WEBVTT - BMO Slashes Junk Debt Holdings as Geopolitical, Economic Risks Spread 0:00:17.960 --> 0:00:20.560 Hello, Welcome to The Credit Edge, a weekly markets podcast. 0:00:20.640 --> 0:00:23.360 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:23.600 --> 0:00:26.960 Hi, I'm Spencer Cutter, senior analyst with Bloomberg Intelligence, and 0:00:27.000 --> 0:00:30.120 we're delighted this week to have Earl Davis joining us. Earl, 0:00:30.160 --> 0:00:31.280 how are you this fine day. 0:00:31.560 --> 0:00:33.640 I'm doing very well and that it's a pleasure to 0:00:33.680 --> 0:00:34.040 be here. 0:00:34.400 --> 0:00:36.840 Great, thanks for joining us again. Earl's a managing director 0:00:36.840 --> 0:00:39.360 at BMO Global Asset Management, where he's the head of 0:00:39.360 --> 0:00:41.600 fixed income and money Markets. He's a member of the 0:00:41.680 --> 0:00:45.880 BMO Global Asset Management Investment Committee with about two hundred 0:00:45.880 --> 0:00:49.360 and twenty billion in total assets under management. Prior to BMO, 0:00:49.479 --> 0:00:52.800 Earl was a director at Ontario Teacher's Pension Plan where 0:00:52.800 --> 0:00:56.240 he managed over eighty five billion of global fixed income assets. 0:00:56.600 --> 0:00:59.120 So with that introduction, James will hand it over you 0:00:59.160 --> 0:01:00.280 to get the ball. 0:01:00.640 --> 0:01:02.480 Yeah, it's great to have you on the show. You 0:01:02.600 --> 0:01:05.800 have a great long history and a really interesting perspective 0:01:05.840 --> 0:01:09.679 and I've always enjoyed your sharp commentary on Bloomberg TV. 0:01:10.640 --> 0:01:13.160 We are his talk about credit, but before we get there, 0:01:13.200 --> 0:01:16.600 let's start with rates. US treasury yields are hitting levels 0:01:16.640 --> 0:01:19.040 we haven't seen in twenty five years, as inflation stays 0:01:19.120 --> 0:01:22.040 high and the government just keeps on spending. Plus there's 0:01:22.040 --> 0:01:25.000 a ton of AI debt competing for bond investor attention. 0:01:25.680 --> 0:01:29.840 Is this the new normal? High rates, a steeper yield curve, 0:01:30.080 --> 0:01:31.720 and what does it really say about the state of 0:01:31.760 --> 0:01:34.160 the world that government bonds just keep dropping. 0:01:35.120 --> 0:01:37.399 Yeah, I wouldn't say it's the new normal yet. We 0:01:37.480 --> 0:01:40.520 haven't hit equilibrium or a level that's sustainable. But the 0:01:40.560 --> 0:01:42.679 new normal part of it is that we are in 0:01:42.760 --> 0:01:47.160 an environment of higher rates, and the longer dated the bond, 0:01:47.200 --> 0:01:50.000 the much higher rates that we foresee going forward, and 0:01:50.400 --> 0:01:53.280 not in that very long time, but in one year, 0:01:53.360 --> 0:01:56.920 within one year, see significantly higher rates globally. 0:01:57.120 --> 0:01:59.800 Got a quick question for you then, so you know, 0:02:00.040 --> 0:02:02.280 walked in this morning turn on the Bloomberg terminal, there 0:02:02.320 --> 0:02:04.400 was at least three or four headlines about how rates 0:02:04.440 --> 0:02:07.360 are highest in twenty years in some cases are getting 0:02:07.400 --> 0:02:09.880 close to that ten. Your treasury has gone from less 0:02:09.880 --> 0:02:12.760 than one percent back in twenty one to four point 0:02:12.840 --> 0:02:17.240 seven percent today. At what point or with all that said, 0:02:17.440 --> 0:02:20.639 the economy seems to be rolling right along, At what 0:02:20.680 --> 0:02:22.520 point do you guys. See, you know, if the ten 0:02:22.520 --> 0:02:24.400 youre treasure goes to five percent, five and a half 0:02:24.440 --> 0:02:28.600 percent somewhere, where does that start to actually really bite 0:02:28.639 --> 0:02:31.840 the economy and sort of slow things down. It doesn't 0:02:31.840 --> 0:02:34.640 seem like we're feeling it yet, even though we've seen, 0:02:34.880 --> 0:02:37.560 like we said, much much higher rates. 0:02:37.680 --> 0:02:41.360 Yeah, it's a great question, and one thing that people 0:02:41.680 --> 0:02:43.600 how we look at the markets, and how people do 0:02:43.639 --> 0:02:45.840 not look at the markets. They look at the absolute numbers, 0:02:45.960 --> 0:02:48.320 the absolute rates. So you said five five and a 0:02:48.320 --> 0:02:51.960 half percent, is that sustainable? It depends And this is 0:02:52.000 --> 0:02:54.800 the important thing. It's not the rate, it's the delta 0:02:55.400 --> 0:02:57.960 and the speed of change. So it's how fast do 0:02:57.960 --> 0:03:00.240 you get to five percent? How fast you at to 0:03:00.240 --> 0:03:02.640 fight and a half percent. If we're at five and 0:03:02.639 --> 0:03:04.640 a half percent by the end of this year, yes, 0:03:04.880 --> 0:03:07.920 there will be some effects on risk assets, but I 0:03:07.960 --> 0:03:10.679 do think the market could withstand and hold on to 0:03:10.800 --> 0:03:13.680 five and a half percent ten year rates by the 0:03:13.800 --> 0:03:17.119 end of twenty twenty seven. And this is why it's 0:03:17.160 --> 0:03:19.280 important to look at the delta in the time, not 0:03:19.400 --> 0:03:23.840 the absolute rate. So from our perspective, at five percent 0:03:23.960 --> 0:03:28.000 tenure rates, we are big buyers and we're big buyers 0:03:28.040 --> 0:03:31.560 because not because sentiment will say, oh, rates could go higher, 0:03:31.639 --> 0:03:33.640 could go from five percent to five and a half. 0:03:34.080 --> 0:03:38.120 The great thing about fixed income it's quantitative. If you 0:03:38.320 --> 0:03:40.960 buy rates at five ten year bonds, let's just go 0:03:41.000 --> 0:03:45.200 through a rough example. The Bemal aggregate bond fund, which 0:03:45.240 --> 0:03:49.680 is a combination of bond sovereign bonds and corporate bonds 0:03:50.040 --> 0:03:54.400 right now has an average duration of call it five five, 0:03:54.680 --> 0:03:58.200 five and a half around and the yield is five 0:03:59.080 --> 0:04:01.400 So what does that mean? How does that translate into 0:04:01.400 --> 0:04:03.240 math and why does it make sense to buy at 0:04:03.280 --> 0:04:07.160 that level? If you buy bonds to be more, aggregate 0:04:07.200 --> 0:04:10.040 bond fund at five and let's call it five and 0:04:10.040 --> 0:04:13.720 a half percent all in yield, and you are absolutely 0:04:13.800 --> 0:04:16.760 wrong and the market goes one hundred basis points against you. 0:04:16.800 --> 0:04:20.200 So from five percent to six percent, you will still 0:04:20.240 --> 0:04:23.160 make money in one year. Now you ask how is 0:04:23.200 --> 0:04:25.720 that and that is because you will lose five and 0:04:25.760 --> 0:04:28.400 a half percent in your market price. That is your duration. 0:04:28.560 --> 0:04:31.360 So one hundred basis points times five point five duration 0:04:31.760 --> 0:04:34.960 equals five point five percent. But then your five and 0:04:35.000 --> 0:04:37.520 a half coupon goes to six and a half percent. 0:04:38.240 --> 0:04:41.120 Your coupon interest, you will recoup all your mark to 0:04:41.160 --> 0:04:44.880 market loss plus more within a year. That's what we 0:04:44.960 --> 0:04:47.279 call a margin of safety. That's why we're backing up 0:04:47.320 --> 0:04:50.320 the truck if we hit five percent ten year yields 0:04:50.600 --> 0:04:53.960 because the math makes sense. It's not about sentiment. I'll 0:04:53.960 --> 0:04:56.000 tell you where it doesn't make sense. And what we're 0:04:56.000 --> 0:04:59.040 not buying is thirty year bonds because the duration on 0:04:59.120 --> 0:05:02.360 thirty year bonds is not six or seven, it's twenty. 0:05:03.520 --> 0:05:06.800 So one hundred basis point move on a twenty year 0:05:06.920 --> 0:05:11.040 duration is a twenty percent marked market loss. We are 0:05:11.080 --> 0:05:15.880 staying away from from longer duration bonds and credit per se. 0:05:15.920 --> 0:05:18.560 But there is a room for long duration credit and 0:05:18.600 --> 0:05:21.440 we could speak to that later, but we're staying away 0:05:21.440 --> 0:05:25.680 from it because there is no margin of safety. If 0:05:25.720 --> 0:05:28.960 you lose one hundred basis points on twenty year duration 0:05:29.040 --> 0:05:32.080 twenty percent and your coupon is six percent, it's three 0:05:32.240 --> 0:05:35.320 years to make it back. So that's how we look 0:05:35.360 --> 0:05:37.360 at it. So can the market with standard Yes, and 0:05:37.400 --> 0:05:39.120 we are big buyers at five percent. 0:05:40.279 --> 0:05:42.239 Is that your assumption? Then we do get five percent 0:05:42.279 --> 0:05:44.400 on the ten year US treasury. 0:05:44.440 --> 0:05:46.760 So I'll tell you what our assumption, which I do 0:05:46.800 --> 0:05:50.720 feel will drag treasuries to five percent. Our assumption is 0:05:50.880 --> 0:05:53.560 that we get to six percent on thirty year bonds 0:05:53.600 --> 0:05:56.200 within a year. So right now we're five thirty. That's 0:05:56.200 --> 0:06:00.960 seventy basis points higher. Ten year bonds won't back up 0:06:01.000 --> 0:06:03.320 from today, let's call it four to seventy. They won't 0:06:03.360 --> 0:06:06.360 back up seventy basis points parallel, but a fear chance 0:06:06.400 --> 0:06:09.480 they do back up thirty basis points. So we do 0:06:09.520 --> 0:06:12.159 think there's a fear probability that we hit five percent. 0:06:12.279 --> 0:06:16.200 But again I reiterate we are large buyers there, not 0:06:16.320 --> 0:06:18.960 just because of the math of it, but because we 0:06:19.040 --> 0:06:21.880 also have a strong belief there'll be some treasury rumblings 0:06:21.920 --> 0:06:25.080 at that point, at least the first time round, right, 0:06:25.440 --> 0:06:28.320 whether it be to adjust the issuance again or the 0:06:28.360 --> 0:06:31.400 possibility of QI. So there's a lot of reasons why 0:06:31.440 --> 0:06:33.680 five percent makes sense, but we don't think it stops 0:06:33.680 --> 0:06:36.760 at five percent. We just think the persistence of it 0:06:36.839 --> 0:06:40.320 above five percent will be very short lived. And that's 0:06:40.400 --> 0:06:43.359 how our perspective going forward, not just on rates but 0:06:43.440 --> 0:06:44.240 in credit as. 0:06:44.080 --> 0:06:47.039 Well and the hiking. Do you think that happens in 0:06:47.120 --> 0:06:49.080 the next meeting or is it going to be pushed 0:06:49.120 --> 0:06:50.279 to push off from Oh, we. 0:06:50.240 --> 0:06:54.000 Don't see any hikes in twenty twenty six. And part 0:06:54.040 --> 0:06:57.000 of the reason is it's the Japan model. So what 0:06:57.040 --> 0:07:00.400 do I mean Japan model? The Japan has all been 0:07:00.480 --> 0:07:05.599 at the forefront of unconventional monetary calls. They're basically the 0:07:05.640 --> 0:07:10.200 first ones to popularize zero interest rate policy, then the 0:07:10.200 --> 0:07:15.080 first ones to popularize QE, then the first ones popularize 0:07:15.200 --> 0:07:19.280 negative interest rates scenario. You know what they're popularizing now, 0:07:20.120 --> 0:07:23.720 inflation driving thirty year bonds higher versus your overnight rate 0:07:23.800 --> 0:07:27.120 and not doing anything about it. Why are they doing that? 0:07:27.160 --> 0:07:31.200 Then to question is so now in so in the US, 0:07:31.280 --> 0:07:34.240 you're basically your two year bond to your thirty year 0:07:34.280 --> 0:07:36.600 bond has a spread of roughly, let's call it one 0:07:36.640 --> 0:07:39.520 hundred based sports, it's one ten, but we'll call it 0:07:39.520 --> 0:07:41.800 one hundred just to make things each Japan has its 0:07:41.840 --> 0:07:44.960 three hundred basis point spread, and you know what they've 0:07:45.000 --> 0:07:48.120 gone into because of that three hundred basis point spread. 0:07:48.640 --> 0:07:53.320 They've been able to get into a primary surplus because 0:07:53.360 --> 0:07:57.480 their currency devalued so much, the amount of income coming 0:07:57.560 --> 0:08:02.480 into Japan from exports them exporting is significant. Now they're 0:08:02.520 --> 0:08:06.400 primary surplus. I believe UK is doing it as well too. 0:08:06.680 --> 0:08:09.720 There are one hundred and fifty basis points. So I 0:08:09.760 --> 0:08:13.200 think there's going to be stealth steepening and global steepening 0:08:13.240 --> 0:08:17.400 across the world, and that means no hiking because of 0:08:17.480 --> 0:08:20.120 inflation and lend thirty years. Do that and you inflate 0:08:20.120 --> 0:08:23.360 your way out of your debt, your debt crisis as 0:08:23.360 --> 0:08:27.040 long as growth is high, which it is, so we 0:08:27.120 --> 0:08:30.880 don't see any hikes by the Fed this year, possibly 0:08:31.000 --> 0:08:33.800 next year, but that'd be a different story. They're different driver. 0:08:35.679 --> 0:08:39.840 NBC significant curve steepening, and we could come back to that. 0:08:39.880 --> 0:08:45.199 But the implication of that from an investor'spective perspective, globally, 0:08:45.600 --> 0:08:50.840 we are buyers of bank bonds, the ones who will, 0:08:51.200 --> 0:08:54.880 besides the government, the sector that will benefit the most 0:08:55.240 --> 0:08:58.920 from steeper curves or banks, it's their business or short 0:08:59.040 --> 0:09:02.640 lend long. So we think the tailwinds are there for 0:09:02.720 --> 0:09:06.720 banks to support their spreads, to support their coupon payments, 0:09:07.040 --> 0:09:09.440 and not only that, we think that tailwinds are there 0:09:09.480 --> 0:09:14.960 for bank bonds the sector to tighten over time. So 0:09:15.080 --> 0:09:17.400 that's one of the implications of the steeper curve from 0:09:17.400 --> 0:09:19.760 our perspective, what. 0:09:19.920 --> 0:09:23.120 One follow up? And you know, I'm a credit guy, 0:09:23.200 --> 0:09:26.120 so by definition that means I'm a pessimist. Everybody called 0:09:26.200 --> 0:09:29.040 the e or to flip the script a little bit. 0:09:29.720 --> 0:09:34.000 What would then potentially cause the FED to ease or 0:09:34.080 --> 0:09:36.839 lower rates, whether it's through just cutting rate excuse me, 0:09:36.920 --> 0:09:39.480 cutting rates, or quant state of easing. And I bring 0:09:39.520 --> 0:09:43.120 that up because you're seeing a lot of strong, strong 0:09:43.280 --> 0:09:46.439 economic growth today despite everything we just talked about. With 0:09:46.520 --> 0:09:49.439 higher rates, you're starting to see a lot of that 0:09:49.520 --> 0:09:52.440 was has been driven by tech and AI and data 0:09:52.480 --> 0:09:54.640 center buildouts, et cetera. And you're starting to see some 0:09:54.720 --> 0:09:58.840 cracks in that. You know, the situational awareness blow up, 0:09:59.280 --> 0:10:01.920 the open AI IPO seems to be on hold. Steve 0:10:01.920 --> 0:10:05.800 Heisman's out there saying he's selling his tech stuff. I'm 0:10:05.880 --> 0:10:10.000 you know, I'm old enough to remember two thousand very vividly, 0:10:10.080 --> 0:10:16.000 so I'm having flashbacks. If if the AI bubble, if 0:10:16.000 --> 0:10:21.079 it is, that were to finally pop, and that then 0:10:21.400 --> 0:10:24.400 causes the market to drop, you know, twenty percent. I 0:10:24.400 --> 0:10:29.520 know some have some sort of meaningful correction. Given we'll 0:10:29.559 --> 0:10:33.000 also have inflation pressure still, whether it's from tariffs or 0:10:33.080 --> 0:10:36.079 higher commodity prices from the war and I ran, et cetera. 0:10:37.520 --> 0:10:40.120 Could the Fed? Would the FED ease to try. 0:10:39.920 --> 0:10:44.800 To reinflate equity prices or asset prices in that scenario? 0:10:44.920 --> 0:10:47.000 Or what would you see happening if if there is 0:10:47.040 --> 0:10:50.880 a downturn, you know, AI bubble driven. Would it be 0:10:50.920 --> 0:10:53.360 that sort of normal response that we're we've been programmed 0:10:53.400 --> 0:10:57.320 to assume, but you know it's different this time. 0:10:58.240 --> 0:11:01.240 Yeah, So to answer question now, I'll go into more 0:11:01.240 --> 0:11:03.960 details than an answer. Yes, they would ease. Definitely would ease. 0:11:04.440 --> 0:11:06.120 So let me back up and just go into a 0:11:06.160 --> 0:11:08.120 bit more detail on a higher level. So what would 0:11:08.200 --> 0:11:10.959 cause the fat to ease? It's a recession, That's basically 0:11:10.960 --> 0:11:13.960 what it is. It's a recession. So in our books, 0:11:14.000 --> 0:11:17.160 we have three things that could drive that recession. One 0:11:17.240 --> 0:11:19.720 is what you touched upon is the AI growth story 0:11:19.760 --> 0:11:23.600 doesn't play itself out. That story, however, in our view, 0:11:23.640 --> 0:11:25.640 is not going to be a twenty twenty sixth story, 0:11:26.520 --> 0:11:29.400 highly unlikely a twenty twenty seventh story to twenty twenty 0:11:29.400 --> 0:11:31.680 eight and beyond story, because you have to give the 0:11:31.720 --> 0:11:34.400 revenues a chance to catch up to the expectations they 0:11:34.440 --> 0:11:36.120 won't give a long time, but it's going to be 0:11:36.120 --> 0:11:37.520 at least a year, so I don't think that's a 0:11:37.520 --> 0:11:40.400 twenty twenty seventh story. The other thing why I don't 0:11:40.400 --> 0:11:46.120 think that's a twenty twenty seventh story is I believe 0:11:46.160 --> 0:11:50.439 the investment case for AI is out there in regards 0:11:50.520 --> 0:11:53.480 to the productivity and what you see. The winners are 0:11:53.480 --> 0:11:56.440 to be determined, so it might just be a shifting 0:11:56.480 --> 0:11:59.120 of who are the leaders and whatnot and things there. 0:11:59.160 --> 0:12:01.840 So A is definitely one of the reasons the AI 0:12:01.920 --> 0:12:04.200 growth story collapsing is definitely one of the reasons for 0:12:04.240 --> 0:12:07.280 a potential recession. Don't see that being a twenty twenty 0:12:07.320 --> 0:12:10.120 six or twenty twenty seven story, but it's definitely one 0:12:10.120 --> 0:12:14.200 of them. The other reasons, which are probably would happen 0:12:14.240 --> 0:12:17.880 a little quicker are one hundred and fifty dollars oil 0:12:18.679 --> 0:12:23.440 could drive the recession story. And the scary thing about 0:12:23.440 --> 0:12:26.320 what's going on in the spray of her moods is 0:12:26.440 --> 0:12:30.400 we haven't seen the rise and oil prices because reserves 0:12:30.400 --> 0:12:33.640 are being used. So what that says it's not going 0:12:33.679 --> 0:12:37.240 to be a leanar function from eighty dollars oil to 0:12:37.280 --> 0:12:41.760 one hundred and fifty, it's really gonna jump. It's a 0:12:41.840 --> 0:12:44.440 jump function. So that's a scary thing. So I think 0:12:44.520 --> 0:12:46.920 that would be the number one thing that's more likely 0:12:47.480 --> 0:12:51.520 than the AI to cause the recession. The other thing, 0:12:52.160 --> 0:12:57.800 which which is possible is the war in the Middle 0:12:57.840 --> 0:13:01.679 East expanse. You know, we've seen the headlines about in 0:13:01.720 --> 0:13:07.320 the background China selling weapons to Iran not confirmed and 0:13:07.360 --> 0:13:11.079 all that that accelerates and there's more direct involvement, then 0:13:11.160 --> 0:13:15.800 it's all better off because in the war environment, all 0:13:15.840 --> 0:13:20.200 your choices become uneconomic choices, they feed the war machine. 0:13:20.520 --> 0:13:24.720 It's inefficient choices, it's public competing with pride, and that's 0:13:24.800 --> 0:13:28.480 highly inflationary. So those are the three things that could 0:13:28.559 --> 0:13:33.480 drive a recession in our mind, that come of immediacy, 0:13:33.559 --> 0:13:37.600 but we don't think that would stop the FED from easing. 0:13:37.640 --> 0:13:40.720 With one caveat that we haven't spoken about and no 0:13:40.760 --> 0:13:43.280 one's speaking about here because the market only has time 0:13:43.320 --> 0:13:46.000 to focus on one story at a time. But definitely 0:13:46.000 --> 0:13:47.960 the twenty twenty seven story is going to be El 0:13:48.040 --> 0:13:52.520 Nino super el Nino. So does that actually take effect 0:13:52.520 --> 0:13:55.680 and where's inflation actually there once that kicks in. That's 0:13:55.720 --> 0:13:57.920 the wild card on whether the FED would ease or 0:13:57.960 --> 0:14:00.480 not in my mind from the inflation per expected. 0:14:01.320 --> 0:14:03.240 Yeah, we're getting a lot of talk about El Nino 0:14:03.280 --> 0:14:04.360 out here on the West Coast. 0:14:05.559 --> 0:14:07.800 I mean, I guess it's interesting. 0:14:07.880 --> 0:14:10.240 You know, Yes, if oil hits one hundred and fifty 0:14:10.280 --> 0:14:14.640 dollars a barrel, that could be slow down the economy 0:14:14.679 --> 0:14:17.000 but also be inflationary. If there is a broader war 0:14:17.240 --> 0:14:21.040 expansion in the Middle East, obviously that would also potentially 0:14:21.120 --> 0:14:22.800 drive oil to one hundred and fifty dollars a barrel 0:14:22.880 --> 0:14:27.440 or higher, who knows the slowing on the economy, but 0:14:27.480 --> 0:14:30.400 then also inflationary. So I guess where I'm getting at 0:14:30.520 --> 0:14:34.280 is all these things that potentially slow the economy that 0:14:34.280 --> 0:14:37.680 would normally prompt the FED to ease also drive inflation higher, 0:14:37.680 --> 0:14:41.000 which would then creates that tuggle war between which one 0:14:41.040 --> 0:14:43.680 wins out and I And that's why I'm kind of 0:14:44.120 --> 0:14:46.360 stuck between you know what, what does the FED? 0:14:46.440 --> 0:14:47.840 And and will the FED be effective? 0:14:47.880 --> 0:14:50.760 I mean, they could short cut rates, but without heavy 0:14:50.800 --> 0:14:54.800 quantitative easing like we saw in the COVID downturn, could 0:14:54.800 --> 0:14:56.360 they really get the long end of the curved down? 0:14:56.440 --> 0:14:58.320 Or is everybody gonna sell off? You know, three year 0:14:58.360 --> 0:14:59.480 treasuries go even higher. 0:15:00.160 --> 0:15:02.160 Not sure I'm happy you brought that up, because I 0:15:02.160 --> 0:15:05.200 actually for about to bring up a critical point. The 0:15:05.240 --> 0:15:07.200 reason why they would ease, in my mind in those 0:15:07.240 --> 0:15:11.080 scenarios is the demand shock. It's a consumer economy. The 0:15:11.120 --> 0:15:14.880 demand shock in a recessionary environment would be significant. They 0:15:14.920 --> 0:15:17.720 would short term look through inflation to try to get 0:15:17.760 --> 0:15:20.720 equities up by reducing things and getting you know, the 0:15:20.760 --> 0:15:24.920 old old game book. How much they would ease that 0:15:24.920 --> 0:15:28.240 that could impact it, But I think the at least 0:15:28.240 --> 0:15:31.160 the initial eases and the first one in that environment 0:15:31.160 --> 0:15:34.400 could be a fifty basis point ease, especially considering you know, 0:15:34.560 --> 0:15:38.160 overnight is three seventy five, right, let's call it. They 0:15:38.200 --> 0:15:41.880 got room to ease, so I think the demand shock 0:15:42.000 --> 0:15:45.680 aspect will allow them to overlook the headline or nominal 0:15:45.760 --> 0:15:47.240 inflation that will have At the time. 0:15:48.840 --> 0:15:54.280 This still sounds pretty volatile. The BIX is very low, 0:15:54.400 --> 0:15:57.040 and people seem pretty pretty calm. It hasn't been a 0:15:57.120 --> 0:15:58.880 quiet summer by any means. You know, we've had Jane 0:15:58.880 --> 0:16:02.200 Street losing fifteen billion, as we've seen Guggenheim Partner's kind 0:16:02.200 --> 0:16:03.880 of falling apart in the credit market, and all these 0:16:03.880 --> 0:16:06.840 other things you mentioned lurking out there, But how do 0:16:06.880 --> 0:16:09.160 you position them from a risk standpoint. 0:16:09.720 --> 0:16:13.480 Yeah, it's a great question from especially the ball perspective. 0:16:13.520 --> 0:16:15.680 So we look at the move index, which is basically 0:16:16.000 --> 0:16:20.280 the Vixa fonds, and it is at the lower end 0:16:20.360 --> 0:16:22.600 of its range of the past five years. So it's 0:16:22.640 --> 0:16:26.240 proximately we both call it eight seventy five seventy five 0:16:26.240 --> 0:16:27.960 to eighty. The low end of the range in the 0:16:27.960 --> 0:16:30.400 past five years is sixty to eighty. The high is 0:16:30.480 --> 0:16:32.560 like one forty, but let's call it one twenty. It's 0:16:32.600 --> 0:16:34.480 above one forty on a spike, but let's call it 0:16:34.480 --> 0:16:38.520 one twenty to one. Exactly because we are in this range, 0:16:38.520 --> 0:16:42.440 this lower ball range. We had been reducing our credit exposure, 0:16:44.080 --> 0:16:47.960 but we're maintaining our holdings of credit. We've just been 0:16:48.000 --> 0:16:53.160 selling all of our high yield and buying ID. So basically, 0:16:53.240 --> 0:16:55.520 it's like being in movie theater. We love the movie, 0:16:55.680 --> 0:16:57.840 We're still there, but we're just getting a seat closer 0:16:57.840 --> 0:17:00.880 to the exit door. And part the reason why we're 0:17:00.920 --> 0:17:03.400 looking at that's not because we're scared of growth or 0:17:03.400 --> 0:17:05.920 the impact. We actually love growth, and given how much 0:17:05.960 --> 0:17:07.880 we like growth, and we could talk about the drivers 0:17:07.880 --> 0:17:10.320 of that and why we love it. We are significantly 0:17:10.400 --> 0:17:16.080 underway credit given how much we like growth, but it's vaal. 0:17:16.359 --> 0:17:20.280 We're active managers. You're not getting paid to hold risk 0:17:20.400 --> 0:17:23.280 as much risk care or high beta risk. Given the 0:17:23.359 --> 0:17:27.360 types of spreads. However, you know, fundamentally it could still 0:17:27.400 --> 0:17:29.560 be supportive. We could stay at these tight levels for 0:17:29.600 --> 0:17:31.679 a while, but we want to make sure we have 0:17:31.800 --> 0:17:35.440 that dry powder for when Vall re emerges and comes. 0:17:35.440 --> 0:17:38.400 There's almost complacency in the market, and I would say 0:17:38.440 --> 0:17:41.960 our highest conviction view is volatility. You know, you look 0:17:42.000 --> 0:17:45.800 at the world geopolitics, you look at the new FED 0:17:45.880 --> 0:17:48.000 and people try and still get a sense of the 0:17:48.040 --> 0:17:51.960 credibility there. You look at you know, oil prices, which 0:17:52.320 --> 0:17:55.760 really geopolitics super Almino Vall is there to stay. So 0:17:55.840 --> 0:17:58.879 these levels we are reducing risk and if we get tighter, 0:17:58.920 --> 0:18:01.280 which is a possibility, will sell even more CREPT. 0:18:03.000 --> 0:18:06.679 One of the points of volatility you mentioned is commodity prices, 0:18:06.720 --> 0:18:10.600 particularly oil, obviously given the dynamics in Iran in the 0:18:10.600 --> 0:18:13.440 Middle East, and at the same time you mentioned you're 0:18:13.480 --> 0:18:16.680 selling a lot of your high yield positions moving to 0:18:16.720 --> 0:18:20.760 investment grade. I'm curious, how are you looking at energy 0:18:20.800 --> 0:18:23.239 within that? Given that's MySpace. I want to pick your 0:18:23.240 --> 0:18:25.560 brain on do you still want you're holding onto any 0:18:25.560 --> 0:18:28.400 of the high yield energy space, moving on taking profits 0:18:28.400 --> 0:18:31.280 there and moving just out of energy in general, or 0:18:31.400 --> 0:18:32.760 still keeping some exposure there. 0:18:32.800 --> 0:18:33.840 What's your look on that. 0:18:34.480 --> 0:18:37.760 No, we're not keeping any exposure now. Having said that, 0:18:38.320 --> 0:18:40.679 it is the number one area sector. We want to 0:18:40.720 --> 0:18:43.119 increase our exposure too. So why do we not have 0:18:43.160 --> 0:18:45.359 exposure now because of how much you like it? Just 0:18:45.400 --> 0:18:51.040 because how much high yield spreads, especially in energy have tightened. Well, 0:18:51.080 --> 0:18:55.080 it's below the index, it'll stay tighter, it's structurally tighter. 0:18:55.320 --> 0:18:57.800 But it's the first area we will buy on any 0:18:57.880 --> 0:19:00.960 widening is energy, and that's when we did when the 0:19:01.000 --> 0:19:03.600 war started. We have our list and that's what we bought. 0:19:03.640 --> 0:19:06.400 That's what we did last year as well too, when 0:19:06.440 --> 0:19:09.359 TWIS came in as well. We really like the energy 0:19:09.359 --> 0:19:11.399 sector and we like it as a hedge to the 0:19:11.440 --> 0:19:14.280 rest of our portfolio. How I said, one of the 0:19:14.320 --> 0:19:17.280 areas where we see a recession probably coming from a 0:19:17.320 --> 0:19:19.520 one hundred and fifty dollars oil. You know what will 0:19:19.520 --> 0:19:24.240 poly perform in that on bonds energy companies, So we 0:19:24.320 --> 0:19:27.120 see it as a great hedge to the overall risk 0:19:27.240 --> 0:19:29.960 on tome that we have in the balance of our portfolio. 0:19:30.240 --> 0:19:33.120 It will be the first sector that we buy on 0:19:33.200 --> 0:19:37.080 any widening. And what's interesting part of what gives us 0:19:37.080 --> 0:19:39.800 confidence in that So as you mentioned before, I used 0:19:39.840 --> 0:19:42.399 to be I used to have fixed income currencies at 0:19:42.440 --> 0:19:45.560 Ontario Teachers Pension Plan. Prior to that, I was the 0:19:45.680 --> 0:19:51.199 lead PM on inflation inflation bonds, used to own have 0:19:51.720 --> 0:19:55.720 multi billion of tips. We used to trade tips against 0:19:55.800 --> 0:20:00.920 our bob against gas because of the correlations and how 0:20:00.960 --> 0:20:04.800 our BOB feeds into the CPI print and NSA CPI print. 0:20:05.200 --> 0:20:08.080 We used to trade that against gas. But now with 0:20:08.160 --> 0:20:11.120 the refining across the world being so constrained, all these 0:20:11.480 --> 0:20:15.600 oil companies, especially ones that are refining, will be printing 0:20:15.680 --> 0:20:19.399 dollars and supportive of spreads. So it's one of the 0:20:19.400 --> 0:20:23.120 things that gives us additional confidence in buying energy companies 0:20:23.119 --> 0:20:26.120 and the high yield energy companies on why and. 0:20:26.080 --> 0:20:28.600 It obviously has done well you know this year bens. 0:20:28.760 --> 0:20:31.199 Do you don't think that once the you know, oil 0:20:31.320 --> 0:20:33.879 price keeping up, then the then benefits reday crew mo 0:20:33.960 --> 0:20:35.119 to the equity than the debt. 0:20:35.480 --> 0:20:40.680 I'm a skeptic of energy bonds rallying much because again, 0:20:40.920 --> 0:20:44.520 credit spreads are as tight as they've ever been, and 0:20:45.720 --> 0:20:48.520 at least with particularly an investment rate, but throughout high 0:20:48.560 --> 0:20:51.439 yield as well, credit metrics are also as strong as 0:20:51.440 --> 0:20:54.359 they beg In leverage ratios are the lowest in generations, 0:20:55.160 --> 0:20:57.560 and all the free cashle that's coming in, you know, 0:20:57.640 --> 0:20:59.639 all these companies have now the policy of we're going 0:20:59.720 --> 0:21:02.120 to send fifty sixty seventy five percent of free cash 0:21:02.119 --> 0:21:05.520 flow to use for stock buybacks and dividends. I don't 0:21:05.520 --> 0:21:09.520 see energy outperforming because energy is doing so much better. 0:21:09.600 --> 0:21:13.640 But I do see energy potentially continuing to outperform because 0:21:13.680 --> 0:21:17.080 someplace else is blown up and energy stays sort of 0:21:16.880 --> 0:21:21.640 the safe haven, and people just you know, like we're 0:21:21.640 --> 0:21:24.320 talking about here, is you move out of tech because 0:21:24.320 --> 0:21:27.120 the AI story is slowing down, and where you're gonna 0:21:27.119 --> 0:21:28.720 put your money, well, I'll put it in energy bonds 0:21:28.760 --> 0:21:31.080 because oil is still as long as there's still volatility 0:21:31.119 --> 0:21:35.480 in Middle East, oil still be high. My one concern 0:21:35.720 --> 0:21:39.679 is if and when there is peace breaks out in 0:21:39.720 --> 0:21:43.040 the Middle East and the Horn moves reopens, you could 0:21:43.119 --> 0:21:46.760 see a repeat of twenty fifteen with the Middle East 0:21:46.800 --> 0:21:49.320 country you say, all right, I've been sitting on the sideline. 0:21:49.320 --> 0:21:51.800 I've been have not been able to sell my product 0:21:51.880 --> 0:21:54.680 as much as I would have liked. Now I can, 0:21:55.320 --> 0:21:58.399