(adventurous music) ♪ ♪ ♪ be ready for any market with a liquid etf. get in and out with dia. >> from new york city, i'm sonali basak and "bloomberg real yield" starts now.

♪ the powell pushback. the central banker keeps rate hikes on the table. problems for the long term with 30-your auction gone wrong. we begin with the big issue, the market versus the fed. >> listen to what the fed says. >> the powell comments. >> a slightly more amped a version of what he's been saying for a while. >> reiterating what he said all along. >> much more hawkish speech. >> danger being good but not definitive. >> they are focused on inflation. they are focused on the jobs data. >> they are nervous about declaring victory and then having to on declare victory -- undeclare victory. >> the market continues to disbelieve this higher for longer. >> right now nobody has any idea

what the bond market is going to do. >> there's a lot of underlying tensions in the bond market. >> a good chance we will see a lot of volatility. >> the federal have much less of an influence on where rates go from here. unfortunately, that does not mean the quality is going to go away -- quantitative easing is going to go away. sonali: we look at the two-year yield. at march, 376. we have gone more than 60 or 70 basis points higher and flirting with 5% all year, including at the beginning of the year. we are back there now. you have seen a lot of fluctuation around that 5% mark. back up today to about 5.04% on the heels of comments by fed chair powell. you see the volatility at the short end. more pronounced relative to long end. the whip sewing was drastic. the yellow bar is the two-year

yield. you have seen 80 basis points move lower or 60 basis points higher. now we are looking at that move at the longer end of the curve being more pronounced. now 60 to 40 basis points in either direction. we saw more volatility after powell said this. >> if it's appropriate to tighten further we will not hesitate to do so. we will continue to move carefully however, allowing us to address both the risk of being misled by a few good months of data and the risk of over tightening. sonali: joining us now is gennadiy goldberg of td securities and ashok bhatia of neuberger berman. if you look at the volatility in the short end versus the long end, are you more concerned about the short or long end when you think about financial conditions? gennadiy: more the long end. there is not as much debate

about what the fed will do in the short term. you have the fed already raising interest rates. they said they are probably done. maybe one more or two more. we think no more. on the long end it is becoming more toxic. you have seen this massive rise in rates. that is creating a lot of losses on bank portfolios. it is tightening conditions by tightening bank credit as well. sonali: if you think about the control the fed has over the short versus the long end, do you get concerned about what is driving the long end higher in terms of rates? ashok: the things that are driving the long end higher are the supply that is coming. the fed is taking less duration onto its balance sheet. that will be a continuing theme. the federal government is issuing more debt that the private sector has to buy. those dynamics are outside of the fed's control. the fed can promise us policy rates are not going to go higher

and give us certainty on the policy path, but some of these issues that are driving intermediate and longer yields would still be there. the tightening of financial conditions may be driven by the longer end is the key macro fact right now. sonali: with that kind of volatility how do you position trading? is it a duration play here or matter of trying to capture yield with er? -- where they are? ashok: we are capturing where they are. those types of maturities in the mortgage market investment grade credit markets, we could see another hike. it is not our base case. these types of yields, at some point whether it is a year from now, two years from now, three years for now, policy rates will go down at some point. the market will be well ahead of any fed ease. we have reached the judgment it is time to do duration extension.

sonali: i want to point out what katie kaminski said earlier this week about the potential for shorting some of the curve. >> we are still short because for trend following it is not just about a couple of days. it is about persistent trends in the market. we have been saying short, short, short all year. for the first time it is starting to feel like we already got that short come through. sonali: seems like a brave trade. how do you feel about how that can play through into the market? would you go short? gennadiy: i wouldn't. we went long in the portfolio last week. the middle of last week. we were doing ok and that trade but it is a lot of volatility. that is keeping a lot of investors away. i agree with the earlier comment about trying to play that duration and capture that. a lot of clients are paralyzed about the next six months. everyone knows eventually there will be a slowdown. it is just a question of when. if it takes another year or year

and a half to actually hit then it becomes a problem. you can be holding onto a losses for quite some time. sonali: i will ask you the same question. how do you position at this point in the cycle? gennadiy: you want to be exposed to the two to five-your part of the curve. -- five-year part of the curve. less volatility than what we saw on march. march was more volatility than even 2008. you want to start to chip away at these very attractive longer-term rates. the question is what will be the catalyst? it has to be the data starting to turn over. sonali: i had a conversation this week with mark's business, the founder of universa investments. he talked about how he thinks that rates can actually go much lower. this is my own crazy theory. i think rates are going back to zero as well. i mean, a lot of people with

think i'm nuts. ashok, do you think he's nuts? ashok: i would never call anyone nuts but i think seeing 0% is hard to see. 0% is saying effectively we need to be negative real yields in the policy rate again. that seems a hard stretch. the main reason is i think the political dynamics around qe and this type of aggressive monetary policy has changed. i suspect the political support with the fed going back there absent a real crisis is going to be a lot more limited than it has been in the past. sonali: if we were to get back even to cutting it could be either the fed has done its job or the economic data turns. what do you think happens first? gennadiy: the data turns first. the data has to be the big driver unless -- i think this is where i would not call anyone nuts as well but unless there is

a big crisis. if there is a crisis, everything is off the table. you can go to 0%. it really is something the fed wants to avoid this time around compared to last time. they realized they overdid it. they will not admit it and that will be a long-term strategy for them. unless something terribly breaks in the system that requires them to step in with qe or to go to 0% interest rates, that is not their baseline. they are worried about inflation re-accelerating. it is like a tinder. if you don't put it out fully it will reignite. sonali: how big of a risk is that for higher short-term yield as well? gennadiy: if i look at the fed's forecast, just thinking about this recently, the inconsistency is there is no pain. we don't get growth negative. we don't really get the unemployment rate higher. you get inflation magically coming down. that is a one-week point of the forecast. if inflation does come down,

they can be in trouble and might have to basically push on a string and keep taking is higher and keep ramping up those financial conditions further. sonali: another interesting aspect is quantitative tightening. the fed's balance sheet has not been reducing itself meaningfully. do you think the fed will have to provide more support to the market? do they have to keep the direction of travel such that there is quantitative tightening? ashok: i think is very difficult for the fed to change its qt policy. as you correctly noted, the fed balance sheet reductions have been pretty modest so far. they will be a bigger impact into the markets next year. the hurdle for that is to change that is pretty high. we should assume that is on autopilot, at least for the next 12 to 18 months. longer-term, there are plenty of

arguments the fed will need a larger balance sheet. we will see how that plays out but i don't think it's an immediate investment question. sonali: how much does it tighten financial conditions on top of higher rates? ashok: i'm sure we have seen estimates of 25 basis points, 50, some out there that it is worth as high as three hikes. thinking about this is something where 25 to 15 based -- 50 basis point seems reasonable. you are seeing the impact and things like the mortgage market. with the regional banking system, the fed, those have been three large buyers of these assets since the financial crisis. the fed, it is something that has been contriving to relative weakness to other asset classes in fixed income. sonali: what's amazing is you see household credit starting to grow, particularly on credit cards. there is obviously loan weakness. do you think the lagged affects

have not been seen when credit is still flowing in the economy? gennadiy: i think you are right. we are only starting to see it now on the pickup. you have seen the report from the new york fed this week talking about the liquid sees and credit cards and auto loans, even mortgages. they are coming off a very low level but they are starting to come up. higher interest rates bite and they take a little bit of a while to pass through, certainly the mortgage market tends to be the first one. we are seeing it in credit card to liquid sees and auto delete with these. i think you will keep biting. we have to -- credit card delete quincy's and auto delinquencies. sonali: up next is the auction block, and extreme the active week with companies selling fresh bonds. we will look at the details ahead. this is "real yield" on bloomberg. ♪

sonali: i am sonali basak and this is "bloomberg real yield." time for the auction block where we sell the continued surge in issuance this week. in the united states we have 30 companies generating nearly $44 billion in sales, topping estimates. vw, charter, alreadyx -- charter, rtx. you had a russian high-yield. funding cost dropped a little bit. notably spirit arrow system sold $1.2 billion -- aero space systems sold 1.2 bond. it sold two dollar denominated bonds for $3.5 billion, which combined orders of $36 billion. speaking of ubs, the ceo spoke

at the bloomberg new economy forum. he told our friend that clients are attracted to fixed income. >> higher rates. the asset allocation thinking of clients back to a more traditional component on bonds, on -- people saying 6.5% kind of yield. 7% even with pretty good quality. do i really need to add risk? that has changed. it is a reflection of both risk aversion but also the attractiveness of fixed income. sonali: joining us now is daniel zwirn, ceo of arena investors, and andrea di censo of loomis. thank you for joining us. when you think about the cracks in the market, even the safer of markets, we are seeing so many investors piled more into investment-grade. excited about the yield,

thinking they are safe. when you have double lien saying we will be specific in those markets. we are worried about places like regional banks and others. where in the safest markets are you worried? daniel: part of the issue is it is a bond by bond selection issue. the nature of the investment grade market is it is focused on coverage as well as default. it should be focused on leverage and severity. there are distortions in the market in the way the agencies look at things. as an example, at a bank you might have an unsecured bond with investment grade rating. at the very top of the very bottom of the capital structure, versus something in a mortgage rate where you might be secured at the top of the underlying assets. it requires you to not just be the market but rather pick through it one by one. sonali: andrea, when you look at the delinquencies so far, what is the data telling you about where things are starting

to deteriorate? andrea: what we are concerned about is centered around the consumer. your previous guests hit on some of those talking points. it is increasing credit card delinquency. some concerning signs around mortgage delete quinc -- delinquency. when you look at the financial tightening flowing through the markets today, the consumer is not able to spend at the same pace they were able to just 18 months ago. as we look forward, and you saw this highlighted on some luxury earning reports, consumer spending, even at the top tier is falling. that is the number one concern for us. the consumer makes up over two thirds of global gdp. as you start to see them pull back on spending that will have much broader implications. not just to average credit quality across the investment-grade market, but also much more severe consequences within the high-yield and emerging-market space. sonali: when you think about the

cracks you are seeing in the consumer, mortgage, credit card, how much more pain is there to come? how are you thinking about a from where you are sitting? daniel: there is quite a bit more to come. the numbers have been rising the last several months. how does that get priced into the market or how was it shown to the market? what we have seen since the goc is there is less intermediation of bonds. if you are a financial institution you might not have to run the loss through your income statement if you don't actually sell the bond and it only goes through your balance sheet. sonali: if you are an investor do you wait for peak distress to get in? daniel: yes. the answer is there is a fire somewhere, always. since the beginning of the blowup in late 2021 you have seen things implode. roughly in order of the degree to which they are subject to a cash miss or and asset liability mismatch. growth in funds and cre, now leveraged direct lending.

in six to nine months you will see it in structured finance. sonali: question for you about where you see opportunity in investment-grade or even high-yield if you think about the ability to capture yield at this level? andrea: i think about the shape of the overall curve and where the shape is going in the next six to nine months will help you think about where you want to be taking risk and where you are able to monetize that credit risk premium. you have seen the most volatility in rates building in the back end of the curve. we have moved from a bears steepening environment to what tends to follow the steepening. looking back to the 1990's, it is a bowl flattening environment. if we think about where we are finding opportunities investment-grade, we are looking in the triple b space, at some potential opportunities further of the curve.

we have taken advantage of the shorter duration place. now we want to think about this segment. within high-yield you want to be cautious triple c's. we believe defaults will likely rise. we have already seen a double-digit return in triple c. what about single b's and double b's? those were punished. we see a lot of opportunities in the coming few months. sonali: speaking of the every thin -- everything bubble, perhaps wework might be a harbinger of things to come. >> it's an ongoing issue. some people refer to them a zombie companies that existed because capitalist sheets interest rates were low. when rates for 5%, 5.5 percent, your hurdle rate for investment in return on investment is a lot higher. i think what we are seeing is the growth pains of these higher

interest rates where you will see more highly leveraged businesses, maybe those not run as efficiently or did not turn out their debt as they needed to, will face a very stiff headwind. sonali: wework was really reminiscent of a time where people were borrowing money for nothing. how much more d.c. problems like mini weworks? daniel: there's a great opportunity if your credit arbitrager. would you want to be is effectively positioned that way to be long put optionality and then come back in. once they are busted, there are opportunities that are busted. sonali: do you see that there are more problems under the surface, perhaps more than meets the eye? andrea: we believe there are

certainly problems. you really have to sharpen your pencil into your fundamental analysis here. there are a lot of companies that have already turned out their debt. they don't need to come to market. their balance sheets are in a much better position today than they were 24 month ago. this current default cycle is unlikely to look like the past default cycle because of the improving credit quality of the high-yield market. therefore we think many corporations within the high-yield space, specifically more around the double b area are able to afford -- absorb some of the losses and turn out ok and achieve really attractive single-digit returns. sonali: we have to leave it there. daniel zwirn and andrea di censo , thank you for your time. still ahead, the final spread. the week ahead. another key inflation print. this is "real yield" on bloomberg. ♪

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sonali: i am sonali basak and this is "bloomberg real yield." time for the final spread. coming up on tuesday a lot of price data. u.s. cpi, plus home depot earnings. wednesday is ppi and u.s. retail sales. thursday another brand of jobless claims, plus earning results from walmart, macy's and gap. midnight friday is the u.s. government shutdown deadline. for my final thought, let's look at what is expected for inflation. we have a cpi year-over-year expected to cool to 3.3% from 3.7% year ago. core to stay flat. month over month to cool quite meaningfully. down from 14% the month part -- .4% month prior. core cpi is expected to stay but

the same. that does it for us. same time, same place next week. this is "bloomberg real yield" and this is bloomberg. ♪ ♪ the chase ink business premier card is made for people like sam, who make- everyday products, designed smarter. like a smart coffee grinder, that orders fresh beans for you. oh, genius! for more breakthroughs like that- i need a breakthrough card. like ours! with 2.5% cash back on purchases of $5,000 or more. plus unlimited 2% cash back on all other purchases. and with greater spending potential, sam can keep making smart ideas- a brilliant reality! the ink business premier card from chase for business.

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jon: welcome to "bloomberg markets." matt: let's get a check on the markets. we are at session highs on the s&p 500. gaining 1.2% to 4399. a real bounce back, making back everything we lost yesterday and then some. the u.s. 10-year,. little changed. the bloomberg dolla