sonali: from new york city for our viewers worldwide, bloomberg's real yield starts right now. ♪ ♪ sonali: coming up, a hot jobs

report builds a bigger case for a soft landing and investors are rethinking the timing of fed rate cuts which is causing two-year yields to have the biggest move in two months. we begin with the big issue -- the bond market gets a reality check. >> it's no doubt this morning jobs report was probably stronger than expected but exceeded expectations. >> this is a good report. >> good news for the economy. >> it says we are not in recession now, but it's not necessarily an all clear signal for next year. >> it will still be a bumpy ride. >> you not seeing the level of restrictiveness show up yet. >> expectations for fed cuts might be a little overdone. >> this is a report the fed will look at and not really feel compelled they need to embrace the early rate cuts year that that market is pricing. >> it doesn't make the fed want to cut interest rates at this juncture. >> they are likely to cut in

march as markets were expecting. >> the fed is months away if not quarters away from cutting rates. >> market has to think very carefully about the amounts of cuts it is pricing and for next year. sonali: i want to start to take a look at the two year yield. look at the ride we have taken from the low we have taken from may to the high in october. we have fluctuated quite a bit. we've been on the climb lately but today after that hot jobs report and consumer confidence data, we are back on the rise, about 12 basis points. it's about 472 as of 1 p.m. friday. it has been a choppy ride. even with that strong economic data come your nuts is looking at the level of the short end rates but the long end as well and the relative difference. we are looking at the yield curve because when you see a long year, you're looking at a potential recession but where is it? the data is so strong but if you

look at where we are this week, traders are piling into potential steepeners and you still have a more inverted yield curve this week than you did at the beginning of this week. joining us now to talk about what's happening in the bond market is jerome schneider and marie said. let's give you the word on what exactly is happening with a two-year and what is changing in terms of expectations for next year's cuts. >> good afternoon. what we are seeing is that the market is simply recalibrating its expectations but not necessarily with regard to the soft landing, but with regard to the proximity of a fed cut. the fed has been very vocal in terms of how it wants to manage those expectations. they become more data-dependent recent days as they are more positive. today's number doesn't really change the calculus that much.

perhaps it helps to reconcile the disconnect between the market segmentation of and a soft -- seven exceedingly soft lending that would be propelled by rate cuts in 2020 42 one that is probably more normal and realistic. that's probably what we are seeing today is that real-time reconciliation between expectations of the dead and the market expectations -- of the fed and the market expectations. when you get to this point, even though we have had a sell off of about 12 basis points in the front end, it is only worth about half of a rate hike over the course of 2024. it's large and basis points today but it's not necessarily that meaningful in terms of the overall market segmentation of rate. sonali: the year is not over and is much as we want it to be, how much can happen this year to

start to change those expectations more given what jerome was saying that it's not this drastic change relative to what we have seen in terms of recalibrating this year? >> excellent question. i think jerome was spot on. i think the amount of recalibration we have seen even though the jump in the read seems to be significant come it's not that significant of a change in expectations over the course of next year. i would note that look at the big change we saw during november. there was the expectation change from three cuts to five cuts. we are getting into normalizing between those two outside ends of the range. i think the general direction remains that we will have several cuts over the course of 2024 but does it start in march or may? that's where the bond market is trying to recalibrate. in terms of your question of

what could cause a significant change here, i don't think we will see a jump back up in inflation expectations. we have had pce come in at half of what it was a year ago. you would have to have a really generous shock event to change the trajectory we are on now. sonali: i want to listen to what jp morgan had to say. the strong wages and higher artistic patient should keep the soft lending narrative alive. what do you think about the 10 year at this point? what are the buying entry points? >> i think what we are trying to do is rationalize where we've come from in terms of the rate spectrum. low rates from 2022 are no

longer. we look to next year and we see an evolving landscape, one where rates not only produce income but also produce potential safety and capital appreciation as we get into a landing which is something a little bit harder than a soft lending but not a deep recession. that's where bonds moving further out in the curve into short-term and in the mid part of the curve, make a little bit more sense. this range we are seeing across the curve is more palatable for investors especially those who potentially see volatility emanating from a weakness in the broader economy. that's the outlook for 2024 from a pimco point of view. sonali: how do you feel about duration? do you think it can still be a bloody trait? >> i think we may have a little bit of volatility like we've seen. you saw a few basis point move today on the jobs report but we

believe duration makes a lot of sense. that prior quote is exactly right. let's not forget that 10 year yields are still the highest they've been since 2020 -- since 2007. . it is not a bad place to be. we continue to like duration but maybe you don't get the price appreciation but you still go north of a 4% on the coupon. it's a good place to park, a good place for risk assets. sonali: something else i've been thinking about is you have the economic data but you also have the market functioning. you saw those repo stresses that have posed problems in the last week or so. how much does that were you? do you think about liquidity concerns? >> i think there is to main focal points for next year.

the first one is the inflation outlook and what we think is the last effective getting inflation close to the target for the second one is looking at liquidity conditions next year. you have a market which is not only function with concern because of the higher cost of capital and trying to understand where risk lies but you also have the practical implication which you have excess reserves or cash sitting on the sidelines and its diminishing and that will be something that goes from $3 trillion in the global banking sector to something to 2.5. the cost more effectively or the ability to have cheap funding for global central banks and global banks in general is going to become more expensive. for investors, it means that the investors who are keen to take advantage of dislocations in the market with a higher cost of liquidity and sitting on the side will have opportunities to put cash to work in meaningful ways. a little bit of patience, a little bit of active management and finding locations that are defensive yet not necessarily

priced fully for the dislocations are going to be opportunities next year. liquidity is something to keep an eye on in the new year. sonali: defensiveness is a funny word when you look at this comment. >> the reality is, the economy is a little bit in an interesting goldilocks phase. there is concern about a slow down that's been on everybody's mind. the fed has done a nice job of maintaining higher rates. i would argue that the fed put us back in the market now. sonali: to what extent is the market relying on the fed stepping back in to do that again? >> i don't know if we completely agree with that sentiment. if you say the fed put is present in being careful with the quantitative tightening

pace, maybe that's the place to look for it. in terms of we are going to hold rates steady and see with the economic data tells us, that's not necessarily a put. that's the fed being careful and looking ahead which they have to do. in past cutting cycles, they actually start to cover rates ahead of a declared recession. it's their job to follow the data and know when we've had that slow down. some people are thinking we are actually starting to see the slowdown in terms of the data october-november. the fed is acting in advance and i don't think it's to prop up asset values. i things to make sure they effectively manage the soft lending. i want to also address something jerome talked about before with liquidity. that is absolutely an opportunity when you see liquidity dislocations. i think the fed is also looking

at that. they want to be cognizant that the pipes in the plumbing, how banking funding occurs, that's not stressed and will create a liquidity crunch that transfers into a credit crunch. they are watching the spikes and repo rates and watching the usage of the standing repo assessments. ays.li: i go to next week is a big week again, not just for the u.s. central bank. what are you looking for in the dot plot next week? >> i think the dot plots will be most meaningful. not necessarily that they will have a realization of the rate hike they forecast in september. but what is the median dot and what does that mean to the outlook for rate hikes additionally later next year? in that regard, the fed might hold steady and with the data today, it probably shifts the

median from three rate hikes to two. when we look at the two-year note at 4.7%, we still see that equates to about five rate cuts in that regard as opposed to the two rate cuts the dot plots will likely reveal. to be clear, there is still a lot of reconciliation between the market expectation of cuts and the federal reserve prognostication of cuts. we think there is probably more likely closer to the fed prognostication. sonali: we thank you both so much for your time. is the auction block. j.p. morgan and wells fargo putting heat back into the market. december issuance was quite high and inclusive interview with chris sheldon about default risk and opportunities and high heels. this is real yield on bloomberg. ♪

sonali: this is bloomberg real yield. it's time for the auction block where this month u.s. high-grade issuance is already exceeded all of last december's total. notable sales this week from jp morgan, gm, wells fargo, bank of montreal and american electric helped drive the weekly total past $12 million. blue-chip companies are borrowing shorter to avoid locking in higher interest rate. only 13% of bonds issued matured in 30 years or more. i went billion dealer sale for xpo was seven or $8 billion and

that surpasses last december. we talk more about the high-yield market. >> with rates going up in height yield alone is going up quite quickly in the last six months and you are seeing bank credit growth slowed down substantially. all that so far looks like a soft landing in the risk is a people wake up and say maybe there is more downside risk because they hit is not only from interest rates going up and people start losing their jobs in the labor market is off, we get the double winnie of higher interest rates test double whammy of higher interest rates. sonali: kkr sent a letter out to investors.

let's bring in chris sheldon of kkr who wrote that letter. when you look at chances to dive in, what type of case are you starting to dive in the market to? >> we are of the view you should be consistently investing today. it's not a time to just sit on the bench and watch and wait for the bottom. what we've learned from previous cycles is the markets usually buy them well before the fundamentals do. you need to start and get going. . when you look at private credit assets, it takes a while to get invested. you should get going right away. sonali: there is this call you make in this letter from the private credit giant like kkr, people forget you also trade public assets. you said private credit could actually see more defaults. why is that? >> there has been a huge growth in private credit as a whole. a lot of that is focused on the

middle-market in the lower middle-market. where we play in the private and corporate market is on the much higher end. what we've seen over the last 12-18 months is our average ebita is growing as the public markets are shut or closed. we think there is less tools for some of the smaller businesses to access the capital markets to free up liquidity. we actually see increasing defaults probably in the smaller and middle-market businesses than what you will see in the high-yield bond market. if you look at where financing has been of the last decade, people have avoided the high-yield yield bond market like the plague. they've gone to the syndicated loan market and the private market because the bond market has a lot of restrictions. what we see in the high-yield bond market is the highest quality high-yield bond market we've ever seen. it's 50% bb and looking at

default rates is not a way to look at that going forward. sonali: how do you think about the dynamic into a potential recession? you expect a mild recession going into 2024. >> defaults are definitely increasing, downgrades are going to increase. i'm not sure we had a technical recession or not. we are of the view there will be more of a soft landing. what the fed is doing is working and it's slowing the economy. if there is a lot of dispersion in their approach, 90% of the jobs came from government, health care, education and travel and leisure. there is a lot of dispersion in the market. there is going to be increasing defaults but that doesn't mean this vintage deploying into private credit, deploying into new issue today means those will default. it's about this credit market,

it's about being opportunistic and having breadth and credit selection. sonali: we talked to investors a lot is when they look at bars of the market that could soften, they're worried about the consumer. today was a good david at the same time, should you see the consumer we can without levered they are to credit card debt? how do you think about entering more sensitive parts of the economy like consumer debt? >> not to sell or to what i just talked about with dispersion. we feel really constructive about the high and in the primary of the consumer and we are more concerned about that subprime on the lower end and that is creeping up into the lower middle end. there is a lot of inflation we think rates will be higher for longer. we think labor is going to be challenged and wage inflation will be there. we are deploying into consumers. we are seeing some portfolios

out of regional banks and buying pools of high quality auto loans. we are constructive there but not on the sub prime. it's more and more about dispersion in the consumer market. sonali: to the extent that you get out of some areas given the money of seen pouring into some risk assets including credit or that you avoid scenarios, what does that look like? >> as i mentioned, we are into credit. if rates are higher for longer, that means equity valuations are lower for longer. from relative value, credit looks good relative to equities. we are constructive on credit and it's about where you go within the credit space. we like asset-based finance and what you are seeing out of regional banks with a lot of product coming out of that either high quality portfolios we wouldn't have seen otherwise or stepping into areas that have retreated from lending and one areas real estate credit

particularly around some of the transitional assets. there are places to avoid like the dispersion with secular decliners and places and businesses that haven't been able to pass on price and we are avoiding those type of businesses. sonali: i'm curious about the regional bank play. do you see the prices declining enough? what's the clearing price on some of these assets being sold at regional banks and is it just cre? >> it depends, we are seeing some really nice portfolios with high quality where the price is not that much of a discount but they are providing a lot of financing to make the returns work particular for pools of capital like ourselves. there is also big discounts on distressed assets and those of the things we are not participating in. the time to go into stressing our minds the time when fundamentals are recovering. we are in an economy where fundamentals are declining so it's about keeping it simple.

there is a lot of opportunity out there so i wouldn't get caught up in the fears of increasing defaults. there is a bubble in private credit which a peer often with we don't agree with and i think there are fears that are stalling deployment in the market right now. sonali: we will have you back on soon and debate that bubble all day long. thank you for your time. still ahead, the final spread, a host of central bank decisions coming to the market. this is really yield on bloomberg. ♪ a few agona, they told me there's no electricity on the island. we always thought that whatever we did here would be an emblem of what small communities can achieve. trying to give a better life to people that don't have the means to do it. si mi papá estuviera vivo, sé que él tuviera orgulloso también de vivir de esta viviendo una vida como la que estamos viviendo ahora. es electricidad aquí es salud.

♪ ♪ ♪ be ready for any market with a liquid etf. get in and out with dia. sonali: time for the final spread, the week ahead. tuesday come investors are watching to see if the latest uscp cpi data continues to show evidence of a slowing economy. a big inflation print less wednesday, the conclusion of the fomc meeting kicking off a 60

hour central bank with lots of monetary policy decisions accounting for 60% of the global economy. that does it for us today, from new york, same time, same place next week. this is really yield. this is bloomberg. ♪ manage all your sales from one place with a partner that always puts you first. (we did it) start today at godaddy.com

♪ jon: welcome to bloomberg markets. sonali: let's get a quick check on the markets. we are back in the green today. the s&p 500 and the nasdaq 100 both up more than 0.2%. they've been flirting with gains and losses all day long and the two year yield has been a stunning move after the strong jobs print and the strong consumer sentiment report. a 12 basis point move higher in the two year yield. it's standing below 4.72 on the day which is the biggest jump in months.