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coming up, the edge of of u.s. inflation, followed by a downshift from the federal is herb. -- federal reserve. we begin with the big issue, fighting the fed. >> they still have more work to be done. >> he kept pounding away at the market. >> 17 of the 19 dots are above 5%. >> the market is calling the fed's bluff. >> they are saying we are going to price in a terminal funds rate above 5%. >> we can say the. what is relevant but when has it been right -- the dot plot is relevant but when has it been right?

>> the markets are look for central banks to react. >> they have lowered their gdp 0.5. that is as close of a recession as it gets. >> more than the market ignores the fed, that will force the fed to keep raising higher for longer. >> you fight the fed on this at your peril. katie: joining us is tracy chen and we have cuts in the second half of next year. if you rewind and look at what the new dot plot says, it doesn't say anything about cuts, so who wins here? tracy: the market has been misinterpreting the fed speech. there hawkish on the terminal

rate and dovish on the pace of hiking i don't think there will be rate cuts next year and the market has been pricing at least one cut. i think there will be adjustments in terms of price going forward, especially on the short end of the rate. i think there will be repricing of that in the market should try to price that out. matt, there is a good reason why don't fight the fed is one of the most overused. is there any chance this time is different? matthew: there is always a chance that this time is different there is always the chance. what we are seeing is an interesting paradox so if the fed ever says, we might cut at the back end of next year or that might be necessary, the

more they talk about something like that happening, less likely for it to come true. if they start talking about potentially cutting financial conditions will ease and it will make it harder to do. now by saying we are getting higher and staying higher for longer and we don't see rate cuts, by saying all of those things, they give the market more credence their fighting inflation and get more credibility and will create conditions, tighter monetary conditions, financial conditions that might make cuts at the back end of next year a lot more likely than the fed thinks right now. katie: you bring up financial conditions and that was the first question to jerome powell and got questioned about easing financial conditions in recent weeks is a problem, and he pretty much rushed that off as short-term moves. we got a reminder from the

former fed chair richard clarida saying if markets keep using financial conditions, the restrictive policy loses its bite. at what point do financial conditions easing become a problem for the fed? matthew: my sense is the fed is not happy with how easy financial conditions have gotten. they are not going to say that but that was what he was alluding to when he said we don't look at short-term but we want to see a trend but there is a significant gap between with the rates market is saying and deeply inverted curves highly predictive of an recession and economic indicators, two percent negative, the largest negative print in terms of declines over six months we have seen since 1959 and the history of the data

so a lot of things are saying that but the labor market is not saying that. credit spreads are not saying that at all. hi yield is 4.5 percent approximately, not near recessionary levels at this point. at some point you would have to think they have to soften more as labor market softens and catches up to the other data. katie: we will get to the different message that the credit markets are sending versus the treasury market, but let's bring in george bory. he is from allring. -- allspring. even though there is a lot of daylight between 7% and 2%, how long does it take to close that gap? george: we think it is going to take a while. confidence is critical and that is clearly the impression of

what the fed is trying to maintain, a hawkish bias to convince the market it is going to be able to get inflation down towards target. next year is going to be a challenge and dividing the trend into maybe three thirds, the first third going from 7% down to 5%. will be reasonably conceivable and easy to get to. the next sort of third from 5% to 3.5% -- that's going to be a challenge and that is where the expectations for the middle of next year we have questions about. and the final one third back down to 2% will be a test of the fed's resolve whether they are willing to pressure the market and push the economy to those levels. right now, the most important thing the fed can do is they need to get fed funds above the

spot rate of inflation, and we are not there yet. the pce numbers, looking at core cpi, still hovering below 6%. fed funds is at 4.5%. those numbers should cross as we get into 2023. once that occurs the fed can become much more purposeful and viewed as a head of the curve, but we are not there yet. the fed has to keep the markets's confidence that they will get there. katie: let's talk been when those two lines meet. does that happen when fed funds are at 5% or closer to 6%? george: we think it is 5%. given the trajectory and getting that towards the five and sub 5% we think is achievable.

which we think could happen in the first half of next year the fed can be much more patient. we don't have to have this ongoing game of cat and mouse in how's -- powell's toggling back and forth. i think we will getting more balanced message. until we get to that point, you can't afford to do it, because that confidence element is so critical and he has to preserve confidence. it was very encouraging yesterday that the bond market recently held. it effectively, stocks were off and bonds were flat. that is a good story, and we think you are getting to the point you could say the bear market and bonds could be over, simply because the fed is heading in that direction. inflation is falling and the fed is tightening. those are powerful for a bond investor. katie: that is a big call that

we could be at the end of the bear market in bonds. tracy, i want to come to you with what they are doing with china being a potential pivot away from covid zero and potential reopening of one of the world's biggest economies. what would that mean for u.s. inflation and for the federal reserve? tracey: i think china's reopening is faster than anyone expected. the decision is almost a forced one because they cannot continue the cpi with the lockdowns anymore. this quickened pace of reopening with chaos and the near term. in the near term we are seeing growth worsen before it gets better. the timeline is hard to estimate right now when we are buying to

see the recovery in the economy. i think right now, it is dependent on the limitation of whether we are going to see some more detrimental variant from the virus that we are closer to the end of the tunnel. it is a double-edged sword. you will see a pickup in recovery and potential decreased demand for global commodity and that will increase the risk of inflation. i think that is definitely a wildcard. but at the same time, the growth will be hard to estimate at this point in terms of timing. in the near term, we will see more disinflation or deflation on china. katie: one of many crosscurrents hitting fixed income of all stripes. we are going to keep talking

about it next. everyone is sticking with us. up next, j.p. morgan makes a move to top the tables. that is next. this is "bloomberg real yield." ♪ from one company committed to building a world that works, to three that will focus on a future that does too. this is ge healthcare, creating a world where healthcare has no limits. this is ge vernova, helping generate and move the energy

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katie: i'm katie greifeld. this is "bloomberg real yield." the global debt market saw 148 fundraising actions with bonds, loans and asset-backed securities were $75 billion hold in 2022. in the u.s., bond offerings dried up in december. volume set to finish down by 16% from 2021.

j.p. morgan sold $3 million earlier this week to narrowly take the lead in the league tables for high-grade sales in 2022. we caught up with notable investor bruce richards from marathon calls for a recession in the second half of next year. that coupled with an earnings recession will start downgrades and a default cycle. bruce: we think will have a default rate of 10%. that is enormous because the high-yield market used to be a one .7 trillion dollar market and now it is a $5 trillion market, so 10% of that is whopping. for us to pick a quality portfolio of double b credits, loans, structured credit that yields 8%, 9%, 10% that will default and then you have a default cycle picking up and that allows you to play it multiple different ways.

katie: still with us, george bory, matthew diczok and tracy chen. this potential downturn, we haven't seen a pickup in default. he thinks that is going to change. where do you fall on that? do we see more default in 2023? tracy: this is not a normal cycle. if you use the old playbook it might not work this time. i think default will go higher year, but how height it can go depends on the -- how high it can go depends on the credit assets. the interest sensitivity in the cycle is lower than before. the mortgage owners, existing mortgage average coupon is 3.5%. the rate increase is lower.

the balance sheet of both consumer corporations -- and corporations are better than the ones they had in the global financial crisis. i think the default cycle this time around, i am more worried about the financial stability, because the pace of hiking in this cycle is unprecedented. we haven't seen that in the past 40 years. something is going to break. we have already seen the housing slow down drastically in the bitcoin market has turmoil as well. so what will be the next shoe to drop? i think the financial market will see some fireworks there next week -- next year. katie: as we look ahead to next year, we have jp morgan's bob michele saying our best idea is

to use every backup in yields to add high-quality duration to portfolios, investment grade bonds top the list while government bonds offer the highest real yield since the financial crisis. george, is that your best idea as well, high-grade bonds? george: the notion of positive real yield is really our best idea. you can scale positive real yields at different points along the rating spectrum as well as the yield curve. going back to what you mentioned around corporate and corporate risk, there is a fair bit of risk embedded in the corporate system, but it really comes down to balance sheet structure were than anything else. the whole notion that you get 10% cumulative default rates wraps a lot of attention and is good messaging and a starting point, where do those manifest

themselves? it will come down who can't absorb or hedge out the interest rates. as tracy mentioned, if you finance yourself with low debt that doesn't mature for a long time, you are in a good position. if you bought a whole load of bank debt rapidly repricing and haven't hedged it and can't pass to the interest costs, now we have a meaningful problem. we are taking a narrow approach of where they may manifest themselves and the global market is definitely the spot where we see the most amount of pressure and where we are most cautious. we have been reducing our allocation there. to go back to tracy's point, acid -- asset classes look the best. katie: what you expect largely is if you have a view of a recession. if you look at what stocks and

treasuries are pricing, it looks close to a recession. then you look at spreads, investment and high-yield, no such concern. what changes in 2023? our spreads right or are all of the other classes going to win out? katie: this is a very interesting conundrum. i think what explains it is the fact that the labor market is still quite strong for now, so it is more recession delayed but not denied. matthew: until you start seeing job losses and on employment rates up and until you see the consumer squeeze, maybe you don't need to see the recessionary levels yet. from our view, the more complex the macro picture, the more disconnected the yield curve and economic indicators are for industrial spreads, make sure portfolio incisions somewhat

easier. you just don't want to stick your neck out too much on a number of asset classes. you want to be broadly diversified. want to have treasuries and don't be too overweight spread product but we agree there are longer periods of time that investment grade corporate's and high fixed incomes that do well. these are some of the best real yields we have seen since the financial crisis. this wasn't operate time to go over fix. we are seeing a lot of activity in the short end but closer to the duration target in fixed income. katie: it is people's that is the only thing that has worked this year is cash. romaine bostick and i caught up with the aberdeen ceo earlier this week on that topic. >> cash has been a very good

diversifier. it is the only asset class where you're getting a return in 2022. you have to have a portion in cash, because nobody knows what is going to happen. when you don't know what is going to happen, you need to look at balance in the portfolio. cash is a short-term benefit. we also think that you've got to be positioning for not just today but tomorrow. and that is where investors are saying what is going to happen next. katie: he also said his position in cash has been increasing as rates have risen. george, do you agree that you should be in cash at this moment, at least at some level? george: the quiddity is very important in this market and we have seen that become more of a factor as the year has unfolded. if i know i can buy front and yields at roughly right around

4.5% to 5%, everything has to be that. there is a good argument for intending -- maintaining a certain amount of cash. we have it both from liquidity management and tactile goal -- tactical management, we are not giving that up yet. we look at the optimal risk return targets, the two and three your part of the curve look very interactive across a variety of segments in the market, including corporate, structured products, mortgages, that position for the yield and curve position very attractive. the combination of those two gives you quite a bit of income, and tries to position that yield relative to where volatility is today. katie: george bory matthew , diczok and tracy chen. everyone is sticking with us.

major central bank decisions continue, plus a host of u.s. data. that is next. this is "bloomberg real yield on bloomberg." ♪

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katie: on katie greifeld. this is "bloomberg real yield." coming up the rate decision on tuesday and a slew of economic data, gdp, housing, spending, durable goods, and now is time for the lightning round. does the fed cut rates next year? tracy: i don't think so. george: no. matthew: no. katie: publishing the peak in 10-year treasury yield's? tracy: i think so, yes. george: yes, definitely. matthew: yes we have. katie: do we see 100 or 200

basis points on spreads? tracy: 200. matthew: 100, but it will be close. george: we may touch 200. katie: thank you so much. it from new york, this is bloomberg. ♪

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