lisa: from new york city, for our viewers worldwide, i am lisa

abramowicz, in for jonathan ferro. "bloomberg real yield" starts right now. coming up, u.s. inflation accelerated to a fresh 40-year high, pushing consumer sentiment to a record low, inverting the curve, keeping pressure on chair powell. we begin with inflation in america. >> u.s. cpi index. >> the headline number came in hotter than expected. >> what i worry about is a lot of people embracing the idea. >> the risk really is that inflation becomes unhinged even further than we have seen. >> the reality here is that everybody knows inflation will not be transitory. >> in the face of 5%, 6%, 8% inflation, you still have a country of only 1%, so the country is well behind the

curve. >> the fed has more work to do. >> we are clearly in a slowdown. >> we have made the turn on employment. >> there's lots of bad news. everybody knows with the bad news is. >> nothing from where they are going. >> the fed will be raising rates. lisa: joining us now to discuss, jim stevens and a guess from goldman sachs. jim, i want to start with you. jim: i'm not sure it changes the fact of what we are in right now. we are in a tough market right now, meaning that the fed is still dealing with the equation, based on the law of access put into the system, and the restarting of the academy coming out of the pandemic. but it is very tight and there's a lot of volatility, a lot of

uncertainty when it goes to how those will open up. so when you think about, like, goods inflation and labor, or you think about food inflation and the issues associated between the extended conflict between russia and ukraine, as well as oil, which is a huge thing, demand starting to pick up, a very tight market, and then all three of those are subject to what i would call a downside risk or more upside risk to inflation, so that is a complex environment for our policy to try to navigate. and, you know, we are in a period where they are trying to push down a soft landing, but the variables are going to be volatile all the time. there is a risk of recession, but we are certainly cycling down to that. lisa: do you think this changes of the recession, of the downturn, of a hard-line? >> i mean, it certainly further

generates the trade-off between the fed and inflation. in general, it makes the policy backlog more challenging than it had been. now, recession is not the baseline, what the fed is trying to do, one, use hiring in the job market and then, number two, cool down wage inflation. we do see the back of that but almost by design, that grass is quite narrow. at the moment, it is not our baseline forecast. in terms of where the fed is going next, we think we put the basis point highest, you know, all the way from december, as very likely. we learned a long time to wait and see what happens. but for now, we see hikes and are still in a recession. lisa: you are not alone with

that come across the street, but your economist, john, boosted his forecast on the back of this cpi report to exactly that, 350 basis point rate hikes. summit, including barclays, jim -- some, including barclays, jim, have talked about a rate hike as soon as next week. do you think that is likely? james: i don't think so, because they are trying to maintain a level of trying to get control of this. i don't think it is out of the question that they should try to do that. at the end of the day, this is going to play out over time, and in the sense that, you know, there is a lot of opportunity for them to have a, navigate a soft landing, but the markets are going to challenge it, right? and you are going to see a lot of volatility based off of risk premiums, based on the data we see, information of central

banks around the world. i would expect to see volatility around equity, for instance, rate curve, as well as spread product. lisa: why haven't we seen more volatility around spread product, jim? james: i think you have in the last couple of months. you have had some pretty significant moves. there are a couple of things that are more fundamental, and on the fundamental side, we are coming out of the last couple of years of a great earnings environment, right? where you have tremendous operational leverage and really good earnings. you have improving credit quality. i think on top of that, most companies come on the levered credit space, we are fairly disciplined, on how much leverage they are putting on. coming into 2020, you had a pretty healthy covered levered credit market. a lot of that, when it comes to valuations, reach into more of a growth equity market or in cryptocurrencies. a fair amount of discipline that we start to see this evolution

of policy tightening. you now start to see some more volatility. equity prices, broadly speaking, as well as some of the better spread product. that impact affects a lot of what we see. lisa: certainly today we saw a pretty big selloff in premarket come up with nasdaq leading the way down, down more than 3.6%. to that point, these positive aspects that have really supported credit evaluations and capped some of these stress, ho widew could go, deutsche bank seeing the prospect of a credit cycle unlike what we have seen over the past decade, getting into 2024 on the heels of something that is more like a hard landing. what is your view on that? lotfi: look, i think the question is whether you believe in the longevity of this business cycle are not. i would say, from a credit standpoint, let's get the credit

cycle and the inflection point where you see a big inflation, negative right in migration, it is basically a mirror of that capital allocation and inefficiencies of a balance sheet. the reality is, i completely agree with jim, that we already had pretty strong survivorship in high-end markets. the credit flow is very good, but we think it probably peaked in the fourth quarter. i do think we will see a strong case for a meaningful uptick in defaults, even if you have a recession, i think, you know, it will likely be the first recession. it is unlikely to see rates going to the usual double digit levels. that is the high-yield bond market. i think we see the leverage in the market, could be a bit different, but on the public side, for bonds, i struggle to

see a strong case for meaningful defaults. lisa: do you think this is a good time to be buying credit, particularly with the risk here? lotfi: there are better value propositions. spread valuations have reached ok levels, not great levels, in my view. but everywhere you look in credit, you have been meeting the last 20, 40 years. do you think there is more room? it is quite simple. even though we do believe there is a path here, the reality is there is a wide range of outcomes, and markets do not operate on model outcomes. markets operate on distribution. so what you need to see is can the soft landing happen, if it becomes tangible, i think. lisa: jim, before i move on, i

want to get a sense of how the glut of private that has change the situation for credit markets, including public markets. when things go south, you so what you can, not necessarily what you want to. there is a sea of less visible debt out there that people have been investing in, that is illiquid, they cannot trade. how much could that potentially raise the selling in the public market, because that is what people can sell, not what they will sell, in the case of a downturn. how much does that raise a pressure for spreads that perhaps was not present in previous cycles? james: i do not necessarily think that is the right way to look at it. at the end of the day, there has been in the last decades and evolution of the credit market, in evolution as the banks really move toward the public credit markets. investment grade, high yield, but also the credit markets have

grown along toward the growth of private equity, right? so i do not really look at it as a sense from a glut standpoint. there are different risks and profiles when you think of private credit. at the end of the day, the majority of private credit is owned in lockup structures. very similar to private equity. if you are looking at a recession or a default, ultimately, that will eat into the return profile of the fund that the credit manager is running. it is not necessarily force selling elsewhere, and it is not like what you see in some of the hedge funds that may have owned the assets in the liquid vehicle, which you force the deliver. it is a dynamic, and i would call that very healthy when i look at today. at the end of today, the credit cycle is going to be determined based off of the earnings cycle, right? and you think about, you know,

where we ultimately end up with economic growth, where ultimately that leads to because of the earnings quality. that would feed through into the public in credit markets, with the longer-term terms are. there's gouges here. that being said, there are a lot of risks in the macroeconomy that will put pressure on what the earnings will be in 2022 and 2024. that is what you will see across managers, arriving to dispersion between the quality of returns that we are able to produce for our client. lisa: thank you, jim, lotfi, both of you staying with us. that conversation coming up next, and two-year yields in the u.s. hit the highest level since 2008. this is bloomberg. ♪

lisa: i am lisa abramowicz, in for jonathan ferro. this is "bloomberg real yield." time now for the auction block, where we kick things off in europe. issuance, about 31 billion euros. in the united states, high-grade bond sales topping $33 billion this week, the largest volume in nearly two months. in the cell phone market remaining steady since the busiest week in january. roughly $3 billion. recommending investors stick with higher quality names. take a listen. >> it is not like everything else is hunky-dory and the economy is on fire and you are seeing a move up in spreads. we have got the double whammy of the recent move up in spreads at the same time demands are

slowing. problematic for lower quality companies, for lower quality trade, i think is very much in that territory. victoria joins us, alongside james keenan and lotfi karoui, who are still with us. victoria, we will start with you. what are the growth scares you are seeing right now? victoria: lisa, look, we are focused on the quality. we have a little bit of exposure to high yields but not very much. you were having a conversation among moment ago about high-yield and what they were doing, and some of those higher yield issuers are going to have trouble with the revenue, with their bottom line, so you might see those rates go up, and it makes them a little more risky. it is not an area we can roll the dice in.

i do think you need to be really choosy and focus on quality, qualities of companies, quality of balance sheets, qualities of earnings that jim talked about a little while ago. if those are areas you need. to focus, and unfortunately, for high-yield bonds, i don't think that is where it will land, especially if you don't have coupons that are paying you for taking that risk, and we just don't have it right now. lisa: do you think the u.s. is still the sweet spot for investing in credit and beyond? victoria: we still like the u.s. right now. obviously you see europe having issues with the russia-ukraine war, with food price inflation. we see china shutting down the shanghai again this weekend. so there are continual issues going on there. i think in the u.s., the underlying fundamentals are still strong enough that it will probably outperform international this year, both equity and fixed income. so we would stay domestically focus for now.

lisa: lotfi, what is your sense of the u.s. versus europe, especially if the ecb does start to tighten but raises the prospect of being flexible in fragmentation and being sensitive to that in the periphery. lotfi: i agree with the reference of with holding. one, the ability to grow is larger in europe relative to the u.s., particular to the threat of a ban on natural gas. there is a difference between the dollar market in the euro market. the euro market has an a lot more dependent on ecb support for many, many years. and to give you an idea, the ecb owns over 11% of the overall lng market. they bought over 50% year to date of supply in the market. that is gone, basically, in the second half of the year. so markets in europe will have to learn to fly without that

support, and the fact that that support is being produced at such a rapid pace is why we over develop markets in europe. lisa: "even if relative value has been tilted in the favor of your, it is undeniable that europe remains the eye of the storm," agreeing with lotfi and with victoria. what is your view? james: i would agree with both of them. at the end of the day, when you look at that in spread terms, europe looks attractive relative to yes, when it comes to the pickup -- to the u.s., when it comes to the pickup in the premium spread. you have to look at those earnings, and europe right now is an a lot more risk than the u.s. just because of things lotfi was talking about. they are much more exposed to getting squeezed out as the

consumer continues to weaken, now the ecb takes a much more hawkish tilt, saying you have the cuts driving the squeeze, so i think, even though the european market is probably a bit of higher quality, when it comes to historical, but i think they are more exposed to earnings in the future, in which case, you have more spread volatility than the u.s. lisa: coming into the united states to buy credit, we saw this in japan, for example, and there has been some speculation that is not going to happen. lotfi: it is a little bit complicated in foreign finance, but number one, the yen, all unequal, the power of japanese investors. but more importantly, in our view, from a funding and hedging standpoint has changed quite dramatically. if you see foreign investors or the balance sheet, you basically

have to find and hedge a position to and that funding and hedging cost is going to go up over time. so our expectation is that foreign demand will likely look a lot weaker, certainly relative to 2020 and 2021. so the outlook is not holding welcome in my view, for foreign vance. lisa: victoria fernandez, jim keenan, and lotfi karoui. still ahead, a host of central bank rate decisions. let's see what the fed has to say. that situation coming up next. ♪

lisa: i am lisa abramowicz, in for jonathan ferro. this is "bloomberg real yield." time now for the final spread,

the week ahead, coming up, cpi data followed by jobless claims. starting with the fed and the chair powell news conference on wednesday, then it is the bank of england's turn on thursday, and finally, rounding out with the bank of japan on friday. still with us here, we are happy to say, victoria fernandez, jim keenan, and lotfi karoui. a lot of noise around the fed meeting in particular. victoria, do you want to weigh in on how much he could bring forward with expectations as a result of today? victoria: i'm not sure they are going to do a lot based on today's number alone. what have powell and the rest of the fed president's been saying? they want to see clear evidence of things changing. they want to see it over time. obviously, the cpi being higher today -- and not the headline, it is the month over month that is truly important, right? that is what they are watching.

not seeing that number come down is what is troubling for them. i am not sure they pulled forward this meeting, i am not even sure they pull forward the july meeting, i think they have to start wondering what is that going to look like if we don't see inflation start to come down. it gives them a few more data points. what they have already told us is 50 basis point that each time. -- points at each turn. james: the narrative might change within the fed. certainly there could be a delay , and they're just focused on getting inflation under control. there are a lot of factors that have to walk into that, and, you know, i think some of the inflation with regard to the demand we are seeing, consumer sentiment, but also, you know, the jobs picture, softening, and

the housing side of things. so it is starting to pick up. i think they will be a little data dependent. but the market will come again, challenge it, and the risk will evolve over the short term. i think it will provide some good opportunities for the masses here. lisa: all right, it is time for the rapidfire brown, three quick questions, three quick answers. is u.s. inflation becoming un warned? lotfi: no. james: no. victoria: no. lisa: is the chance of a u.s. recession in the next 12 months above or below 75%? victoria? victoria: below. james: below. lotfi: below. lisa: all right. will we see parity with the euro-dollar cross in the next six months, jim? james: yes. lisa: victoria? victoria: no? lotfi: no. lisa: thank you to all of you,

the tory fernandez, jim keenan, and lotfi karoui on this insane day as we rethink how high peak inflation really is. that does it for us, same place, same timex week. that was "bloomberg real yield." this is bloomberg. ♪

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