it's easy to get lost in investment research. introducing j.p. morgan personal advisors. hey david! connect with an advisor to create your personalized plan. let's find the right investments for your goals. okay, great. j.p. morgan wealth management. >> from new york city for our viewers worldwide, i am katie greifeld. bloomberg real yields starts now.

coming up, to the break and back for the banks ripping up global rate hike expectations ahead of the fed as the primary market goes dark. we begin with the big issue, all eyes on powell. >> silver gay -- >> signature -- >> first republic -- >> it has been a boring time -- >> good bank and bad bank, what everyone a call it the kwak friction in areas of the financial markets -- >> investing weakness wherever they can -- >> the bond market is the place where you see the volatility express itself -- >> the fed hiking rates next week has the potential to be the greatest gap -- >> policy option becomes more and more restrictive -- >> next week's meeting is a tough call. i think they should pause. -- >> it is remarkable chair powell sees this 50 basis point hike tuesday and 24 hours later the financial stress began --

>> it makes you worry about the tip of the iceberg. katie: joining us now is tony rodriguez, survived or a sop, and michael cup top boasts -- i think it is safe to say that powell did not see this coming when he spoke to congress last week so the question becomes as we head into next week's fed in the banking said there what that says about financial instability at the moment, is that enough to knock the fed off course? >> possibly but we still think at least for this meeting they stay the course and deliver 25 basis point rate hike. but it is a tough call because financial stability is part of their mandate. the fed has not pre-committed to a 25 basis point rate hike like the ecb has, so for the most part, i think they might try to pull off what president lagarde did yesterday, which is deliver

a height but keep their options over so i dovish hike if you will so markets are not expecting future rate hikes unless there is more stability in the financial system. katie: i think it's telling when you look at the back and forth we saw with barclays in their fed call. as friday, a week ago, feels like a literal year ago, after the jobs report we got, they changed their fed forecast to call for a 50 basis point rate hike in march but monday they scrapped the call entirely writing, based on the financial turbulence over the weekend and signs of a sudden intensification of risk aversion, we believe a 50 basis point hike is off of the table for next week and the decision point will be between 25 basis points hike or a pause and we believe the most likely outcome will be a pause. that is the barclays view and that back-and-forth nicely encapsulates the indecision

here. what is your view? katie: good to be with you. -- tony: good to be with you. i think the data supports that but the financial stability risk of that showing up this past week will make it be off course and that is going to be either a 25 or pause. our view is they should probably pause but they are actually likely to stick with 25 and make that a dovish 25 basis points the market may interpret a pause as the fed being worried about a greater financial instability risk command markets are aware of because they have a kind of information advantage when it comes to financial industry credit health and liquidity conditions. so it does have risk, they

really spook in the markets, if they were to pause and certainly cut. katie: you may be would have expected them to know there was trouble at svb but point taken. we've got when he five, 25, and it was interesting to see commentary out of nuvera calling for a rate cut next week. is that anywhere in the realm of possibility in your view? michael: it should not be. that is for sure. i probably would air more -- err more on the side of 250. we still have an inflation problem. it's a little tongue-in-cheek and clearly not going to do 50 but pretend everything is now falling apart in the world is coming to an and i think his way overreacting. one week prior to as bb we had unbelievable jobs come i thickly created a hundred thousand jobs with the last data to the upside

and inflation has not been growing as much as the fed liked. at the end of the day, the whole point of tightening financial conditions, the whole point is ultimately rain and lending. if you do not want that to happen, why bother with rates in the first place. they are not going to do 50, absolutely not. they should not pause and unfortunately on this panel, i'm with everybody else on 25 basis points but i do not know if that is necessarily the right call. katie: it's ok to have a chorus, we are in agreement and harmony, it is kind of nice after the week we lived through. to the point we see financial conditions tightening aggressively now, the timing we have seen over the past week, when he think it is worth in terms of basis point, the hike or several from the fed's tightening? michael: ultimately lessie on

this you are looking a backward looking data and that is why you have cycles so i don't know if it takes out of that. the better way to put into this, going into this episode of bank stress, you had, for small and medium lenders, one of the tightest lending standards since the global financial crisis. that is only going to worsen because of everything we have experienced over the last week or so. that is a small community, regional bank likely pulling back on lending for it. quite frankly she ripped off this across all banks reining in red and ultimately that will mean you probably do have lower -- a lower threshold of a peak fence -- feds fund rate but whether it is 25 or 50, i am not entirely sure but time will

tell. it goes back to a lot of strength in the service side of the economy and that needs to be weeded out. katie: as we talk about what the fed should do from next week we heard from former treasury secretary larry summers saying the fed should disregard the current banking volatility, urging a quarter-point rate hike next week. take a listen. >> i think it will be very unfortunate if the solicitude for the banking system the fed were to slow down its rate of inflation -- of interest rate increase beyond what was appropriate given the credit contraction katie: what would be more unnerving to markets, if the fed were not too hike at all or go 50 basis points? subadra: definitely 50 basis in

this market because the market pricing suggests the fed will maybe cut rates once -- hike rates once but then they will have to cut in june or july meeting so in that context i think the fed probably does not really want to go against the investor sentiment broadly speaking and swim against the tide if you will. for the most part, larry summers has been spot on through the cycle and i don't know if the fed has been listening to larry summers during the course of the cycle and it is not clear they will at this particular meeting. probably speaking, i agree with what tony and mike were saying, the economy is relatively strong, we do not really see any signs of a slowdown or imminent recession. the real risk is if they do not address national stability

issues, this look -- this could lead to a sooner, faster recession. katie: you bring up the idea of rate cuts and pricing we have seen in the market has been pretty shocking when you think about we were about 5% on the two year yield last week. that feels like a long time ago and had one point this week there were 100 basis points of cuts priced into the market. is that premature or do you think the fed will ultimately get there? tony: we think that is premature for cuts this year. a situation that would cause it to be in play to us would be a severe intensification of this financial instability over this coming weekend and next coming weeks, meaning taking down more institutions than what we have seen already. on our base case, they are ready to get somewhat under control, we would expect to see them pause for most of the rest of the year until economic weakness begins to intensify later in the

fourth quarter, introducing maybe one or two cuts this year rather than 100 basis points worth of cuts. katie: just to hone in on the two-year treasury yield, it has been fantastic watching the moves this week. we were above almost 30 basis points of one-day moves, two days this week, now down another 21 basis points and we were down 61 basis points on monday. the volatility we are seeing in the world's safe haven asset, when does it come down? are we close to the end? michael: it will be interesting to see. the inverted yield curve is not good for banks. . full stop. as you have any inverted yield curve and tightening of liquidity, you have a tremendous amount of concentration risk that a lot of these smaller, regional community banks, it certainly seems like this may not be the end of the banking

crisis of 2023 and if that is true then we will continue to see volatility in the race to market but certainly it feels like what happens in these situations is your biggest moment is when things start so i think we probably have seen or are getting close to seeing the end of this huge move in interest rates, unless this all ends and we are at the end of the banking crisis of this year and you have to reprice the terminal rate higher again and can see the move in the front end and that would be commensurate with that. we are probably near the end. katie: we don't have a ton of time left so i will ask you a difficult question, to the point, have we seen peak banking crisis? can we move past that or is there more shoes to drop? subadra: i think it is too soon

to know because, ultimately, the way we fix the making blown or crisis of conscience we are having right now is changing the regulatory framework. it is already coming under skirt and tea so for the most part, you can kind of stay the course and are going to need to see the confidence spill back into the market. also what you are seeing is cash and deposits flowing out of regional banks into the larger banks and more stable banks that are the important g6. for that to stop you will need to see some level of confidence regained by the regional banking sector. broadly speaking, i think these look like isolated problems when some of the banks and we could probably look past it but the resolution is not going to be a swift one in my view. katie: it's an important point that maybe the end result is that the big get bigger. great stuff tofu -- so far,

tony, sue bought -- subadra and michael are sticking with us. more next. this is really yield on bloomberg. -- real yield on bloomberg. ♪ it's easy to get lost in investment research. introducing j.p. morgan personal advisors. hey david! connect with an advisor to create your personalized plan. let's find the right investments for your goals. okay, great. j.p. morgan wealth management. if you wake up thinking about the market and want to make the right moves fast... get decision tech from fidelity. [ cellphone vibrates ] you'll get proactive alerts for market events before they happen...

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it's easy to get lost in investment research. introducing j.p. morgan personal advisors. hey david! connect with an advisor to create your personalized plan. let's find the right investments for your goals. okay, great. j.p. morgan wealth management. katie: i'm katie greifeld and this is "bloomberg real yield." time for the auction block where there is a stall in sales. in the u.s. today marked the sixth straight session with no sales making it the first blank week since june. estimates called for $25 billion in sales previously. in europe, barely any issuance at all, a complete slowdown from the record start to the year and there were only 2.6 billion

euros worth of sales. billy place we did see action was the u.s. system of federal home loan banks, a key source of cash for regional lenders. it raised more than $88 billion as a backstop that private banks can use for short-term funding. jp morgan's bob michaels says there is still more pain to come as rate hikes lag keep hitting markets. >> if you think about where we were a year ago, the fed was just starting its rate hiking cycle, so over the next couple quarters, you are going to get those long and variable cumulative and lagged impacts hitting the market further. i think this is the tip of the iceberg, i think there is a lot more consolidation, a lot more pain yet to come, so you put your money into highest-quality assets you can find whether government bonds or high-quality corporate and securitized credit. katie: still with us we have tony rodriguez, subadra pajappa, and michael contopoulos.

tony, obviously bob michele is sticking towards the higher quality end of the spectrum. is there any case for taking on credit risk here? tony: so we agree there will be a little more pain as it moves through the year but this is not an iceberg, we think we will see a moderation in inflation. our expectation is for a moderate recession as of the fourth quarter early next year. in that environment, given the credit help we see across corporate america, we think we can take credit risk. what we are advocating and how we are positioning, you want to be in the high quality segments of the various asset classes. when it is high-yield leverage loans, emerging markets, you want to be in the double b category if you are below investment grade and kind of high-quality liquid names if you are within the investment grade states. katie: are there sectors in

particular that jump out to you as opportunity? tony: i think our biggest point is you want to be diversified. we think the larger systemic financial institutions are in good shape so while we do not think we will see more than 200 plus billion institutions going under over the weekend like what happened last week so the view is higher-quality, larger, u.s. financials are in good shape and when you look across other industries, we see opportunities across a number of those. katie: obviously in talking about opportunities, when you have crisis, that does great opportunities and i caught up with anastasia amarillo earlier and says by bank bonds but not debt. she says the reason i like that is -- that that over equity is because some of the large-cap banks are not immune to the pressure and for that reason i do not think equity is the right opportunity. it seems to me you have to have

a pretty strong stomach to buy bank bonds but we love -- would love your take. michael: the first thing i would do is disagree with tony. i don't see the upside in corporate credit when you can create the same profile of a corporate bond by using long-term treasuries and high-quality either floating rates to drop the credit or short-term treasuries. with regards to bank bonds, i think you are buying a different thing when you buy large-cap bank debt, particularly short dated urn in bank bonds. you are buying the health of the balance sheet, not really buying the earning of given financial firm like you do with equity market. when you buy equities you are really buying earnings growth and that is what you are buying. when you are buying fixed income in particular as i mentioned short-term bank bonds, you are buying the down sheet strength

of effectively large banks and i think coming to --, given a widening you have seen this week and last week, that is not a terrible place to be if you already have to own corporate. katie: tony, i have to quickly give you the floor to respond to michael. tony: again our view is if you do proper underwriting, if you can say the double b space in high-yield, we find many companies where we we find yields in the -- in the range of 7% to 9% and that is not something you can replicate through the treasury market. we also like structured credit so we think taking credit risk, not just corporate credit risk, makes sense but you have to be in the higher-quality segments so you have companies that can weather through, instructors can weather through this inevitable weakening in the economy we think will happen over the balance of the year. katie: we only have a minute left but as we debate where you want to be, a lot of people are just going into cash. if you look at the latest ici

data, u.s. money market funds saw the biggest week of inflows since april 2020. as cash the best place to be right now? subadra: i still favor treasuries, high -- shields. as i was mentioning earlier, there is a deposit from the smaller banks into the bigger banks and other sources of investment that are perceived to be safe so it is not unusual in a quality-type scenario for money to flow into money funds or cash but broadly speaking if you look at her bond yields are across the curve, you are getting these are returns to owning treasuries. in this context it makes sense to either be looking into treasuries for high-yielding investment grade assets for returns because if you want a

play, bonds is where you want to be. katie: up next, the final spread, the week ahead. we discuss it. this is really yield on bloomberg. -- real yield on bloomberg. ♪ sfx: [soft beach sounds] c'mon ref, that's a foul!

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katie: i'm katie greifeld and this is "bloomberg real yield." time for the final spread, the week ahead. we have the ec president lagarde speaking on tuesday and the fed's rate decision along with chair powell's press conference. bank of england rate decision is thursday plus another round of u.s. jobless claims and in more u.s. eco-data with pmi and durable goods. before we get there, it is time for the rapidfire round, three quick questions, three quick answers. mike, let's start with you. 25, 50, or zero basis points from the fed next week? michael: 25. tony: 25.

subadra: 25. katie: we've got consensus. mike, let's go onto the next one. does the fed cut rates this year? michael: yes. katie: tony? tony: one time in the fourth quarter. subadra: no. katie: ok. all right. mike, does the to/tens yield curve on invert this year -- un invert this year? michael: no. tony: no. subadra: no. katie: this was great. my big thanks to tony rodriguez, subadra pajappa, and michael contopoulos. we are heading into a big next weekend we of course are going to get the high-stakes fed decision, from jerome powell, we will see what we ask again wednesday. from new york, that does it for us for now, same time and same

place next week. this was bloomberg real yield and this is bloomberg. ♪ it's easy to get lost in investment research. introducing j.p. morgan personal advisors. hey david! connect with an advisor to create your personalized plan. let's find the right investments for your goals. okay, great. j.p. morgan wealth management. it's easy to get lost in investment research. introducing j.p. morgan personal advisors. hey david! connect with an advisor to create your personalized plan. let's find the right investments for your goals. okay, great. j.p. morgan wealth management.

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