>> from new york city for our viewers worldwide, i am in for jonathan ferro. "bloomberg real yield" starts now.

katie: coming up, inflation expectations falling, investors jumping back into junk bonds and all as 2023 quickly approaches. we begin with the big issue, fed minutes out and about an hour but investors looking beyond december. >> the markets are focusing on the fact the fed is likely to decelerate the pace of hikes. >> looking for a 50 basis points in december, another 50 basis points -- >> 50 for december, less on the promise of more hiked into the future and maybe a higher interest rate. >> placing for the moment -- waiting for the moment where the fed is likely to pay that -- >> are we there yet? are we there yet? >> we think we're about 70% to 80% done with the tiny cycle. >> now more than ever it is about growth. >> they are growing. it does not matter what they say because that will continue. >> we worry about the fed or

other central banks going too far. >> the fed sees a greater risk in over tightening. >> that is still going to go hand-in-hand with considerable market volatility as investors are looking for guidance. katie: joining us now, academy peter scheer, fran wrote a love so and kim dawson of new edge. we got minutes from these fomc minutes -- meeting rather in just about an hour. is there anything we could learn at 2:00 p.m. that would change your base case? >> i think it is less of a question of what they do in december because 50 basis points as well telegraphed in priced in. it has been a real question about how much higher that terminal rate will be. powell signaled back at the november meeting that to expect the terminal rate to be higher than the 4.75% in the september sep, so how much higher above 5%? that is what the market is

pricing in right now. will we see that terminal rates go? there is likely still going to be a discussion about wanting to keep rates in that restrictive territory for some time. it will be interesting to see how much the bond market reacts to that simple because there still are cuts priced into the back half of next year. katie: peter, you heard from cameron, 50 basis points priced in for next month. if they deliver 50 basis points, does that change your expectations for the rest of the trajectory of the fed path here? peter: not really. i think a few weeks ago the market was thinking every 75. i think the data was coming and weak. weak pmi's, three weeks ahead of the time. i think the market is diverting from any hawkish and as the fed could say because we are starting to realize recession is probably base case and i think a lot of people come to the direction i have been all along which is the recession will start sooner and be deeper and that will take the fed jawboning

off of the table. katie: so the recession is your base case as well. fran, let's turn to you because for so long the reality -- the rally cry was the fed would go higher and hold it for longer but if a recession is on the way in your view, does that shorten the period of time between the fed last rate hike and its first rate cut? >> it would for sure depending on the depth of the recession and if peter is correct. they will be having to actually pivot. our base case has been for more of a pause at the middle of next year. what makes me nervous about the base case is that seems to be what the market is pricing in, at least for a few months, which is eminently wrong, so obviously there will be a lot of data between now and then. i think the fed may be in a difficult spot next year because, although inflation data is getting softer along with economic data, there is still signs that part of the inflation story will remain persistent for

some time. katie: as we talk about the depth of a potential recession here, let's talk about the depth of the inversion we see in a variety of yield curves are now, whether the three month tenure, twos, tens, pick your curve really. we are at the most inverted levels in decades. does the magnitude of that inversion say anything to you? cameron: it is certainly important because it is a big, flashing yellow light that there is economic weakness at some point on the horizon. the problem is the depth of the inversion does not really tell us much about the timing of the economic weakness and we have seen pockets of better growth in recent data, so atlanta for gdp now is still tracking 4.2% for the fourth quarter. we think instead of looking at just the depth of the inversion for the yield curve, it really is a matter of when it starts to re-steepen. because that is the signal the flashing red light that we are

in an imminent recession and that is likely because the short end of the curve starts to rally end really price in rate cuts in that three-month and two-year part of the curve. katie: so that we steepening, what is the bigger movement in there? is that coming from the short end echo the two-year tenor or is that more the long end? cameron: it will likely come from the short end when we see the receiving. that is typically what happens before recessions and that is also what happens before you see bottoms and risk assets. before you see bottoms in credit and equities, you see that we steepening. it happens because the bond market sees true weakness, a key weakness in the economy, it is spac's the fed to cut -- it expects the fed to cut rates and that is where you see real weakness in corporate profits that affect the risk assets. so we really look to the short end of the curve to be our guide to tell us the timing of the

recession. katie: so more movement there at the short end when you think about a potential re-steepening of this deeply inverted yield curve but let's talk about the long end for a little bit because bloomberg's liz mccormick had a great interview with the chief rate strategists over at goldman sachs. the view was inflation will remain someone about the fed's target over the next few years, so our yield forecasts are a reflection of the view inflation will be somewhat structurally higher. this cycle is different, not like those we have seen the last 30 years. what really caught my eye was this call that the 10-year treasury yield will stay at 4% or above through 2024, quite a big call. do you agree with that? do we have or percent treasury yields in our future for much longer? francis: i actually do agree with that. i do not think that is bad news, however. i think the scenarios is we are going closer to 3%, tenure

treasuries would be worse news economicly in all likelihood -- economically. the fed owns 25% of the treasury market so there's another part of monetary tightening going on in qt. so balance she reduction. it will also have an impact on the entire yield curve. that factors in but it has been the assumption all along that inflation is going to remain more persistent than the market would like, and we are listening to the fed on that as well. that is why they remain committed to the hikes so far. so yeah, 10 year rate -- breakevens, if you look at tips versus treasuries, they are optimistic. even two-year breakevens are optimistic in terms of inflation coming down. we do not think that is in the most likely category. katie: let's talk about what this means for volatility.

if we have structurally higher inflation, if we have structurally higher long and treasury yields, obviously the move index, treasure volatility, has been elevated this year. climbing all year, you compare that to what is happening in the stock market, one of the biggest market mysteries for me, why we are not seeing stock volatility. on a cross asset level, how to those two measures volatility come back together? do think bond volatility comes down here? or do you think it will eventually drag the vix higher? peter: i think we will see bond volatility come down a little bit. a lot of the issues in the bond market you are starting to see mortgage prices stabilize or mortgage rates higher with a rally. i think we are in for a lot of pain. i think we will see 350 on tens before we see four. i think we will see the flooding of the yield cover and i think from a stocks stand in, the we will shift fairly soon and it is not as much about the volatility

but of all of yields. stocks are yields are lower that is a good thing. i thing fish it will come when people realize yields are going lower as the bond market is seeing economic problems and that will weigh on stocks. that might be the signal that to which the yield cover and maybe that triggers the two-year and guess the other signals on the bottoms and so i don't think we see the bottoms of the stocks until we get a traditional risk off rally, lower treasury yields as stock prices. katie: in a way it is the same call, if you have the ceiling on yields perhaps you have the bottom in stocks. but it is very aware to me that tomorrow is thanksgiving. i want to get a little cute here, peter. if you look at the economic data that has been coming through, look at market-based expectations of inflation, where the fed is going, what would you say central bankers are thankful for this year? cameron: wow. that they are allowed to keep their jobs when they got it so wrong last year. [laughter] katie: that's a pretty good one. francis: i would say the same,

that they are happy to be employed. they are probably also happy there is some sign of softening inflation and that they don't have to keep the 75 pace into december or else they might not have a very merry christmas. katie: central bankers and weathermen get to keep their job. we are heading into the holiday period, what do you think is on the fed's wish list as we sort of count onto that? cameron: they certainly want to see some of the pandemic-related parts of inflation continue to decelerate. we started the year with durable goods, inflation running -- durable goods inflation almost 20%. it slowed to 5% now and that is really that transitory part of inflation that has come out of the system because supply chains are healing. as demand has remained robust, and if we have a strong holiday spending season, does it cause the supply chains to be caught

flat-footed again and we see a re-acceleration in that durable goods inflation? it's of question for 2023 given the fact that retail sales and overall consumer demand remained so resilient. katie: you guys are all very good sports. i'm glad you are all sticking with me. everyone sticking with us. up next, it is the auction block , a slow week for u.s. issuance during this thanksgiving week but big macro trends. details next. this is really yield on bloomberg. ♪

why do so many businesses use stamps.com? they save time by printing discounted stamps and shipping labels right from their computers get a 4-week trial plus postage and a digital scale go to stamps.com/tv and get started today katie: i'm katie greifeld and this is bloomberg really yield.

time for the auction block where we have a shortened week in the u.s. that brought $6 billion in high-grade issuance. with that low level of issuance, we take a more macro view. in europe, multiple central bank rate hikes this year pushed borrowing costs to the highest level in a decade. the result is bonds sold this month by investment-grade issuers have an average tenor of about six years, the lowest since december 2018. looking at european junk bond sales, issuers on the sidelines as investors demand skyhigh premiums. sales are down 80% from the same time last year and have accounted for 1.9% of total issuance volume since the start of the month. turning to sovereigns in the u.s., as of last friday, around $13.5 trillion worth of bonds have been sold this year. that push issuance down 14% compared to the same period last year. when it comes to high-yield, a rally in u.s. junk is bolstered

by flows into junk bond funds. the sector sign estimated cash intake of 2.4 billion dollars between thursday and monday, putting the we contract to be the fifth consecutive with inflows. as you might imagine, the two big u.s. high-yield etf's are seeing a second straight month of inflows. peter scheer, fran riddle also, and cameron dawson are back with us. fran, i want to start with you on the point where you saw this enthusiastic jump into the junk bond funds both mutual funds and etf's. do you think now is the entry point for that market? francis: i think now is an interesting entry point. high-yield has come back in now to around 8.5 percent, closer to 8.5% weighted average yield to where it was over 9% last month, which even from an historical perspective is quite attractive. it is roughly what high-yield

was yielding for the decade prior to the global financial crisis before we entered this period of unprecedented monetary policy. also reissuance has been extremely low, net new issuance almost nothing in the high-yield market. corporate fundamentals from a set a point of you look solid, obviously there could be a lot of changes in their earnings pictures over the next six to 12 months. but for all those reasons, namely the current yield, carry, which could be enough to absorb about a couple hundred basis points in higher rates, higher credit spreads, or some combination thereof. so carry, that we have not seen in more than a decade, is playing what it should play, a big role, the most important role in those terms. that is why investors are coming to high-yield. etf's, there are always technicals, hedging instruments, could be related to options strategies. flows etf's are not always indicative of market sentiment

about in this case they probably are. katie: definitely a good sense check on etf flows, they are actively used as trading vehicles. there is a great show on etf's 1:00 p.m. eastern on mondays, really killer anchor, but let's go to you, cameron. fran raises a good point, sort of the idea of you have very attractive yields at this point but one of the biggest reasons why you have seen so much spread widening this year is because of the duration risk, the interest rate risk. i senior know to expect spreads to widen more from here. is that more of the interest rate risk or are you getting nervous on the fundamentals here? cameron: more about corporate profits from here because, if we think a recession could start sometime in 2023, even if it is later 2023, you would expect corporate profits to come under pressure, corporate margins to come under pressure, which should then impact credit fundamentals, meaning, though we

have seen this rally back into risk -- and there has been many examples a pretty ravenous risk-taking throughout the market whether it is flows into high-yield ets, flows into equities being nearly double what we saw in the prior equity rallies earlier this year, so people are definitely chasing into your end but once we get into 2023 and look at those corporate profit fundamentals, we expect to see deterioration, which would warrant spread widening. of course we will have to weigh that with the supply demand because, as we have been talking about, there is still just demand to lock in yields higher than what we have seen in decades so if you can be a long-term investor, ride it out until maturity, maybe you are not a sensitive to the near-term fundamentals, but we expect widening. katie: peter, like cameron said, there has been really ravenous risk-taking going on, especially in the bond market. where do you fall now in the debate between investment grade

and high yield? what is the more attractive as i class there? peter: that's a tricky one. on an outright yield basis or return basis, high-yield has room to outperform. you get the movement yield, spreads will be ok, and you are currently getting paid for taking that risk so you get yield, path to hell is paved with carrie but for now you can live with that. i think if you're looking at a relative value on a spread basis, if you want to -- you want to own spread rather than high-yield. i compare high-yield to the russell 2000 and i think you will see equities underperform. if you are able to own spreads versus equities, i think that is interesting. if you have to own spreads outright, be cautious because we probably see spread widening in your end. katie: cautious on spreads outright. i want to bring you this quote from t. rowe price, this caught my eye, that there is a risk of over tightening until the fed is done, do short duration and

actively position that way. fran, i want to bring that to you, not so must the risk of over tightening but the idea of short duration. do you agree? do you just sit on the short end or is it time to add back duration? peter: that really depends -- francis: that depends on your view in the economy. for investors at see the risk of deeper recession, it is one of those facets of fixed income that provides a hedge against equity returns. now that we are in a more normalized fixed income environment where you have positive, nonzero yields, maybe not positive real yield yet, duration can play a role. however, there is attraction to the short end of the curve. getting 4.5% on t-bills or higher is compared to what we have seen the last decade. it is low credit risk, low duration risk.

even if recession is likely or at least a slowdown next year is quite likely, there is a wide range of potential scenarios, so even duration can be a risk in this market, particularly with the inflation story not completely told. but yeah, the short end -- and i agree with peter, there is a good argument for staying higher-quality. you can get healed now in fixed income for the first time without taking excessive duration risk or excessive credit risk area katie: cameron, we only have about 30 seconds but something unusual so far about this cycle is we really have not seen that wave of downgrades, the wave of defaults that usually comes in a downturn. do you think that is next? katie: it is next but it will take time. it usually lags, usually we see defaults peak after the peak of spreads so we would expect downgrades, expect defaults to, but just in time, meaning it is

likely more of a late 23/early 2024 event. katie: just-in-time, defaults. cameron dawson, erica williams, francis rodilosso, everyone sticking with us. i had, the final spread, we hear from angel central-bank leaders after the holiday weekend in america. on that next, this is real yield on bloomberg. ♪

katie: i'm katie greifeld, this is "bloomberg real yield." it is time for the final spread, the week ahead. coming up, u.s. markets closed for the thanksgiving holiday but we get a host of global central-bank decisions on thursday. u.s. markets are closing early on black friday, but we get ecb president lagarde and boe governor speaking on monday. we will hear from fred chair jeb -- fed chair jay powell followed by u.s. economic data on

wednesday including gdp. it is time for the rapidfire around. three questions, three quick answers. cameron, i want to start with you because junk spreads right now are at 440 basis points currently. do we see 400 or 601st? cameron: we see 401st and then we go to 600 2023. francis: 600. peter: i will go with 401st. joe: does the fed cut rates in 2023? cameron: very backend. katie: peter? francis: possibly -- peter: possibly backend. francis: no. katie: does quantitative tightening last through the end of 2023? cameron: yes. katie: peter? peter: yes. francis: yes. katie: great job. my thanks to erica williams, cameron dawson, and francis rodilosso --cameron dawson,

francis rodilosso, and peter scheer. we will be back friday. this was "bloomberg real yield" and this is bloomberg. ♪

mark: welcome, i'm mark crumpton with bloomberg's "first word news." in venezuela, the government of president maduro and the opposition have agreed to resume talks this weekend. it potentially opens the door for the united states to ease oil sanctions. the talks will include conditions for venezuela's 2024 elections. the eu is discussing capping the price of russian crude oil at $65-$70 per barrel.