>> from new york city, i'm craig greifeld -- katie greifeld in four jonathan ferro.

real yield starts right now. katie: coming up, cooler than expected u.s. inflation, investors rushing back to junk bonds on a potential fed pit. we begin with a seven handle on cpi. >> inflation starts to come down. >> there is some evidence we are moving from peak inflation. katie -- >> they were starved for information on the inflation front and we got it. >> i don't think the fed will have to do 75. >> this is about being on mile 20, you still have 10 katie:. >> i don't think the fed will stop because of this number. >> i think we will see yields coming lower. >> there are a lot of

crosscurrents that people are not addressing. >> things are not as scary as they were but far from good. katie: joining us is -- as the cpi print a changer for the fed? lindsay: it is important. it is in the right direction. inflation is not slamming on the brakes, it is tapping. you have to look forward to the next numbers. katie: has your fed call changed in the wake of thursday? winnie: and is not changed in the wake of thursday because we were expecting the fed would be more dovish than chair powell's hawkish tone was. we were anticipating a 50 basis point rate hike.

it is now coming back toward that level after 60 basis points before the cpi print. we expect the fed to be on hold because we see signs of progress that monetary policy is working to address inflation and the long and variable lags that the fed highlighted in its policy statement are going to start to materialize. katie: that seems to be the consensus that the fed will ultimately be less hawkish than powell has sounded as recently as last week. i want to take this international -- what is the easier call, the fed or the bank of england? luke: i think it is the bank of england, and since that we will face a nasty recession, unemployment rise quicker. i think it is a lot easier to pick a 4% ceiling for the bank of england than 5% for the fed. katie: let's talk about the ceiling for the fed. if you get expectations for the

fed's terminal rate, at one point yesterday there was an entire 25 basis point rise out of the market and you saw risk go to the races. is it premature to price out that magnitude from the terminal rate? lindsay: i don't think so. the market is coming to what we believed would happen. without the fed was going to go 58 next and then another 25 basis points and then take a pause. we all know the monetary policy works with a lag, made one year or two years of the conversation is that everyone understands there is a lag. we think the market is coming back to where we are and they will not have to get to 5%. it is in -- it is not actually operational. katie: if the fed pauses and that becomes more of a conversation after the data we saw. let's about what we have until the december meeting.

we have another cpi print, another employment print -- does the stakes on those raise as we get closer and closer? winnie: the stakes are important, but also the fed is not looking at one data point in a vacuum. there is always a number of other things going on in the economy, monitoring market liquidity and how credit markets are functioning in general. while we are focused on those data points, we are not trying to lose sight of everything else going on in the market right now and there is strong evidence that policy tightening is working, at least from a liquidity prospect. katie: tightening is working and we have a big lag and we heard from the central bank last week. what caught my eye in the last hour or headlines from the boston fed president susan collins, who said that i think as we have raised rates that the

risk of over tightening has increased. luke, i want to bring that question to you. what is the bigger risk, over tightening or calling victory prematurely? luke: both the fed always does too much. they have to see under limit higher and until that happens along with inflation coming down, they will keep tightening. they will reduce the amount from 50 to 25 but it is going to keep going up. the biggest risk is people think it can be on pause for a long period. i think one of my biggest non-consensus causes is a short pause before they realize they've gone too far and start coming back and maybe in the summer of next year. katie: maybe as early as the summer of next year. what is your base case for the

fed? winnie: it is the pause and it is a relatively new development in the market. until market, consensus and futures were pricing in an immediate reversal, a cut and run but it has gotten confidence around the cpi data and the strength in the data market and perhaps the fed can sit on hold and we still are a believer in the bumpy landing. there is a risk that the policy tightening is to cool and having to chase the inflation number with incremental policy tightening next year and also that we over tighten and the fed finally hikes rates into oblivion and has to cut and run. given it some of the commentary we have heard from the fed and fed chair powell, that we feel like a pause is actually a reality. katie: cut and run and i have not heard that and i'm actually going to steal that.

i want to bring this to the yield curve because it was striking. we got as low as -62 basis points already this month. we are floating around an inversion of about 52 basis points. it feels like the flattening, inversion has been one of the consensus traits this year. how must -- much juice is left? lindsay: it is not a focus for us to play for so much more. we have seen a huge move already. it is a helpful indicator if you are thinking about recession. people hang onto the twos and tens. i think the more important thing is figuring out where is the fed going and how long are they going to stay put and what that means for economic output, both here and abroad. that is where our focus is.

i don't think it is five or 10 a steepener or flatten or. katie: is that the range we are playing on, five or 10 basis points? i am wondering about the direction of this curve, obviously in deeply inverted territory. how deep can that go? lindsay: if it stays around here it could flatten a little man -- a little more. katie: i've heard some calls for 100 basis points of inversion that there is a lot of daylight between now and then. i want to get to the news of the day, fixed income, one of the biggest headlines on the terminal is that we had crypto exchange ftx file for chapter 11 bankruptcy. i don't think there is a huge amount of overlap between bond investors and cryptocurrency investors. with that being said, let's talk about the spillover effects. and luke, do you see any

contagion risks here from what is happening in the cryptocurrency market? luke: there will be contagion and we don't know where it is going to be and what is going to be because the complexity of the lending. the mess that ftx has gotten itself into will not be the only place it is happen and not the only time it has happened this year already. so far it is clearing cleanly. we have seen things like digital coins fairly stable in all of this. those of the ones we have to watch for contagion. if they lose, much like the money market, they have to liquidate real assets. so far, that is fine. right now we are probably ok. it is contained within its own market but you have to remember this is a consumer led market of

technology driven companies that people are getting hurt in and hurting horribly. they are going to feel less wealth and spend less with all of that but i don't think it is big enough to make an economy wide impact as of yet. katie: so maybe no systemic risk. is there any contagion risk from this cryptocurrency spillover, fallout, and what does that actually look like? winnie: i think this is an adjusting question because one of the things that surprised us about the broader market is the lack of true liquidity events in such an aggressive tallassee -- policy tightening, russia, ukraine, inflation, all of the headwinds that are knocking investors offsides and the fact that we have not seen the u.k. pension ldi issue result in a

severe blow up since the boe stepped in or the crypto markets being as volatile as they have and now with ftx bank of c, not driving a pure liquidity event on the heels of it as a head scratcher. i think that speaks how much liquidity was injected into the system in 2020. if you look at u.s. cash levels alone and when he market accounts and prime funds, they are at all-time record levels. that indicates to me there is a lot of cushion in the system. when it comes to crypto, is the institutional leverage in the crypto space that will ultimately impact other asset classes that are more liquid and can fund reduction? the point we are at right now, the answer has not been yes, but there is still a long wait to go. katie: a long way to go and a lot of questions. everyone is sticking with us.

up next, credit market surge the most in two years after the inflation surprised in the u.s.. that decision coming up next. this is bloomberg. ♪

katie: time katie greifeld and for jonathan ferro. this is "bloomberg real yield." time for the auction block, we start in europe or bowers pounce on demand for risk and spur where the best week for bond sales this year, using 58 billion euros. all but one had investment-grade. in the u.s., a pickup in sales with $45 billion of high-grade corporate debt issuance this week.

one notable name was oracle which had a $7 billion bond sale. and the 30 year treasury auction stood out at 21 billion dollars sold with primary dealers awarded a record low share amid surging demand. moving onto high-yield, i had the chance to catch up with jeff sherman, the $98 billion asset manager deputy cio. we spoke for the inflation numbers came out with this is what he had to say at that point about high-yield. jeffrey: i am not touching high-yield today. there has been too much of this belief in the fed pivot and the risk rally we saw in equities. there are things in the securitized markets, or esoteric, commercial real estate where people are nervous that for a double beal -- double be.

-- double b. are you touching high-yield? winnie: i can't say we are not touching high-yield. we have a neutral recommendation on that asset class. we prefer investment-grade right now. this is almost entirely coming down to relative value between u.s. and high-yield id. ig is trading at a higher rate than high-yield whereas high-yield has been bolstered by technicals and a higher quality market. i can't say we are not touching it. there are definitely opportunities, but we agree there are some others that are quality. katie: what would shift you in either direction? winnie: in order for us to get

more constructed on high-yield, we need to have more fundamental clarity around a potential downgrade. right now if feels highly uncertain with the conversations around over tightening and a hard potential landing in the u.s. it would be worse for high-yield and investment-grade. if you look at these two asset classes, which is compensating for investors for potential losses in the downgrade cycle, they are on top of each other. so i would rather buy ig than high-yield. katie: it is an interesting question. when you look at the real value between investment-grade and high-yield or get right now, which looks more attractive to you? luke: as we go through the end of the year and into next and move more and more into the triple, and important distinction is that is about

nonfinancial high-yield, industrial high-yield. that is the companies that will find 2024 actually pretty tough. 2023, i think they will be fine, inflation is ok and growth is slowing but ok, nominal sales. 2024 could be tough for these guys and we will get closer and closer to maturity and needing to refinance and is often the pinch point or high-yield. we are moving into the triple b space. the real key, things like bank space at 10%, that is a great buy from investment-grade companies that issue high-yield debt. katie: 2024 could be a really difficult year for some of these companies. is that a recession call on your part? luke: partly, some of that will go through next year with the recession but let's remember what a recession is, a decrease in real gdp.

we can still have recently good inflation numbers and growth is going to be slowing but it is not going to be too bad aired in 2024, we can get 2% growth and 2% inflation. that is 0%, nominal growth, which is where you have a problem for high-yield is this is. you need that nominal growth to pay down debt. katie: lindsay, embedded in this conversation about the corporate credit market is the default cycle, and at this point we really haven't seen many default. the default rate is historically low you look at past downturns. when does that start to change, if at all? lindsay: i think it goes to what luke was just saying it is predicated on the height recession and what of the contours of the recession. it sounds like we have a similar base case that we are predicting the most probability and moderate recession.

not something super severe are 2008 style, but we are not inspecting to have that many more defaults. we are on the lower end of the allocation for high-yield. i am lucky to work with credit analysts and we can actually pick the names instead of just buying high-yield. katie: when you look at the high-yield, is it slated for any sector or industry? lindsay: there are sectors we like. homebuilders make it surprising and they are doing a good job managing the backlog and land purchases. that is a sector that we like. it really is specific in finding the names we find will get feedback on. katie: name specific is

something to keep in mind as we progress towards act -- actual session. when i talk about the spread widening both on the high yield and ig, so far this year the explanation i get is it is mostly duration risk and interest rate risk. it is not concerns over quality and the specific credit risk, is that still the case or is that starting to change at all? lindsay: it is a great point and an interesting question because we have reached an inflection point. for much of the six months of the year, it was all about duration risk and has been damaging to portfolios. what we are seeing is spread decompression and much more dispersion across markets in the idiosyncratic risk.

if people are concerned about downgrade and default, it leaves a lot of opportunity for those you get right and you have to be much more flexible in your wrist read ahg -- in your strategy. katie: still ahead, the final spread. the week ahead with a host of fed speak on deck. this is real yield on bloomberg. ♪

katie: i'm katie greifeld and for jonathan ferro. this is "bloomberg real yield." a look at the week ahead, we have president biden meeting with president xi at the summit, followed by gdp and gpi out of

europe. we have a host of fed speak coming up on thursday and another read on inflation in europe. it is time now for the rapidfire round. we have three questions. i am looking for three quick answers. luke, does the fed hike by 50 basis points next month? luke: yep. easy one. katie: i think we lost you for a second. winnie: yes, they do. katie: lindsay, what is your guess? lindsay: 50. katie: is the first cost -- first cut next week -- next year? luke: yes. winnie: no. lindsay: no. katie: has a 10 year yield hit its peak? luke: yes. winnie: yes.

lindsay: yes. katie: my thanks to lindsay rosner , winnie cisar , and luke hickmore this was "bloomberg real yield." this is bloomberg. ♪

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-- a dramatic setback for vladimir putin. it was part of a territory that putin illegally annexed and he said it would remain russian forever. russia says it will hold its first nuclear talks with the u.s. since the invasion of ukraine. according to the foreign ministry, discussions will be in cairo.