Starts now. Volatility steals the show, while those in the bond market and caught wall streets attention. Jamie dimon says to prepare for the entire curve to move up 100 basis points. Bill gross says to invest in the curve that he sees turning from inverted to positive. We begin with the big issue how much longer until this Strong Economy breaks . Strong consumer numbers in the gdp data. Gdp growth of almost 5 . Looks really good on the surface. Consumer spending is the driver of the economy. Consumer spending of 5 . Inflation is something that is still really casting a long shadow. The fed is looking at at all of these datas that juxtaposed with inflation thats still do i. We have up test we will have a hawkish look out from the fed next week. I feel like this is the deal with the devil now. If the Federal Reserve wants to back off with rate hikes, and say the market will do its work, be very careful. Is this sustainable . Sonali you may remember when a 30 year bond only moved five basis points in a single day but now its far more volatile. You could be looking at 15 or 20 basis points throughout this week. Look at how much volatility is in the market. Typically, the move index which tracks volatility moves in conjunction with the vix. It has more recently decoupled in a much bigger way. Why is the bond market so much more volatile than what you see in equities . I want to show you the longer term bond yields and what has been happening. Typically, thats where you see the safety. There has been a conflicted trade when you look at maturities 20 years out. Glt tracks the maturities 20 years or longer and you see how much the drawdown has been this year. In the last couple of years, you have investors pitching duration at a greater scale but the trade hasnt worked out with the drawdown of more than 12 this year. If you look now and you saw bill ackman earlier this week take a short position off the longer end of the curve, you see people coming back in. This trait is still very contested and we will talk about duration. Joining us now is cliff corseau and diana amoa. Its safe to take on risk on the long end of the curve . We would shy away from it a little bit. Youve explained a lot of why that would be. With the Strong Economy we have with hot inflation or sticky inflation, almost at 4 , i dont think the all clear signal is in there yet for duration. We are not sure its quite over. We think we are closer to the bottom in the price drop on fixed income. But its not yet going out the curve in our opinion sonali bill ackman a Pershing Square tweeted earlier that we covered our bond short but there is too much risk to remain short bonds at current longterm rates. The economy is flowing faster than recent data suggests. When you look at that move to take on the short position, do you think you could get into the long end now or do you still see a short position building at a reasonable scale . I think a lot of the short positions have been taken off. The reason is the speed of the move we had with rates in the last few months. Has meant there is more convexity in the bond market. To make money from the short side, you meet you need a much higher move and yields. Its a question of tightening and whether it makes sense to be short these levels are not we dont necessarily think this is an attractive level to be shorting bonds. We think its harder Going Forward to monetize the short side of the trade. One of the things thats keeping investors on the sidelines is the amount of headline risk we are facing over the net couple of weeks whether is the treasury refunding coming through or its what we hear from the fed if they acknowledge the tightening on the back end of the curve as a replacement to hikes Going Forward. I think markets have a lot to digest the next few weeks which means longs and shorts are probably sideline for now. Sonali im interested in the treasury funding announcement wednesday morning. You think about how much is required to refinance the United States right now. There is a sense that a lot of funds are coming into the front and the backend to hedge their current exposure. How much do you see shorting is a function of the market now . Its definitely a function. We had some big name investors coming out a few weeks back and saying they were shorting treasuries off the concern of these fiscal issues. When something is so well discussed, you have to accept that there is a probability some of that is in the price now. We think shorting the back end at this point given where yields are simply does not look attractive from a risk reward perspective and it makes total sense that investors will hike on the front end of the curve especially given that the curve is still inverted. Sonali if you think about the treasury refinancing announcement, do you think there is a real risk that it adds more volatility to the markets then we have already seen . One trader made a point that with the shrinkage of the Balance Sheet and regulations of unlevered funds, this issue could get worse into next year. Its definitely a possibility if you look at the supply numbers. They are gargantuan. Its 125 debt to gdp and we havent seen that since world war ii. We will have a lot of supply for a long time. A lot of it is in the front end. If you look prepandemic, no short issuance with Something Like 100 billion per quarter and now that number is pushing 500 billion. That is rattling the market a little bit. There are all kinds of ships going on in terms of buyers of the curve like foreign governments like china and russia and we dont expect them to buy at the past. An increasing supply dropping demand arguably doesnt necessarily create a common bond market necessarily create a common bond market. Sonali let me point to bill gross who had the idea that the idea of investing in the curve, various combinations show them going positive before year end. Hire for longer is yesterdays mantra. How do you capture moves in the yield curve . There is a couple of ways to think about it. One is just looking at the shape of the u. S. Carve. I can see why investors are looking at the front end. When we look at u. S. Activity, theres been a huge focus on the gdp print thats backward looking data. When we look forward, there are signs the impact of Monetary Policy are playing out whether you look at new them sales or mortgage applications, they are at their lows and credit growth is negative for the First Time Since the great financial crisis. Small businesses had to refinance at a much higher rate. Lets not forget, Small Businesses account for 15 of gdp and 50 of the labor market. All these things and 15 of the labor market. We actually think of the front and rates where they are makes sense to put some cash there is a slow down hedge at a minimum but you also need to be invested in the front end of the curve and it makes sense that the curve canyon can continue to sweep and to steepen Going Forward. Sonali do you believe in flattening . The curve is a frozen rope. Its testing 5 , that typically doesnt last long. It signals maximum uncertainty. Error view is you can have a rally in the front end of the curve because we think there will be a mild recession. I think we would caution that there is probably a limit to where or how much the fed can rescue the markets and the economy this time. Error view is that inflation will remain sticky and we are in a regime change where 2 will be difficult to get to. We would say that maybe 3. 5 is the new 2 and thats fine. I think the market can live with that but it needs to be stable. That Way Investors and corporations and individuals can go about their business in a predictable way. I think steepening but only really because of potentially mild recession. Sonali you had jamie dimon this week saying it doesnt make a difference of rates go up 25 basis points or more. This is what he had to say. I dont think it makes a piece of difference whether the rates go up 25 basis points or more. I think the curve going up 100 basis points, be prepared for that. Sonali the idea that the whole curve can move up 100 basis points, how significant is that . Its extremely significant. Chair powell said the yield curve is doing some of the work for the fed so they are look at the tightening of Financial Conditions and factoring that into their Monetary Policy considerations. 100 basis points from where we are today seems a stretch but as weve seen the last few months, the rate cut has become d anchored because youve got a certain amount of supply coming through in the price insensitive buyer which was the fed has stepped back from the market along with other factors weather is looking at china, japan willingness to buy rates. We think if you get that 100 basis points move up, thats going to be the thing that tips markets into a recession. Thats teva Financial Condition tightening is just more than the current economy can absorb. Sonali the idea of 100 basis points moving up in the yield curve, how does that add to the equation . If it happens fast, it will rattle the markets. If you look at where the 10 year is today at 5 , theres been consternation around five in the market is not trying to push it back. If you look at history, 5 10 year in the current time is not abnormal. Its normal. Typically, the 10 year would be priced around 200 basis points plus inflation. Our view would be more like 3 . We are not that far off base. Its just the speed upon which it happened. We havent adjusted to it yet but another 100 would take yields up higher. I think you are beginning to get into a restrictive zone there. I would predict more of a steepening in the curve as the market would price in a recession moving forward. Sonali thank you to both of you. Up next, taylor swift enters the chat when it comes to the surge in yields. This is real yield on bloomberg. Its easy to get lost in investment research. Introducing j. P. Morgan personal advisors. Hey david. Connect with an advisor to create your personalized plan. Lets find the right investments for your goals okay, great. J. P. Morgan Wealth Management. Be ready for any market with a liquid etf. Get in and out with dia. Was also the first time you heard of a town named dinosaur, colorado. We just got an order from dinosaur, colorado. Start an easy to build, powerful website for free with a partner that always puts you first. Start for free at godaddy. Com sonali this is bloomberg real yield. Its time for the auction block. Last week we saw lots of action especially from the bank for this week a different story. This is the fifth straight day with just one single issue work tapping the highgrade market even with offerings from amity bank, capital one and american express. Weekly volumes fell well short of estimates. Looking at the month, october is on track to have the lowest issuance of volume and at least a decade. Yields are putting pressure on funding costs at risk premiums in europe wasnt much better. There was the largest deal of the week and even with that deal, issuance reached more only more than 10 billion euros which falls into the most bearish of expectations. Jp morgans lisa coleman finds the space extremely attractive. I think there is a tendency to look at the rates market and people get nervous about the volatility. This is kind of in a sea of confirmation perspective. When we put the package together, the higher yields plus fairly attractive spreads for an investor like a pension fund or insurance company, its almost like candy. We havent seen these kind of levels and years. Sonali if yield candy doesnt get your attention, maybe taylor swift us. Fixed income investors also tend to think about eras. Joining us now is west two id tashs westwood and charles schwab. The year of the bond has not played out. At what point to start making money from investing in the bond market when the safest assets of lost you this much money . Hopefully now. We thought this was the year of the bond but prices have fallen pretty sharply. It hasnt been the best year but we think it continues to remain attractive. We want to frame it differently and thats his focus on the shortterm performance swings. When we talk to our clients, they are longterm investors. We can undo what weve seen this year but the best part about bonds as they mature. We are looking at fields whether his treasuries at 5 or Investment Grade corporates. We think its an attractive opportunity to lock in height yields and high income which is important for investors and maybe have to write out some volatility over the next few months or quarters to get to the highest yields weve seen in years. Sonali we will get to Investment Grade but on the risky stuff, if you are taking a look at the broader market, what is starting to crack . You mentioned earlier issuance being a little bit lower. We are seeing Companies Finding capital costs that are more restrictive. These Financial Conditions are not as excepting as they have been in the past. One thing that has led his engineering. Its not necessarily a crack but its something to take note of. They are not taken must as much issuance because companies are not issuing as much. We are not seeing as many Financing Options coming to market. That will have an impact on Economic Growth overall. They finance and longerterm or Economic Growth and then theres less of that financing, theres the potential for less growth. Sonali i think about the late scott minard who talks about capital preservation and not losing money is a credit investor. When you think about high yield versus Investment Grade, do you take on credit risk at this point given where the economy is . We think Investment Grade is very attractive now but we have concerns about high yield. With Investment Grade, we think its an attractive opportunity. The first reason is the slope of the yield curve. For many investors, its a tough proposition to accept a lower yield for longterm bond. Its not inverted, the inverted yield curve is yet less of an issue. Lets say things slow down as we expect, thats a big concern with high yield. Investment grade spreads good move a little higher but in periods like that in the past, yields have fallen. You dont really get the yield riser price to climate you will see prices rise little bit because the treasury decline can offset the Investment Grade spread increases. At 6 or above, gets attractive for companies that generally have strong Balance Sheets. They are not super sensitive to the rise in rates the way high yield issuers are. They have a smaller and less diversified borrowing base. With Investment Grade, its more diversified. Rising rates might affect them over time but not as quickly as high yield companies. Sonali investors in junk bods of completely turned a blind eye to the fact that you are seeing bankruptcy start to take higher. Do you think there is another shoe to drop on the people who have loaded up on high yield in the last couple of years given there is still so much complacency . I think there is a little bit of that that investors need to understand that high yield is a different constituency from the asset class. Prior to 20, companies were providing about 20 of the highyield bonds which were providing security. Now its around 60 . They are shorter maturities as well. What you price in on the spread of a highyield bond is not just compensation but recovery potential. Higher recovery potential when you more security and less compensation necessary when its a shorter maturity. When i say thats reflective, its not surprising that its a little more resilient now that its lower. I do see a little bit more pain coming. We see Credit Conditions are not supported now and there is a higher potential we could see a sharper drawdown that will impact the Smaller Companies in the highyield issuance most. Sonali what is not being reflected in the higher for longer narrative to the extent that you could see more pain . Where are investors not looking . If you look at the spreads, they are not high. They are below the longterm average but there should always be an aster because they go up and down and you drawisk a line between them. They are usually above or below but they are right now. Higher for longer Means Companies that have been waiting this out wont be able to wait it out forever. Thats the risk we see. Over the past 13 years, issuers of had the opportunity whether its spikes in yield or spread, they have to wait for a better entry point. It if this is a true higher for longer situation, its an opportunity. Yields are high right now so even if spreads rise, you have enough of an income buffer to offset some of that. If we get spreads going up three or four basis points, you will probably lose money but over 12 months with yields around 9 , that gives you a lot of buffer. Sonali we thank you both for your time. Still ahead, the final spread in the week ahead, a we could Key Central Bank decisions including the fed. This is real yield on bloomberg. Explore endless design possibilities. To find your personal style. Endless hardie® siding colors. Textures and styles. Its possible. With james hardie™. When you automate sales tax with avalara, you dont have to worry about things like changing tax rates or filing returns. Avalarahhh ahhh sonali this is bloomberg real yield. Its time for the final spread, the week ahead. Monday, earnings continue with mcdonalds so find more and tuesday, the bank of japan Rate Decision and wednesday is the feds term plus the treasury announcing is refunding. More earnings on thursday and the bank of england Rate Decision plus the u. S. October jobs report friday. I want to bring you to expectations. We think about the fed Rate Decision, they are expected to stay on hold in the next meeting but they are expected to take another hike higher into the end of the year with cuts starting in the middle of next year. This depends on the way the economy shapes up. This move right now, the severe cuts into next year implies a tougher recession add. We have not seen one yet but lets see whats to come. From new york, that does it for us. This is bloomberg real yield and this is bloomberg. J. P. Morgan Wealth Management knows its easy to get lost in investment research. Get help with j. P morgan personal advisors. Hey, david ready to get started . Work with advisors who create a plan with you, and help you find the right investments. So great getting to know you, lets take a look at your new investment plan. Ok, great this should have you moving in the right direction. Thanks jen. 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My advice for everyone is to go with golo. It will release your fat and it will release you. Jon welcome to bloomberg markets. Matt we are looking at losses again so lets get a check on the markets to end the week. The s p 500 is down another half a percent. Yields are higher but i guess the 10 year is low relative to some of the highs we touched over the past few saxons test few sessions. We have the dollar coming down but its pretty high right now