>> from new york city for our viewers worldwide, i'm katie greifeld. bloomberg's real yield starts now. coming up, powell and peers say

the inflation fight is far from over, with wall street divided over where yields go next. coming up, our exclusive interview with the oaktree capital management incoming cio. barreling into the second half. >> the report this morning was good. >> three waves of inflation that we had, the demand shock after the pandemic, the supply shock of the war and profit let inflation, wave one and two. >> things are continuing to be much better than expected. >> i don't think this is the end of the bull market. >> the economy is robust. >> i don't think an awful lot has changed yet. >> our call is that the fed will probably stay in or around current levels. >> the>> fed is being vigilant in terms of keeping rates hot. >> it's not out of the question that they raise rates by 25 or even 50 basis points by the end

of the year. >> we are looking at a new interest rate regime moving forward. >> i think it's a relatively hawkish message still. >> i hope the fed does not hike. >> the fed is committed to keeping policy higher for longer. >> whatever this is, whether a recession or a growth scare, i think it is starting. >> we are cautious. >> there's a lot of stuff on the table. katie: joining us now, robert and kelsey. great to have you. robert, i want to start with you. we heard from powell himself. we heard the opportunity to hear the fed chair multiple times this week. the possibility of two or more hikes is real. have you changed your expectation in the last week? robert: we have not. the news is coming in favorably, a little bit better than people hoped for in terms of growth, which you might think would put

upward pressure on rates, but they are getting cooperation on inflation too, so i think there are things people are missing about the outlook here and the fed themselves with the dots they are missing next year and the year after that, but in terms of this year, i think he's keeping the markets on guard. they want the latitude to raise rates without shocking anybody if they need to but they are hoping that they can do one and be done. but that kind of looks like the course here. no changes based on the data we are getting here. katie: kelsey, we have all of the data in front of us. you think about what we saw in the past week, jobless claims not falling as much as expected, and pce, maybe a little bit of good news this morning. when you put that together and think of where the fed should go, what is your opinion? kelsey: so it's likely that the fed is going to hike again in july, but to us, what we are

focused on is trying to determine how restrictive monetary policy is at this juncture and we look across a variety of different ways of measuring how restrictive policy really is. and what we are finding is that policy is actually -- [no audio] to judge that just how restrictive monetary policy is, because you look at financial conditions, market based measures, they tell one story, then you look at real yields, for example, and they tell a

little bit of a different story. what are you using to judge? yeah, exactly. i mean, i've had my eye on five year real yields all week. they have been testing that 2% level. that's the cycle high for the year. that's also kind of a multi-decade high for real yields. and to us, that signals that policy is restrictive. but there are other ways to look at it that we're assessing. so, for instance, if you look at the nominal fed funds rate and you compare it to market expectations for inflation over the next year, i should say, consumer inflation expectations for the next year. and we saw the university of michigan one year expectation is really starting to drop. now it's down to 3.3%. you compare 1980's.

another thing that caught my eye recently, looking back at some of this fed research that has been published over the past week, they are noticing it too. the number of distressed firms is highest since 2008, 37%, and what that means is you combine that level of distress that's starting to bubble up in the corporate america world, and that is suggesting aggregate demand is going to moderate and this policy will bite. katie: we are starting to see that again. i want to talk about the five-year real yield. the highest level since 2008. let's wrap this with a view on the markets. we heard from a jp morgan strategist. they are unwinding. "we can no longer justify our tactical long-duration view. treasuries have outperformed their underlying drivers and

valuations remain rich. positioning is long, indicating there could be risks of long liquidation in the coming days'' robert, when you look specifically at the belly of the curve and a little bit longer, what is your read? are you staying away or do you think now is the time to extend? robert: yeah. i think you have to cut the baloney a little bit more finely. big picture, rates are of a ton. the fed has hiked 500 basis points and they are getting some of the things that they want to see and there's a good chance that we are going to be here for a very long time. yes, rates are up a lot. there is churning within the economy. the residential real estate sector has slowed down, but when you look at what we have seen this week, durable goods are phenomenal. you are getting some increase in jobless claims, sure, but we were at an unsustainably strong labor market, so things are moderating.

i think people have been trained this century to assume that every time you get a tightening of monetary conditions, you are going to have a recession, and they are not used to seeing an environment where interest rates go up because you have not seen them go up, and that is what we have seen. they were a couple percent lower than they needed to be for a couple years longer, but the fed needed to make sure the economy was running well and they were not going to have another 25 years of inflation below target, waited too long, and they needed to hike 300 basis points from 2%. and that is where they are. so it is kind of like a mid-1990's environment where there's a lot of financial dynamics, a lot of concerns churning within the economy, but ultimately this will power long. so i think getting to your question on the yield curve shape, the middle of the curve is not an attractive place to be. you are going to have a situation here where the roll is going to burn people but strategically the level of yields on the bond market is

where it should be. katie: i different dynamic than i have been hearing about. i have been talking to a lot of belly bulls but they are not as loud as they have been. i went to bring you into a debate -- i want to bring you into a debate i have been having. we heard from phil dudley, former new york fed president, writing in his latest column, the fed's short-term interest rate target averages about 1% over the next decade. inflation averages 2.5% and the bond risk premium is one percentage point. in sum, this suggests a 10 year treasury note yield of 4.5%. on the other side of the trade, you have we expect yields to gradually decline over the coming years. we retain our call for a 3.2 5% 10 year treasury yield by year end. the yield curve should

steepen, turning moderately positive next year as the fed lowers policy rates in a recessionary context. a lot of words but the takeaway is you have 4.5% and 3.25%. kelce, where do you fall? kelsey: we can take a step back because we are halfway through 2023. what we have seen so far this year, the fed has hiked rates 75 basis points and the 10-year yield is lower, lower by five basis points, so what you are seeing is, as the cycle extends, the sensitivity that the 10 year yield has to front end yields is falling. in fact, as you get towards the end of the cycle, that correlation turns negative, so we think from here the bulk of the repricing in the 10-year yield is already behind us and in fact as the fed approaches the end of the cycle what we should be seeing is we should be seeing yields start to move

lower, so we would be in that camp of expecting yields to move gradually lower over the course of the year. katie: robert, weigh in on that. when you look over the rest of 2023, the next lecture yields, specifically for the 10 -- next leg for yields, specifically the tenure, higher or lower? kelsey: the prevailing wisdom is you will see people looking for aggressive moderation in growth and inflation and lower yields ahead and cuts from the fed. like the fed in their dot plot themselves are showing 1, 2, and three years out, but i think the reality here is that we shifted, and, you know, we have just come from and how long does it take the market to get on the right side of that? isaac we saw the markets grapple -- i think we saw the markets

grapple for 40 years on the wrong side of the yield curve. from the 1980 period all the way down, people expected rates to be stable or move back up. the consensus was generally not below spot interest rates and it took them a long time to figure out the fed want to disinflation to stop. the fed was going to keep engineering a lower and lower interest rate environment. prior to that, they were slow to see inflation. what the market now is slow to read is that the fed will be at 5% or so for a long time. investors see that if i am getting diversified fixed income, i am buying high-yield, i'm getting a tremendous yield, i will outperform cash over the long-term. i agree with that but corporate product and spread product provided good long-term competitive returns is not inconsistent with there being a little bit of upward pressure on treasury yields over the next 1, 2, 3, 4, 5 years.

katie: great discussion. appreciate your time. that is robert tipp and kelsey berro. we have an exclusive interview with the incoming co-ceo of oaktree capital management. this is really yield on bloomberg. ♪

katie: i am katie greifeld. this is bloomberg real yield. time for the auction block as we wrap up the month, quarter and first half of 2023. we start in asia, where foreign borrowers are raising a record amount of yuan debt in china. lower rates and looser rules boosting the appeal of that market.

in europe, issuance surpassed one trillion euros despite today marking the first session without sales, ending the longest streak since 2021. in the u.s., we saw a summer holiday slowdown to close out the month. june issuance came in at just over $90 billion and the year surpassed $700 billion in sales. pleased to say that joining us now for an exclusive interview is armen panossian, head of performing credit at oaktree capital management, one of the largest distressed debt investors in the world. it was announced he will be co-ceo of the firm starting in the first quarter of next year. armen, great to have you with us. i want to get to your views on the market but let's talk about the news of the week. the co-ceo label. congratulations. it's not a label we see too often, co-ceo. how is it going to work at oaktree? armen: i appreciate the opportunity to be on real yield.

the co-ceo designation at oaktree, yes, it is a new one. we often don't see it, but myself and my partner, bob o'leary, who have been at the firm now 16 years in my case and over 20 in bob's case, have worked together directly in our opportunities group for many, many years, and several years ago, i moved over to the performing credit strategies. our partnership is strong across all things oaktree. we work closely with our credit areas and our noncredit areas as well as our noninvestment areas of the firm having been here for so long, so we are not really dividing the world in terms of the opportunities set for responsibilities -- set or responsibilities. it is a partnership. i will continue overseeing credit strategies and bob will continue overseeing the opportunities group. i think there's a tremendous opportunity collectively at oaktree given the current market environment and economic backdrop. so we are excited to move

forward and to really build on the 30 year history of oaktree built by howard, bruce, and the other cofounders. we are on solid footing and are excited and humbled by the opportunity to lead the firm going forward. katie: let's talk about some of the opportunities in the market. just a couple weeks ago at super return in berlin, you called this period we are in a new era of tight credit markets. where are you seeing that tightness right now? armen: we are seeing it across multiple areas. first and foremost, the liquidity in the market is meaningfully lower today than what it was pretty covid or even in 2021. we are not seeing a lot of trading volume. we are not seeing a lot of new issuance in high-yield bonds or senior loans. part of that is because there just are not willing borrowers, and in the case of m&a activity, we are not seeing willing sellers at what are today

depressed valuation multiples. it's really because at this point we are at a massive inflection point around rates, where we have had the inversion or reversal of 40 years of downward movement in rates and about 12 or 13 years of easy money in the markets. with the rapid inflation we have seen in the economy, the fed -- and they have set as much even this week -- the fed is very much of the opinion that it needs to raise rates to battle inflation to get to the point where we actually have real rates. in other words, rates in excess of the nominal inflationary picture. so that's -- katie: i was just going to say we have seen extraordinary happenings on the monetary policy front. i am curious, though, in the time we have with you, to hear your thoughts on what we have seen in the banking sector, because i know you have made the point in the past that you are expecting tougher regulation ahead for u.s. banks. what opportunities would you expect that to create and are

you seeing those opportunities surface already? katie: absolutely -- armen: absolutely. in the case of investment banks, we are seeing a reduction in access to those balance sheets and a reduction in the new issuance volume seen from those banks. it is because the loans that were placed on the balance sheets in 2022 and were placed at massive discounts into the market in late 2022 and early 2023 really created a big hole in the bank balance sheets the billions of dollars and the risk desks and regulators are watching this closely. in the case of the commercial or regional banks in the u.s., they have tremendous amounts of real estate and other corporate loans and a fed that's articulated a higher level of equity capital needed to manage those banks, and as a result, we are seeing how that plays through in the

markets as a reduction in lending activity by commercial banks across the board in real estate and commercial lending, which allows nonregulated entities, such as oaktree, to step into that void and partner with banks in some cases as well as lend directly to borrowers for real estate and corporate lending that no longer have that incumbent lender available to them. katie: i want to get to fundraising, but quickly on that point, have you started to see banks start to offload some of that? there's a great story on the terminal to that effect, that basically you are seeing that already happened. is that something oaktree is trying to take advantage of? armen: yes. we have seen it began but it's only the beginning. i think the depth of that opportunity is yet to come. there have been some transactions. there have been many conversations as well as discussions about partnership between the private lending universe, asset manager universe, with banks, but there

are transactions of portfolios in both real estate and corporate lending that have already occurred, and based on those conversations, will continue to occur at a more rapid clip over the next few quarters. katie: hope to have you back to talk about those conversations but let's talk about some other news from oaktree in the past couple days. you announced the close of oaktree's life science lending fund for $2.3 billion. tell us about that sector and what are you looking at there? armen: life science is an attractive industry from a lending perspective for multiple reasons. first, it requires specialized knowledge and therefore it's a less efficient marketplace for competitors to lend in. we are able to get more attractive legal terms, better pricing, lower values than you would typically see in other asset classes as a result of that. second, life sciences companies are not gdp correlated. if a company is good at curing

cancer, saving lives, changing lives, it does not really matter if we are in a recession or having some sort of broad market dislocation. from a credit perspective, the company's performance makes it such that our loans to these businesses are well covered. so we really like that from a diversification standpoint in a broader credit portfolio that uncorrelated assets that will not have the same outcome as an industrial or consumer business might. so those are the two name reasons we like it. the third as i would say there's been a meaningful reduction in the valuation multiples for these businesses since the pandemic. during the pandemic, they rallied hard, and since then, they are off 70%, which means that the cost of incurring or the cost of raising capital in the equity markets is prohibitively expensive for these companies and diluted. therefore finding alternative

solutions like the ones we offer at oaktree in our life sciences business are very attractive at the time. we are seeing a meaningful increase in our deal making. katie: great to get some time with you. that is armen panossian. thank you. still ahead, the final spread. data including u.s. jobs. that's next. this is really old on bloomberg. ♪

katie: i am katie greifeld. we have the markets closed on tuesday for the fourth of july. wednesday, fed minutes. thursday, joel's data, and friday -- jolts data, and friday, the jobs report. it is that average hourly earnings print you want to watch. that is next friday. from new york, that does it for us. we will be here next week.

this is bloomberg real yield and this is bloomberg. ♪

>> welcome to bloomberg markets. i am matt miller. a quick check on the markets as we wrap up the week, the month, the quarter and the first half. we are looking at big gains on the s&p, up at a session high, 44.5 the level.