Speaker 1: Hello, Welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2: Hi, I'm Spencer Cutter, senior analyst with Bloomberg Intelligence, and
Speaker 2: we're delighted this week to have Earl Davis joining us. Earl,
Speaker 2: how are you this fine day.
Speaker 3: I'm doing very well and that it's a pleasure to
Speaker 3: be here.
Speaker 2: Great, thanks for joining us again. Earl's a managing director
Speaker 2: at BMO Global Asset Management, where he's the head of
Speaker 2: fixed income and money Markets. He's a member of the
Speaker 2: BMO Global Asset Management Investment Committee with about two hundred
Speaker 2: and twenty billion in total assets under management. Prior to BMO,
Speaker 2: Earl was a director at Ontario Teacher's Pension Plan where
Speaker 2: he managed over eighty five billion of global fixed income assets.
Speaker 2: So with that introduction, James will hand it over you
Speaker 2: to get the ball.
Speaker 1: Yeah, it's great to have you on the show. You
Speaker 1: have a great long history and a really interesting perspective
Speaker 1: and I've always enjoyed your sharp commentary on Bloomberg TV.
Speaker 1: We are his talk about credit, but before we get there,
Speaker 1: let's start with rates. US treasury yields are hitting levels
Speaker 1: we haven't seen in twenty five years, as inflation stays
Speaker 1: high and the government just keeps on spending. Plus there's
Speaker 1: a ton of AI debt competing for bond investor attention.
Speaker 1: Is this the new normal? High rates, a steeper yield curve,
Speaker 1: and what does it really say about the state of
Speaker 1: the world that government bonds just keep dropping.
Speaker 3: Yeah, I wouldn't say it's the new normal yet. We
Speaker 3: haven't hit equilibrium or a level that's sustainable. But the
Speaker 3: new normal part of it is that we are in
Speaker 3: an environment of higher rates, and the longer dated the bond,
Speaker 3: the much higher rates that we foresee going forward, and
Speaker 3: not in that very long time, but in one year,
Speaker 3: within one year, see significantly higher rates globally.
Speaker 2: Got a quick question for you then, so you know,
Speaker 2: walked in this morning turn on the Bloomberg terminal, there
Speaker 2: was at least three or four headlines about how rates
Speaker 2: are highest in twenty years in some cases are getting
Speaker 2: close to that ten. Your treasury has gone from less
Speaker 2: than one percent back in twenty one to four point
Speaker 2: seven percent today. At what point or with all that said,
Speaker 2: the economy seems to be rolling right along, At what
Speaker 2: point do you guys. See, you know, if the ten
Speaker 2: youre treasure goes to five percent, five and a half
Speaker 2: percent somewhere, where does that start to actually really bite
Speaker 2: the economy and sort of slow things down. It doesn't
Speaker 2: seem like we're feeling it yet, even though we've seen,
Speaker 2: like we said, much much higher rates.
Speaker 3: Yeah, it's a great question, and one thing that people
Speaker 3: how we look at the markets, and how people do
Speaker 3: not look at the markets. They look at the absolute numbers,
Speaker 3: the absolute rates. So you said five five and a
Speaker 3: half percent, is that sustainable? It depends And this is
Speaker 3: the important thing. It's not the rate, it's the delta
Speaker 3: and the speed of change. So it's how fast do
Speaker 3: you get to five percent? How fast you at to
Speaker 3: fight and a half percent. If we're at five and
Speaker 3: a half percent by the end of this year, yes,
Speaker 3: there will be some effects on risk assets, but I
Speaker 3: do think the market could withstand and hold on to
Speaker 3: five and a half percent ten year rates by the
Speaker 3: end of twenty twenty seven. And this is why it's
Speaker 3: important to look at the delta in the time, not
Speaker 3: the absolute rate. So from our perspective, at five percent
Speaker 3: tenure rates, we are big buyers and we're big buyers
Speaker 3: because not because sentiment will say, oh, rates could go higher,
Speaker 3: could go from five percent to five and a half.
Speaker 3: The great thing about fixed income it's quantitative. If you
Speaker 3: buy rates at five ten year bonds, let's just go
Speaker 3: through a rough example. The Bemal aggregate bond fund, which
Speaker 3: is a combination of bond sovereign bonds and corporate bonds
Speaker 3: right now has an average duration of call it five five,
Speaker 3: five and a half around and the yield is five
Speaker 3: So what does that mean? How does that translate into
Speaker 3: math and why does it make sense to buy at
Speaker 3: that level? If you buy bonds to be more, aggregate
Speaker 3: bond fund at five and let's call it five and
Speaker 3: a half percent all in yield, and you are absolutely
Speaker 3: wrong and the market goes one hundred basis points against you.
Speaker 3: So from five percent to six percent, you will still
Speaker 3: make money in one year. Now you ask how is
Speaker 3: that and that is because you will lose five and
Speaker 3: a half percent in your market price. That is your duration.
Speaker 3: So one hundred basis points times five point five duration
Speaker 3: equals five point five percent. But then your five and
Speaker 3: a half coupon goes to six and a half percent.
Speaker 3: Your coupon interest, you will recoup all your mark to
Speaker 3: market loss plus more within a year. That's what we
Speaker 3: call a margin of safety. That's why we're backing up
Speaker 3: the truck if we hit five percent ten year yields
Speaker 3: because the math makes sense. It's not about sentiment. I'll
Speaker 3: tell you where it doesn't make sense. And what we're
Speaker 3: not buying is thirty year bonds because the duration on
Speaker 3: thirty year bonds is not six or seven, it's twenty.
Speaker 3: So one hundred basis point move on a twenty year
Speaker 3: duration is a twenty percent marked market loss. We are
Speaker 3: staying away from from longer duration bonds and credit per se.
Speaker 3: But there is a room for long duration credit and
Speaker 3: we could speak to that later, but we're staying away
Speaker 3: from it because there is no margin of safety. If
Speaker 3: you lose one hundred basis points on twenty year duration
Speaker 3: twenty percent and your coupon is six percent, it's three
Speaker 3: years to make it back. So that's how we look
Speaker 3: at it. So can the market with standard Yes, and
Speaker 3: we are big buyers at five percent.
Speaker 1: Is that your assumption? Then we do get five percent
Speaker 1: on the ten year US treasury.
Speaker 3: So I'll tell you what our assumption, which I do
Speaker 3: feel will drag treasuries to five percent. Our assumption is
Speaker 3: that we get to six percent on thirty year bonds
Speaker 3: within a year. So right now we're five thirty. That's
Speaker 3: seventy basis points higher. Ten year bonds won't back up
Speaker 3: from today, let's call it four to seventy. They won't
Speaker 3: back up seventy basis points parallel, but a fear chance
Speaker 3: they do back up thirty basis points. So we do
Speaker 3: think there's a fear probability that we hit five percent.
Speaker 3: But again I reiterate we are large buyers there, not
Speaker 3: just because of the math of it, but because we
Speaker 3: also have a strong belief there'll be some treasury rumblings
Speaker 3: at that point, at least the first time round, right,
Speaker 3: whether it be to adjust the issuance again or the
Speaker 3: possibility of QI. So there's a lot of reasons why
Speaker 3: five percent makes sense, but we don't think it stops
Speaker 3: at five percent. We just think the persistence of it
Speaker 3: above five percent will be very short lived. And that's
Speaker 3: how our perspective going forward, not just on rates but
Speaker 3: in credit as.
Speaker 1: Well and the hiking. Do you think that happens in
Speaker 1: the next meeting or is it going to be pushed
Speaker 1: to push off from Oh, we.
Speaker 3: Don't see any hikes in twenty twenty six. And part
Speaker 3: of the reason is it's the Japan model. So what
Speaker 3: do I mean Japan model? The Japan has all been
Speaker 3: at the forefront of unconventional monetary calls. They're basically the
Speaker 3: first ones to popularize zero interest rate policy, then the
Speaker 3: first ones to popularize QE, then the first ones popularize
Speaker 3: negative interest rates scenario. You know what they're popularizing now,
Speaker 3: inflation driving thirty year bonds higher versus your overnight rate
Speaker 3: and not doing anything about it. Why are they doing that?
Speaker 3: Then to question is so now in so in the US,
Speaker 3: you're basically your two year bond to your thirty year
Speaker 3: bond has a spread of roughly, let's call it one
Speaker 3: hundred based sports, it's one ten, but we'll call it
Speaker 3: one hundred just to make things each Japan has its
Speaker 3: three hundred basis point spread, and you know what they've
Speaker 3: gone into because of that three hundred basis point spread.
Speaker 3: They've been able to get into a primary surplus because
Speaker 3: their currency devalued so much, the amount of income coming
Speaker 3: into Japan from exports them exporting is significant. Now they're
Speaker 3: primary surplus. I believe UK is doing it as well too.
Speaker 3: There are one hundred and fifty basis points. So I
Speaker 3: think there's going to be stealth steepening and global steepening
Speaker 3: across the world, and that means no hiking because of
Speaker 3: inflation and lend thirty years. Do that and you inflate
Speaker 3: your way out of your debt, your debt crisis as
Speaker 3: long as growth is high, which it is, so we
Speaker 3: don't see any hikes by the Fed this year, possibly
Speaker 3: next year, but that'd be a different story. They're different driver.
Speaker 3: NBC significant curve steepening, and we could come back to that.
Speaker 3: But the implication of that from an investor'spective perspective, globally,
Speaker 3: we are buyers of bank bonds, the ones who will,
Speaker 3: besides the government, the sector that will benefit the most
Speaker 3: from steeper curves or banks, it's their business or short
Speaker 3: lend long. So we think the tailwinds are there for
Speaker 3: banks to support their spreads, to support their coupon payments,
Speaker 3: and not only that, we think that tailwinds are there
Speaker 3: for bank bonds the sector to tighten over time. So
Speaker 3: that's one of the implications of the steeper curve from
Speaker 3: our perspective, what.
Speaker 2: One follow up? And you know, I'm a credit guy,
Speaker 2: so by definition that means I'm a pessimist. Everybody called
Speaker 2: the e or to flip the script a little bit.
Speaker 2: What would then potentially cause the FED to ease or
Speaker 2: lower rates, whether it's through just cutting rate excuse me,
Speaker 2: cutting rates, or quant state of easing. And I bring
Speaker 2: that up because you're seeing a lot of strong, strong
Speaker 2: economic growth today despite everything we just talked about. With
Speaker 2: higher rates, you're starting to see a lot of that
Speaker 2: was has been driven by tech and AI and data
Speaker 2: center buildouts, et cetera. And you're starting to see some
Speaker 2: cracks in that. You know, the situational awareness blow up,
Speaker 2: the open AI IPO seems to be on hold. Steve
Speaker 2: Heisman's out there saying he's selling his tech stuff. I'm
Speaker 2: you know, I'm old enough to remember two thousand very vividly,
Speaker 2: so I'm having flashbacks. If if the AI bubble, if
Speaker 2: it is, that were to finally pop, and that then
Speaker 2: causes the market to drop, you know, twenty percent. I
Speaker 2: know some have some sort of meaningful correction. Given we'll
Speaker 2: also have inflation pressure still, whether it's from tariffs or
Speaker 2: higher commodity prices from the war and I ran, et cetera.
Speaker 4: Could the Fed? Would the FED ease to try.
Speaker 2: To reinflate equity prices or asset prices in that scenario?
Speaker 2: Or what would you see happening if if there is
Speaker 2: a downturn, you know, AI bubble driven. Would it be
Speaker 2: that sort of normal response that we're we've been programmed
Speaker 2: to assume, but you know it's different this time.
Speaker 3: Yeah, So to answer question now, I'll go into more
Speaker 3: details than an answer. Yes, they would ease. Definitely would ease.
Speaker 3: So let me back up and just go into a
Speaker 3: bit more detail on a higher level. So what would
Speaker 3: cause the fat to ease? It's a recession, That's basically
Speaker 3: what it is. It's a recession. So in our books,
Speaker 3: we have three things that could drive that recession. One
Speaker 3: is what you touched upon is the AI growth story
Speaker 3: doesn't play itself out. That story, however, in our view,
Speaker 3: is not going to be a twenty twenty sixth story,
Speaker 3: highly unlikely a twenty twenty seventh story to twenty twenty
Speaker 3: eight and beyond story, because you have to give the
Speaker 3: revenues a chance to catch up to the expectations they
Speaker 3: won't give a long time, but it's going to be
Speaker 3: at least a year, so I don't think that's a
Speaker 3: twenty twenty seventh story. The other thing why I don't
Speaker 3: think that's a twenty twenty seventh story is I believe
Speaker 3: the investment case for AI is out there in regards
Speaker 3: to the productivity and what you see. The winners are
Speaker 3: to be determined, so it might just be a shifting
Speaker 3: of who are the leaders and whatnot and things there.
Speaker 3: So A is definitely one of the reasons the AI
Speaker 3: growth story collapsing is definitely one of the reasons for
Speaker 3: a potential recession. Don't see that being a twenty twenty
Speaker 3: six or twenty twenty seven story, but it's definitely one
Speaker 3: of them. The other reasons, which are probably would happen
Speaker 3: a little quicker are one hundred and fifty dollars oil
Speaker 3: could drive the recession story. And the scary thing about
Speaker 3: what's going on in the spray of her moods is
Speaker 3: we haven't seen the rise and oil prices because reserves
Speaker 3: are being used. So what that says it's not going
Speaker 3: to be a leanar function from eighty dollars oil to
Speaker 3: one hundred and fifty, it's really gonna jump. It's a
Speaker 3: jump function. So that's a scary thing. So I think
Speaker 3: that would be the number one thing that's more likely
Speaker 3: than the AI to cause the recession. The other thing,
Speaker 3: which which is possible is the war in the Middle
Speaker 3: East expanse. You know, we've seen the headlines about in
Speaker 3: the background China selling weapons to Iran not confirmed and
Speaker 3: all that that accelerates and there's more direct involvement, then
Speaker 3: it's all better off because in the war environment, all
Speaker 3: your choices become uneconomic choices, they feed the war machine.
Speaker 3: It's inefficient choices, it's public competing with pride, and that's
Speaker 3: highly inflationary. So those are the three things that could
Speaker 3: drive a recession in our mind, that come of immediacy,
Speaker 3: but we don't think that would stop the FED from easing.
Speaker 3: With one caveat that we haven't spoken about and no
Speaker 3: one's speaking about here because the market only has time
Speaker 3: to focus on one story at a time. But definitely
Speaker 3: the twenty twenty seven story is going to be El
Speaker 3: Nino super el Nino. So does that actually take effect
Speaker 3: and where's inflation actually there once that kicks in. That's
Speaker 3: the wild card on whether the FED would ease or
Speaker 3: not in my mind from the inflation per expected.
Speaker 2: Yeah, we're getting a lot of talk about El Nino
Speaker 2: out here on the West Coast.
Speaker 4: I mean, I guess it's interesting.
Speaker 2: You know, Yes, if oil hits one hundred and fifty
Speaker 2: dollars a barrel, that could be slow down the economy
Speaker 2: but also be inflationary. If there is a broader war
Speaker 2: expansion in the Middle East, obviously that would also potentially
Speaker 2: drive oil to one hundred and fifty dollars a barrel
Speaker 2: or higher, who knows the slowing on the economy, but
Speaker 2: then also inflationary. So I guess where I'm getting at
Speaker 2: is all these things that potentially slow the economy that
Speaker 2: would normally prompt the FED to ease also drive inflation higher,
Speaker 2: which would then creates that tuggle war between which one
Speaker 2: wins out and I And that's why I'm kind of
Speaker 2: stuck between you know what, what does the FED?
Speaker 4: And and will the FED be effective?
Speaker 2: I mean, they could short cut rates, but without heavy
Speaker 2: quantitative easing like we saw in the COVID downturn, could
Speaker 2: they really get the long end of the curved down?
Speaker 4: Or is everybody gonna sell off? You know, three year
Speaker 4: treasuries go even higher.
Speaker 3: Not sure I'm happy you brought that up, because I
Speaker 3: actually for about to bring up a critical point. The
Speaker 3: reason why they would ease, in my mind in those
Speaker 3: scenarios is the demand shock. It's a consumer economy. The
Speaker 3: demand shock in a recessionary environment would be significant. They
Speaker 3: would short term look through inflation to try to get
Speaker 3: equities up by reducing things and getting you know, the
Speaker 3: old old game book. How much they would ease that
Speaker 3: that could impact it, But I think the at least
Speaker 3: the initial eases and the first one in that environment
Speaker 3: could be a fifty basis point ease, especially considering you know,
Speaker 3: overnight is three seventy five, right, let's call it. They
Speaker 3: got room to ease, so I think the demand shock
Speaker 3: aspect will allow them to overlook the headline or nominal
Speaker 3: inflation that will have At the time.
Speaker 1: This still sounds pretty volatile. The BIX is very low,
Speaker 1: and people seem pretty pretty calm. It hasn't been a
Speaker 1: quiet summer by any means. You know, we've had Jane
Speaker 1: Street losing fifteen billion, as we've seen Guggenheim Partner's kind
Speaker 1: of falling apart in the credit market, and all these
Speaker 1: other things you mentioned lurking out there, But how do
Speaker 1: you position them from a risk standpoint.
Speaker 3: Yeah, it's a great question from especially the ball perspective.
Speaker 3: So we look at the move index, which is basically
Speaker 3: the Vixa fonds, and it is at the lower end
Speaker 3: of its range of the past five years. So it's
Speaker 3: proximately we both call it eight seventy five seventy five
Speaker 3: to eighty. The low end of the range in the
Speaker 3: past five years is sixty to eighty. The high is
Speaker 3: like one forty, but let's call it one twenty. It's
Speaker 3: above one forty on a spike, but let's call it
Speaker 3: one twenty to one. Exactly because we are in this range,
Speaker 3: this lower ball range. We had been reducing our credit exposure,
Speaker 3: but we're maintaining our holdings of credit. We've just been
Speaker 3: selling all of our high yield and buying ID. So basically,
Speaker 3: it's like being in movie theater. We love the movie,
Speaker 3: We're still there, but we're just getting a seat closer
Speaker 3: to the exit door. And part the reason why we're
Speaker 3: looking at that's not because we're scared of growth or
Speaker 3: the impact. We actually love growth, and given how much
Speaker 3: we like growth, and we could talk about the drivers
Speaker 3: of that and why we love it. We are significantly
Speaker 3: underway credit given how much we like growth, but it's vaal.
Speaker 3: We're active managers. You're not getting paid to hold risk
Speaker 3: as much risk care or high beta risk. Given the
Speaker 3: types of spreads. However, you know, fundamentally it could still
Speaker 3: be supportive. We could stay at these tight levels for
Speaker 3: a while, but we want to make sure we have
Speaker 3: that dry powder for when Vall re emerges and comes.
Speaker 3: There's almost complacency in the market, and I would say
Speaker 3: our highest conviction view is volatility. You know, you look
Speaker 3: at the world geopolitics, you look at the new FED
Speaker 3: and people try and still get a sense of the
Speaker 3: credibility there. You look at you know, oil prices, which
Speaker 3: really geopolitics super Almino Vall is there to stay. So
Speaker 3: these levels we are reducing risk and if we get tighter,
Speaker 3: which is a possibility, will sell even more CREPT.
Speaker 2: One of the points of volatility you mentioned is commodity prices,
Speaker 2: particularly oil, obviously given the dynamics in Iran in the
Speaker 2: Middle East, and at the same time you mentioned you're
Speaker 2: selling a lot of your high yield positions moving to
Speaker 2: investment grade. I'm curious, how are you looking at energy
Speaker 2: within that? Given that's MySpace. I want to pick your
Speaker 2: brain on do you still want you're holding onto any
Speaker 2: of the high yield energy space, moving on taking profits
Speaker 2: there and moving just out of energy in general, or
Speaker 2: still keeping some exposure there.
Speaker 4: What's your look on that.
Speaker 3: No, we're not keeping any exposure now. Having said that,
Speaker 3: it is the number one area sector. We want to
Speaker 3: increase our exposure too. So why do we not have
Speaker 3: exposure now because of how much you like it? Just
Speaker 3: because how much high yield spreads, especially in energy have tightened. Well,
Speaker 3: it's below the index, it'll stay tighter, it's structurally tighter.
Speaker 3: But it's the first area we will buy on any
Speaker 3: widening is energy, and that's when we did when the
Speaker 3: war started. We have our list and that's what we bought.
Speaker 3: That's what we did last year as well too, when
Speaker 3: TWIS came in as well. We really like the energy
Speaker 3: sector and we like it as a hedge to the
Speaker 3: rest of our portfolio. How I said, one of the
Speaker 3: areas where we see a recession probably coming from a
Speaker 3: one hundred and fifty dollars oil. You know what will
Speaker 3: poly perform in that on bonds energy companies, So we
Speaker 3: see it as a great hedge to the overall risk
Speaker 3: on tome that we have in the balance of our portfolio.
Speaker 3: It will be the first sector that we buy on
Speaker 3: any widening. And what's interesting part of what gives us
Speaker 3: confidence in that So as you mentioned before, I used
Speaker 3: to be I used to have fixed income currencies at
Speaker 3: Ontario Teachers Pension Plan. Prior to that, I was the
Speaker 3: lead PM on inflation inflation bonds, used to own have
Speaker 3: multi billion of tips. We used to trade tips against
Speaker 3: our bob against gas because of the correlations and how
Speaker 3: our BOB feeds into the CPI print and NSA CPI print.
Speaker 3: We used to trade that against gas. But now with
Speaker 3: the refining across the world being so constrained, all these
Speaker 3: oil companies, especially ones that are refining, will be printing
Speaker 3: dollars and supportive of spreads. So it's one of the
Speaker 3: things that gives us additional confidence in buying energy companies
Speaker 3: and the high yield energy companies on why and.
Speaker 1: It obviously has done well you know this year bens.
Speaker 1: Do you don't think that once the you know, oil
Speaker 1: price keeping up, then the then benefits reday crew mo
Speaker 1: to the equity than the debt.
Speaker 2: I'm a skeptic of energy bonds rallying much because again,
Speaker 2: credit spreads are as tight as they've ever been, and
Speaker 2: at least with particularly an investment rate, but throughout high
Speaker 2: yield as well, credit metrics are also as strong as
Speaker 2: they beg In leverage ratios are the lowest in generations,
Speaker 2: and all the free cashle that's coming in, you know,
Speaker 2: all these companies have now the policy of we're going
Speaker 2: to send fifty sixty seventy five percent of free cash
Speaker 2: flow to use for stock buybacks and dividends. I don't
Speaker 2: see energy outperforming because energy is doing so much better.
Speaker 2: But I do see energy potentially continuing to outperform because
Speaker 2: someplace else is blown up and energy stays sort of
Speaker 2: the safe haven, and people just you know, like we're
Speaker 2: talking about here, is you move out of tech because
Speaker 2: the AI story is slowing down, and where you're gonna
Speaker 2: put your money, well, I'll put it in energy bonds
Speaker 2: because oil is still as long as there's still volatility
Speaker 2: in Middle East, oil still be high. My one concern
Speaker 2: is if and when there is peace breaks out in
Speaker 2: the Middle East and the Horn moves reopens, you could
Speaker 2: see a repeat of twenty fifteen with the Middle East
Speaker 2: country you say, all right, I've been sitting on the sideline.
Speaker 2: I've been have not been able to sell my product
Speaker 2: as much as I would have liked. Now I can,
Speaker 2: and they try to go back and get market share.
Speaker 2: So like the Saudi did in twenty fifteen and flooded
Speaker 2: the market, oil prices crashed and you had a huge
Speaker 2: wave of bankruptcies. And the credit quality within the energy
Speaker 2: space is much much stronger today than it was then,
Speaker 2: So I wouldn't see I wouldn't predict the same total
Speaker 2: dislocation of bankruptcies. But that is the one thing that
Speaker 2: kind of keeps me up as night is if again
Speaker 2: Hormones reopens tomorrow, you know, Uae, Kuwait, Saudi Arabia, I
Speaker 2: would see them saying, all right, let's let's ramp up
Speaker 2: our production, our exports, because we got to we got
Speaker 2: to get our market share back. And then that could
Speaker 2: obviously then way on way on oil prices, which can
Speaker 2: then ways on energy bonds because they are priced to perfection.
Speaker 3: Finding and the importance of the being able to refine
Speaker 3: it and get it out there.
Speaker 4: Yes, but yeah, Yeah.
Speaker 3: So one of the interesting things that you mentioned. When
Speaker 3: we buy bonds and let alone energy bonds or sectors
Speaker 3: or whatever, we don't because we anticipated rally, right, We
Speaker 3: buy it because of the carry profile and and and
Speaker 3: the support of the cash, the cash will supporting the
Speaker 3: coupon paints. Having said that, we do buy it on
Speaker 3: the wide and if it does rally, we sell because
Speaker 3: we view that as a monetized basically an immediacy of
Speaker 3: the monetization of the carry profile. And it's it's interesting
Speaker 3: which which gives us comfort in selling and not try
Speaker 3: and guess it's the bottom or the highs. It's just
Speaker 3: to have the powder to reload it at a at
Speaker 3: a further time.
Speaker 1: I'm interested in the AI side, though, I mean, you know,
Speaker 1: you like energy like banks, and we should come back
Speaker 1: to that. But but you know, you can't avoid now
Speaker 1: the fact that AI is flooding the investing grade bond
Speaker 1: market and every other capital market on the planet, including
Speaker 1: the Canadian dollar. How do you deal with that? What's
Speaker 1: the opportunity? I mean, some people claim that it's even
Speaker 1: crowding out the governments and it's causing ways to go
Speaker 1: higher at the long end. So what are you making
Speaker 1: of it?
Speaker 3: So I agree with that. I wouldn't say it's crowding out,
Speaker 3: but the competition for capital, they're definitely the leading, or
Speaker 3: arguably the leading, because I would say the government's police
Speaker 3: the leading required need for capital to fund the deficits.
Speaker 3: But nonetheless the competition for capital is increasing. As I said,
Speaker 3: I used to be a real rate portfolio manager. I
Speaker 3: have never seen real rates move like they are now. Structurally,
Speaker 3: I saw it move during global financial crisis two level
Speaker 3: similar to today in the ten years, if not a little
Speaker 3: bit higher. But structurally, this competition for capital is significant
Speaker 3: and we're seeing it in the real rates. So the
Speaker 3: question we ask ourselves with hyper scalers, and we're slightly underweight. Now,
Speaker 3: we've been buying on the widening tube to get to market.
Speaker 3: We haven't participated in the initial offerings, in the primary
Speaker 3: offerings just because of how tight spreads work. But as
Speaker 3: they get goes through where they were initially off, we
Speaker 3: are buying. But the question is what's the market's ability
Speaker 3: to accept the next incremental dollar debt from a hyperscaler
Speaker 3: And my answer is it depends the reason why, and
Speaker 3: it depends on your insurance companies. Your insurance companies are
Speaker 3: the number one buyers in segmentation theory of longer dated
Speaker 3: corporate debt thirty year corporate debt, and we we're seeing
Speaker 3: a significant amount of issuance from hyperscalers there and they
Speaker 3: have been digesting it. But there's two things that will
Speaker 3: control that going forward. One is how close are they
Speaker 3: to their credit limits because obviously with the amount of
Speaker 3: issue in those limit limits are getting eaten up. And
Speaker 3: the other one, which is pension risk transfers, so like
Speaker 3: where are they on that? So what is that? It's
Speaker 3: a significant partner. I think it's going to play in
Speaker 3: an increasingly important part in fixed income markets in twenty
Speaker 3: twenty seven and beld So when you look at the US,
Speaker 3: there's in defined benefit plans, there's about three point one
Speaker 3: trillion in defying benefit plants. They put a lot of
Speaker 3: voluntility on the balance sheet of corporates that offer those
Speaker 3: to their employees because it depends on two things, your
Speaker 3: assets and their growth there which is largely equities and
Speaker 3: the and your debt, your what is your thirty year
Speaker 3: bond rate? Your discount rate. Those in the past years
Speaker 3: have been going both to the benefit of corporation. So
Speaker 3: all these pension plants are fully funded wealthully funded, probably
Speaker 3: the most they've been in twenty years. So a lot
Speaker 3: of these corporations like to get that volatility off their
Speaker 3: balance sheets by selling it to pension plants. You basically
Speaker 3: invest in an annuity in longer dated bonds. They are
Speaker 3: your number one buyers along dated bonds. So far, we
Speaker 3: haven't seen as much as expense as expected in pension
Speaker 3: risk transfers. Corporations are still holding them because it's making
Speaker 3: their balance sheets looks good, and there hasn't been that
Speaker 3: much volatility. Yields have generally been going up and equities
Speaker 3: have generally been going up. But you start getting some
Speaker 3: wobbling in equities, which you know is a possibility. We're
Speaker 3: still risk one, but it's a possibility to get increased volatility.
Speaker 3: There you will see an increased amount of that three
Speaker 3: point one trillion called petch risk transfers, which means more
Speaker 3: buyers and longer dated bonds, which is supportive of hyperscalers.
Speaker 3: So I'm looking very closely at that market see if
Speaker 3: there's an uptick in pension risk transfers to insurance companies
Speaker 3: to determine what to have an outlook on spreads. Having
Speaker 3: said that, going back to your statement of flooding the market,
Speaker 3: they definitely are flooding the market. Why could I say
Speaker 3: they're definitely flooding the market because you had everything for
Speaker 3: triple A call it your microsofts to triple B, your
Speaker 3: SpaceX and your Oracles and in between. You know, everything
Speaker 3: else is double A. But they're all trading with a
Speaker 3: spread of one notch lore. That's how you know they're
Speaker 3: flooding the market. So it's a very attractive yield until
Speaker 3: limits are hit, and then you then your subject to
Speaker 3: mark to market risk is spreads continue to widen, and
Speaker 3: that's the thing we're looking at. We will not go
Speaker 3: overweight hyperscalers in regards to their bond holdings and issues,
Speaker 3: but we will get at weight. Let me take that back.
Speaker 3: As spreads do widen significantly, we will go overweight. But
Speaker 3: at this level we will not go over Do.
Speaker 1: You think that the risk is being properly priced? You know,
Speaker 1: with things like this massive n video deal half a
Speaker 1: trillion dollars and then the collatero is basically chips. We
Speaker 1: don't know how much things those things are worth. We
Speaker 1: don't know what they're going to be replaced by how soon?
Speaker 4: You know?
Speaker 1: It all seems and then there's the circular idea. I mean,
Speaker 1: it all seems a bit intangible, a bit hard to value.
Speaker 3: So my answer to that is I don't know. And
Speaker 3: the reason why I don't know is because the revenue
Speaker 3: model is still to be determined. They'll, you know, have
Speaker 3: the revenues that are required to provide a return on
Speaker 3: this invested capital. So TBD. There's still a lot of
Speaker 3: sentiment involved in here, and I have what what what
Speaker 3: I call a hope jar. Any time any PM uses
Speaker 3: the word hope, you have to put five dollars in
Speaker 3: the jar. We're not about hope, we're about expectation. How
Speaker 3: fun is that is that jar? Right now? Hey? You
Speaker 3: know what everyone's about positions.
Speaker 4: To be able to pay for the office holiday party.
Speaker 3: You see, sir, it's pretty empty. But nonetheless there there
Speaker 3: the market. There's still a lot of sentiment. There is
Speaker 3: some hope, but you are being you are being rewarded
Speaker 3: for it, because how I said, the spreads are one
Speaker 3: the equivalence of one not's lower than the rating, So
Speaker 3: you are being rewarded for it. The thing is, can
Speaker 3: it hold on to these lucks.
Speaker 2: So kind of go on full circle back to tying
Speaker 2: what James just asked recently, you know, is AI debt
Speaker 2: flooding the market? And seems like the answer is yes,
Speaker 2: at least it's it's having a big impact. And then
Speaker 2: is there going to be a down turn within AI?
Speaker 2: Which I understand it may not be this year, may
Speaker 2: not be next year, but as we have just said,
Speaker 2: there's a lot of hope driving these valuations and it
Speaker 2: does look like there's some potential cracks coming in the market.
Speaker 2: And to our discussion at the beginning of would bonds
Speaker 2: be you know, bond yields come down if the market,
Speaker 2: the stock market, equity market, AI valuations come down, and
Speaker 2: that would be a good hedge. I guess the question is,
Speaker 2: if there's so much AI debt now, is the debt
Speaker 2: market really a good hedge between or safe haven if
Speaker 2: you're trying to get out of the stock market and
Speaker 2: get out of your exposure to the NVIDIAs, the Googles
Speaker 2: and all the hyper scalers that you might think are
Speaker 2: overvalued because you buy bonds, and well, now the bond
Speaker 2: portfolio is going to be holding all the bonds from
Speaker 2: all these people you know, in that sort of crisis
Speaker 2: to all the correlations go to one and everything goes down.
Speaker 3: So I say, yes, I'm actually excited about fixed income.
Speaker 3: So let me answer Let me back up and answer
Speaker 3: this a bit more holistically. There's three reasons why you
Speaker 3: would own bonds or why you investor want to own box.
Speaker 3: Three reasons. One is income generation. And the thing about
Speaker 3: income generation, what you have to look at is are
Speaker 3: you getting a real return? You know what? That's a check,
Speaker 3: that's a yes. That means your coupon that bond in
Speaker 3: ten five years or ten years when immatures will be
Speaker 3: that that dollar value will be worth more than the
Speaker 3: dollar value today. So your income generation box is checked
Speaker 3: because you're getting a positive real return. So your own
Speaker 3: number one reason your own bonds is income generation or
Speaker 3: number one in one A. The next reason you own
Speaker 3: bond is capital appreciation, So that's in your risk off times.
Speaker 3: Will that bond or the treasury yield underlying that bond
Speaker 3: appreciate this kind of lose your question will continue going higher.
Speaker 3: I would say yes at these levels when your real
Speaker 3: rate in thirty year bonds is three, but in ten
Speaker 3: year bonds is two and a half. I remember probably
Speaker 3: about ten years ago, your real rate in tenure bonds
Speaker 3: was probably minus one hundred basis points. It just says
Speaker 3: there's a lot of room, there's a lot of room
Speaker 3: for central banks to ease, so that possibility, I won't
Speaker 3: say definite of capital appreciation is definitely there. It's more
Speaker 3: than it's been in a very long time. And then
Speaker 3: the other reason is diversification. It definitely provides you diversification,
Speaker 3: especially as you said, you know you're you want to
Speaker 3: reallocate your portfolio and to have more bonds. It definitely
Speaker 3: provides that diversification. Even if you look at it just
Speaker 3: fro where you are in the capital structure, you're still
Speaker 3: higher up the capital structure, especially if you're worried. So
Speaker 3: for those three reasons, I would say definitely yes, And
Speaker 3: we're not there yet, but we're very close to being.
Speaker 3: As I said before, backup the truck buyers, do you
Speaker 3: give another fifty basis points? And I would be a
Speaker 3: big buyer. And what's interesting about our role here and
Speaker 3: my role as an active asset manager. I always tell
Speaker 3: my team when they go out, you only get one
Speaker 3: of two. You get what There's only two things you
Speaker 3: can get from a potential client at or client one
Speaker 3: is capital, so that's AEM so you manage your AUM
Speaker 3: and the other one's confidence. What's the confidence you get
Speaker 3: and what's the confidence discipline process both in the active
Speaker 3: management alpha generation as well as getting out before everything
Speaker 3: kind of widens or blows up, which I'd explained to
Speaker 3: our discipline approach right now, and transparency and being able
Speaker 3: to explain it and not just explaining it off a sentiment.
Speaker 3: This is why I go back to the margin of
Speaker 3: safety argument. You can actually so show mathematically that a
Speaker 3: one hundred basis point move against you the next day
Speaker 3: and you'll be flat if not make money within a year.
Speaker 3: That doesn't speak to the asymmetric nature. So that was
Speaker 3: if your bonds go one hundred or interest rates go
Speaker 3: one hundred base points against you, and your flat in
Speaker 3: a year, as they go one hundred base points for
Speaker 3: you or lower, you actually make like a ten percent return.
Speaker 3: Once you're able to show people the asymmetry of that
Speaker 3: and how it takes time and you let the coupon
Speaker 3: work for you, it's a beautiful time being involved in
Speaker 3: fixing cup. And you have to think, if we're fifty
Speaker 3: basis points higher shortly, You're going to get a few
Speaker 3: things going on. You're going to get less supply because
Speaker 3: issuers unless they have to repay a coupon and haven't
Speaker 3: financed it yet or don't have cash on the balance sheet,
Speaker 3: they're not issuing the will issue when we rally, so
Speaker 3: less supply and more demand. That's an environment where I
Speaker 3: see if you get wobbling in risk on assets, you
Speaker 3: get your pensured risk transfers come in. Eighty percent of
Speaker 3: retail money is invested in equity, eighty percent. It doesn't
Speaker 3: take much to come in to rebalance into fixed income.
Speaker 3: So there's a lot of compelling reasons to really like
Speaker 3: fix income. We're almost there, and I could sit being
Speaker 3: there quite short Just.
Speaker 1: For our listeners to be clear. The fifty basis points
Speaker 1: increase you're talking about, is that on the USIG spread,
Speaker 1: or is it on the tech spread, or is it
Speaker 1: on a particular issue. Where are you looking at to
Speaker 1: see that.
Speaker 3: The treasury yield, because you're all in spread, would be
Speaker 3: a component of that credit spread and your treasure yield,
Speaker 3: So thank you for helping me clarify that, so that
Speaker 3: would raise you're all in yield and those have been
Speaker 3: the number one buyers. Basically, Like it's interesting you say, Okay,
Speaker 3: with everything going on and all that, why are credit
Speaker 3: spread so tight? And I'd say, very simply, it's it's
Speaker 3: basically your supply of cash that's buying all in yield.
Speaker 3: So where's your supply of cash come in from. Comes
Speaker 3: in from QE that we've seen past, that's still in
Speaker 3: the market. That's why there's so much out there money.
Speaker 3: It's not happening anymore, but that money's so relating. You
Speaker 3: have income now, your coupon income on bonds is a
Speaker 3: lot higher than it was before. That's money that's absorbing
Speaker 3: corporate issuance and all that and your equity returns. There's
Speaker 3: a lot of wealth out there. You're rebalancing from that,
Speaker 3: and you're seeing it like in your money market funds,
Speaker 3: which is you know, over seven trillion. So again, some
Speaker 3: potential buyers on higher yields. There's a lot compelling reasons
Speaker 3: to say we're going to see we could see significant demand,
Speaker 3: not while things are happening, because people don't like investing
Speaker 3: when there's volatility, but we will be buying and we'll
Speaker 3: be ready for when it comes. Now then they come
Speaker 3: back into the market, which we've seen time in and
Speaker 3: time out over over the history of bonds at least
Speaker 3: a micro.
Speaker 1: That'll be talking about the IG yield all in going
Speaker 1: to close it to six percent? Right, yes, yeah, where
Speaker 1: it is now?
Speaker 3: That's right, it's around five and a half now. We
Speaker 3: like IG spreads above five percent. It's around five and
Speaker 3: a half. Now you get high yield, be like high
Speaker 3: yields north of seven and a half. It's probably touching
Speaker 3: seven and a half now, but we like it further north.
Speaker 3: But that credit spreads, high yield index spreads probably too
Speaker 3: eighty ish. You know, we'd be buyers around three point
Speaker 3: fifty on that spread. So there's a lot of widening
Speaker 3: that could happen there. And IG saw your ID to
Speaker 3: your point, your ID all in yield is flight and
Speaker 3: a half, which is a component of your bond yield
Speaker 3: in your eighty percent credit score.
Speaker 1: Right, And the spread on IG right now is around
Speaker 1: at basis points, which is very low compared to history.
Speaker 1: The my long standing thesis for that has been, and
Speaker 1: you can feel free to disagree, is that there's just
Speaker 1: not enough net new supply of IG bonds in the
Speaker 1: US market and We're going to see a radical reworking
Speaker 1: of that this year with you know, very high net forecasts.
Speaker 1: I think Goldman had close to a trillion in net,
Speaker 1: which we've never seen before. So you've got the combination
Speaker 1: of AI funding and M and A really pushing that out.
Speaker 1: And I get the demand side, but does that not
Speaker 1: push things into more of a balance and they're therefore
Speaker 1: push spreads wider from here?
Speaker 3: Issuance could I agree with you on net issuance hasn't
Speaker 3: been that high although we've had record ig issuance, Your
Speaker 3: net issuance isn't that high because of the coupons and whatnot,
Speaker 3: just before the spread thing. Another reason why I'd say
Speaker 3: that we're structurally tighter is private credit. You know, a
Speaker 3: lot of your lower quality names have gone into private
Speaker 3: credit credit who otherwise would have come into high yield
Speaker 3: and and possibly ID as well too. So i'd say
Speaker 3: that's the other reason why you're structurally lower, uh issue,
Speaker 3: and I believe we will stay structurally lower. The reason
Speaker 3: why we don't we're not longer is just because volatility. Basically,
Speaker 3: when you're long credit, you are short vall. We don't
Speaker 3: like being short ball at the lows so that's why
Speaker 3: we're waiting until we get better levels to go long
Speaker 3: vault so that you will get it right. We've seen
Speaker 3: it every year, we have spikes of it. This year
Speaker 3: was the war driven, last year was tariff driven, and
Speaker 3: we do expect it to come again and we will
Speaker 3: mold up then again.
Speaker 1: So right now you've seen to maybe have a lot
Speaker 1: of cash in terms of relative relative to your normal positioning.
Speaker 3: A lot, so yes and no. So no, we don't
Speaker 3: have t bills in cash, but we we've moved a
Speaker 3: lot of our credit holdings into the two year and
Speaker 3: under setter. And the reason why we've done that is liquidity.
Speaker 3: It's the most liquid part. Obviously, it's the part that's
Speaker 3: most exposed to idiosyncratic defaults. That's the part that winds
Speaker 3: you get an in version of your credit speak curve.
Speaker 3: But we're not worried about the economy. We actually see
Speaker 3: default probabilities going down, which business concern. But there's a
Speaker 3: few things. The liquidity in that where the easiest part
Speaker 3: to liquidate. To go into high yield it would be
Speaker 3: sure great, and the rolldown is very attractive. The rolldown
Speaker 3: is always been attracted in the shorter end of the curve.
Speaker 3: So that's where we're traversing right now.
Speaker 1: And where do you think you might find alpha right now?
Speaker 3: Alpha is what I said before, basically kind of on
Speaker 3: the sidelines. Actually, what's interesting is we do believe alpha's
Speaker 3: on the duration side of things. As I said before,
Speaker 3: like one of our higher conviction views is a steepening
Speaker 3: of the Yeal curve. And there's which is important. It's structural,
Speaker 3: it's global. So and let me go back to the
Speaker 3: reason why I see it as important, going back to
Speaker 3: my teacher's days. It was a global bond fund, like
Speaker 3: you said, eighty five billion, partly lever and partly cash.
Speaker 3: But the key thing there, because it's so large. You
Speaker 3: can't base your views off of flows because you become
Speaker 3: of the float. You are the flow multi day. You
Speaker 3: can't place your views off technical analysis because you are
Speaker 3: the technical analysis. So you need tailwings. What are the
Speaker 3: structural tailwinds when you look globally, the number one structural
Speaker 3: tailwind is deficits, which is more bonds in you know,
Speaker 3: higher real rates, but also leads into curve steepening and
Speaker 3: curse deepening. Not just from a perspective negative perspective, but
Speaker 3: from a government beneficial perspective as demonstrated by Japan, and
Speaker 3: the ability again to primary surplus or the possibility increasing that.
Speaker 3: So because of that structural view we have we have
Speaker 3: a long dated underweight in our portfolios. We are still
Speaker 3: overweight credit, but in the short duration buckets, as I explain,
Speaker 3: ready to go out and get higher credit, we're basically
Speaker 3: where we were at the beginning of the year. We
Speaker 3: were more than three We had three times as much
Speaker 3: what we call dts or duration times right during the
Speaker 3: war when we loaded up on high eel. But now
Speaker 3: we liquidated that, we're just waiting.
Speaker 1: Floating rate doesn't appeal.
Speaker 3: Floating rate, No, there's no appeal there because one of
Speaker 3: the things, as there's two things. We have institutional counter
Speaker 3: institutional accounts have longer data mandates. We're also asset managers.
Speaker 3: One of the things with floating rate floating rate holdings,
Speaker 3: it reduces the duration of our portfolio, which we have
Speaker 3: to offset by buying thirty year bonds. And we don't
Speaker 3: want to buy thirty year bonds because it's a poe.
Speaker 3: It's a quarter your duration of basically a floating rate.
Speaker 3: So now we're not there. We rather short credit for
Speaker 3: one reason. I'll give you something else. The spread of
Speaker 3: IG index versus T bills is approximately at one hundred
Speaker 3: and seventy five basis points right now. That was zero
Speaker 3: about two years ago, so it's getting more and more attractive,
Speaker 3: which says you'd rather be in short data i g.
Speaker 3: Than floating rate or tvOS And that's a key consideration
Speaker 3: there as well.
Speaker 1: Right, you're pretty heavily US skewed, but you know, delighted
Speaker 1: to have someone in Canada on this show because we
Speaker 1: we do find it a fascinating market. We don't often
Speaker 1: get a chance to look set. But what are you
Speaker 1: saying up there in terms of Canadian credit or rates opportunities?
Speaker 3: Uh, yeah, it's very so the number one thing in credit,
Speaker 3: The biggest part of the index here and the biggest
Speaker 3: country is financials, you know, the big Canadian banks and
Speaker 3: what they what they issue and whatnot. This probably represents
Speaker 3: our largest holding. We like it and we like it,
Speaker 3: and we haven't reduced our exposures there given our views
Speaker 3: on the curve and how that is supportive of banks income,
Speaker 3: so their net income which is good for bonds and cash,
Speaker 3: fll and whatnot. So that's our largest holding. There. The
Speaker 3: other thing what's interesting in Canada has a nascent high
Speaker 3: yield market. How I said, we sold all our US
Speaker 3: high yield, we kept all our Canadian high yield because
Speaker 3: it's a developing high yield market. There's two reasons why
Speaker 3: we did that. Because and it'll touch upon something a
Speaker 3: bit more global as well too. Whis interesting because it's
Speaker 3: a nason high yield market. Spreads are wider, they're building
Speaker 3: it up, and they're attracted to us. We're investigating. There's
Speaker 3: mining high yield here, there's goal. There's a lot of defense,
Speaker 3: which we like. We like that sector, defense company, so
Speaker 3: we like that sector. The other reason why we kept
Speaker 3: onto high yield is some of our US exposure we
Speaker 3: hedged back into Canada. The hedge costs are significant, so
Speaker 3: we're better off holding Canadian high yield. We earn on
Speaker 3: the margin more than holding US high yield heads back
Speaker 3: to Canada at these levels. What's interesting when the US
Speaker 3: intervened funding costs or hedge cost for all globals of Europe, Japan,
Speaker 3: Canada got more attracted to buy US corporates.
Speaker 1: We talked about just the intervention in the en.
Speaker 3: Yes intervened on the end that collapse the funding costs
Speaker 3: like probably by about ten to fifteen basis points. So yeah,
Speaker 3: but the technicality and basis point pick up by investing
Speaker 3: in US corporate yield and hedging it back to your
Speaker 3: local currency. So that was an interesting thing there. So
Speaker 3: that's it. But I would say that is it for
Speaker 3: the Canadian market much smaller obviously than the US. Yields
Speaker 3: are slightly higher and like for like, if you look
Speaker 3: at IG versus US and we think that's a liquidity
Speaker 3: premium or a liquidity the market might be too small
Speaker 3: for larger investors to come in, of which we're reaping.
Speaker 3: We've seen a collapse of that spread this year and
Speaker 3: everything going on. There is volatility here obviously the free
Speaker 3: trade discussions between Canada and US. But we are a
Speaker 3: commodity based company. We are oil based economy in regard,
Speaker 3: so large commodities in oil, so that is very supportive
Speaker 3: on the medium to long term. So we look for
Speaker 3: those tailwinds when we.
Speaker 1: Invest earlier financials that you're talking most about money center banks,
Speaker 1: not just in Canada but also in the US. In
Speaker 1: terms of your financials exposure overrule, it's it's.
Speaker 3: It's everywhere it's Europe, it's US, it's Canada.
Speaker 2: I'm gonna say some of those high yield Canadians I
Speaker 2: assume are oil and gas companies as well. Given the resources.
Speaker 3: There they had, they they don't need the cash.
Speaker 2: Well it's so so that's that's the same as the
Speaker 2: US oil and gas companies.
Speaker 4: I got you. Okay.
Speaker 2: You talk a lot about volatility, and that's the one
Speaker 2: thing you can be sure of at this point with
Speaker 2: all the dislocation and different things going on around the world,
Speaker 2: and you know, you're you've kind of moved out of
Speaker 2: high yield and into the investment grade market just to
Speaker 2: be a little more safe.
Speaker 4: Like you said, get a sea closer to the it.
Speaker 2: Given that positioning and the increased volatility, what what does keep.
Speaker 4: You up at night?
Speaker 2: What do you think is the you know, the unknown
Speaker 2: unknown that you know could cause everything to go south.
Speaker 3: Well, first of all, being in fixed income, I'm never
Speaker 3: slept better man being thirty years in fixed income seeing
Speaker 3: yields so high, it's a beautiful thing. And there's a
Speaker 3: lot of attraction. There's a lot of money coming into
Speaker 3: and being an active manager, we're seeing a lot of
Speaker 3: allocation or a different balance of passive and active unfixed income.
Speaker 3: So it's good. There's already one thing that keeps me
Speaker 3: up at night. UH and I and to me it's
Speaker 3: not it's it's no probability, but if it does happen,
Speaker 3: it's uh. All hands off, desk, All hands off basically
Speaker 3: is an acceleration of the world of the war in
Speaker 3: the Middle East. That's the only thing I keeps me
Speaker 3: up at night, I do believe. And part of the
Speaker 3: reason why that's the only thing. The reason why we're
Speaker 3: so positive on growth in the US is twofold one
Speaker 3: is all the deregulation that has been brought in. No
Speaker 3: one talks about the deregulation anymore. Your small and medium
Speaker 3: sized businesses are your drivers of the US economy, seventy
Speaker 3: percent plus of jobs. So deregulation is a cost to
Speaker 3: the smaller and medium sized companies, not the large companies
Speaker 3: because they're so big. It's it's just an expense item,
Speaker 3: but it's a big driver. So what the deregulation has
Speaker 3: been going on in the US with this administration, it's
Speaker 3: been significantly beneficial for small and medium sized companies. You're
Speaker 3: seeing it in hiring intentions. I think that combined with
Speaker 3: AI is extremely supportive of growth. That tide is rising
Speaker 3: for potential growth in the US in our minds, So
Speaker 3: that's one of the things that's very constructed and supported
Speaker 3: and gives us a significant amount of comfort. The second
Speaker 3: thing is the lowering of capital requirements that's expected to
Speaker 3: happen towards the end of this year, possibly but for
Speaker 3: sure next year for usban ear. That increases the amount
Speaker 3: of money available for moans, which is the multiplier effect,
Speaker 3: So your ability to get capital to grow will be there.
Speaker 3: The incentive for banks to lend will be there, So
Speaker 3: you add that in with the increasing that income and
Speaker 3: lower capital requirements. These are all reasons why we're very
Speaker 3: bullish on the economy underlying despite the volatility on top,
Speaker 3: because the volatility is like a wave. The waves will
Speaker 3: differ in sizes and you'll get some massive ones, but
Speaker 3: the tide of economic growth is growing. That gives us
Speaker 3: comfort because it all comes down to lower default rates,
Speaker 3: comfort with high yield, comfort with credit, and a general
Speaker 3: risk on tone that we believe will be sustainable in
Speaker 3: the US economy, which impacts the global to com So
Speaker 3: that is why there's not many things that keep me
Speaker 3: up in night, especially with a higher real rate in
Speaker 3: a real return in bonds. To me, it's all a
Speaker 3: beautiful thing.
Speaker 1: At the same time, though, I've never seen the US
Speaker 1: more antagonistic towards the Canadians. I've been going there for
Speaker 1: decades and I've never seen such you know, logg aheads
Speaker 1: How much does that really matter for your business?
Speaker 3: Short shorted? So what's interesting is our business when you
Speaker 3: look at the business is equities and fixed income. Equity
Speaker 3: markets are still going up. TSX is a commodity driven index,
Speaker 3: and marketing companies. You're seeing the amount of global dollars
Speaker 3: come into Canada. So short term, I am concerned from
Speaker 3: an investor perspective, in the adjustment period of new delta,
Speaker 3: there's going to be rolling recessions in dipping areas depending
Speaker 3: on what the agreement is. You know, there's hard times
Speaker 3: right now, Loomum steel, you're seeing in those sectors, so
Speaker 3: on and so forth. So there will be adjustments. But
Speaker 3: the antagonism is accelerating the change to the next level.
Speaker 3: And because we have the things that the blood the
Speaker 3: world want oil, critical metals and minerals and metals, water,
Speaker 3: there is great demand here. There's great significant potential, and
Speaker 3: that doesn't even speak to the pension plans that we
Speaker 3: have here. Trillions of dollars of possible investment money that
Speaker 3: could be reinvested in Canada, most of which is invested externally.
Speaker 3: So I'm not worried on the medium to long term,
Speaker 3: but the short term adjustment period will be a little rough,
Speaker 3: and that's how we're looking at it.
Speaker 1: Great stuff, Earl Davis with BMO Asset Management, and many
Speaker 1: thanks for joining us on the Credit Edge.
Speaker 3: Thank you, it's been a pleasure, and of.
Speaker 1: Course very grateful to Spencer Cutter, a Bloomberg Intelligence. Thank
Speaker 1: you for joining us today.
Speaker 4: Appreciate it. Thanks for having me.
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