dani: bloomberg real yield starts right now.

coming up, i know that red hot jobs report to send yields flying. rates rise as volatility in the credit market starts to wake up. we begin with the big issue, a blowout print. >> today's data on jobs. >> a higher number than we were expecting. >> the incredible strength of the labor market. >> it is a much stronger labor market. >> a very tight labor market. >> resilience within the labor market. >> the fed will not welcome this report. >> the fed wants the labor market to slow. >> rates will have to stay higher for longer. >> the fe'higher for longer narrative. >> push back on the table for a hike the first of november. >> when you fall behind at the

beginning of an inflation cycle, you pay the price we get to the last mile. >> the cost to the paid for a much higher interest rate environment. katie: we have bank of america's -- i will start with you because nerves were frayed in the jobs market and the bond market and we got this job sprint. what stops this celloff? >> i think it is really one of two things, it is either we see more pressure on the equity market, driving more this flow back into the risk-free asset which is treasuries or we need to see a more substantial turn in the data that gives the market more confidence the fed is going to be cut think eventually. it is one of those two things that i think today's they separate really puts us in more squarely in the view that it is probably more upside to come for rates near term.

katie: i am taking a look at your nose and you write, this pain should pass. evidence suggests the move up in longer yields is nearing an end. where is the ceiling? have we seen it? >> i think we are nearing the end. i think in the post-pandemic environment, the economy has proven to be much more resilient and much more inflationary than we thought. i think as a result the fed and markets are grappling to figure out where it fair value. what is the new post-pandemic level of use? the fed have us r-star of 2.5. the market thinks the r-star must be up in the 4% range. value restored in fixed income market. the market is trending almost as if it is momentum driven but there is fundamental value that

should -- delirium yields are a we think we are to a point where people need to look at fixed income and saying nearly 5% yields on 10 year, on the 30 year, these are attractive yields and equilibrium yield post-pandemic will not be 2x what it was pre-pandemic. katie: has your base assumption of what are our status, the eagle to be the bond market actually is, has that changed the past couple of months? meghan: i think that mentality is what is because a lot of folks this the real money community to be early, long and wrong in this view. one of the most surprising things we have seen alongside the selloff, it is been pretty wirly. we see liquidity go down quite well. speaking with our trading desk in london, relief lows have been generally more normal. -- real

ly flows have been generally more normal. despite this pressure high your ungrace, we are not seen that yet. despite the fact that rates are very far above what the fed is telling us, economists are telling us with the nugent rate can said, i think there's more pressure because he come if you have the capitulation for investors byte rates for the mentality for months. katie: maybe no one is hitting the panic button yet per we heard from san francisco fed president mary daly earlier in the week who found a silver lining in the bond selloff we are seeing. >> the bond market has tightened considerably. 36 basis points since september so that is equivalent to about a rate hike. the need to do tightening additionally is not there. katie: when you think about what

this means for the fed, when you think about what we have seen at the long end, but we have seen in real yields, how much tightening because it done for the central bank? i think the fed is up to recently may have first been frustrated how longer yields moved. maybe next tightening cycle they will think twice about having sharply inverted dots in the dot plot. typically 10 year treasury yield rises and matches the fed fund rate in tightening cycle. this time it is not happened in part because the fed has been telling us they will have tightened drastically to fight inflation and they will ease in 2024 and 2025. in september they diminish the easing, they raise the trajectory of the fed funds rate in the next couple of years. the markets are struggling to figure out where is fair value because they do not know if the

fed knows were fair value is. i would suggest five-year forward o.i.s. 4.40 is very high in real space and suggest fixed income investors are going to do better prospectively than we have done recently. meghan makes a good point. the capping how your of the market told you there is not a fundamental set a confidence about valuation. i think at this point we were staring 5% pretty much on your screen, you start to think real yields are the highest they have been since 19 -- late 1990's. value has been restored. trading this market like momentum market you're probably going to miss the turn. katie: i want to talk a little bit more about duration because when you think about rates all

at near 5%, what does the risk reward of going out the curve right now look like? rates could go higher but if we drop, what pay off we looking at? rj: the skew is favorable. we manage hundreds of billions of dollars in money market funds. we are happy with the performance of those funds for our clients but from a perspective standpoint, looking forward 12 months, if you're adding to a fund that is about 5.5% duration, you're introducing much greater upside the you've had in the fixed income market over many years. for a long time we were dealing with a low income fixed income market. the income has been restored. with the income and prospect of duration, you have some upside in years to come. how we settle down this yet -- clearly not pretty at today's job report was red-hot.

the economy is doing well. it is going to slow down in coming quarters and we believe the consumer will be tapped out of excess saving and the cognitive impact of all of these massive rate increase is going to have significant impacts on the economy. it is had a huge impact on housing. the ford ability index is the lowest in the history of the index. these things are ultimately going to exert restraint of the economy, the laws of economic have not been revoked, they have been my -- monied by the pandemic. katie: let's talk a little bit more about duration here. i caught up with -- earlier in the week on that question. >> i like duration risk a bit better today. i still like the credit we on the. i like the duration risk given the sell off and where yields

are today. katie: people look at yields and they say bonds are losing so much money for you this year but you think about 10 year or 30 year at 5%, do you lock that in now? meghan: i am really not so sure because if we are thinking about extending duration further out the curve, you're also thinking about almost levering up on that duration risk as well. we have more certainty on right now is the direction of the curve overall. i think from path of least resistance perspective, we need to be looking at steeper curves. that can help us a device demand for the out of the curve if we do indeed see rates begin to look more attractive versus front and rates. if i were to pick up point on the curve to bite right now, it would be more towards the frontend of the curve particularly in real yields were received front breakevens sub 2% right now on an inflation basis.

the steepener positions beginning to look more favorable and attractive, particularly when we look at degree of cuts price for next year. i was on here a couple weeks ago talking about the potential to see more of these cuts come out of the market pricing and we have seen that. at this point, it is making the curve steepen position look more attractive to us. katie: we take a look at the 210 spread is remarkable recent evening. -- resteepening. when you think about what is going to drive that curve back to positive territory, are you thinking about a bowl or continued bear steepening? meghan: i think what can come first and really what the pain trade is going to be to the real money community is discontinued bear steepening -- this

continued bear steepening. this waiver duration supplied we have coming to the market because the size of deficits. the fed is still reducing the size of its balance sheet. we've only just begun to see that wave of supply come through because so much previously financed from front end supply, treasury bills will we have seen demand from investors. absorbing that duration supply, the coupon supply is going to be a lot harder which means we could see more room for this bear steepening to persist but once real yields do break something which we think will happen, that steepening will move back to a bull steepening and thankfully it is the same trade for either. katie: when you think about the yield curve, how deeply inverted we have been, how less important we are going, what you think it is back to positive territory and when? meghan: --

rj: i think for a while in the bro money community we felt he steepening would be solved in a bullish fashion, that has not what has happened here. the resilience of the economy has been far stronger than anyone expected. i did not believe there was a single economist today who predicted the nonfarm payroll blowout north of 300000 and yet it happened. economic strength is causing re-strengthen when there a small the fed balance sheet and more market-making than they used to be. you have had big moves. i think the curve is at this point un and 13 because people are reevaluating the treasury -- un and verging because people are reevaluating. it is been a bear steepening, not a bullish one. 50 months out i think we see the opposite develop where the

economy -- 15 months out i think we see the opposite develop. we saw the stress in the banking system. i still believe we are in appointed now were yields presenting some value. is it the bottom of the selloff? it is hard to call that. katie: really enjoy this conversation. up next, the auction block where it is called in october at least with issue is with yields on the rise. details next. this is real yield on bloomberg. ♪

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katie: this is bloomberg real yield. the surge in yields causing a slowdown in issuance. in europe managed only around 12 billion euros of sales sentiment soured on the top rated names like hotel giant accor ventured into the tough market conditions. is u.s. weekly volume finishing around $9 billion well below consensus estimates. only a few notable names -- the market. rising yields and spreads presently shut down the borrowers as barber stayed on the sidelines waiting for com to return. -- borrowers stayed on the sidelines waiting for the calm to return. >> companies leverage up when the rates were cheap and the

bill is now coming due. companies and most companies are refinancing their debt so they are refinancing their debt at a much higher interest rate environment. katie: in this chart, the higher cost for high yields companies already taking hold and joining me to discuss . i want to start with you. we think about the cost of capital going higher and higher. if i want to sell bonds right now, what am i to do? >> thank you for having me back. i think there's a lot of companies that have sat on the sidelines and are paying a price for having done so. talking with capital markets guy earlier this week who told me he had five different companies that had ignored his advice and said we're going to wait until rates drop and it is now a costly error on their part if you look between the last three

weeks and in five-year and the increase in sprays, you're talking 80 basis point move. i think companies will wait and will find it will get worse as spreads likely to widen. katie: if spreads continue to widen here, credit spreads were going nowhere, we see some signs of life. is that doable? -- durable? >> we have a bifurcated view in terms of tactical and strategic. topically we think -- you had this huge move in yields and credit spreads held in will also we take a cautious approach from adding risk at this level but if we see spreads move back come with think the movie be an attractive level looking forward

as yields are very attractive and we are expecting a more constructive 2024 relative to what we have been anticipating given how much strength we are seeing in the economy and we even think the fed might have the opportunity to bring rates lower as they focus on the road policy rate versus the nominal policy rate. katie: is that your view as well? you think about the white and eight we start to see in the past couple of weeks, does that look like an opportunity or do you think there is more to come? ken: we think there's more to come. we have all been waiting patiently a number of high-yield investors waiting patiently, looking at the tea leaves and things like the senior loan service survey would imply they should be higher than they are so this is a bit of a catch-up. a lot of companies got the financing they needed done in 2020 and 2020 one which were

back to back record years. nominal yields new significantly higher and that is helped as well. if you look at it, companies at a number of different industries have been operating at record profit margins so they have had extra cash. to not worry so much but i think that is going to change here. katie: when you think about refinancing risk, potential maturity walls. we look at the 2024 and beyond, how real are the risk? ken: the answer for 2024 is the risk is not enormous because there is very small portion of the market maturing in 2024. 2025 it is a different story, almost 10% . companies do not wait in the high-yield market until the last minute until they refinance. they typically refinance what you in advance so by this time we get to the back end of 2024,

companies are going to start chipping away at the 25 maturities. katie: how painful will that be? a lot of these companies, especially in high-yield market, cannot wait into the last minute? they will refinance into much higher rates. what does that mean? zachary: this were to be challenging for fundamentals and interest coverage perspective. even for these high-yield companies, it is still elevated historically. a lot of these companies were able to extend maturities at much lower levels. when we think about the timing of having to address these maturities that are predominantly in 2025 and 2026 we expect yields to move lower from where they are today, around the middle of next year, so i think there's going to be an opportunity there and more flexibility on corporate balance sheets to sort of observe and do liability management exercises over the course of the next year that allows the impact to

certainly have a draw deterioration on fundamentals but not something we think will have top of the market together. -- topple the market altogether. katie: so much as been about the rate markets in equity and corporate credit. is this going to be a macro driven market going forward? ken: we have our eye on pretty substantial risk. cpi next week. fomc date is huge and the federal government may going to shut down again mid november with the house speaker losing his position so we do think there is progress for now but we're expecting that to create opportunities for a longer-term perspective in both investment great and credit going into 2024. katie: we have to have you back both soon for a longer conversation. we really appreciate your time on this friday. have a great weekend. still ahead, the final spread.

the week ahead. we discussed next. this is real yield on bloomberg. ♪ (sfx: stone wheel crafting) ♪ the biggest ideas inspire new ones. 30 years ago, state street created an etf that inspired the world to invest differently. it still does. what can you do with spy? ♪ 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. the final spread. monday the u.s. bond market close for the holiday and on tuesday fed speak continues with bostick, daly. u.s. pbi on wednesday. friday bank earnings kick off with citi, jp morgan, and wells fargo. let's talk about cpi we think about the big moving events in bond market, it is these numbers right here. you're expected to see it cool across the board from headline to core. month-over-month core expected to stay at the same level but

still may be a little bit of relief there. from new york, that doesn't do for us. this is bloomberg real yield and this is bloomberg. ♪

jon: i'm jon erlichman. welcome to "bloomberg markets". matt: and i'm matt miller. the jobs blowout this morning drove equity markets down and yields higher, but we have had a turnaround. equity markets are gaining and we are at a session high on the s&p. 1.2% the gain. take a look at the 10-year yield, 4.78. earlier we shot up over 4.88. hitting fresh highs