katie: bloomberg real yield starts right now.

bond traders are all but settled on a skip in june after a red-hot jobs report. we begin with the big issue come a skip and then what? >> the u.s. economy remains a major engine of job creation. >> where is the tightness? >> i think you can pause. >> powell said we have the luxury to wait. >> they say skip because they think they will have to do more. >> the fed will probably be done for the cycle if they skip in june. >> for the fed, it's a pause or a skip, it's a skip. >> my guess is it's consistent with a skip. katie: joining us now is ian lingen and george borey.

is june a live meeting? >> insofar as we will get updated as bp and know more about the dot plot but the fed will not fight. they have already said they won't. the market is pricing in and the market's has shifted towards a lot and there's a high probability the july meeting will see a rate hike according to market pricing, not our call. we are confident they are not going katie: in august. july is not your call either. is the fed done? >> i think the fed has reached terminal and they are very cognizant that as the tga is replenished with a lot of bill issuance over the next three or four months, there will be qt coming from janet yellen in risk assets might take a hit on that so they will be cautious at this stage. katie: we will definitely get to people issuance. we have the view so let me bring

you the cd securities view. she said a strong payroll report with upward revisions on that fed is likely to hike in june, that is our base case, a june hike. what is your base case? >> our base case view is a pause or a skip, it doesn't matter what you call it. it's basically a pause and then they can continue along the path of data watching. the expectation is the hope that inflation continues to not lower. as ian mentioned, the heat is still on so they may need to raise rates again. our view is that they are on hold for an extended period of time and that will allow monetary policy to continue to do its work behind the scenes. we've got qt also happening so there is enough tightness in the system to continue to contain both growth and ultimately inflation. katie: you bring up the

difference between a pause and a skip. we are torturing the english language but there is an interesting note out from brown bothers harriman -- you look at what the market is pricing and as was pointed out, there is pricing for a hike in july. what will paint -- change potentially between june and july? >> inflation data. the job market is pretty robust. you can debate whether there is underlying softening but the job market is fairly robust. growth is slowing and we've seen corporate profitability very diverse. there are signs of this very gradual slowdown. it ultimately comes down to inflation. if core inflation is not coming

down, it may not come even if they pause for two meetings and august is fairly unlikely, but that september 20 meeting is really the next point on the horizon where there will be enough aggregate fundamental data to determine whether they are going to skip or it's a pause on its way to something lower. all that is very far off in the distance. katie: at least we have august. we can all agree on august and we are talking about hikes. we are not talking about cuts. about a month ago, that was the topic of conversation on this show. can we finally put to bed the topic of 2023 cuts? >> i don't think so. i don't think the fed will actually need to cut in 2023. when we look at what the market is pricing in, we love to look at a 27 basis point rate cut

priced and by the end of this year and say that is 100% confidence the fed will need to find tune with 25 basis points by the end of the year. it suggests 25% confidence we will see 100 by the end of the year. it's either going to go well enough for the fed to have the soft landing scenario play out or something will go wrong. when i worry about what could go wrong, i am focused on the credit tightening resulting from the regional banking crisis. that is a slow motion hit to the economy. is that unfolds, i would expect the fed will be very closely watching the senior loan officer survey, the one for q1 and i think there is a false sense of security at the moment for the real economy. katie: i like that phrasing, a slow motion hit to the economy because it feels like we haven't

seen in the data yet so the market has moved on from worrying about the credit tightening. have you moved on or do you share that view? >> we share the view that there will be kind of a limited reason for the fed to cut rates. history tells us once they do, they don't smoothly cut rates in a slow fashion. it's typically fast and furious and it's in response to something that has hit the economy and hit the data quite hard. they rarely have that luxury. when we look at markets similar to what ian said from an economic standpoint but from within the corporate sector, there is this rolling decompression. it's this dispersion. i am a corporate bond person at heart which is where i spent most of my career. we are seeing things like default rates pick up. it is a very divergent sort of trajectory.

you are getting small but growing impacts as the effects of tighter policy, higher cost of capital and tighter credit conditions are working their way through the system. the exogenous shock that will hit as is inflation, not deflation. the inflation fighting strategies are different and they work their way through the economy in a different way which is white we get to see this sort of cataclysmic blowup. inflation can be good if you are on the right side of it as a corporation or an individual. that is still with us today. katie: you have seen that in some corporations passing on the higher cost and they get the boost to their margins. let's wrap this into a view how you should positioning your portfolio. we heard from j.p. morgan earlier this shake -- earlier this morning. >> we feel we've been given a gift that the backup and yields.

we swung a little bit low in yields in the market got excited. now it is going the other way. we think we will see 3% across the coupon curve by the end of the summer. katie: is that your view as well or maybe longer duration? >> i think it's a good time to play for lower yields across the curve. there was a fallacy in the market for a moment that was that effective fed funds would serve as a floor phenomenal rates. what we have seen is that is not the case this far into the cycle regardless of whether we are at terminal or the fed has another hike or two left. the reality is camille's will continue to compress over the course of this year -- the reality is. this is very consistent with the fed's objective and it favors playing for a rally in fives

versus 30's and tends versus the balance of the curve. we are largely on the same page. we like the belly of the curve versus the two-year sector. katie: you have 30 seconds or yes, how are you thinking about duration? >> we like the five-year part of the curve which is enough duration to capture any drawn out yields. it's a nice opportunity to reload. as we watch the curve pivot, we are seeing that is a nice anchor. we don't want to go super long. we want to add duration but if we can coalesce that around the five-year point on the curve, the fixed income portfolio is very nice today. katie: let's ended there. thank you both so much. up next, the auction block, bmw helps drive sales to a record in europe. that's next. this is real yield on bloomberg. ♪

the first time your sales reached 100k with godaddy was also the first time your profits left you speechless. at the counter or on the go, save 20% with the lowest transaction fees and keep more of what you make. start saving today at godaddy.com

oh booking.com, ♪ i'm going to somewhere, anywhere. ♪ ♪ a beach house, a treehouse, ♪ ♪ honestly i don't care ♪ find the perfect vacation rental for you booking.com, booking. yeah.

katie: i am katie greifeld. this is bloomberg real yield. time for the auction block in like the weather in new york today, it's hot. your had a record month of may with bonsall topping 119 billion euros. bmw helps to drive this week sales. in the u.s., cvs and at&t flooded the market with offerings, making the month of may the second busiest so far this year and the most active masons 2020. in high-yield, private equity backed sales propelled issuance at $22 billion, making it the busiest month for supply since january, 2022. even with those red hot sales come investors remain nervous

about added stress on the system. >> credit is always the canary in the coal mine. the equity market doesn't seem to be paying attention to it now. the fixed income and credit markets are not necessarily paying enough attention to the details. when we look at small, private issuers, they are defaulting at an alarming rate at the moment. when you look at repeat filers, they've increased quite a bit as well. these are your weakest links in your weakest links always go first. katie: joining us now is stephen oh and colleen cunneth. let's start with credit in the canary in the coal mine. if credit is the canary, what is that bird saying now? >> i think it's saying slightly different things across different sectors. when we see the earnings season roll on, we saw increasing evidence of some potential consumer weakness, mentioning's

of d stocking so that creates an environment in those two asset classes where we continue to proceed with caution. as the previous commenter remarked, the leverage lend market on the private credit markets are different right now. not a lot of transparency and a lot of heavy waiting for lower quality credit. the canary is singing a different song depending which sector you look at but the overall theme is approach with caution at the moment. katie: private credit in particular has taken off. is the lack of transparency get in leverage loans and private credit enough to keep you away now? is that a concern? >> it is a concern but that -- this feeds right into the core strength of the vanguard global research team.

we believe there is selection opportunity there particularly in the higher end of the leverage loan market and the double b segment so it doesn't keep us on the sidelines, it just means we do our work and know what we are investing in. katie: stephen, there is an interesting research report from deutsche bank flashing a warning for corporate default -- they say credit defaults will consistently rise in 2023. they estimate defaults should peak at about 9% for u.s. high yield by the end of 2024. is that a concern you share when it comes to the fundamentals of this market? >> i don't share that level of concern. it does pick up in a decelerating economy that's fueled by the fed conditions. when you look at the underlying composition and what constitutes

leveraged finance as well as the type of economic environment we are headed into. my expectation is that default rates are simply going to rise from ultra low levels we have experienced recently more toward or above historical averages of somewhere at three or 4%. that is far from causing a great deal of concern overall. i would say with respect to leveraged loans, there is expectations that leverage loan default rates would be substantially higher than high-yield bonds. we have a different opinion on that. despite the proliferates of single b transactions, you look at it company by company as opposed to top down results in an outcome we are you're not going to get that extraordinarily high default rate. they will be default rates which we believe will be favorable for market conditions because it creates a bit more balance to the marketplace. the last comment i will make is

about the lack of transparency. within the syndicated leverage loan market, there is tremendous transparency. i agree the private credit market has some weakness but within the syndicated market, it's a different story. katie: when it comes to lack of transparency, talk more about private credit. especially after what we saw with the banks in march, you are seeing some bullish commentary about private credit and how that market could grow. then you have the lack of transparency. how do you approach that when you think about the potential opportunities there? >> i think you need to separate private credit in terms of transactions that were done in a more bullish time relative to what transactions are being done today. private credit has migrated since the financial crisis away from what was traditionally

which was lending to small and medium enterprises and not competing at the lower end of the broadly syndicated marketplace. if you think about the last six or seven years, the highest risk components of what would have been issued in the leveraged loan market really went to the private markets in large part because of the clo requirements which limit the transactions. one of the defenses of private credit is they have greater levers to work with companies that do get into the stress situations. they can manage that default process that her. i think the real opportunity lies with the new vintage of transactions that are about to take place under much more attractive conditions than we saw the last two years. katie: let's switch gears and move from private markets back to the investment grade and back to high yield. we were having a conversation on

default risk. you look at what spreads are doing and they are not doing much. if we go with the view that maybe we see defaults pick up from historically low levels, do you think these markets are priced for any sort of pickup of any magnitude? >> we look at the valuations in the market is relatively fair right now. you've got high and yields offset by tighter spreads. from a valuation perspective, we would say it's fair given the current conditions. katie: within the overall fairly valued market, are there any parts of the market you see as particularly overvalued? >> let's talk about default. we don't see any -- i'm focusing on the high-yield market. we don't see any particular subsectors that look bubble-ish. with think the default rates will probably be driven by

weaker financial statements running into a slowing economy and higher interest rates. from a default perspective, we don't have particular sectors we have isolated. we continue to do the deep work to figure out where we need to be in those sectors. from an investment standpoint, our approach is pretty typical of how we would approach this kind of environment where we are staying away from deep cyclicals and looking at things that werebuoyed by the covid impact and sticking to the non-cyclicals and some of the entertainment and travel sectors that now seem to be benefiting from where the consumer is. katie: there is default risk and there is downgrade risk. you have seen spreads for bbb bonds widen compared to higher-rated tears and you had investment management writing that they are leaning on higher quality and the risk of a recession is still hanging over the market and not being

overweight feels like the right place to be. does that playbook makes sense here where do you think risk is missing opportunities in those lower rated parts of the ig market? >> if you approach investing from the top down, being more cautious onbbb makes sense. the dispersion has increased within bbb and that results in better opportunities to pick and choose and produce superior outcomes. i wouldn't say avoid bbb because you get better opportunities on a credit by credit basis but from a top-down macro standpoint, as we head into in environment of slowing earnings, they are decidedly negative but we don't expect any type of meanings -- meaningful recession

with unemployment levels really low now. when technical trends are negative, spreads tend to widen. caution still relevant and should stay in place. katie: i saw in your notes that you wrote that concern is more around short-term technical trends rather than the long-term fundamental outlook. before i let you both go, talk to us about the short-term technical outlook. when should that start to clear up? >> i think we are still in environment where the short-term technicals are going to be about earnings where at the top level you may not cnet earnings declining but if you look underneath, you will see a subset of companies. the fed will recalibrate market expectations about rate cuts and do some of that optimism. over the next three have been six months, the technicals are

likely to drive spreads wider rather than tighter. if you look at valuations in of your time horizon is tour three years and you can look at port -- purchasing a portfolio that kind of time horizon, then the fundamental values will be good. katie: thank you both so much, great discussion. still ahead, the final spread, that's next, this is bloomberg. ♪

katie: this is bloomberg real yield.time now for the final spread. opec-plus is meeting in vienna over the weekend and on monday, u.s. durable goods and ism services. midweek, you caper prime minister rishi sunak is visiting president biden washington. another round of jobless claims thursday and eco-data from china to round out the week on friday. there will also be the bloomberg invest conference next week.

we will hear from some big names. that does it for us, same time, same place next week, this is bloomberg real yield and this is bloomberg. ♪

>>john welcome. the united states is prepared to respond with ukraine and other allies if and when russia is ready to work toward peace. secretary of state antony blinken says they can't legitimize vladimir putin's landgrab. cia director william burns made a sick visit last month to beijing where he met with chinese intelligence officials. while he was there, he emphasized he wants to maintain open lines of communication and intelligence between washington and beijing. the trip comes as the biden administration attempts to