From New York City for our viewers
worldwide, I'm Katie Grifeld. Bloomberg
Real Yield starts right now.
Coming up, a tick up in the Fed's
preferred inflation measure as tariffs
work their way through the US economy,
leading to consu consumer sentiment
sinking to a threemonth low. and Fed
Governor Lisa Cook suing President Trump
over his push to remove her. We begin
with the big issue, pressure building on
the Federal Reserve.
>> There's an enormous amount of pressure
on the Fed right now that cannot be
ignored. This is a real assault on the
Federal Reserve's independence,
>> which means higher inflation,
potentially, less credibility, even
higher long-term interest rates. I don't
think we should be too confident that
this is the this is going away anytime
soon.
>> The Fed is under a lot of pressure in
terms of the future policy path. This is
a Fed that's going to proceed with a
series of cuts.
>> Ultimately, the Fed is on an easing
trajectory.
>> The dovish side of uh of the FOMC may
have taken control.
>> Is very very important. At the end of
the day, 3% is still not the Fed's 2%
target. The jobs data next Friday is
going to decide for sure whether or not
we're getting that first cut.
>> Any kind of cuts are going to come with
a steepening.
>> You will get lower short-term rates.
>> We're more nervous about the long end.
What you're seeing in the long end is
certainly somewhat worrisome. By the end
of the year, we're at 450 on 30s. Bonds
here look like a good buy.
>> The market's just a little bowled up on
the Fed uh steepening the curve.
>> Well, let's take a look at the trends
developing in inflation. And you had
today's print showing progress stalling
on the path to the Fed's 2% goal. We
stacked up all your different measures
here. You have PCE, CPI, and PPI. PCE,
that's in white. That's what we got this
morning. As you can see, I mean, it's
not going higher. Maybe you could get a
little bit worried about what's going on
in yellow with PPI. But overall, it
seems like we have stabilized on
inflation. And the idea here is that
given that we are sort of trading
sideways, that's probably not going to
derail the Fed, even though we are still
uh some distance away from that 2%
target. Let's take a look at how this is
playing out on the Treasury curve,
specifically on all the different yield
curves we have to look at. The Fives30s,
the 210 cents, and the 230s. You can see
that the trend really since about mid to
early 2023 has been to trade steeper.
That steepening trade has been on for a
while and really it started to work this
year in 2025. Maybe some stalling out
when it comes to the two cents in blue,
but the trend is clear. We're going
higher on those yield curves. Let's
stick with the Fed because Scott
Alvarez, he is former general counselor
counsel at the Federal Reserve Board. He
joined Bloomberg TV yesterday and spoke
to the challenges facing the central
bank. think it's definitely worse for
the institution if the president can
fire a member of the board at will uh or
based solely on an allegation that's
unproven uh undemonstrated. I think in
that situation there really is no
independence uh of the Federal Reserve
and its ability to act and that's got to
set markets um make markets uneasy.
>> And let's keep the conversation going
with George Borie. He is chief
investment strategist of fixed income
over at Allspring Global Investments and
Pria Mizri, portfolio manager over at JP
Morgan Asset Management Core Plus Bond
ETF. Uh Pria, I'll start with you since
you are sitting in studio with me here.
I want to start with this morning's PCE
figure, of course, coming in bang in
line with expectations on pretty much
every single measure. What do you make
of a print such as that where there were
no surprises at all when you're thinking
about how the Fed is actually going to
proceed next month?
>> So, with everything that we're dealing
with this year, a number that comes as
expected is actually not a bad thing. Uh
we're hoping for a quiet day. So, it it
comes in as expected. To your point, it
is above the 2% inflation target, but it
was not higher. So, at least that was
good news, particularly as the Fed uh as
Chair Pal seemed to indicate is on this
riskmanagement approach. we had that
weak payroll report or the with the
revisions. I think there's concern at
the Fed and I'm maybe part of that group
concerned about is the labor market
losing momentum and they they know that
monetary policy is restrictive. So I
think the inflation report allows them
to reduce the level of restrictiveness.
We know we're living with tariffer
there. The dual mandate of the Fed is
intention but the inflation number
hasn't picked up to the point where they
might say that hold off we really can't
start to cut rates. So I think the the
labor the the inflation report allows
them to cut rates as they've signaled
that labor report next week is really
important whether it's a 2550 what
happens after the 25 I think that's what
we need to see we know the labor market
slowing is it slowing in line with
structural issues because of break even
numbers are lower because of whether
it's AI or immigration or is there
something cyclical I think that's the
big question we're grappling with ahead
of that I think the Fed so what this
means for the Fed is I think they can
cut that 25 it's really what's next how
many more cuts, where's the end point?
All of that. I think we need that labor
report. I'd say more important than even
that inflation print today.
>> Well, let's uh bring that topic over to
George Borie because Pria makes an
interesting point that okay, you take a
look at the odds for a September rate
cut. They're hanging out at about 88%
right now. I'm going to go ahead and
call that a lock. But when you consider
the trajectory beyond next month,
George, is it going to be the labor
market that is the key?
Well, as as uh as as Priier mentioned,
you know, it's it's very much they're
still data dependent. Whether whether we
want to call it that or not, they are
data dependent. There's certainly air
cover. There's room, there's rationale
to start to cut rates. The labor market
is shown clear sign of deceleration and
there's a very mixed bag of growth. You
know, that that on average growth also
seems to be slowing. Although, you know,
the second quarter numbers still looked
pretty pretty solid and third quarter is
holding up reasonably well, but with the
labor market showing signs of slowdown,
they can cut. It's just a matter of pace
and and and I think that's what you're
mentioning is is absolutely critical. it
it doesn't appear to to need to be fast
and furious at at this point that that
you can start to incrementally lower
rates, align that with a labor market
that's showing some sign of softening,
but you have to be very respectful of
the inflation backdrop which is kind of
stuck. We're stuck at slightly above
target and the question is, is that
going to go down? It doesn't appear to
be going down anytime soon, but if the
Fed wants to look out a little bit over
the horizon and say slow and steady for
now and then we'll have to see how
inflation evolves, that seems like a
very practical, very realistic approach
at this point in time.
>> Well, the phrase that we're using,
George, stuck when it comes to
inflation. I mean, I think the chart
told the whole story that looks like
where we are. And I want to talk about
this in the context of the Fed's dual
mandate. You have the labor market, you
have inflation. Of course, that's what
the textbooks tell us. Do you think that
those two sides are in conflict? Because
if I take a look at today's reading,
core PCE on an annualized basis at 2.9%.
If the labor market does weaken
materially here, I mean, what kind of
magnitude can we talk about when it
comes to Fed cuts uh with inflation
still around those figures?
>> Yeah, that's that's an excellent point
and that's why we think it's going to be
very measured. like they do have room to
incrementally cut rates, but it's going
to be meeting by meeting that to be able
to forecast sort of a rate cutting cycle
that's going to drop a 100 more 100
basis points or more. It's premature at
at this time. There is kind of the dual
mandate conflict that that that you
mentioned. And and the other is is with
respect to to to inflation is to as to
like what will be the drivers to sort of
bring it down. Is it does it have to be
growthoriented or can it be organic?
Historically, it needs to be growth
oriented to get inflation down. And from
the Fed's perspective, we think there's
really one, you know, there's an
important aspect to this. It's
confidence, market confidence in its
ability to get to target and to maintain
their inflation fighting credibility.
Powell's doing a pretty good job, but
he's trying his best to preserve that.
and and and that's what the bank overall
is is trying to preserve as we get sort
of pressure from from from the
administration to ease rates in the face
of what is still very persistent stuck
inflation. So we kind of watch the long
end. We very much watch break evens.
We're very much looking at term premium
in here to kind of calibrate like is the
market getting uneasy? There is some
signs of that as you pointed out earlier
but we haven't sort of fully
capitulated. The bond market is still
largely holding together and
particularly important we think are
those break even inflation rates 10 and
30 years out which are which are holding
in reasonably well but still showing
some signs of upward drift.
>> Yeah, absolutely well behaved for the
moment but as you said uh also a
direction of travel higher. Pria, uh,
George touched on the concept of Fed
independence, and we have to get to one
of the big stories that's happening this
week, and that, of course, is what's
going on between President Trump and Fed
Governor Lisa Cook. What's interesting
to me with all the drama of this week,
of course, Trump asserting that he can
fire uh Lisa Cook, Lisa Cook then suing
Donald Trump, is that you really haven't
seen much reaction in the bond market.
We know what the worst case scenario
might look like. uh long end yields
going higher but haven't really seen
that anxiety come through in pricing
>> right and I think you know we should
look at the bond market absolutely I
stare at it all the time the the curve
has steepened a little bit but I think
you can attribute a lot of other things
to that steepening the fiscal trajectory
global term premium going up but if
really we were concerned about Fed
independence really getting challenged
here I think equities would be much
weaker I think credit spreads would have
been wider the dollar would have been
much weaker there is uniform agreement
ment among economists, among market
participants, among global policy makers
that you want an independent central
banks. I think it's one of the basic
tenets of a of of an of a you know
developed economy of US exceptionalism.
I really think the market is saying
there's an institutional gu there are
institutional guardrails around the Fed,
whether it's the Supreme Court decision
from earlier this year, whether it's the
fact that there is a diversity of
opinion at the Fed. We really don't have
clear political leanings at the Fed. I
think, you know, we've got the 12 people
that vote. You've got that, you know,
all the board members. I think the
market saying this is sort of drama. We
can look past it. I don't think the
market's really seriously pricing in a
loss of independence. It would be
extremely serious if that happens. Maybe
I'm naive, but I do think that those
institutional guard rails are there to
protect that Fed independence because
everyone I think the president wants an
independent credible central bank
because that tenyear is the policing
authority for the market. If the market
gets a whiff of a non-independent
non-credible central bank, you're going
to see those break evens much wider.
Long end rates will rise. The Fed really
won't be able to control the long end.
And then you know that that's when the
bond vigilantes sort of wake up and
every market wakes up and t uh takes you
know uh notice of that. So I think it is
a risk. It's it's absolutely something
we should keep an eye out for. But I
would put that in the realm of a big
tail risk maybe starting to get priced
in. I think the market's still looking
at a credible central bank and the you
know growth slowing inflation staying
sticky and how we're navigating. Can we
stay in that soft landing? And the Fed
cut just enough to keep the soft landing
going. I think that's the key focus. But
you're right, we should all I think keep
an eye out for whether that independence
is threatened or not.
>> Well, we'll continue of course to follow
what's going on uh in DC of course uh
court hearing today. George Priya, great
to have this time with you. That is
George Borie of Allspring Global
Investments and Pria Misra of JP Morgan
Asset Management. Now coming up next,
the auction block. Junk bond yields
falling to their lowest level in more
than three years. We'll talk credit
next. This is Real Yield on Bloomberg.
I'm Katie Grfeld. This is Bloomberg Real
Yield. It's time now for the auction
block where we highlight the big global
debt sales of the week. And we start
with treasuries. There were auctions for
the US two, five, and seven-year notes.
We did see the five and the seven-year
sale tail, but still come in at the
lowest levels since last September. In
credit, US highgrade saw a slater summer
slump as only a few deals happen this
week. August volume falling just shy of
$100 billion. The pace of sales though
expected to pick up dramatically next
week. And over in Europe, no summer low
to speak of, logging its biggest biggest
week for sales since late June. Deals
were driven by French borrowers who came
to market to raise cash before a
potential collapse of the French
government next month. That does not
sound good. But back here in the States,
Colin Martin from Charles Schwab says
that he has credit concerns even with
spreads remaining tight.
>> I'm concerned that I think we're seeing
a lot of dynamics with supply and
demand, people really reaching for
yield. um stock market optimism, a lot
of demand in the private credit space.
And I think when we get all this demand
moving into an asset class, I think you
lose price discovery and it can't it
can't mask things that are going on
underneath the surface forever and we're
seeing I mean defaults are are still
relatively high.
>> Joining us now we have Winnie Cesar. She
is global head of credit strategy at
credit sites and Jeff Peskin the founder
and CIO of Phoenix Invest. And Winnie,
I'll start with you because this has
been the question for a while, right?
When we take a look at credit spreads,
whether it's in junk bonds, whether it's
in IG, the fact that you have spreads so
tight at these levels, what's the
takeaway? Is this calm or is this
complacency?
>> I think that the takeaway is that
technicals can be a powerful driver of
valuations. And that is perhaps
something that people have continually
missed really since the Fed started
hiking rates back in early 2022.
Attractive yield levels can be really
enticing to investors and when they are
looking at yields versus equity levels
and credit spreads being very tight
balancing off kind of all-in yield
levels. We continue to just see robust
cash coming into the asset class and
that can actually help fuel fundamentals
as it leaves a wide openen primary or
new issue market which allows companies
to raise new liquidity.
>> Jeeoff weigh in here when you take a
look at where spreads sit right now. I
mean what message do you glean from that
especially when you weigh that against
some of the fundamentals as Winnie was
just touching on?
>> Sure. It's a good question. I I think
spreads are relatively tight which uh
historically it gives people pause but I
think the bigger picture is the absolute
yield on high yield bonds now it's right
around 7%. Um when you look historically
at what you get in returns in the equity
markets of roughly 8 to 10%. Um high
yield bonds are now somewhat
competitive. In addition the
fundamentals are very strong. the uh the
earnings that just came out uh a lot of
companies hit their numbers showing you
know good looking forward very good uh
opportunistic uh business fundamentals
default rates I think are going to stay
well contained um so the credit quality
and high yield is good um and the yields
are okay especially when you compare it
to equities
>> it's interesting uh you know listening
to you both I mean this is something I
think about when it comes to the
corporate credit market often you know
do Do you take a look at spreads such as
that we're showing on the screen, say,
"Wow, that looks super tight." Or do you
take a look at the all-in yield and say,
"Okay, this looks pretty lofty." And
Winnie, I'll toss that back to you. It
sounds like uh it's the all-in yield
that you're really focused on here.
>> Well, we're focused on it to a point. We
realize that investors in credit have a
wide range of mandates. Some of them are
looking at all-in yields. This is
especially true in the high yield market
which has typically been a total return
asset class. But when we think about
investment grade, there is that balance
of excess return performance which
doesn't look like it's going to be
particularly strong going forward given
how tight spreads are right now versus
total return performance which has been
very strong already and could continue
to prove stronger. What we're really
focused on is that risk adjusted return.
When we look at investment grade total
returns for this year, they're only
lagging the high yield market by about
60 basis points. And when we think about
some of the potential crossurrens in
terms of potential margin compression,
what happens with rating cycles, what
happens with downgrades on a
riskadjusted basis, we don't think that
you're getting as compensated in the
high yield market as perhaps that almost
7% yield would imply. And you know, we
were just listening to uh Colin Martin
over at Schwab and I mean, Jeeoff, he
made the point that he sees default
staying sorts sort of near these levels.
He says that these are relatively high
levels. Reading through the notes that
you sent over to our producers. Uh I
know that you have a different take that
you look at defaults and say that
actually they look pretty low right now.
And from where you're sitting, does that
lead you to want to take on a little bit
more credit risk here versus uh maybe
staying a little bit higher quality?
Uh yes, I do. I I think the real value
in the credit space right now is in the
shorter duration
uh kind of off therun credit space. High
yield bonds, you can get an eight or 9%
yield right now in some shorterdated
high yield bonds uh where the
fundamentals are are in good shape. Um
you know, default rates obviously go
through these wild swings, you know,
like an OA type of things where you get
it over 10%. Long-term average has been
about 4% default rates. you're probably
looking at the next year and a half of
two and a half% or so, two and a half or
three. So, defaults are behaved. Again,
yields are are are pretty elevated,
pretty competitive with what's going on
in the rest of the asset classes. And
again, the credit quality is really high
historically. Again, um a lot of uh the
weaker credits are in the private credit
space. these public bonds are um at some
of the highest metrics of credit quality
you've seen in a long long time. So, I
think when I weigh it all out, I think
you're getting a good deal in the high
yield market, especially off the run,
>> shorted dated stuff. Um, and if rates
stay highish in the long end, for the
foreseeable future, these rates, I think
over time, are going to be pretty
compelling. And there's a lot of money
still coming into the high yield market.
The new issue market, uh, it's been wide
open. the next basically year to 18
months of of of refinancing that need to
be done have basically been done already
this year. So I think you've got a
little line of sight for the next year
or so where the credit quality is good.
Um the yields are okay and um you know
the earnings from these companies have
have been very strong.
>> Right. Well, Jeeoff, you make an
interesting point, too, that when you
think about the quality of the public
credit markets, the fact that maybe some
of the problem children are staying in
the shadows in the private markets, that
certainly helps, but overall, you're
sticking to shorter duration. Winnie,
I'd love to come to you on that question
and how you're thinking about duration
risk right now.
>> Yeah, so we've kind of neutralized our
duration view, especially in the
intermediate to long end of the Treasury
markets. When we look at our fair value
model assessment of 10-year Treasury
yields, they're about 50 basis points
higher than what our model would
indicate. And as you discussed with Pria
and George Borie, there are some reasons
for that long end to be lagging a little
bit. And some institutional concerns
around the Fed, around fiscal policy,
all of these things are probably keeping
the long end yields a little bit more
elevated. But we do see the mix of
opportunity if the Fed does start to
ease on a more moderate pace or if we
start to see more contraction in the
labor market uh balanced out fairly
nicely with some of the more uh
significant questions that the the
market and investors are facing right
now within the high yield market. From a
duration perspective, it's really all
about credit specific catalysts and
fundamental catalysts. We do see some
opportunities for positive ratings
momentum, continued upgrades into the
investment grade space. We've seen some
significant transactions that have been
deleveraging and that's where we're more
focused.
>> All right, that's a good place to leave
it. Really enjoyed this conversation.
That is Winnie Cesar of Credit Sites and
Jeff Peskin of Phoenix Investment. Thank
you. And if you can't get enough talk on
credit, check out the Bloomberg Credit
Edge weekly podcast on the terminal and
wherever you got your podcast. But still
ahead, the final spread. The week ahead,
a holiday shortened week ending with a
critical US jobs report. That's next.
This is Real Yield.
I'm Katie Grifeld. This is Bloomberg
Real Yield. It's time now for the final
spread. the week ahead. Coming up,
Monday, US markets closing for Labor
Day. Tuesday, Congress returns to
Capitol Hill. That brings us to
Wednesday when we get the Fed's Beige
book. Thursday, comments from New York
Fed President John Williams. And Friday,
the big event, the US payrolls report.
But that does it for us. Same time, same
place next week. This was Bloomberg Real
Yield. This is Bloomberg.