>> from new york city for our viewers worldwide, i am katie greifeld in for jonathan ferro. bloomberg real yield starts right now. ♪ katie: still fighting the fed on 2023 rate cuts. a december surprise from the bank of japan.

and bond issuers planning a new year's blitz. we begin with a big issue, closing out a messy year for markets. >> the volatility to start the year. >> we have seen that volatility play out. >> 10-year treasury yields breaking 4%. >> inflation is still elevated. >> the biggest factor this year is man-made volatility. >> fixed income, equities, currencies. >> we have a war, federal reserve tightening rates. we have all types of things going on in the oil market that are beyond anyone's control. >> there is another issue that has to drop and that is the economy. >> what can go right in 2023? >> we don't think it will necessarily be a year of robustness. >> there is so much pessimism. >> recovery will not be easy. katie: joining us now to discuss, jim's michael collins, luke hickman, and troy gayeski.

you heard it there, a lot of uncertainty, pain priced into the markets next year. that was the common denominator across markets this year, especially in fixed income. does 2023 look any better from your vantage point? troy: on a relative basis, not nearly as much in the barclays ag. we think that a fed committed to crushing inflation, taking the front end to 5.25, as well as the fact that qt is still simmering behind the scenes will lead to one more higher high in yields. we believe the 10 year will breakthrough 4.25, but we can disagree on that. the bottom line is you don't have as egregious risk reward as you did coming into this year. you do have some protection in the event that the economy slips into recession faster than we think. not as much downside, certainly no great upside.

not egregiously bad risk reward, but not a place where you want to reach out for duration and take the risk of higher yields in the short term. katie: not looking at duration yet, but troy breaks up the fed's fight to crush inflation. still hinging on what happens to inflation. there is still a lot of daylight left between 7% and 2%. have we passed the ceiling on cpi when you look at the past several months of data? luke: apart from that being the graveyard of all predictions. [laughter] yes, we are past the peak of inflation. if you look at what's been happening with gasoline prices coming down, umich 22 people's expectations easing a bit. we need to see the employment market cooldown as well, wages cooldown, too. but it seems to me the demand

push is maybe faltering a little bit. and the cost push is definitely faltering a little bit. by the second half of this year, we are going to be getting very close to where the fed wants us to be. katie: does that include a recession? when you think about crushing inflation, taking the edge off the labor market, again, the fed is working with really blunt tools here. are you concerned they will overdo it? luke: the fed always overdoes it. every single tightening cycle leads to a recession, pretty much every single tightening cycle. 65% of your economic survey respondents on bloomberg are seeing a recession is coming. i am shocked that is not more. i see a recession baked on for next year. it will probably be q2, and it probably will not be a drawn out one, like b r p to see in the u.k., but it is coming.

katie: michael, let's stick with the idea that recession is coming. you look across wall street and you can quibble over the magnitude, severity, but it seems like the consensus is for recession next year. is that your view as well? michael: the magnitude and the severity is really the important point, katie. i think it is kind of a foregone conclusion that you'll have some kind of soft landing or maybe mild recession next year. that is pretty much priced into risk assets. what is not priced and is something much worse, where the on employment rate doesn't just go from 3.7 to 5%, it goes up to 6%. to luke's point, the fed has generally done a bad job engineer these soft landings. they have done it in a couple of occasions, the mid-1990's. then they moderated pretty quickly and bounced it around,

and the economy averted the hard landing. that could very well be the case. i am much more in the mild recession/soft landing camp, because the fundamentals of the economy, fundamentals of companies and industries are actually much better than we were going into some of these more existential crises we have become accustomed to. katie: you are right, we are missing the important part of the conversation, how bad that recession will be. it seems like because of that consensus -- the details we are light on -- but maybe that is why you are seeing some cuts priced into the end of next year. very different from what the fed's latest dot plot is showing. morgan stanley's jim karen says that is a mistake, the markets have been wrong. the fed is committed to taming inflation. that is the view of jim karen. >> i don't believe the hiking cycles are especially priced in.

i think what is priced is the opposite. people expect rates to come down. i think we need to listen to what the central bankers are saying. they are worried about inflation. katie: michael, there is a bit of a fight brewing there when it comes to the back half of 2023, that that is saying one thing, the markets are pricing another. who wins out when it comes to rate cuts? michael: i think the markets will win out. there is a game of chicken going on, to your point, katie. the market knows that the fed has to talk tough. the vent doesn't want financial conditions to ease too much, for marcus to take off and for demand to continue to be robust. they have to talk tough. but the markets we get them, we get it, but we all know that inflation is coming down. we all know that growth is coming down. we know that you are going to blink and you are going to cut

probably 50 basis points next year, maybe another 150 in 2024, which is where the bigger delta is between the fed's dot plot which expects fed funds rate to be at 4%, and the market is 100 basis points lower. katie: troy, let's game plan this out a bit. if recession is on everyone's bingo card for 2023, is that accompanied by a downdraft in inflation, getting back maybe not to 2%, but close to that target? is that just bullish on bonds, is that a green light? troy: first of all, with regards to financial conditions tightening, the fed continues to want tighter conditions which includes higher bond yields. no disrespect to michael, but we think they will be very reluctant to cut into the next downturn until they are crystal clear that the 2% core is within sight. that will be harder to get

inflation from 4 to 2, or 3 to 2, and it has been getting off the highs recently. a number one scenario have to plan for in broader markets is, with tightening continuing, as well as the ballot sheet draining, money supply being drained out of the system, it is more than likely that we make a lower low in risk assets. we will get out of this recessionary spiral. the thing is that the price of that we will pay for it is recession. we don't think equities or speculative credit is pricing that in yet. katie: i think jerome powell would be happy to hear you say that it is still unlikely that we get rate cuts and some form next year -- in some form next year. what would shift you maybe tomorrow michael's camp that we could see the fed ease next year? troy: if you look at a diagram of right tails and w

here probability intersects -- maybe ticking the front end only 25.25 and go no further. c, they continue to be cautious at the speed that they drain the balance sheet. lastly, we don't have a degree of margin compression in corporate america. if all of those things come together, then there is a possibility in a deeper recession that the fed is cutting in q4 of next year, but that is the soonest that we can see it, if that is the case, perhaps we happy to trough 30% market drawdown in the s&p. yields have peaked at 4.25 and we will not see that again. from our standpoint, that will take a lot of right tail evidence and different probability distributions to achieve. katie: so much to dig into but we should talk about the news of the week. i was expecting a pretty quiet

macro week, but the bank of japan got markets off card with a shift in their bond yield policy. money managers betting on the central bank to maybe crack and finally cash in on that. bay asset management is sticking with short positions, saying the genie is out of the bottle here. seeing validation and doubling down from schroders. the market will not pressure the boj. we are building our position in the yen. this has more legs, and we are on it. luke, i want to bring that to you. japanese investors have been mia from the treasury market this year, but that group of investors is the largest class of foreign holders of u.s. bonds. maybe it is a long-term issue, but down the road, if you have yields higher in japan, maybe that class of investors staying home, does that we were you when it comes to the demand picture for treasuries? luke: it will play out over the

next six months, for sure. there is a real risk, i would agree about being short 10-year jgb's. it feels like this could easily speed the market to a point where we see quite a sharp selloff into maybe 100 basis points in the 10-year. even at that level, the relationship with a long end, which has been free to trade for a long time, would still be at historical wide levels. if that happens, it starts to look attractive domestically, you could see some repatriation of funds. it would also take the fx markets to shift around a bit. the timing seems tricky to do at the moment. the dollar would definitely be weakening. if people start buying into that rate cut story in the second half of next year, we could see a weaker dollar. that could lead to more

repatriation into yen bonds, too. there is a risk, but we are not there yet, i think, in terms of the relative value for japanese investors shifting out of treasuries. katie: bigger ramifications for the currency market, maybe for the bond market, as well. we are just getting started. mike collins, luke hickmore, troy gayeski, everyone is sticking with us. bond issuers planning a new year's blitz after the slowest december in 15 years. that conversation is coming up next. this is really yield on bloomberg -- really yield on bloomberg

katie: this is real yield on

bloomberg. i'm katie greifeld, in for jonathan ferro. it is time for the auction block, where we kick things up in europe. market issuance following 14% this year, total volume fall short of 1.5 trillion euros with a record 50 days of no bond sales. in the u.s., high-grade that sales are expected to hit $40 billion next month. bond issuers are storming a market after the slowest december in 15 years. no issuance this week in the u.s. junk art market. the proper way to close out the slowest year in 2008. sticking with credit, tom tip source of strategic revealing his outlook for the year had. >> we are looking at a very shallow recession and very shallow credit retraction in 2023. we expect to see positive returns and investment-grade credit. how you will be a potentially different story because it will depend an awful lot on the types of credits the industries

management because in high yield you are always four quarters away from default. you have to consider will some of these names make it out of the recession alive? katie: still with those are mike collins, luke hickmore, troy gayeski. michael, high yield has outperformed, but his view is that ig is the place to be. where do you fall in that cap? michael: high yield has outperformed because it has a higher yield, spread and default rates continue to be near record lows. they have been really muted. it's all about what will happen. default rates will increase next year, we know that. whether they go from one to two or three or four or five or higher is really unknown, but they are going up. typically when default rates are going up, you don't want to be true getting into high yield. we are playing it pretty defensively in the riskier parts of the credit market.

i am more concerned about delivered loan market which is fundamentally in much worse shape than the u.s. high yield bond market. generally stay away from the riskier credits until you get either a clearer sign from the fed or signs that the economy is bottoming. katie: you bring up a good point, default rates to this point have been very low relative to history. maybe we are heading to the increase, to what degree we are not sure yet. what is your view on where corporate america is heading on defaults,?how does that filter through to the riskier parts of the bond market troy: income has gone up, debt service coverage ratios have collapsed. from our standpoint, if you are

going to move out on the efficient interior and take more risk and credit, two areas you could focus on would either be bb clos or higher in the capital structure. single-a's is yielding 8%, which is unprecedented given the credit quality. there you have real ample subordination to an increase in the balls and levered loans and you can still benefit from yield pickup going forward. if you segue over to higher-quality areas, one of our favorite expressions right now -- mortgage backed securities where you have tremendous yield not only because prepayments have collapsed because interest rates have gone up so much, but also because home prices have started to decline. as home prices start to decline, it is difficult for those who took out a mortgage the last nine months to refinance regardless of levels. it is very unusual for people to kick in more equity into their home in order to refinance.

because agency pass-through spreads have widened so much due to the fed's qt, you can be long interest on strips, negative duration, buyback duration three agency pass-throughs, which sets up a nice 10 percent to 15%. quality air is credit, sean levered loans. if you are going to take that risk, take a look at seal those which have more subordination. there are more opportunities invest fixed income markets. you don't have duration risk and the degree of credit risk. katie: not reaching for risk. let's bring you the view from bnp paribas. they are looking for another year of surprises, writing, yields are the best they have been in decades but it's quite possible we widen again at the start of next year. we have had sharp unexpected moves and this will continue. luke, let's talk about that. i want to talk about spreads, how they typically perform in a

recession, high yield specifically. 800, 900, that is the benchmark that i've been socialized to expect. but the downturn that we could be heading into, how do the riskier parts of the high-yield market, for example, behave in that environment? luke: the thing that is different right now, we have got inflation which means a recession is still nominal growth. once we get that inflation down, nominal growth comes down, and risk in 2024, we could see a normal recession with real growth. that is a horrible situation for high-yield. it is those markets that will look to that kind of area, and we could easily see movements into the seven or 800 over four a lot of high-yield credits in the single b and ccc area. probably nonfinancial rather than financial. most of the financial stuff in

high yield is the lower parts of the capital structure which we actually quite like a lot here. banks are in such a good position going into the recession. but that high-yield, the market looking forward to that, is a first half of next year story. in europe we have been shorting crossover, started to build up a position there. we'll be doing that more and more as we go through the early part of next year, trying to protect some of those spread widening moves that we could see. katie: luke likes financials, mike. what sectors appeal to you? michael: we actually like some of the more cyclical, traditionally cyclical sectors within the higher-quality part of the high-yield market, investment-grade. financials, commodities, energy companies, even autos and homebuilders, have been killed. but they are cheap and are in a much different financial

position than in past downturns. there is some value there, as well. katie: everyone is sticking with us. still ahead, the final spread, the week ahead. u.s. jobless claims stealing the spotlight amid a holiday shortened week. that is next here on real yield on bloomberg. ♪

katie: i'm katie greifeld. this is bloomberg real yield. markets close across europe and the u.s. on monday and observance of the christmas holiday. wholesale inventories coming on tuesday. u.s. jobless claims and the ecb publishing its economic bulletin on thursday. finally, u.s. bond markets close early on friday, 2:00 eastern. before we get there, it is a rapidfire round. three questions, three quick

answers. truly, 10-year treasury yields, 3% or 4% first? troy: 4%. michael: three. luke: 4. katie: troy, credit spreads, wider or tighter by this time next year? michael: wider. luke: talking about the u.s.? katie: i am talking about the u.s.. luke: wider. katie: troy, yes or no, does the bank of japan hike in 2023? troy: yes. michael: sure. luke:.have to katie: a lot of consensus there. i thanks to mike collins, luke hickmore, troy gayeski. that will do it for bloomberg real yield. thank you so much for tuning in. this is bloomberg. ♪ ♪ at booking.com,

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