you don't have to worry about things like changing tax rates or filing returns. avalarahhh ahhh >> from new york city to our viewers worldwide, i am vonnie. bloomberg real yield starts right number.

fed chair powell signaling policy pitted. his definition tone sending 10-year gilts to five year lows and extending the credit rally with spreads at a two month low. the fed igniting the pivot party. >> it is a pivot party and we are all invited. >>. >> a bit of>> a pivot gadget that the fed is done raising rates for now -- >> we can expect rate cuts at some point. >> we were surprised by the dovish tone powell struck. >> powell's dovish comments. >> this is the first time he gave a nod to the trajectory of inflation and it is easing. >> a victory lap because inflation is moving down. >> what chair powell gave us was an early christmas gift. >> we got an early holiday gift. >> that felt like santa claus

came to town. >> a rally in the bond market. >> we should be good for the bond market. >> we are entering next year with a growing sense of optimism. vonnie: john williams, the new york fed president did try to pour some cold water on the pivot, but markets are still pressing in next year. market pricing in 5.5 cuts. we will see if one comes to me to the other or what exactly happens. 137 basis points lower for the u.s.. for the ecb, 160 basis points with of cuts being priced in next year even though the ecb was much more underlining of the fact that they have not even started thinking about cutting next year. the bank of england will be joining the party, corn to traders. -- according to traders. you can see the moves of the pivot.

coming down substantially since october 19. 100 basis points coming down. you can see this last couple of days we saw a 30 basis point lowering of the 10 year yield. -- call this a miniature melt up into a soft landing next year. all of this is reacting to fed chair powell's comments. >> the question of when will it be appropriate to begin dialing back the policy restraint. that begins to come into view and is because the topic of discussion in the world and a discussion for us at our meeting today. vonnie: joining us now, marion bartel saint jory wealth and matthew diczok. the most surprising thing about the moves this week? mary ann: powell surprised

everyone and the ones he surprised were the ones short the treasury yield. that is why -- that is one of the reasons you see such a dramatic fall in the 10 year yield. we recently did our year ahead in november and to called the bucking bull. as you said, the party has already started and now we are saying we are running with the bulls in fixed income market. vonnie: running with the bulls. matt, let me ask if you have the same impression, if this we can't you offguard. matt: markets can always cut you off guard. for us, this is another example that you need to lay into assets as they get cheaper. we have had the same view six months now. in june we said we think the fed is new the end of the rate hike cycle.

let's start to get long-duration here. 5% on the 10 year, we set the same thing. things look even more attractive, definitely accelerate getting long-duration here. here we are, the 10 year below 4% and we are not changing our tune. we think the fed is at or near the rate hike cycle. the market is convinced six or seven cuts are coming next year. that is our base case, we think cuts are coming. our forecast is for a soft landing. we are not going to say that the fed is displayed. we are still cautious. the history on inflationary spikes is you don't just see one, you see two or three. we are sticking to our call. generally or at the end of it. and a lot of juice has been squeezed out of long-duration. we borrowed a lot of those returns from next year. vonnie: i want to ask you about the trade. i also want to ask about the gap

between seven rate cuts next year on the s&p which is only pricing in 3 -- seven rate cuts next year and the s&p is only pricing in three. matt: we are not saying that, the market forecast is for six or seven. bank of america thinks it is going to be less than that. there is a very big disconnect here. the fed i don't think has expected this reaction. obviously we had williams this morning try to start the walk back. the market has taken us and is running with it. from our perspective, when there is a big disconnect, the markets saying the fed is physically done, stick a fork in them, cuts are coming, and the credit market risk assets saying this is good to be great. we have ig below 100, high yield below 300, the s&p doing well saying there are going to be rate cuts but it is going to be benign, may be a soft landing or

a midcycle slowdown. usually goes first rate cuts are not mock it positive. this does not seem like history which says when you hike this much this quickly -- the last 40 or 50 years when you hike, you have a recession. when there is that big of a discount, our device to clients is clear, fully invested been neutral across equities, fixed income, defensive, don't take additional risk. wait for better opportunities, better valuations for de-risking portfolios. vonnie: are things going to be any a clear come january or march? mary ann: i would be surprised if you got a cut in march. we see manufacturing coughing, we are seeing real gdp actually turn up. the spending legislation bills biden signed starts impacting

the economy next year. that is the inflation protection act, the chips act, and the protractor act -- the infrastructure act. i don't think the economy goes into a recession. inflation can ebb and flow. we have been comparing this cycle back to the 1950's where inflation on the cpi year to year peaked around 9% and trended down and went negative. i would not be surprised if you do see inflation go negative. here is what is important. we think in the recycle we have reached generational lows in 20 and 2021. rate cycles last 20 or 30 years. this writer cycle was a four years -- this cycle was four years. we think 2024 is a bull market

where rates fall. one of the surprises could be if we have a mild recession that the 10 year can fall to 2.5%. i don't think that is priced in at any point in time. eventually i think we can reach that. if we reach that, i think that is the low and restart any uptrend in interest rates again. therefore, we are stressing with clients that they want to letter portfolios. we do think interest rates are going to trend higher. you would want your bond portfolio to be maturing so you can lock in those higher rates. vonnie: mary and is calling for a 2.5 on the 10 year. we have seen phenomenal moves quickly. earlier we caught up with earl davis who explained his the retrade. it is another interesting one. >> we shorted u.s. to your bonds, discounting 100 65 basis

points of yeezus by january, 150 by december. it is possible. we like the tailwind of being short, you make money if nothing happens. we think that is a great tactical street, buying real yields and tips on pullbacks. vonnie: explained to us the this is here -- explain to us the thesis here. would you be shorting real yields at this point? matt: we would not be shorting real yields. our investment timeline is longer than that. we have been using real yields as a barometer of market cheapness and a time to extend duration. a couple of months ago when the 10 year was 5%, we had a real rates across the entire tips curve at over 2.5% or higher. we thought that was a remarkable opportunity. two years ago we were talking -2% real yields. the privilege of on a government

securities -- privilege of tipping government securities. we find these to be attractive valuations. higher yields both normal and real and the ability to potentially drop significantly if we get the recession. is a good time to be a bond guy. -- it is a good time to be a bond guy. guys want to listen to us. we feel good about real yields. not as much as a few months ago. vonnie: we did have williams coming out and not throwing fully cold water on the idea of talking about a cut, but he did suggest it was not a big discussion that the market took it to be. do we need to hear from one fed speakers in relation to this in order for the market to walk back a cut by march or a 25 basis point cut?

mary ann: i'm not surprised they had to walk back because the market had its own dramatic effect and powell added fuel to the fire. between now and year end, it is going to be hard to dial things back. we are only a few trading days away from closing the year and i think before young managers are windowdressing and try to lock in those returns. next week, people will be going on holiday. you would have to have more commentary next year. all eyes next week will be on bpce. we get the pce. if that does surprise above expectations, i think you get a knee-jerk reaction within the equity market and the interest rate market. i think it is temporary. vonnie: the markets ignored fee manufacturing index. if there is a surprise pce next week, does the market take notice?

matt: i think the market will take notice and i think what you saw today with williams' comments, i think the fed is uncomfortable with how certain the market is. the market is saying six to seven rate cuts. the market is saying a rate cut is definitely coming in march. i think it has moved a little far a little bit faster for the fed's comfort the fed has changed messaging. last meeting we were not talking about rate cuts and now it is part of the conversation. it is very difficult to micromanage markets. fed policymakers are determined hard-working people trying to do their best. this is difficult to try to micromanage markets. they have made the pivot and now it seems the market may be ahead of itself. is a disconnect between what usually happens or what the market think is going to happen. it means for portfolio construction, just being defense level quality, staying close to home while being fully invested

and taking advantage of high yields probably makes the most sense. vonnie: riders coming out with a headline -- reuters coming up with a headline saying two rate cuts in 2024 likely from the third quarter. that is a second voice trying to change the market's mind on what it heard from the fed chair this week. mary ann bartels and matthew diczok, thank you. next, high-grade issuance meeting the usual december chill. credit's reaction to the pivot. we get all of that next. this is "real yields" on bloomberg. ♪

vonnie: "bloomberg real yield mrs. -- this is "bloomberg real yield." now to the chopping block, there was a december chill. today sees another day with no companies looking to sell bonds. the week was frontloaded and saw volume below $2.5 billion worth. the slowdown might indicate a wrap, a supply of $23 billion come short of the $32 billion forecast and a different story in high-yield, bond sales start at $12 billion worth of this month. that is more than five times what we saw in december last year. jp morgan warning of a credit reckoning. >> typically when we think about a higher rate cycle and to that impacts, it is the lower rated credit operators who are hit the

hardest. today we have a credit market overall that is the lowest credit quality ever. i think the credit reckoning may take time to arrive but it will arrive with some dramatic reprises. vonnie: let's bring in criag bergstrom and brian rehling. issuance is ahead scratcher. let me ask you if what we are seeking -- seeing is based on any reality in the markets. brian: i don't think so. i think you will see issuance come up. it takes time for things to move through the pipeline. no doubt with the decline in rates we have seen, credit spreads have been mentioned quite tight. it will be more proactive in the new year. vonnie: explain the tightness of

these at the moment. craig: credit markets have rallied quite strongly. it feels they are following other assets. it is following strong returns for equity, mirrors strong returns for on the run leverage loans. at the same time, it does not feel to us as investors like those on the run credit assets represent particularly attractive value. vonnie: explain why the market is being so kind to junk borrowers. it is as if there is no anticipation there will be trouble ahead. craig: if you want to look on the bullish side, you say the market is expecting three or four more rate cuts next year. if you get that and a soft landing and a supportive equity

environment, dry powder in private equity and credit, i guess you could get there. in our mind, that does not make for a particularly attractive risk reward. vonnie: that is the other part of the story. our markets pressing in unbelievably unachievable outcomes and is an investor getting rewarded for taking that kind of risk? brian: you could say the same about all risks. i think they will continue to perform well up until the perfection soft landing scenario is proven otherwise. it is a great risk-reward, especially in high-yield credit. it is hard to ignore. until we have that event, till you have the selloff, perhaps it a of reckoning, you are just going to underperform -- perhaps a day of reckoning, you are just

going to underperform. that is the struggle. vonnie: i want to get your thoughts on when we are going to see a first rate cut. some saying we will see two next year starting in the third quarter. brian: the market is pricing in a cut -- craig: the market is pricing in a cut as early as march. we are not in the red cross ignition -- the rate prostate nation business. we don't make granular rate of use but it seems there is room to get disappointed there. especially when you see it from an institutional perspective at the fed. to cut in march and be wrong on inflation, to have it remain persistent seems more institutionally damaging then to wait another quarter. vonnie: are you saying that the

fed must be fairly convinced that we have inflation linked? -- licked? craig: i would say certainly reasonable cuts but they could be if you ran later than the markets are pricing in today. vonnie: you are agreeing with what the federal reserve officials are saying? brian, would you have the same reaction? brian: i would given the current environment. i view tails next year as a greater risk than the consensus which is the soft landing. either there is the potential that something breaks with remaining tight too long and the fed has to cut, or i lean more towards the tail that the punch for continues -- punch bowl continues. you don't see the uptick in

unemployment some might be expecting and you start to see inflation we accelerate into the second half of the year -- re-accelerate into the second half of the year and the fed has to start hiking again. i think is important to handicap those scenarios but i think they have to be on the table. vonnie: do you think the clo market is going to face challenges? where are you looking for opportunities in private credit that you are interested in? craig: the clo market is interesting, you have not seen a ton of issuance. we think the debt side remains interesting. you talk about high-yield and needing to participate. obviously to the extent that people are managing to benchmark, that is an issue. tl though aaa is issuing around seven. we are more active down in stack. for an individual investor looking for a low risk option in a retirement account, a aaa is

really interesting from a risk-reward perspective. i think in the clo market more broadly we have not seen a ton of issuance. it is picking up a little bit. we think it is going to remain in a somewhat challenging environment given how wide liabilities are and what that means for clo equity returns. vonnie: brian, very briefly, are you seeing opportunities outside the united states given that we are going to see a bunch of central banks pitted next year? -- pivot year? brian: we are focused on the u.s.. the u.s. is in a better place in the world. yet your economies are not doing as well as we are. i don't see a huge advantage over waiting outside the u.s.. vonnie: thanks to both of you. that is craig bergstrom and

brian rehling. still ahead, the final spread a week ahead. this is "bloomberg real yield." ♪ a few years ago, i came to saona, 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.

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vonnie: that does it for this week's "bloomberg real yield." this is bloomberg. ♪ i don't want you to move. i'm gonna miss you so much.

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>> this is bloomberg markets. >> we begin on a day where we are digesting fed speak in the united states. more from john williams who tried to hold back what fed chair powell deliberately said the other day at his meeting. you would not know to look at the s&p 500 because we are down a point. a lot going down today with that melt up we saw the last couple of days. the 10 year yield up 3.93,