odel, it's ai designed to multiply developer productivity, so you can generate code quickly. ibm. let's create. sonali: from new york city, it's the last show of the year for "bloomberg real yield," and it starts right now.

a triple whammy hits the markets with a possible u.s. government shutdown. socks and yields taken for a wild ride as investors dial back from the fed-induced selloff leaving 2025 looking uncertain. the big issue, deciphering the fed rate path in 2020 five. >> everyone has got a lot of uncertainty at the moment. >> this is a fed that is deeply divided and doesn't have a clear idea among themselves what they should be doing next. >> it's going to be a constant recalibration process as we get new information hitting. >> the meeting by us is still there. the question to me is -- does inflation get in the way? >> they are afraid of a

stagflation environment. >> the longer that the fomc takes to achieve the 2% target, the more risk i think comes around those expectations being unanchored. >> 2% inflation would be really hard. >> we are anticipating more cuts next year. >> i think it's important not to anticipate anything and to wait and see how this unfolds. sonali: taking a look at the volatility on the short end of their, the two-year yield this week, we have been paying attention so much so the long end, we lost track of what is right in front of us. we saw the two-year shoot higher at one point this week and you saw it hit above 435 before dropping back down to end the week below or hundred 30. let's flip the board to talk about the two-year as related to the long-term as well. the treasury curve steepen to and at one point it steepened to

the most since 2022 and you have seen it really move in one of the most drastic fashions so far this year. the problem is investors are being met with a bear steepener and we will talk about the ramifications of that later in the show. sticking with the fed right now, mary daly joined us earlier, emphasizing the need for a slower pace to cut rates. >> we feel we have that recalibration behind us and we are in the next phase, which is really looking at the incoming information where we can return to a more typical pattern of gradualism for the fed to. my prediction is it will take much fewer rate cuts then we thought, but i will watch the economy to see if that works out. sonali: joining us now, george and brian. george, we talked about that just a second ago it bear stephen -- bear steepener. george: it's very logical for where we are.

the fed kind of cut the brakes -- pumped the brakes when it came to future rate cuts. they want to create as much optionality in their future projections. but the economy is still doing well. the mix, the mix of policy likely to come from the new administration on balance is fairly growth positive and should be fairly constructive. but the rub, the risk here is that there are some inflationary components to it that the bond market is having a hard time digesting. we are not surprised about the bear steepener. the bear component is this extra element of uncertainty that has worked its way into the markets over the last week or so. sonali: inside the fed we have had some interesting dissent. part of that came from their newcomer. the fed over in cleveland, you have seen her talk about monetary policy that she

believes is not far from a neutral stance but that she provides -- inflation rising to the 2% objective. brian, do you believe that? at the end of the day, do you believe we are near neutral? brian: well, the economy says that we might be. the economy has done better than the fed expected. better than many expected up to this point. it looks pretty robust going into next year. there is not really a reason for the fed to get much more aggressive here. you know, tap the brakes. see how things develop. if you look around and look at the economy, maybe it says that neutral is not that far away and maybe that rate was higher than everyone thought back in august, september. sonali: george, what do you think about this dynamic and the number of cuts being seen next year?

george: we think that neutral is better than it was, but we don't need to be there tomorrow. the fed has to evolve with the economy. as we have seen, inflation is sticky with some very, very sort of slow incremental movement lower, so they could be a little bit patient so that the orientation is still lower, but in reality as brian mentioned, the economy is doing well. unemployment is low. the job market is holding together reasonably well, so there is no urgency to push rates reasonably lower. as i mentioned before, the prospect of material change on the fiscal side is something the fed will have to contend with over the course of next year and they don't know how the interplay of those factors is going to roll through the economy. so, we think it is sensible to take it slower. sonali: talking about higher for longer, there is a question of how high, isn't there? at t. rowe price they say, "the

6% 10-year treasury yield's, yes, it's possible, why not, but consider that when we move through 5% in the transition for u.s. politics, that's an opportunity to position for increasing long-term treasury yields and a steeper yield curve ." that's what he says. brian, would you take that kind of risk of adding duration at this point in time? brian: i think you can slowly think about it. i like it as more of a play where the 10 year gets up around 5%. if inflation is sticky, even saying above expectation with 3%, 2% growth, 5% seems reasonable to me. i think we will have a hard time pushing higher than 5% unless the bond vigilantes show up at some point, which again i don't expect in the coming year. sonali: it's funny, the bond

vigilantes, you wonder how quickly they show up, if at all. george: rather than taking a simple bet on duration, which is always difficult to calibrate and predict, the curve has been steepening. that is sort of a much more directional view than we think is implementable in the bond portfolio. so, the important thing about duration is that it's a powerful tool in a bond portfolio and at this point in the cycle could be go to 6%? it's possible but it doesn't seem likely. it's definitely possible. we think you should rather diversify that. there are different types of duration and securities around the world, some of which will see price appreciation. you want to be in those. those are the front-end rather than the long end. it's the lower parts of the spectrum and in many instances they are outside the country. that form of duration is much more powerful than just the up down view on u.s. treasuries.

sonali: speaking of the treasury market, up in new york, down in washington, the gop are fighting with each other and elon musk is weighing in. this conversation months ago would have involved much simpler math, right? this idea that maybe tariffs could get in the way with inflation, but now it's getting more complicated when you are worried about what the debt limit looks like at the end of the day. when you see what's happening in washington, how does that complicate further the picture for next year? >> it injects uncertainty, of course, but it's nothing new, we have seen uncertainty in washington for a long time. key items need to be resolved. we will have the expiration of the tax cuts, the spending issue, and then the debt ceiling . bond investors will be watching those closely to see if there is any big movement from what we

have seen in the past, but frankly i view it as more of a bump in the road for the time being. i don't see a real seismic change as it pertains to fixed income investors. sonali: call me naïve, but do the bond vigilantes show up if you raise or eliminate the debt ceiling? george: that's a great point. brian is right, the trajectory is in place but flash points are there that could materially change the trajectory. the fiscal position of the u.s. is likely to erode and it could do so meaningfully over the next couple of years. eliminating the debt ceiling takes away the notion that there is a kind of control that forces people back to the table. will the debt ceiling go up with every meeting? absolutely. but if it is a sort of unbridled open opportunity to just spend as much as you want, that would start to i think create a lack

of confidence and you will see that in the long end. the important part to look at is inflation expectations. they remained fairly well anchored. until that starts to move significantly, medium-term inflation expectations, it's hard to get too worried about it . anyone of these variables could be a trigger point that braggart -- radically changes market expectations, pulling the bond vigilantes out of the market and demands a much higher term premium out of the long end of the curve. that is really what we think is going to happen over the course of 2025. you will see a bigger term premium in longer dated treasury materials, spreading across the bond market. there are ways to sort of offset that with credit, with muni, with international bonds. that will be a large part of what a bond investor will need to do over the course of next year. sonali: if you thought that

yields were interesting now, 2025 to get more interesting. thank you both for joining us for the final "bloomberg real yield," of 2024. wall street strategist growth of 2025 with highlighted bond sales around an estimate predicting a record year. honing in on credit, next. this is "real yield," on bloomberg. ♪

sonali: this is "bloomberg real yield." time for the auction block, where we wrap up the year for credit issuance. starting with notable treasury auctions this year, 20 year and five year tips. both sales tailed with the 20 year having the highest yield

since april. u.s. high-grade sales came to a halt because of the fed meeting with 2024 finishing with sales totals near one point 5 trillion. with activity topping forecasts for most months, including december. the second busiest going back to 2017. still keeping an eye on the u.s. leveraged loan market, the december total stands at $190 billion thanks to the loan repricing surge. this has been the busiest two week stretch ever for launches. the volume tops 1.3 trillion, easily breaking the annual record. looking ahead to next year, amanda lyman makes out the case for buying credit amid an uncertain backdrop. amanda: you have to be clear why you are buying credit. we should recommend to investors to buy it for yield and for carrie. don't buy it because you think that spreads will tighten or that rates will fall

dramatically. both of those tighter spreads and lower rates would boost total returns in a typical way for duration exposure. it's a nuanced argument and we are actually quite constructive heading into 2025, recognizing that it is really for yield based demand. sonali: joining us now, elizabeth at finch ratings, with kelly lieber at barings. think about the year that was. talking to you all year about where the spreads have been. yet they have been tighter and tighter and tighter throughout most of the year. yet you look at where yields have been and now this higher for longer environment, is it a blessing for 2025 in some ways? >> i have to agree with amanda's earlier commentary about being constructive or leaving out. -- early out. despite the team being super

busy and getting through the repricing's that have occurred this year, we like loans in the market, given the context of higher for longer. you just have continued attractive carrie in the market. in the bond fund we utilize loan buckets to be able to enhance returns that much more as we go into the year. but we still see a lot of places for opportunity in the global high-yield market. we have been spending a lot of time talking to investors about how bifurcated it is at this point in time. we have been looking at legacy issues that came to the market before 2023. they remain pretty discounted in price overall with shorter duration profiles. we are looking for those pull apart stories in that segment. in the newer vintage bonds, they have provided investors with coupons in the high sevens, the eight percent context. a nice contractual income there. even though on the surface of

things the market is in a yield context with a 300 spread context that looks historically tight, the yields are still working and there are definitely places to find value. sonali: it's a perfect set up for leveraged loans. the year-end come back has come in so hot. how is this playing out coming into next year? has a lot of that come to the front for something that could be a head or do you see more where that came from? elizabeth: as you noted, 20 has been a tremendous year for the leverage loan market with a tremendous amount of activity just in december. a lot of the deals that were launched will close in the first quarter of next year. activity this year was dominated by overpricing the existing debt. m&a volume was still a little bit lower, volume wise, then investors had hoped, due to

elevated evaluations and the ongoing disconnect between acquirers and the target companies. however, we expect, and there is optimism in the market that things will improve on the m&a front in 2025. sonali: it's an interesting pipeline. kelly, you mentioned a form of caution as well. recalibration. where do you get cautious about it all? kelly: it's more of a sector by sector credit by credit discussion. there are areas of the market where we are being more careful such as energy. we see a lot of price agnostic new supply coming on in 2025. we see that supply demand dynamics shifting against us. we are also going to be cognizant of anything housing related. in a higher for longer environment, these mortgage rates remain too high to be affordable for consumers. those are areas where we are

cautious but many are still investable. the credit market overall remains very up in quality. even in the sectors that could be more challenged, it is still dominated by a lot of double b, high single b issuers. sonali: where's the cautious leverage loan? of the default rates that you are seeing currently, where do we stand relative to history and what's expected next year relative to today? elizabeth: great question. default rates are ending the year in the 5% range. we are at 5.1% right now, right now forecast. for 2020 five we have forecasted default rates of leveraged loans at 3.4% and 3% for the leveraged yield. the rate is lower going into next year and the reason why is because a lot of issuers, and we

had forecast that default already. a lot of fewer companies are going to be forecasting next year. you have to put that in terms of the historical context, right? peak default rates happen around the great financial crisis where leveraged loan defaults were around 10% and even if that sounds relatively high, and it is beyond what we saw on the pandemic, from historical standards it is still relatively low and constructive. sonali: you mentioned supply demand dynamics, how drastically with that change pricing? kelly: on the technicals market it is quite strong. leveraged loans have seen 21 billion in inflows on that asset class and on the bond side it's 19 plus billion. within loans as well you have seen a tremendous amount of cielo activity boosting demand for that market as it makes up

two thirds of the overall demand front. bonds again, you just have a lot of yield hungry investors. in allocating assets within the markets, that's also just about relative value. why would bonds stand out versus other asset classes and this rate environment? we are on a super short duration of three years in total at historically low levels. this structural component of the market has let high-yield produce twice the amount of excess returns as a longer duration asset class for the last seven quarters. again, it's about what high-yield can offer over other asset classes. for the investors who are more cautious and defensive, we need to look at things like the equity market where the downdraft high-yield outperforms the more challenging scenarios. sonali: one reason i ask about supply demand dynamics was private credit, which stole the show in such a big way this

year, but leveraged loan markets came back in such a big way. how do you see that playing out into next year and do you feel that private credit can steal back the glory in a way that makes it not as robust as you think? elizabeth: private credit, as you know, has come into its own and is full by many accounts one third of the leveraged capital markets. there is that interplay between leveraged loans and high-yield debt that we expect to continue. it really depends on where the rates are, right? we are seeing issuers going to private credit to seek out the spoke financial solutions with more interesting capital setups. but a lot of what we have observed is those companies are coming back into the leveraged loan market to take advantage of lower spreads. there is a lot of going back and forth and we expect the trend to continue. with elevated m&a lbo activity next year, that would be fuel on the fire for private credit markets as well. sonali: elizabeth, kelly, thank

you both so very much. have a very happy holiday season. still ahead, the final spread, the holiday week ahead with a light dose of economic data. this is "real yield," on bloomberg. ♪

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sonali: this is "bloomberg real yield," time for the final spread in the week ahead. coming up, monday u.s. consumer confidence. tuesday, new home sales and durable goods in the u.s. and if you can believe it, wednesday is christmas day day with most global markets closed and you still have economic data for the rest of the week with thursday european markets closed for boxing day. friday, u.s. wholesale inventory with economic data from japan and the preliminary impeachment hearing for the south korean president. for my final thought, i wanted

to say happy holidays to all and a very happy new year. i'm very excited to see you in 2025. that does it for us. we will be back in two weeks on january 3 "bloomberg real yield. this is "bloomberg real yield -- generally third. this is "bloomberg real yield," on bloomberg. ♪ ♪ ♪

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>> welcome to "bloomberg markets ." i'm scarlet fu. s&p 500 up almost 2% on the day as we arrive at midday here in new york. looking at a reversal of the post-fed soft in stocks and bonds, triggered by the central bank's forecast for fewer cuts next year. even with this recovery in equities, still looking at a decline of more than 1% for the s&p 500 this week, down 1.2%.