you don't have to worry about things like changing tax rates, exemption certificates or filing returns. avalarahhh ahhh ahhh ahhh >> from new york city for our viewers worldwide, i am katie greifeld. bloomberg real yield starts now. >> coming up, inflation is cooling, but expectations are

climbing. credit default forecast continuing to pick up. all as the debt ceilings at state draws closer. where are we now? >> this market is trying to figure out, do we get some soft landing, does this work out? >> big schism for this market. >> inflation is headed back to old. >> one month does not make a prim. >> the market is vulnerable. >> people in d.c. have lost the focus. >> having a technical default is not an option. >> this is an issue that needs to be resolved in the next few weeks. >> looking at the risk overall -- >> the risk of recession is high. >> the bond market has been flashing these recession warnings >> for a while. >>a lot of futility is in order as we go into the next few months. >> joining us now, eric nelson of wells fargo and earl davis of

bmo world global management. i'm going to start with a question that you posed in the notes you sent over to us. is the inflation we are experiencing right now cyclical or secular? >> our view, it is definitely secular. you see it from the deglobalization. you are seeing it from, even though supply chains are caring and getting fixed, we are still seeing high core inflation. the implications of that, this is not a two-year or three-year phenomenon. this is a 10, 20 year phenomenon with the trend of generally higher volatility, higher inflation, higher interest rates. katie: if that is the case, if we are in a period of secularly higher inflation, does that mean yields should be structurally higher, as well? >> it definitely does. one thing it does not mean is yields will always go higher. they will go lower if you look at the seven days, you have yields higher, rates lower. oldham lee, rates very high. rates structurally should be

higher and they should be above where you see inflation settling out, which we see around the 4% area. katie: comment on this, looking at your notes i see that you are favoring long-duration right now, not necessarily buying into that secular trade. >> well, i think you have to distinguish from a time perspective how long we are going to see this secular trend play out and what is the cyclical factor in the short term? you look at the key growth indicators across not just the u.s. but a lot of western economies, as well as some of the underwhelming recovery in china. to me, the cyclical factors are pointing towards softer inflation in the next six months or so. i sympathize with arguments made over the longer-term secular inflation trend being one of higher, 3% or 4% inflation. before we get to that, we are looking for a continued downtrend inflation into the end of the year on a certain global

recession concern. katie: how does that play along the curve, especially when we think about this year's popular trades? the yield curve steepening trade, for example? >> yeah -- >> eric, go ahead. >> i think investors have been frustrated by, a lot of them focused on the tuesday and part of the curve and targeting steepeners there. that is a tough trade to see and materialize. we see the fed indicate more willingness to cut, or until something else breaks and forces the fed's hand. i am not sure we are there yet. from that perspective, you may have to wait longer to see the next big move and steepener. katie: might have to wait a little bit longer. earl, are you one of those frustrated investors when it comes to that yield curve steepening trade? >> we were in and out of it. right now, we are out of it. i agree with eric, the catalyst

will be not just a fed pause but a fed easing. the other reason why we are out of it, if you think it is higher for longer, the absolute vestry whether inflationary or short end trade is big short u.s. two-year bonds. right now, u.s. two-year bonds are for and overnight rates are 5.25%. that is a big tailwind of carrie and roll down. if rates do not do anything. katie: if rates do not do anything, certainly that two yield has been flush going -- what you waiting much higher. you brought up easing. one of the more interesting dynamics in the market, to me, is the magnitude of rate cuts priced into the end of this year and beyond. when we think about what the catalyst would be, a lot of people are saying recession. what is actually going to drive the fed to the first cut? does it have to be a downturn? erik: i think the unfortunate thing is, we rarely see a

situation where the fed cuts gradually and in 25 basis point increments. it takes is time getting back to neutral and accommodate us, right. what is more likely is we see banking turmoil we saw earlier in march, which is not yet resolved from our perspective. you cced -- you see something structurally break in a financial system, that drives the fed to cut. when you look at how urgent the fed was in raising rates last year, the speed, the velocity of the hiking cycle, it is more difficult to conceptualize a very gradual easing cycle. which brings me to my next point, yes, there is a lot of cuts priced 250 basis points on the curve. relative to past easing cycles, that is not necessarily a especially steep cutting cycle. it does not stand out as being unusual. in the market, doesn't necessarily have it wrong, it is just too tough to time. katie: i want to focus on the

point you made. when it comes to cuts, the catalyst could be either recession or we could see something structural break. earl, when he thing about the magnitude of cuts priced in, when you think about what is going to drive the fed, what is the more likely catalyst? does it have to be a recession, or is it more likely we see more signs of fracture? earl: whether you view this as secular or cyclical. in the central -- if the central banks view this as cyclical, they will cut because of a recession. if they view this as secular, they will wait for unemployment to increase dramatically to a four handle before they start cutting. we fall in that camp where there will be unemployment that drives the fed cutting, which delays when we see jesus coming into the market. katie: let's take this global for a second. erik, we should talk about the bank of england hiking rates once again. i do not know, they were

ambiguous, some saying maybe a pause next. the bank of a interpreting them saying there could be more to go. it has been the fed that has been the most hawkish, develop markets central bank. do you see that baton getting passed to the bank of england? erik: i think the bank of england has been one of the more electing hikers of this -- reluctant hikers. when you look at bailey's comments yesterday saying they may be willing to pause and -- think they are having a hard time pausing, given the difficult inflation backdrop. still double-digit's on a headline basis. if there is one central bank that wants to stop tightening relative to its inflation outlook, it is probably the elites. i think the fed is a harbinger of what is to come for central banks, which is getting closer or already at their terminal rates. katie: let's not forget the bank of canada. really was a trailblazer when it came to pausing.

i promise you both before the show started we are going to talk about the debt ceiling. we heard from treasury secretary janet yellen earlier today, saying there is limited options for this debt kneeling debacle short of congress taking drastic action. [video clip] >> there is no satisfactory solution for the united states. a solution that will be good for the economy and financial markets other than congress acting to raise the debt ceiling. through potential ads could be taken if that does not happen, but there is not a single thing that can be done that will save the united states from considerable, economic, financial damage. katie: earl, listening to yellen's language, the words she used, definitely some urgency behind those words. it sounds like treasury

secretary janet yellen once to get a deal done. earl: not everyone -- everyone wants to get a deal done, but on their own terms. i have been around for the previous debt ceiling issues. in retrospect, they all turned out to be noise. it was not any louder -- less loud than it is now, to a point s&p downgraded in the u.s. our take away is that, this is largely noise. it will get settled. either before hand or in court. we do not want it to distract from the global environment in context. we look at that from that perspective, what else is still going on? let's not get distracted there. katie: noise, but some people are finding opportunity. we spoke to bill gross, the former cio of pimco earlier this week. he argues the current tension presents trading opportunity. [video clip] >> it is always resolved and not that it is 100% chance, but i think it gets resolved.

i would suggest for those that are less concerned, similar to myself, that they buyout one month, two month treasury at a much higher rate than they get with a longer-term treasury. katie: eric, when you look at the surge we have seen in one month, two month treasury bills to bills point, they have gapped out quite a bit. do you see an opportunity there? erik: it depends on who you are. and what kind of investor class you fall into. the money market funds simply cannot buy these bills. they cannot really risk that. perhaps some more speculative accounts will be willing to take on that kind of risk. really, for the big players, the money market funds, they cannot touch it. that is why they are trading at such a discount in will continue until there is some short-term or long-term deal struck. katie: it is a great place to end. that is eric nelson of wells fargo and earl davis of the bmo

global asset management. next, the auction block where apple let a flood of borrowers raising cash with high-grade bond sales this week. that is next. this is real yield on bloomberg ♪. t refunds.com powered by innovation refunds can help your busi get a payroll tax refund, even if you got ppp and it only takes eight minutes to qualify. i went on their website, uploaded everything, and i was blown away by what they could do.

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katie: i am katie greifeld. this is bloomberg real yield. time for the auction block. we start with on sales in europe rated was the busiest week or investment grade corporate since march. l'oreal and at&t helping push issuance to around 40 billion euros. in the u.s., apple, merck and t-mobile offering names -- names with offerings this week. total weekly sales coming in at

33 billion dollars. high-yield company sold more than $1.5 million, drives up this month's tally to $9 billion, up to 100% compared to last year. there is more than two weeks to go. christina can't manny of invesco says credit is something to stay away from right now. [video clip] >> when we look across the board and think of three levers of credit effects, credit is the least compelling to us across those. when we look global. fx on a global basis probably is the most compelling. if you think about credit in the u.s., credit valuations are on the rich side. i think mortgages look more interesting than credit. and i think it is a hard debate people have of, you want to rent the income and credit, but if and when things break, credit will break, as well. katie: joining us now, winnie and matt.

i know you are head of credit strategies. maybe a little bit biased. when you think of those comments, you think of credit in relation to other asset classes, matt, is this a market to stay away from altogether? matt: and i think you have to differentiate based on timing. in the short run, we are in the q3 recession camp. we think it is a mild recession. we would agree with the view that interest rates, the short end of the corporate credit curve and arguably other safe haven assets are probably more attractive from across asset perspective. having said that, we think the recession is mild. we have the fed cutting aggressively starting in the fourth quarter. the silver lining is for structural clients, large institutions we speak with with 12 to 18 months in terms of a time prize and/or longer, we think credit is going to be a great asset and generate very attractive returns relative to cash and relative to other asset

classes like equity. a key distinction is, are you looking over the next few months, six months or 12, 18 or 24 months? katie: i'm glad you brought up that cross asset view. winnie, you wrote in a bumpy landing scenario, u.s. corporate credit is well positioned relative to equities. walk us through that call. winnie: what we think is the corporate credit universe has really improved itself from a fundamentals perspective. balance sheet's are in pretty good shape to head into what we see as this rolling, bumpy landing where one sector is at the crux of the issue and it moves into the next one. we have seen some of that play out. given where current all in yields are, we think there is a lot of cushion to offset yield. against some spread widening. we perhaps put the whites in spreads in investment grade and high yield for the time being,

absent or real meltdown of the debt ceiling. katie: i think bruce richards would agree with you. he spoke to bloomberg television earlier this week. saying, credit is having a heyday. [video clip] >> what makes us the golden era of credit is very different. we will see a 10% default before this is done with, but 90% -- 90% of price not default. if you are good at picking credits, good at building a portfolio of performing credits on the liquid side and making loans that have tight covenants, that have good credit metrics on good companies that will make it through, you will make the best returns we will see in a generation. katie: matt, i take his point, but a 10% default rate sounds pretty scary to me. what are you anticipating in terms of defaults in this economy? matt: we are looking for a peak of about 6% for high-yield bonds next year.

leverage loans at about 8% or 8.5%. the loan market is going to be an above average recession -- default experience. what i would say is, we think everything pivots around the short break. this is a market that cannot absorb the short rate at 5% for a sustained period of time. so, in our baseline view, we have the fed cutting down to 4.25% at the end of this year, cutting to 2% by the second half of next year. what that does is unwinds a lot of the damage of a fed engineered recession. it also provides relief on the multiple and the flow side to those areas we think are most vulnerable, which includes leveraged loans and private credit. i would agree with bruce with the caveat interest rates need to be cut and they need to get down to 2% 3%. if you are still at 5%, the

default cycle becomes severe. acumen of the profile looks closer to the late 1980's or 1990's. credit is going to be a difficult place for longer than a quarter, which is what we are assuming. katie: got to dig into that a little bit. let's suppose for example the fed is stay at terminal for a while, the fact this could lead in your words to a severe default cycle. where would that pop up first? matt: it is going to show up in middle-market, private credit and sme's. the statistic i will give you is, fixed interest coverage is about one turn if you look at a large sweat the middle-market or private firms. you can offset that. there is very little room for error, simply put, because most of your cash flow is paying interest. you can offset that if it only lasts for a quarter or two. obviously, sponsor injections, liquidity and other infusions. you can basically amend and extend or get some relief in the

short run from lenders. if the interest rate stays at 5%, the bottom line is a large number of companies, large part of that universe is just not prepared to absorb effectively a 10% cost of funding over time as opposed to where we were a year or two ago, which is half of that. it is 5%. that is the key point. there is a number of other asset classes i could .2. bank failures i would argue in part a reflection of the significant inversion of the yield curve and very high-end elated spot short rate. the bottom line is, i think the curve inversion and the level of interest rates at the short end is just not sustainable into 2024. if higher inflation or if the fed reaction function that is less elastic with the data keeps us there, you need to be more concerned about growth and the accumulative default cycle. katie: winnie, build on this.

let's assume this is a fed that stays on hold at 5%, 5.25% for a while. what does that mean for the corporate credit landscape? winnie: that is the assumption, that the fed does remain on hold for the remainder of 2023. it is going to be hard to get that inflation data to the levels the fed feels comfortable , starting to cut rates in the back of -- back half of this year. through credit perspective, it does mean that leveraged assets are at risk, especially those that were underwritten at low borrowing costs. there is this near-term catalyst for running out of liquidity. the good part of the leveraged loan market and private credit market is, there is a lot of ability for negotiation, amend and extends, the willingness of sponsors to frequently kick and more capital to extend that liquidity runway. we do not think we are going to be at 5% for the next three years. it could be into 2024 and rates

start to fall. we are seeing the vulnerability in the ccc market and high-yield bond market. starting to see more loans and concern pop up, as well. media, health care, some telecom. there is definitely some sectors that have been at the crux of some of these issues. to me, it is, was this a good company with a bad capital structure or a lousy company and a bad capital structure? that is where you are going to see defaults center. katie: great conversation, not enough time. wait to get your perspective. thank you both. ahead, the final spread. the week ahead. we are going to get into it next. this is bloomberg. ♪

what do you see on the horizon? uncertainty? or opportunity. whatever you see, at pgim we can help you rise to the challenges of today, when active investing and disciplined risk management are needed most. drawing on deep expertise across the world's public and private markets in pursuit of long-term returns... pgim. our investments shape tomorrow today. katie: i am katie greifeld, this is bloomberg real yield. time for the final spread.

the week ahead. coming up, fed speak kicking into high gear next week starting monday with -- and tuesday is the senate hearing on svb's failure. we get ego data wednesday, including nba more gang -- thursday brings another round of existing home sales found another round of jobless claims. friday, the g7 leaders summit beginning. we are going to hear from powell and bernanke. one thing to watch next week, an important read on the consumer. going to do that first with retail sales and all week, we have big-box earnings to look forward to. we are going to hear from the likes of home depot, target, walmart and costco taking the stage. getting a sense on how that consumer is bearing ahead of that very sticky inflation that continues to be here. from new york, that does it for us. same time, same place next week. this was bloomberg real yield and this is bloomberg. ♪

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>> i am john hyland with the first word news. visibility to iran's nuclear program did not last after -- international atomic energy data showed the number of examinations fell 10% in 2022 after iran ended monitoring rage and specified under the agreement with all times. in a document, the head of the iea says -- were seriously affected by iran's edition. granted two weeks bail over a corruption case by the high court. the latest twist in a high-stakes political drama fueled unrest across the country. consular seeking bail on a number of other charges. supreme court ordered the release on thursday describing his arrest as a legal, a decision slammed by the government. new york city may begin charging