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hot pc points to sticky in place and, boosting that's a more fed hikes to come and sending investors running from junk bonds. we begin with the big issue, another hot print. >> that news. >> that news across the board. >> pci number is quite high. >> inflation is headed the wrong way. >> we will not have inflation back to a 2% range before 2024. >> we are in an abnormal situation now. >> is it 5.25%? that remains the baseline but the balance of risk is there. >> it will be hard for them to stop raising rates. >> they have a real problem there. >> there's too much we need to get through. >> there will be more pain to come. katie: joining us now is colin martin and cameron dawson.

let's just recap some of the numbers we got at 8:30 a.m. core pce came in at 4.7% year-over-year in the estimate was for 4.3% in january it was a beat when you look at the month over month data and when you put that together and about the reports in the past few weeks, did the fed downshift the rate of hikes too soon? >> probably yes and we think all the talk about disinflation was likely misplaced. we did see disinflation in the back half of last year but was driven by two very narrow parts of the inflation picture, gasoline prices and used car prices. the rest of the components still remain rather elevated. as those have turned higher to start this year, that's why inflation has re-accelerated. when we look at the pce data, it was so broadly inflationary, you

saw the number of components above 4% take up as well and even that super court measure, the pce x housing, x gasoline also ticking higher and that shows you that the fed still has more work to -- to do in this fight against inflation. katie: whenever i hear super core, i see a bunch of asterisk. if the case of inflation is re-accelerating, do you expect the fed to re-accelerate the pace of rate hikes in response? >> i think that probability is ticking higher but i think 50 basis points is now going to be highly dependent on the february print for cpi which we get about a week before that fed meeting on march 21. if that comes out hot again, we would expect to basis points to come through end of the softer, maybe they stick with 25 but we think we are pretty locked in for 25 in march, 25 and make and

another 25 in june. katie: in reaction to the pce report, we heard from the cleveland fed president who said the report is just consistent with the fact the fed needs to do a little more on our policy rate to make sure that inflation is moving back down. at the same time, we got a study coming out from the likes of j.p. morgan that says -- you just look at the words they are using and masters is saying more and while she is saying significantly more so what does reality look like when it comes to the fed tightening path? >> it's somewhere in the middle but i would lean toward what meester said. we know she already favored 50 basis point hike at the last

meeting so for her, highlighting that it might take more given how hot the numbers were this morning was not a surprise. the study that you reference was pretty shocking because you had a mix of academia and some large banks. to talk about simulation of 6.5%, that's very high and way above what most of us are expecting right now. never say never, but we think they will likely take a measured approach. we expect 25 basis points hikes the next three meetings. katie: the focus on that study, there were 55 pages. i have not read them all but they said the computer model spit out a terminal rate of perhaps 6.5%. i remember when we were talking about 5% fed funds which seems quaint. should we be talking about 6.5% when you think about the and destination for the fed? >> that seems high but what we

are looking at is what the neutral rate is. the amount of tightening we've seen so far yet still seeing elevated inflation readings and still seeing the healthy consumer spending number shows it has not had much of an impact so maybe the neutral rate is higher than expected. if you look at the fomc projections and their goal of 2.5%, there is the thought that maybe that's where the neutral rate is now. there is concern that the fed discontinued it because of the pandemic it is -- but if it is higher, maybe conditions are not as tight as they are. that's what we are focusing on to see how high they will ultimately go and how long they will hold at that peak rate. katie: if 5% terminal rate is quaint, so too is the fact that a few weeks ago we had the markets pricing in we were going to get half a percentage point

of rate hikes in the back half of this year. russ certo wrote that today's data only underscores how far powell has to go -- what are you thinking about potential loosening? are rate cuts what we should be talking about this year? >> we don't think so. when we thought the bond market was getting ahead of itself and pricing in the 50 basis points of cuts into this year, simply because none of the data would have been bad enough on the growth side were low enough on the inflation side to sue work and easing of policy. we still have about 15 basis points of cuts that are baked in if we look at that pricing for this year but then there is a lot of cuts priced in for 2024

and even fed members and the dot plot have a wide spread of where they expect 2024 rates to end. there is about a 300 basis point spread between the high end and the low end. when we go into that march meeting, we will be watching next year's. plot to see how much is being priced in those cuts and they start to move higher for longer. katie: we are looking at a 10 year treasury three point 97%. it's knocking on the door of 4% and we think about the selloff in the bond market over the past few weeks, that rise in yields, it strikes me a lot of that is coming from breakevens when you break down nominal yield. when we look at the two-year breakeven, they are now above 3% at the highest level since about august of last year. we know the fed cares deeply about inflation expectation so how worried do you think they

are about the rise in breakevens? >> i think they are worried because we are not only seeing it in inflation expectations but the numbers tick up again. if you look across the tips rake even curve, they were not where they were a year ago but they've been trending higher weather is the five or 10 year and we see it in the survey-based expectations we got today with the university of michigan numbers. 5-10 year expectations of 2.9%, we think that's way too high. we figure out what our outlook is and what the fed outlook is an it means they need to continue to hike and they are likely to hold for a while. there are expectations for potential cut and we see that unlikely. we thought it was unlikely before this morning's number because even if it's disinflation that continues, if you have a strong labor market, there is no reason for them to cut rates because that would be a form of stimulus which could result in inflation going higher

down the road. we don't expect rate cuts this year until mid next year. katie: what do you think that means for the bond market in terms of investor appetite? 10 year treasury yields are almost at 4% so when do we see some dip buying there? >> we saw that to start the year we saw the big rally in bonds and now it's been completely unwound in the last couple of weeks. it's been interesting to hear that many people think the 10 year cannot rake above that 4% level because we will have real money buying at that level meaning pension plans and insurers will step in and buy that 10 year in earnest to lock in what is a yield we have not seen for quite some time in the past cycle. it will be interesting to watch because if we continue to get strong growth data and strong inflation data that will push the inflation expectations as well as the term premium which

could put upward pressure on yields, i think it's a big push/pull to see we can break above the 4%, probably in the face of increased demand. katie: before we move on, i want to talk about the yield curve. the twos and tens looks about -86 basis points. do you think we will get to triple digits? >> i think it's very possible. it depends on the short end of the curve. it's one of the reasons why we don't think the yield curve is telling us we are falling into an imminent recession which means until we see the two years start to move significantly lower a meeting pricing in the rate cuts, we don't think the bond market is actually pricing in that kind of imminent, sharp recession that will come quickly. we think further inversion of the curve as possible and we look to the steepening of the

curve as the true sign we are about to enter a recession. katie: great conversation so far. up next, the auction lock, rush of offerings looking to get ahead of buyer rates. this is real yield on bloomberg. ♪

katie: this is bloomberg real yield. time for the auction block where there was a rush of sales ahead of pce with eli lilly, ups and kellogg's raising $14 billion yesterday. volume for the wii comes in around $22 billion, short of what they were asking. in your come a rare debt deal from astrazeneca which was the

sole bond pricing there. it's the first deal for the company into years and a possible sign of the higher rate effect on credit, american car center had to pull his sale back on sub prime. we spoke to alliancebernstein about the equity bond correlation breakdown. >> high yield is a risk asset. we are in this good news is bad news environment and bad news is good news and for that, we will keep seeing a positive correlation between rates which we don't usually see. i think it's important that we pay attention when that changes because that is a signal that things are turning back to normal. katie: our guests join us now.

to that point, we can definitely say that equities have been on the back foot over the past few weeks and you see that in the junk bond market as well. is that the dynamic going forward with more pain to come? >> with increased rate volatility, that's certainly a possibility. what was happening during the last several fed hikes before these recent stats were that financial conditions were not really loosening. equity markets were rising, interest rates were falling, credit spreads were tightening but i think that was all factoring in an awful lot of good news rather than a recession, it felt more like a goldilocks pricing. a correction is certainly necessary we think pricing some risk back into the market in credit and equities in terms of

potential for earnings to climb at some point, entering at least a mild recession in a way investors would rather see some of the risk priced into assets. katie: perhaps we are starting to see something of a correction and you look at what spreads are doing, we have seen some backup but not much with ig spreads at about 20 basis points in high yield spreads at 420 basis points. where is fair value? >> it depends if we go into a recession or not. if we are going into recession and we've seen high yield spreads go well above 700 basis points to the 900 territory and higher during covid. it depends on the deepness of the recession. it's been interesting how tight these spreads have gotten through the first part of this year because financial conditions have eased. we've seen high rate issuance up

20% year to date in the deals are more oversubscribed than they usually are and at less of a spread then they have been on the long run average. this is just a function of the reach for yield, investors saying i would rather lock in a high-yield and maybe hold it to maturity even if it has a time where we see spreads widened and i have losses, as long as i hold it to maturity, i can lock that in. it raises the question if we see more of a risk off tone if data starts to weaken. katie: the tightness in spreads particularly in junk hans, does that reflect the actual fundamentals of that market? >> i don't think it does. we've been confused over the past few months why we saw spreads solo when the concern was slower growth and potential recession like when you see the inverted yield curve. we've seen spreads rise a little over the last few weeks which i think is good, it's healthy and it's good to get more of a risk

premium to assume those risks of lending and high-yield companies. we think there is room to move higher. it depends on the soft landing or hard landing outlook. if you look at the aggressive pace of fed tightening on lower rated issuing's, we think that's a negative. it could be the loan market if you are a standard bank loan issuer, you've likely seen the interest rate double over the next few months and that's an environment where you see rising labor costs and likely seeing slower growth so that's a big risk. for high yield, you don't see the uptick in borrowing costs in real time but it does happen faster than the investment grade market which is more diversified funding opportunities. we see risks and we would rather consider investment grade right now because the yields are offered. we like 5.5% if you look at the average yield. there is risk if the economic

outlook stays the same but we think it's significantly different if we get to a recession. katie: when you look across the universe of this, not just high-yield or drunk -- or jump at treasuries as well, where is the most opportunity at this moment? >> i think you have to split the difference. bb's versus bbb's look more attractive. if you are in the risky credit market, that's where you are farther down the credit spectrum. that's a lot of singleb's and bbb's at the low. you could move into safer parts like a fallen angel strategy. it's difficult to ignore even in high yield with your level at

8.5% and i think that's keeping investors in the market to a degree. we've seen some outflows recently but there is a lot of carry their to absorb the spread widening and rates with probably come down precipitously if we had a major spread widening. you can see spreads blowout to 700 basis points or higher. rates would most certainly be coming in and high yield would may be be down to 6%, in that range. you are more sheltered right now. investors have not had the opportunity to take advantage of yield in the front end of the curve there is reinvestment risk when you're floating rate instruments start setting lower but there is something to be said for taking the front end of the curve and investment grade. katie: i've been specifically

looking at the treasury bill market and if you look at six month treasury bill yields, they are about 5.10% and you look at the average yield on u.s. investment grade, it clocks in at 5.4%. what is the reason to venture out the curve? why not stay in the short ends? investment risk is a real thing with reinvestment but what's the case for not just sitting in cash? >> investors, i would assume, they are hoping that various fixed income capacity classes will play their more traditional roles and portfolios and you expect when you're equities are risky credit and of it -- and declining in value, the duration would be a good place to be. aside from the fact that of rate start coming down, if the economy turns, if you are out 7,

10 years on the curb or farther, you could actually have a little bit of a return buffer against declines in equities and the riskier parts of the credit market. i think that's one reason and that is what we are hoping for with interest rate normalization. the process does not seem to be complete and the fed is not succeeded to the degree they want to make conditions tighten correlations have remained higher than one might have expected when you got 10 year yields back near 10%. katie: everyone is sticking with this and still ahead, the final spread, the week ahead with another we packed with data and fed speak. that's next, this is real yield on bloomberg. ♪

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katie: this is bloomberg real yield. time for the final spread, the week ahead, fed speak continues with president jefferson monday and goolsby on tuesday than ism manufacturing in the u.s. and pmi out of china and europe and the u.k. on deck wednesday. plus, we will hear from the d.o.e. governor and we get cpi in another round of jobless claims in the u.s. and finally fed president logan, bostick and logan. our guests are still with us. it's time for the rapidfire round, three engines, three quick answers. does the terminal rate get to 6%? >> no. >> no. >> no. katie: 10-year treasury yield peaked at 4.3% in october, do we test that level again this cycle? >> no. >> yes. >> yes. katie: we've got a leave it

there. thanks to all of you. from new york, that does it for us. this was bloomberg real yield and this is bloomberg. . ♪

>> welcome, the one-year mark of the russian invasion of this country, ukrainian president says his people will secure victory if allies maintain their suit word. he says winning the war will bring with it a new international order. >> let me be frank -- [indiscernible] overall on the continent and the international organizations so how should we handle the different secured infrastructures?