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sonali: coming up, jay powell leaves the door open for future rate heights and speak to the neutral rate. with yields writing higher, the five-year freely yield at the highest level since 2008. we will begin with the big issue in how investors are trading on the idea of hire for longer. >> is the fed's job to bring inflation down to our 2% goal. 2% is and will remain our inflation target. the process till has a long way to go even with the more favorable recent readings. gdp growth is common above expectations and consumer spending has been robust. we expect the rebalancing to continue.to months of good dater only the beginning of what will take to build confidence that inflation is moving down sustainably toward our goal. getting it down to 2% is expected to require a period of

below trend economic growth monetary restraint should show through fully over time. sustained progress is needed in restrictive monetary policy on a 12 month basis. we are attentive to signs the economy may not be cooling as expected and risk management considerations are to go. we are committed to achieving and sustaining a substantial monetary policy and will remain cautious as we either raise or lower. sonali: joining us now is michael collins and danielle polly. thank you for joining us on a pivotal day. you are seeing the front end of the curve up about 505 on the two-year. when you think about what was said in jackson hole, does it change anything about the way you are thinking about putting

money in the bond market? >> yeah, the markets reaction has been pretty muted. if anything, the markets continue to shift toward the view that the fund rate, whether it goes up anymore from here or not, it's how long it will remain with a five handle and the markets are shifting the intermediate part of the curve closer and closer to that fund rate. that's been our view that the front and was too inverted so the market is starting to pop price and a higher fund rate for longer and that's a possible scenario. sonali: he did hint at the uncertainty around our star but not to the degree the market wanted. when you thing about longer rate inflation, do you think there needs to be movement on that front? >> i wasn't surprised either by his comments. it confirmed a higher for longer environment that we thought we

been in for some time. there was a seachange in markets at the end of last year. persistently high inflation would require more restrictive monetary policy. this era of cheap money which has fueled stocks another equities and it created in interesting and compelling opportunity for credit markets where rates are higher and that has implications. it can benefit investors who can no get decent yield across the curve. sonali: where are you comfortable putting the money to work? there are opportunities but on the other hand, the higher rates could signal more distressed in terms of riskier parts of the market. >> that's absolutely right. where we can be tactical and nimble and allocate across different categories, we have been favoring loans given their floating-rate nature, the increase in base rates and the yield one can get is attractive.

when diversifying across those assets, if the double yield. but you have to be a credit picker you have to avoid the landmines. income is a double edge sword and we are seeing stress in some borrowers making significantly higher interest payments. we expect stress in the market will pick up, defaults will be higher but it is such a large market that if we can avoid those landmines, there should be good opportunities. sonali: the other issue that came up today is the divergence in rates and the divergence in monetary policy across the world. what does that mean for the value of you u.s. treasuries? >> u.s. treasuries look attractive to us by almost all measures. it's versus other bond markets, versus even real risk-free rates or other risk-free rate that aren't affected by the huge amount of treasury supply.

when you strip that out, you're getting paid a huge premium to own long-term treasury notes in the u.s. versus other risk-free assets. i think there is value there in a few run a global bond portfolio, there is a lot of different parents that happened across different central banks and different bond markets in different yield curve shapes. there are ample opportunities to take advantage of that. we might be short japanese government bonds, thinking the 10 year jgb at 65 basis points might have upward pressure given these higher rates around the world. sonali: there is a lot of conversation this week about the pricing when it comes to european bond markets, potentially overvaluation or overbought gilts or the euro. do you have a view on whether that is the case? >> interest rates in the

developed world generally looked really high. you are seeing growth obviously in china really start to crumble. that will affect europe and it is affecting europe which tends to have a more immediate impact but not in the u.s. where we are internally focused. the view is that many places will continue to lag and come down and whether or not inflation follows, i think there opportunities in those other bond markets. whether it's european central bank's or the bank of england, they are probably looking to raise rates to or three more times. sonali: when you think about what was said today in jackson hole, there is a ton of economic data ahead. what are you looking at in particular and how are you factoring in potential future

inflation shocks? >> we are focused on inflation. we have seen commodity prices come down rapidly. they could surprise to the upside in the future and we're focused on shelter given what a large percentage of core that makes up generally outside of inflation, we are watching the labor market. it has remained incredibly tight with significant wage growth and we think that needs to cool off and we will get increasing data. jay powell expressed that his views and monetary policy will continue to be data-dependent but there will generally be tighter financial conditions in the market which then has implications for all types of different credit asset classes. we talked about the public markets but also the private credit market a particular, tighter financial conditions, less lending from banks, this should create an opportunity for credit investors. sonali: how much competition does that set up for credit investors?

you have asset managers pitching 8-12 percent returns. in private markets, they give you that trade off liquidity. do you buy that story over what is publicly traded or do you find the public markets offer compelling opportunities as well? >> i think the public markets offer compelling opportunities and if you can have a blend of both in your portfolio come all the better. i think you've seen issuance generally down in the public markets and some of that is being absorbed by private markets. there are managers that don't have legacy portfolio issues and can really step in where the banks have pulled back and it's not just the case for corporate loans. real estate in particular with commercial lending, banks have provided over 50% of the financing and there is a lot of maturity coming due over the next year that will need to be refinanced. we see attractive private opportunities.

sonali: i want to point to a conversation earlier today with citigroup who weighed in on the bond moves, take a listen. >> one of the things you can see now are record high levels of short positions and futures in 10-year note's and 2-year note. it's like where we were in the equity market at the beginning of the year. we see a lot of shorting a bonds right now. sonali: i want you to weigh in here on some of the futures positioning and how investors are set up for the potential future selloffs. is that the correct direction of travel? >> that's a great contrarian indicator. the positioning tends to go from student body left to student body right. the markets were pricing in a high probability of recession a few months ago and everybody was of long duration at that time. we actually got a little bit short thinking there are way too many fed rate cuts priced in way

too soon. as the curve has backed up a lot and that we are moving back toward what is likely the higher end of the range on interest rates, everybody is no pricing in the soft landing scenario, a benign scenario in rates and credit. the idea is to fade both of those and go the other way and start adding duration. we have been covering our short duration position much more constructively at these levels. we are a little more nervous on credit given the spreads. sonali: if there are sectors or types of credit you are avoiding, what would you sell or avoid touching now? >> it's hard to paint things with a broad brush stroke. you need to look at some of the capital structures that were put in place back in 2018 through 2021. private equity sponsors were not considering this drastic rise in base rates we have seen and they

had to refinance it to this type of market. some of those companies in those vintages will be the most vulnerable across different types of sectors. generally, what we've seen this earnings is some resilience with the consumer. they are doing better than many thought and there may be reasons for that like excess savings not having run out and many of these companies having time to hear their businesses for recessionary businesses. sonali: if you think about the idea bonds versus loans given the attractiveness of a floating rate, do you stick to that trait or do you start to rotate now? >> i love the yield pickup that loans provide today. i am mindful looking top-down at the two markets that the loan quality is a lesser quality market.

high-yield market is abb percentage that at a 10 year high. if you think about covid where you had defaults from investment grade as well as the worstccc defaulting in the market, it's a higher quality market and one which many use the open window to extend their liquidity. in loan land coming out of the interest payments are coming up and ratings are lower, it's a generally lower quality market. not only capital structures put in place with those vintages but if you can pick the right lung, it's a $1.3 trillion market at there were increases in default, that leaves so much of the market that will repay that high income and we don't think it can be ignored actively. sonali: recalibrating our bets across the board on a big day, michael collins and diane polley, thank you for being with us. up next, the auction block as

charles schwab sells fresh debt after reviewing plans to cut costs. this is real yield on bloomberg. ♪

sonali: this is bloomberg real yield. it was a quite weak in the united states but quite active in europe. financials help drive sales of the primary market past one billion euros. one notable sale in the u.s. was tightly bank. charles schwab told 2.3 billion dollars of unsecured notes. it comes the same week and announced job cuts and office closures.

financials around the globe have sold $2 trillion worth of bones in record times. sales are up more than 50% from last year making up the largest share globally. we will get back to jay powell be good mohamed el-erian weighed in on the fed president. >> if the right inflation target is 2% and they want to get there in a credible period of time, then we are not sufficiently restrictive. if the right inflation target is about 2% given the structural changes in the way we will get there is not by announcing the new target but by following a shadow target and once we see it stable, that is the most likely outcome, then we are sufficiently restrictive.

sonali: brian smedley joins us now. if you take a look at what has been said today by fed chair powell, was there anything surprising? he left the door open for future interest rate hikes and you still have a market expecting cuts into next year. >> i don't think chair powell broke any new ground today. he echoed a lot of themes he emphasized in the press conference and in the july meeting. he really put a marker down to indicate the fed is not considering revising up its inflation target. they are focused on 2% and they clearly feel the job is not done and there is more work to do to loosen up the labor market and the fed to feel confident inflation can be brought down to 2% and sustained their going forward. sonali: there is a lot of conversation about the uncertainty around the target. he did not go so far as to say

it should be revised. should it be? >> long-term, it's probably higher than half a percent3+ . that's probably too low and that estimate came down in the postgfc period and has stated 2.5%. the evidence suggests it has risen. as chair powell indicated, the labor market is having a greater impact on inflation today than we saw before the pandemic and that suggests the fed's longer run unemployment rate may be too low and r-star may be too low. sonali: what does that mean for longer rate interest rates? >> is certainly speaks to the higher for longer theme your previous guests were discussing. it suggests the fed will have a long waiting period when they

finish hiking to see the results and get more clarity. one of the challenges the fed has had is the forward guidance on the longer run neutral rate i would suggest has been working at cross purposes with what they are trying to do on short-term interest rates. it has contribute it to a significant inversion of the yield curve. there guidance is contributing to that anchoring of long-term inflation expectations. sonali: there is a lot of conversation about the lag effect and the tightening we still macy. explain what the balance sheet reduction means on top of the rate hikes themselves. >> the fed's addition of duration supply through the roma for the portfolio is contributing to the rise in long-term rates. we just heard from the treasury of the beginning of august that they are beginning the process of several quarters of increasing supply. that will add to what the fed is

doing and we've got a significant budget deficit. the market will be struggling to digest supplies so from the yield curve position standpoint, we will see the seesaw between bear flattening at like today and steepening episodes as we saw earlier in the month. sonali: another view was brought out by pimco. they wrote that recent data would suggest the consumer and the economy can remain surprisingly higher but it means it's not unthinkable to envision the fed not staying -- not only staying on hold announcing a further rate hike next year, do you buy that? >> i think it's possible. there is a good chance in the first quarter that the fed might decide that more work to just a more work needs to be done. maybe they deliver one or two more hikes by the end of this year but it's too early to say

with the first quarter looks like. as we get through the first quarter of next year, we are more likely to see the labor market data rolling over and that will probably be a place where the fed decides to stand down. sonali: there was a conversation this week about the places you've seen the interest rate issues really take hold, the real estate sector, the consumer not quite yet. at what point do you see employment softened materially. >> probably not in the next couple of months but into next year, there's a chance he on employment rate will start to move up. looking at the fed predictions from june, they anticipated the rate to ride to 4% by the end of this year. it's less likely i think that 4% happens in december but if you take them at face value, we are likely to see recessionary conditions next year.

that's the only way you get a percentage point rise in unemployment. sonali: do you think the recession will be the soft landing the fed is hoping for? >> chair powell said they are looking to see some softening in labor market conditions and a higher unappointed rate. the historical evidence suggests we have never seen a rise in the unemployment rate of half a percentage point or more without a recession. the rise in the unemployment right has always been at least two percentage points. it's hard to see and it would be on president for the fed to not only see the unemployment rate go up i think a soft landing is looking unlikely. sonali: and a messy couple of years, we thank you so much. still ahead, the week ahead. jobs day in america next week

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sonali: this is bloomberg really yields. time for the final spread, the week ahead. coming out tuesday ahead of the meeting of gdp wednesday. thursday another round of jobless claims plus the pce deflator we will round out the week friday with the u.s. payrolls report. let's talk more about what that would look like. nonfarm payroll is expected to come in at 165,000 the unemployment rate will be steady at 3.5% and the participation rate will also be steady as well. the average hourly earnings month over month expected to cool slightly at three basis points of 1% higher.

from new york, that does it for me, same time, same place next week and this was bloomberg real yield and this is bloomberg. ♪ my cpa told me i wouldn't qualify for the erc tax refund, so i called innovation refunds. their team of independent tax attorneys will work with your cpa to determine if your company is eligible. [whip sound] take the first step to see if your small business qualifies. so, you've got the power of xfinity at home. take now take it outsidee if with xfinity mobile.

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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. >> welcome to bloomberg markets. i am amber can more and i am alix steel. let's get a quick check on the markets. i should point out the volume is really light. nonetheless, the s&p is eking out a gain of .2%. it does feel like you could find a hawk and a dove within jay powell's speech. we will get to that in a moment. a couple things look at. the dollar index is up. the dollar-yen is at its highest level we've seen so far this year. just keep