welcome to a new era of flight. >> from new york city forever viewers worldwide, i am katie greifeld, bloomberg's real guild starts now.

katie: cooling inflation has lawmakers staying the course and spreads grind tighter. we begin with the big issue, one and done? >> we are done with the hikes. >> after july, it will be the last hike. >> that's what i would do if i were them, one and done. >> take yes for an answer, chair powell and let's stop with the rate increases, done. >> if they stop, every time the fed meets, we restaurant tourists start sweating. >> it's pretty much a done deal, it's what they do afterwards. >> the real question is what happens to the second hike? >> the fed is determined to go a little bit further. >> the fed still thinks they haven't done quite enough. >> the idea that they will be cutting soon i think is a fools errand. >> they have to cut pretty aggressively. >> you cannot get in the way right now of the soft landing narrative. >> we are looking better in

terms of a soft landing. >> he could be the wizard of the economy and wall street if he can soft land this. >> the jury stay out of whether the fed is done or not. katie: joining us now are our two guests. great to have you both with us this week. we've seen one of the most aggressive rate hiking campaigns in modern history. is july truly the end of the road? >> i think it is. i'm not going to be very original and say anything different. at this point, this is the insurance hike and that's the way i look at it. i think that september will be a lot harder for them to make the case for a hike. we are already seeing inflation come down pretty decently. the inflation data we got, the way i look at it, was not so much a surprise to the downside, it was more of a relief that inflation is finally starting to do what everybody thinks it

should do. i think powell at this point can step back and let all those rate hikes they had in the past maybe do their work for the future and see if they can bring inflation lower. katie: that seems to be the expectations in the market if you look at swaps pricing, he moved beyond july, we saw the odds fall pretty sharply. i want to bring you chris waller who spoke yesterday and it seems like he is taking a pretty hawkish stance. >> ic two more 25 basis point hikes in the target range over the four remaining meetings this year. if necessary, to keep inflation moving down toward our target. i see no reason why the first of those two hikes should not occur at our meeting later this month. katie: those comments came after we got june's inflation numbers but waller is sticking to his gun saying to more hikes this year. how big of a risk do you see

that actually happened and we are setting up for another markets against the fed situation? >> i don't think another 25 basis point hike after the july meeting is really going to move the needle in a meaningful way. if you told me that the fed is going to be following the taylor rule and raising rates by 200 basis ways from here on, that's a meaningful effect on yields. 25 basis points in my view is not really going to move the needle by a lot. the question is, the more the fed hikes, i think the deeper the potential that the recession will be. the consensus view right now is for a soft landing. if the fed were to hike beyond 25 basis points, and perhaps more hikes after the july meeting, that certainly increases the odds of perhaps a deeper recession and perhaps a recession that sooner than

people have penciled in. katie: there has been a lot of debate over the probability of a recession and whether or not it even happens and we heard from bob michele earlier whose gearing up for some big moves in the global bond market, saying -- at this point, is a long duration call? >> we have had a long-duration call almost since the end of last year in october given the fact that if the fed is at were being close to being done, the trade you want to be in ultimately is long-duration.

the reasonable slowdown in growth means a decline in yields. to me, the most important narrative for the next 6-8 months is how long the fed keeps policy on hold and that's really where i think the higher for longer metric makes sense. in that context, a decline in yields is probably going to be modest. it should only get to 3.75% by the end of the year. katie: let me get your thoughts on recessions but let's stick to that point, the idea of how long the fed is going to be on hold. the conversation really has been how many more times they will hike. is the better question to ask how long they are going to stay in terminal? >> i think it is. the way i look at recession right now is i'm saying bring it on. the sooner we have a recession, the shorter it will be. the longer it takes to have a

recession, the deeper it's going to be because that's where the excess builds up. i'm not forecasting a recession by any means but i'm saying that if the consensus is correct that a recession starts in the fourth order or the first quarter of next year, i think it's a mild recession. it seemed like a higher for longer trajectory is there but if we have a recession, that is likely to cuts. how much will they cut? you got a five year treasury that's around 4%, you got a 10 year treasury that's low 4%. -- that's below 4%. if the fed rate is going to be 5.5% in a couple of weeks, how much will they cut? if they cut 50 or hundred basis points, or those long-term yields going to stay at levels where we are now? i think the market has already priced a lot of this in.

maybe there is a shot that the 10-year treasury yield gets down to 3.75% and i think we get there and bounce back up. i'm not 100% sure how much protection the back end is giving us. for the initial reaction to potentially falling into recession it's good but then i think we need to risk manage after that. katie: where on the curb does that leave you? if you look at the front end, the moves in the two year yield, we were above 5% at this point and it feels we are away from that now. it feels volatile everywhere you go. >> the sweet spot for me and what we've been doing in our portfolios is with cap duration around the three year point. it's like a decent level where it's not so much the front and and it's not the backend, it's kind of a closer front end spot which gives us enough duration that if there is a downturn in the economy and the fed cuts rates, that you will participate in that. it also gives you the hedge that

it takes longer for the fed to start cutting interest rates that you are not giving up so much carrie. if you are on the five or 10 your point, you are well below the fed funds rate which means you would be better off just holding a three-month bill and letting it roll over time and that would be the concept of the carrie. essentially, it's hard to tie in these things. if you told me we would have a deeper session in october, by the 30 year long bond. but if you say is higher for longer and it might take some time in a might go gradually and if they cut, it will be 50 or 100 then i think the front end is around that three year point. for our management in her wrist portfolios come that's a sweeter spot. katie: all of this really centers on what the fed will do and depends on inflation. we got some really good news on

inflation this week from the june numbers but this part of your note caught my eye --buy two-year tips, why two-year? >> because things have risen quite dramatically and you're looking at a trajectory where realize inflation will probably be a lot higher than what the market anticipates or what the inflation forecasters are pricing in. breakevens have moved on quite dramatically because of the fact that we have seen commodity prices and oil prices come down. two-year real yield as well as 10 year real yield got close to the highest level in a while. it really makes a lot of sense at this point to be long real yields as a direction play for a normalization of real yields to lower levels. we are looking at going long on real yields in the most

attractive spot is the two year given our projections for where cpi will be the next couple of years. across the curve, i think real yields have widened dramatically last year and it's starting to normalize and i think there's more room for you -- real yields to normalize from here on. katie: looking at real yields, it's been amazing watching this rise depending where you are on the curb. we are looking at the highest levels since 2008-2009. do you see that as an entry point? >> i do, i think she has it right. this is a place where i would argue that real yields tips will outperform nominal's. my personal view is we are in an inflationary environment. i think inflation will average somewhere around 3%. over the next several years going forward, we will be in a 2-5% range. it doesn't mean we can't bill it just get below to if we go into recession. owning real yields at this point

makes a decent amount of sense and this is a good entry point. katie: we will end on that harmonious note. i really enjoyed this. thank you both so much. up next, the auction block, big bank earnings could jumpstart a wave of issuance. this is real yield on bloomberg. ♪

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katie: this is bloomberg real yield. time for the auction block where we focus just on the u.s. this week. it fell short of estimates for investment-grade sales at just about $11 billion sold.

banks like rbc continue to drive volume. next week, we expect the u.s. banks to take center stage now that earnings are underway and the group is expected to sell between 28-30 $2 billion of new bonds. in u.s. high yield, we finally have a sale first of july, oil and gas support service firm see drill sold about $35 million. ubs is the current environment is a solid one. >> when you are buying high yield, you're buying for the coupon, you're not buying for much more spread compression. the coupon is really attractive. at 8.5 percent on the high yield index all in, that's quite good especially since we are not of the view that the economy falls off a cliff and we are of the view that as the fed slows down and approaches the end of its tightening cycle, that rate volatility can come down.

that's positive as well. in general, this not too hot, not too cold environment is a good one for credit and the spreads reflect that but the carry is very attractive. katie: my guess join us now and if i look at ig spreads at 120 and high-yield spreads at 380, it seems pretty tight. is it really all about the carry of this point or could the spreads go lower? >> i think there is three scenarios, sticky inflation, baseline view we have a mild recession and a soft landing that i don't think the market is fully price for a soft landing. that would require the volatility on the right side to come down. we need equity volatility to stay low and we ultimately need some of the early optimism in the soft data to flow through into the hard data and the growth picture to improve but ig

we think in a soft landing scenario which is not our baseline but a soft landing scenario would probably tighten 5-10 basis points and high-yield is probably in that scenario maybe 15-30 basis points. katie: what is the base case at ubs? >> we are still in the camp that we have three recession models where the modal outcome is a downturn of mild recession. unfortunately for the market, people got too excited and calling for the turn and starting middle and second half of last year so a lot of clients are once bitten twice shy but we ultimately think the yield curve murder model, is very consistent with the recession that's coming. we think the leg of credit tightening clearly plays out four-six quarters after the start. that started really in the third quarter of last year and combined with that, you hear from a number of early earnings

reports that the consumer strength is fading or at least shifting so we think christmas saving slow down and ultimately credit tightening hits the economy. we are not overly negative in terms of our spread targets relative to a typical recession but we are basically looking for peak spreads of 30-40 basis points wider than ig and at high yield, one hundred 50-200 basis points wider for the year. katie: i want to get your thoughts on this dynamic and markets right now. are you happy clipping coupons? do you think there's more juice left in the rally? >> i am closer to matthew's view. we think there will be a recession in the second half or maybe the first order of next year. the market is not pricing it in. the market is pricing in a soft landing and there is no room for error. if we get that slow down -- we are in a goldilocks scenario for the short-term but when we start

seeing things like the yield curve and the savings rates and other things slowing the economy, the market has no room for increased amounts of default order thierry rating credit. katie: a no room for error market -- this is a conversation i have all the time with the equity market. is it more about macro conditions or is it about the corporate fundamentals? when you look at the credit market, particular he high-yield, what is this market being driven by? >> we don't see a bubble forming in any of the major parts of the economy. the consumer has delivered over the past few years and there is not a specific sector in the high-yield market that's over levered and borrowing way too much money. it should be relatively mild. the problem with the high-yield market is that coupons are so low. when you refinance, you go from 4, 5, 6 to 7, 89 and that's when

you see a strain in the market. it's not that we will have a huge spike in short-term and default but you probably have a longer term recession as companies have to work through this dynamic. katie: let's talk about what this means in terms of total returns. you put out a note earlier this week and you wrote that as long as the yield on 10 year treasuries slips to 3%, you be a season vestment grade offering total returns of 7%. if you look at 10 year treasury yields we are pretty far away from 3%. if we stay near these levels on 10-year gilts, what does that mean for or per edit returns? >> if you stay here, they look more like carrie and you don't get that support from interest rates rallying ig at 7% in particular is a call on rate duration. if rates rally eight basis points, that's driving 90% of

the total return. you just get carry. we still think ig in different scenarios looks pretty good. from a yield standpoint, you're getting just about 5%. u.s. high-yield has performed very well in the last month or month and a half so you're just about 8%. is it really worth reaching for the extra 3% per year or 150 basis points over six months to go to high-yield when you can own ig and even if you think the recession plays out. if it's delayed to the first half of next year, we still ultimately think the combined return looking for 7% to the end of the year in our scenario which is that rates go to three, the following year, we think returns are low to mid double digits. that's high-grade, high-quality credit and that's an environment where we think the fed is cutting next year and it means your money market or your

savings account is no longer going to pay four or 5%. we think it will be closer to three or below by the middle of next year. ig in many different ways looks really good to us on a total return basis. katie: i think that's a great point that 5% you're getting on cash is not going to last forever. when you think about total return expectations in the high-yield market, have you had to down grow those -- downgrade those expectations as the euro went on? >> we've been having to break them up. we haven't really seen that slow down hit yet. defaults are creeping steadily higher but the market is looking beyond that and assuming we have this goldilocks outcome. we have not changed our view that we will end up in recession. the question is going to be the timing. what's interesting about this scenario that matthew lays out is if we are stronger for

longer, that puts the fed back in play. perversely, you could end up where you have a much higher probability of getting a september or later rate rise even as we start seeing some of the things that support the economy so far run out. that could potentially lead to a deeper recession sooner. katie: against that backdrop when you look at the sector level, where is the most opportunity? >> i like tips.that's a great trade given where the carry is an even if we look at the number in cpi, core cpi still over five and it doesn't have energy and it so that will be supportive of inflation at the same time, you have attracted real yields in the tips market in the 2-5 year sector. katie: we really appreciate your time today. thank you so much. still ahead, the final spread, the week ahead with more earnings on tap including bank of america and goldman sachs. that's next, this is real yield on bloomberg. ♪

katie: this is bloomberg real yield. time for the final spread, the week ahead coming up with lots more earnings on tap next week including bank of america and morgan stanley on tuesday, goldman sachs, tesla and netflix tuesday in regional banks including truest thursday. and we will get another round of jobless claims plus existing home sales. it's going to be earnings that will be important to watch after the financials, we get many interesting groups including airlines, some social media, tech and then we move on to some of the energy names. it will be a 10 day blitz and we will take you through it. from new york, that does it for us. same time, same place next week, this is bloomberg real yield and

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♪ jon: welcome to bloomberg markets. matt: let's get a quick check on the markets right now. a little bit of a reversal on this friday in terms of the treasury trade. you have very little movement on the s&p 500. we are still over 4500 on the benchmark index. you see yields starting to rise again on treasuries after the consumer confidence came out better than had been forecast in the best level we have seen since the end of 2021. the 10 year treasury yield is over 8.0.