>> i'm katie greifeld. bloomberg real yield starts right now. katie: coming up, the higher for

longer message since yield soaring to the highest levels in over a decade and prompts default fears. how high and for how long? >> the rates will be higher for longer. >> higher for longer. >> higher for longer. >> this was a hawkish pause. >> pretty much bracing in the fed scenario. >> a soft landing is more likely. >> they say gdp will still be sluggish. >> there are some real questions that need to be answered. we all have forecasts and most likely, they are all wrong. >> we don't have the fed taking any steps of action until march 2024. >> the fed will cut rates even if the inflation rate doesn't get to 2%. >> 2024i think there is real scope for rate cuts to overwhelm

and yields to push much lower. >> the fed needs to be cautious about when they want to cut. >> take the fed message with skepticism. katie: joining us now we have a cohead of u.s. rates strategy at jp morgan and morgan stanley director of research. a few of the conversation has shifted over whether they will go again to how long this federal reserve could stay on hold. after what we heard from jerome powell this week, how long do you think we will stay at that eventually terminal rate? guest: thank you for having me. it has been our view at jp morgan that we think the fed is likely done tightening. that is been our view for some time. the risk is to one more hike but it's they are on hold, they're likely on hold for the next year or so. don't envision the fed lowering rates until the third quarter of

2024. we do see growth decelerating after strongly above trend growth to start the year through the middle of the year. against the backdrop of an economy that is likely to move below trend into next year but inflation should remain elevated. we think that is on hold for an extended time although it's unlikely the market will get this clear for a few months. with the dots still indicating one more hike is likely, we think it will take the data panning out over the next few months to get certain about this. katie: how much stock deep into the idea that we could see a cut not because of a downturn or recession but because they want to get back to neutral? guest: it is our view that as inflation eases over the next year, real policy rates will be getting more restrictive so at some point when the fed is comfortable, the inflation is getting back poster to its target, it will leave room to ease if anything to prevent

rates from becoming more prescriptive. think the pathway back to neutral will be relatively slow because even if we see growth slowing, it's hard for us to pick out nonlinearity amongst consumers or corporate's or even state and local governments to think bigger downturn is coming. katie: where do you fall on the duration argument? >> we are constructive on duration. our research view is also that the fed is done. the dot plots of indicated another hike, but we think the fed is done. i think the point of some disagreement with jay powell for me with be that we are more optimistic on the deflationary

process perhaps compared to the market. thus far, how it has unfolded is very much in line with our expectation and if this process continues to be the case, i think that there will be in conjunction with slowing of the employment scenario as well, we think there will be a reasonable chance that and of q1, we will see the fed cutting. once again, fed cutting not to stimulate the economy, but beginning the process of gradually moving to a more normalized monetary policy. katie: what gives you confidence in that path of deflation? you've seen enter -- energy prices significantly, you are starting to see that filter through breakeven rates. what makes you confident that we

will continue to see inflation come down? guest: a number of things. first, the fed thinks and core pce terms. some of the more volatile energy prices likely will affect more of the headline inflation. i think the more important thing is that we expect the growth spurt that we saw in the third quarter comes from some of the one-off events and we see a considerable amount of economic headwinds facing the economy. clearly the w -- uaw strike perhaps expanding a bit. there is a high likelihood of a government shutdown. that means that a meaningful slowing is ahead and if you look at the median expectation from the dot plot the fed, to get to 3.7% court pce but the end of the year, between now and the

end of the year we would need to see him month on month core pce numbers 33 basis points. our number for the next data point is 14 basis points. we need to see the progress that has been happening in core pce has to be undone and revert into different trajectory with something -- given the economic environment, given the economic cloud that are out there, pick that's we are very confident about our expectation about the deflationary process. katie: he brought up the government shutdown potentially. it's interesting going through your research, you put out a note in the past few weeks saying that if you think about that set up now heading into the potential shutdown, fed policy is pretty tight.

if we do see the government shutdown, how might that play out? guest: it's interesting that in each of the three government shutdowns with seen in 95, 96, 2013, and 2018, treasury yields have trended lower and in each of those instances, the fed was easing or pivoting or dovish where right now we are in an environment where the fed is leaning toward potentially another hike. it is not wanting to sell any optionality. we think the impact on treasury yield is likely to be much more neutral this time around unless there is a sharp shift in risk sentiment. the thing that concerns us is an acute awareness and concern on fiscal spending and treasury supply. to the extent that has manifested itself with an increase in term premium over the last couple of months and we heard chair powell talk about that, that might pressure treasury yields higher if we have a shutdown. katie: as jay walked out, we are

looking at a pretty tight stance of monetary policy. 10-year gilts 4.42%. guest: it depends. what really matters is how big of a shutdown? how long will the shutdown last? if it's a matter of a couple of weeks perhaps it will not be clear to the markets or the overall economy but the longer it lasts it will be worse. as research analysts, there may be a situation depending on which departments get shut down, we may run into the data releases that come out that may not come out. we have seen that happen in the past.

the world is very dependent on policy outcomes not having data that would add to the data hays. katie: a lot to potentially get rid about. -- get worried about. we saw an interesting morning the bank of international settlements this week saying that basically you look at the leverage buildup of short positions, is big enough it could cause financial vulnerability should we see some sort of margin spiral. when you think about how big the basis trade has become and these risks, are you as worried as vis? guest: over the medium term, the increase in these positions could bring with it a reason to be concerned about financial instability but you need a lever or something to

pull in order for that to be a massive source of concern. to me, the growth in the basis trade is natural. we talked about how with the treasury market moving gradually away from price insensitive investors like the fed and u.s. commercial banks and the foreign community, that price-sensitive investors need to pick up the slack. with treasury supply growing, with volumes increasing, a higher likelihood that that is close to if not done with its tightening cycle leaving more room for relative value trading, it's not surprising to me that the basis trade is picked up. it seems smaller than 2020 and the treasury market is bigger. it is something to watch, but not right now to be 100% concerned about. katie: we appreciate your time. have a great weekend. up next, the auction block.

there was a flurry of sales ahead of the fed decision this week. that's next, this is real yield on bloomberg. ♪ ♪ (captivating music) ♪ (♪♪) (♪♪) (♪♪) (♪♪) (♪♪)

the first law of thermodynamics states that energy cannot be created or destroyed. (♪♪) but it can be passed on to the next generation. (♪♪)

katie: time now for the auction block where we had a quiet and to the week. we did have a flurry of action ahead of the fed. $16 billion in sales for the week highlighted by companies such as hyundai and ubs. we also got strong demand in a

deal to fund the partial leveraged buyout of the company. it is the largest lbo financing package since twitter. it follows the trend of recent hybrid offerings from companies like oaks wagon that also saw a strong order book. we caught up with -- about risk. guest: in high yields -- that could continue for the next 6-9 months and that is been going to open up a risk that we will see the cost of capital harder and harder they cannot even get a new loan or refinance an existing loan, we begin to run the risk that we will see more companies defaulting. let's bring in the head of ubs strategy.

we feel like this bogeyman that we haven't really seen materialized -- but anything about how high real rates are. how high jerome powell would like them to stay high and for how long, could we see a pickup? guest: it is been really interesting. tactically, we've gotten a little more -- less bearish. we have seen stability in the key metrics that we think are the leading edge of default. three i would highlight. one is bankruptcy filings it seemed to stabilize albeit at high levels. credit default moderated .3%. leverage loans has been an area of focus for us and reviewers. you've seen ratings migration stabilize in august then september to date. i think really it's a question of time horizon. we are feeling a little bit more

surprised candidly at the resilience of some of the default and stress metrics. longer-term as you allude to come at the biggest risk certainly after the fed is the potential for no landing, higher for longer. certainly or concern when you go to 2024 about the potential scenarios for default rates in the u.s.. katie: it's refreshing to hear that you are a little less bearish. when you look at the fundamentals of the corporate credit market, are you on the same page or are you feeling more worried? guest: i would say we are feeling more worried and i would caveat that with the back story that we are feeling quite good about 2023 in the corporate credit market. we started constructively this year and we have been slowly rationing down our risk tolerance more toward -- we think that looking ahead to headwinds in 2024 could start to grow quite considerably especially if the fed is on hold

at this elevated level for an extended time. into the back half of the year. that is not our basecase case expectation, we think the fed will be able to start cutting sooner than the market is anticipating, but we think that's because we expect some deceleration in sectors that have done well like consumer discretionary for the past 12 months as the broader consumer starts to slow down a bit. katie: it's interesting to hear you say that. i want to talk globally because when we think about very high rates and how high they might stay, the point is been made any times that a lot of companies got ahead of this, they have refinanced and i want to bring this to you because we had an interesting conversation at the global credit form -- foreign in london -- global credit forum in london whose -- with someone

who made the point that if you have floating rate debt, that transmission mechanism is pretty immediate. if you have fixed rate debt, you're going to have to refinance your bonds. when you think about the differences between u.s. corporate and european corporate's, do you agree that that sentiment? guest: i think it depends on how for you look out. we think in general that liquidity cash on balance sheets and fundamentals will be resilient in europe through the end of the year. as you look into that large 2025 maturity wall, a lot of investors are focused and more concerned as you look into next year. we have shown about one under $20 billion in debt coming due for european high-yield companies over the next several years. i think the short answer is, it depends on timeframe. in the short run, we are not overly concerned. long-term with the ecb staying at close to 4%, it will deftly

present some problems but a lot of that is contingent on the economic environment. katie: when we think about the other component of what he was saying, it's interesting to hear the call on floating-rate debt because i look at etf's all the time. the products the track senior loans have seen many months of inflows. his floating-rate debt the way to go versus fixed-rate? katie: i would say looking ahead we have -- guest: we have a preference of it straight over floating-rate. floating-rate is where you would onto position for most of 2023 and all of 2022 as well but we do think that will start to shift as we see some of the refinancing needs and this elevated interest-rate environment starting to impede floating-rate issuers. when we look at the leverage loan market, fundamentally it's lower quality than the high-yield bond market.

we think that going forward, preference should be for fixed over floating. katie: is that your read at all but the juice is all out of the floating-rate trade? guest: a lot depends on your economic outlook. the short answer is yes. we think there's a slowdown coming, spreads are tight. we think right level for those is more like 135, 140 near-term. yields are harder to argue. attractiveness of ig getting close to the high 5% level or 6% high-yield now this week through yesterday closer to in some cases 9%. we are saying that in the flow data and you are seeing buyers

command most notably pension -- insurance companies in the u.s. in the long-duration or longer part of the ig curve. katie: you have been surprised at the resilience of some of these corporate. are you willing to risk or go out for credit risk again? guest: we ultimately think that if you are looking for your viewer that has a total return or a typical bond fund that the attractiveness of interest rates offsets the risk of spread widening. short answer is for somebody who in most cases owns a total return bond fund, we would look to go out the curve. we think the curve will flatten as the spread curve as the interest-rate curve steepen's. we are generally thinking that lower rates and lower u.s. we'll -- yields will largely offset or more than offset any spread widening. katie: where are you feeling on

the risk appetites spectrum? guest: i would say we are feeling much more neutral. we have some parts of the market we are favoring, we like a barbell strategy. we think the high-yield market still looks very attractive a risk reward perspective and we still like high-yield energy as well. katie: great post and it. we appreciate both of your time. still ahead, the final spread predict the week ahead features a wide range of economic data. this is real yield on bloomberg.

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katie: this is bloomberg real yield.

time for the final spread, the week ahead coming up. we'll have a slew of economic data ranging from durable goods to pce to home sales to personal spending. we will also hear from central leaders such as jay powell and christine lagarde. let's talk about the estimates for pce. if the fed preferred measure of inflation. you are expected to see core pce drop as headline continues to heat up. that mirrors what we saw in cpi expected see the same thing with pce. the diversions we see between headline and core pce maybe it will row if we continue to see energy prices continue to climb. what that means for the federal reserve, we will see. from new york, that does it for us. this was bloomberg real yield and this is bloomberg. ♪

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