sonali: from new york city for our viewers worldwide, i am sonali basak and "bloomberg real yield" starts right now.

coming up, inflation cools. core cpi takes its first step down. changing traders' expectations. sending treasury yields sliding after a wild week of swings. we begin with a big issue. markets brace for donald trump's return to the white house. >> the markets are really off and on pins and needles right now. >> we are beholden to policy, which is not a great place from an investing standpoint. >> there are still policies that could dent economic growth. >> what is important is how they start. is it high and then going nowhere? is it step-by-step? >> the deregulation side, that is the positive. the wildcard is the headlines around tariffs.

>> the risks are skewed toward more inflationary policies. >> i do not know where they will go with this. i do not think a lot of people do. >> what is affecting the tenure is supply. >> going into uncharted territory about how much we are trying to borrow. >> my suspicion is the markets will continue to be quite volatile. sonali: if you take a look at were bond buyers have been stepping into the market the gains are led by the belly of the curve. that is extending the twos, f ives, 30s curve. it is interesting because that is the blackrock trade in a nutshell. buying the belly of the curve and getting more uncomfortable once you extend out on the curve, which brings me to the term premium. can see here that one of the biggest seen a more expensive tail end of the curve, yields much higher is the

term premium for the 10 year is at the highest level since 2015. a lot of this has to do with the costs investors are demanding due to uncertainty for extending a duration when it comes to treasuries which creates a conundrum for the incoming treasury secretary, who will have to figure out how to issue at longer ends of the wall. also speaking of policy, former fed chair has said the fed and the economy will need to remain flexible to rising yields. >> putting policy on serve into the context of where the economy is is where the markets need to be. bond yields can go up not just because of budgets but strong growth and optimism about productivity. the fed will have to do some signal extraction. if yields selloff because washington is running and irresponsible fiscal policy that is part of how the economy needs to adjust. sonali: we are joined now by our

guests. if you think about the longer end of the yield curve there is excitement because the 10 year got a bid. with some promising economic data but you just sighed at 4.8% a week ago. do you see this as being sustainable? >> i think it all depends on the period. realistically i think the 10 year needs to get closer to 5% if not higher depending on what we see from the incoming administration over the next 60-90 days in terms of fiscal policy and other policies for which we have very little visibility. we need to see how they get implemented and what gets implemented. the speed with which we got to 4.8% was not sustainable. the grind it toward the 5% level

is almost getting close to baseline. sonali: i also want to bring up this quote -- they have joined the likes of t. rowe price. the 10 year hitting 6%. they posited that the 10-year treasury yield's are still low in relation to two key drivers, consumer price inflation and -- when combined with the refinancing of maturing debt could result in gross u.s. treasury issuance of $5 trillion or 17% of gdp. do you buy into the 10 year when there is so much uncertainty and some investors are saying 6% is possible? >> in the near term i am a buyer, a tactical buyer because we have a huge move to the upside. we have some half decent ppi-cpi numbers. my issue is, we can throw out

numbers like 6%, but i have it in my mind, what is neutral? where is a fair value? my go to is around 4.5%. given that, i do not think they can get below 4.5% to four. once i see it hitting 4.5%, it is kind of neutral to me. the next move is toward 5%. sonali: if you think about what we heard this week from christopher waller, the idea that you can see the fed lowering rates again in the first half of this year while you still have market pricing pushing rate cuts out to july, what do you think it is possible this year in terms of rate cuts that if you believe neutral is higher? >> i think neutral is higher. the fed has been prudent giving

away 100 basis points of the small gifted had in terms of rate cuts. i would agree the market, there is an extended pause if not an end to the rate cutting cycle. i heard what you said, what has changed? we have had $2 trillion deficits for four years. we have had extremely high inflation and nothing has changed. the call for 6% seems to be -- i would say what this administration actually does, yes, sure, we might get to 6% and that might be reasonable. otherwise if i look at the neutral rate at the short and i am looking around 4%. going back to the last question, fair value for that 10 year, i put into a premium of something

like 75 basis points to 100 basis points and i get toward 5%. if inflation remains sticky or goes up and we have supply issues coming out of the fiscal policy and it gets put into place, we could easily go above 5%. sonali: the world is trying to figure out what the new policy will be from the new administration. inauguration just days away on monday. what do you believe is possible in terms of any potential inflationary forces from policies the president-elect has been discussing? >> the obvious ones are the tariff risk and the original idea was 10% tariffs on everything. if that were to happen, you would have to brace for an economy wide price rise of .5%.

whether that is inflationary is a different story. my issue at the moment, 3% inflation economy. the tariff threat puts upward pressure on that. the other big issue is the taxcutting agenda. together with the removal of -- all of this is inflationary. it is hard to imagine a disinflation narrative given the combination. still bearish on treasuries. sonali: what do you think the new administration will mean? has a lot of this risk been priced in? especially if you are of the camp that some tariff policies might not be as strong as what was initially posed during? the campaign >> i agree with him. i would fully agree that you could have the tariffs in place. we have estimated .4% to .5%.

to me that is not the determining factor of inflation. i am looking at fiscal because it has been fiscal at the heart of what we have seen over the last four years. the fact we moved from those 9% levels to 4% levels. we have been kind of stagnant at around 3%, 3.5% for the better part of months. we have not seen major progress on disinflation. to me this just means inflation remains -- inflationary pressures are stagnant. if you get any upward pressure coming from expansionary fiscal, which fuels consumer demand, it will take off again. that to me means the fed cannot do as much as it would like to do as soon as it would like to do it until we get more clarity

on what will happen. sonali: is this a wait-and-see moment? if it is, what are you waiting for to put on any real conviction trades? what is the best trade into this year that you believe will be the story of 2025? >> the trade is still short duration and positioning for the 10-year treasury yield. i do see buying of direction right now. the latest data showing for the first two weeks of this year the short we saw at the end of last year and now guys are coming back in and buying duration. the move to the upside -- the buying pressure short-term. i am looking for inflation to come to a more sensible level. when the fed cut in september, they have to wait for three or four months of decent inflation data before they could do that. the issue is we have moved back

to where we were before that when they could not cut. they really could not cut because of the inflation. i am waiting for the inflation story to get into a better position over the course of the first half of next year. we are not ruling out the possibility fed the fed does cut. we are still in the camp that the next move is more likely to be down than up. sonali: a lot of uncertainty still ahead. we thank you both so very much. have a great weekend. up next we will talk about the auction block because it was a big week in the u.s. big u.s. banks have wasted no time selling debt after earnings. they have been flooding the issuance of schedule. we will bring you details next. this is "real yield" on bloomberg. ♪

sonali: i am sonali basak and this is "bloomberg real yield." it is time for the auction block were issuance surged thanks to the big banks. jp morgan, citigroup, wells fargo and morgan stanley. bank of america also had big debt sales totaling $25 billion. overall issuance pushed to over $46 billion. another notable sale for the week was citadel. it sold $1 billion over two parts to fund a payout to its owners. we end with u.s. leverage loans as that area stays red hot to start 2025. volume around $50 billion with

monday seeing the most launches on record. the bulk of activity is mainly from repricings. when it comes to credit, morgan stanley lays out the drivers for current investor appetite. >> this is a credit market i think a lot of investors would describe as a good yield and a bedspread. yields are quite high and nominal. relative history on the corporate indices. spreads are low. i think a lot of buyers of credit at the moment are more yield driven. sonali: joining us now, the global head of credit strategy at bnp paribas and the portfolio manager at brandywine global. the economic data this week was good. when you think about what we saw in terms of cpi and even in terms of retail sales, you did see retail a little lower than expected. mixed data all in all. inflation was promising.

how do you take that into account when you are making decisions? >> i think the data has been quite strong and that shows you the resilience of the u.s. economy. if you look at the credits, the fundamental has been released from. the vibrancy of the u.s. economy give us more confidence to be constructive. sonali: how constructive are you at this moment. you have seen investors pushing spreads to essentially all-time levels. his risk being marked inappropriately echo >> definitely. we are very constructive. constructive in a carry-on kind of way. one of the best things about the credit market is yields are

high. i want to stress this, especially in a period where it rates have been volatile, higher rates are good for credit because it helps attract to the asset class and also helps supply. it facilitates a better supply/ demand balance. that is one thing that suggests volatility in spite of all the politics might not be so high this year. this might be a fairly on volatile credit market. that is exactly how we think there will be four returns. sonali: how do you think about this in terms of the higher for longer cross currency? tracy: i think andrew -- the spread is bad but the yield is good. especially this yield, the

higher for longer environment. if you can manage it it is even better. we like shorter duration corporate credit. the fundamental has been strong. one of the drivers behind us from fundamental has been the maturity. that has been favorable for the fundamentals. for households, it is a similar reason. the locking of the mortgage rates. the transmission mechanism from the higher interest rates to the fundamental of the private sector is not strong. we have a missing transmission mechanism. the u.s. economy is less sensitive to a higher interest rate and that is why the current higher rate is still not restrictive enough. sonali: the entire economy has

not been immune. i look back at analysis from s&p global showing u.s. corporate bankruptcies are at a 14 year high. if that is also true, at the same time when you are seeing fairly strong economic data, how as an investor do you enjoy those kind of pitfalls in the credit markets? viktor: it is true that bankruptcies are high. the default rates, though, are probably not as high and they have been peeking. i think the companies that are going bust right now are very small and mid-cap type of companies. the rates environment now is higher. when you look at the high yield default rates, it is trending down. the loan default rate is also

trending down, even though from much higher levels. i think avoiding the pitfalls is really avoiding sectors that have frontloaded debt maturity walls. also avoiding industries that are inherently rate sensitive. we actually think this is a pretty good environment to have a cyclical tilt to portfolios. there is a cyclical risk premium that really should not be there. you have an incoming u.s. administration that is progrowth. being in a cyclical sector is a good way of positioning credit portfolios. sonali: how do you feel about this in terms of asset classes? leverage loans coming back with a vengeance. what does that spell about how the market will perform in the coming months? tracy: we are very constructive

in the market. i think it has been the best performer for the past one year, three year, five year. almost comparable to the equity market. the strong performance is due to the resilience of the market. the market has been through a global financial crisis and has been performing well. i think it is the best spot to be. sonali: what do you think of the clo resurgence? do you think this is a place that is relatively safe because of the weight has been packaged or does it pose some risks given the exuberance that is ahead? viktor: the underlying loan fundamentals have been going through a default cycle. but a lot of the defaults are

restructurings, and therefore the recoveries are ultimately much higher than you have in a typical bankruptcy situation. therefore, i think the ultimate losses we are experiencing are much lower than the default rates would imply. if you add to that the valuations are quite a bit more compelling in the high-yield space, loans and by extension clos, they look like a great place to be in 2025. also an asset class and tends to do pretty well. sonali: viktor hjort of bnp paribas and tracy chen of

brandywine, thank you for joining us. still ahead, the final spread, the week ahead. a new administration in washington. global business leaders in davos and a busy week of earnings. this is "real yield" on 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.

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sonali: i am sonali basak and this is "bloomberg real yield." time for the final spread, the week ahead. on monday, inauguration day in the u.s. u.s. markets are closed in honor of mlk day. the world economic forum be gives in davos. earnings from netflix. christine lagarde in davos. thursday, donald trump remarks from davos, virtually. earnings from verizon. a rate decision.

we are looking at 30 year mortgages over the last six months. rates remain elevated at 7% despite rate cuts. we will keep an eye on that. from new york, that does it for us. same time, same place next week. ♪

>> welcome to bloomberg markets. i'm sonali basak. the u.s. supreme court has upheld a law that bans tiktok. updates continuing to come out of washington around the story. we will bring you the latest. first, check on markets. s&p 500 is hitting a session high just a moment ago, firmly above that 6000 level. the last day of trading before president-elect trump begins his next term. it