katie: bloomberg real yield starts now. global bonds rally hard to end

the week as pocket central bankers take the stage. we begin with the big issue -- is inflation or recession the biggest risk? >> globally, series inflation problem. >> core inflation remains high. >> central banks feel compelled to attack that aggressively. >> central banks have had to come back to the table. >> this is hawkish from the u.k. >> the most hawkish because. i could have imagined. -- hawkish pause i could have imagined. >> we are only now getting too tight policy. >> all of the empirical evidence, surveys are all pointing to recession. >> the recession will happen. >> with the fed and tightening

policies aggressively, it does start to bite and is starting to bite. katie: joining us, we have oksana aronov laird landmann and --oksana aronov and laird landmann. soft pmi's from europe and the u.s. are we near were central bankers focus on the risk to growth rather than inflation? oksana: people answer that from the standpoint of what they would like the central bankers to do. have to get into the head of central bankers who lost so much credibility in 2021 and 2022 that now they have to demonstrate they are willing to

come to this fight. you have tremendous examples, the u.k. earlier, what happens when you fall behind in the fight with inflation. i don't think any central banker wants to make that mistake. if you look at core inflation, it has not essentially budged on an annualized basis for the last six months. i think this becomes or remains problem number one and it is hard to point to anything in this economy and say this is recession right here. katie: i'm to get into the head of central bankers, it is helpful we keep hearing from them. we heard about the 2% target. let's take a listen. >> it is working families who suffer directly from high inflation and it is for the benefit of those people we need

to restore 2% inflation in this country on a sustained asis -- sustained basis. katie: 2% on eight sustained basis, we are at 4% now. what is the path to 2% on a sustained basis? laird: there are really sticky elements that we have to overcome that involve wages, service industries, area still doing well like travel with demand. i think it is going to take a while for us to get down to 2%. the path is going to be encouraging, but as we look around, when you look at market pricing and breakevens anywhere from two or 230, we are going in the right direction.

the slowness of banks to overcome services in inflation will cause some of the central banks to go a little farther than they otherwise would have and to us towards recession. katie: i was looking at your notes and was delighted to see you highlighted the tip etf when you look at the demand, it hasn't been there. it is on track for 1.5 billion dollars of outflows this year. with the inflation we are dealing with, are you surprised to see investors reaching for tips? laird: they have been disappointed. if you are calling for inflation in 2021 and 2022 and you bought a lot of tips as an individual investors thing that would be a good hedge, it didn't work out well at all because real rates dominated the return and went from negative two today at 1.6%,

according to the tips work it. you got killed and in many cases you underperformed nominal treasuries of similar maturities by only tips. it has been a bad right and is not surprising -- a bad ride and it is not surprising seeing it balancing out tips. we think tips represent compelling value at tcw. katie: what does the j.p. morgan asset management view? they haven't really done super well in this inflationary environment. do you think they make sense or other better inflation hedges? oksana: i is that from the standpoint of a return investor, someone different from a more benchmark aware investor. my new 2.4 risk is essentially quiddity. -- liquidity -- i sense is a

risk is essentially liquidity. tips do not really represent tremendous opportunity in our opinion because the duration and they tend to be longer duration and will dominate the risk. we the fed will continue to be on that pause or even hike further. at least it will not be immune to the interest rate risk. as much debt or in combining or having dry powder in your portfolio. and then attacking opportunities as they arise which we have seen some in credit related markets, not as much that will come our way over the next 12 to 18 months as the consumer turns over which we have not, commercial real estate issues come to pass.

they are going to be attractive options out there. katie: let's talk about the dry powder. in your portfolios, you want cash and then you look at the money coming out of money market funds. according to data, we are on track for two straight weeks of outflows. what is the bowl --- bull case, value proposition? oksana: to deploy your capital for interesting or great returns, in today's work it whether you at interest rate or credit, you are not compensated for the risks. if you are moving out on the curve and into longer ration, that is not compelling because

we believe the fed is not going to deliver the cuts. you will continue to be very well compensated at the front of the curve, which for us, a fixed income asset class. when you look at you are being compensated for one of the worst polity companies out there, cash is giving you 5.25%. do you want to take that drive powder and ploy it into the market where yields are at 8%. it will only take 8% to wipe out that yield. it is something that can happen. have we seen opportunities? yes, in bank related paper on the stress created in regionals.

there are things to do with irs. we think that is just the beginning of the effects of higher rates for longer and there will be more opportunities this as we go through. katie: how are you thinking about 5% yields at the very front end versus maybe the opportunity costs of being in cash overweight. laird: we never think of this as rocket science. this has been a faster, violent cycle than we have seen in a long time. the next sustainable moves whether it is the end of this year or next year is that monetary policy will cause a slowdown in the u.s. economy and we will get a turnaround and the curve will normalize and volatility, interest rate volatility will come down.

there is a lot to do for institutional investors. you want to be invested in the short and but have duration. there are a variety of ways to do that. we are trying to get as much exposure to one year to three year parts of the curve as possible but still maintain a longer than average duration. we think the long-term price action will be favorable, rates will come down over the next couple of years. we do not think real rates are sustainable. we think those are the trends you want to look for, renormalization of the curve, long-term rates coming down, volatility coming down. agency morgan sees -- agency mortgages make a lot of sense.

we are broadly neutral. outside of that, we don't see a lot of opportunities. katie: i think it was a portfolio manager from tcw called it a screen and by, something along those lines. i want to talk about a phrase you talk about, the normalization of the curve. it is a full percentage point. are we at the depths of this inversion, peak inversion or is there more to go? laird: i think there is more to go in the u.k.. think we are underestimating the amount of tightening that will need to happen to feel they have not inflation expectations out. in the u.s., we are within 25

basis points of peak inversion. the inversion has a long lag of monetary policy. it has been negative for nine months now, more negative than we have ever seen it and is working its way through our system. the problem in the regional banks will cause credit to be pulled back in many of the smaller parts of the business areas of the economy. that all adds up to, we are probably headed for a recession. it is the no-win situation of fixed income. with inflation will raise rates until we have a recession. that is what is happening. katie: really appreciate both of your time. that is oksana aronov and laird landmann. is the issuance on a hot streak,

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♪♪ katie: i'm katie greifeld. this is bloomberg real yield. time for the auction block. europe on its longest streak since october 2021. record was set when it saw 21 billion in issuance. the nasdaq had an offering in both europe and the u.s. this week, sizable demand for both sales. in the u.s., i.e. yields, six companies lined up to sell $5 billion of bonds this week. tuesday saw the most sales in one date since january.

john hancock management says this is a great time to look at higher quality fixed income. >> there is not a lot of risk being christ in. -- risk being priced in. we'll meet look at portfolios that have been overweight risk that has done well, we would look to trim in to some strength and redeploy it to higher quality fixed income, take some chips off after such an exceptional run. katie: joining us is ken monahan and michael contopoulos. higher quality fixed income, how crowded is that trade at this point? michael: i'm getting a little nervous about it. question is what type of

high-quality access because they are not all created equal. some will say the investment-grade is a good place to be. we don't the corporate credit is actually where we want to be positioned at the moment. there are different types of high-quality and i think you do want to be there. we have to be careful with which specific areas. katie: let's talk about it area, agency mbs you say it is getting more attractive but are not all in. it was a great piece on the terminal from some of my colleagues quoting tcw saying mortgage bonds are screaming cheap. it sounds like that is not your view. what are you waiting for? michael: they are cheap and the fundamentals are fantastic. you have no prepayment risk. all the bonds have extended. you have duration but we are

comfortable with that duration. the problem is, we don't know exactly what the bank crisis will play out as. we have more bank selling mortgage paper, that could yield higher it in the asset class. he lost your two biggest buyers, the fed and banks. from our perspective, there is no rush here. i don't see how spreads are going to go tighter in the near term given some of the technical and structural headwinds in the market. we would rather have some certainty that the market has the all clear signal. if we miss a little upside waiting for that certainty, that is fine because there are other opportunities elsewhere that are pretty attractive. we are adding an remain underweight after being very underweight last year. katie: when you look across the totality of the corporate credit market, where is there still opportunity?

ken: i take your guests previous point in that there is a great deal in optionality. there are not a lot of parts of the market that looked exceptionally cheap or the comment ridges slipping cheap is accurate. while they may get wider, we can't really tell what will happen to the banks. the fed is the selling agent still here. it is a good entry point. when looking at corporate debt, high-yield debt, they are at the tighter and of the range trading and we cannot say it is cheap because it is not. katie: entry points have come up several times in this conversation. i want to bring the midyear out

look, the opportunity cost of waiting for a perfect entry point is high and difficult to time. when you think about entry points, specifically when it comes to duration, are you looking at the curve or staying cash? michael: when it comes to duration in the united states, we feel we are getting into interesting territory. we think that is the time to add where the 10 year is. katie: so that is the time for the 10 year. when you look across the curve, what is the case for duration and is that the case you are making for your clients? michael: let me address the all spring quotes because i couldn't disagree more, quite frankly. when you hear a comment like

that, as the portfolio manager where the returns are going to come from. allspring said it would come from treasury yields and if that is the case and not from a collapse in spreads, why not just own treasuries or something similar? there is no reason chad spread risk if the returns are coming from risk-free yields. from my perspective, there is no relative value given where spreads are in corporate credit. there is relative value in duration, and i think you confront and treasuries or triple l -- aaa clo's and you can barbell with longer-term treasuries like the 20 year and 30 year and get total return potential at the long end. i think you could do that today and feel good about levels.

we are there and you should be involved in those parts of the market today. i want to see high-yield north of 800 basis points, ig north of 180 basis points before i am excited about ig in high-yield. katie: just cut out the middleman. weigh in when you think about treasuries, what is the valuation, relative valuation relative to the corporate credit market? ken: i take michael's point, the high-yield spreads are at the narrow end of the range and have been running at 125 basis point range and 4.25 or 4.30 at the narrow end. at 5.25 or 600, if we have a slowdown which we expect in the

fourth quarter of this year, it will be relatively mild and improved over what was 10 years ago. we can't say high-yield is cheap but investment grade is not either. katie: really appreciate it. still ahead, the week ahead. that is next. ♪

katie: i'm katie greifeld. time now for the final spread. tuesday, consumer confidence. wednesday, test results. thursday, u.s. gdp and friday rounding out the week with the preferred inflation measurement. talk about the bank stress results. standards are tougher than a year ago. from new york, that does it for

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>> welcome to bloomberg markets. matt: concerns about the european recession, no word about a u.s. recession as well as flash pmi. s&p 500 down .4%. investors buying bonds, hoping to seek safety from a rate hike recession. bitcoin rising on optimism that big financial