>> bloomberg real yield starts now from new york city. i'm vonnie quinn.

coming up, and upside surprise u.s. payrolls, sending treasury yields higher across the curve. putting fed rate cuts on the back burner. we begin with the big issue, december payrolls surprising to the upside with the highest sprint in nine months. >> clearly it's a strong number and that's the best of the market reaction. >> this is a kind of goldilocks report. of course, markets are treating it like a hot print. >> fundamentally it's good for the economy. >> that's how we emphasize that. >> we are above trend. >> there's a lot of health and the labor market because the economy is healthy. >> the question is, can the fed stay on top from here or cut one or two more times? >> what's the forward economic progression from here? will there be softening of the

economy to bring the fed back? >> it will take more data points and decisions from the fed to figure out where the yield environment will take us. that's basically the story for the 2025 outlooks, uncertainty and not being able to be forecast. vonnie: those jobs numbers are coming in well above most estimates. 256,000 jobs created in december, a sharp intake of breath at the fed. unemployment was down to 4.1%. average hourly earnings also fell, but month over month they were up 3% and then we had more data at 10:00 showing inflation expectations, which are important for feeding the inflation dynamic overall, rose. just the five to 10 year end one year inflation expectations were up 3.3 percent. this is what happened in the treasury markets. we started rising, the curve, just across the board, sending yields higher.

the 10 year, the 20 year, the 30 year, all back to october of 2023 levels. taking a look at the 20 year, we are well above 5% right now, flirting with 5% on the 30 year with 10% up. where it is a go from here? it depends on what the market says the fed is going to do, right? pushing out the cuts right through september and october now, with banks and strategists changing their opinions, no rate cuts at all this year. goldman bringing their forecast back to two from three with citigroup saying there will be five cuts this year. >> is a fair value for mutual, 20%. looking at the 10 year for value mutual, that's around 4%. treasuries trade 50 basis points above that, 4.5%. that is your starting point, fiscal deficit. inflation issues are off. the economy is doing ok.

ambition from the coming administration to cut taxes. it's all in the mix. vonnie: yields rising above 5%, that looks a lot more likely just in the last few hours. joining us now are kathy jones from charles schwab and markup bohne of bank of america. let's start with you, kathy. your first thoughts as it crossed? >> the fed doesn't even have much room to talk about cutting rates in the near term. the market is accurate and pushing out the possibility to the end of the year because the momentum still seems to be pretty strong in the jobs market, lifting treasury yields to steepen the yield curve. vonnie: bank of america also saying there will be any cuts this year but the market is surprising in responsibility. as we know, a lot can help -- a lot can happen in 12 months. mark: you are exactly out --

exactly right, but the justification for it is strengthening of the labor market in the consumer with sticky inflation. the expectations that you mentioned earlier are a big deal for the fed. until they see inflation that looks like it's coming downward more confidently, they will stay on hold. our economists don't think the fed will be adjusting that stance for a long time and if that's right, it means rates are going to stay more elevated. you are going to see the market debate whether or not the fed will be cutting or if they will seriously contemplate hiking in the future. that has not been a part of the market narrative. we think it will take further downward pressure on the unemployment rate. probably core pce will print around .3 for the fed to seriously contemplate hiking. that part of the discussion has moved back into the markets mind after strong data this morning. vonnie: is the possibility of

hiking much closer and more of a reality? kathy: it's a reality but not a strong probability at this stage of the game. one of the things the fed is grappling with is what is the potential growth rate in the economy? the belief was that it was quite low, but now we have had a string of years, a year or so of strong economic growth. with inflation kind of sticky but steady, has the potential growth rate, up and justified a higher terminal rate for the fed ? i think that's the situation they are facing right now. that may not justify rate hikes at this stage of the game, but it certainly takes out the possibility of cutting rates anytime soon. vonnie: what's confusing? is it the fed or the economy?

right now bank of america and yourselves, plenty of others, have five cuts this year, looking obviously for something to break. kathy: i think the markets are confused and rightly so. the economic data had been confusing. looking back at the pandemic era , it's very different. we never turned off the lights on the global economy and then turned around to say let's find out what happens. what has happened is this resilience in the u.s. relative to the rest of the world and the resilience in the economy, as mark mentioned, the stickiness and inflation says why would we do anything right now but wait and see how things develop? it's hard for me to envision a downturn in the economy given that we have the potential stimulus on the horizon with inflationary pressures and policy. it would be hard to make a case for lower rates from here. we would have to see something really change in the economic data. vonnie: how much are you pricing

the possibility into your forecast that we might see tariffs, that we might see a lot of immigration reverse, putting pressure on the labor market. these dynamics could change quickly. mark: most would acknowledge this uncertainty. we don't know what the policy changes would be or when they will take effect, but we don't know what the ultimate impact will be. we can debate the growth impulse and what that would be. most would agree it's the upside of inflationary pressures. a key question for us is what is the fed function if they see higher inflation as a result of say tariffs being put into place. key in their judgment has to be where are we on inflation right now and what are inflation expectations doing? seems the fed in 2018 had a bias to look through the inflationary impact of tariffs if they rose.

they never really did, but if the fed wanted to look through again today, they would be asking themselves are inflation expectations stable? if not, that reduces the flexibility that they have. they would have to respond to it if expectations are rising. i don't want to put too much on that one data point from michigan, it's often revise lower, but if those expectations look like they are going higher, it changes the calculus for the fed and limits the flexibility we think they have. vonnie: which is what you have been saying as well, kathy, so expect to hear much more about inflation from the fed, chair powell, who talked last year a lot about the anchoring of not wanting to lose ground. what about the idea of higher yields themselves slowing the economy, that this is more restrictive than we have been seeing as the stock market sells

off? 8 that's one of those surprising things about the cycle even as credit spreads were tightening. the markets were wide open for companies to issue debt. we have a private sector providing a lot of funding to smaller companies that might otherwise find yields prohibitive. the stock market until recently has been wide open for financing . so, financial conditions have been pretty easy. probably the only area they got tight was for consumers with poor credit. those credit card rates are now proving to be difficult as delinquencies rise. it's hard to make the case that the policy has been terribly restrictive, given the way the markets have behaved and the economy has responded. vonnie: asking you briefly about the term premium, we've seen a rise a lot.

now it's pretty distinctive. ira jersey is one of the one saying the backup and yields is thanks to the term premium and so on. what do you think about where it goes and how much it is responsible for the yields where they are and whether it matters? mark: we don't like the fed term premium matters -- mom models, we think they are only capturing the next 18 months and we think a lot of the rate move as reflected a higher expectation for a neutral policy rate. it is the market that has realized that the economy seems relatively impervious to rates where they are today. the increase in the terms that the models reflect is an expectation for the neutral rate to be higher. we don't find it as concerning. one thing we don't recognize is

that there are questions about the supply demand backdrop in the treasury market and we think those dynamics are most pronounced at the back end of the rate curve. we think treasuries will cheapen and it will be reflected through tighter 30 year swap spreads, the best reflection of a supply demand imbalance. if the fed, indeed, is done cutting, long and investors will increasingly ask themselves if i'm being fairly compensated to own longer-term treasury debt at current levels and likely be demanding even more compensation for that, likely cheapening long data treasuries. in a way it will help the fed to likely bring about more restrictive conditions in the economy. vonnie: and what do you think, kathy? kathy: we are calling it the year of the term premium. it's a shift in the expectations about the fed policy being what

ithould be. there is also an element of uncertainty built into that that has to compensate for the policy uncertainty on the horizon. putting it together and it's a powerful combination over time. we are looking forward to continuing to move up this year. vonnie: we thought that last year was going to be exciting. 2025, the year of the term. what's more exciting than that? thank you to kathy jones and mark cabana. flooding the global debt markets in an unprecedented pace, credit hud strict -- credit hungry investors are being taken advantage of. this is "bloomberg real yield." ♪

vonnie: i am vonnie quinn in this is "louvered real yield." that sales are strong across the world. the japanese 30 year sale is drawing the highest demand ratio since 2020 and in europe there were 120 billion euros in sales this week. tuesday the region solve the most borrowers ever in a single day with italy in particular seeing to most orders on record. in the u.s., monday was the biggest day since early september. helping to draw a $60 billion week for sales. a trio of treasury sales in the 3, 10, and 30 year auctions of note. the 10 and 30 year join the highest yields since 2007. and jp morgan they are looking at upside ahead after a two-year bull run and the equity market.

>> the fundamentals are very strong. the spread site you reference are tight for good reason. we are seeing continued inflow into bond funds. people are rebalancing and realizing the two-year is back to back. maybe this is going to slow down, that is when the bonds, 6% to 7% in bonds in an uncertain environment, that's a pretty compelling environment. joining us now -- vonnie: joining us now, amanda lynam and peter to keeney. thank you to you both. amanda, how does this morning's job report and expectations data that we got at 10 a.m., out is a chance -- how does it change the environment? amanda: we have a constructive view on corporate credit. we have had it for quite some time, the past few quarters, actually, even though spreads are tight and yields are attractive and we like credit

from the incoming perspective, the data this morning further underscores the comfort level with such an economically sensitive asset class. as yields are higher, growth in data has been surprising on the upside. that's been attractive for corporate credit, allowing the strong fundamentals to persist. vonnie: has it not been crazy confusing in 2024, peter? would you not be just a bit trepidations right now in terms of looking to fix or float? if you had to choose. peter: it's been a crazy year of manic narratives. stepping back to talk about that for one moment, in september of 2024 we had a situation where the market was pricing in four cuts. fed funds futures pricing in four cuts for 24 and 25. the futures market is pricing in only one cup for 25. that seems like the opposite set

up relative to what he had in september, which was too hawkish, now to dovish. we are -- the narrative is overwhelmingly bullish and few people talk about valuation with risk-adjusted returns. frankly, as the 10 year approaches 5%, i might lean towards the floating rate rather than fixed. particularly relative to corporate credit, we like structured credit. in certain structured credit markets you can see trading 140 basis points wide to the double be rated corporate credit. we just don't think that the risk-adjusted returns of corporate credit are there at the moment. the structured credit market is one of the few that frankly gives you the excess return risking macro backdrop warrants. vonnie: what is the backdrop that makes this a good environment for corporate credit?

is it that we are getting better growth with great, strong jobs data that is good for corporate america? or has it become more uncertain now and the fed is likely to be higher for longer? peter: the fed stopped the fight too early. we were looking at headline cpi at 2.7. the 3.3 super court was still up four. the idea that inflation has been beaten doesn't seem to ring true for me. there will be a reflexive reaction from the markets that are higher in the near term. the elephant in the room for me, vonnie, is fiscal stimulus. when i ask you what is different this cycle, there are two things . first, fiscal policy. we are almost 7% deficit to gdp. unprecedented except for wartime.

o with his team to cut the deficit. that is going to be a tailwind that people have taken for granted that is just not going to be there in 25 in the same way that it wasn't 24. vonnie: we have seen the dollar going berserk, right, having to do with stories outside the u.s. if the dollar is so strong, would you look at places outside the u.s. to put money? amanda: it's strong because of u.s. exceptionalism being well telegraphed and we are seeing that with some of the data, but we actually have a constructive you and european credit. the growth backdrop is more challenging and there are some reasons that european credit has been able to hold in quite well. it tends to skew up and quality of it. if you are looking for underperformance european assets, corporate credit isn't typically the best way to express that. a lot of u.s. borrowers actually

issue in europe, so you can still capture some of that u.s. growth momentum in that market. we really like floating rate exposures. for the past few quarters, floating rate exposures have been an important element of diversification in portfolios. when you see the volatility and the higher yields in the treasury markets, the structural changes happening, it's the case that we have floating rate exposure in the liquid and private credit markets and we think that is really compelling for investors. vonnie: talking about the private credit markets for a year, where to go with the spreads being so tight right now? amanda: there are a lot of options. the premium can range from 15 to 100, 200 basis points, depending on where you are taking risk on the spectrum. for institutional investors, that's meaningful when you

magnify it. it's compelling in terms of longer-term savings for retirement and we like the risk reward set up when you look at the great run equities have had to. when you can capture attractive yields in the structure, we like that risk for income, diversification, and the expectations of higher term premium and the buildup to artificial intelligence that is all structurally changing in the economy vonnie:. we have to leave it there already, thank you both so much. still ahead, the final spread. the week ahead, u.s. cpi headlining data. this is "real yield," on bloomberg. ♪

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vonnie: i'm vonnie quinn, this is "real yield." coming up on monday, the j.p. morgan health care conference gets underway. plus, earnings from kb homes. tuesday, kdi with confirmation hearings taking off for the trunk cabinet picks. wednesday, december, cpi print with big bank earnings getting underway. a two day bonanza with more big bank earnings. retail sales at the confirmation hearing for treasury secretary. friday, rounding out the week with economic data for china and u.s. housing starts. for my final thought, let's look ahead at that cpi data on wednesday, the all important data next week. will it change the calculus for a federal reserve that has already seen calculus change this week?

benign prints are expected with blow away upside surprise today on jobs, which might mean we could see expectations change in the early days of next week. in the meantime, this was the reaction after today's jobs report, equities s off across tard. ♪ lock in let's go.

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welcome to "bloomberg markets." jobs data was strong todayth mo, resetting expectations for rate cuts this year, putting more of a pause on it. let's get a quick check on the markets with equity markets selling off and on the news. good for the economy that so many jobs were created but fishing out those rate cut expectations down one point 6%, the nasdaq 100 down one