and that's where our strategic investing approach can help. t. rowe price, invest with confidence. katie: i'm katie greifeld and "bloomberg real yield" starts now.

coming up, fed officials refusing to commit the on one more hike, rising default suggesting the corporate credit crunch is just beginning. and the banks returning to the fed lending facilities in search of more liquidity. we begin with the big issue, the fed final words. >> a bunch of fence be coming out -- >> right now they are in a bind -- >> the fed is in a box. >> they are trying to go to high to prove a point, let the economy softening come back down. >> the may 3 meeting i think will be the last for the cycle -- last i for the cycle. >> inflation is sticky. >> they need to continue on this battle. > the biggest worry for the fed, what keeps them up is inflation becomes unanchored. >> there is not a zero chance that they keep going. >> it's very behind the curve where they had to chase the rate hikes. >> weenie credibility. >> this is by no stretch mission accomplished. >> i don't see how we continue

to play this short-term data game. >> if there's a risk to their actions, it is not they don't heighten up at this point, it is that they don't cut quickly enough. katie: joining us now i am pleased to say we have lisa coleman, rob all there, and cliff corso with advisors asset management. cliff, we got the last fed speak before the may meeting. has anything changed in your view? cliff: i certainly think certainly the regional banking crisis has put a whole new dynamic in terms of how the fed has to think about where they are heading on this path. they are already jacking rates up to this 5% rate and maybe they go to 5.25% but they are beginning to wrestle with systemic risks out there now and lurking, and how do they way that down? they have done enough and is it time to hike it all? which is what the forecast is. as some of your guests are

pointing out, can they hold if we do have a recession question mark i think a lot has changed. the other thing that has changed, last year, the fed is, right now for the first time, at a loss in real yield territory. as of 2019, that did not work out too well. so they've done a lot on the job hiking. in terms of how they play at what we think they hike. katie: lisa, it has been one of the favorite thought exercises on wall street over the past month and a half, trying to quantify how much what we are seeing in the banking system right now is worth in terms of fed tightening. when you think about the month and a half we have seen, what do you think it means for the fed on their trajectory of tightening interest rates? katie: --

lisa: the fed has hiked nearly 500 basis points and on top of that we have about qt going on, $95 billion a month. the fed has hiked a lot. as a credit person, i am looking at things through the credit lens. we have had in march two bank failures in the u.s., we have had a number of surveys that have pointed out that credit conditions are tightening, whether a senior loan officer survey, whether it is the small business credit conditions survey. we have seen, now that we have bank earnings coming out, we have seen the loan growth has been relatively muted, whether we are looking at large banks, looking at regional banks. i think the fed has done enough and it is time to stop and to let things fall where they may. we know that there are lags between fed hikes the entire period -- hikes. the entire period can be long.

we see evidence the fed has done enough. katie: to the point you think the fed has done enough, i'm curious what you think the bigger risk here is, an attempt to get inflation down, that the fed tightens too much? how do you weigh that against the risk we still have pretty hot inflation at the u.s.? lisa: you are right about inflation. whether it is pce, whether it is cpi, it has come down but it is elevated. we think as the economy slows we will continue to see inflation weaving lower. we have had a little evidence of that. some of the inflation numbers and we are looking at that all-important component, looking at primary rent, there is evidence that is beginning to wane. i would also point to things like average hourly earnings. we are looking at the three-month annualized rate, six-month rate. those seem to be coming down i think the fed would be wise to exercise patience to allow these

numbers to begin to diminish. and i think it is hard, as i said earlier, to ignore the impact the fed's actions have had on credit conditions. i talked a little about banks but also some of the surveys. the new york fed on surveys indicating consumers are starting to feel credit conditions are tightening around them. i think we just need to take a pause and let's see where we get to over the next several months. katie: rob, come in on this question, what were the policy mistake from the that -- what would he policy mistake from the fed look like, especially from what we learned from the bank? rob: i think it is what you see. i agree with lisa. if we go back to basic principles here, the inflation is coming down in the u.s., looks like the peak was more than six months ago, growth is slow, we are not out of recession but it is slow and below potential, so it is not a bad macro backdrop the fed is

kind of a victim of its own narrative it has created that it is all about core or super core services inflation and they need to see that rate go up. they are looking at environment that looks favorable to me. they created a narrative that they have to hike rates and i think that central bank makes mistakes when they don't look at the facts on the ground and instead they act out of fear. say mistake on the way and by the way because the narrative was inflation will never go up, you can never create inflation, and they stuck for that narrative too long, way past the time and data pointing the other direction. i thing they are doing the same thing now. katie: so how do you position a portfolio around this narrative the fed has created and for better or worse they are sticking to it? where does that leave you when it comes to the treasury board? rob: i think you got the perfect panel here, fixed income and

real yield panel. we finally have real yields to offer. we have a great value promise for clients. i think high-quality fixed income makes a ton of sense because you're getting over 5% yields in high-quality fixed income, you have the protection of what we think is protection of duration, so if the bad outcomes i can think of now, the debacle, recession, some other geopolitical event, all of those in our view would come with a lowering of the overall level of interest rates. so by buying a longer duration high-quality credit asset, you are getting the nice keel and building in a little bit of potential to benefit or protection into your portfolio. katie: and as we talk about what is going on in the u.s. economy, we should point out we got pretty hot data from the u.k. this week when it comes to inflation, u.k. inflation rose into the double digits last

month. we heard earlier from ella hodge a highlighting the diversions of central banks. let's take a listen. katie: there's a big puzzle -- >> there's a big puzzle when it comes to the central bank in the fed is taking a seriously. we have not seen the same from the bank of england. if it put a for message on it that they will get more serious and more hawkish, perhaps they are turning a corner but i would not stake my money on it. for us, guilds are short versus treasuries and on top of it all, when it comes to cars, we would say more of a steep buy for us. katie: talk to us about what you are seeing when it comes to trajectory of these different central banks and where that leads -- leaves you on the european debt market as well as the u.s. that market? cliff: last year, most of the central bank's were acting in consort. everyone was buying the curve and inflation is a global problem, not just u.s. problem,

for several reasons which is why we think it will be sticky. if you look at europe, we have to not treat that as one location. you point out the u.k. has a real inflation problem, 10% plus inflation and that will add up for more occasions for hawkishness in their central bank policy. conversely, if you look at germany, the real economic engine of europe, they had a very soft ppi number so there is different speeds, a multi speed world, and we need to pay attention to that. we think there is value in europe. looks like they are in sync with the u.s. slowing down and ending, reaching a terminal rate in their central bank rates. but again, some locations like the u.k., they are in a titan mode and you can look at china. they are easing, trying to kickstart and rev up their economy. so opportunity now in multiple

markets including fixed income markets to pick and choose. it is not just a binary beta trade looking at all rates going up. divergence creates opportunity for investors. katie: and quickly, when you look at the global fixed income market to your point that there is opportunities to be found in europe, where when you look across em, across europe, u.k., u.s. do you see the most attractive entry points now? cliff: it may be a little early, depends on what country, but we think e.m. is interesting. there are many e.m. countries that would benefit from some of the changes and reordering of the supply chains. think about commodity-producing e.m. countries, those are quite interesting. if you want to develop markets, everyone loves to on banks but not the large banks. rbc credit suisse has issues but if you look at how capitalized

the banking system is an spreads offered in the markets, depending on where you want to be in capital structure, we think there are really good opportunity within the banking market, not only internationally but here domestically and in large-cap cap banks in the u.s.. katie: we are going to be talking about the banks next. everyone is sticking with us. next is the auction block, big banks heading up the primary market through a strong first quarter. that is next and this is real yield on bloomberg.

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this is the lexus variety of electrification ... inspired by, created for and powered by you. ♪ katie: i'm katie greifeld and this is "bloomberg real yield." time for the auction block where we saw anyone bond sales reopened, weeks after credit suisse collapse set off a global fire sale of the debt.

a japanese firm sold about $1 million. in the u.s., post earnings based lead the charge to a $29 billion week. we have morgan stanley and bank of new york all with sales. in the high-yield market, the space is gaining momentum with a new offering everything a day this week. volume exceeding $14 billion for april. sticking with high-yield, michael collins expecting higher default rates to open in the trap and entry points. >> when default rate goes up, stress go wider. we are being attacked in this regard. credits press will probably -- probably should push 100 basis points wider from here before you get excited to start buying them. if you bought i think the high-yield asset class today and held it for five years through the cycle, you are going to earn the excess yield over treasuries but it is not cheap. i think it gets cheaper as you go through the weaker part of

the credit cycle. katie: still with us we have lisa coleman, rob, and cliff corso. lisa, that has been one of the stranger features of the economy, the superhot inflation we have, the fed's aggressive campaign to cool it, it has a translate into higher default rate. do you see that dynamic changing soon? lisa: it should. the amount of credit contraction getting pushed through the economy now because of the fed actions will ultimately have any impact on default rates going forward. our high-yield team is thinking we approach 3% to 4% as a more realistic target for high-yield defaults. in my world and the investment grade space, we would expect to see pressure building in there as well and one of the things and commenter you had earlier were talking about valuations. one of the things not priced into our market is a valuation

for a recessionary outcome. in particular, i look at investment grade. with spreads where they are, they are nowhere near pricing and recession. we think they are pricing into the u.s. 26% to 27% recession probability. when you look back historically and compare where spreads get to during recessionary times, we could see considerable spread widening to begin to compensate us for those risks. i think based in our market we should see spreads at least north of 200 basis points before it starts to get interesting. katie: before gets interesting, there's a lot of daylight between 200 basis points and where we are right now. on my screen, i see 130 when it comes to investment grade. what is going to be the catalyst? what's finally going rake spreads out of this range we have seen, maybe to levels approaching 200? lisa: one of the issues is there's a lot of demand for fixed income. rob talked about that earlier

that when investors look at falling yields, they are probably going back some number of years close to the 70 percentile, almost 80th percentile in terms of attractiveness. on a spread bases we are nowhere near the level. what are -- what catalysts could happen? i think we need to find ourselves in recession and we look at these periods where you have an inverted rates curve, what happens to credit spreads? they tend to move around in a relatively contained range with a bias toward wider. really where you start to see material spread widening is when the economy is in recession and that is when investors finally get compensated for the risks they are taking by investing in the corporate market. i think you need to see the data. one of the things that we believe is we will see the economy moving toward recession. we think the tea leaves, we are reading the tea leaves and they are there and we think by the second half of the year you will be in recession and that is where we see spreads really move. katie: this is the debate taking

claes on wall street right now. we are seeing sides form. you have old men doubling down on one of his bullish stance is saying companies can adapt to tighter mainlandic standards. jp morgan view saying the opposite view, they expect high-grade spreads to widen amid the uncertainty. barclays also sounding the alarm on junk saying investors are basically too optimistic in this economic environment. rob, what is your view? obviously goldman a little more rosy than the rest of the bunch. where do you fall in this debate. -- debate? rob: we -- i think the conversation we just had about if there is recession spreads will go wider is 100% true. it comes down to what you think the problem of recession is and how bad the recession is. if you look across the u.s. economy, i think it is hard to find imbalance.

if you do not have those imbalances, you probably don't get a substantial recession. you get bumping along, zero growth, and i don't see that much risk to high-quality credit assets. might spreads go wider a little bit? maybe but you have a nice cushion in terms of rates now. that is why we say high-quality, corporate credit assets makes sense. we would be a little more cautious around things that might be more tied to the economy like high-yield, where you could see defaults. i want to come back to where i started, if the fed pauses and does what we michael maintenance cuts, which follows inflation down to keep real yields stable, that would be a very positive environment for asset markets. i think it explains why spreads are where they are and explains why the equity market has done better than many people think it would have. katie: it is a great point that

this is not just a credit story, you have the equity market, merrily rallying. i want to bring cliff into this conversation and what we have been talking about, this stability that we have seen in spreads on the high-yield and investment-grade side. is that a dynamic you can -- you think can continue? cliff: it certainly can. i think back to 2005 and 2006 when many in the markets back then, they said something's not right, something will probably break, don't know when. he looked at ig spreads during that horizon and high-yield. ig bounced up and down around 25 to 130 spread which is where we are today. it was at the plus side 50. high-yield was kind of cuffed around this 400 level plus or -100. we are in the pattern right now and that is because you see these divergent views we have

maybe a little on the panel on which way it will go so spread markets are incremental. i would take a step back in our view is we will have a recession and spreads widen. if you look at the market dynamics, there's a massive incongruity in the markets. you have the threes intends curve that has never been inverted, outside of that track record not perfect. you have beats on equities and you kind of in the middle spreads have wider. you have to make a choice in many ways. our view is that recession occurs so spreads would widen. think about high-yield in particular, companies cannot default unless there debt comes through. what companies did a great job of doing in the last couple years is pushing out the maturity. when is the real paul of majority -- maturities coming due and high-yield? it will pick up next year.

the real story is 2000 when he five. i am not saying spreads will hold to 2025 with recessions sooner than later but i think that is part of the dynamic is a lot of companies may default but that is not coming due yet. katie: 2025, mark your calendars. lisa coleman, rob waldner, and cliff corso are sticking with us. still ahead, the last round of eco-data rolling in ahead of the fed's may meeting. this is bloomberg. ♪

katie: i'm katie greifeld and this is "bloomberg real yield." time for the final spread, the week ahead. first republic is out with some of the most anticipated results monday and we get new home sales and consumer confidence tuesday followed by wholesale inventories and durable goods come wednesday plus u.s. gdp,

another round of jobless claims thursday, and finally we have eurozone gdp and u.s. pce. still with us, lisa coleman, rob waldner and cliff corso. it's time for the rapid round, three questions and quick answers. lisa, is the fed's last rate hike may? lisa: yes. katie: rob? rob: yes. cliff: yes. katie: does the fed cut rates in 2023? lisa: yes. rob: yes. cliff: no. katie: some disagreement. lisa, does high-yield or investment grade outperform this year? lisa: investment-grade. katie: rob. rob: ig. katie: cliff. cliff: ig. katie: great discussion, really appreciate it. my big thanks to lisa coleman, rob waldner, and cliff corso. from new york, that does it for us but we will be back same time and same place next week. this was "bloomberg real yield" and this is bloomberg.

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>> welcome to the bloomberg audiences. this is first word news. a russian warplane fired on one of its own cities today. it wounded three people. the russian state run media reported that the explosion happened on a residential street in the city of bell grove. it is by russian forces to launch attacks against ukraine since the war began more than a year ago. the supreme court has until midnight to decide on access to a commonly used abortion drug while legal challenges go forward. the biden administration has argued that low court rulings on method prestone will of the -- disrupt availability. a judge overturne