>> i'm katie greifeld. bloomberg real yield starts now.

a hawkish hold after 10 straight hikes with powell ruling out rate cuts for a couple years. jp morgan says get out of the cash trap. moving in with the big issue, not done yet. [video clip] the markets do not believe the fed is going to make[video clip] >> -- >> i believe maybe it is not a question of belief but relative positioning. >> powell did a good job keeping that relatively hawkish option there. >> the market does not believe that all the fed is going to deliver those two hikes. >> the market is thinking this will be a shallower recession then thought. >> it is feeling the fed is almost finished. >> we think the fed is done here. >> we are likely to have seen

our last rate hike. >>.i will not be surprised if we get one more hike powell was unwilling to commit to july. >> the fed is undecided. >> the fed once all options on the table. >> the fed has to sleep with one eye open while into the future. >> seeing is going to have to be believing. >> joining us now is matthew destocked and colin martin. matthew i want to start with you. we paused rates this week, we penciled in two more. when you weigh that in against jerome powell what was your take away from wednesday's meeting? >> my takeaway is finally, they are starting to get the market focused on how focused they are on getting inflation down. much better than being to double its for the market -- dovish for the market. two more to go, we are going to fight inflation, that is the right messaging. so much easier for the fed to be

hawkish now. manage expectations correctly. overpromise the rate hikes and then the situation is worse. if they need to ease back, easier to set the market up or try to set the market up for more hikes and bring it back down as opposed to being to dovish. much better messaging, much better communication. this is the right way to be right now. not saying it is the correct policy going forward, but the messaging and our opinion is correct. katie: you would give them a job well done when it comes to the messaging. that is interesting, i have heard dissatisfied people. let's listen from -- of apollo. [video clip] >> if you think inflation is too high today, you should be hiking rates today. i think the chatter is to say we will get more rate hikes.

there was disagreement in terms of how many we would get, but basically everyone says we will get more rate hikes. if we get four more rate hikes, why not just rate -- hike rates today? katie: colin, same question. why not just hike rates today if you are planning on doing it two more times? >> the key comes down to the plan and the evolution of the data. we think the pause makes a lot of sense. we are seeing signs inflation is coming down. when we take every thing together with the statement, the updated projections and powell's press conference, we see a determination in the fed to tell the markets to tell us that they are fighting inflation and they are going to do what it takes to bring it down. that is where the hawkish sentiment comes in. we are not convinced they need to do that. we expected a pausing we were not sold we would get one down the road. we are pretty much in that camp. i hate to use the term data

dependency, but that is the case right now. if we see signs of disinflation coming down over the next month or six weeks, we think it is possible they stay on hold. they are telling us the door roads are open, they are committed to fighting inflation let's see what happens over the next six weeks or so. katie: let's see what happens. we are going to get key data points between now and the july meeting. let's talk about cuts. i put this down in my notes because i wanted a timestamp on it. powell did say we are talking about a couple of years out for rate cuts. colin, anything about where we are when it comes to inflation, do you agree with that timeframe? >> a couple of years, no. we would not expect to see cuts too soon. we were seeing cuts priced in for the end of this year in early 2024, that seemed premature. a couple of years seems to long

especially when you look at the fed's own projections themselves. that confuses the issue a little bit. if we are going to look at their projections for what they might do at the next meeting, we need to look at what that means at the end of 2024 and we see a median rate of 4.6%. when you take that together a couple of years does not seem appropriate, but we expect a prolonged hold or pause. whether they hike again once, by two 25 basis point hikes, we would expect a prolonged pause to see how this plays out. we think they will take a patient approach. the fed is only going to cut if they have to. if the economy is doing ok, the last thing they want to do is cut rates, stimulate the economy which would allow inflation to bubble up again. katie: matt i am looking at your notes and you right, fed three hikes from now, who cares? 200 basis points is the main

story. tell us what needs to materialize in this economy to see 200 basis points of cuts and what timeframe are you talking about? >> that is right. we spent a lot of time thinking, pause, one, two hikes. these things are marginally fun to talk about but not the main picture. the main picture from our perspective is as the yield curve has been telling you of november 2022 when the fed funds went higher than the 10 year rate, we are getting to the end of the rate hikes cycle. we are late/end of cycle now. that is the most important point. weather 12 or three is not the most important debate. powell had said it is a couple years away from rate hikes. anything is possible. future is a was going to be different than what we expect. the market has been saying consistently for seven months

now if you look at fed funds futures or silver futures the fed, wherever they get to terminal rates, is going to cut about 200 basis points over the next year and a half. that is the main thesis we have. we do a forecast for two more hikes. our u.s. economist did change his forecast, he pushed his recession time into the first half of 2024. he always said if there is any risk, the risk of recession later. if we are getting to the end of the rate hikes cycle, we need to think of that extending duration, possibly moving from neutral to longer duration, getting ready for rate cuts that we expect after we pause into next year. katie: who am i but, 200 basis points of rate cuts in the next year and a half seems like a huge call to me. colin, your thoughts on not? >> it could happen. we share a lot of the same views

when the fed tightens things tend to break. we believe the fed will successfully slow down growth and inflation. even though it seems that first cut has been pushed back a little bit, we would expect a cut down the road because of all the tightening they have done. we agree from a extended duration standpoint and what this means for clients, we have been hearing the past number of months fed, said, fed, should i wait for the fed to finish hiking rates before we consider locking in younger term yields? we agree whether it is one more hike or no hikes, that does not matter as much in the grand scheme of things because we think the impact will be the same and growth and inflation should slow. we will see rate cuts and all yields fall. we would rather lock in higher yields relative to the last 15 years with certainty rather than face that reinvestment risk once the fed does begin to cut. katie: i want to talk about that.

both of you have brought up extending out duration. i have talked to people who say cash looks good. if we have a fed on hold, you are going to see short end rates stay up at these high levels for a while. you have no credit risk, no duration risk. when you are thinking about duration, colin, why not just stay in cash? >> we have to look down the road at what the fed will do. how much the fed cuts in the next 18-24 months, we do not know what is going to happen but we have an idea. we have an idea of what fed officials think that neutral rate of interest is. the long run rate a here. -- rate appears to be 2.5%. if the fed can pull off a soft landing and cut rates because they slowed things down and realize they do not keep it at a restrict of level for so long, we can earmarked 2.5% as a logical landing place sometime down the road.

given that, we would rather lock in 4.5%, which you would take on credit risk to get those yields. we would rather lock in those yields then risk that 2.5% in a year and a half or two years. katie: matthew, that sounds like your view. blocking those rates now, not worth staying in cash. >> the way we think about it, we have been counseling clients to extend duration out to at least neutral. we are neutral right now, but we have and i towards -- an eye towards moving longer duration towards neutral and we are thinking about that in the current context. the way we think about it is essentially people think we are highlighting the thought process. you can get no interest rate risk and higher rates right now while being short in cash, that sounds like a great alternative. there is no risk, reducing rate

risk and getting higher yields, what is the problem? the problem is, allow me to nerd out. it is bloomberg real yield amongst friends. the conservation of energy neither created or destroyed is the same thing with risk. risk is neither created nor destroyed, just switching the risk. for clients who are too much in cash, they are not reducing rate risk. they have replaced rate risk with a massive amount of reinvestment risk. when the fed starts cutting rates, they can get much higher for longer if you extend that. we want clients to move down to at least neutral and potentially go longer as we watch the business cycle. we get higher rates for longer and they will reduce reinvestment risk i taking more rate risk. katie: it pains me to say goodbye but we are coming up against the break. really enjoyed this, thank you. next is the auction block and the rate talk is causing a new trend to grow for bond sales.

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katie: i am katie greifeld. this is bloomberg real yield. time for the auction block were rising rates have impacted issuance in a sign bondholders are preparing for potentially more fed hikes. floating, no debt sales -- note that sales account for 4% of ig sales in the u.s. totaling more than $2 billion. in europe the market for the riskiest type of bank debt is back open for business three months after credit suisse's wipeout. two lenders saw healthy demand. in the u.s. the uncertainty around the fed and cpi plus issuance to miss weekly

estimates. volume finished at more than $10 billion missing forecasts about 15 to $20 billion. jp morgan's bob michele says that the fed is finally done, it is time to exit the cash-strapped. [video clip] >> if we are right and this is -- we have seen the last fed rate hike and the market starts pricing in rate cuts, cash returns will start to evaporate and you will have locked-in not only the carry but get some capital appreciation from your bond portfolios. katie: joining us now, megan robson of bnp paribas out and cities richard so got on set. i want to start with you richard. let's talk about the cash-strapped, cash is obviously the place to be for well over a year. is it time to get out? >> i think there are some real attractive yield opportunities out there in credit.

it is hard to pick the right time to move into those. i would say that this is not a bad time to move into whether, depending on your risk appetite if you want to stay with something more high-quality or lesser quality, you gain a distant station --gain a decent return today. if we believe rates are going to peek and start to slow down it would be a good time to move in and take advantage of that. it is impossible, i wish i could pick, figure out the exact right time. if i could i probably would not be sitting here, i would be on a beach somewhere. it feels like an attractive time to move into credit in one way, shape or form. katie: i hear timing in the market is tricky. what is your risk appetite? >> from our side, we are positioning for decompression.

we think investment grade looks attractive relative to high-yield. heading into the second quarter, investors were very risk-averse. you saw that in positioning as we have passed links -- past things like the debt ceiling and better data, credit has rallied a lot, especially high-yield. since may, high yield spreads are 50 basis points tighter. over that same time, ig is essentially flat. we like rotating into ig. yields look attractive there especially for an investor in cash. katie: we are just about halfway through the year which means it is midyear outlook. morgan stanley released there's, quote our call is for writers spreads, further decompression and muted excess returns. we favor ig overleveraged credit, prefer to own the front end within ig and recommend adding cdx hedges." i'm curious to get your view. seems like morgan stanley is

looking at ig. megan said she favors ig over high-yield. where are you on that spectrum? >> this is a first time in a long time, probably since the great financial crisis, where i think you are getting a nice return in the ig market. what we are seeing is the traditional ig investor is flocking back into that market. over the last 10 years, the pension fund, the insurance company, the core of their portfolio has generally been ig. those folks have been under pressure to search for yield, going to more esoteric products, dip down the ratings curve. for the first time in a long time, they can come into regular way investment grade and get a decent return and good credit protection. i think ig is a attractive place right now. the hard part about ig is, we are having a difficult time building and creating a supply

that will make -- that would meet all this demand. i think you are going to be competing with a lot of folks for product, which could compress spreads over time. for the time being, ig is very attractive. if you think about leverage, and i do not disagree with what megan is saying, right now leverage has performed well. we think that is going to continue for a period of time. but, it is not going to continue forever. there is a big maturity wall that starts in late 2024, continues throughout 2025 and even slips into 2026. a lot of those companies would have a difficult time refinancing maturities in the current rate environment. a lot of them are employing the often utilized, never effective strategy of hope and hoping for rates to come down. if that works out, the leverage markets will do well. if it does not, you could see problems starting mid next year

in the leverage markets. katie: talk to us about the maturity wall, megan. i. come up, it reminds me of the debt ceiling where it is ok. are you worried about the maturity wall this time around? >> we are worried about it. we think it becomes a greater risk heading into third quarter of this year. from our work, we see the maturity wall increasing materially in when he 25. issuers -- 2025. issuers tend to be 18 months forward-looking in terms of refinancing maturities. as those come into view, we expect the refi risk will start to rise for high yield assures -- high yield issuers. katie: let's talk about default risk. a report from moody's said the default rate hitting i percent in 2024. the long-term average for context is 4.1%. if we got to 5% by april 2024, which is what they expect, that

would be a dramatic pickup. megan, when you are thinking about the maturity walls, downgrade risk, default risk, where does that leave you within the ig market? >> it lead us to preferring ig. we did -- we expect defaults to rise, we expect that to be a gradual increase. the fundamental deterioration has started to play out and we have seen that in interest coverage ratios which have started to fall as that process continues. we expect a gradual ramp up in defaults. what is going to distinguish this cycle is it will not be as dramatic as an increase as during covid. 5% is lower compared to the 8% in covid. we could stay there for a longer period of time given that this time around the fed is not going to be able to necessarily cut right away. >> i would like to weigh in on that. i agree, it is going to take a while to get to that 5%. not because there are not companies out there with

stressed capital structures, there are. there is just so much money in stressed and stressed investor hands, that money is searching for higher yielding, higher risk opportunities. i think you have seen that, not to pick on one company, but bed, bath & beyond probably should have filed for bankruptcy a lot sooner than it did. the reason it did not is you had stressed investors desperate to find places to put money to work that were willing to take even more risk. i think that dynamic is going to play out and because the default rate to take a wild to get to that 5%. once it gets there it is going to stay there for a while. there are a lot of companies with stressed capital structures. once the stressed investor picks through the bets they want to make, whatever is last will -- left will probably be around for a while. katie: hopefully we can pick those names together again. appreciate your time.

thank you both so much. ahead on this program, the final spread. powell heads to capitol hill. that is next. ♪ 5-hour energy wants to charge up your summer. just purchase any 5-hour energy product, then enter for a chance to win an eco charger electric atv. just go to 5hecharge.com for details. 5-hour energy...charge it up!

katie: this is bloomberg real yield. time for the final spread, the week ahead. markets are closed on monday for the juneteenth holiday. more fed speak tuesday with bullard and williams. wednesday, chair powell begins his two day semiannual congressional testimony. thursday brings the boe's rate decision. friday, u.s. and european pmi data. powell's testimony is likely the event to watch. there was mixed messages coming out of this week's presser. we held rates but also penciled in two more. we will see which way the market takes him when he talks next

week. from new york, that does it for us. same time, same place next week. this is bloomberg. ♪ the first time you connected your godaddy website and your store was also the first time you realized... well, we can do anything. cheesecake cookies? the chookie! manage all your sales from one place with a partner that always puts you first. (we did it) start today at godaddy.com i don't want you to move. i'm gonna miss you so much.

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>> welcome to bloomberg markets. >> let's get a check on what is going on in the markets on this friday. looking at continued gains or rather gains again on the s&p 500. we started up then came down and now we are back up again. if we finish in the green, it'll be the seventh consecutive day of gains for the benchmark index -- we see the 10 year yield continuing to rise.