jonathan: live from new york

city, bloomberg "real yield" starts right now. coming up, a week full of central bank intervention. officials attempting to preserve financial stability. the inflation data pushing them to keep hiking. we begin with the big issue, policy in conflict. >> between monetary policy and financial stability. >> there is a tension there, to put it mildly. >> you are buying lonnie -- long and bonds while you are tightening interest rates. >> these things are in conflict. >> it is like having a foot on the brake and a foot on the accelerator. >> we learned you can get a major policy slip in g7 countries. >> we have learned that liquidity can evaporate in

mature markets, just like that. >> the book says calm nerves be state. >> short-term pressure, then back to a long-term objective. >> we are kind of in a mess now. >> it has been very sobering and we all feel exhausted. jonathan: i feel like i should provide therapy, but i am not here for that. i guess it is a big question for us now, can you address financial stability and tackling inflation at the same time? >> well, this is proof positive that it is challenging to do that, especially in an environment where you are seeing a variety of metrics showing signs of stress. you have poor liquidity in the bond markets. liquidity has been deteriorating since last year. you are looking at a dollar extraordinarily strong.

you are looking at bond volatility at historical highs. the index is at 140. then we have touched that level many times just this year. this is happening at a time when global inflation is rising dramatically and central banks are tightening monetary policy. it is going to get tricky from here on. jonathan: greg, how do we resolve this policy conflict? greg: the bank of england is an --is in an impossible spot. they have to deal with the fiscal policy that was delivered to them. the real question on the table, though, is whether this is the roadmap to other countries' central bank. i don't think it is. it is an open question, but the markets are trying to figure out if the roadmap of central banks having to step in to make up for

the fiscal, how it is going to be going forward. jonathan: i want to jump in. peace is important. what we are seeing in the u.k., could not become something like that? the new normal for the central banks of the regions? >> hopefully not. look, the last thing you want is for the macro pressure to morph into a problem for financial stability. from that perspective what the bod -- with the boe did is welcome. i would take things one step at a time. i agree with greg this is an incredibly challenging equation to solve. it has become a playbook in other jurisdictions. i would keep an eye on europe. in a different set up the ecb is facing a similar tension, which is to manage the distribution and see what happens with the italian budget in upcoming

weeks. while at the same time continue to deliver the tightening of financial conditions required to gain control on the inflation narrative. jonathan: you know that. i think the ecb was the first to go with that cpi program. they had to contain yields for they started hacking interest rates. they are going to go again. they have the mechanism. let's see if they use it. the ecb has set up a vehicle to deal with what is happening in the bond market. the chinese are threatening to intervene. i'm sitting here wondering who is next? is the fed going to come into play? >> very high bar. we expect them to stay the course, deliver 75 basis points in the next meeting. when i think about central banks , the fed is probably the one central bank where the bar is really high. partly because there is still a ton of good momentum in the economy. the risk of recession is low,

and i think that will dictate every action. jonathan: greg, what is your take on that? greg: i completely agree. i think the bar is really high for the fed. i think the markets are misreading the fed and have misread the fed all along. the fed continues to push back. they are doing it today as well. i think when you have been in this environment where traders and investors in the u.s. have dismissed what the fed has been saying all along, and is finally catching up since jackson hole, i think that is going to continue. i don't see what is happening in the u.k. as something that is a concern here at this point. i think it is early for this global central bank. some are latching onto. i think that is a farce. jonathan: one thing we talked about this year, there is a choice here, recession or high inflation and you have to pick

your poison. i wonder, is it a choice between recession and financial instability, or higher inflation for longer? is that the decision the central banks have to make? subadra: absolutely. i think there is a third wheel. it is not just inflation or recession, it is also financial stability. to the discussion earlier, the thing i am concerned about for the fed is the lack of liquidity in the treasury market. let's not forget that in march 2020, when the fed engaged in qe , it was because liquidity in the modly -- the bond market was starting to dry up. that is something i'm closely watching, because the metrics have declined. like i pointed out, there are a bunch of other variables that could potentially lead to financial instability. that is where the balancing act gets tricky. i agree with greg, they are

going to be focused on raising rates and focusing on bringing down inflation. but they are going to have to deal with financial stability as they go along. jonathan: push that through the yield curve. in your notes we maintain a bearish bias and expect to yield curves to remain inverted. folding this discussion into that. subadra: so, the front end is pegged to expectations. the fed has told us they are going to be delivering about 150 basis points of hikes this year. the front end is going to reflect that momentum the fed has communicated very clearly. on the back and it is much more a situation of what is happening in growth. i think as a recession fears rise you are going to see that played out in back and yields. so we are going to see much more inverted curves in this cycle than any prior in the past two

decades, because of the fact global recession fears are starting to rise meaningfully as central banks start to raise policy rates. jonathan: the range on treasury this week's, on the 10 year. quite a range on a 10 year treasury this week. greg, growth is screaming to send yields lower. at the same time inflation is arguing for high yields. greg: the interesting aspect of that, jonathan, is that forward inflation expectations have dropped, right? the market is telling -- the fixed income market is telling you that inflation is not a problem down the road, and it is transitory. to borrow a phrase. that is the conflict in the market. the market is giving the fed and central bankers a lot of room to maneuver here on a forward basis.

if that changes, then i think the whole backdrop changes. that is the thing we are focused on much more, what forward markets are telling you around expectation. that is dropping, not rising. that gives credence and comfort to central bankers. jonathan: i can tell you the equity strategists are starting to dabble in fixed. i have guests come on the morning program and talk up the prospects of bonds done to behave well. i wonder if you think the bond market is going to behave in that way it typically does? whether we can break this correlation between risk and the risk-free assets? lotfi: we definitely have the best level of yield support you had in 15 years, so mechanically, yes, i think you have a much better buffer if you think about a 60-40 type of portfolio. in terms of the direction of yields, we are probably the closest neutral we have been in

quite some time, even though we have a little bit of a short bias, at least on the margin. there is a lot that is priced in at the front end. so the risk is more balanced there. to add duration need to think about the value proposition of cash. it feels premature, particularly given where the risk of imminent recession is today, which is low. i think for the time being gas remains king, but to answer your question, you do have a buffer. no question. jonathan: we will talk about the credit market in a moment. coming up, the auction block. another week of the volatility keeping borrowers on the sidelines. that conversation, up next. ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." it is time for the auction block. friday recording the 39th day without a single debt sale this year. another slow week for high-grade debt issue in september. and a group of banks with a $4 billion debt offering thursday. sticking with credit, jp morgan playing it safe. >> we are remaining defensive. we are staying short duration. where we are allocating money it is too high quality, short-dated, investment-grade in the securitized space. think about auto loans, for instance, or consumer loans. people are still employed, which means they are able to pay their bills. jonathan: assuming this year's

move higher in yields, corporate followers could face the largest shark in the cost of capital in three decades. lofti, what are we upending here? a decade of zero interest rates, in some places negative interest rates. what are we upending here? lotfi: yields -- if yields do not revert to where they were pre-pandemic, you will have to transition toward a new regime. that is probably permanently higher cost of capital. i think it means an adjustment for leveraged balance sheets. the good news is if i look at bond issuers you do have time. there is very low refinancing needs in the near term. you are sort of back when you were in the 2000 and mid-1990's. it is mechanical, there is nothing magical about that. more importantly, investor's

tolerance vis-a-vis balance sheets is going to go down dramatically, because it is going to cost more to issue. jonathan: greg, what do you think this shift is going to expose? greg: i think the overall leverage. it is a simple story, ultimately, right? corporate america broadly has added a lot more leverage over the past decade because they were hyped up on low interest rates. there is a tremendous amount of leverage built into these capital structures. that works great when revenues and profits are moving in a positive way. i think there is a lot more leverage not being anticipated. you have not seen a cleansing across sectors or within the system for a very long time. i think ultimately that excess capacity has to get cleared out. so my strong suspicion is that this credit cycle is going to be a little longer and harder than what many are forecasting. jonathan: lofti, agree?

lotfi: i have sympathy with that. 80% of the universal leverage loan issuers today are actually loan-only capital structures. they rely entirely on the markets for their financing needs. every jumbo hike delivered by the fed translates into a higher one in coupons for these companies. there is definitely pockets in the market where the risk of a shock is somewhat elevated. jonathan: listen to this conversation, the outlook for growth, the risk in the credit orchid. high yield spreads, 560 basis points. our come from -- our conversation seems pessimistic. why do you think that is? subadra: no, because of the fact you are getting pretty decent

returns from the better names by investing in bonds, right? it is in the treasury market getting towards 4%, returns start looking quite attractive to investors, probably speaking. so i don't see -- you know, you could see that as being a near term cap on treasury bond yields over the near term. for the credit markets it is much more nuanced. i think that the quality of the credit matters a lot more. as we head into a recession i think probably there is more concern on both high-yield and credit spreads in general widening as we head toward a recession. i would be more cautious on risky assets here. jonathan: this is the piece i wanted to pick up on, the recession risk. if you ask someone if the fed is going to stop hiking if the market is bullish, they might say yes. if you said, if the fed is

cutting in a recession, is that bullish, you might get a different answer. this fed might not be cutting interest rates in a recession. greg: i think that is kind of the scenario for investors with large. essentially that is what the fed is telling you, right? if you listen closely enough during i think there is a big divide between risk-free treasuries versus credit. so if you think about that scenario of a recession, whether the fed is pausing or cutting, you want to own duration, you want to own u.s. treasuries. you cannot say the same for credit. the way we are thinking about it is sequencing. you want to own duration first, get through the tough parts, then get into credit. jonathan: duration right now is the difficult piece of it. how do you price risk when the

risk is in the risk-free asset? we have seen that play out in wild swings in treasuries. how do you price risk when the risk is in the risk-free asset? lotfi: again, i will come back to where we started the conversation. i don't think the u.k. playbook is something we should apply to other jurisdictions, but i think you stay up in quality, up in liquidity because of all the microstructure challenges we discussed. that is how i would look at it. jonathan: greg, your take on it? greg: as pessimistic as this program is, i probably more excited about the opportunities. the market is extremely dislocated. you are seeing high quality assets trading really quite cheaply. i think people are complaining of financial stability risks. it is high quality, the market is affording you the opportunity. take advantage of it.

jonathan: does that include a 10 year at 3.75%? greg: it is closer. i will not claim that is the top, but you are a heck of a lot closer now. i think we are getting closer and getting more excited about it. jonathan: subadra, you getting excited about 3.75% ? subadra: we have our year in forecast. i think that would be a buying opportunity. if you think about it in terms avoid would be wanting to put your money in at the end of the year when the fed is very close to its terminal fed funds rate, is going to have to be treasuries first, and risky assets later. jonathan: don't blame me for the tone of this program. the three of you are the ones that make up the tone. i'm just asking the questions. sticking with us. i haven't done this program for

about a month. still ahead, the final spread, featuring the payrolls report and fed speak. can't wait, can you? that conversation,. -- that conversation, up next. ♪ at fidelity, your dedicated advisor will help you create a comprehensive wealth plan for your full financial picture. with the right balance of risk and reward. so you can enjoy more of...this. this is the planning effect.

jonathan: live from new york, i'm jonathan ferro. this is bloomberg "real yield." . coming up, fed speak. plus more throughout the week. we get pmi's out of the euro zone. and rounding out the week with the u.s. payrolls report friday. i can tell you now the estimates so far in our survey. it is $250,000. the previous week, 315,000. let's come to you quickly, subad ra. a line that stuck with me this week. you cannot fire what you could

not hire. is that the maturation people are looking for in the labor market? whether it shows up anytime soon? subadra: it just might not. you are looking at an initial jobless claims for the last several weeks has been trending lower. we are expecting maybe $250,000 to be created next week when we get the unemployment report. the job market is extraordinarily robust. what you might start seeing initially is job openings might come down. people might stop hiring, but i think we are a ways away from targeting mass layoffs. that is why a gradual rise in the unemployment rate makes a lot of sense. if we do get there, we are looking at a meaningful slowdown in the economy, and perhaps recession. jonathan: one thing we know is

this cycle has moved quickly. 250,000 was the estimate. i want to get to the rapidfire round. earlier this week 4% on a 10 year yield. 4% on a 10 year this week. hired the week, the higher the year. ray peters, is that going to be the high of the year? greg: no. subadra: no. lotfi: yes. jonathan: when we get to 2023, is the fed still doing qt? we get to 2023, is the fed still doing qt, yes or no? lotfi: yes. subadra: yes. greg: yes. jonathan: final question. on the bank of england, scheduled meeting november 3. can the bank wait until november 3 to hike rates? just a quick yes or no.

subadra: yes. greg: yes. lotfi: yes. jonathan: thank you. that was good. it was not that depressing, guys. thanks for staying late on a friday afternoon. to the three of you, think you very much. from new york, same time, same place, next week, this was "real yield." this is bloomberg tv. ♪

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mark: welcome to the bloomberg audience. i'm mark crumpton. vladimir putin is vowing russia's annexation of four occupied regions in ukraine is a reversible. russian president also demanded ukraine in -- in the fighting and resume talks. >> recall the kyiv regime -- we call the kyiv regime to immediately stop the war.