katie: from new york city for our audience worldwide, bloomberg real yield starts now.

coming up a pickup and unemployment gives a gift to bond bulls only to see yields reversed after strong ism manufacturing numbers and wall street says the fed can pause from year. the big issue is the fed goldilocks moment. >> the kind of goldilocks scenario the fed wants. >> the goldilocks network. >> the federal reserve it's a good report. >> it's a little bit less wage pressure which is good. >> wages coming down is significant. >> softening wage gains. >> the stubbornly lower unemployment rate is finally taking up. >> working in the direction the fed wanted to go. >> everything looks like it's moving in the right direction. >> this is clearly a labor market rebalancing. >> the labor market can be a slippery slope. >> the fed is looking carefully at data. >> is this the data point the fed needs? >> it's about restrictive policy

for longer, not hire for longer. >> read what the underlying trend is in data. >> follow the labor market. >> the fed is likely to press the pause button on the rate hiking cycle. >> when will inflation be done? katie: joining us now is mary and bartel's and ed alhusanien. let's talk about the price action this morning. the unemployment rate finally came up in the two-year treasury yield goes 10 points lower. we get the ism manufacturing figure and that we are three basis points higher. talk us through that round-trip and what is the right to read from the numbers we got today? >> it's the last friday in august so let's be careful, not a ton of liquidity. the market is trying to find an equilibrium around where the fed will be next year. i think the question around this

year is the probability of micromanaging the possibility of hiking again. that's getting priced in. how much space is there for easing next year? the data in aggregate now doesn't give the fed a lot of room relative to market pricing and we see that market pricing being taken out. katie: when you think about what the market is price for and what we are hearing from the fed, how much distance do you think there is between those two? >> i think everyone is trying to figure out where the fed is and we been trying to figure that out all year. we've had a hard time. the market has had a hard time figuring it out. i still think there is a distance. i think there is a camp that can argue that the fed should pause and stay on hold. there is a camp that they may have to raise rates. don't forget that we are recently in the middle of wage negotiations with significant

higher wages. although we saw a ticked down in wages, does that mean the data going forward if we are getting higher wages and other pockets of the economy, does that mean it has bottomed? i am still suspect. i think rates are moving today. the data is mixed but rates from a technical perspective are extremely oversold. i think that can argue that they can rally. they are holding key technical levels and i'm still in the camp that we have not peaked in rates. i still think there is a risk at some point whether it's later this year or next year that the fed may have to raise one more time. katie: i'm so happy you brought up the strikes so let's talk more about that. within this data, we learned the film industry in terms of payrolls are like 17000 and you look at trucking payrolls, they fell 37,000.

how noisy is the data we got today? how noisy to get him we think of the impact of the strikes and those wage negotiations? >> that's why you want to use moving averages. when you look at any data any data point is not a direction. you want to smooth things out to really get a trend. in most of the data we have, i don't think we have very clear picture which is why the market is having a hard time trying to actually find where the fed is. jay powell was very clear and i think this was an important issue at jackson hole last year. he said he would keep at it and this jackson hole, he closed that the fed will keep at it. i think that was a very strong signal that they are data-dependent and they are not afraid to continue to raise rates if they need to. katie: you heard mary and bring up the point that rates look oversold.

there is an interesting debate going on on that debate, let's take a listen. >> continue treasury is a screaming bot. i think we continue yields vector 3% and i don't think it happens this year i think that will be a first half of 2024 event. >> i think the screaming by is the two-year. there you have the best combination of yields and as we see in the market reaction, it brings changes to this kind of normalization. that is the partisan yield curve where you will have the best risk reward in terms of owning duration. katie: we've got that view. where is the screaming by in your minds? >> i'm tempted to split the difference and say the intermediate part of the curve

is pretty good. it gets you a little away from some of the debate we are having at the front end of the curve in terms of how much hiking is left to do. how much easing will the fed have room to do next year? it could be part of the curve. we think the curve will steepen out and that benefits the intermediate part most aggressively. most of the screening this year -- screaming this year has come from bond investors. clearly, the curve has not found equilibrium yet. katie: let's talk a little more about the intermediate part of the curve. is it safe to call it the belly? >> yes. katie: what's going to drive it? is that a bet on rate hikes in the next five years or so? >> there are three pathways to a

steeper curve that would benefit the intermediate part of the curve. one is a recession. the fed will be under pressure to cut rates in that environment. also inflation coming down and that's been the story of this year. the key story has been inflation has come down much faster than the fed anticipated. the third part of the story is a steeper curve led by long ends moving higher. that damages the 10 and 30 year part of the curve and that's the economy repricing to a higher neutral and that's the economy repricing to an environment where we can stay at higher rates and generate growth. that's been the story of this year. the intermediate part of the curve captures the best risk reward. between those three scenarios katie: you did make the point that rates look oversold. when you look across the curve, where do you see the most dislocation in the most opportunity?

>> i would agree with the two speakers. we like the front end in the backend and the backend we don't like the belly. we would balance between the short and and the long and. - end. what concerns me about fixed income is when we look at sentiment surveys and help fund managers say they are positioned in fixed income especially relative to equities, we have been overweight in fixed income and underweight in equities. my experience has been when you deal with sentiment of that kind of extreme, it has to flip-flop. the risk is that something negative happens in fixed income and something positive happens on the equity side. i still think we will have a lot of volatility in fixed income. if you look at the move on the volatility income -- index for fixed income, it remains

elevated more than what we see in the equity market. let's not forget the banks and the unrealized losses they have. if rates continue to go up, that will be problematic. something that we call relative ratios so we will take a stock price and look at it relative to the s&p 500. citibank, a money center bank, just recently traded at an all-time relative new low, below where it was in 2008. that is just shocking. i think the banks will play a key and pivotal role in where we are going in fixed income markets eventually. katie: on the topic of the banks, you think about the small and midsize lenders. one of the big problems as they will have to pay up for deposits. you look at money market funds hitting a fresh record, nearly

$5.6 trillion in the week just past. if we continue to see that flow of cash and it remains to be seen whether it's coming out of deposits or simply a safe haven trade, what is the pressure on the banks? >> in my mind, the key pressure right now is their capacity to raise additional capital. we see issuance go up and i think the good news is, we have a lot of capacity to absorb that issuance in investment grade capital markets banks are going to likely shrink their loan books, raise additional capital and be quite conservative going into 2024. that's exactly the mode we want them in. one of the surprises this year has been the economy in some ways has accelerated despite the fact that lending conditions have tightened at the bank level. that tells me that some of the bank lending is being intermediated away from them,

credit etc. the longer-term story for them is how we maintain a business model where we are being eaten away katie: from competitors. katie:a really tricky existential moment for these banks. thank you both so much. up next, the auction block, lbmh helps close out august in style. that's coming up next and this is real yield on bloomberg. ♪ when you automate sales tax with avalara, you don't have to worry about things like changing tax rates or filing returns. avalarahhh ahhh

explore endless design possibilities. to find your personal style. endless hardie® siding colors. textures and styles.

it's possible. with james hardie™. katie: this is bloomberg real yield. time for the auction block which is completely dead in the u.s. this week.

there is plenty of action in europe where we saw around 35 billion euros of sales highlighted by names like l volkswagen,bmh and caterpillar. looking ahead to sales for september and the u.s., $120 billion will be issued, much more than the $78 billion sold last september. checking out the forecast for high-yield and leverage loans, we should see a pickup of more than 15 billion dollars which is much more compared to pandemic years and way more than 2019 which had roughly a $60 billion step -- $60 billion total. >> corporate credit looks way too rich. i don't see the benefit of owning high-yield or investment corporate credit. spreads are so tight, you are not compensated for any uncertainty.

companies need to refinance. that is happening all the time in the loan market has rates flowing but the high-yield market has companies coming to market and issuing new debt. unless their earnings are accelerating to a higher degree than rates are going up, there will be a lot of pain and high-yield. katie: joining us now, we have colin martin and tomtezzoris joining me both onset on a summer friday which is a treat. when you look at spreads, i'm looking at 120 on investment grade and 370 on junk bond spreads, is that too rich against this economic backdrop? >> it is too rich and i share the same concerns but we are more positive on investment grade. there was a handful of indicators coming into this year that suggest spreads should be higher and it just hasn't happened.

it shouldn't be too surprising with stocks up so much and risk assets up in the soft landing idea. if you have an inverted yield curve in banks tightening credit standards and if you have spreads solo, 3.7%, we don't think it makes too much sense given how high yields are or across the globe, why take so much risk when you can get 5.5%. with investment-grade issuers katie: or with cash. colin mention performance and i like to look at etf's and if you look at popular tickers, they are sitting on total returns of 7%, 6%. they have seen an enormous outflows all year and as a category, you have seen high-yield bond etf's shed billions of dollars. why aren't the flows following performance? is this a valuation story? >> like you saw on the equity market over the last two decades, you saw the deep public

credit markets generally shrinking relative to the private credit market. you are seeing outflows from the broadleaf traded public indicators like high-yield etf's but credit liquidity is flowing in from private credit direct lenders. that is helping to stem some of the distress that's building. i would echo the comments that simply put, we are too tight on the ig site even if there is no recession by maybe 10-20 basis points. if the recession probably 8100 basis points. -- 80-100 basis points. even if there is no recession, we are probably 150 basis points on the high-yield side. katie: you brought up some specific levels. do you have any levels in mind that would be closer to fair value? >> higher than they are now. if we look at the past 10 or 15

years, how high spreads got, it is general market volatility. it's in the seven or 8% range. it doesn't just get us there now but the market dynamics have changed and you mentioned the privates and the size of the market has shrunk and there is a lot of things out there so we think it is probably higher than it is now when we wouldn't be surprised if high-yield got to 5.5 or 6% in the next 12 months. katie: it feels a long way away. let's talk more about private credit. it feels like it is eating everything. >> no one really knows how large this market is, even the amount of assets under management, there is a lot of ambiguity there. we can say it's large and it's probably rivaling in size the high-yield market itself and potentially rivaling the high-yield market plus the bank loan space depending how much there is in the pipeline coming

from pension funds that could continue to increase allocations. we are talking around $2 trillion in size, something on the order of $400 billion of dry powder. that appears to be the case and that will not keep spreads from widening but that is certainly adequate to keep spreads anchored where they are while stress is not apparent. katie: should i be scared? >> i don't think so for now. things look ok and if you look at defaults, they have been picking up in their proper -- probably picking up in the private market but in the public markets they are but they are not surging higher. it is a gradual increase back to long-term averages. as time passes, it's the higher for longer and the impact of these higher rates and what that means on these companies bottom lines. if you cut loans -- if you look at loans, the floating-rate coupons have seen their annual

interest expense more than double in the past 12 months. how can you sustain that for the next 12 months in an environment where corporate profits are slowing? we think that's a big risk right now. >> what does this mean for bank business models? we were just discussing the absorption of funds going into money market funds may be coming from bank deposits. then you have private credit booming to make matters trickier. what does this mean for the sector and the debt? >> for the banks, it means their business model continues to be one that will be under pressure from regulatory attack. it means there will be more of an emphasis on fee-based income finds or penalties for their clients, things like that as opposed to a lending pipeline. the lending pipeline will very be much lend to securitized type of model.

that means it will favor the larger lenders and scale and size and we don't think that changes. we think regional banks will continue to be under regulatory pressure and competitive pressure from all different angles. i think that's the case we are looking at and i don't think that's particular surprising given what we've seen so far. katie: we could keep this conversation going for an hour but i only have two minutes left. i want to talk more about levels before i let you go. there is an interesting quotation from cameron dawson on television yesterday talking about if we saw 10 year yields go back to 3% and there have been calls for that, that would be an acceleration for credit which i thought was interesting. what would be more painful for the corporate credit market at this juncture? would be 10 year yield going to three or 5%?

>> that's a good way of framing it. i would say 5% because then you have that all in cost and an environment we think is slow. if the economy slows and inflation remain sticky, that's a problem for corporations. if we go down to 3% on the 10 year treasury, the fed would be cutting in that instance and not for good reasons. both would be relatively bad but our main theme and what we tell our clients is focusing on quality regardless of the outcome. katie: we have about 30 seconds, what's scarier 3% or 5%? >> i would agree with 5% but when you are an investor in a ccc credit, your short yield volatility. if you get big jump source jet big drops, you would see spreads why now for multiple reasons and that illustrates that problem. 5% is the place i would be worried about. katie: this treasury market has been defined by volatility.

it sounds like a fun dynamic. we have to leave it there but i really enjoyed this. still ahead, is the final spread, the week ahead, fed speak picking up again. this is really yield on bloomberg. ♪ wake up, achievers. you're making the most of every hour of your life. except the hours that you're sleeping. so why do we leave so much untapped potential on the table? this is a next level bed, for a next level you. my circadian rhythm is kicking your circadian rhythms butt! it's not a competition. i know, but i'm still winning! so, it is a competition. save 50% on the sleep number limited edition smart bed. plus, free home delivery when you add a base. shop now only at sleep number.

(sirens) [due at target in 5!] copy that. make a hard left down the alley. network's got you covered. [please confirm requesting back-up.] -changing route. -go. roadblock ahead. ...back up, back up... reverse! reverse! next level moments, we're 30 seconds out. need the next level network. [north corridor, hurry!] -coming through! -or 3, let's go. the network more businesses choose. transplant received. at&t business.

katie: this is bloomberg real yield. time for the final spread, the week ahead with markets closing on monday for labor day and durable goods and factory orders coming on tuesday ahead of the feds beige book out on wednesday. then we have fed speak picking up midweek and then we get another round of jobless claims. it's probably the parade of fed speak will probably want to keep your eye on. we've had so much economic data this week and wall street divided on what this means for the fed, both how much higher

and for how long we stay at those high levels. that's a question for next week because from new york, that does it for us, same time, same place next week. this is bloomberg real yield and this is bloomberg. ♪ ♪ discover the magnolia home james hardie collection. available now in siding colors, styles and textures. curated by joanna gaines. hi, i'm jason and i've lost 202 pounds on golo. so the first time i ever seen a golo advertisement, styles and textures.

i said, "yeah, whatever. there's no way this works like this." and threw it to the side. a couple weeks later, i seen it again after getting not so pleasant news from my physician. i was 424 pounds, and my doctor was recommending weight loss surgery. to avoid the surgery, i had to make a change. so i decided to go with golo and it's changed my life. when i first started golo and taking release, my cravings, they went away. and i was so surprised. you feel that your body is working and functioning the way it should be and you feel energized. golo has improved my life in so many ways. i'm able to stand and actually make dinner. i'm able to clean my house. i'm able to do just simple tasks that a lot of people call simple, but when you're extremely heavy they're not so simple. golo is real and when you take release and follow the plan, it works. it's an amazing thing

when you show generosity 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. >> welcome to bloomberg markets. >> the s&p 500 isn't going anywhere, but that belies what's taken place the last few hours. there is a bifurcation in the chip story. crude oil firmly above $85 per barrel. the dollar is bid once again today. the two-year