katie: bloomberg will yield starts now. coming up sticky inflation and slowing growth has stagflation and focus ahead of what traders will say is the fed last hike. we begin with the big issue, all eyes on jay powell. >> the fed is not done. >> i would be shocked if the fed did not hike 25 basis points. >> 100% we will see another hike. >> my head is spinning. >> suggest it is harder than

what the fed would like. >> core inflation is not coming down. >> inflation is still well above target. >> economic momentum is going to be downshifting. >> things definitely appear to be slowing. >> every indicator is flashing red. >> it suggests we will have pressure on the economy. >> the underlying uncertainty is now structural. katie: joining us now, we have our guest. alexander, we have high inflation slowing growth and unresolved issues when it comes to the financial sector. what does the fed do with all of this? >> we think we are in the bed not break stage of the cycle. that means were going to get conflicting data.

one of the things the fed is focused on is pci. with that showed is on an annualized basis, you are seeing figures close to 5%. that is very far from the fed target of 3.5%. the expectations next week are for 180000 and 3.5 on a blunt rate. these figures don't align with getting to the 2% target. think the economy is slowing, but not enough. they are going to be very focused on inflation. katie: the fed zero focused on inflation that continues to be an issue. there are still issues to be resolved when it comes to the financial sector. first republic still looking for the rescue plan. when you think about the state

of what we are seeing in the banking sector and you weigh that against the economy, how do you think the fed is factoring that into their monetary policy plans? guest: overtime, the damage caused by the potential pullback will become clear. for the fed's decision, it is the date at that is here and now that will matter. i agree with alexandra the inflation part of the mandate that they are likely to prioritize. the tightening of lending conditions is coming through from the banking side, that gives them more rationale for holding onto a pause, but they will probably parse that as dual sided i.e. hawkish that they don't want to buy the optionality of hiking later on rather than a prelude to a pivot or rate cutting. katie: let's talk about the

economic data because it seems that tce and the employment cost index driving home the narrative that inflation is still very sticky. we got gdp earlier this week, growth slowing. you still have the labor market hanging and of the people are adding that together and talking about stagflation. has that entered the conversations you are having now? >> stagflation has been a part of our conversations for a while and something we outlined as a possibility coming into 2023. we think it's the most likely from the fed standpoint that's why we think they will go 25 basis points next week. this is important for the credit markets we see a true stagflation scenario is the worst possible outcome for investment-grade and high-yield. we currently assigned the

highest probability. katie: we heard a similar point earlier today talking about stagflation. >> stagflation by far that is the worst case scenario. one of the things that has been underpinning markets is the idea that at some point in the next six months, eight months, the fed is going to start cutting rates. inflation if it were to reignite and start moving up, that takes away everything underpinning the market today. katie: worst case scenario or not, how do you invest? what is the stagflation playbook? guest: the risk of stagflation cannot be ignored. it is where consensus already

lies which is buyers holding onto the pockets of the credit market where you can whether a meaningful slowdown and companies that are unlikely to lose access to markets even if rates are held higher for longer. what comes to the fore in terms of risk is where you have the layering of overleveraged allen sheets and rate sensitive balance sheets. it's going to eventually start mattering a lot more when the maturity walls are coming up by the end of this year or early next year. katie: what is the greater risk for the balance sheets? is it basically a leverage he spoke of or the interest-rate risk? guest: in a typical hiking cycle, the earning side

eventually helps limit the damage from higher interest rates. it's also true on the leverage side. you're going to have this layering of risk that eventually matters but if you were to put me on the spot and talk about which of the risk matters more, i would argue it's the ability of companies to pay double digit yields. it's meant to be quickly challenged. these are temporary or stopgap arrangements. a persistent double-digit yield environment is going to be bad regardless of the quality of the balance sheet. katie: as we discussed these risks, we should note that it is the final trading day of april. if you look at the markets in april, it's not a lot. 10-year gilts are two basis points lower -- 10-year gilts are two basis points lower.

what breaks is out of this range? >> we think it's difficult to break out of the range. when you get a breakout in yields, we think there will be a bid to the market because people are interested in adding that traditional ballast back into the portfolios. katie: whenever a bring up the debt ceiling people say you don't have to worry about it until it starts to show up in markets. if you look at the t-bill market you see a big discount priced into three-month versus one month. when you think about what is being priced in, is it time to start caring? guest: there's a meaningful

bifurcation between the equity market and the bond market that we have seen in multiple different layers through this year. to your point, 150 basis point marking stress concerns as it relates to the debt ceiling. credit has been relatively resilient and the equity market is more focused on localized earnings data which is proven to be much better than expected. ultimately, the tale could be quite large if you saw something akin to the 2011. but you are also dealing with the european sovereign debt crisis. we think you can see risk off credit spreads widening, equities down not to the same extent. katie: to alexander's point, you are starting to see dislocations when it comes to the treasury bill market come up across asset it's really hard to find those types of concerns.

do you see any meaningful spill over in the months ahead? guest: we think spillover is a distinct possibility as negotiations have been nonexistent up until recently. when recently looking at the t-bill curve, i would look at one month-two month. there is a focus on early june and if you look at income tax receipts that have come out over the past week, they have been weaker than expected. we think that brings early june into play. so if you look at how that spills over into markets broadly, we think that takes place over the next month or so. be we need to get through earnings first. you're starting to see upward pressure on credit spreads and that could intensify if we are looking at morava 2011 scenario -- more of a 2011 scenario. we think the move could be widening in spreads and down in

equities, but perhaps not to the same magnitude to her point. katie: is that your expectation as well that ultimately we could see debt ceiling discussions impact the credit market? guest: that's a fair formulation. the 1.i would add is that the transmission is not to the market side. it's not really about the u.s. defaulting on its debt, but the delays in payment of other obligations. that adds to the concern that you may have more of the slower growth impetus coming out of the debt ceiling side of the equation. katie: great discussion so far. we are going to dig more into the credit market next. everyone is sticking with us. up next, the auction block. six flags returns to the junk bond market.

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katie: time now for the auction block as we wrap up the week, and the month. we start in europe where the u.k. received a record level of demand for its inflation linked notes. in the u.s. april volume for high-grade sales missed estimates by a wide margin. expectations were for $100 billion instead, we hit $65

billion. in u.s., six flags sold $800 million at a slight discount. meanwhile, a blackrock guest says despite growth concerns there are some bright spots. guest: even a time of below trend growth should warrant rebuild of risk premia in corporate credit. high-yield has outperformed ig year to date. all of the concern for downside risk to growth, we haven't seen that manifest in the lower quality parts of the market. katie: our guests are still with us. alexandra, it's striking when it comes to high-yield, this is one of the least loved rallies i can remember. is that warranted? should it be? >> guest: guest: in terms of

four a multi-exit framework and high-yield credit doesn't look so bad. you're talking at loans of 9.5% yield. default rates are somewhat low. if you have the view that default rates will be low and may be the default side is somewhat longer in terms of the cycle, then it does represent some opportunity to have some carry in the portfolio while we are navigating this cycle ultimately may be going over year and. katie: equity like returns, are you talking about high-yield credit broadly or specific type of structures? guest: this is more talking about the yield of the market but if you are looking at some places like private credit, you're talking about mid teens low teens type returns. in recent history, these are once-in-a-lifetime opportunities to get into some of these deals.

we think there's a lot of opportunity, but the index level on top is tight. this could carry on for some time and to your point, it is unloved but it has been consensus, it's want to take some time. katie: at what point does foam a -- pyramid now start to kick in? watching junk continue to rally and when i say jump, is the riskiest types of junk. i'm talking triple c lead this rally. i'm talking to investors who may be have been going up the quality curve say i can't ignore this anymore. guest: that's a great point. it gets back to what we saw at the start of the year. a big rally across credit,

across the different levels. let's say we hear from the fed and they go 25 then they pause, we still have economic growth remaining positive. many companies have been able to turn out debt, we don't have a maturity wall concerning over the next couple of years. that kind of backdrop where some of this macro volatility we have had over the past month or so with regional banks situation, if that starts to come off it creates a situation where you can see spreads tighten even further back toward our year end target of 400 basis points over yield. there could be that fear of missing out aspect but we need to wait to see what the fed and ecb does next week. katie: a bullish case can be made, but to your point it comes with a ton of nuances. it's noticeable that -- notable that despite this rally we have

seen in investment grade and high-yield financials have definitely lagged. is that for good reason or do you see opportunity when it comes to the banks? guest: the lag that you talk about is more confined to the smaller regional banks will be look at the financials. pending on whether you include rates into the cohort. it's not just around the in-place fundamentals or concerns around the risk each of m&a did in march, it's also that investors, that's one of the consensus within the investor portfolios but also on the investment grade side globally. that's also a sector where we see a clear path for supply continuing to remain high as regional banks shift out of deposit funding potentially tapping into wholesale markets. it's a combination of existing positioning and the fact that there is a reason to think about continued supply, that's what's driving some of this

underperformance within financials. katie: i want to get your thought on this idea that a credit crunch could be looming for the economy. there is a note out from ubs they noted that if you look at bank, commercial, and industrial loan growth it looks to track drop 5% then 10% in the first quarter 2024. those are near levels that are typically associated with a recession. when you think about the possibility that credit could become less available, how big of a risk is that in your eyes? >> we definitely have to solve for bank lending being more expensive and the term structure of funding and the cost associated with funding with banks is going to be different. part of the reason why we are not saying that escalate into something of a bigger concern looking at the markets or a high-yield market specifically is that companies still have some time to put into place

refinancing plans. if you look at the overall refinancing needs, it's pretty much negligible through the rest of the year. it starts to build more gradually in 2024, but it still 6-7% of the outstanding debt that matures next year. if you're looking at this set of financial conditions in the context of banks and market cost of funding being this hot by the time you get to this year or early next year, that's when i think the credit market starts to worry about access to financing and what that means for the lower quality companies. katie: talk about what this moment means for active managers? with all of these d's locations -- dislocations popping up? >> we like active management right now. when you look at what's happening from the earnings perspective, you see 60% of the s&p 500 come out with earnings and 70% of them have beat

expectations but there is so much he wants under the hood. we think the ability for active managers to come in and provide liquidity where we see large air pockets when that starts to happen when you start to get to the late stages of the cycle, we want them to be able to put dry powder to work. we think this is going to be a really great market for active managers. katie: everyone is sticking with us. still with us, the final spread the week ahead all eyes on the fed ahead of the rate decision plus jobs day in america. this is real yield on bloomberg. [speaking foreign language] ♪

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in pursuit of long-term returns... pgim. our investments shape tomorrow today. katie: time now for a final spread the week ahead. euro cpi coming out on tuesday

along with earnings. wednesday the main event, the fed rate decision. thursday more earnings in the form of apple and peloton. the ecb rate decision and another round of jobless claims. we round out on friday with another data point, the u.s. april jobs report. first it's time for rapidfire. three questions, three quick answers. does the fed cut rates this year? >> no. >> no >>. no. katie: does investment grade or junk outperform in 2023? >> investment-grade. >> high-yield. >> ig. katie: does the 2-10 yield curve invert this year? >> now. >> no. >> now. katie: great discussion, really

appreciate it on this friday. my thanks to our guest. we are counting down to the fed may rate decision. any are saying this'll be the last hike from the fed. let's take a quick look at the bond market. the two-year yield just above 4%. we will see how that changes in the week ahead. what it means for that dynamic between the front and and the long and. that has been in focus all year, the yield curve deeply inverted. for us, that does it for now. same time same place next week. this was bloomberg real yield and this is bloomberg. ♪

romaine: a volatile and to a low volatile month. the s&p 500 making a retest to the upside. good earnings continue to be the resounding narrative at least for the last couple of days. we are wrapping up the week and month. it was driven by a lot of the macro concerns but it looks like it is ending with much more of a focus on the micro. deason earnings over the week including from most of the big cap tech names. drag from amazon and others.