sonali: from bloomberg in new

york city, to our viewers worldwide, "real yield" starts right now. coming up, the fed goes big, cutting rates by 50 basis points in a bid to defend the economy. investors debating the pace of future rating cuts, chair powell warning not to assume half-point moves. treasuries on the back foot as they rev up the most hyped a week in years. the biggest issue, digesting the 50 basis point cut. >> the fed really tried to thread the needle. >> the press conference challenge was give 50 without spooking the market. oh >> he did that well. >> i think he navigated that well. >> probably less dovish than we thought. >> basically said we are doing

this because the news is good. >> this is catch up. it's coming to terms with the fact that monetary policy is restrictive. >> what has changed since july? >> they will be slow on this. >> they will be very deliberate, data-dependent. >> when you go forward, it's a soft landing baseline. >> it's a soft landing story and i don't think they'll pull it off. sonali: want to take a look at the u.s. 200 10 curve, the differential between the 10 year and the two year, you are coming off a really historic conversion and what we've seen, diss inverted now, steepening for a fifth straight week. now the steepest level since 2000 22. the question, this doesn't normally coincide with some sort of recession. do we see that this time around? we are talking more about those expectations, but first, expectations on the short end of

the. massive repricing in just the last couple of months, even the last couple of weeks, as we drum beat towards the 50 basis point rate cut. you have seen the move, well over 100 basis points, just since the end of the second quarter. jay powell spoke following the decision, here is what he said. >> i do not think that anyone should look at this and say that this is the new pace. you have to think about it in terms of the base case. what happens will happen. we are recalibrating policy down over time to a more neutral level and are moving at the pace that we think is appropriate. you can take this as a sign of our commitment to not get behind. sonali: joining us now, jp morgan and franklin templeton. you look at the move in the short term rates. 50 basis point cut as well. you have seen volatility in the

bond market since then. a lot of this is predicated on how much, how soon. where do you think we end of the year? it >> the bond market has been interesting on the long end of the curve. i was saying look, the long end is already pricing in 200 basing -- base points and unless we are seeing a dramatic slowdown in the economy, how is this an appropriate level for the 10 year? that has steadily moved up since this very anticipated and, in my opinion, too hasty 50 basis point cut. we just heard jerome powell talking about protecting the economy, not falling behind, making sure that rates are not too restrictive, but we are not really seeing that in the economic data, right? protecting it against what? industrial production beat again this week. we are seeing constructive points across the board with the

exception of the more normal labor market that just went from extraordinarily tight to slightly more normal levels. sonali: to that end, this idea, do they even need 50 to begin with? we can ask that all day, but what about the path forward? do they need to go 50 in november as well, or do they slow down as well? >> absolutely not, i could not agree more with oksana. i don't think they needed to do 50, but fine, they did 50. i think that powell tried to calm down the market. but i'm not sure at all, there seems to be an attempt to take back any perceived hawkishness in his statements. i think it is 2525. honestly, i've been calling for the long-term neutral rate to be closer to 375, four, and another

thing they've been doing is inching up their estimate of neutral from less than 2.5 to closer to 2.9 and i think that needs to go further up still. sonali: glad that you brought us there. throughout the week we have heard a wide range from investors on where they think the star is. where do you think? oksana: let's establish the reality around the fed funds rate. when powell talks about going back to neutral, historically the average fed funds rate is 5.6%. if we exclude the extremes of the early 1980's we get to 4.6%. that is still higher for much longer than i think the market is pricing it at right now. in terms of our star, it's no longer got a handle on it and the fed is quietly moving towards that conclusion as well. sort of talking about 2% inflation, but really allowing the market to live with the idea of higher inflation, 2.2 at the

end of last year towards 3% wear them number will continue to move up. we are in the era of higher for longer, not the least because of the fact of fiscal dominance. we are now in the era of fiscal dominance that will keep a floor on the longer term rates and neutral rate as well. sonali: it's fascinating, the spread is still enormous. you said may be as low as 375. we heard from carlisle saying that it was closer to 4.5. there is still quite a delta. how much volatility do you expect as the market and the fed calibrate what is neutral? sonal: when we look at the year ahead, we can't really do it without looking at what is likely to happen. it is very likely to happen and it doesn't depend particularly on election outcomes, because we are seeing profligate physical

desires, to put it that way, from both parties. i keep hearing that i shouldn't worry so much, because after all, they are likely to have a split administration versus congress and the reality is we have lived with that for the last two years and it didn't seem to stop them from running up enormous deficits nonetheless. the sweep would be catastrophic. so, volatility, absolutely, but do i think that yield over five to 10 years will face upward pressure? yes, i do. sonali: it's interesting, if you look at the pricing in fed futures here, wirp on the terminal is still 200 basis points of rate cuts priced in through the end of next year, bringing you to what, around 284, that's the applied rate here, still way lower than what we have been talking about.

so, is the market getting something meaningfully wrong, or are they just pricing in a landing that is harder than what we are talking about? oksana: it's hard to talk about the forecasting function of a bond market with 7 trillion still on the fed balance sheet, which by the way was 3 trillion after the great financial crisis, somehow we are still here. i don't think you can really discount the reality of nearly 50 years of mainlining liquidity , just endlessly, fiscal stimulus, endless where the fed to continue to ply liquidity. i do think that there is a behavioral component where normalization is believed to be something in the two's at the 10 year part of the curve, and it will prove to be elusive as more and more economic data comes in. it's really interesting, talking about that fiscal backdrop, right? so far we have 1.9 trillion in fiscal deficit with weak

treasury auctions. i think that is a phenomena that will start to occur more and more frequently and those expectations, the bond market will force the issue and those expectations for long-term rates will start to move up and over the next 10 years as we look at the rate backdrop, yes, there will be a lot of chop higher and lower, but broadly it will be higher, not lower. sonali: taking another note on that, jamie dimon saying at an event today, at a festival in washington, that he is skeptical that inflation will go away so easily. for a lot of investors, that fiscal impulse is a big part of the story. do you think that we stand here heading into 2025 having to worry potentially about inflation again once we see a new president, republican or democrat, take hold? sonal: yes, short-term

absolutely. i never bought the idea. belatedly, the idea. belatedly, the imf is now saying that the previous round of inflation had less to do with supply shocks and more to do with fiscal monetary policy. actually, i would say that is 100% in keeping with what we have been saying for several years about fiscal policy playing an enormous role in demand and i think it will continue to support demand. so, the notion, i think there is a recency bias in the market, looking at that post global financial crisis as some kind of -- it seems to have some gravitational pull for practitioners that we will go back to back -- back to that post gf see pre-covid period,, but that is recency bias with data highlighting that we are going back towards something that really is where the market was and where the economy was.

there is no sign of deflationary concerns, which was, you know, the mantra post gf see, to worry about secular stagnation, deflation. these are just not clear and present dangers. oksana: i would add to that that the fed to my knowledge has never acknowledged the link between monetary policy and inflation numbers. in my mind, that means there hasn't really been this come to jesus moment for the fed to say look, maybe we did something wrong, maybe we need to reevaluate going forward. when they talk about becoming less restrictive, i talk about what that really means. the last 12 to 15 years, that's not normal, that's the anomaly. normal is where we are today, 5% high force, that's a lot more normal in terms of bond market history. sonali: finally, investors

getting used two or more use to higher for longer. sticking with us, we want to bring you guys breaking news. we had some news come in at the top of the hour about the ftc suing cvs, cigna, and united in good health for manipulating insulin sales. this was accusing these drug middlemen of engaging in illegal programs to drive up the price of insulin and working with higher priced providers instead. more news as we have it, but cvs and unitedhealth shares are down , cigna is still in the green. bringing you more headlines out of germany, this was highly contested, the german government deciding not to sell any more shares in commerzbank. for the time being you have seen that movement lower to the tune of .3% and within the country since the initial set of sales

they have seen tremendous disagreement about how the sales were handled. coming up next, u.s. high-grade sales already exceeding forecasts, but this week delivered the biggest forecast news for any week this year. we will talk about the state of credit and what's under the hood after the fed's big move. more "real yield," next year on bloomberg. ♪

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high-grade supply was just above $12 billion, missing estimates for 25 billion, the biggest forecast miss for any week this year. dealers are calling for a bounce next week. we will see how things go. junk-bonds at their lowest in two years, driving up a flurry of new deals, bringing the monthly tally to 2 billion, up 34% since last september. they expect credit spreads to widen heading into the u.s. presidential election. >> our view for the next six to eight weeks is bearish on credit. we think that investors are under appreciating policy risk and typically heading into an election volatility rises. given that you have a binary outcome with two very different implications, investors tend to de-risk portfolios, reduce risk positions, causing credit spreads to widen.

into november we think that credit spreads will get wider. i can't -- sonali: oksana is still with us in joining us is stephen. at pine ridge, stephen, would you purchase junk debt at this point in time? would you join the credit spectrum if we hit a soft landing or are you worried that things might get worse? steven: when you first start off by talking about junky debt, we need a market upswing, referring to the semi-high yield, which it hasn't been for quite a while. from a fundamental standpoint, all signs point towards continued support. you have got default rates trending down, not up. a slowing economy, but remember, high yield performs best in positive economic growth, not fast. what the fed did, by cutting rates and pointing towards a

glide path that indicated strength and confidence in the economy going forward, it would all be supportive of high-yield bonds and spreads. the counterpoint is if you look at where valuations are. particularly if there has been a massive rally in the triple see component, valuations are at best fair to overvalued. so, the skew of probability of outcomes widens from here. should it why did -- widen and will it are two different things and i think there will continue to be strong support and appetite for leverage credit and loans. from a coupon basis for the rest of this year, we still see a return that approximates a yield minus. sonali: how worried are you about the riskier parts of the credit market, given where we have seen spreads compress? there's been almost no risk

baked into this market. oksana: the risk is definitely baked into the market, the market is not priced for low risk. looking at any investment we have to look at what is priced in. high yield in the 200s in terms of spread, some of the tightest levels we've even's -- ever seen, within spitting distance of cash. what is priced in? a lot of companies in this space probably should not have made it through 2020 and will now find it more difficult to find financing, even in a world where the fed funds rate is 4.5. it's just not a world that they are used to issuing debt in. part of the reason we have seen lower credit resilience is continued demand in a market that has been shrunk in terms of supply. we also know something that 80% -- something like 80% of the maturity role comes up, looking at the fundamentals and

realizing it's not a liquid investment, it's not an ongoing investment, it can't survive. with all of that in mind, seeing defaults rising, they are coming off of extraordinarily low levels. interest rate coverage levels falling, not in the entire sector but definitely in the weaker areas, what typically happens is when a certain part of the market falls out of bed, it takes the entire market with it. we have seen this time and again . what is priced in? i think investors will do well to hold back at the optionality. as we continue to live in a higher for longer world, that is not an uncomfortable place to a junk rated credit. sonali: glad you brought that up, how far do rates really need to decline, stephen, to be comfortable with where we stand? if you think about the maturities coming due next year,

if we don't get back to where we were before, and there are many doubts, of course, rightfully so, that we will, what do you start to see fall off the engine if rates don't fall far enough, fast enough? steven: for the last couple of years the high level of rates has not been much of a determinant in driving leveraged finance issuers into default status. companies have defaulted, the few that have have been more idiosyncratic structural problems that they are dealing with. so, as we look out over the next several years, we don't see the pace of yields decline or rate cuts necessarily having a meaningful impact on driving incremental default rates. in fact, default rates have already peaked in the high-yield market and are on their way down, though there is a component of the leveraged finance market right now experiencing viability management exercises outside of defaults.

and then the other component of relatively high levels of leverage is really the growth in the private credit markets for businesses that have been over levered and still structurally sound. many of them have been able to refinance. so, when we think about risk exposure, there is a tendency to look at the broader index. you really need to look at the triple see stress components. that is where your cluster is and we are in extremely low aggregate volumes of that amount. sonali: thank you both so much for your time. we could have gone one hour today with the new information we have. coming up next, the final spread, the week ahead. a lot of fed speak is coming up. we parse through all of it for you. this is bloomberg ♪.

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sonali: this is "real yield," time for the final strike, the week ahead. coming, many thanks are getting global pmi on monday. tuesday, the u.s. consumer confidence figures and bloomberg's global business form kicks off in new york city. wednesday, a fresh read on u.s. new-home sales. thursday, all eyes will once again be on jay powell speaking. jobless claims, coming out more and more, and important data point every week. and the preferred defense inflation gauge, pca -- pce with sentiment data. final thought, fed speak in the pipeline. even just after today hearing remarks from waller about inflation is the key decision, remember, we also have folks like austan goolsbee speaking,

the chicago fed president, where the story about employment will be an even bigger question at the end of the day. fed supervision chair also speaking next week and of course, bank capital rules are front and center. from new york, that does it for me. same time, same place next week. this was "bloomberg real yield," and this is bloomberg. ♪ so, what are you thinking? i'm thinking... (speaking to self) about our honeymoon. what about africa? safari? hot air balloon ride? swim with elephants? wait, can we afford a safari? great question. like everything, it takes a little planning. or, put the money towards a down-payment... ...on a ranch ...in montana ...with horses let's take a look at those scenarios. j.p. morgan wealth management has advisors in chase branches and tools, like wealth plan to keep you on track.

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sonali: welcome to "bloomberg markets," i'm sonali basak. let's take a look at where markets are trading. after a record high in the s&p 500, we are lower today by .2% on the s&p 500, really holding the 5700 line. looking at a decline of .3% in the nasdaq 100 with the two-year yield just a little state --