>> from new york city for our viewers worldwide, i am katie greifeld and "bloomberg real yield" starts now. coming up, barreling into a triple header of central bank meetings with inflation cooling around the globe. all as the riskier credits

continue to outperform. we begin with a big issue, waiting for the fed. >> the fed in their tightening campaigns -- >> widely expect they hike in july. >> hike right when he five basis points. >> inflation data coming down faster. >> no indication yet of greater market weakness. >> consumer is showing up. >> there has been welcome news for the fed as of late. >> the last inflation print was low. >> the economy will surprise people. >> the data is starting to show maybe we won't have that recession. >> what is the right inflation target for the world we're living in today? >> how high will they be willing to tolerate? >> at some point we think recession will come. katie: joining us is toni kroos tunzi and megan sweitzer joining me on a friday. must be my lucky weekend we are

course meeting before the fed meeting next week. getting away from how many hikes are left, seems like july is baked in at this point. how long might this fed be on hold? tony: the view of ray cuts flies in the face of the legendary fed chair and his idea of keeping at it. the title of a book he had. chair powell over a year ago said one of the three lessons of history is to keep at it, sustain the higher rate of the fed funds rates in order to keep the pressure on inflation -- downward pressure on inflation. the fed does not one to make mistakes that happened to others, to cut rates prematurely. you should expect the fed to keep at it until it is clear and by clear we mean through inflation expectations. that the job is done. inflation data won't cut it alone, the fed has to feel households are confident the inflation rate will be down over the long run too. katie: megan, tony brings up

paul volcker, let's talk about ben bernanke. he heard from the former fed chair and he weighed in on the next move saying it looks clear the fed will raise another 25 basis points added to next -- at its next meeting and also bold increase in july my pedal last one. if it is july and done, how does that work itself through the treasury curve? how are you thinking about opportunities at the short end versus long and? megan: what we see born out in history as you really want to be buying the last hike of the cycle, particularly further out the curve. we do think going long as we near the fed's final hike makes a lot of sense. you usually see the tenure rate rally around 100 basis points or so in the 12 months after the fed delivered the final hike. markets are only pricing in about a 10 basis point rally or so. we think the long positions are well served but important to put them further out the curve. when you look at what is priced into the front end and tony was

making this point earlier, there is a lot of question marks around how long the fed is going to stay on hold. the markets pricing a full 25 basis point cut by the first quarter of next year. we do think there is more curve for the curve -- more room for the card to invert further. we think ultimately the cuts priced in are largely overstated. katie: i want to get to the message the yield curve is sending but you bring up duration and i'm glad you went there because we actually got the annual investment letter, one of the investment letters from the former pimco cio, bill rose, and he wrote with inflation back to 3% or so, and the fed nearing the end of its tightening cycle, it would appear a new bond bull market is about to begin. while i think the tenure at 380 may have peaked, able market is not in the cards. so you are on the others of the tree. tony, where do you fall? tony: i would agree with megan. 90% of the time, since 1978,

core bonds, with duration let's say 6.5 years, has outperformed cash, t-bills and such, by an average of three percentage points over three rolling periods. looking back three years from now, through today, it is likely these long matures farewell. it is a false game to some extent to keep playing the tebow money market game. blinken you may miss -- blink and you may miss the next bond market rally. the time now is for turn tile investing to get the gains that megan suggests could occur because movement means a lot in terms of price gains and you never know when that will happen. and for what reason. now is the time as history suggested when the fed is about to be done with its rate hike cycle, call it a few months. that is the time to be investing in longer maturities. we would suggest the volatility that could bring in the interim because you cannot time a

diversifier is bonds are so we would suggest being leary about doing so. ed: sounds like the operative -- katie: sounds like the opportunity cost of cash is long right now. tony: it is quite attractive and you want some liquidity but you have to make sure you are getting a return for the liquidity. in short-term funds such as those we have managed by jerome schneider, the carry of a yields maturity in the zone of over 6% or so but you want to be sure you can part with liquidity to get the yields we think there is always some for many investors i should say ability to part with liquidity to get the extra yields closer to 6%. katie: i do want to get back to the yield curve because that has been one of the big stories in the market, that externally stubborn inversion we are seeing and what it is signaling. i was reading your notes and it stuck out to me, the deeper carbon version does not

necessarily mean recession risk is higher. talk to us about what you mean by that and what this curve is suggesting. megan: i think when we look at recession probability models for example, they largely take into account the shape of the yield curve, the deep inversion we are seeing. if you look at those, that would suggest recession risk is elevated be a what the carbon version is telling us and what the curve tends to get right is anticipating fed policy action. the carbon version is telling us this message, this expectation for the fed to be cutting but the fed can be cutting for different reasons. in recent cycles, the fed is cutting alongside the downtrend we saw following the pandemic, cutting during the global financial crisis, but the fed can be cutting this time and what the markets actually reflecting his cuts alongside inflation moderating very quickly. certainly we have gotten a lot of good news on this and in recent inflation prince but the market is pricing not only this perfect storm of inflation

falling right now but that continuing overtime. the fed operating at a policy rate as aggressive as they are right now, over 5% after they delivered this next hike, ultimately will become more restrictive out of lower inflation rate -- at a lower inflation rate. it argues for them to cut alongside moderating inflation, which we think is the message of the curve telling us right now, not so much the cuts along material growth downturn. katie: just to draw this point out, it sounds like almost what you're saying is the fact the curve is this inverted it is in some way an endorsement of the fed's policy? megan: absolutely. i would say the one thing powell can look back on and see a lot of credibility on is the inflation market. and five-year five-year breakevens, the feds view into how the markets are reading these longer-term inflation excitations that tony mentioned, they have been consistently pricing the fed being able to hit that 2% target over the long

run, even alongside a lot of volatility in [indiscernible] there's a lot of credibility the market will go with the fed. tony: it is the confidence in the federal reserve that will keep inflation down, do whatever it takes if you will, that is causing it in part. secondly this is what is called a term premium the fact, the impact of fed policy and bond purchases made in the past bond yields. consider for example the federal reserve holds $2.5 trillion worth of mortgages. it has $5 trillion worth of treasuries, it took a lot of bonds off of the shelves several years ago during the pandemic. to go to the shelves today, there are fewer items on the shelves so the prices are naturally higher. as the fed puts some idols -- items back on the shelves, the additional profits you get from the yield curve will rise and that will affect yields. the biggest factor i would say

is confidence in the fed on future rate cuts in terms of where yields are eventually going and it is another message to investors to not wait too long in adding duration to turn toward total returns tile investing, income style investing, anything where you can get the capital gain and high-quality assets. katie: there are five different points i could dig into there that are interesting but, megan, you also made the point it is not just a recession that would cause the fed to cut, we are in restrictive territory. i do not think that is controversial to say and just getting out of restrictive territory will require summary cuts. i have kind of a difficult question, where do you think neutral is in this economy? tony: pimco's view is the neutral rate is between zero and .5 point about the inflation rate, call it 2.5 or so. it may be evolving, there's a

debate about the impact of demographics for example. we know 1957i mentioned this fact before, it is the biggest birth yield by sentry so fast forward 65 years later, big wave of retirements, the biggest in history. it is reducing the amount of labor supply and will continue through 2030, pushing up wages and that could have an impact for all we know on the neutral rates. secondly, this movement worldwide to invest in defense and in the brown to green energy transition, supply chains, all of that might raise spending and reduce the saving glut that kept interest rates down. it could also boost productivity which can have influence, upward influence, on the neutral rate. so the jury is out but we sticking with the idea that it is lower than historical and that will keep yields low and the yield curve probably reflects that. katie: we don't have much time left but i would be remiss if we did not mention is not just the fed next week, we have the ecb

end boj as well. when you look at that lineup, where do you think the most risk for surprise comes from? which region and central-bank? megan: that is a good question. ultimately the message we are hearing across all central banks are now is this commitment to data dependence. central banks are now are also limited in terms of how much they can ultimately shock the market because so much of the path forward here is going to come down to the data. we are going to hear that from the fed next week, the story will be a lot more about the focus around what they are ultimately going to do next. at the end of the day, the fed needs to be able to push back against some easing in financial conditions that we've seen following cpi. the relatively muted rate we recently had gotten. all of those things together do blend itself to central banks needing to keep the expectation out there for potential adjustments hire an overnight policy rates. katie: a lot of look forward

two. our thanks to tony crescenzi and megan swiber. big banks earnings driving the week of issuance. that is next and this is real yield on bloomberg. ♪ if you have this... and you get this... you could end up with this... unexpected out-of-pocket costs. which for those on medicare, or soon to be, is a good reason to take charge of your health care. so consider this. an aarp medicare supplement insurance plan from unitedhealthcare. why? because medicare alone doesn't pay for everything. and what it doesn't pay for, like deductibles and copays, could really add up. even thousands of dollars a year. medicare supplement plans help by paying some of what medicare doesn't... and making your out-of-pocket costs a lot more predictable. call unitedhealthcare today and ask for your free decision guide.

learn more about plan options and rates to fit your needs. now if you like this... greater freedom... you'll love that medicare supplement plans have no networks and no referrals needed... see any doctor. any specialist. anywhere in the u.s. as long as they accept medicare patients. these types of plans also give you more flexibility when traveling in the u.s. your plan goes with you... anywhere you go in the country. even better, these are the only plans of their kind endorsed by aarp. call unitedhealthcare today for your free decision guide. so if you have this and want less out-of-pocket costs... and more peace of mind... consider adding this. an aarp medicare supplement plan. take charge of your health care today.

just use this...or this to call unitedhealthcare about an aarp medicare supplement plan. katie: i'm katie greifeld and this is "bloomberg real yield." time for the auction block where big bank earnings drove sales this week. u.s. high-grade primary markets saw weekly volume push past $30 billion, topping the high-end investments. wells fargo is a main contributor, pricing two separate deals totaling more than $10 billion. we're going to dig into the banks as they saw massive demand . morgan stanley, jp morgan, and the wells fargo sale all saw

their order easily outpace sales and investors also piled into the leverage loan and high-yield bond market. monday alone saw eight new loan deals and for junk bond sales, the week totaling more than $3 billion in high-yield. some say the current environment presents a buying opportunity. >> we think bonds are back so to speak. yields now across the spectrum into corporate's emerging-market to and other parts of fixed income where the total return you will see or potential is a lot higher than it has been for most of the past decade. katie: joining us now i am pleased to say we have marino connor of wells fargo and zach grifitz. zach, between bearish and pound the table bullish, where you fall on this corporate credit market? >> i would say we are bullish and really that is adjusted a bit.

recently i think the move in high-yield has gone a little too far so we did recently downgrade high-yield to market perform from outperform and that is not to say we are moving to a cautious outlook on high-yield but we are recognizing the opportunity for spread here is limited. forward returns look great on a six month and 12 month basis we think that is a good trade but we recognize the possibility for additional tightening is probably limited and we maintain an outperformed recommendation on investment grade, a spread target of 100 basis points, so are looking for more there. deaf only in the bullish camp. katie: i want to get to the high-yield call but let's talk about investment grade. i g spreads are already at 120 basis points, really close to the narrow levels of this year. how much lower could spreads go from here feasibly? >> i think we agree with zach in that our longer-term view is

bullish across credit products including investment grade but in the near sense, we are probably more neutral and we have come very far, very fast. if you look at the index level as you note, we are trading close to the year to date, only five basis points wide of the tights we saw in q1. a lot of the higher-quality industrial names are already trading at their year-to-date tights so if there is any sector level performance from here, it is probably within financials or perhaps further down the rating spectrum with further spread compression across triple d's. as a whole, if you like in the near-term sense, spreads are fully valued in this current range and we see maybe a little more downside risk to spreads the next couple months versus upside potential. katie: let's talk about that narrowness we have seen, it has come with very little volatility. there was a really interesting report out from barclays looking at the past three weeks, high-grade spreads traded within a range of three basis, the

narrowest band in 18 months. given we are already at your year and target for investment grade spreads, what kind of volatility do you expect from here or could we continue to grind sideways? zachary: i think grinding sideways as a possibility and the lack of volatility we have seen i think comes to interest rate volatility coming down quite a bit. he saw an aggregate level looking across the curve. you also had limited volatility in equities and fx. i think financial markets are coming around to the view that at least the fed is almost done tightening. we are expecting eight when he five basis point rate hike next week and for the fed to remain on hold for the remainder of the year. i think a lot of the macro volatility we have gotten used to the past year and a half is starting to subside. that is a positive for spreads so in terms of additional tightening, perhaps it is limited but with yields at these levels, we think it is an attractive prospect and going to bring a tailwind of demand in the second half of the year.

katie: let's talk about technical demand. even with this conversation we are having about a range-bound market, spreads fully valued, it is an important point there's a lot of demand out there. maureen, in your nose, you point out if you look at the fund flows, people are clearly coming into the asset class. break down the demand, what types of buyers are emerging? zachary: we are -- maureen: we are in sweet spot where we have seen a return of the total rate of return buyers, so this is different than last year where we had record breaking outflows across high-grade etf's and mutual funds. that dynamic has almost reversed itself this year, we had nearly unbroken inflows into high-grade flows with the exception of a couple weeks around the regional bank crisis in march. we have a race almost 80% of the full year outflows we saw in 2022. to this point. you have a total rate of return buyers chasing 3% return for

that set class but on top of that and as noted, with yields remaining elevated like they are, have a very attractive entry point for a more yield focused buyer. so ldi buyers, insurance companies, yields are trading 150 basis points above outstanding coupons on the index. so you have this perfect storm of a number of different buyers facing investment grade all the while supply has been moderate this year, down 3% versus last year's volume. that technical has been strong. katie: that is the investment grade backdrop, a lot of demand there. i want to talk more about the high-yield side of things. we heard from amanda line and at black box -- blackrock saying there could be weakness ahead in the riskier credits. >> there's probably some scope for resilience still at the high-end of the high-yield spectrums. we do not review a recession as a necessary ingredient for an uptick in default. katie: zaki, like you mentioned earlier in this interview, you

recently downgraded the high-yield market to market weight from overweight earlier this month. where do you see is the fundamental backdrop when it comes to some junk rated companies out there? zachary: i think you are seeing a bifurcation in terms of the lowest rated credits showing signs of deterioration and fundamentals. triple c's have performed well so far this year but we emphasize focused credit and security selection if you're going to go far down the credit spectrum. if you remain in triple b's -- double b's, that is a very attractive place in terms of yield and we have not seen the deterioration in credit fundamentals. you see a softening there but we think it is manageable at this point in terms of other factors and the economy, including ponte of cash on coming to balance sheets providing flexibility even as borrowing costs rise. we are not really looking for immaturity while to hit until

2025. if yields and rates are still at 5.5% or 6% in terms of the policy rate going into the second half of 2024, that could become an issue. but that is not the base case. we think high-yield is a great place to be but you need to be careful with your rating selection. katie: we don't have much time but i want to get your thought on the second part of what amanda said, we don't review recession as a necessary agreement -- ingredient for an uptick of defaults. when you think about this investment in investment grade, would investment scare away some buyers? maureen: yes and no. what you will see is writings decompression. you will see investors gravitate to where the highest-quality names of the stack, single-a and double rated -- aa rated names and triple b's outperform in that environment it our market is driven a lot by base rates. in a recessionary environment, treasury yields are likely to rally and that will generate positive returns in fixed income

and those returns will attract total rate of return buyers to the extent the losses you see on the spread widening do not overcompensate for that move lower in rates and that tends not to be the case. set another way, we would expect to see investors buying investment grade as a safe haven play and a place where you could potentially eke out positive returns even in a recessionary environment. katie: gotta leave it there, really appreciate your time and a reminder that right now president biden is speaking following a meeting with seven leading artificial intelligence firms about a new agreement for ai. you can check that out at live go on your terminal. this is bloomberg. ♪

katie: i'm katie greifeld and this is "bloomberg real yield." time for the final spread, the week ahead. coming up, the nasdaq rebalancing monday. tuesday tech earnings. wednesday is the fed rate decision, then the ecb on thursday, then the doj on

friday. this is bloomberg. ♪ wait. can i still play? since we work with emower, we don't have to worry about planning for a third kid. you can still play golf... sometimes. take control of your financial future to empower what's next. 76% of 23andme health customers surveyed reported taking healthier actions. take control of your financial future because they know health isn't just a future state. health happens now. start your dna-powered health journey today with personalized insights from 23andme.

t possible. - with going, i get really, really good flight deals all over the world. - anytime, like now. kids, time to go! - where are you going? sign up for free at going.com.

>> welcome to bloomberg markets. >> let's get a quick check of what's going on on the markets. continue gains on that's -- s&p 500. defensive sectors are pushing is higher. utilities are rising, energy as well as health care. in terms of the yields, the 10 year is coming down as investors by the bonds. they are selling the two-year so we are looking at 4.85 on the two-year as the curve gets more inverted.