template was quicker than putting on work pants? but what if you could keep up with projects without chasing other humans down? what if? how humans work actually worked for humans operate at peak human smartsheet. hey hey corporate types. would you stop calling each other rock stars? you're a rock star. you are a rock star. no more calling your coworkers rock stars. look, it's great that you use workday to transform your business, but it still doesn't make you a rock star. so unless you work with an actual rock star. hi, i'm oswald. hello, oswald. and you are a rock star. i wasn't gonna say it. from new york city for our viewers worldwide, i'm sonali basak in bloomberg. real yield starts right now.

coming up, a large bid comes back into short term bonds as the fed looks closer to ending its rate hiking cycle. and that bid gets bigger as the job market shows broad signs of softening and traders are starting to price in rate cuts. earlier a slowing pace over the last few months. >> the payrolls report was picture-perfect for the fed, foreign data and bond market. >> you are now starting to see labor symmetric to other parts of the economy. >> consistent with a soft landing for the economy. >> it's consistent with a

softening labor market. >> the momentum and sentiment will be hard to push back against. >> this takes the wind out of the sales who wanted to go further. >> this will be by markets and the economy. >> this is a chart that will make you dizzy because if you look at the 10-year yield that had the critical level of more than 5% just less than 10 days ago, october 23, and since then you have seen a more than 50 basis point move downward and yields, 54 basis points. we are looking at a 4.53% on the 10-year today and it's a massive change in expectations for a market that had been expecting higher for longer and is now repricing. how drastically? if you flip up the board and look at rate expectations into next year, if the market -- you have the market starting to price in cuts earlier in the year. you're seeing the fed swap start to price in as early as may or

june to a greater degree the expectation for cuts from the fed. the problem is how tight our financial conditions really and is the job over for the fed? we caught up with former new york fed president bill dudley, who thinks the markets and powell could be done. bill: he feels confident the fed has done a lot, policy is restrictive. he think by talking to the markets in a supportive way, stocks rally and that's loosening financial conditions. sonali: joining us now. let's start with you on the notion that bill dudley had brought forward, because what he is trying to say is the more the market, the fed, thinks it's

over, the harder it is for the fed, which is trying to tightening financial conditions more, so how does this play out through the rest of the year and into 2024? >> good afternoon. great to be here. thank you. i think recently there's been a huge amount of focus on financial conditions tightening, but what we have to remember is while that is important and chair powell will introduce that in the fomc statement, ultimately what will drive their behavior and price action and policy will be the labor market and inflation's trajectory. financial conditions obviously matter. they have been tightening and now they have unwound a little bit of that, but i do not want investors to think that is the only driver of what is going to lead powell to either ease or hike from here. sonali: what did you think of the idea that there was a broad enough cooling in the jobs report to suggest the market is softening enough? >> i do believe that investors

are taking it that the fed is going to stay on pause in december and we are going into year end. you have to remember there's a lot of shorts that have been positioned in the tenure, and if you are going and -- in the 10 year, and if you are going into the end of the year, you're going to start covering those shorts if you think the fed is on pause, so i think part of the violent movie pointed out earlier in the program in terms of rates falling, part of that i think is also short covering, so i think we need to also put part of that move into perspective. sonali: i am glad you brought that up because can rates at this point move higher just as fast as they have come down? gargi: i think a lot of it will depend -- actually, last week was important. let's see how the market responds to the supply coming into the market because before this week the driver of long end

interest rates, the steepening that took place, was very much driven by the concerns around deficit. it was that move we saw. so now when we look at next week's options and the treasury market, the threes, tens and bonds, let's see how the market responds. if we look at the options since august, all of them have tailed meaningfully. the takedown for non-dealers has been trending lower. so i think suddenly yields can be range bound from 4.5% to 5%. i don't think this is the beginning of a vast move lower, especially for the long end. i think where there's tremendous value actually is the belly of the curve. the three to seven year part of the treasury curve is where we think investors should be positioned. sonali: if you look at what janet yellen had said, i want to pull up a quote. she said having regular and predictable maturities across the spectrum, long, intermediate and short, is critical to have

deep liquid markets for u.s. treasuries, which is critical to lowering our costs over time. at present, the duration is about the longest it has been in decades. this idea has been a massive dispute in the market. a billionaire said he's surprised the treasury secretary has chosen to exclude the $8 trillion on the fed balance sheet it is paying overnight in repo rates. when you think about the dispute that happening, and he's saying it does not make sense to exclude that from your calculations, marianne, how do you make sense of the long end of the curve when there's this massive frustration in the market from large investors that they did not finance earlier at the longer end? do people start to get in longer duration at any point soon safely? mary ann: at this point, it is should have, could have, would have. they did not so that time has passed. you really have got to move past that but i think part of the discussion that's not happening

in terms of supply is who is a potential buyer, and that potential buyer is the individual investor. at least at our firm, we are seeing our clients want to lock in interest rates. now, we are talking about layering and you want to be across the curve. we think over time the risk is that rates will go back up again, but i think that we are not talking about the individual investor that has not had income from the fixed income market for 16 years and, if you are moving into retirement or in retirement, locking in a rate around 5% is very attractive, and of course, we are seeing this a lot at our firm, so i'm not as concerned about supply because i think we have a very large buyer in the market that no one is talking about. sonali: how much do you think the u.s. household can step up and how much do you think about

the leveraged hedge funds? gargi: i think we all know that the household has to be that marginal buyer now. i would argue that there are a lot more price -- that they are a lot more price-sensitive than other buyers have been, whether foreign institutions or central banks. i think the level of yields matter. the longest part you go is the seven year point. by the five-year. by something like a ieia treasury bond etf. i think that is the longest to go. and, yes, households can step in, the let's from ever their very site -- in, but let's

remember they are very price-sensitive. sonali: there has been dispute about whether you by steepeners at this point and where you buy in. how are you thinking about that dynamic? mary ann: the yield curve has steepened in a way we are not used to. we are use to it steepening by the front end of the curve going down and we steepened at the back end. i am in the camp that the traditional economic models that we are using are not working as well as they used to. and the reason for that is the amount of stimulus that the fed has had going all the way back to the great financial crisis to covid to now also having fiscal stimulus coming into the market, and that's going to start in 2024 through 2026. so i think trying to analyze the fixed income market, trying to analyze the equity market, has been very challenging because of the amount of monetary stimulus.

so i am in the camp that we are going to enter 2024 on a positive economic note. we are starting to get early signs that the consumer is slowing but they are not stopping so that means economic growth is probably going to continue, so i would agree that the back end of the curve can stay pretty choppy between 4.5% and 5%, but if we are getting softer - softer economic data, you will expect the fed to cut. that is how i would analyze the move on yield curve. sonali: we have to leave it there but thanks to you. got to have some positivity to end the week. next is the auction block. ford returns to the debt markets after getting a blue-chip upgrade. this is real yield on bloomberg. ♪

sonali: i am sonali basak and this is bloomberg's real yield. it is time for the auction block. volume nearly doubled projections. you had organizations like hyundai and humana coming to market. more than $30 billion for weekly issuance in the investment-grade sector. you also had ford tap the market for the first time since returning to blue-chip status. it borrowed $2.8 billion. when looking at forecasts, the debt issue is expected to continue. banks project up to $100 billion a blue-chip sales. speaking of credit earlier this week, there are still risks to the market. >> credit investors should be asking themselves are you

compensated by buying the passive index according to the risk you are taking or might you be taking more risk in particular, especially in high yield but also in ig, where the spread at the moment is so high simply because the base rate has gone up? i would expect to see as the economy slows down, which is what the fed is trying to achieve, that you should expect credits weds -- credit spreads to widen. sonali: joining us, matt and gene. if you hear what he was saying and the issuance we are seeing, investment-grade is still getting some love, but at this point in the cycle is still showing some signs of softening as shown by the job market, but what does that mean for the investment appetite for anything riskier than investment grade? matt: it's a good question and i think he asked do you want to own the passive index? i think the answer is no, but

are there opportunities in that universe worth investing? i think absolutely there are. it's absolutely true that dispersion will be increasing as we move into 2024 based on the higher cost of capital and at least deceleration in the economy similar to what we have seen in this morning's labor market report, but if you look across the high-yield market, there's huge dispersion by credit quality with double b companies, the higher end of high-yield, having interest coverage above 5.5 times, but those triple c companies just a little more than 1.5 times interest coverage, sowa little more shock to earnings and demand, further to the cost of capital, and you could run into a tricky situation quickly. i definitely think there are opportunities when you are looking at a yield north of 9% for the full market. i would argue those opportunities exceed what you seen the equity market but you have to be careful given the changing backdrop. sonali: if x the question, when you see treasuries -- it begs

the question, when you see treasuries how they are, how safe is safe? even in the investment-grade landscape, how discerning do you have to be? matt: we think the base yield is quite attractive in that interest rates on corporate debt can contract because of the dislocation of treasury yields higher. so that looks very sound. you are at a 1.2 5% spread and the demand in the long end of the curve from pensions looking to lockup liabilities is strong. from an individual investor standpoint, you can bias toward the middle of the curve and credit curve and get quite a lot of income, but we don't see an imbalance in the corporate earnings space on the ig side that will create a downside. i think eugene is right. higher rates, we have been insulated from the general economy but we are not inoculated against higher rates and the low end could begin to see some headwinds but i don't expect it to be broad-based in the investment-grade space. sonali: when youth about where spreads are today, do you see an

entry point at which you would start to get into even riskier areas, gene? gene: i think so. to start with the investment-grade market, the overall spread is average and fundamentals are in the good place. demand is not a problem, as matt was saying. if you look within the market, it's a story of dispersion, where sen. paul:'s and -- where cyclicals and industrials, it's a dispersion. we look at the big banks, where, you know, they largely have the flexibility to deal with some of the unrealized losses and those headwinds that come from higher rates and their spreads are quite elevated relative to more cyclical industries. we think there's a buying opportunity now within investment-grade banks. as you move into the high-yield market, it varies, but you have to keep in mind not only the

yield and spread of the dollar price where you are buying those assets. in high-yield, your downside is a default and ultimately what your recovery would be, and you're starting price is 80 to $.85 on the dollar. so that's going to insulate on the downside and i think the next cycle where we see spreads widen, it's likely they get out to may be 600 or 650 basis points rather than the 1000 basis point barometer that is often viewed as an economic or credit cycle. sonali: to the extent you see opportunities in banks, what's an entry point that's reasonable to you and do you have to stay with the biggest of the big with the concerns in the sector? matt: that is the price to start and then you move incrementally. the middle sized banks still have realistic concerns. there is still funding volatility. this rally in rates helps but that real estate concerned talks about what is going on in the securitized markets, where you

still have a lot of cheapness in aaa assets. so the dislocations create something where you don't have to go heavily down in quality to create aaa assets or you can buy high quality banks, but as opposed to going down, i would go to the mortgage sector or securitized sector where you could equal or higher spreads. sonali: where do you see opportunities in mortgage and securitized products? matt: they are a pretty safe and boring investment but you get a 6% plus return on a aaa asset. it's not a matter of if you get your money back. it is when. when rates hit 5%, we think the cap, near term, volatility measures are starting to decline in the 10 year. that should support volatility lower which will support the price of high quality assets.

you can also play the high-yield space gene was referencing. another way to play that is aaa at a 1.50 to 2% spread. sonali: when you think about risk-taking here, where do you see opportunities if you are going to take on credit risk? i am definitely one of those people that are probably watching bankruptcies more than your average correspondent. you can take on some credit risk, where you go? gene: i would break it down first between the consumer balance sheet and the corporate balance sheet. on the consumer side, we are starting to see some weakness, particularly in the lower credit -- quality, lower income borrower, so when we look at asset-based securities, we are being up in quality, positioning up in quality and those areas, aaa and higher-quality investments there. when you look at the corporate

space, we want to be a little bit less cyclical. if we look at some of the industries like metals and mining or chemicals or the energy industries, there's a lot of good news priced in. i think the soft landing is priced in. if you look away from those sectors, more stable, less cyclical, banks, insurance, utilities, food and beverage and the fed stamps, those are stable areas where we still find good value. the risk return prospect is still attractive. sonali: when you look at the opportunity in terms of a soft landing, what happens if you factor in the potential for a hard landing? do you think that scenario is not yet meeting the market and what is the risk of it? gene: we have not priced in a hard landing. we should be clear about that. and in that scenario, i would expect a couple things to happen. you would express -- would expect credit spreads to be widening significantly. that demand destruction has not been there. we can talk about nonfarm

payrolls slowing a little bit but topline revenue growth is still in the mid-single digit range in general, consistent with where nominal gdp growth is, so i would expect those credit spreads to widen out, but i it would -- but i would also expect, different than 2022, that rates would be falling and now they are in a position to do so if we see that demand shock, so to be clear, we are not pricing in a hard landing them, but what we do have is a significant risk premium with higher yields they can cushion the blow to the extent we try to transition to a slower growth economic backdrop. sonali: thank you both. still ahead, the final spread. the week ahead features more comments from fed chair powell. this is real yield on bloomberg.. ♪

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sonali: i'm sonali basak and this is really up. it's time for the final spread. monday, we get bank of japan minutes and eurozone pmi data. tuesday, earnings taking off, including ups and uber and kkr. finally, thursday, jay powell speaking again. the day after on friday, you have christine lagarde speaking for the ecb. one final thought before i let you go, because in addition to public markets, i'm looking at private ones. hire for longer rates in the private market means more borrowing. you have private equity firms taking out loans at 60%. if you thought 5% was a lot on the 10 year look at what borrowing costs look like if you are borrowing to stave off current borrowing costs into the future longer. from new york, same time, same place next week. that does it for us here at real yield. this is bloomberg. ♪

jon: welcome to "bloomberg markets." matt: let's get a quick check. looking at 1% gain on the s&p 500. if we close the session and the green every single day this week we have been up as the market thinks the fed is done and continues to see signs like the jobs number this morning. the fed does not need to raise rates again. the 10-year yield coming and 11 basis points.