away from the level where the fed would react at this point. jonathan: any idea where that might be? bob: no. the strike price has moved considerably lower than where we thought it was a couple years ago but, again, it is conditional. it goes back to the question you asked. it is a function of are we seeing pressure on labor markets? his job growth slowing and unemployment rising -- is job growth slowing and unemployment rising? does inflation end up being more persistent than expected? it creates real tension for the central bank. they have blunt tools and no doubt they will try to use them as efficiently and effectively as possible, but this is going

to get tricky. you know, financial assets have been, as my colleague, rick, likes to say, you do not pay us to hold cash but, boy, cash looks attractive relative to anything with duration or risk at the moment. jonathan: talking about cash relative to credit next. bob miller, matt hornbach, kathy . this is bloomberg. ♪

jonathan: i am jonathan ferro. this is real yield. we kick things off over in europe. marking the first european junk bond since early february. in the u.s., volatility limiting

junk-bond sales to $11 billion this month, the slowest rate since 2009, and two issuance coming to date thursday. sticking with credit, pimco making the case to stay defensive. >> we have been favoring airlines, banks, financials and apartment reits, getting cyclical risks down, getting subordinate credit risks down and sitting in cash, the covid recovery sectors, and also noncyclical defensive sectors, so defense, cable, telecom, health care. we have been reducing credit risk for seven months and building up this cash. it is up to 10%, 12%. jonathan: kathy, you are turning cautious on credit. you agree with some of that.

why? kathy: the challenges ahead for credit are just immense and the yield compensation in the spread you are getting is not high enough. when we look at peak profit margins, continually rising costs from energy, say, or input costs and labor, that will weigh on profit margins, and then the global situation is certainly not easy and the fed tightening on top of that. it is very hard to make a bullish case from here and also spread -- also spreads have widened a bit, but not enough to ease up on our cautious stance, so we are particularly focused on being more defensive in high yields, but even in investment grade. i kind of like the single-a's better than the triple b's here. i think you have to move up in credit quality and waited out. jonathan: bob, do you agree?

bob: absolutely. for the time being, up in quality, more defensive posture is appropriate.i agree that spreads have not really moved much. where we are getting to yield levels, aa, you can source stuff in the mid-fours to low-fives. some of these yields look reasonable to us. fast forward to a couple years from now, i think inflation will be, eventually, below 3%, and, you know, you can start finding some positive forward real yields that are in the 2% to 3% range for reasonably high quality intermediate duration kind of stuff. there is some value there. jonathan: bob, relative to the spread widening we've seen in the not too recent past, why do you think it has been so contained over the past year? bob: because the underlying

growth story has been solid, right? so the cash flow dynamic has been superb. yes, companies have been faced with rising employment costs and input costs but they have been able to pass those along, so margins have not really degradation -- not really degraded over the past year and a half and the underlying picture in the u.s. specifically looks reasonably resilient such that no one is really -- no one has really begun to consider whether we will have defaults, even in the high-yield space. the quality of the high-yield market in the u.s. today is ready high relative -- is pretty high relative to a longer-term observation of quality in that market. you know, the likelihood of defaults in the next year or two is very, very low absent some kind of shock. jonathan: is that the right way to think about the next year or so or do you just not like this story?

i am wondering whether you anticipate the economy breaking down a little bit from here or do you think it is just a little too rich relative to the risks out there? bob: let's take the five-year point on the curve. i think you can source and comfortably own some high-quality credit risks. you can create a portfolio that has a 4.5% to 5% yield of reasonably high quality securitized credit, and some ig type stuff. and yeah, i do think rates are going to go higher still, especially i am more concerned about the term structure of rates moving higher. it is a different topic that i think we will probably come to, but the intermediate structure in the u.s., where they are, it is starting to look, you know, ok. it is not cheap but no longer ridiculously rich. jonathan: matt hornbach? matt: i agree completely with

bob. we've had a decent steepening and some of these real yields, even in the treasury market, are starting to look more reasonable from a longer-term perspective. the one year forward, one year real yield in the u.s. is very close to zero and some people would consider a 0% real yield to be a neutral level, so we are definitely more reasonably valued. with respect to why credit has performed reasonably well, again, i agree with bob. another technical factor that i think is worth noting is what we are seeing happening in the corporate pension fund industry. there solvency ratios, the funded status between their assets and liabilities, has improved dramatically over the course of the last year, so i think there have been a decent amount of flows out of equities and into longer duration corporate bonds, which may have been helpful to that market. the final thing to say, jon is

that we have had, in terms of corporate credit, we have had a decent steepening in a product, agency mortgages. they are looking obviously much more attractive today than they were at the beginning of the year. so that's another consideration i think corporate credit will have to deal with at some point. jonathan: what this universe is competing with, and, kathy, i want to finish their. do you think 2% to 2.5% on treasury yields is the thing that breaks -- kathy: i agree with both bob and matt. you are starting to see yields in the intermediate term area of the curves that are pretty attractive relative to where we have been for a very long time, and when i start to look at the whole spectrum of credit relative to, say, where dividend yields are now, the prospect of what happening with further fed tightening, i think there's plenty of alternative to

tina. i just think you have to be cautious. jonathan: kathy jones, matt hornbach, bob miller. stay with us. the week ahead coming right up featuring a fed rate decision and payroll numbers for the u.s. that we've hardly talked about. 390,000 the estimate i have on my screen now, the moving target, the previous number 431,000. that's next. this is bloomberg. ♪

jonathan: live from new york city, jonathan ferro. wrapping up the month of april, the week as well, with the nasdaq down more than 2% on the session. on the month, down almost 12%. on the year, down on the nasdaq 100 by almost 20%, going into a massive week for equities and bonds alike. for the bond market, the employment cost index lighting a fuse underneath yields on the front-end going into the fed next week.

if you thought this week was big, the next is even bigger. a host of fed decisions on deck and central-bank decisions including the rba and vanke of england. we hear from the fed chair on wednesday. u.s. payrolls report this coming friday one week from today. let's get to matt hornbach, bob miller, kathy jones for the rapidfire round. you know how this works. three quick questions and answers. let's start with where does the fed peak this hiking cycle? pick a number. matt hornbach. matt: 3.75%. jonathan: kathy jones. kathy: 2.75%. jonathan: bob miller. bob: i will take the middle. 3%. jonathan: there we go. second question. hi yields from where they are now, spreads wider or tighter by year-end? bob miller. bob: wider. jonathan: kathy jones? kathy: wider. jonathan: matt hornbach? matt: tighter.

jonathan: tighter? interesting. final question. 2-10s, call it 19. steeper or flatter by year-end? kathy? kathy: flatter. jonathan: bob. bob: deeper. jonathan: matt. matt: flatter. jonathan: to the three of you, thank you, matt hornbach, kathy jones. that does it from us. we will see you next week. this was bloomberg real yield. this is bloomberg tv. ♪

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mark: welcome to the bnn and bloomberg audiences. i am mark crumpton. in moscow, they have slashed

interest rates. germany has signaled it would not oppose an embargo on russian oil. last night, russian missiles killed journalists in their home just as -- was visiting the ukrainian capital. odesa was also hit. the battle for donbas remains the russian focus. and advances have been slow in the face of ukrainian resistance. there' is virtuals meeting between president biden and -- to discuss the efforts to stem the flow of migrants to the southern u.s. border. this is ahead of the administration's plane to let title 42 expire. the order allowed migrants to be quickly expelled without hearing asylum claims. a senior administration