katie: bloomberg real yield starts right now.

coming up, i bid comes back into bonds every brutal beat that evaporated. it sends a shudder through the corporate credit market. we begin with the big issue, all eyes on wyoming. >> jackson hole. >> jackson hole next week. >> next week, jackson hole. >> jackson hole is going to be two points of focus. >> if we really come down to powell to be on message. >> we don't really think we will hear a big change in narrative. >> what is the fed ultimately looking for? >> they are likely to take a look at why demand imbalances. >> labor markets will decide how much they need to adjust the over night fed funds rate. >> the fomc participants should be looking at the last three months worth of data. >> the fed has done so much

already in terms of delivering those hikes. >> these are not going to be near term policy decisions of what they need with rates next month. >> rate hikes at the september meeting. >> maybe the fed doesn't need to hike. >> we are not certain blessed hike is behind us. >> the fed will keep rates higher for longer. >> the fed will have to be more aggressive, raising rates higher in keeping rates higher for longer. katie: joining us now is michael and mark. since you are sitting next to me, i will start with you. we will get to jackson hole but let's start with the price action. it has been intense to say the least. when you think about the sell off we've seen in 10 year and 30 year treasuries, what would you say is the key factor driving that? >> number one, a reassessment of the growth outlook. also the q2 gdp prints but

lingers in the minds of many. 10 questions over the supply/demand backed up the treasury market and that backdrop is daunting. we know there is a lot of supply and questions about who will be the end buyer. i think that reassessment of how strong the u.s. economy will ultimately be, where is the neutral rate in the economy coupled with questions around who will buy the bonds has really driven the selloff we have seen. it's driven it relatively bare steepening of the curve over the last month. katie: when you think about the sell off we've seen in the longer data debt, is it supply, growth, inflation or all three? >> first of all, it's an honor to be on with you also mark. we used to work together at bank of america and i can't imagine a better person to talk about the rates. >> so sweet. >> i try to be a nice guy every now and then.

i think it's a combination of factors. everything mark said is spot on. you have a situation where issuance has been bigger than expected. it's actually been three well absorbed. couple that with august illiquidity and what's going on with japan and relaxing the yield curve controls a little bit and the expectations that might go further later this year. of course, the thing we can't hide from is better than expected growth. i think the move makes a lot of sense but the question i have is how much higher can we really go? as you know, and a secular basis, we very much have been in the camp that inflation is likely going to be stubborn and we will be in a period where inflation is higher than it has been sometime. we see higher highs and higher lows but on a cyclical basis, i think one could argue that we are getting much closer to fair value here and the risks are starting to skew may be more

toward lower rates from here in the near term over the next nine months and appreciably higher rates from there. katie: i like that you and mark are friends. unfortunately, you are agreeing with each other. maybe if we talk levels, we will get to some tension. when you say where fala -- were fair value is and look at the 10 year yield around 4.23 percent and you think about fair value, what is your gut reaction on where that is? >> generally speaking, we have a model that looks at the number of different factors like leading growth indicators, inflation, the size of the fed balance sheet, the lending rate and it leads us to around this level, about 4.25%. a lot of what we are seeing over the last month or so is very reminiscent to what we saw last year. you had a huge spike in yields and subsequently, you had a big fall of about 80 basis points thereafter. not a lot of new information out

there other than maybe a little bit of growth has come in higher than expected. our model suggests this is right about fair value on the 10 year. katie: are we heading to a 5% world? >> that seems to be the buzz phrase today from some of our other colleagues in research. we are already at a 5% world in some parts of the rates market, certainly at the front and. from the u.s. rate strategy perspective, we don't think we are headed to a 5% 10 year world. we think you will see rates probably want to push higher. that's where the momentum is and that's where positioning is indicating the path of least resistance. we think rates will keep pushing higher. they will probably steepen until you see one of two things. number one, signs the u.s. economy is indeed moderating. we haven't gotten those signals yet an effect would gotten signals to the contrary that indicate monetary policy is in

for sufficiently restrictive. second thing we think the market is waiting to see is some kind of negative feedback from financial conditions which tell us that rates have fallen far enough and we are now seeing corporate struggle to refinance and seek earnings get hit and see de-risking in the market from investors who maybe don't think they are being adequately consecrated -- adequately compensated and de-risking into higher quality like treasuries. we think that's where the market is pushing right now. in terms of fair value, our fair value models have trended close to four. our forecast by the end of the are have the 10 year rate at 4%. we think we will hit that point where you start to see the economy moderate and you start to see some signs that risk assets are struggling a little more. we think it's more likely to see rates in the year lower than higher from where we are today. you got to respect the

technicals and respect positioning which has been very long from the asset management community. they've been long and struggling and there is a lot of frustration in that community. we think some of the more momentum driven accounts like some of the cta's or higher frequency accounts have been in this bare steepening dynamic and i think they will push it until they see signs of feedback from the real economy or from financial conditions. are we there yet? we don't know. we are starting to see some signs of that feedback from a risk asset and into rates market. my question for mike who is more of a credit specialist than i will ever be is when is the credit market really going to care? when will be start to see some of that negative feedback from credit indicate that rates have gone high enough and that real rates in particular are high enough to start driving some of that de-risking behavior? >> i think we are pretty close

to that right now. when you look at defaults in the u.s. in the first part of this year, they are the highest as more defaults in the first seven months this year's then since the first seven months of 2010 immediately following the global financial crisis. that tells me that there is underlying credit stress here. you look at the senior loan officer survey and it continues to tighten. credit conditions are not easy and the availability of credit is not easy. all of that is bad for corporate credit. real rates are at nearly 2% and that's not good for corporate credit. the high-yield market in particular has a little bit of an advantage. it actually has locked in lower interest rates for some time and is arguably a higher quality high-yield market than it's ever been. a lot of the junk has been pushed down into the leveraged loan market, middle-market

leverage loans, private credit etc. so we think the stress on the credit side will be more from the floating-rate portion of the market, the levered loans portion of the market, the private credit portion of the market but eventually, small leads large, week leads perceived strong so you should see that bubble up. i think that could happen at any time and it's not a coincidence you have to get through about 4% before you saw a regional bank issue. the next shoe to drop, if it does, will probably stem from the credit side of the economy. katie: to your point on leveraged loans, you have seen defaults there outpaced what you are seeing in the high-yield market. i take your point that it's a higher quality junk bond market then maybe we've seen in the past. when you look at spreads right now at 3.90, does it seem reasonable? do we need to see that get above 400? >> absolutely it needs to get

above 400. the best case for high-yield now is it's a carry market. carrie is pretty good and the yield on high yield is 8.5% so one can make a cogent argument that if you think earnings are accelerating in the economy will do well for the next 6-12 months, i don't think it's an unreasonable argument to say i'm happy to earn carrie even if i lose a couple of points. it's still not bad in terms of a total return perspective. certainly, spreads need to widen. we earn a spread to compensate you for risk and compensate you for uncertainty. uncertainty, is it going up or down? i would argue with probably going up whether that be economic uncertainty or rate uncertainty or default uncertainty or recovery uncertainty. i don't think it falls much from here and even if it does, spreads at 390 basis points, no,

that's getting to the narrow end of any sort of compensation. . even if it declines come you don't have a lot of upside from spreads. you have to go higher from here in the question becomes, how much higher? katie: we only have about a minute left. i will give you the last word -- we have jackson hole next week and we get to hear from jerome powell himself in the fed minutes we got this week, it seemed like the market took that to skew hawkish. when we hear from powell next week, will he try to walk that back? >> no, we think the risk is that he sounds more hawkish. recent fed speak as sounded more balanced. you've heard that balance from powell at the joint press conference and saw in the minutes as well and the balance i'm referring to is a fed that's been more cognizant of rick's that -- of risks that they might over tighten given that was seen progress on inflation.

we don't think powell will sound that balanced. that's primarily because the data flow since the july fomc has been strong. we had a strong retail sales print and financial conditions had been easing further so we think he will reiterate the fact that the job is not done, they cannot declare premature victory, and they will see this through. that will be heard from the market is a slight change in tone. will he generate a major rate selloff like he last year at jackson hole where he was unambiguously hawkish? no, we don't think that's his intention. he will probably sound less balanced and be slightly more hawkish than recent fed rhetoric. katie: we have just a week to wait. it will be exciting and i enjoyed this with both of you. thank you both so much. up next, it the auction block in

debt issuance gets a lift from crane manufacturer, that's next. this is real yield on bloomberg. ♪

katie: we kick things up in europe and it was another day with zero sales to close out the week. that's eight consecutive fridays with no deals and four straight weeks for market wide volume failing to break 5 million euros. the primary market remain subdued in the u.s. as well. the last company to sell high-grade tech this week, boosting their five-day tally over $13 billion. an overhead crane manufacturer

concluding its $500 million sale of five year, high-yield notes thursday and that took the weekly vote -- volume close to $3 billion. >> there is a lot of dispersion that's happening at the corporate credit level. if you take that index level of 375 basis points of oas in the high-yield bond market, that is tight but if you look under the surface, half of that universe is trading below 300. there is significant dispersion between the haves and have-nots and that's true within high-yield between high yield and loans and certainly as you get into the investment grade landscape, it's more resilient. it will be a name of dispersion as we move through the next 12 five and 18 months i think that will be. katie: is adrian from westwood and cesar of credit sites. who are the haves and have-nots

in this market? >> it's a great question and i think a lot of clients are trying to navigate that carefully. some of the haves would be maybe what you would not expect in a fed hiking cycle where you seen the consumer still quite resilient. some of those higher-quality or even not as high quality names that were issuing at the height of the pandemic have performed really quite well or continue to be able to refinance some of that high coupon debt in the new issue market recently. we have also seen energy performing pretty well given that commodity prices are remaining quite supportive. the universe as a whole seems to be a strong have an on the have-nots side of things, telecom, media, health care have definitely come under some serious pressure this year. katie: where are the opportunities right now and what parts of the market would you stay away from? >> on the haves and have-nots

question, it's clear that those companies that became an issue -- they gave out issue heavily in 2020 and 2021 where we saw elevated issuance from the universe did a good job of locking in lower rates at a time when they can actually do that. the yields are now 8.5% on the high-yield universe. use of pretty much in issuance holiday or borrowing holiday in 2022 as there was sticker shock. into this year, you are seeing these companies providing more security on their bonds, more collateral packages that are covenant structures. it's costing them a little bit to do that on the borrowing side but they are getting better lending rates by doing that. those are kind of the haves and the ones that locked in lower rates at a time when they couldn't markets were open because they were concerned about financial conditions dropping rates going up are the haves and have-nots.

the statistic for them as we will see rates going higher and some will actually benefit from this who took cash in the balance sheet because of the uncertainty. i also believe that around the have-nots are those who are the sectors that are in focus, telecom and there is a concern. some of the consumer sectors i think will be in the have-nots sectors. airlines have done so well this year especially in the high-grade space. they are in the haves portion. katie: we have a nice scorecard here. . let's talk levels. if you look at high-yield right now, spreads are sitting around 390. we have economist tripping over themselves to push back their recession calls. against that backdrop, on an index level, is 390 basis went an entry point? >> i was listening to the last segment and i want to wait in there as well. i think we are in better shape for two reasons.

one is the constituency has changed. if you look back to 2018, around 20% of high-yield bonds had security or collateral. now we are running around 50 or 60% of that universe. the quality is potentially a little higher. the recovery rates are potentially a little higher. the other thing is at 390, it can take into account a risk premium that's a long-term risk premium. i certainly believe that what the fed did in 2020 with opening up their balance sheet and buying corporate bonds reduced the long return risk premium. so it's a little bit of a different consideration. i look back and overall history of where we are on spreads, we are about the 40th percentile's and not far from average in height yield bond compensation with default risk. default risk is going up and it doesn't look that attractive but

those 8.5% yield in the equity market that could experience pressure, i agree that is not unattractive. katie: let's talk more about defaults. we had a report out of fitch this week the said the high-yield default rate could be as high as 5% by the end of this year. if you look in july, the rate was only about 2.8%. the reason for them saying that is that -- when you think about a 5% default rate, does that scare you and is that just a natural consequence of higher interest rates? >> a 5% default rate doesn't necessarily scare me. it's also not our big call. we think default will continue to rise this year at around 3% by the end of the year and then 4% by midway through next year.

somewhere between 3-5% is a historic average for high-yield. there are very few average years for default. the range is much wider in terms of default spiking and coming well below average level. as we get to a 5%, you would need to see a true stagflation type of scenario take hold which would also result in the capital markets really shutting down. so far, we've seen a lot of liquidity and to the leverage finance universe. with money being raised for private credit funds and blending, we are not particularly scared by the potential for default but if you look at what current levels are pricing in, it would not day at a near term 5% default level. katie: when you put all of that together come you think about investment grade versus high-yield. which are more -- which are you more comfortable in now? >> we are neutral weight in both

ig and high-yield. we like high-yield for the carry. we have a some what bias onbbb and bb's and that's around treasury yields. if there is the bias for yields to continue to move higher, high yield is where you want to be. katie: not enough time and we have to have you back soon. we appreciate your time. thank you both. still ahead, the final spread, the week ahead, all eyes on jackson hole. this is real yield on bloomberg. ♪

katie: this is bloomberg real yield. time for the final spread, the week ahead coming up, earnings pick up tuesday, macy's, lowe's and dick's sporting goods and wednesday is the first 20 24 gop presidential debate. then you have the fed at jackson

hole thursday and all eyes will be on that summit, particularly on jay powell's speech but for us, that does it for now. this was bloomberg real yield and this is bloomberg. ♪ i don't want you to move.

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of spirit to someone. and you want people to be saved and to have a better life, then you don't stop. the idea that we have saved five million people's lives, it's overwhelming. it's everything. ♪ jon: welcome to bloomberg markets. matt: let's get a quick check on what's going on in the markets at this hour. a mixed picture in terms of stocks. we have the s&p falling about 0.2%. we are seeing the nasdaq fall further so tech stocks are really weighing on the indexes today but the dow jones industrial average is actually up. it's showing some gains. yields are