when you automate sales tax with avalara, you don't have to worry about things like changing tax rates or filing returns. avalarahhh ahhh sonali: from new york city, i'm sonali basak and "bloomberg real yield" starts right now. ♪ coming up, fed divergence.

it calls for one cut this year as markets and other central banks are more dovish. u.s. yields are driven lower as inflation data and consumer sentiment starts to cool. u.s. junk bonds head towards the strongest weekly return in six weeks as investors bet on more cuts. we begin with the big issue, deciphering the fed's message. >> the theme is patients. >> it is stay the course. it is cautioned. >> the fed will remain data dependent. >> there is no clear indication they will need to rush to cuts. >> if you look at the conference of look at the economy it is relatively strong. >> like they did not overreact a stronger inflation data, they are not going to overreact to the weaker inflation data. >> having been burned by the enthusiasm at the end of last year and the reversal on inflation, they are not going to want to reverse so quickly with just one good print. >> there will be cuts by the

u.s. federal reserve at some point in the second half of the year. >> they will start cutting sometime in the quarter of next year -- sometime in the first quarter next year and deliver a steady set of cuts. >> there is a higher probability the fed cuts more aggressively at some point in the future. >> they are trying to tell us they are keeping all optionality open. sonali: this might have been the week that broke the camels back. you look at the cpi and ppi headline numbers, you saw progress here on both fronts. we saw that jump up in late 2021 in producer prices. you had a day later this producer prices also giving the market more steam to start the change expectations perhaps ahead of the fed in terms of how many rate cuts could be seen this year. finally progress really baked into the market.

look at what the translate -- what that translates into. for the pricing of fed rate cuts. a week or so ago when we saw the jobs report and the strength seeping into the economy a lot of concerns about when the first rate cut would be. not only now do you have more bets on rate cuts, a lot of differences in the market between the july and september and november cut, but certainly certain to hear we might see at least two by the end of this year despite with the fed's dot plot says. here is what jay powell said about it. >> we think policy is restrictive. we think ultimately if you just set policy at a restrictive level you will see real beginning in the economy. that has always -- real weakening in the economy. we have always been pointing to cuts at a certain point. not to eliminate the possibility of hikes but no one has that as their base case. no one on the committee does.

that is how we think about it and that is what we have been getting. sonali: joining us now is gennadiy goldberg and brian rehling. to the both of you we have seen such a huge round robin this week. you have such an interesting price target here for the end of the year. can you explain where you see rights heading towards the end of the year and put that in perspective from what we are expecting out of rate cuts this year? gennadiy: we expect two rate cuts starting in september and december. we are looking for the ten-year to finish at 3.9%. it sounds really low. look how far we have come this week. we have moved basically 30 basis points on the 10-year just this week alone. a couple of weak data prints and we will be there. it's sort of a one-way market. you some remarks from jay powell. they basically lopped off the entire right hand side of distribution of interest rates.

he said we are not looking to hike. it is either hold or cut. the markets are starting to move. sonali: brian, where you see us at the end of the year for the 10-year? brian: we have a higher range. it will look more like 4.25%, 4.5%. we have been trading between 3.8% and 4.7%. we are in the middle. we have to see how the economy plays out. i expect more volatility than we have seen in the first half. sonali: we have seen a lot of it so far this year already. it has made it hard for investors to find an entry point. how do you figure out where the entry point is today? gennadiy: looking for extremes to be honest. we are looking at towards the lower end of the range. we are foreseeing a weakening in retail sales next week. we can see rates extend the move. if not, we backup.

the range has shifted. we went from an upper channel to a downward channel at this point. all the momentum, the market did not take that one rate cut signal to price out cuts this year. they priced in over two cuts this year despite the warning from the fed to be cautious. sonali: how do you figure out how this disconnect really plays out in the market? if you look at what the fed is saying, plenty officials are vocally saying they are not ready to call victory on inflation just yet. how do you feel about the market's propensity to push that narrative forward and see those two rate cuts? brian: let's not forget the market was looking for six or seven rate cuts at the beginning of this year. the market sometimes tries to push around the fed. there is no urgency for the fed here. dual mandate. price stability. we are not down to the 2%

inflation target. we are trending the right way but we are away from that. the unemployment market is still relatively close to full employment. risk markets are up. what is the urgency for the fed? if those factors change, if we saw a big selloff and risk markets, a bigger movement and inflation one way or the other, a bigger rollover and the jobs market, yeah, the fed may have to expedite things. as it stands now there is no urgency for the fed. we do expect them to cut this year. i think the fed is sitting back. they just have the ability to wait at this point. sonali: at the same time while we see interest rates higher, no cuts today at the least or in the very near term, you see that university of michigan sentiment data. consumer sentiment falling to not expect it seven-month low. do you think under the surface that replaces where things are

starting to weaken more than expected despite with a jobs number say? gennadiy: absolutely. if you look at the job openings in the pace of the decline in job openings, it is something chair powell continues to mention. look at the pace of the decline. it has plummeted. some fomc members are getting concerned this is starting to happen too quickly and wondering what if this happens to spill over into the broader economy. what if we will continue to see data softened? we have three payroll reports, cpi reports, pce reports ahead of the september meeting, not the july meeting. that is mostly a placeholder. i think they want to get started sooner than later. the last thing they want to do is overdo it on tightening. they have been very consistent about that. they will keep rates on hold. they are not rushing. there is no rush. the next couple of data points can be pretty surprising for

them, especially as inflation has come down to medically. sonali: when you look at pockets of stress, whether it is low in consumers or pressures persistent in the real estate market, do you have concerns there are parts of the economy that concern hard enough that it would bring other parts down with it? brian: we have had concerns for some time. the surprising thing is the consumer, at least the high-end consumer, has consistently showed up. maybe we are getting stretched. there is clearly stresses in the commercial real estate markets and other pockets of stress. as you can see in the consumer sentiment numbers, the perception and probably what a lot of middle to lower income consumers -- they are feeling it but they have been feeling it for some time. it is a matter of seeing that

spillover into the job market. people begin to be less confident about their jobs. if they start to see their home values -- real estate values have held up ok for households. if they see that fall over and see their 401(k) go down i would likely get more cautious. until those things happen, you know, the continuation of what we have seen in the first six month of the year has the central to continue. that potential to continue -- has the potential to continue. sonali: the forward calendar is riddled with fed speak. what are you listening for? gennadiy: lots of divergence. they will be all sorts of opinions. you can see with the dots are. some call for no cuts, one cut or two cuts. we are talking about things we getting -- weakening. inflation has dramatically

slowed. it is going to continue to sell. we saw it when insurance prices started to turn over. rents coming down as well. the path forward is actually quite positive. a lot will tell us if that continues, despite the fact the economy is growing, we can start rate cuts sooner rather than later. it does not have to be a falloff in growth. sonali: thank you so much your time. happy weekend to both eu. gennadiy goldberg and brian rehling. up next, the auction block. even with the issuance slowdown this week, burberry is making a stylish return. details are up next. this is "real yield" on bloomberg. ♪ (♪♪) what took you so long? i'm sorry, there was a long line at the thai place. you get the sauce i like? of course!

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sonali: i am sonali basak and this is "bloomberg real yield." the double dose of inflation data in the fed put a sudden stop to the credit issuance surge we have seen all year, at least for a week. it was the slowest week of the year for high-grade u.s. sales with just under $6 billion of new supply. one sale that stood out in the u.k. was burberry. it sold bonds for the first time since 2020 as it works to raise cash for a turnaround. it had a $300 million -- 300 million pound offering and received more than 990 pounds of orders. in sovereigns, the 10-year and 30-year treasury had strong demand. the bid to cover ratio was the highest since 2018.

credit suisse still sees opportunity brewing and credit. >> there is a push and pull between spread buyers and yield buyers. yield buyers are winning. anytime you see a backup in yields, a widening in spreads, people get in. investment grade at 5.5%, 6%? historically that's a home run. hi yield a percent? historically that's a great -- high yield 8%? historically that's a great bet. expecting rates to be higher for a little longer has not really played through in those highly leveraged rated capital structures and the loan market. we like taking credit risk. we are fine going down to double b's. duration looks really attractive. sonali: joining us now is andrea dicenso from loomis sayles and portfolio manager at barings, michael best. what a week to talk about high yields. you are seeing people put

on more risk after tight -- appetite. the search for yields, how far does ago? michael: great question. with spreads for double b's and single b rating credit approaching all-time tights and in some cases through them, investors are looking at more than just the spread metric to evaluate high-yield. duration is quite short in the high-yield bond market relative to historical levels. prices are discounts. every time there is any sort of backup and macroeconomic data or what have you there are buyers that step in pretty easily. there are stresses out there in the lower end of the market. certainly we want to be cognizant of those. our expectation is the ccc's and lower rated and lower distress names in leveraged loan land will struggle to rally in the market because fundamentals are not going to support them

rallying. sonali: if you look at how much money has been pouring in do you think the returns are justifying what you are getting for the risk you are taking on where spreads have been lately? andrea: i think he's hitting the nail on the head. when you think about the backdrop that is towards the lower quality securities, it's been a low volatility backdrop. that is so consistently the case across most asset classes. where we are seeing vol pick up as we shifted the narrative from concerns about inflation towards concerns about growth. that certainly will disrupt the return profile of those lower quality tears of the leveraged loan market and the high-yield market. sonali: let's go into some riskier once. leverage loans is one of the exciting parts of the market because you feel issuers coming to market for all sorts of different reasons. pc the banks pushing it. are there buyers on the other end?

andrea: so far to date there have been buyers. i think as we start to see perhaps more than one as the fed -- more than one cut as the fed put out in the marketplace as of this week, the market is pricing in two cuts. should we get more concerned about growth and start to see three cuts potentially priced in? i think he was the door in the floating rate market for duration assets at that point. sonali: mike, you alluded to troubles brewing under the surface in some areas. where are you seeing the stress is starting to materialize? where are you watching for more stress is to come to the surface in the future? michael: i will tackle the first one, where we are seeing them now. we are generally speaking seeing stresses come up in less cyclica sectors -- cyclical sectors. cable media and telecoms is a

hot sector for distresses and default scenarios. what is chester's -- investors are seeing fund mentally are not able to grow at a really fast clip right now. and, by the way, it's been alluded to interest costs rising for them are really eroding free cash flow. as they tackle a changing media and technology and changing cable backdrop they are having a harder time dealing with the stresses. fund metals are deteriorating there. sonali: go ahead. michael: what we are looking for is where are the new stresses going to emerge. those names are already trading in some of the sectors quite white. if you use -- quite wide. you can track or 40 basis points off the benchmark if you want to. it is prized in largely in that sector already. new sectors we are getting concerns about are things that

are generally speaking consumer driven. as all the data is showing, inflation is still running pretty hot. the lower end consumer is eventually going to have problems where they are not going to be able to continue to spend at the levels they have. we are looking for more stresses in those type of sectors right now. sonali: the consumer point is a great one. a lot of people have concerns about anything that is consumer sensitive, particularly to lower and middle income consumers. how big of a ripple effect is there here in that consumer sentiment we getting -- weakening? when will they start to ripple in the credit markets? andrea: i deftly think it is probably a top priority to be watching the consumer. what we are watching closely is the unemployment rate. as we have seen it take up a bit -- tick up, that is going to hit more than just the middle to

low income consumer. they are not the individuals driving consumer spending in the u.s. it tends to be the top of the income distribution. once you approach that 4.2% on employment rate it is expected to -- unimplement right it is excited to see those consumers change their spending profiles and grow concerned about their own job outlooks, and that might be the catalyst to start to see high-yield leveraged loan markets begin to underperform as we believe it is going to go very quickly towards the traditional safe haven of more duration, higher quality, and that tends to be the portfolio that works at this phase of end of cycle. sonali: what do you think is the best opportunity other? putting new money to work tomorrow, where you put it? michael: where we are putting in money to work is in a mixture of two things. on the high-yield bond side we are continuing to favor shorter

duration yields two event types of --to event type bonds. where not trying to introduce new risk into the portfolios. the economy could roll over and some of the sectors could be is advantageously -- dis advantageously underperforming. we are upping quality. in terms of the higher single beat portion of the market. we are avoiding adding the rest of the portfolio in distressed and discounted names. they are nothing many discounted names in the loan market right now. overall we are sort of more or less positioning up in quality in the sector and in businesses and sectors that are really stable. industrials, chemicals, some of those sectors, we are finding better opportunities overall than away from consumer media, telecom, those things. sonali: favored trade? andrea: i think the sweet spot

now given the backdrop is the bbb to double b space. mike hit the nail on the head thinking about where to be positioned in the leveraged loan market. we like up in quality. we are paring back some great exposure in the portfolio in favor for more duration sensitive exposure. i think in the bbb space we are able to find some bonds trading at discounts. should we start pricing and more cuts from here. sonali: andrea dicenso and michael best, thank you for your time. a complicated time in markets but that is what makes a market. a big week ahead. a host of fed speak. we will talk all about it next. this is "real yield" on bloomberg. ♪

sonali: this is "bloomberg real yield." time for the final spread of the week ahead. it has been a busy week ahead of us. patrick harker kicks off a busy week of fed speak. some critical economic data ahead. investors looking to retail sales for the health of the consumer by tuesday. wednesday markets are closed for juneteenth. thursday more central bank decisions from the fnb, boe and norges bank. friday, global manufacturing pmi's. the final thought on all that fed speak for next week, patrick harker, susan collins and many others throughout the week. we have been talking about it with our guests. it is divergence many looking for on how they feel about the future of this economy over the next year as they look to make the first rate cut if not a second is a market would like. from new york that does it for

us this week. same time, same place next week. this is "bloomberg real yield" and this is bloomberg. ♪

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>> from the world of politics to the world of business, two times a day, joe mathieu and kailey leinz deliver news, insight and analysis from and about politics' biggest power players. >> that is nonnegotiable. >> this will be an ugly year. >> balance of power live around the world twice a day at 1:00 and 5:00 eastern, only on bloomberg tv and radio. context changes everything.

>> welcome to bloomberg markets. equities ending on a sour note. traders turning from their risk appetite to risk off. let's check on the markets. the s&p 500 quickening those losses a little bit. we have a .3% move lower on the day. tech names holding on. the nasdaq roughly flat. holding on to some green territory but not by much. two-year yield at 4.68% on the day. what a week we have had in the bond market. let's see we can break the