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coming up, treasury yields are heading for their biggest drop since 2008, and the short end is plummeting, traders downshifting their rate hike tax. silicon valley bank fuels concerns with the biggest u.s. failure in more than a decade. jobs day in america, let's hear what our guest had to say. >> the number is strong. >> the inflation number will be important. >> the fed has made their decision. >> the payroll report is lacking. >> tightening has consequences. >> you got a with of stability. >> that is doing heavy lifting for the federal reserve. >> this is a difficult environment. >> makes the fed job top. >> the question is how tight is financial conditions getting. >> it is tilting to be higher

than the risk of runaway inflation. >> the invariable lag may have sped up >> it's a tough job for the fed. sonali: joining us as meghan graper of barclays, ryan rally -- brian rehling, and luke hickmore. meghan, we have incredible moving yield from the two's and tens. is that justified? meghan: o conviction in the market. it is tough not to say this morning's release raises the stakes even further for tuesday's report. beyond that, it called into question to me whether or not the justification for a fed downshift is still intact, particularly when you pair that with what powell called the totality of the data. 's look at last week's numbers, the input in uptick cost.

unemployment is rising but very gradually. combined, there is arguably further evidence that december dip was a one-off rather than the january bounce back. on the 22nd, at least leave the door open to a potential re-acceleration of policy. sonali: brian, do you think the market expectations are in line with any potential surprises in a week from now? brian: i thought the market over racked -- overreacted a little bit to powell's comments and are overreacting to what i think is some contagion fear around svb today. i think the fed will raise 25 basis points. they are in restrictive territory. they will continue to march this path forward. they need to get inflation down to targets.

it's a long road and a hard job, but i see no reason for them to re-accelerate. the fed tends to set those expectations and keep to them unless there is an overwhelming amount of evidence to the contrary. sonali: beyond talking about contagion fear and systemic risks, which we will get into to what extent they are warranted, but the basic sense that so much of this is because of an economic softening that you are seeing banks feel the impact, is not enough evidence to say to the fed slow down or 25 is enough, don't go to 50? is silicon valley bank big enough to make that a reality? luke: i think the fed needs 25, not 50. the speed that we got to where we are and to the fed rate increases should warrant caution. every time we've seen the fed act really quickly, we often get

problems coming up later on from areas you never expected, and that is what we are seeing today. we will get onto lending quality and how much banks are willing to lend at the moment, and that's part of the whole landscape coming through. the fed needs to listen to that. 25 this month, 25 in may. i would then pause but i suspect jay powell will keep going to 4.75. sonali: i want to read something quick on a conversation with steve kelly and he said the fed is quite explicitly trying to tighten financial conditions, and there's no reason this wouldn't apply to banks. when you look out there at the credit markets, how much tighter do conditions get? we took a big player out of the market. do you think that just coming by the way of loans will get harder, minus one of the top 20 banks in the united date, and

pressure on other banks? brian: there's no question the fed is tightening, raising rates, continuing to do quantitative tightening and taking liquidity out. liquidity isn't a problem until it is so you may see a crack in the wall today. i don't think the wall will tumble because of the svb issue but will continue to mount those cracks until it does tumble. that's what the fed has to do, tumble the wall to get inflation down to target. 4% inflation, 3.5 percent, that's not the target. they need to do what they need to do to get it to do percent. sonali: i'm curious, do you think this brings forward issuance? what do the credit markets look like if you are worried about the direction of rate and credit drying up or dramatically? meghan: while we saw secondary

volumes out in the midst of the volatility and down something like 20% week over week in a more challenging market backdrop, but that does not preclude another active week for materializing with borrowers continuing to frontload ahead of the data centric week. supply acceleration is overwhelmingly characterized, the investment-grade primary calendar in particular but we have begun to hear more of an intensifying debate over the timing and also currency collection for corporate borrowers who are focused on yields. in my eyes, there are two schools of thought that have emerged. you have those pulling forward supply with the view it will get worse before it gets better. equally, there are those who have been willing to exercise restraint, even if that means sitting out the entirety of 2024. if you think about what that suggests of the health of the

investment-grade market, the ability to sit out during periods of heightened volatility is reflective of a borrower based that has reasonable financing needs and strong corporate fundamentals. you think about that paired with corporate earnings around the corner, it is likely to keep eye cap on total primary market volumes going forward. why we were going up on the tail end of last week, we are down year-over-year about 3% today. that trend is likely to continue. the supply and demand imbalance is likely to persist. sonali: could you speak more here, i want to go back to the silicon valley bank issue given the dramatic scale. if you define bank failures, the second largest in u.s. history not counting some of the others that had sold in crisis, when you look at the pressure of the bank market overall, do you think securities are being sold

off with the bathwater? do you think there are buying opportunities? luke: -- was an fbi see insured so hopefully we -- fbi see insured so hopefully we can take it out. there are opportunities rising. as a credit investor i would be looking through the cap obscurities in the fixed income space and it is not enough real change to get excited. some of the stuff we liked in the 81 space and the tier two space were attractive yesterday and are still attractive today. balance sheets for the systemically important banks are amazing, in better shape than they've ever been going into a recession, and that is coming. i don't think svb changes that it all. the regional banks, people will be cautious about, and reasonably so.

it is a little harder to get your head around how it works and they can fall over quickly, as we've seen. people will be avoiding those for a while, but category one through three are certainly worth sitting through to see if you can find low deposit to loan ratios. sonali: maybe you can talk about how you are repositioning given the new uncertainties entering the market. do you have a greater view on distress and where do you find buying points on things that have sold off? brian: i've been impressed on how well the lower credit quality names have held in. obviously we have widened a bit over the last few days, but if you take a step back, your averages oas spreads on high-yield indexes are really very reasonable. i would look for them to widen

further into an eventual recession. we are positioning more conservatively, looking to up credit quality within the credit portfolio. that would include high-yield trying to move up to investment-grade. even moving up there is not a bad idea if you believe a recession, as we do, is likely in the second half of this year. sonali: the biggest concern investors are telling you about when they think about getting into the market now. meghan: the bank headlines, you need to look to what has played out over the last 48 hours to see credit dispersion is on the rise. it is rightly bringing relative value back into focus and credit risk into focus. we overstate the implications for regional banks as we think about sibb in particular. you have to see asset deterioration and sibb is a story of concentrated deposits.

that translates to from a buy quality perspective where investors are likely to deploy their money, but even with today's reaction, we are 60 basis point higher in two's and 30 intends since the beginning of february -- in 10's since february. the net effect is the continued underpinning of significantly more attractive yields for credit investors and that is drawing out a bid at the front end of the curve. sonali: meghan graper, brian rehling, luke hickmore sticking with us. huber is shining amid uncertainty. we will talk about it. ♪

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sonali: i am sonali basek and this is bloomberg real yield. the auction block, there was a flood of issuance to get ahead of the uncertainty. european issuance topped 540 bureau -- euros since the beginning of the year. on the other hand, the united states, a bit of a slowdown which tends to be one of the busiest times in the primary market. sales are falling short over the last two years. one name that stood out is uber, on a $760 million leverage loan after a 1.75 billion dollar leveraged loan last month. earlier, pgim's mike collins weighed in. >> when the fed heights -- hikes

policies, it hikes too much and you can never guess where it would be. i would not guess it would be the silicon valley bank. there is so much debt that investors own from insurance companies, pensions, banks, that are underwater, that they have unrealized losses. if you have to crystallize that at silicon valley bank, it gets to be painful. sonali: still with us is megan britt -- meghan graper, group -- brian rehling, and luke hickmore. i'm surprised you saw so many cracks, crypto, technology, and two banks focused on those feeling the pressure. are there other areas of the economy that you think banks will start to feel the pain from that will start to deteriorate the credit quality we see among borrowers? brian: i'm sure there are other

issues that will emerge. further cracks, if you will. what's really holding it altogether is just a really strong labor market. until we see that market, the labor market start to roll over, i think we will hold this together a bit longer. sonali: luke, i think you had something to say because clearly there are cracks elsewhere. luke: inflation hides a lot of that. high inflation, high revenues, inflation will fade even if you get to 3.5%, 4%. that will be hard for companies because the cost still be -- the will still be rising. i think that means 2023 will be ok. we could get events like svb and 2024 could be a tough year for earnings, tough margin compression, and maybe a ratings

drift downward. sonali: credit strategists at goldman sachs are downplaying the contagion risk and writing that contagion from small to large banks is remote, considering the low share of regional banks in the ir -- ig market. they would use any large selloff as an opportunity to add risk. how many of your clients see it this way? do you? meghan: i agree completely. in the tug-of-war between yield and read, yield continues to win and it has created meaningful supply and demand imbalances. if you think about what's contributing to inflows into investment-grade more specifically, 5.5% on the index, you exceed the current earnings yield of the s&p 500 without having to take an uptick in risk. you can make the case that mid to high eights is slightly less compelling unless you have a

high risk tolerance and are being selective and where you deploy cash in an asset class. it's not surprising we are continuing to see inflows in the context of renewed income and carry. the situation of having a subset of borrowers whose balance sheets are in incredibly strong shape allows investors to be patient through volatility and is likely not only to put a cap on supply but keep pace -- keep a cap on spreads for the foreseeable future. if you think the intentional decision by the fed is to take us into a recession as they target inflation, the longer-term, you are not really seeing that risk priced into the underlying credit east of the equation. for the time being, yields feel like that paired with credit selection is affording an entry point for investors on days like today where there is weakness. sonali: to the extent that you

see more problems in the financial system after silicon valley bank, where do you see them? brian: it's hard to say. by nature, they are unexpected. i don't think a week or two ago, people would have highlighted svb as potentially failing this quickly. it is very difficult, but one thing that's for certain is as the fed continues to tighten financial conditions, and continues to remove liquidity, there will me -- there will be more cracks. one of those cracks will be big enough perhaps to bring things down more than we have seen. sonali: how do you reflect that view? is this a market that you can be buying cds, buying put options against securities? how do you reflect that concern? luke: it means you are careful with equity. particularly in the banking

space where earnings will come under pressure, 10 trillion in deposits in the top 10 banks, yes, but that money is trying to find the best home. that will put pressure for their margins. if you are an equity investor, it is particularly difficult. credit investors, it is an attractive place to be and the best quality stuff. let's remember that the normal relationship between government bonds and credit is starting to come back. we are seeing that today, credit is wider, bond yields are lower. that's pretty normal. be very flexible with how you approach these market. sonali: meghan graper, brian rehling, luke hickmore, we have the final spread. see -- cpi and ecb highlights the week ahead. this is "real yield." ♪

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sonali: i am osnali basak and this is bloomberg "real yield." the latest read on inflation in america is out on tuesday followed by ppi and retail sales, and an ecb decision and remarks from president lagarde on thursday. friday, the sentiment survey, a big read on the consumer. still up with us -- still with us are brian rehling, meghan graper, luke hickmore. big is cpi, not hearing from the federal reserve since then. what is it to you? meghan: it boils down to cpi, even before this week's testimony. our strategies at barclays were of the view that a monthly gain

of at least 200 k would be the precursor but needed to be accompanied by similarly strong cpi, north of .4 on the core month over month. despite the mixed bag today, that pattern holds. the question becomes in a period of blackout on the fed, adding messaging on the fast-forward will provide ambiguity. that introduces risk for the markets but potentially not for the fed decision-making. sonali: do you have an expectation next week on cpi? brian: it is a risk in the market. there is potential that it surprises to the upside but i think we need a big surprise to get the fed off 25. again, as was mentioned, they are in blackout period next week so if we got that big number, we would need to look for them to

plant a story to move to 50. most likely we get 25. sonali: time for our rapid fire around. this or that, one or the other. high-yield or investment-grade? luke: investment-grade. brian: investment-grade. meghan: investment-grade. sonali: duration or credit risk? meghan: duration. brian: duration. luke: last week duration, this week credit. sonali: 25 or 50? meghan: 50. brian: 25. luke: 25. sonali: meghan is the outlier. thank you so much, meghan graper, brian rehling, and luke or. from new york -- luke hickmore. from new york, that does it for us. this is bloomberg "real yield," and this is bloomberg. ♪

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>> welcome to "bloomberg markets ," and i am kriti gupta. today is a weird weird day, it is important to look at what the s&p 500 is doing. down, almost paring off the losses -- the risk off sentiment. headline payrolls coming in hot, wages coming in soft. the net that result is lower stocks on the day and lower yields on the day by a massive margin, 2