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

coming up, another sign inflation is still very much an issue which eggs the question, can the fed afford to slow down? and all is the primary market goes dark for primary bonds. we begin with the issue -- >> we have cp in weekend the fed announcement. what will you hear from chair powell? >> the nation print will be important. >> cpi. >> we are watching cpi numbers closely -- >> services inflation and wage inflation remains resilient -- >> expect core inflation in the u.s.. >> the bond market tells you inflation is a thing of the past and the fed has done too much. >> they are trying to monitor how the economy is reacting to hikes. >> the fed should be able to stop around 4.75 or 5%. >> now that the fed is closer to pause, inflation is starting to roll over, you will get diversification properties from fixed income as well. >> it's a good idea to owned

bonds. >> we believe bonds are back. >> how year from now, yields were bu lower. >> stress will come in the credit markets. >> there are question marks on where inflation rates settle down. katie: joining us we have wells fargo's brian and another guest from goldman sachs. we have seen hot ism services data and how ppi this morning. when you add that together, can the fed afford to slow down right now? >> i think they will go to 50. there is a lag in the impact of monetary policy so we are still cycling through a lot of the 75's still. i see no reason to cycle -- night -- not cycled on the 50. does not mean they are pausing but it seems appropriate. katie: is there anything you could see tuesday when we get

cpi that would change what we get wednesday? brian: i don't think so. i think the fed comes -- the fed fed likes to not surprised the market so i think we are confident we will see 50 regardless of cpi prep. katie: careful, deliberate communication, that seems to be the jerome powell fed for the last two years. maybe 50 basis points in december is a lot but when we think about the past week and a half or so, has the fed's end destination changed at all? >> we don't think so. we think the pace of the hikes is poised to slow down. the final destination is the same. the question is really what does that mean for markets. to me, the fact we are starting this new phase with fewer of these double hikes and a slower pace of hikes, that probably cuts the tail of a scenario in which we have a fed-induced recession driven by over

tightening. that is a positive thing. the other thing is rates volatility is poised to slow down here which is good news from fixed income because it allows outside capital to be deployed given the fact we have a much better value proposition from a yield standpoint today. the final destination in my view is the same. katie: so a five-induced recession. i've heard that before but you see rate volatility cooling down maybe as we enter that recession. can you square that circle a little more for me? lotfi: the idea is simple, it does not matter how the cycle ends, the thing is we are getting a lot closer to the end of the cycle then beginning. once the countdown starts, i think you slow down based -- i think you dampen volatility in the rates market. the question is, what are the pockets of the market that will benefit from that? i think a lot of the other performance of -- performers of this year, take example the

market that should continue to benefit and agency has how performed very well, as soon as rates volatility declined, the other example would be the front end of the investment-grade curve from an all in yields standpoint. great sharpe ratio if you put a lid on that volatility. to answer your question, it does not matter how the cycle ends. i think the key here is you are getting a lot closer to the end of the cycle of the tightening cycle than the beginning. katie: as we talk about the potential for recession, romaine bostick and i caught up with his ailments of callister earlier this week. let's take a listen. >> i feel like a recession has happen because in my lifetime, and the fed raises rates, this aggressively, 75 time and time again, the economy slows down, the inflation is from the supply chain disruptions and the war, maybe inflation slows down on its own. i would be surprised but i think

we are going to have a recession. katie: brian, it feels like we have heard that up and down wall street this week, that a recession is coming and if that is the case, does that help explain the rally we have seen in the bond market over the past month and a half or is there something else going on here? brian: absolutely. that is exactly it. growth slows down, you tend to see longer-term bonds dupre he well and they have ripped. they have done well since late october so a recession is to me basically a sure thing, it is the only way to bring inflation down. the fed, the actions they are taking, it is on the doorstep no doubt about it. the potential is a could even be here now. we will not know until in hindsight. katie: we have seen a big gap open in terms of the year-end forecast. this is the hsbc view, the 10 year treasury yields are going to end next year at 2.5%. then you think about we got out

of wells -- what we got out of wells fargo, their expectation is the 10 yea nominal yields should trade between 4.25, 4.75 next year. i don't know, just a yawning gap, where do you fall in between that rain? brian: i think we are probably in the middle. i do think inflation is going to stick around a little bit, it will be a little sticky. we might not see the return to the 2% yields as quickly as next year, but also with growth slowing significantly next year, i think investors are going to be looking for more of the safe havens, long-term fixed income typically sees flows during those periods so trading somewhere in the mid-threes makes a lot of sense to me. it would not surprise me at times if we move about 4%. would be adding duration as quick as i could during those periods when they present themselves. katie: i spent a long time going

over the wells fargo call because we have not seen for 75 -- 4.75% since 2000 and seven or so but the call is we are entering a period of structurally higher inflation and that should mean a period of structurally higher policy rates should follow. do you think we are heading into that environment? lotfi: i do. i think the higher cost funding environment is something investors will have to come to at some point but i agree with the comment made earlier which is recession feels -- fears has probably been the biggest driver of the impressive rally we have seen in yields. the other thing i would add is there is probably a desire from a lot of investors to re-anchor yields to the levels that prevail pre-pandemic or between the post-global financial ash the post-global financial period and pre-pandemic period.

the fact we are getting closer to the end of the tightening cycle than the beginning, probably means the next high-end deals will be in the front loaded rate hikes but it will be more about the resilience of the data. our baseline view is still for some kind of a soft landing scenario into next year but if the data continues to hold well, and if the market comes to the conclusion that the most likely outcome next year is a pause as opposed to a pivot, i think there is a case you can make for yields to move higher again. katie: let's work on that. if the next like higher will be fueled by resilient data, doesn't that raise the odds the fed will have to act even more aggressively to cool the consumer and cool inflation? lotfi: it's a risk. i agree with that and that is a great point but it is a great that we would be keeping an eye on. one of the side effects that

-- side effects of the fact we passed peak inflation and that is to accelerate into next year, real disposable income is post a run out. that poses an upside risk to growth and could basically force another tightening in financial conditions because the necessary condition to bring inflation down is keep growth low trends. every time you post upside risk to that scenario, you force a recalibration of the fed reaction function but i agree that is a risk. katie: i want to end on the idea, the risk of over tightening. obviously we know the fed is concerned about that but when we continue to get the strength in the data we have seen over the last couple weeks, does that risk become even more of a fear? brian: i think so because if there's one thing i've conviction on more than anything is the fed will be successful on returning inflation back to a level they are comfortable with,

some 3%. if the inflation data remains elevated, the fed will remain elevated. i do not see them capitulating at any point until they win. they have their entire credibility on the line. katie: great conversation. brian rehlings and lotfi karoui are both sticking with us. of next, the auction block. december has been chilly for issuance. those bear numbers next. this is real yield on bloomberg. ♪ what if you were a global bank

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katie: i'm katie greifeld in for jonathan ferro, this is "bloomberg real yield." time for the auction block. for the word of the week and probably the month is slow. we star in europe, primary

market participants think the holiday season is already here, that group mean to a standstill this week with no new deals pricing yesterday or today. over in the u.s., the same story, weekly volume at $4.3 billion, lining up to be the slowest december in at least the last 15 years. if you are looking for some activity, you have to go to sovereigns and back to europe for barclays government bond -- -- net issuance rising to 500 million in 2023, a record high has the ecb pivots away from qb. when it comes to credit, kerr sheldon at kkr is sticking with it now. >> the market is so fragile where weighting could be a dangerous game. starting to strike now is a way you should thinking about credit and if we are at a higher resting heart rate for rates for a long period of time,

valuations will be lower, credit seems attractive relative to equities and the market essentially is set up almost like a tender bonds -- box ready to ask what because when there is consensus and conviction, a lot of caches on the sideline. that will step in and there's not a lot to buy. katie: brian rehlings and lotfi karoui still with us. not a lot to buy. do you expect supply dearth to continue into next year, and if so, is that a tailwind? lotfi: absolutely. it has been a tailwind throughout the year particularly in the high-yield bond market where we have at spectacular bond market on the other cyber we are on track to finish the year down 80% relative to last year in terms of gross new issued volumes. it is probably gonna finish the year -10% of the outstanding. the market has such contracted

by 10%. i think later into 2023 you should see some normalization in primary market activity, driven entirely by refinancing needs. if you look at the high-yield market, the maturity wall sort of kicks in in 2025. the typical issuer on average comes to the market a year to year and a half before the majorities -- maturities come due. if you -- that sets us up for a little rebound in 2020 three. relative to historical standards, particularly 2023 and 2021, i think recovery will be slow. katie: before we get to next year and outlook, i want to go back to this year and the fact credit spreads have been as resilient as they are because i have been looking for an explanation when you look at volatility going on in the treasury market. why credits press have been so unbothered.

does that come back to the supply story? lotfi: i think there's a number of reasons. technicals have been a big driver, no question about that. everyone into the year was focused on the demand side of the equation and prospect of a slow down there. with that, if you look at flows, they have not been that impressive but a lot of that has been upset by the big adjustment we are seeing on the supply side so that is one. i think fundamentally credit does not have a problem. you can look at things at the sector level, at the issuer level, irrespective of what will happen in 2023, i do think we are going into it with a position of strength and i think that fun middle strength visible in liquidity positions, declining leverage, etc., has provided a lot of stability to the market. maybe third factor and a lot of speakers alluded to that already, the return of income

and fixed income markets has been a big driver of resilience too. katie: let's talk more about the fundamentals because there was a bank of america note that caught my eye this week. i will redo the quote. for the market overall, we agree and look for resilient ig fundamentals as earnings are supported by inflation and management continues to reduce debt. however, the lack of stress indicates another kind of uncertainty, something typically breaks on a recession. at this point, markets do not know what that will be for ig. coming on this point, the fact there is no stress if you look at the credit markets. is that something to worry about? brian: i would keep a close eye on it. as we go to next year, i have a view we will have recession, i have a view earnings will be more challenged than people expect, so fundamentally i think people at some point are going

to sell credit. typically in every prior recession we have seen high-yield credit spreads hit almost 800 over and we are sitting around 450 now, so i'm not sure we will hit 800 because of the yield, of the income, the demand there so i agree the fundamentals are stronger than we may have seen in the past but surely 600 to 650, something like that would be an entry point. getting a lot more aggressive in terms of credit but this is predicated on my view recession is basically on the doorstep. katie: you hit on something i have been wondering about. to something -- to your point, looking a past period's of recession, you have speed that she had seen spreads blow out not happening here. 650 may is the entry point. do you expect the default rate to rise as well? brian: sure. it lags of course but as we go into a recession, earnings are challenged.

companies are better positioned in the sense that they took care of a lot of the funding needs but ultimately, especially at the lowest credit quality, down at the lower end of high-yield, the triple c-type names, i thing those are going to be quite challenged in the economic environment that i think is coming. katie: i want to compare and contrast, talk about the relative value between ig and high-yield. when you compare the two rating tears and you think about the fed-induced recession you say we are heading into, which is the better opportunity at this point? lotfi: just to be clear, our baseline assumption is still for some kind of a soft landing, so recession is not what we are forecasting next year. i do think we have witnessed the fastest and most pronounced increase in the cost of capital since the onset of the great -- great moderation. second thing to keep in mind, we have had a different hiking cycle from anything we have seen the last three decades.

the fed has been hiking and will continue to hike into a slowdown. we have any ecb hiking into a recession which was unthinkable only four quarters ago. to me, that is an up and quality -- in quality and that leaves me more constructive on ig versus high-yield because the bigger you are the more financial flexibility and operational agility you have, the better position you are to withstand the transition towards a higher cost capital environment. katie: if a soft landing is the base case, i want to blueprint what that looks like. if we get a soft landing and it seems like the path is getting more narrow by the day, what happens to spreads? what happens to defaults? lotfi: i think what happens is probably some rebuild of the first half of the year as the market continues to navigate that uncertainty. there are a lot of constraints on how tight spreads can go to the fact that -- continue to

lean against excessive leaning in financial conditions but second half of the year, if that soft landing path becomes visible, i think you will see probably tighter spreads. katie: brian, i want to get your thoughts on the idea that may be a soft landing still is in the cards and if that is the case, what do you buy? brian: i would be very surprised if we had a soft landing. the yield curve -- there are so many signals to me that suggest it is a far case, but if we would have a soft landing, it is risk on. if we avoid a recession, it is just risk to me, by risk -- buy risk. there is pent up energy, you can see it any time the equity market pulls back a little bit. there are buyers there. any hint the fed will slow down or pause, buyers come in.

the buyers want to be there so if truly we do not see the fall off in earnings, we do not see a recession then yes, you would be buying -- to me, risk assets will have the best returns, but that would not be my expected case. i expect we would have a recession, i would still be at this point be more defensive if i'm doing anything offensively right now, which we started in october, it is adding duration. especially when i see tenure at 4% or higher, those are the areas i would be offense of the adding duration. other than that i am in defensive posture. katie: on the offense in the long end, brian rehlings and lotfi karoui staying with us. still ahead is the final sprite, the week ahead. it is the local central bank super cool. this is real yield on bloomberg.

katie: i'm katie greifeld in and for jonathan ferro, this is "bloomberg real yield" and time for the final spread. coming up, it is a big one. the big u.s. inflation print coming on tuesday and then finally the fed decision followed by chair powell's news conference on tuesday. then a host of great decisions -- rate decisions thursday including the boe and ecb and a news prep conference followed by president lagarde. finally wrapping up the week this pmi and cpi data out of europe but it is time for the rapid fire around running out of time but let's start with you, i think i know the answer, can the u.s. economy avoid a recession? lotfi: yes. brian: no. katie: does the twos 10 curve on inverted next year? lotfi:? yes. brian: by the end of the year yes. katie: tighter or wider credit spreads? lotfi: modestly tighter. brian: wider.

katie: you guys, brian rehlings and lotfi karoui, thank you for your time. that does it for us, same time next week. this is "bloomberg real yield". ♪

>> welcome to bloomberg. i mark crumpton with first word news. the democratic led senate has gotten a jolt. arizona's senator kyrsten sinema registers as an independent today, days after democrats gained a clean majority in the chamber. her move will not affect the overall control of the senate next year, but it could complicate the party's agenda. she says she will not caucus with republicans. vladimir putin said russia may add the first nuclear strike to its military doctorate. his comments to reporters today came days after the russian president warned the risk of atomic war is rising. the u.s. and