>> "bloomberg real yield" is brought to you by pimco. jonathan: live from new york city for audience worldwide, "bloomberg real yield" starts right now. coming up, equities down, treasury yields climb.

investors brace for chairman powell. the big issue, counting down to jackson hole. >> jackson hole. >> jackson hole. >> jackson hole next week. >> that is the next event to watch. >> all bets are off. >> it is a tricky situation. >> the fed's job is not done. >> there is a lot of work for jay powell to do. >> fed chair powell saying we are close to neutral. >> every governor comes out and says something that is a contradiction. >> there is a tug-of-war from a macro standpoint. >> why quit now? >> 8.5% inflation, it looks different. jonathan: joining us now is a fantastic lineup, meghan swiber, luke hickmore and troy gayeski

powell. what are you looking for? meghan: i wish we could say we were going to get a clear message from pal next week but with another cpi print to go and another payroll print to go before september, we think he will be endorsing a message of data dependence and not willing to give the market the forward guidance it needs. jonathan: luke hickmore, a quote, jackson hole might be boring, let's leave it there. luke: back from the levels that the fed would like to see. maybe he starts talking about the 1970's and the inflation we had back then. people are expecting fireworks. jonathan: troy, will we be disappointed next friday at 10:00 a.m. eastern time? troy: there will not be any

shock and awe. it will be a muddled message about data dependency. the fed is in a tough spot. financial conditions have lucinda back up. the more strength the economy shows, more burning inflationary pressure and the more high they will have to go. not only with equities rallying, treasury yields retrading. this will give them more strength and more confidence that they can move ahead with a much more aggressive tightening campaign. the balance sheet reduction is about to get ramped up into september. it is pretty clear -- 4.5%, there is more than needs to be done. jonathan: is the fed upside down right now?

luke: it is bananas. it is deja vu. it is different than you and i are used to. i was stunned by the comments because he has been my the most dovish guys around. someone who has turned hawkish. clearly there is more tightening to come. financial conditions have to tighten more to get inflation anywhere within 3% to 4%, let alone 2%. jonathan: a tug-of-war of financial conditions. i love this quote. right now the fed is losing. they will look to regain a better grip at jackson hole. the price inches up with better inflation news. the easing of financial conditions. how to expect chairman powell to navigate it.

meghan: that is the way the fed thinks about. the transmission of policy is through the financial condition lens abby:. they are --. they are monitoring these things closely. they look at financial conditions closely. we have heard a bit of a pivot from what powell's real true message was. other participants are trying to clarify the message. to speak to the movements we have seen in financial conditions. i again think the fed has more room. we have seen some signs inflation is moderating but this is one step to what the fed needs to move on and do.

jonathan: do you think the soft landing has gotten better and not worse over the last couple of months? meghan: that i think is the key question to what a lot of folks are focused on in the rates market market. this for the market is pricing the fed needing to deliver rate cuts into the second half of next year suggest there is some probability of a hard landing outcome. where the fed needs to cut rates to dial back its policy. i would say the first sign that we need to see was the cooling in goods inflation meaning the fed does not have to press so hard on services to get core inflation back down to target but there is so much work that needs to be done regarding what

the next data prints will be in whether or not the fed needs to do 50 versus 75 in september. jonathan: 50 versus 75 is one thing, rate cuts versus pausing is another. we caught up with j.p. morgan and she mentioned that in 2023, you have a market talking about cuts. it was said the raise and hold strategy has historically paid off. raise the what and hold for how long? luke: she was great. her point was in the past we have seen a multiple. of 12 to 18 months of hold. i am in a little bit of a hard landing camp where we get to 3.5%, 4% early next year.

we only hold for a fairly brief period of time. prices in the u.s. will be so important. we will all be watching like hawks. that will drive people's view, as well. one, maybe two courses before the fed has to start to cut. unemployment is going up. they will be start to be worried. jonathan: let's look at the first fed psychos. -- let look at the last three fed cycles. six months in 2018, 2019. what is in store? luke: the problem with markets today is the are looking too far ahead into 2023.

they are somehow not pricing in declining earnings substantially and also higher corporate defaults. before you go through the ultimate cut cycle, which could be six to 12 months after they finish hiking, you are going to have to go through some potentially substantial earnings declines and corporate default rates above 4% or 5%. there will be another round of risk for the potential for economic recession, as well as more tightening that will be much more aggressive with the balance sheet than we have seen so far. a lot of the talk of the pivot is so premature. you have to let this cycle play out. it is playing out rapidly with a much steeper trajectory than we have seen in the past. to answer the question you asked meghan earlier, the risk of heart landing is going up but that should not be viewed as good news.

that should be used as news to become more defensive in an environment like this. roll out the capital structure focused on non-correlated exposures as opposed to trying to play bear market rally. jonathan: let me ask you, troy, what is the non-correlated asset right now? 60-40 is toast. troy: on the 40's side, we do not know what is more tragic. if yields peaked at 3.5% despite 8% cpi prints which means you will never get income again, that is obviously not good news. or if the fed will have to take the 4.5%, you have another round of duration pain. it environment like this, commercial real estate or focus on multi-strategy funds that are doing interesting things. you would love this, jon,

selling european interest rate volatility. the reason it has peaked is there was so much over six years now that the ecb is moving, investors are forced to buy that back. you can sell buy back the u.s. those are the non-correlated defensive positions where we have a chance to make a reasonable return and not get sideswiped by the next risk off or the potential for another round of substantial moves and rates higher. jonathan: you mentioned it three times so i have to pick up on the balance sheet point. how come nobody is talking about it? it is strange with rate hikes up to 4% but balance sheet reduction will be in the mix in the much bigger way. what kind of impact will that

have on the market? meghan: i will say we are definitely talking about it in the treasury market. it is having an impact on functioning and liquidity. the fed's absence from the market is creating a question of who will be buying all of this incremental supply we are currently seeing with foreign investors out of the market and banks out of the market, it is creating a gap until we see a more significant turn and see those 60-40 portfolios move, which is typically what you begin to see at the turn of the cycle. one interesting thing that sets us apart is when we do see the fed cut rates in what we think would be september of next year, we are anticipating the fed stops qt. that would be in our view a likely positive thing for the

treasury market. jonathan: i cannot get to september of next year. i cannot get to september this year, ludlow next year. coming up, the auction block. borrowers racing to the market ahead of a holiday. from new york, this is bloomberg. ♪

jonathan: live from city, i am jonathan ferro, this is "bloomberg real yield." it is time for the auction block where we kick things off in europe. the busiest week since late june. monthly volume of about 100

billion. some life into the junk bond market. sticking with credit, a recent rally in high-yield. >> we are in the camp that you are supposed to really take some chips off the table. credit quality has been sound. we have just started to see the first sign of some downgrades in the high-yield market in some very specific sectors of cruise lines. credit quality is good, companies are flush with cash. they have done a good job managing liquidity and bottom lines. there may not be fully compensated investors. jonathan: back with us, meghan swiber, luke hickmore, troy

gayeski. 500-something basis points only a month ago, all the way down to close to 400. what do you make of that? luke: exuberance across risk markets. right now, some protection. alternative assets, if we can do that that would be great. if you are in a credit fund with limited options, layering in to crossover on the u.s. high-yield version, a pretty good price for getting there. i think we can easily go 20% wider at the end of q3 and start worrying about q4 and earnings coming down. credit quality to the point of numbers being talked about. high-yield is probably the

riskiest part of the credit market right now. i actually prefer that yield by a long stretch. jonathan: are things tougher from your seat compared to where meghan is sitting right now? luke: the u.k. is a tough place. if you think you have an inflation problem, our numbers are through the roof and it will be a lot longer before they come back down. in the meantime, europe, winter is coming up. the recession numbers -- it could easily spike. that is a big problem for smaller companies across the continent. not the ones exposed to with credit. it is a hard thing for the credit market to get over before the end of the year. jonathan: financial conditions

in the face of some of these risks with the data coming out of europe and china. very few fear the fed. the last time the fed ended a cycle with negative real rates was 1954. assuming cpi gains over the next six months, whether the fed knows it or not, they are nowhere near done. what do you make of the quote? meghan: it is a very fair point. it is something we have been highlighting. one thing, listening closely to what howell has been talking about, they are looking at how rates -- prices across the entire yield curve. not necessarily just across the front. inflation expectations are well anchored. look at where we see five-year

inflation breakevens. there is a lot of agreement that we are effectively going against this place where the fed will get inflation back under control again. there is a lot of confidence for the fed. ultimately come up to go back to the point we were discussing, allowing the market to price the cost and allowing the curve to be as inverted as it currently is. cpi will go back down closer to target in the second half of next year. jonathan: what is the gdp cost to get it back down to those kind of levels? troy, the 10 year yield is at 2.97%. three years -- ask the question, whether an investor would be willing to accept another yield. troy: right now, it is the long end of the curve. clearly standing -- we all know

it has the last six to 12 weeks. the risk of recession has gone up. where the labor market has deteriorated substantially. the yield curve has been an effective predictor for recessions. the cycle has been moving rapidly. u.s. consumer single-handedly keeping the global economy afloat. investors are willing to take a lower yield than they did as recently as eight weeks ago. we have seen a meaningful adjustment the last few weeks which is currently driving the risk off markets. if we step back from 1000 feet, from our perspective, if you want to get more defensive the best way to do that is insurer pass-throughs rather than treasuries. those are basically round-trip despite that the wind down of the balance sheet for agencies will pick up.

we think there is more positive than shorting high-yield bonds and less negative carry. in terms of getting defensive, that might be one place people can look. jonathan: meghan, i know you wanted to jump back in. meghan: i would say that in order to get inflation back down, what we will need to see is a mild recession, which is what we are forecasting. nothing compared to what we saw around the covid crisis, the great financial crisis. a mild recession will help the fed and their mission. jonathan: meghan swiber, luke hickmore, troy gayeski. the final spread, the week ahead featuring fed chair jay powell from jackson hole. coming up at 10:00 eastern time next friday. from new york, this is bloomberg. ♪

jonathan: live from new york city this morning, good morning -- rather, good afternoon. the yield right now at the two year is about 3.25%. we opened up monday morning at 3.25%. we are ending the week where we started the week. coming up next week, speaking on tuesday. numbers out of europe and the united states. second-quarter gdp and jobless claims coming up thursday. the fed hosting its annual economic forum in jackson hole, wyoming, with chair powell taking center stage on friday. i will be there, hopefully i never what time it is when i get over there. meghan swiber, luke hickmore, troy gayeski back for the rapidfire around. 50 or 75 in september?

50 or 75? meghan? meghan: we will go with 50 because of the way the fed has been talking about a passive policy going forward. they think they are already around a neutral range which suggests a dial back. troy: 75. luke: 50. jonathan: have we seen the high of the two year? yes or no? luke: no. meghan: no. troy: no. troy: yes, toward the back end of 2023. luke: yes, q2. meghan: yes, september. jonathan: so precise. meghan, luke, troy, good afternoon. from new york city, that is it

for me. this has been "bloomberg real yield." this is bloomberg tv. ♪ millions have made the switch from the big three to xfinity mobile. that means millions are saving hundreds a year on their wireless bill. and all of those millions

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>> welcome to the bloomberg audience, i am mark crumpton with first word news. the g20 summit in bali. the documentation came from indonesia's president ended interview with bloomberg. >> i know that you have invited president xi to come to the g20. has he said he will come in november? >> yes. >> xi will come. >> and president putin? . >> he has also said he will come. >> it would set up a showdown with president biden and other leaders opposed to russia's invasion of ukraine.