caroline: i'm sonali basak and bloomberg real yield starts right now.

sonali: coming up, countdown to the fed. days away from the next u.s. century bank decision and in the walk up, short and yields on the rise. a flurry of issuance underwriters looking to get ahead of the big rate decision but we begin with all the big issues all eyes on -- >> the september meeting. the outcome of the september meeting. >> i think the fed will do what we expect it to do. pause and indicate they are data dependent. >> the fed has to rethink their done hiking. that's -- they have to maintain the policy stance. >> think they will be inclined to deliver a hawkish pause. >> the trend of inflation is moving slower. >> core inflation moving in the

way they want. >> most central banks probably done hiking. >> i think the fed is going to be responsive to the labor backdrop. >> i think we may be at the end of rate hikes. sonali: joining us now are jerome schneider and maureen o'connor . someone who manages along the curve, i want to ask you about the rates this week because we have had a 13 basis point move from the tops to the bottom and we are off those highs, but we are close to them. how drastically our expectations changing moving into the end of the year? jerome: i think for the most part there's a couple of factors that plaintiff volatility we are seeing. we are coming off the summer with people trying to digest risk. we have had corporate issue is coming to the market which has to be digested. we are also dealing with recalibration of expectations. not only of inflation, but where

that that destination of terminal rate might be. that means the market is more data sensitive than the federal reserve in terms of digesting. one of the interesting things is the fact that the market has been more or less going about the baseline risk to the expectations market but also detail risk, profitability of a recession -- probability of a recession. where is he a range of moving to higher rates as effective of the fed got its data which is been moving towards cover zone, not in their comfort zone and it is reflection that the market might reject too soft landing that may not come as quickly as the federal reserve might like. sonali: it is important to think of the expectations for corporations. 33 in the economy. we work with so many issuers, how much risk some of the surface? maureen: i think much like in the investor community, when do we see peak rates?

i think that is the question a lot of treacherous cfo level folks are trying to get their arms around. is now the time to lever up your balance sheet, refinancing debt, funding acquisitions, digging into at these elevated rate levels? i think you're starting to see around the edges where companies are willing to extend duration a bit across the curve, willing to lean in and recognize the higher for longer narrative is probably with us for some time. 2.5% 10 year treasury yield is something of the past. sonali: it is interesting to see the midyear expectations for rate cuts next year. ddp corporate issuers are having different expectations about rates a lowering from here? maureen: i think you saw it last

year. last year were in the middle of a rate shock and a narrative was this transitory. this will not allies. -- not last. he saw the duration of issuance get shorter on the curve. our was asking -- borrowers active scene bank level debt and in an effort to breach of themselves to a lower funding environment and in the future and now you start to see the narrative shift a bit. the market is pricing in cuts for next year, i think the overarching thesis that might not play out. their be normalization in the curve. i think in terms of term level interest rates, we might see a bit of relief, i do not think anyone forecasting lower rate environment the course the next 12 months. sonali: how does the expectation

change in economic data come in? the fed is thinking about their calculus. jerome: i think we have to be focused on the fed is probably not data dependent in the immediate senses. there probably articulated in a hawkish pause, suggesting they remain vigilant but not act. expect an additional rate hike vote i think we're getting to the top and of the rate hiking policy sequence which means we have to get comfortable with the higher rates for longer. the second part of the sequences is how quickly inflation comes back down to the landing zone the fed wants of the 2% rate. we do think core inflation, especially the more favored metrics powell likes, do not see that happening as quickly. one of the reasons we anticipate what we would called a soft

ish landing, inflation figures probably remain stickier than central banks would like which means the 100 basis point cut the forecasted next year might not come to fruition the course of 2024 and 2025. that friction is something investors can benefit from but at the same time recognize that yields a more attractive across the curve compared to where we were 12 months ago given the calibration of rates. sonali: next week is pretty much a doozy. the fed, boj. to get the story of the u.s., how complicated does it make your job? jerome: it makes it complicated because we are waiting geopolitical factors, other factors from central banks. this week read out only considering the hawkish policy come from the fed, but dovish hike that happened at the ecb.

boj in play and we are dealing with various factors of globalization and deflation which might have longer-term effects within the economic sequencing. what i think is important is to recognize the fact that there will be need for little bit of higher degrees of flexibility within portfolios we manage, but also issuers perspective, investors perspective to understand these addition period might not be as smooth as people expect. there could be aftershocks to liquidity, market conditions, pricing of credit that happened as we digest the economic cycle that perhaps is not necessarily a soft landing as people might expect. these are a myriad of factors in addition to other factors later in 2024, the election, which come into play that might weigh all markets. sonali: there's the idea of front running, key events, the election, the fed decision. at what point does the actual data become a bigger concern?

how much are you concerned about liquidity? maureen: see the credit markets from the markets almost never felt as liquid as they do now. brad a high point in the appetite for -- we are at a high point of the appetite of others. you see dips of liquidity in summer months. but in terms of the available cash and technical landscape, it is basically never felt better. we had a robust primary are blank the last couple of weeks but it is going to taper off into the end of the year. i did not expect the narrative to change. the election is on our radar. it is not getting much airplay in my market. it is so far off. as we get closer we are going to start to see a bit of noise around that. but to the point to how she was positioned around that, companies want to get in front of it. he saw that this month.

key inflation data this week and critical fed meeting next week. the month was frontloaded. love it quite a couple of weeks the end of the month as we navigate those releases. sonali: it is amazing how much nervousness has ticked up in conversation. and think about the idea, data becoming much harder than expected, the idea the soft landing might not come as soft as you would think, in that scenario, where do you go? jerome: we think about it is being more defensive. we reflect their is the markets at this point. we also paint a more cautionary tone. excess reserves removed from the system. we are on a path but have to be focused on liquidity. this is probably never a better time in more than a decade to have higher amounts of liquidity for defensive purposes, corporate perspective, not

really worry about the impact to performance. the drive from higher cash balances, drag from additional liquidity is not as consequential. it is beneficial at this point in time. if you are a corporate cfo, you think about the defensive mechanism and liquidity profile which favors higher cash balances, not just today but the course of the next one to two years. i think the focal point is given the uncertainty of it is a soft landing or otherwise, detail risk or something that is undervalued meaning desperate is he to be had in more defensive at this point, given the optimistic outlook the market is possessing right now. sonali: thanks to jerome schneider and maureen o'connor . this is real yield. ♪

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sonali: it is time for the auction block where the september surge carrying on the. we start with investment like bank of america, nissan. all flock to sell debt ahead of 10 weeks inflation data and ahead of the fed next week. within $34 billion was sold. the action just as heavy in high yield, 15 sales supply of almost $10 billion. an update on one of the most anticipated deals in leveraged finance this year, group of banks led by goldman and jp morgan launch a 4.4 million dollar debt sale to fund the

purchase of a majority stake in worldpay. >> we see downside for credit spreads, we are forecasting writers present a year and to break out of this more narrow range we think we need to see more material weakness in the consumer. sonali: joining us now is axonic peter cecchini and mike contopoulos richard bernstein . i need to note where you think things are going to start to crack as things they hire for longer. mike: you look at investment-grade corporate bond spreads and their only about 119 basis points the investment-grade market is rising in the best of times. at the end of the day, the risk behind the investment-grade market are not huge. most investment grade companies have turned out their debt.

many of these companies generate a ton of cash flow. high quality companies. the problem is the spread already reflects that and you can pick up similar yield without taking the credit risk. from our perspective, it is not that we expect spreads to widen dramatically to 180 basis points, it is more a function of you can create structures that you take no credit risk and get a similar type of yield so why not do that. the other thing that is concerning is if you look at the vix, the move, they tend to be very good leading indicators of where spreads are going. move and fix very low at the moment. what happens if those accelerate for any reason? you come off about them that is easy to see that happen. spray should widen if that were to happen. you did not have much upside and that is a real concern. sonali: you are even talking about this in the safer parts of the market, when you think about

the high yield sector, do you have concerns about where these trade today? peter: i think that was well said. nick is about risk-adjusted returns. you're not getting it in ig or high for that matter. when you talk about high yield spreads about 400. that does not square with our outlook at least what we are seeing on the four bases with the economy. the vox has been almost useless given his competition is affected by seven or eight technology names that have done nothing but rally on an ai narrative. rates remain fairly will in and it tends to be a little bit of a better indicator on the four bases. there is yield curve volatility and we have had a yield curve

that has been inverted and inverted deeply for some time. i think that is speaking to the ford outlook better than the vix given the composition issues with the s&p 500. it would not think risk-adjusted returns are good high-yield so i agree we can find better returns in structure credit. we tend to play more in the top of cap stack. high single-digit yields from is no credit risk in the market so we are focused their. sonali: i want to read this quote from apollo'writing in and the balance sheet with higher debt, lower earnings and lower savings first hit by fit hikes -- fed hikes with for consumers and affirms. there are still questions even about the consumer part of the story. even some of the lower quality balance sheets.

where is the canary in the coal mine that perhaps the market is not yet factoring in risk could be? mike: your weakest companies go first. weakest companies lead to stronger companies. you're already starting to see defaults -- it just has not to be the large names. you look at the falls in u.s. through august, you got more defaults through august than any time since 2010. much of that risk resides in private credit and leverage floating-rate a portion of the market. many of these deals underwritten at a time where -- was zero and the yields, coupons they were paying rescue the 4% range. the other thing that was going on back in 2020 and 2021 was you

were underwriting this debt with incredibly rosy outlooks on where growth is going to be. all the power was in the bar was hands -- borrowers hands. that is a recipe for disaster. i think that is the canary in the coal mine. the private credit space, vintage deals for 2020 one, leveraged loans, floating-rate debt. that is what you need to pay attention to.sonali: another comedy from bridgewater found is speaking at the milken institution summit earlier this week saying i did not want to own the dead. bonds and of those things early cash as i think good. where does cash stand in the equation? peter: michael articulated it well. i think cash is a reasonable

asset class at the moment. when we talk about cash substitutes like t-bills or even two-year treasuries, get above 5%, when i compare that to equity yield or equity dividend yield, or other things, risk-adjusted return standpoint it is attractive given our outlook. there is fragility here. route dispersion -- wild dispersion and there's lots leverage their. the dispersion applies to the u.s. consumer. alexa's been made of how strong the consumer it has been and much of it is because the fiscal stimulus and unprecedented

amount in form. we are seeing for some borrowers, a bit of dispersion and weakness so for lower fico borrowers, we are seeing delicacies tick up at. a rapid pace sonali: we think leverage, 15 years since the lehman collapse. leverage at higher rates is still at an all-time high. thanks for drawing out all the risk underneath the surface. still ahead, the final spread. a busy week for central banks and investors. the fed decision and a look at markets as s&p is a session low. this is bloomberg. ♪

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sonali: it is time for the final spread come of the week ahead to. union general assembly monday and ukraine president expected to meet with president biden at the white house during the week. tuesday we get eurozone cpi data

. wednesday the fed rate decision followed by the ble decision on thursday per year followed by initial jobless claims in u.s. and u.s. existing home sales. friday boj rate decision. a closer look at the fed decision we can take a look at the function on the bloomberg terminal because as the market awaits the fed decision, there is mostly an expectation for a hold. market is pricing in more than 30% chance of a rate hike november and still expecting cuts for the middle of next year. that makes the dot plot so important with deflation still above the 2% target, the question of how much the data supports the hawkish hold, the idea has potential to take speed. i want to get a quick check on the markets because we are watching at a session hold low two year yield at 5.02 off of the highest but 10 year yield also about two basis points moving higher. we're looking at s&p at a

session low at about 1.1% lower on the day after green on the screen throughout the week. that doesn't for new york for us. more at markets up next show the same time, same place next week. this is bloomberg. ♪

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>> i'm jon erlichman. welcome to bloomberg markets. matt: i met matt miller. we are at session lows on this friday afternoon looking at the s&p 500 now down one point 2%. 4450 is the level there. we see investors settling bonds as well. the yield on the 10 year is rising three basis points to 43164.

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