>> from new york city, bloomberg real yield starts right now. lisa: coming up, lifting

sentiment triggering a relief rally across assets and pushing back against hawkish central banks. >> markets are completely ignoring fed speak. >> they don't want to hear it. >> i don't care what the fed is going to do. >> we are fighting the fed. >> credit is strong. >> the equity market. >> the market is optimistic. >> sentiment is built on this better than expected data. >> ping-pong back in for based on one data point. >> congratulations, we have record high inflation. we just didn't add to it. >> i think it is over. >> the theme this year is about reestablishing fed credibility. >> the fed is not driving this ship. lisa: joining us now on fed rhetoric versus the market,

maureen and mike, i want to start with you, maureen about what you expect from what we have seen so far. this feeling that they ahead of the fed. would you fade the rally and credit? >> yeah. certainly credit markets have benefited from this most recent injection of market optimism even leaning into the numbers this week, they have been on a three week long rally in spreads and it appears that will continue toward the end of the summer. there are flags here. data this week suggested we have seen peak inflation but i think the market is ahead of itself assuming we should take a victory lap. we still have extremely high cpi. there are components of core

inflation the fed has within its control that are still running hot. this market is a little prematurely calling the end of the tightening cycle and therefore we see additional catalysts for headwinds in the investment-grade market to come. christina: in rates, in particular, pricing this perfect soft landing by the fed. rate market treasury should be biased higher and we have certainly seen the rally as we ping-pong between the data of are we concerned about recession risk. exactly right. one data point does not make a trend and the fed is going to look at the whole picture to determine the path going forward. lisa: i was waiting for one of you to re-create the lala lala law.

i'm sure you can agree with each other. i wonder whether you feel there is one tenor of the credit markets, the debt markets, that is more optimistic than all others? mike: the bond market and equity markets seem to be diverting a little bit. inversion of the curve, long and yields, that marks a big difference from march when the entire yield curve went up. this time it is going down. longer dated treasury yields are saying there are growth concerns. service pmi's, building permits, consumer confidence -- name your measure and things are getting worse. not better.

the long end of the treasury curve is reflecting that. lala land is going on. there is tremendous opportunity in the long end, 20 year looks phenomenal. liquidity will find its way to the 20 year if the economy rolls. for profit growth turns negative, which we expect on the equity side, there are opportunities out there and there is a big diversions between what the markets are telling you. lisa: fascinating question. the team at td morning "the longer the inversion continues, the more investors and consumers will become nervous of recession and that might have self fulfilling consequences." you think investment-grade has gotten ahead of itself. more broadly, if what mike is talking about, the diversions between a yield curve and

credit, which basically suggests companies are in a better position, that even the most precarious of borrowers are having a more creditworthy moment? maureen: appetite for credit has been uneven to start the year. dig into the details of investment-grade. there was a clear decompression rating. there was a preference to quality as rates continue to selloff. investors were using that to up tier to the detriment of our weaker bbb names. same goes for high yield. massive amount of decompression to start the year and now you see some of the weaker rated names get uplift. risk on means investors feel more inclined to reach further

down the spectrum to pick up yield. it feels like the last shoe has not dropped yet with respect to the fed tightening plan. that will impact technicals. we advise proceeding with caution on the risk plays. lisa: confusing. you have the enthusiasm and markets, the inverted yield curve, then the fed could get back to the 2% inflation rate. "the market is not quite understanding what the fed is going to do. we continue to expect a 75 basis point hike in september and policy rates reaching above 4% early 2023." this is what the market is pushing back on. they don't see this as reality anymore. do you think the benign reaction will make it more likely the fed will take a harder line to prove

to the market they still have teeth and they are not going to let conditions loosen much? kristina: the market and the fed will focus on what financial conditions are pricing. easing in conditions in the last week with the bounce -- is that concerning? i think it is. i think the markets pricing this soft landing, a great confidence in the fed to deliver that. inflation markets, we price a very benign outcome for inflation two years forward and a belief the fed can get us back toward 2%. the market seems to be looking at this cycle similar to what we have had the last 30 years which was stalling inflation where the fed hiked and immediately cut. our difference in view this time around is the fed will hike but

we are not going to deliver cuts that are priced into '23. this market pricing is taking out that tail of 4% or higher fed funds here out. lisa: i wonder how much officials will try to be more aggressive, in rhetoric and action because financial conditions have been easing substantially. they have taken out hikes and tightening achieved earlier. how much more likely where they'll be a fed call on this market rhetoric? ann-marie: there is no fed put -- there is an michael: there is no fed put here. that has become obvious. all the governors saying you misinterpreted the press conference. you bring up a great point. you see most likely rhetoric around inflation job is not done.

we have much further to go. you are seeing the doves saying market, we will hike for a while and aggressively. we don't care what the equity market does. in fact, the frost in crypto and areas of a credit market and equity market, we hope those things come down. so doing, we are going to tighten financial conditions. the market will help us. whether it is credit, equities, the world hasn't woken up to that yet. it is not thata typical. bear and market rallies happen all the time. people like tighter spreads and hire equity prices. that is ok. that is normal. it is probably not going to end well for a lot of people

entering into the trade today. lisa: love it. if people want to go for it, go for it. have a nice time. you are sticking with us. up next, a slowdown in inflation triggering high yields. this is bloomberg. ♪

lisa: time for the auction block in europe. market pulse, 2 billion euros in sales, weekly volume at the lowest level is here. in the u.s., high-grade bond sales heating up. duke energy pushing weekly issuance past $3 billion. the junk bond market at the

summer low, monthly sales to $3 billion in the slowest august since 2008. sticking with credit -- >> for credit markets, noninvestment grade, investment-grade credit, mortgages, there is still more room for spreads to tighten. probably, best opportunities are in the noninvestment grade market but also things like short maturities, financials. there is more total turn right now coming from credit income and spread tightening than we will see a big drop in interest rates from these levels. lisa: with this question of where you allocate cash, where you see opportunities at a time where the market might be getting things wrong, i know there has been skepticism about

the higher leveraged assets. is there an area where you think there are big opportunities, whether less liquid debt or higher rated credit? kristina: we see opportunities on the e.m. side, particularly e.m. fx versus the basket whereas the dollar versus the euro and yen still remains a challenge with the policy diversions focus. emerging-market rates are starting to look attractive. historically, whenever we have periods of why differentials above 4% between e.m. rates and dm rates, they correct quickly. lisa: e.m., is that a place of opportunity? maureen: tactfully. there are still ample catalysts for volatility from the fed and otherwise. it tends to impact higher names

the hardest when things turn south and that can clearly have a larger overhang in e.m. debt. our tactical plays are more around higher-quality investment-grade credit, more established names in the domestic and developing world. lisa: you were talking 20 year treasuries, mike, in terms of how inverted the yield curve, 30 year yields were -- i'm wondering if it is mainly treasuries or if you are finding places with investment-grade that has rallied so much? michael: straight run-of-the-mill credit is not my preference at the moment. if you thought we were going through midcycle slowdown and high yields got to 600 basis points, it is always buy. if it is a midcycle slowdown. if it is not, you would never

buy it there at the end. maybe the rallies have more to go but over the next 6-12, spreads are likely wider, not tighter. i think that goes for the high-yield market. it is not a bad credit cycle. fundamentals are good. you see wider spreads on a longer-term basis. front end bank spreads, floating rates are a good place to park cash and pick up yield. aaa clo's, quite attractive. floating-rate aspect, a lot of reset caused yields to go up. that paired with a long rated treasury is the perfect bill. lisa: since it is existential friday i want to hone in on, not a very bad credit cycle.

is it going to wash zombies in the market? or is it a dip? michael: the latter. everyone refinanced debt in '21. everyone locked in low long-term interest rates. look on the ig market, cash on balance sheets has never been higher. that will help. we wouldn't expect a default cycle similar to the last several cycles. it would not shock me if you got a 7% peak, which is quite different than the past. there will be great opportunity in credit, private and public market. just not today. maybe three months, six months, nine months.

you always get the baby thrown out with the bathwater. you always get people who expect the worst. we haven't had capitulation yet. everyone is asking whether, when are we going to buy? that is not capitulation. capitulation is not when you ask. capitulation is when you hide under your desk and refuse to buy anything. whenever we have that moment, that will create an opportunity because it will not be that bad for all the reasons you mentioned. lisa: if people are not hiding, there are people raising money. are they doing so opportunistically or because they don't have other options? kristina: a mix. issuers that have a nine-month funding need on the horizon have been waiting for pockets of opportunity, like now, with a

sustained period of positive spread momentum to take advantage of that knowing there are plenty of headwinds in the future for the back half of the year. we have seen a rush to the investment-grade markets in the last few weeks. repriced $160 billion of volume in the last weeks alone, $9 billion in the month of august, which is typically quieter in the back half. there is opportunism in looking to d risk near-term funding needs. capital constraints in the bank market have encouraged issuers carefully about accessing bond markets. you think about this window a positive spread momentum coming against an environment of lower treasury yields from 1.5 months ago. yields on the investment-grade indexer close to 60 basis points lower. there is an opportunity in the

debt capital markets after cost to funds. lisa: everyone sticking with us. still ahead, but week ahead, featuring a host of fed speak and the latest meeting minutes. this is bloomberg. ♪

lisa: this is bloomberg real yield. time for the final spread. u.s. housing numbers coming tuesday. retail sales on wednesday. more fed speak on thursday. another round of initial jobless claims, friday. this has been the issue. we want the rapidfire around before the data points coming up. which do you prefer?

u.s. or euro credit market? kristina: we have been liking some of the european markets better, especially financials. at1's some yields upwards of 9.5%. lisa: maureen? maureen: selectively, across european credits, but we are still staying closer to home in the u.s. given the lack in the euro market. you have seen a run-up in valuations over the last few weeks. michael: i like u.s. credit more than european credit, especially if you extend it to the broader fixed income, mortgage debt and aaa clo's. lisa: to consolidate the answers, where do you expect

better returns over the next six months? investment-grade or high-yield? maureen: investment-grade. headwinds in both sectors. returns continue to deteriorate. as we get closer to weakness becoming less of a technical issue and more of a fundamental issue later on, that is when we expect high yields to underperform. investment grade. lisa: i have a feeling. michael: agreed. lisa: you as well? kristina: we would echo. lisa: have we seen peak yield in the u.s. 10 year treasury for this cycle? michael: yeah. maureen: we agree. upward pressure from here. kristina: we can test 350 in 10s. lisa: i'm curious if there is a

data point you're looking at with retail sales coming up or if it is going to be quiet until jackson hole? michael: retail sales are an important indicator. if there is one thing i continue to track it is jobless claims. every other area of the market has shown cracks. the jobs market is incredibly healthy. it will be the last shoe to drop. jobless claims every week, inflection point or not. lisa: my thanks to all of you. we appreciate you taking the time in a week where there was a massive pivot by the market in the belief the fed would pull back from some of the hikes, completely winding back some of the inflation they had been expecting. all of our panelists said it is too soon to say that. you have others saying the market has been right and the fed has been wrong. next week, we get the latest read with retail sales and jobless claims.

from new york, same time, same place next week. this was bloomberg real yield. this is bloomberg. ♪ millions have made the switch from the big three to xfinity mobile. that means millions are saving hundreds a year on their wireless bill.

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>> welcome to the first word news. in western new york, author salman rushdie was stabbed in the neck this morning. his writing many consider offensive to islam. witnesses say a man stormed the stage and attacked him as he was being introduced. his book "the satanic verses" in banned in iran. the country offered $3 million to anyone who killed him. the ayatollah culture his execution in 1989. in mexico, drug gangs turned firepower on civilian targets during street violence. 11 people were killed in ciudad juarez.