>> from new york city for our viewers worldwide, i am sure and "bloomberg real yield" starts now.

coming up yields go for a ride. seeing some ground to end the week. and that's because mixed with official saying the market is tightening rapidly. inflation still running hot but how hot is too hot for the fed to push rates higher? we begin with the big issue, the market gets ahead of the set. >> the bond market is tightening financial conditions and that is doing the work for the fed. >> europe was doing the fed's job. >> we have been watching the rising bond yields the last few weeks and tighter financial conditions so we think that is doing some of the work for the fed. >> the fed is probably done raising interest rates because they realize the bond market has been recently doing all the heavy lifting. >> don't worry, the fed will have to do less because the market will do more. it does not want to work that easily.

sonali: we are coming off a week with drastic moves in the bond market. the 10-year alone with sawing the last few days, 20 basis points for more. what does that mean for the direction of travel? we have seen an orderly rise forward in yields, upward. in recent weeks, we tested those highs. have surpassed those highs fairly recently. the move lower in yields today supports the trend but if we were to see a leg higher, all of a sudden you have a new trend beginning. i want to lift up the board to show how painful this move higher has been for investors. because people pouring money into the bond market thinking these yields were appropriate have lost a lot of money. the last three years alone have been negative for bond investors in this is the 10 year alone. coming off the worst year since 1999. for investors last year, the trend is continuing now meaningfully into the end of this year. joining us is barry knapp and

brian smedley. barry, when we start to think about what we have seen just this week alone, and what we have heard from fed officials in terms of the id of the market is doing the work for the fed, do you believe that? barry: i would frame it differently. we had -- there are three ways to diss advert the curve and make no mistake, the curve needs to be diss inverted by 2024 for the banking system to absorb the multifamily realistic projects that need to be ruled, the supply of credit to small businesses to flow in 2024, so of those three ways we could disembark the curve, we were on the benign path which was a potential full steepening with the fed cuts rates because inflation is coming down, not because employment weakens. but what began at the beginning of august was the most insidious

way for the car to dozen bird which is a bear steepening come along rates rising, potentially through 5% on tens and 30's, which would leave a lot of carnage in its wake and securities portfolios for one and that was well underway in august. we thought the fed understood the risks of exacerbating that but they made what i would consider their third communication blunder to the course of the tightening cycle. the first coming in september 2022, the second coming at the monetary policy report in early march of this year, which was quickly followed by bank collapses and again this time. the fed exacerbated this move, the market did not do the fed's work, the fed exacerbated the supply demand imbalance that existed in the treasury because of unsustainable debts. so i don't really think -- i would frame it as the fed made a blunder here, which they tried

to partially reverse this week. sonali: i want to point to another view in the market because formal federal reserve bank st. louis president james bullard on the sidelines of the meetings said the risk underpriced in marsh -- markets is disinflation stalls ourselves altogether and core pce inflation goes up again and if that happens, the kid -- committee will contemplate going to 6% or 6.5%. what is that risk? brian: i think that is an important risk to bear in mind. i would differ a little bit in the interpretation of the bond meal -- bond yield move. partly due to the fact oil prices have come off peak levels midyear. we have been choppy this week up about five dollars per barrel wti but on balance, oil prices moved higher and in a world where the fed needs to bring inflation back to target, any move upward in commodity prices that could pass through to inflation and inflation expectations needs to be met with higher real yields. i think that is part of the

story. real gdp growth surprised to the upside for the last couple quarters. this talk the markets are doing the fed's work for it is reminiscent of what we heard in march when we had tightening in credit conditions or expectation in the turmoil of banks around skillet -- silica and value. if you look at real gdp growth in the six months that passed, we have completed about 4% real gdp growth and strong growth in that period. sonali: if you look at the treasury market as a haven, do you think that starts to complicate this idea yields could go higher? brian: i think so. obviously the situation in israel in the middle east is tenuous. let me say our deepest him for these are with the people of israel of course after this terrorist attack and millions of lives are disrupted with the war but there is a significant risk of disruption in oil supplies that could meaningfully impact the trajectory of the economy and monetary policy. sonali: jim beyonca a beyonca

research online pointing out this idea that those sharp moves in the 30 year only happen when something is up. what is up? do think these moves will continue to be exacerbated either because of macro reasons or because of treasury market liquidity concerns? barry: it is the supply demand imbalance. i don't really recall, and i have been at this 39 years, two serious events where excess supply really caused a backup in long-term rates to absorb that supply. the first began january 4 22 anyone when the republicans lost the senate. we went from expecting no new stimulus to an additional .9 chilean dollars. if you take the 30 year real rate or tip sealed, part of the curve least impacted by the fed's balance sheet or rate policy, that backed up some 60 basis points. the same magnitude of move occurred after the treasury

announced they would sell $500 billion more the second half of this year than a specter. to mere that was -- to me that was clearly driven by supply and i think fed policy exacerbated that imbalance. the fact they have backed away from another rate hike in november is a parcel pivot that does provide some cushion against instability in the back end of the market but really does come down to supply. i spoke a bit with jim recently and in broad agreement that things have changed around the supply demand dynamics. sonali: speaking of supply, what about demand? when we look at what happened with the auction yesterday, there are concerns about dealers having to step up the way they did. how does that bode as more supply continues to hit the market? brian: it is a challenge for the market to digest a great deal of bond supply and barry hit on the fact that the estimates from treasury have increased. sometimes we can look at that

and say that is a shock to supply demand dynamics in the bond market but there is also an economic impact. the reason bond supply from the treasury is increasing to such a degree is because we have an enormous fiscal deficit. that deficit, the saving of the public sector is transferred into a positive balance of saving in the private sector and is furthering the excess demand story in the real economy. we've seen strong consumer spending, strong business outlooks and so as we hear quarterly earnings coming up, so far starting with jp morgan, a rosy outlook. sonali: jp morgan's ceo bringing up the issue of quantitative tightening again. he has repeatedly raised this risk. when you think about this, how much tighter cannot create financial conditions in the wake of the balance sheet of the fed stripping out some of that liquidity? barry: a couple issues that come to mind off the things jamie

said. quantitative tightening will eventually run into a problem in terms of total bank reserves. those have been relatively stable around $3.1 trillion to $3.2 trillion or so. it is estimated by some include my former colleague at barclays that around $2.7 trillion of bank liquidity will start to tighten in the fed may find themselves in a position of having to at least restructure qt, maybe take the reinvestment of mortgage pay downs and put it in treasury bills to keep that abundant reserves environment in place. the other thing jamie got out, which is a much bigger issue for the banking system in broader credit creation is the excess capitol -- capital pushed by the administration and vice chair for supervision are. i did a lot of work at this as equity strategist in the 50's --

1950's and 2010, the 14 to thousand 18. , vanke rv never got above 10%. in that environment, credit creation tends to be fairly tepid. that bleeds into rod or capital formation and overall aggregate growth. so jamie is not just talking about his share price, he is talking about aggregating economic activity from too much credit in the system. lost in michele bowman's speech, a marrakech was a push back on that. so you have a little battle underway within the fomc where bowman does not want to increase the capital requirements but barr does. i think jamie is onto something because stocks are uninvestable if these proposals go through. they will perform like they did through most of the 2000 when as barclays at -- equity strategist i was underweight in, but it will bleed over in new growth in credit. >> to the last thought here, the

big question in the market is the yield curve. how are you reading some of these moves at the long end relative to the short end? brian: the interesting move in the last week was the flooding of the curve notwithstanding last week's auction, but over the course of the last several months, the story has been very steep being in the yield curve and i think barry talked a little bit about the expectation the fed is not going to hike november, november 1. that potentially tees up an interesting decision in december and i think that will be dependent on how financial conditions evolve between november and december but i think what we will be watching, whether an atypical scenario where the fed is on pause for an extended period of time, the fives and 30's curve steepen's. where there is a rally in the belly of the curve as the market prices hit the next easing cycle and the long end but lags the move. i think it will be interesting this time to see if we see a bear steepening where yields

move higher led by the long and which has been the trend of late. sonali: so market long and search for good news. that is brian smedley and barry knapp. thank you very much for your time. up next, the auction block, a sweet deal arrives amid the stress over rising yields. this is real yield on bloomberg. ♪

♪ sonali: i am sonali basak and this is "bloomberg real yield." it is time for the auction block where i want to touch on rates once again. i mentioned the high-profile 30 or auction was awarded at the highest yield since 2007. the primary dealer award was also the highest of more than

year. looking at u.s. investment grade , jm's tap the market to finance acquisition of hostess brands. the week on the whole had over $13 billion in sales. cruising to high-yield, unit of norwegian cruise lines sold nearly $809 to refinance debt. the whole market priced about $2 million this week. on credit, greg peters this week warning borrowing is only good to get more expensive from here. >> the cheaper credit has rolled off, that will be replaced with more expensive terms, so if you think about how many companies have really utilized the zero and negative rate environment to their benefit, starts to go away. i think credit, it really matters where you are in credit and the more leverage you are and more susceptible you are. sonali: joining us now is when he sees our and colleen cut us.

when we look at the caution that is seeping into the markets, things have held up steady until now. at what point do bond investors get more materially worried about losses and -- in riskier parts of the market? >> that is a great question because we have seen credit spreads hang in much better than we would have anticipated and we actually recommend our clients take a little bit of a short-term caution stand. we have that on really through the fed meeting on november 1, also coinciding with the treasury refunding announcement and will probably be when we start to hear more on the u.s. budget and potential government shutdown front as well. so i think in the near term we could see pressure on spread as we have seen so much rates and no equity market volatility. the reality of the borrowing costs are starting to become more front and center as people look ahead to 2024. sonali: if you think about how

markets have been behaving, intense volatility, the safest markets in the world, when does that rollover and impact high-yield and investment grade markets? >> thanks for having me. on the high-yield side, obviously, any investment grade side, volatility is a concern. none of the market like -- markets like volatility. the markets have held pretty well so far. what we are continuing to look for as we go out is signs of weakness we think could flow through to the economics and fundamentals of the companies as we've discussed in prior shows. we are heading into this environment with strong balance sheets but chatter about the consumer has been strong in driving performance, potentially see weakness, could flow through into the numbers. we are going to continue to look for that, and at that point, if you have that in volatility combined, you can see more impact on the markets. sonali: what does this mean for

new issuance? you are starting to see market come back. we are starting to see the core of wall street get excited about this idea of new issues. do you think some of this volatility can throw things off course and set off investor demand for new deals? colleen: on the high-yield side, we have seen in the last eight months or so with deals coming to market, the market is receptive. deals are getting done for companies that the market is well familiar with, training has been flat to sideways, so i think -- and i think we will continue to see that environment as we go through war -- toward the end of the year. markets are by no means lows but people are selective. everybody is just trying to find those points where we might start to see weakness that could flow through. sonali: winnie, if you think about the credit risks available in the market today, do you think it is more prudent at this point to take on credit risk or duration risk? winnie: we have been more

thoroughly embracing adding duration risk to portfolios. we have been recommending a barbell strategy for much of the year, telling investors they should start to extend duration as long as long and yields are above 4%. we are well above that at this point. credit risk has outperformed magnificently this year and even last year as well even though we did see concerns around recession and -- rising. we think the duration play feels like a more attractive play on a long-term basis over the course of 2024. sonali: if you think about the entry points, at what point are you getting reported for taking on credit risk? winnie: i do actually like still a lot of the high-yield market. i think you have to navigate triple d's carefully as

valuations are not particularly cheap, especially in the u.s. market. perhaps in the euro market it is a little different. double bees, especially relevant to triple b valuations look pretty attractive on a duration adjusted yield basis. and we note a lot of double b capital structures are in solid shape with fundamental metrics pre-much in line with or approaching investment grade levels. the single be universe, we have seen a number of issuers demonstrate there is investor appetite for new deals and the ability to refinance. that leaves us pretty constructive on the three to five your segment of the single be capital structures. sonali: if you think about the point he made earlier, this idea you have not yet seen a lot of pain, this idea here the maturity wells are still coming up in high-yield, bankruptcies are taking higher yet you are still not hitting levels that were reminding you of prior economic downturns.

how much are investors really willing to take on risk knowing the worst of the bankruptcy cycle is perhaps not over and is maturity rollovers who mean higher interest rates? colleen: i will bifurcate my answer into the two markets we focus on the lever side, high-yield versus leverage loans. the high-yield market is just a better average quality than it has been through prior cycles. the default rates are continuing to remain ready reasonable and even when you look at the distressed rate and figure those turning into defaults, we think it is pretty manageable, even on the interest coverage. if you look through the metrics over four times basically across the market is a much better position than say the last crisis. so i think on the high-yield side, we are a deep credit research shock so we will always say you have to do your work and pick your spots and understand

your companies but i think we are pretty comfortable with the risks we see on the high-yield side. the leverage loan market, that is a place where we think more defaults will occur and the credit fundamentals, particularly on the lower end of the leverage loan market, the smaller end of the market, continues to be a space where we think is relatively risky. we pick our spots but that is how we view those two markets at the moment. sonali: that is when he sees our -- winnie sees our and colleen, -- colleen cunniffe . the fed is ramping up speak. this is bloomberg on real yield. ♪ if you're trying to get a view of the whole organizational financial health and you're trying to do that through multiple systems, that makes it very, very cumbersome.

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this is "bloomberg real yield." it is time for the final spread, the week ahead. monday, philadelphia fed president patrick harker is kicking out the fed speak and we will talk about that and a second. tuesday, bank of america and goldman sachs reporting earnings followed by u.s. retail sales. wednesday morning, to round out the big bank before tech earnings begin. and we have all of that fed speak ahead of us starting with patrick parker, philadelphia fed president, and jerome powell ending the week on thursday really big moment of the week speaking at the economic club of new york with david westin. we will also hear from many others throughout the week. from new york to london including the new york fed president speaking at queens college in london and christopher waller also speaking in london. that would be the same day wednesday as the fed releases its beige book wednesday and that is on top of the banker names and economic news we will get for a very busy week for rates coming off of an already

very volatile week for interest rates. from new york, that does it from us, same time and same place next week. this was "bloomberg real yield" and this is bloomberg. ♪ the first time you made a sale online with godaddy was also the first time you heard of a town named dinosaur, colorado. we just got an order from dinosaur, colorado. start an easy to build, powerful website for free with a partner that always puts you first. start for free at godaddy.com sales tax automatically. avalarahhhhhh what if tax rates change? ahhhhhh filing sales tax returns? ahhhhhh business license guidance? ahhhhhh -cross-border sales? -ahhhhhh -item classification? -ahhhhhh does it connect with acc...? ahhhhhh ahhhhhh ahhhhhh you're probably not easily persuaded to switch mobile providers for your business.hh

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>> welcome to bloomberg markets. >> session lows -- mystical look at stocks -- let's take a look at the stocks. even though we have seen yields which he debated. look at the 10 year, buying going on there. he's you -- 10 year yield