>> for our viewers worldwide, i am katie greifeld. bloomberg real yield starts now. ♪

katie: coming up, a blockbuster payrolls report in america triggering a selloff in the bond market and giving the fed the green light to keep hiking. we begin with the big issue, a monster upside surprise. >> wow. stunning. awesome. great for the economy. >> it is impressive. >> a robust number. >> the top estimate was 300,000. this is way out of the league. >> this is yet again a soft landing type of report. >> we are in good shape in terms >> of where employment is. job growth is averaging 350,000 or so a month come you cannot discount that. >> i worry that this challenges the view that fed chair sent as a couple of days ago, disinflation has started. >> the hot, tight labor market is still going to be an issue for the inflation outlook. >> for the fed, it is doubly hard.

the last thing it was to be seen is destroying the labor market. >> do you have to put another hike, another 25 on to what the fed does from here? katie: joining us now, blackrock's marilyn watson. christian armani of lafayette college and cliff corso's of asset management. marilyn, let's start with the market reaction. we're looking at 16 basis points higher on two-year treasury yields. the 10 year treasury yield back to 3.50. is this a overreaction? >> it highlights we are at this point in the market where we are so incredibly data-dependent. we have seen so much volatility continue after the fed and recent data we have seen. we have these incredible latent market data today. we have strong ism. it has been noted a lot about financial conditions easing. yet, we have had a huge amount of rate increases.

4.75 in the span of about a year. we are at this point which is difficult to for the market to determine the future path where the economic data is going to go and assess where we go from here. i think it is highlighting the uncertainty at the moment. the fact is, the labor market remains incredibly strong. inflation is coming down in the u.s. now is going to be very much a case of being very dependent and the market beginning to scrutinize every single data point that comes out. katie: cliff, along with this big move across the curve but from turkey early in the front end comey's uprising the fed's terminal rate increased slightly. the conversation wednesday from the fed was perhaps we get a pause now. maybe that is the best -- next move. did the numbers we got today push out the pause? >> i think they absolutely do. you heard the superlatives, that

is a blockbuster number. i think underneath the hood of the fed, the market is concerned about wage inflation. it is coming down, but that is the easy part. coming from 9% to 5% inflation, no one should be surprised by that. it is going from 4% down to 2%. i think we got a wage problem. labor has tremendous leverage. this good news is maybe bad news because the market has been driven by the pivot and pushes out the pivot. katie: christian, we hear from jerome powell again on tuesday. given the data we got this morning both in the jobs report and the ism services figure, does his tone change on tuesday versus the jerome powell we heard from this past wednesday? >> if you take out the fci part that everyone is so worked up about, it basically said their job is not done and they will keep at it until inflation comes down to their target level.

i do not expect him to say too many things that are going to be different than his press conference. from the fed's perspective, the key thing to remember is is wage growth is coming down. it is not coming down fast enough and clearly this print does not help the cause that much. at the end of the day, they are focused on soft landing and have added another increase or two. the path has not changed. he told us, do not expect a pivot. he market did not price it out. that is going to persist for some time. katie: we did hear from morgan stanley's ellen zentner, she expects the fed to slam on the brakes. she wrote "we think incoming data and forecast decisions will lead the fed to pause at its next meeting. march feels a long way away at this point. talk about it, do we think the dot plot is going to change in march and in what direction?

krishna: looking for a pause might be to -- a pause in march might be too brave. i think pausing sometime in the first half of this year is quite likely and they will probably pause and keep rates at those levels for a long period of time. the real economic data is not soft enough for them to pause this early, relative to what they have already told us. i think the fcp may get revised down a little bit, but not meaningfully so based on the things they have said and the data we are seeing today, especially the partial rear accelerations in certain parts of the economy. katie: you guys brought it up here it honestly, it has all i have been thing about. financial conditions, what they mean, what they are pricing in. powell spoke about financial conditions wednesday. let's take a listen. >> financial conditions did not change much from the december

meeting to now. it mostly went sideways her up and down, but roughly came out in the same place. it is important the markets reflect the tightening we are putting in place. there is a different perspective by some market measures on how fast inflation will come down. we will have to see. i am not going to try to persuade people to have a different forecast. katie: marilyn, help me out. you look at the bloomberg measures, goldman sachs measures. you even look at the chicago fed measures of financial conditions. i see easing there, i do not see too much in the way of meaningful tightening especially not in the past six months or so. i am going to come to you. what are financial conditions, what do you look at to judge financial conditions? marilyn: when you look at financial conditions, it is a broad-based set of data you are taking into account. i think possibly win we heard from chair powell who was talking about -- essentially,

you are looking at a whole range of factors including what lenders can borrow. it includes the value of stocks, including leverage, a whole range of different factors. i think when you look at the broad range, not just the housing market, not just interest rates, but rates they have used. you can see some of that even when you look at corporate earnings. i think a lot of companies are in a good position. i think you really want to be looking at households, corporate and the different measures that impact them rather than a more narrow set. i think it is something the fed will be considering, but i think in terms of messaging we heard wednesday, they were clear they want to stick to the communication. i can agree with krishna, they do not want to yet really highlight they are going to pause. they want to be measured, be

data-dependent and highlight it will -- as much as it takes. katie: cliff, powell on wednesday didn't seem concerned about financial conditions. put this into context about what this means the feds inflation fight. we went from 9.1% headline cpi to six .5%. we think of the easing we have seen in financial conditions. what does it mean for the fed's trajectory back to 2%? cliff: i think you are right. the actual printed announcement coming from the fed was more hawkish than it came out in the press conference. i think it is going to be irritating to say the least to the fed that every time they tighten rates, financial conditions do not get tighter, they get easier. that is not the impact the fed is trying to have. when we think of financial conditions, you think of balance sheet, makeup channels, markets. you look at the beginning of this year, the fed slowed down

the amplitude. if you look at the stock market way up, rates, the bond market, they have a rally in rates. you look at spreads, both high-grade and high yield. very tight. this is not the point the fed is trying to ease financial conditions. i think that is part of the job owning he is trained get across the market, particularly with regard to the pivot. i do not think he thinks this next rate hike should be higher, tighter bond spreads and lower rates. that is not what the fed is trying to accomplish. katie: marilyn, i want to pivot. he didn't just get the fed this week. we got the bank of england, the european central if you look at the stock market, the rest of the world has got the u.s. i want to talk about the bond market. when you look at the course of 2023, which market do you expect to outperform? is it the u.s. or european bond market?

marilyn: at the moment if you look at where the ecb and bank of england are compared to the u.s., the ecb is behind the fed in terms of its cycle. we think adding to the stage may look to pause as well. they bank of england also raise rates this week, we expect them to slow from possibly the race again in march and possibly may. when you look at the overall stock markets both -- the bond markets in the euro zone versus the u.k. versus the u.s., i think now we really like a lot of the carry you can get in the u.s. in particular. we have added 12 positions there. we think you get very attractive, high-quality kerry also in the euro zone, we have added 12 positioning in spain where we think we get very attractive, liquid kerry as

well. given the ecb will continue to raise, it is going to eventually pause pretty soon, as well. you look at the u.k., given the poor performance we saw in the bond market and the second half of last year, we have seen for example u.k. credit has outperformed in january this year. as we have seen a catch up in that market, too. this is an interesting time. when you look globally across the different bond markets and japan, that is a different story. we really like diversification and like the fact we can find a lot of different opportunities right now and take advantage of different value trades. katie: great conversations so far. marilyn watson, krishna and cliff watson. we are going to hear from chair powell again tuesday. he is going to be speaking to david rubenstein right here on bloomberg. next, the auction block.

europe's primary market coming to a standstill after a record january. this is real yield on bloomberg. ♪

katie: this is bloomberg real yield. time for the auction block where we kick things off in europe. issuance coming to a standstill on thursday after a record january. sales nearing 300 million euros for the year. in the u.s., high-grade bond sales totaling $18 billion and seeing monster demand with most issuers pricing through their guidance range. the u.s. junk on market pricing its first deal of the month on thursday. unigroup selling $2.6 billion of well-received debt following the

busiest month in a year. sticking with credit, jp morgan's bob michele saying is not the time for high yield yet. take a listen. />> we have stayed away from high-yield because our analysis shows us that the peak in high-yield credit spreads always comes during a recession. it could be fast, just like the pecan treasury yields in october happened quickly. but, that is when it happens so we think high-yield is a latter half of 2023 trait. katie: still with us, marilyn watson, krishna and cliff. marilyn, it is a quality world. i hear that week after week. is that your world, as well? marilyn: yes, we still very much favor quality at the moment. as you mentioned earlier, given the type spreads we are seeing in the different asset classes within fixed income not leasing in high-yield and investment grade. at the moment, we have concentrated on very liquid,

high-quality kerry that we can invest in and reap that kerry -- carry. we can get carry that is securitized, which is high quality and comparable in terms of carry to high-yield. we like select names in high-yield. i think now, there -- we are looking at everything from a -- perspective and a cross currency bases where the best opportunities are. for now, given this environment and where we are and what we discussed in terms of where rates might go now. spreads are incredible he tight, we think we want to focus on the risks, we understand the liquidity and where we can get the decent carry. katie: krishna, credits rally big time. both the sealed, investment grade and riskier parts of the bond market. how much steam is left in that trade? krishna: i think that is going

to be the biggest challenge for the trade markets. that is relative to the risks we face of a potential recession. if the fed continues to tighten, the spreads are not that wide. therefore, it is primarily still very much a carry game. if the carry game you are playing, when the base rates are at 5%, playing it in the high-yield market i do not think makes that much since you can get decent return short investment at 4%. i think that is where the best values. i want to come back to this fci issue. katie: ok. krishna: the thing to remember, somehow people think fci is some metric of economic activity. it does not. what it does is correlates well with credit growth, it is credit growth we are focused on.

while financial conditions have eased, i do not think credit growth has had the same quantum jump. that is why the fed and jerome powell feel confident they have time on their side and they are not going to be moved around because equity markets had a 10% rally. katie: krishna, i'm glad you took us back there. i was not exaggerating when i say that is pretty much all i have been thinking about since jerome powell reads those words. one of the components of financial conditions are credit spreads. as you bring up, they have not widened that much. certainly not to levels we have seen in past recessionary period's. cliff, i want to come to you on the widening that is not there. does that set up change? cliff: i think it probably does. our view is the probability of recession is greater than the probability of not having a recession. that was said by others here. spreads typically widen and dramatically. not to stream levels and global

financial crisis, but typically you can see high-yield spreads generically speaking widened to -- basis points. that is the market. the way where thinking about it, we are focused on income generation and building resilient portfolios in an uncertain world. i think there is a place for carefully selected high-yield. from our perspective down the front into of the curve, some of the things we are looking out -- front end of the curve, avoid high cyclical sectors. there are solid sectors in the double b space. there are some good candidates, you could earn 7% to 8% being careful without a lot of rate risk. you might have spread widening and you will have to stomach that. if it is carefully selected, it is a good yield in terms of returns albeit the default rates would be expected to rise. katie: an important component of this conversation is the fact we have not seen too much in the way of corporate distress, at

least when it comes to the default rate. we got something interesting from jp morgan earlier this week. they said credit defaults in january hit the highest since october 2020. we are only talking about five that affected a total of $5.8 billion of bonds and loans. that comes after the fourth quarter where we saw no defaults at all, marilyn. maybe we are seeing the tide turned a little bit. what are your expectations for this year when it comes to the default rate? marilyn: as cliff said, if we see the economy slow down further as we expect it to and if it were to not be a soft landing -- soft landing is primarily the obvious case. if it were to be worse than that , you would expect to see the default rate pick up a little bit. i think we have not seen a lot of activity in that space. you have not seen a lot of u.s. users, seeing more coming through now. a lot of companies are in a

better place then happen in terms of the balance sheets, even three years ago. as financial conditions possibly tighten, and as we see essentially economic data slowdown, we are focused for example on -- we are cautious towards consumer focused sectors . all the different sectors that could be negatively impacted by much weaker, economic growth or even a recession. so, certainly think last year was a holding pattern for want of a better phrase. this year, now that we are seeing such a change in the overall economic environment, change in the bond market, i think it pays to be cautious for now. katie: all right, guys. sit tight for a second. everyone, sticking with us. still ahead, the final spread. the week ahead, we get another dose of chairman powell.

that is next. this is real yield on bloomberg. ♪

katie: this is bloomberg real yield. time for the final spread, the week ahead. coming up, we hear from jerome powell again on tuesday. followed by williams, cook, barr, kashkari and waller on deck on wednesday. then, another round of initial jobless claims on thursday. then, the fed speak continues with waller and parker friday. we close out the week with the you missed sentiment survey --mich sentiment survey --umich sentiment survey. time for the rapidfire round, talking three quick questions, three quick answers. marilyn, i'm going start with you. does the fed cut rates in 2023? marilyn: no. katie: krishna?

>> no. katie: cliff? >> no. katie: does the u.s. get back to 2% inflation next year? marilyn: 2024? potentially, yes. >> yes. >> no. katie: last question, do we see 3% or 4% first on 10 year treasury yields, marilyn? >> 4%. katie: krishna? >> 4%. katie: cliff? >> 4%. katie: sounds bearish to me. thanks to all, great discussion you guys, appreciate it so much. as we count on to the end of this week, you are looking at 10 year treasury yields sitting around 3.50. maybe we will get to 4% by the end of this year. s&p 500 after initially getting back to positive territory is down to .8%.

am new york, that does it -- from new york, that does it for us. same time, same place next week. that was bloomberg real yield. this is bloomberg. ♪

>> welcome to the bnn bloomberg. i am john hyland with the first word news. secretary of state antony blinken's trip to china's offer now. the biden administration has decided to delay his trip after detecting a chinese surveillance balloon over sensitive nuclear sites in montana. his visit to beijing would have been the first such visit by a top u.s. tip amount in five years. the balloon was a clear violation and u.s. conditions were not right for the planned trip. a brutal selloff has gotten worse. the empire has lost more than half market value since the report from hidden berg research alleging fraud. more than $118 billion was erased from the market cap of adani's 10 stocks.