1 00:00:18,440 --> 00:00:21,000 Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast. 2 00:00:21,079 --> 00:00:24,200 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:24,040 --> 00:00:26,560 Speaker 2: And I'm Mat Whitner, a member of our Global Credit 4 00:00:26,560 --> 00:00:29,440 Speaker 2: team within Bloomberg Intelligence, which is Bloomberg's research arm, and 5 00:00:29,480 --> 00:00:32,440 Speaker 2: I am covering the industrial space this week. I'm very 6 00:00:32,479 --> 00:00:35,120 Speaker 2: pleased to welcome Winnie Caesar, who is the global head 7 00:00:35,159 --> 00:00:36,560 Speaker 2: of strategy at Credit Sites. 8 00:00:36,640 --> 00:00:38,840 Speaker 3: How are you doing, Winny, I'm great, Thanks for having 9 00:00:38,880 --> 00:00:39,680 Speaker 3: me for. 10 00:00:39,680 --> 00:00:40,480 Speaker 4: All our listeners. 11 00:00:40,520 --> 00:00:43,280 Speaker 2: Winnie is a very widely published and leading voice within 12 00:00:44,200 --> 00:00:47,080 Speaker 2: the corporate credit strategy world. She's also a frequent guest 13 00:00:47,159 --> 00:00:49,960 Speaker 2: across all of our Bloomberg media and appeared on our 14 00:00:50,000 --> 00:00:52,840 Speaker 2: High Yield panel with Mike McKee for bi's twenty twenty 15 00:00:52,840 --> 00:00:55,760 Speaker 2: five credit Outlook a few months ago. A lot's happened 16 00:00:55,800 --> 00:00:57,600 Speaker 2: since then, so I'm excited to hear your thoughts on 17 00:00:57,640 --> 00:00:58,640 Speaker 2: everything corporate credit. 18 00:00:58,720 --> 00:01:00,520 Speaker 4: So what do you said? Do you want to kick 19 00:01:00,560 --> 00:01:01,240 Speaker 4: this off? James? 20 00:01:01,640 --> 00:01:04,120 Speaker 1: Just to set the scene before we chat, global markets 21 00:01:04,160 --> 00:01:07,160 Speaker 1: are getting whipsawed by recession fears and alarming developments on 22 00:01:07,200 --> 00:01:10,680 Speaker 1: the geopolitical front. Invests are spoops by increasingly haphazard and 23 00:01:10,840 --> 00:01:15,280 Speaker 1: erratic US policymaking, particularly on trade. Despite that credit spreads 24 00:01:15,319 --> 00:01:17,759 Speaker 1: remain quite tight, there's a hope that the longer term 25 00:01:17,800 --> 00:01:20,360 Speaker 1: trajectory of the US economy remains up, that the new 26 00:01:20,400 --> 00:01:22,760 Speaker 1: administration will do its best to defend that, and that 27 00:01:22,840 --> 00:01:26,320 Speaker 1: everything will be okay. High yields are alluring buyers, Plus 28 00:01:26,360 --> 00:01:28,760 Speaker 1: there's not enough supply of corporate debt to satisfy all 29 00:01:28,800 --> 00:01:31,560 Speaker 1: the demand. Bond and loan markets are pricing in very 30 00:01:31,600 --> 00:01:33,920 Speaker 1: low odds of a US recession, even as talk of 31 00:01:33,959 --> 00:01:38,160 Speaker 1: economic downturn becomes more frequent, with consumers weakening and business 32 00:01:38,240 --> 00:01:41,520 Speaker 1: leaders complaining that they can't take long term decisions in 33 00:01:41,560 --> 00:01:44,360 Speaker 1: this environment. We at Bloomberg News are using the word 34 00:01:44,440 --> 00:01:47,520 Speaker 1: uncertainty at the fastest pace since COVID shut down the 35 00:01:47,520 --> 00:01:50,560 Speaker 1: economy in twenty twenty. But what's your view that, Winnie, 36 00:01:50,680 --> 00:01:52,840 Speaker 1: how much do we really need to worry about recession 37 00:01:52,960 --> 00:01:54,320 Speaker 1: or even worse stagflation? 38 00:01:55,280 --> 00:01:57,760 Speaker 3: So we are definitely a little bit worried about a 39 00:01:57,840 --> 00:02:02,680 Speaker 3: stagflation light scenario. We're less worried about an outright recession, 40 00:02:03,000 --> 00:02:07,200 Speaker 3: especially a corporate balance seat recession. The starting point for 41 00:02:07,280 --> 00:02:10,760 Speaker 3: credit fundamentals feels like it's better than it has been 42 00:02:11,000 --> 00:02:13,760 Speaker 3: in prior periods where you've started to see the onset 43 00:02:13,919 --> 00:02:19,040 Speaker 3: of consumer recession like behavior. The problem is that the 44 00:02:19,120 --> 00:02:22,560 Speaker 3: pricing side of things is still not great. Now we 45 00:02:22,680 --> 00:02:27,600 Speaker 3: have seen companies manage through elevated prices pretty well. Margins 46 00:02:27,639 --> 00:02:30,640 Speaker 3: have been expanding for the past few quarters, really since 47 00:02:30,720 --> 00:02:34,680 Speaker 3: the height of inflation back in twenty twenty two, but 48 00:02:35,080 --> 00:02:39,760 Speaker 3: the ability to pass through those prices definitely slowing down. 49 00:02:40,000 --> 00:02:43,280 Speaker 3: So a lot of mixed signals when it comes to 50 00:02:43,560 --> 00:02:47,920 Speaker 3: what the trajectory of margins actually is. Probably not as 51 00:02:47,960 --> 00:02:52,000 Speaker 3: great as it has been, but also not recessionary overall. 52 00:02:52,360 --> 00:02:56,080 Speaker 3: We've been dubbing twenty twenty five the year of status woe. 53 00:02:56,360 --> 00:02:58,720 Speaker 3: Last year was the year of status quo, and markets 54 00:02:58,720 --> 00:03:01,800 Speaker 3: love status quo. And now we don't know if it's 55 00:03:01,840 --> 00:03:04,320 Speaker 3: woe in a good way, woa in a bad way, 56 00:03:04,520 --> 00:03:07,560 Speaker 3: or oh woe was me? Corporate credit spread should be 57 00:03:07,600 --> 00:03:08,160 Speaker 3: way wider. 58 00:03:08,919 --> 00:03:11,440 Speaker 2: Yeah, I think at our year in conference last year 59 00:03:11,440 --> 00:03:13,359 Speaker 2: you had said that the outlook for this year you 60 00:03:13,560 --> 00:03:16,240 Speaker 2: had named it It's complicated. So now that we've got 61 00:03:16,600 --> 00:03:20,600 Speaker 2: concerns about tariffs, potential for persistent inflation, and expectations for 62 00:03:20,680 --> 00:03:23,520 Speaker 2: higher prices, and I think we just saw a prelim 63 00:03:23,840 --> 00:03:27,600 Speaker 2: consumer confidence tank last week. Are you reassessing that to 64 00:03:27,720 --> 00:03:30,239 Speaker 2: title something like it's getting super really complicated? 65 00:03:30,240 --> 00:03:31,959 Speaker 4: Now? How is that? How do you see that UNFAI 66 00:03:32,000 --> 00:03:32,919 Speaker 4: length through the rest of the year. 67 00:03:33,240 --> 00:03:37,680 Speaker 3: It is extra complicated Facebook status apparently. I mean a 68 00:03:37,720 --> 00:03:40,880 Speaker 3: lot of the things that we were anticipating have played out. 69 00:03:40,960 --> 00:03:43,240 Speaker 3: I think that what surprised us the most is the 70 00:03:43,280 --> 00:03:47,560 Speaker 3: markets weren't expecting it to be complicated, and that was 71 00:03:47,600 --> 00:03:49,840 Speaker 3: a major head scratcher for us. And so now that 72 00:03:49,880 --> 00:03:51,920 Speaker 3: the market is kind of standing up and paying a 73 00:03:51,920 --> 00:03:55,760 Speaker 3: little bit closer attention, that feels better to us that 74 00:03:55,960 --> 00:03:58,880 Speaker 3: at least the market is unnoticed that maybe it's not 75 00:03:58,960 --> 00:04:02,160 Speaker 3: just going to be this straight line to soft landing, 76 00:04:02,240 --> 00:04:07,680 Speaker 3: immaculate disinflation, fiscal policy certainty, M and A and animal spirits, 77 00:04:07,720 --> 00:04:10,640 Speaker 3: all of these things that people were anticipating. Instead, it's 78 00:04:10,680 --> 00:04:13,520 Speaker 3: probably going to be a little bit bumpier road. And 79 00:04:13,560 --> 00:04:15,920 Speaker 3: that's one of the reasons you're seeing places like Europe 80 00:04:15,960 --> 00:04:19,039 Speaker 3: outperformed so significantly. There seems to be a lot more 81 00:04:19,080 --> 00:04:23,240 Speaker 3: fiscal policy certainty in terms of what Germany plans to do, 82 00:04:23,360 --> 00:04:27,320 Speaker 3: what the ECB plans to do versus the US where 83 00:04:27,560 --> 00:04:29,440 Speaker 3: it's really still all up in the air. 84 00:04:30,240 --> 00:04:32,240 Speaker 1: But going back to spreads, I mean, spreads did move 85 00:04:32,240 --> 00:04:34,599 Speaker 1: a little bit over the last week or so, but 86 00:04:34,640 --> 00:04:36,680 Speaker 1: they're still very tight. And you know, we looked at 87 00:04:36,680 --> 00:04:39,640 Speaker 1: the last piece of volatility in last August, they were 88 00:04:39,680 --> 00:04:41,760 Speaker 1: closer to four hundred basis points on the high yield. 89 00:04:41,760 --> 00:04:44,680 Speaker 1: Now it's still very close to three hundred. You know, 90 00:04:44,920 --> 00:04:46,760 Speaker 1: I get what you're saying. People have kind of taken 91 00:04:46,760 --> 00:04:48,400 Speaker 1: a second look, but they don't see that worried. So 92 00:04:48,440 --> 00:04:48,960 Speaker 1: what's going on. 93 00:04:49,320 --> 00:04:52,679 Speaker 3: What's I think going on is the broader yield environment 94 00:04:52,800 --> 00:04:55,920 Speaker 3: has not changed that much. Back in August or March 95 00:04:55,960 --> 00:04:59,520 Speaker 3: of twenty twenty three, tenure treasure yield moved meaningfully lower, 96 00:05:00,279 --> 00:05:02,440 Speaker 3: you know, a three handle. We're still treading in that 97 00:05:02,640 --> 00:05:05,560 Speaker 3: four and a quarter to four point four percent range 98 00:05:05,600 --> 00:05:09,360 Speaker 3: on the ten year treasure yield right now, which does 99 00:05:09,400 --> 00:05:12,120 Speaker 3: make it a little bit harder for spreads to gap 100 00:05:12,200 --> 00:05:16,159 Speaker 3: out significantly wider. Now, that tells me two things. Either 101 00:05:16,680 --> 00:05:20,440 Speaker 3: in recession fears are really not being priced into the market. 102 00:05:20,560 --> 00:05:23,520 Speaker 3: One would think that if people were truly concerned about 103 00:05:23,520 --> 00:05:27,200 Speaker 3: an increasing likelihood of US recession, treasure yields would be 104 00:05:27,200 --> 00:05:33,039 Speaker 3: moving significantly lower, and instead inflation concerns are much more 105 00:05:33,160 --> 00:05:36,159 Speaker 3: being priced into the market right now because you're seeing 106 00:05:36,200 --> 00:05:40,880 Speaker 3: sticky yields really across the curve, some minor fluctuations and 107 00:05:40,920 --> 00:05:45,160 Speaker 3: FED pricing expectations, but really nothing all that significant. And 108 00:05:45,200 --> 00:05:49,080 Speaker 3: this is not a terrible operating environment for corporate credit 109 00:05:49,120 --> 00:05:52,479 Speaker 3: because there is kind of that head point you get 110 00:05:52,520 --> 00:05:56,440 Speaker 3: to on spread widening. But if you see this shift, 111 00:05:56,760 --> 00:05:58,960 Speaker 3: that's where things start to unwind. 112 00:05:59,440 --> 00:06:01,440 Speaker 1: What is the I you're looking for? How do you 113 00:06:01,480 --> 00:06:02,840 Speaker 1: read that? And what are the signs? 114 00:06:02,920 --> 00:06:05,719 Speaker 3: I mean, the signs are really tricky because consumer sentiment 115 00:06:06,000 --> 00:06:09,599 Speaker 3: has been really bumpy for the past three four or 116 00:06:09,600 --> 00:06:12,960 Speaker 3: five years at this point, and what consumers have been 117 00:06:13,000 --> 00:06:16,960 Speaker 3: saying has not actually manifested in the data really kind 118 00:06:16,960 --> 00:06:19,799 Speaker 3: of until now. There are a lot of questions about 119 00:06:19,839 --> 00:06:23,760 Speaker 3: recent retail sales data and personal spending data, how much 120 00:06:23,800 --> 00:06:26,520 Speaker 3: of this is real, how much of it is just 121 00:06:26,640 --> 00:06:29,200 Speaker 3: kind of a hangover effect from the holidays or seasonal 122 00:06:29,200 --> 00:06:33,520 Speaker 3: adjustments not being particularly accurate. I think us, like the FED, 123 00:06:33,680 --> 00:06:35,680 Speaker 3: are just a little bit on hold for the near 124 00:06:35,800 --> 00:06:39,320 Speaker 3: term to see how everything ends up working its way through. 125 00:06:39,600 --> 00:06:42,560 Speaker 3: And also inflation is still kind of the big bad 126 00:06:42,560 --> 00:06:43,800 Speaker 3: boogeyman in the room. 127 00:06:44,480 --> 00:06:46,800 Speaker 1: And if there is stagflation, which you know, to me 128 00:06:46,880 --> 00:06:49,360 Speaker 1: sounds quite scary, and that you've got potentially much less 129 00:06:49,360 --> 00:06:51,280 Speaker 1: capacity to repay the debt and the debt's going to 130 00:06:51,320 --> 00:06:55,200 Speaker 1: cost you more for a company, why does that not 131 00:06:55,600 --> 00:06:59,840 Speaker 1: suddenly make for much more corporate credit risk, which really 132 00:06:59,880 --> 00:07:00,640 Speaker 1: is in the spread. 133 00:07:00,839 --> 00:07:04,520 Speaker 3: Yeah, so stagflation is one of those really bad things 134 00:07:04,560 --> 00:07:07,800 Speaker 3: from an economic fundamental standpoint. We're also not calling for 135 00:07:07,839 --> 00:07:12,080 Speaker 3: a true nineteen seventies stagflation shock. There are a lot 136 00:07:12,160 --> 00:07:15,640 Speaker 3: of just structural differences in the domestic economy and the 137 00:07:15,640 --> 00:07:18,960 Speaker 3: markets that make it very difficult to get into that 138 00:07:19,120 --> 00:07:22,560 Speaker 3: kind of hot water. But an uptick in inflation does 139 00:07:22,640 --> 00:07:26,920 Speaker 3: feel like a reasonable expectation over the near term. The 140 00:07:27,240 --> 00:07:30,800 Speaker 3: good thing for corporate credit fundamentals is if borrowing costs 141 00:07:30,840 --> 00:07:35,880 Speaker 3: remain relatively elevated, that maintains management discipline as it relates 142 00:07:35,920 --> 00:07:38,200 Speaker 3: to balance sheets. They're not going to be saying, oh, 143 00:07:38,200 --> 00:07:40,000 Speaker 3: we're going to go out and do this LBO deal 144 00:07:40,120 --> 00:07:43,240 Speaker 3: or this super leveraging deal and just add all this 145 00:07:43,360 --> 00:07:46,280 Speaker 3: debt to our balance sheets because it's really expensive. Your 146 00:07:46,360 --> 00:07:50,720 Speaker 3: return on investment there has to make mathematical sense, and 147 00:07:51,120 --> 00:07:55,680 Speaker 3: with that, bondholders can feel some reassurance that perhaps these 148 00:07:55,720 --> 00:07:59,200 Speaker 3: companies are not going to be intentionally doing something that's 149 00:07:59,240 --> 00:08:02,480 Speaker 3: going to add xcution risk and perhaps get themselves into 150 00:08:02,480 --> 00:08:05,560 Speaker 3: trouble over the next twelve, twenty four or forty months, 151 00:08:05,600 --> 00:08:09,400 Speaker 3: because most bond investors have a longer term high horizon. 152 00:08:10,320 --> 00:08:12,600 Speaker 2: So how do you see that sort of playing out 153 00:08:12,640 --> 00:08:15,480 Speaker 2: in terms of the supply side for like new issue 154 00:08:15,480 --> 00:08:18,640 Speaker 2: and so if you have stagflation, you have higher prices 155 00:08:18,720 --> 00:08:21,240 Speaker 2: and at the same time you have unemployment going up. 156 00:08:21,960 --> 00:08:23,880 Speaker 2: I think, like you had mentioned, you know, we had 157 00:08:23,920 --> 00:08:27,000 Speaker 2: fairly benign spread volatility last year, so you know, at 158 00:08:27,080 --> 00:08:29,000 Speaker 2: least I'm looking at the league screen right now and 159 00:08:29,000 --> 00:08:31,880 Speaker 2: we were up thirty percent on ig issuance. I think 160 00:08:31,880 --> 00:08:33,840 Speaker 2: it's like one and a half trillion. It's pretty impressive. 161 00:08:34,320 --> 00:08:36,080 Speaker 2: But given all these concerns, you know, what are your 162 00:08:36,080 --> 00:08:37,880 Speaker 2: thoughts and how issuance could trend through the rain of 163 00:08:37,880 --> 00:08:40,439 Speaker 2: the year, given the backdrop and some of the angst 164 00:08:40,920 --> 00:08:43,079 Speaker 2: that we've kind of highlighted here. I think high yield 165 00:08:43,160 --> 00:08:45,600 Speaker 2: in the last month at least is out forty fifty 166 00:08:45,600 --> 00:08:48,680 Speaker 2: base points on the high corporate and it's probably in 167 00:08:48,720 --> 00:08:50,560 Speaker 2: the twenty twenty five base point range for IG. 168 00:08:50,720 --> 00:08:52,079 Speaker 4: So how do you see that going. 169 00:08:52,120 --> 00:08:55,840 Speaker 3: Sure, So we always say that supply follows demand. Companies 170 00:08:55,880 --> 00:08:58,040 Speaker 3: are not going to be bringing deals to market if 171 00:08:58,080 --> 00:09:00,600 Speaker 3: they don't feel that they can price them at attractive 172 00:09:00,679 --> 00:09:04,040 Speaker 3: levels and if they don't feel like there is some 173 00:09:04,080 --> 00:09:08,560 Speaker 3: certainty around those new issue conditions. No company wants to 174 00:09:08,559 --> 00:09:11,240 Speaker 3: come to the primary market and launch a deal and 175 00:09:11,520 --> 00:09:15,320 Speaker 3: have not good receptivity or even just need to get 176 00:09:15,320 --> 00:09:19,559 Speaker 3: pulled because there's not enough investor demand. At the same time, 177 00:09:19,679 --> 00:09:23,400 Speaker 3: we've been expecting that overall new issue volumes were probably 178 00:09:23,480 --> 00:09:26,360 Speaker 3: not going to meet what they were last year. Last 179 00:09:26,400 --> 00:09:29,240 Speaker 3: year was very much an exceptional year because you had 180 00:09:29,720 --> 00:09:32,920 Speaker 3: the fear that rates were going meaningfully lower. Perhaps this 181 00:09:32,960 --> 00:09:35,600 Speaker 3: is the last hurrah that I can buy IG at 182 00:09:35,600 --> 00:09:38,319 Speaker 3: five percent. If only we had known that actually you 183 00:09:38,360 --> 00:09:41,040 Speaker 3: could buy IG at five and a quarter now. But 184 00:09:41,840 --> 00:09:45,560 Speaker 3: there was this massive surgeon issuance because there were a 185 00:09:45,600 --> 00:09:47,840 Speaker 3: lot of fears around am I going to be able 186 00:09:47,880 --> 00:09:49,760 Speaker 3: to buy this again? Am I going to be able 187 00:09:49,760 --> 00:09:51,920 Speaker 3: to get this back? And there was such strong demand. 188 00:09:52,360 --> 00:09:54,960 Speaker 3: They're still demand, but the flows have been a little 189 00:09:55,000 --> 00:09:58,040 Speaker 3: bit shoppier this year. And I think that the combination 190 00:09:58,320 --> 00:10:01,400 Speaker 3: of M and a not matiter realizing to the extent 191 00:10:01,440 --> 00:10:03,920 Speaker 3: that a lot of people were expecting. I mean, every 192 00:10:04,040 --> 00:10:08,440 Speaker 3: cell side forecast for twenty twenty five. Animal spirits was 193 00:10:08,480 --> 00:10:12,800 Speaker 3: in the title somehow, yes, And it's really hard for 194 00:10:12,920 --> 00:10:15,680 Speaker 3: animal spirits to be the driving factor when you don't 195 00:10:15,720 --> 00:10:19,520 Speaker 3: know how to do projections, because what do tariffs look like, 196 00:10:19,640 --> 00:10:22,800 Speaker 3: what does ultimate demand look like? All of these different things, 197 00:10:23,000 --> 00:10:25,920 Speaker 3: what's your cost of capital? You know, where are we 198 00:10:26,040 --> 00:10:28,719 Speaker 3: underrating these deals? And so we thought there would just 199 00:10:28,760 --> 00:10:32,680 Speaker 3: be kind of a natural deceleration in issuance overall on 200 00:10:32,760 --> 00:10:37,560 Speaker 3: that combined factor of uncertainty from the future. You know, what, 201 00:10:37,559 --> 00:10:40,160 Speaker 3: what are these companies going to be looking like, what's 202 00:10:40,200 --> 00:10:43,560 Speaker 3: the operating environment? And also where is the demand actually 203 00:10:43,559 --> 00:10:46,240 Speaker 3: going to be? And instead we've seen a lot of 204 00:10:46,280 --> 00:10:50,760 Speaker 3: issuance in Europe because the demand's there. The ECB seems 205 00:10:51,120 --> 00:10:53,920 Speaker 3: to be still kind of an easing mode, maybe less 206 00:10:53,920 --> 00:10:56,840 Speaker 3: so than they were. And also we know that there's 207 00:10:56,880 --> 00:11:00,320 Speaker 3: going to be some fiscal stimulus at long last, so 208 00:11:00,400 --> 00:11:03,400 Speaker 3: hopefully kind of rekickstart the economy over there. 209 00:11:04,240 --> 00:11:07,120 Speaker 1: Talking of projections, so do you have a projection for 210 00:11:07,480 --> 00:11:09,360 Speaker 1: issuance that you can put a number on, or would 211 00:11:09,360 --> 00:11:10,439 Speaker 1: you have to keep changing every day. 212 00:11:10,760 --> 00:11:12,640 Speaker 3: No, we tried not to change it every day. That 213 00:11:13,280 --> 00:11:16,560 Speaker 3: makes for kind of a flaty strategy team, and usually 214 00:11:16,559 --> 00:11:20,800 Speaker 3: our clients don't appreciate that. For US investment grade, our 215 00:11:20,960 --> 00:11:24,480 Speaker 3: gross issuance forecast is one point three trillion, so still 216 00:11:24,480 --> 00:11:27,600 Speaker 3: not a bad year by any stretch, but also not 217 00:11:27,920 --> 00:11:30,280 Speaker 3: you know, kind of the peak volume years. And we 218 00:11:30,320 --> 00:11:33,480 Speaker 3: also did expect that the net supply number would be 219 00:11:33,520 --> 00:11:35,600 Speaker 3: kind of flat to last year, so a little bit 220 00:11:35,640 --> 00:11:39,200 Speaker 3: of an uptick on a percentage basis overall compared to 221 00:11:39,240 --> 00:11:41,920 Speaker 3: what we saw in twenty twenty four. In the leverage 222 00:11:41,960 --> 00:11:45,040 Speaker 3: finance markets, we thought that leverage loan volume would be 223 00:11:45,120 --> 00:11:47,440 Speaker 3: a little bit softer than it was last year. We 224 00:11:47,480 --> 00:11:51,960 Speaker 3: look at net of repricings and extensions, which was just 225 00:11:52,240 --> 00:11:54,760 Speaker 3: a bonanza last year. It was almost on par with 226 00:11:54,760 --> 00:11:57,440 Speaker 3: the US investment grade market, and we think about the 227 00:11:57,480 --> 00:12:02,040 Speaker 3: relative sizes of those two markets. That's absolute lunacy. And 228 00:12:02,080 --> 00:12:04,400 Speaker 3: then the high yield bond market, we have a forecast 229 00:12:04,480 --> 00:12:06,800 Speaker 3: of call it, three hundred to three hundred and twenty 230 00:12:06,840 --> 00:12:09,640 Speaker 3: five billion, so that might be a little high at 231 00:12:09,640 --> 00:12:12,040 Speaker 3: this point. It seems like there's been both kind of 232 00:12:12,200 --> 00:12:15,080 Speaker 3: an issuer strike and a buyer strike going on in 233 00:12:15,080 --> 00:12:17,720 Speaker 3: the high yield market to start the year. A lot 234 00:12:17,800 --> 00:12:21,600 Speaker 3: of the refine needs that needed to get done. We're 235 00:12:21,760 --> 00:12:24,000 Speaker 3: done in twenty twenty four, and so now there's a 236 00:12:24,040 --> 00:12:26,040 Speaker 3: lot of people just kind of looking at capital structures 237 00:12:26,080 --> 00:12:28,240 Speaker 3: and thinking what are we going to do next? But 238 00:12:28,440 --> 00:12:31,600 Speaker 3: there have been some kind of big LBO deals announced, 239 00:12:31,679 --> 00:12:34,280 Speaker 3: so there should be some new issue supply coming to 240 00:12:34,320 --> 00:12:35,160 Speaker 3: the market. 241 00:12:35,080 --> 00:12:36,800 Speaker 1: And a net increase, you think on the high yield 242 00:12:36,840 --> 00:12:37,440 Speaker 1: bond side. 243 00:12:37,559 --> 00:12:40,839 Speaker 3: Yeah, but very modest, very modest net increase, because that. 244 00:12:40,800 --> 00:12:43,040 Speaker 1: All just must keep spreads very tight. That's been my 245 00:12:43,160 --> 00:12:45,640 Speaker 1: central thesis for you know, as long as I can 246 00:12:45,679 --> 00:12:47,679 Speaker 1: remember that. People constantly asking me why spreads not moving, 247 00:12:47,720 --> 00:12:49,720 Speaker 1: why they're so tight, And I keep looking at net 248 00:12:49,760 --> 00:12:51,480 Speaker 1: supply and it's very low, and I keep looking at 249 00:12:51,520 --> 00:12:54,720 Speaker 1: rising demand. That just that tension just seems to be 250 00:12:55,320 --> 00:12:58,160 Speaker 1: persisting despite what's going on in the geopolitics. 251 00:12:58,280 --> 00:13:00,600 Speaker 3: Yeah, it's been interesting. We have done to the high 252 00:13:00,640 --> 00:13:04,240 Speaker 3: yield market the incredible shrinking asset class because it just 253 00:13:04,280 --> 00:13:09,400 Speaker 3: can't grow. There's no new issuance. We had in call 254 00:13:09,400 --> 00:13:12,000 Speaker 3: it twenty twelve to twenty fourteen, all of the energy 255 00:13:12,040 --> 00:13:15,679 Speaker 3: paper that was done in new deals, and then in 256 00:13:15,760 --> 00:13:18,720 Speaker 3: twenty sixteen, really through present, a lot of deals have 257 00:13:18,840 --> 00:13:20,800 Speaker 3: just gone to the loan market that have been for 258 00:13:20,960 --> 00:13:25,000 Speaker 3: private equity and LBOs, and so high yield is almost 259 00:13:25,160 --> 00:13:29,199 Speaker 3: entirely a refy trade save for some kind of interesting 260 00:13:29,320 --> 00:13:33,080 Speaker 3: secured deals for companies that just needed some additional liquidity 261 00:13:33,160 --> 00:13:35,640 Speaker 3: and took it to the high yield bond market. But 262 00:13:35,800 --> 00:13:39,840 Speaker 3: the technical power there has been immensely strong. The change 263 00:13:39,880 --> 00:13:43,480 Speaker 3: in technicals comes when people actually fear a default cycle 264 00:13:43,720 --> 00:13:46,480 Speaker 3: and a downgrade cycle, right, because if you're staring at 265 00:13:46,640 --> 00:13:49,360 Speaker 3: one hundred billion of triple B debt that's coming your 266 00:13:49,400 --> 00:13:52,480 Speaker 3: way as a high yield investor, you are definitely going 267 00:13:52,559 --> 00:13:54,920 Speaker 3: to be shedding some of that single BE risk and 268 00:13:54,960 --> 00:13:57,240 Speaker 3: probably even some double B risk so that you could 269 00:13:57,280 --> 00:14:00,400 Speaker 3: buy whatever that fallen angel is because that history is 270 00:14:00,440 --> 00:14:01,360 Speaker 3: just a home run trade. 271 00:14:01,679 --> 00:14:01,880 Speaker 4: Right. 272 00:14:02,080 --> 00:14:04,920 Speaker 1: But you know, you say incredibly shrinking, but at the 273 00:14:04,920 --> 00:14:09,000 Speaker 1: same time private debt is just blowing up. Is that 274 00:14:09,000 --> 00:14:10,840 Speaker 1: where it's all going? And is that is that the 275 00:14:10,880 --> 00:14:13,439 Speaker 1: sort of technical strength that you know we're getting all 276 00:14:13,920 --> 00:14:15,680 Speaker 1: everything's being privatized in terms of debt. 277 00:14:15,920 --> 00:14:18,720 Speaker 3: Yes, I don't think that the private credit managers would 278 00:14:18,720 --> 00:14:19,680 Speaker 3: like you to say that it's. 279 00:14:19,520 --> 00:14:22,920 Speaker 1: Been blowing up in a good way, you know, in 280 00:14:23,000 --> 00:14:23,400 Speaker 1: a good. 281 00:14:23,280 --> 00:14:26,200 Speaker 3: Way for sure. There has been so much growth within 282 00:14:26,280 --> 00:14:29,840 Speaker 3: private credit, which is, you know, a natural extension of 283 00:14:30,520 --> 00:14:34,000 Speaker 3: regulation of banks. Right, middle market lending has always existed, 284 00:14:34,120 --> 00:14:37,160 Speaker 3: it's just historically been banks that have been doing it. 285 00:14:37,800 --> 00:14:41,800 Speaker 3: And now we've had some interesting factors where private credit 286 00:14:41,960 --> 00:14:44,560 Speaker 3: has had a really good track record during some of 287 00:14:44,600 --> 00:14:47,640 Speaker 3: the biggest economic shocks that we've ever seen. You know, 288 00:14:47,680 --> 00:14:50,840 Speaker 3: everybody looks at private credit portfolio returns in twenty twenty 289 00:14:50,840 --> 00:14:54,280 Speaker 3: and twenty twenty one, and man, those were really great years, 290 00:14:54,320 --> 00:14:57,040 Speaker 3: despite the fact that we had an actual default cycle 291 00:14:57,200 --> 00:15:00,880 Speaker 3: in the high bond market. It tracks capital, you know, 292 00:15:01,000 --> 00:15:04,800 Speaker 3: becomes this virtuous cycle. I do think at this point 293 00:15:04,880 --> 00:15:08,400 Speaker 3: there's a lot more scrutiny on the world of private credits. 294 00:15:09,000 --> 00:15:12,480 Speaker 3: It's still very much kind of the key source of 295 00:15:12,520 --> 00:15:16,880 Speaker 3: liquidity for companies that can't necessarily get deals done within 296 00:15:16,920 --> 00:15:20,560 Speaker 3: the highield bond or the broadly syndicated loan market. If 297 00:15:20,560 --> 00:15:23,120 Speaker 3: that were to shut, then that would be a problem. Right, 298 00:15:23,160 --> 00:15:26,080 Speaker 3: If private credit says no, Mas, we do not want 299 00:15:26,160 --> 00:15:29,920 Speaker 3: any more of these big deals that would be definitely 300 00:15:29,920 --> 00:15:32,360 Speaker 3: in an issue. And then there is the problem of 301 00:15:32,480 --> 00:15:35,520 Speaker 3: just the opaque nature of the asset class. You read 302 00:15:35,840 --> 00:15:38,640 Speaker 3: six different default reports on the world of private credit, 303 00:15:38,680 --> 00:15:41,080 Speaker 3: and you're going to have six different numbers ranging from 304 00:15:41,200 --> 00:15:44,720 Speaker 3: zero percent to ten percent, and so it's really difficult 305 00:15:44,720 --> 00:15:47,560 Speaker 3: to get a handle on what exactly is in this market. 306 00:15:47,320 --> 00:15:49,360 Speaker 1: Right right, Yeah, I know Matt want's to talk about sexes, 307 00:15:49,360 --> 00:15:51,280 Speaker 1: but before that, I just wanted to get you pinned 308 00:15:51,280 --> 00:15:54,560 Speaker 1: down on your forecast for spreads, because that's going to 309 00:15:54,560 --> 00:15:55,920 Speaker 1: be really hard to do. But you did say when 310 00:15:55,920 --> 00:15:58,040 Speaker 1: we last talked in December that you thought three point 311 00:15:58,040 --> 00:15:59,920 Speaker 1: fifty on high yield. Is that something you stick? 312 00:16:00,520 --> 00:16:03,040 Speaker 3: Yeah, we still like three fifty on high yield. You know, 313 00:16:03,080 --> 00:16:06,560 Speaker 3: we've gotten kind of closer to that level. We were 314 00:16:06,600 --> 00:16:10,360 Speaker 3: also in the camp of higher treasury rates as well 315 00:16:10,400 --> 00:16:14,080 Speaker 3: and some more treasury market volatility, so it'll be interesting 316 00:16:14,160 --> 00:16:17,160 Speaker 3: to see if that plays out. So we've been underweight 317 00:16:17,200 --> 00:16:19,600 Speaker 3: high yield, just kind of waiting to get closer to 318 00:16:19,680 --> 00:16:22,920 Speaker 3: that three fifty level. Seeing a little bit more decompression 319 00:16:22,960 --> 00:16:23,760 Speaker 3: across ratings. 320 00:16:23,840 --> 00:16:25,320 Speaker 1: Does that mean no, FED rate cuts. 321 00:16:25,680 --> 00:16:27,000 Speaker 3: We have the FED on hold this year. 322 00:16:27,000 --> 00:16:28,840 Speaker 1: Okay, interesting, so what does that mean for IG? 323 00:16:29,560 --> 00:16:31,760 Speaker 3: So for IG, we have our spread forecast at one 324 00:16:31,840 --> 00:16:34,640 Speaker 3: hundred and ten basis points, which is still objectively a 325 00:16:34,760 --> 00:16:37,120 Speaker 3: very tight level. But when I was out pitching that 326 00:16:37,160 --> 00:16:39,400 Speaker 3: to clients, everybody looked at me like I had grown 327 00:16:39,440 --> 00:16:43,160 Speaker 3: an extra head. Because of the yield environment, people say, 328 00:16:43,360 --> 00:16:46,120 Speaker 3: you know, if IG's north of five percent, then we're 329 00:16:46,160 --> 00:16:48,720 Speaker 3: going to be buying it. And that's true until you 330 00:16:48,800 --> 00:16:50,840 Speaker 3: start to say, well, maybe the Fed's actually going to 331 00:16:50,880 --> 00:16:53,480 Speaker 3: be hiking rates, and maybe cash looks a little bit 332 00:16:53,520 --> 00:16:56,240 Speaker 3: more attractive, and I should stick with short duration because 333 00:16:56,280 --> 00:16:57,840 Speaker 3: the yield care is still super flat. 334 00:16:58,880 --> 00:17:01,760 Speaker 2: So no, no big high yield default cycle going on. 335 00:17:01,880 --> 00:17:05,280 Speaker 3: It's not right now, not today. No, And you know, 336 00:17:05,400 --> 00:17:08,520 Speaker 3: we actually have, I would say, a more aggressive default 337 00:17:08,560 --> 00:17:12,000 Speaker 3: forecast than what the market is currently pricing in. The 338 00:17:12,080 --> 00:17:15,080 Speaker 3: distress ratio in the market is a great forward indicator 339 00:17:15,119 --> 00:17:16,879 Speaker 3: for what defaults are going to look like over the 340 00:17:16,880 --> 00:17:20,320 Speaker 3: next twelve months or so, and that's consistently been pretty low, 341 00:17:20,400 --> 00:17:22,959 Speaker 3: call it six to seven percent for the past twelve 342 00:17:23,000 --> 00:17:26,879 Speaker 3: months or so, and that would imply maybe a one 343 00:17:26,960 --> 00:17:29,919 Speaker 3: to one and a half percent default rate and ours 344 00:17:30,000 --> 00:17:32,400 Speaker 3: is closer to two and a half to three percent. 345 00:17:33,080 --> 00:17:36,080 Speaker 3: So that does assume that some of these capital structures 346 00:17:36,119 --> 00:17:39,080 Speaker 3: that have just been circling the drain and just waiting 347 00:17:39,119 --> 00:17:41,480 Speaker 3: and waiting and waiting, are finally going to do whatever 348 00:17:41,520 --> 00:17:44,520 Speaker 3: distressed exchange that actually triggers a default. 349 00:17:45,359 --> 00:17:51,240 Speaker 2: Is President Trump's I guess geopolitical, you know, true social tweets. 350 00:17:51,280 --> 00:17:54,320 Speaker 2: Is that more a negotiating tactic or do you think 351 00:17:54,359 --> 00:17:57,280 Speaker 2: that there's the Trump put is is a real thing. 352 00:17:57,320 --> 00:18:00,639 Speaker 2: I looking at WI and you know, looks like at 353 00:18:00,720 --> 00:18:04,239 Speaker 2: least today retirement for James and I as another year 354 00:18:04,359 --> 00:18:06,560 Speaker 2: or so out, just based on the market's behaving. So 355 00:18:07,000 --> 00:18:08,679 Speaker 2: how much worse does it have to get in the 356 00:18:08,720 --> 00:18:13,439 Speaker 2: equity market before we start seeing credit market take notice? 357 00:18:13,520 --> 00:18:16,240 Speaker 3: Yeah, this is a great question. I think that right now, 358 00:18:16,240 --> 00:18:20,200 Speaker 3: when you look at yield in the credit market, still 359 00:18:20,440 --> 00:18:23,119 Speaker 3: seven and a half percent for high yield, call it 360 00:18:23,160 --> 00:18:26,480 Speaker 3: five and a quarter for investment grade, and then forward 361 00:18:26,560 --> 00:18:29,960 Speaker 3: earnings yield for the S and P five hundred, credit 362 00:18:30,040 --> 00:18:33,040 Speaker 3: still looks pretty attractive. So you would need to see 363 00:18:33,400 --> 00:18:37,359 Speaker 3: another call it eight to ten percent down on the 364 00:18:37,480 --> 00:18:40,080 Speaker 3: S and P five hundred before you're at kind of 365 00:18:40,400 --> 00:18:44,080 Speaker 3: like for like yield implications. Now that assumes that you're 366 00:18:44,160 --> 00:18:47,439 Speaker 3: also not seeing massive reductions to forward earnings, which I 367 00:18:47,440 --> 00:18:51,439 Speaker 3: think is not necessarily the safest assumption, but that's kind 368 00:18:51,480 --> 00:18:53,959 Speaker 3: of the back of the envelope way to do it. 369 00:18:54,320 --> 00:18:57,479 Speaker 3: I think. In general, credit is still viewed as a 370 00:18:57,520 --> 00:19:01,880 Speaker 3: pretty safe trade, and when people think about valuations went sure, 371 00:19:01,960 --> 00:19:05,720 Speaker 3: spreads got really tight back to all time historic levels, 372 00:19:05,800 --> 00:19:09,399 Speaker 3: kind of depending on how you're measuring your historic timeframe, 373 00:19:10,000 --> 00:19:13,200 Speaker 3: but equity has really felt very frothy. You know, two 374 00:19:13,240 --> 00:19:15,960 Speaker 3: back to back years of twenty percent plus returns on 375 00:19:16,000 --> 00:19:18,520 Speaker 3: the s and P five hundred. It's unusual. 376 00:19:19,240 --> 00:19:21,280 Speaker 4: I enjoyed it. Yeah, I thought it was great. Keep 377 00:19:21,320 --> 00:19:21,640 Speaker 4: it coming. 378 00:19:21,720 --> 00:19:22,159 Speaker 3: I love it. 379 00:19:23,960 --> 00:19:26,359 Speaker 2: So if we get some volatility, where are some of 380 00:19:26,359 --> 00:19:28,719 Speaker 2: the sectors that you like and maybe some what are 381 00:19:28,760 --> 00:19:31,360 Speaker 2: some of the names that you think can perform really well? 382 00:19:31,400 --> 00:19:33,080 Speaker 2: And then conversely, you know, what are some of the 383 00:19:33,080 --> 00:19:36,000 Speaker 2: sectors you think might be doing really poorly? And there's 384 00:19:36,040 --> 00:19:39,480 Speaker 2: some candidates that could be for some spread widening candidates. 385 00:19:39,680 --> 00:19:42,120 Speaker 3: Yeah, I mean, so this is a tricky one because 386 00:19:42,800 --> 00:19:46,480 Speaker 3: there's less to like nowadays and credit, even with the 387 00:19:46,520 --> 00:19:49,119 Speaker 3: spread widening that we've gotten. It's kind of hard to 388 00:19:49,200 --> 00:19:51,520 Speaker 3: you know, pound the table and say, wow, this seems 389 00:19:51,560 --> 00:19:55,480 Speaker 3: like a really great trade within the investment grade. We've 390 00:19:55,480 --> 00:19:59,400 Speaker 3: still been constructive on financials. The thesis on that has 391 00:19:59,440 --> 00:20:02,560 Speaker 3: been of all thing. Our team had been very positive 392 00:20:02,680 --> 00:20:06,120 Speaker 3: on the regionals and some of the consumer finance, and 393 00:20:06,560 --> 00:20:10,560 Speaker 3: as valuations really compressed, they said, okay, maybe now it's 394 00:20:10,600 --> 00:20:12,840 Speaker 3: time to go a little bit up in quality. You know, 395 00:20:12,920 --> 00:20:15,879 Speaker 3: look at the jesibs. Just where are the really strong 396 00:20:15,920 --> 00:20:18,719 Speaker 3: balance sheets where you're going to have some defensive carry 397 00:20:18,760 --> 00:20:21,320 Speaker 3: and kind of sleep well at night. And even if 398 00:20:21,359 --> 00:20:24,800 Speaker 3: there is a credit cycle, we're probably not going to 399 00:20:24,840 --> 00:20:28,119 Speaker 3: be all that impacted by it. But then also there 400 00:20:28,160 --> 00:20:31,920 Speaker 3: are some credits within the industrial space where our analysts 401 00:20:31,960 --> 00:20:34,719 Speaker 3: feel pretty good. You know, we're still pretty constructive on Boeing, 402 00:20:34,800 --> 00:20:38,800 Speaker 3: which seems contrarian when you think about everything that's going 403 00:20:38,840 --> 00:20:42,600 Speaker 3: on in terms of government cost cutting and man Boeing 404 00:20:42,600 --> 00:20:46,439 Speaker 3: has had just the bumpiest of bumpy rides, but you know, 405 00:20:46,520 --> 00:20:50,159 Speaker 3: you're getting paid some decent spread there to actually go 406 00:20:50,200 --> 00:20:52,600 Speaker 3: into that capital structure, and on a long term basis, 407 00:20:52,680 --> 00:20:55,040 Speaker 3: we feel like it's probably not going to be a 408 00:20:55,080 --> 00:20:58,440 Speaker 3: fallen angel candidate, at least for now, which which makes 409 00:20:58,480 --> 00:21:00,960 Speaker 3: us feel a little bit better about things. We also 410 00:21:01,119 --> 00:21:03,840 Speaker 3: just re upgraded Pharma back to a neutral. We had 411 00:21:03,840 --> 00:21:06,680 Speaker 3: been underperformed there because of the whole animal spirits thing. 412 00:21:06,840 --> 00:21:09,080 Speaker 3: Farmah loves to do M and A. They love to 413 00:21:09,119 --> 00:21:12,119 Speaker 3: do big leveraging M and A, but it seems like 414 00:21:12,160 --> 00:21:14,159 Speaker 3: that is maybe not going to be as big of 415 00:21:14,160 --> 00:21:16,600 Speaker 3: a risk, and instead you want to be in some 416 00:21:16,640 --> 00:21:20,240 Speaker 3: of these higher quality, more defensive balance sheets where you know, 417 00:21:20,320 --> 00:21:23,639 Speaker 3: spreads worth sticking out a little bit wide just because 418 00:21:23,680 --> 00:21:25,720 Speaker 3: of oh my gosh, what's going to happen here on 419 00:21:25,760 --> 00:21:28,800 Speaker 3: the M and A space, and really with tariffs as well, 420 00:21:28,840 --> 00:21:30,879 Speaker 3: you know, Pharma is kind of front and center on 421 00:21:31,240 --> 00:21:32,880 Speaker 3: the healthcare side of things as well. 422 00:21:33,440 --> 00:21:33,600 Speaker 4: Well. 423 00:21:33,600 --> 00:21:36,360 Speaker 1: Building definitely a bumpy ride and will waghs than one, 424 00:21:36,359 --> 00:21:39,080 Speaker 1: But Matt, you cover that. So are you in agreement? 425 00:21:39,080 --> 00:21:41,560 Speaker 4: Do you think? Oh? Yeah, I actually I do. I 426 00:21:41,600 --> 00:21:42,040 Speaker 4: do agree. 427 00:21:42,119 --> 00:21:46,720 Speaker 2: I think that Actually they've outperformed since I guess December 428 00:21:46,800 --> 00:21:49,840 Speaker 2: or not December. But October first, when news broke they 429 00:21:49,880 --> 00:21:52,200 Speaker 2: were going to do a ten billion dollar equity Ways 430 00:21:52,200 --> 00:21:55,360 Speaker 2: and Rays, and that quickly turned into a twenty four 431 00:21:55,359 --> 00:21:58,959 Speaker 2: billion with nineteen billion being equity and a mandatory convert 432 00:21:59,080 --> 00:22:02,040 Speaker 2: so after they exercise the green shoes, twenty four billion 433 00:22:02,080 --> 00:22:05,639 Speaker 2: on in so and I would actually Anglis Kelly, who 434 00:22:05,760 --> 00:22:08,159 Speaker 2: is the air Cap CEO, which is basically the biggest 435 00:22:08,240 --> 00:22:11,640 Speaker 2: fire of aviation assets in the world, has highlighted that 436 00:22:12,000 --> 00:22:15,200 Speaker 2: the manufacturing quality has gotten really really good with Bowing 437 00:22:15,280 --> 00:22:16,679 Speaker 2: over the last couple of years. So I think that 438 00:22:16,720 --> 00:22:20,000 Speaker 2: they're taking the steps they need to to Boosto's deliveries 439 00:22:20,040 --> 00:22:23,600 Speaker 2: and production and basically unlock the eighty plus billion of 440 00:22:23,640 --> 00:22:27,359 Speaker 2: inventory that they have on their balance sheet, which they desperately, 441 00:22:27,480 --> 00:22:29,880 Speaker 2: desperately need. So maybe this year we see spreads sort of. 442 00:22:29,800 --> 00:22:31,200 Speaker 4: Behave in an inverse relationship. 443 00:22:31,240 --> 00:22:34,679 Speaker 2: As production and deliveries go up, spreads come down closer 444 00:22:34,720 --> 00:22:36,160 Speaker 2: to she will be to your careers. 445 00:22:36,200 --> 00:22:39,199 Speaker 1: So we go into a downtown, people stop buying flights. 446 00:22:39,240 --> 00:22:41,399 Speaker 1: What's going to happen to these companies? Is that not 447 00:22:41,480 --> 00:22:42,480 Speaker 1: a big risk? If you know? 448 00:22:43,320 --> 00:22:44,840 Speaker 2: I think it's definitely a big risk, But I don't 449 00:22:44,880 --> 00:22:46,840 Speaker 2: think it's a demand issue. I think when you have 450 00:22:46,880 --> 00:22:49,480 Speaker 2: a half a trillion dollar black backlog and at these rates, 451 00:22:49,480 --> 00:22:51,960 Speaker 2: you're looking at production well into the twenty thirties. 452 00:22:52,320 --> 00:22:54,240 Speaker 1: I think many people think of it as a defensive name, 453 00:22:54,280 --> 00:22:57,840 Speaker 1: But is it one of the more obvious relative value 454 00:22:57,840 --> 00:22:59,080 Speaker 1: plays now for both of you think. 455 00:22:59,680 --> 00:23:02,480 Speaker 3: I think so. I mean, I wouldn't necessarily say it's defensive. 456 00:23:02,600 --> 00:23:06,879 Speaker 2: There's yeah bullet the vulture will be negative outlooks and 457 00:23:07,160 --> 00:23:09,400 Speaker 2: a review for downgraded s and P. I wouldn't say 458 00:23:09,400 --> 00:23:12,680 Speaker 2: that it's defensive, but I think they're moving the needle 459 00:23:12,720 --> 00:23:15,080 Speaker 2: in the correct direction at this point. And you know 460 00:23:15,600 --> 00:23:18,720 Speaker 2: when he said, a fallen angel is typically a home run, 461 00:23:18,720 --> 00:23:20,720 Speaker 2: so we actually did some work in the fall and 462 00:23:20,760 --> 00:23:23,280 Speaker 2: if they were to fall, which is not our base case, 463 00:23:24,119 --> 00:23:28,480 Speaker 2: access returns are pretty well of the Ford twelve months 464 00:23:28,520 --> 00:23:32,320 Speaker 2: and usually have that one month adjustment period, And any 465 00:23:32,359 --> 00:23:34,239 Speaker 2: high yield manager, I'm sure it would be salivating at 466 00:23:34,240 --> 00:23:37,560 Speaker 2: a business risk profile like that. And the seventy percent 467 00:23:37,600 --> 00:23:41,200 Speaker 2: of the capitol structure has coupon steps, which is also interesting, 468 00:23:41,240 --> 00:23:42,560 Speaker 2: a nice little kicker on the way. 469 00:23:42,400 --> 00:23:46,040 Speaker 3: Down, big feature. I would say that every high yield 470 00:23:46,200 --> 00:23:50,560 Speaker 3: cell side trading desk would just be ecstatic going we're 471 00:23:50,640 --> 00:23:54,480 Speaker 3: actually downgraded. They get that much in new paper to 472 00:23:54,560 --> 00:23:57,679 Speaker 3: trade around when they just haven't had much. 473 00:23:57,600 --> 00:24:00,359 Speaker 1: Yeah, exactly, And the other set t flag when he 474 00:24:00,440 --> 00:24:03,640 Speaker 1: was metals in mining, is that just because the oil price, sorry, 475 00:24:04,240 --> 00:24:06,720 Speaker 1: the gold price is through the roof, not just gold. 476 00:24:06,840 --> 00:24:09,760 Speaker 3: But you know, as much as we kind of bemoan 477 00:24:10,119 --> 00:24:13,440 Speaker 3: tariff and trade policy as being this net negative and 478 00:24:13,560 --> 00:24:17,399 Speaker 3: creating uncertainty, there's some certainty in terms of actually the 479 00:24:17,520 --> 00:24:21,000 Speaker 3: US companies benefiting from some of these things. And so 480 00:24:21,119 --> 00:24:24,760 Speaker 3: when we look at the domestic metals and mining sector, 481 00:24:25,359 --> 00:24:27,680 Speaker 3: feels like it's one place to try to kind of 482 00:24:27,720 --> 00:24:30,600 Speaker 3: align yourself. You know. Also, we still have a lot 483 00:24:30,640 --> 00:24:34,440 Speaker 3: of capex going into infrastructure. You know, to build a 484 00:24:34,520 --> 00:24:38,359 Speaker 3: data center, you need steel and aluminum and copper and 485 00:24:38,440 --> 00:24:41,359 Speaker 3: all of these things that you know, these producers are making. 486 00:24:42,600 --> 00:24:44,200 Speaker 1: And on the flip side, as Matt said, you know 487 00:24:44,280 --> 00:24:47,160 Speaker 1: what's most impacted by tires? What are you staying away from? 488 00:24:47,760 --> 00:24:49,720 Speaker 3: Yeah, so I think the autos is kind of the 489 00:24:49,840 --> 00:24:52,280 Speaker 3: layup one. Right. We've had a little bit of a 490 00:24:52,320 --> 00:24:56,120 Speaker 3: reprieve for the big US auto makers, But who knows 491 00:24:56,160 --> 00:24:59,199 Speaker 3: what's going to happen on April second, which is quote 492 00:24:59,320 --> 00:25:02,080 Speaker 3: the big one according to Trump. I mean, I feel 493 00:25:02,080 --> 00:25:04,879 Speaker 3: like every Monday has been a big one in twenty 494 00:25:04,920 --> 00:25:07,800 Speaker 3: twenty five, it feels a little bit like Groundhog Day overall, 495 00:25:08,520 --> 00:25:10,919 Speaker 3: but autos has been kind of a bumpy ride. We 496 00:25:11,040 --> 00:25:14,600 Speaker 3: recently saw a Fallen Angel downgrade in the world of autos, 497 00:25:14,640 --> 00:25:16,800 Speaker 3: so that's something to kind of pay attention to. I 498 00:25:16,800 --> 00:25:19,040 Speaker 3: think if Ford came back down, which is not our 499 00:25:19,119 --> 00:25:22,160 Speaker 3: base case, but you know, definitely on people's minds given 500 00:25:22,359 --> 00:25:26,120 Speaker 3: everything that's going on. While long term, that would probably 501 00:25:26,200 --> 00:25:28,520 Speaker 3: be good, it's usually not great if you're a boomerang, 502 00:25:28,720 --> 00:25:31,560 Speaker 3: you know, Fallen Angel, Rising Star, Fallen Angel, Rising Star. 503 00:25:31,680 --> 00:25:35,400 Speaker 3: That starts kind of put people on notice, yes, for sure, 504 00:25:36,640 --> 00:25:39,800 Speaker 3: and then it's it's really interesting. Retail one of the 505 00:25:39,880 --> 00:25:44,920 Speaker 3: tightest trading, most defensive sectors within the US market, very 506 00:25:45,000 --> 00:25:48,320 Speaker 3: vulnerable to tariffs. You know how much of these consumer 507 00:25:48,359 --> 00:25:51,879 Speaker 3: products are we importing from China and other places. It's 508 00:25:51,920 --> 00:25:55,359 Speaker 3: a pretty significant chunk. And we're already seeing retailers and 509 00:25:55,440 --> 00:25:59,480 Speaker 3: consumer goods in the crosshairs of consumer sentiment and shifting. 510 00:25:59,720 --> 00:26:02,760 Speaker 3: Try and we're spending on services and now we're spending 511 00:26:02,760 --> 00:26:05,199 Speaker 3: on goods. So wait, groceries are too expensive. There's just 512 00:26:05,320 --> 00:26:08,480 Speaker 3: a lot to get right in that sector that even 513 00:26:08,480 --> 00:26:11,679 Speaker 3: if it's high quality, you're probably not going to be 514 00:26:12,040 --> 00:26:13,640 Speaker 3: massively outperforming there. 515 00:26:14,320 --> 00:26:17,240 Speaker 1: And by rating Terry. You mentioned it earlier that people 516 00:26:17,240 --> 00:26:20,240 Speaker 1: would probably want to move up to the double b's, 517 00:26:20,560 --> 00:26:22,879 Speaker 1: but that is a very crowded trade. People have been 518 00:26:22,880 --> 00:26:25,600 Speaker 1: trying to do that for a long time, and you 519 00:26:25,680 --> 00:26:28,200 Speaker 1: mentioned earlier that you know there's less to like generally. 520 00:26:28,240 --> 00:26:31,040 Speaker 1: I mean, I'm seeing that's because of valuation, But so 521 00:26:31,600 --> 00:26:32,200 Speaker 1: where do you go? 522 00:26:32,480 --> 00:26:35,119 Speaker 3: Yeah, so we like a barbell right now in high yield. 523 00:26:35,640 --> 00:26:38,200 Speaker 3: And I'm probably going to sound crazy that I have 524 00:26:38,320 --> 00:26:41,159 Speaker 3: a wider spread forecast, but telling people to buy some 525 00:26:41,240 --> 00:26:45,160 Speaker 3: triple c's, I think that when you are anticipating spread widening, 526 00:26:45,240 --> 00:26:48,240 Speaker 3: you want to be aligned with issuers that have a 527 00:26:48,400 --> 00:26:53,000 Speaker 3: high conviction view on maintaining and defending ratings. And the 528 00:26:53,040 --> 00:26:55,760 Speaker 3: triple C universe and the double B universe, I think 529 00:26:55,760 --> 00:26:58,600 Speaker 3: that those are the core places within high yield that 530 00:26:58,720 --> 00:27:01,920 Speaker 3: companies are going to be saying, we don't want a downgrade. 531 00:27:01,960 --> 00:27:05,399 Speaker 3: You know. In triple C that's kind of endgame right there. 532 00:27:05,800 --> 00:27:08,159 Speaker 3: And the move in cost of capital from double B 533 00:27:08,359 --> 00:27:11,280 Speaker 3: to single B that's also pretty significant. If anything, Double 534 00:27:11,320 --> 00:27:13,960 Speaker 3: B assures are continuing to try to migrate up to 535 00:27:14,240 --> 00:27:18,119 Speaker 3: investment grade single B world that's where we've seen a 536 00:27:18,160 --> 00:27:22,880 Speaker 3: lot more challenge in kind of maintaining ratings, and that's 537 00:27:22,920 --> 00:27:27,600 Speaker 3: been an anomaly versus the rest of the corporate credit market, 538 00:27:27,680 --> 00:27:31,400 Speaker 3: where this kind of rating upgrade momentum has still been intact. 539 00:27:31,960 --> 00:27:34,359 Speaker 3: And so we kind of like that Barbell strategy of 540 00:27:34,600 --> 00:27:36,920 Speaker 3: we can construct that seven to eight percent yield in 541 00:27:36,960 --> 00:27:40,240 Speaker 3: the portfolio by kind of a core holding in double b's, 542 00:27:40,320 --> 00:27:43,840 Speaker 3: including extending out duration a little bit there, and also 543 00:27:43,920 --> 00:27:45,600 Speaker 3: adding some alpha within triple c's. 544 00:27:45,960 --> 00:27:48,480 Speaker 1: But the triple cs, by the rating agency definition, is 545 00:27:48,960 --> 00:27:51,840 Speaker 1: very high risk of loss. How do you headge that? 546 00:27:52,800 --> 00:27:54,399 Speaker 3: I mean, you have to hedge that by picking the 547 00:27:54,440 --> 00:27:56,880 Speaker 3: right triple c's and your liquidity. 548 00:27:57,040 --> 00:27:58,640 Speaker 1: Yeah, yes, And. 549 00:27:58,880 --> 00:28:01,840 Speaker 3: You know, sometimes in the kind of liquidity shocks, actually 550 00:28:01,840 --> 00:28:04,040 Speaker 3: being in triple c's is not the worst place to 551 00:28:04,080 --> 00:28:07,199 Speaker 3: be because things just don't turn over that much. Like 552 00:28:07,240 --> 00:28:09,399 Speaker 3: if you can kind of ride it through and listening 553 00:28:09,520 --> 00:28:13,359 Speaker 3: are anticipating you know, two, three, four, five years of 554 00:28:13,840 --> 00:28:18,000 Speaker 3: you know, twenty percent triple C yields, then you're kind 555 00:28:18,000 --> 00:28:20,639 Speaker 3: of kind of be okay as long as you've aligned 556 00:28:20,640 --> 00:28:23,119 Speaker 3: with not those capital structures that are going to be 557 00:28:23,160 --> 00:28:24,800 Speaker 3: doing distressed exchanges and. 558 00:28:24,760 --> 00:28:27,159 Speaker 1: Things like that, Are there any sectors or names that 559 00:28:27,200 --> 00:28:29,040 Speaker 1: stick out in there we're going in triple c's. 560 00:28:29,359 --> 00:28:32,800 Speaker 3: Yeah, so, I mean teleco and media have been front 561 00:28:32,840 --> 00:28:36,959 Speaker 3: and center for problems, and it does seem like we're 562 00:28:37,520 --> 00:28:39,760 Speaker 3: kind of getting to the other side of that in 563 00:28:39,840 --> 00:28:43,400 Speaker 3: some ways. Uh So, definitely kind of looking at those 564 00:28:43,440 --> 00:28:48,320 Speaker 3: spaces as areas of opportunity. Healthcare is another one, you know, 565 00:28:48,400 --> 00:28:51,880 Speaker 3: that's been the big, you know, kind of bad sector 566 00:28:52,000 --> 00:28:54,680 Speaker 3: for quite some time in the high healed space as well, 567 00:28:55,480 --> 00:28:57,800 Speaker 3: But then there's like not a lot of triple c's 568 00:28:57,920 --> 00:28:59,240 Speaker 3: left in other sectors. 569 00:28:59,320 --> 00:28:59,480 Speaker 4: Right. 570 00:28:59,600 --> 00:29:02,720 Speaker 3: Energy has gone through this massive ratings upgrade cycle. It 571 00:29:02,800 --> 00:29:06,520 Speaker 3: used to be the core tripleC market and now it's 572 00:29:06,560 --> 00:29:07,920 Speaker 3: really not anymore. 573 00:29:07,640 --> 00:29:10,280 Speaker 1: Right, and it also seems to be somewhat less volatile. 574 00:29:10,320 --> 00:29:12,160 Speaker 1: I mean, I look at the big market swings that 575 00:29:12,200 --> 00:29:14,200 Speaker 1: go on act. Previously, we'd looked at it and the 576 00:29:14,200 --> 00:29:16,880 Speaker 1: triple cs would just blow out immediately and everyone would 577 00:29:16,880 --> 00:29:19,479 Speaker 1: just dump those. But now there's less of that going on. 578 00:29:19,600 --> 00:29:21,440 Speaker 1: Is that because there's just less supply and more demand 579 00:29:21,520 --> 00:29:21,680 Speaker 1: for that. 580 00:29:21,960 --> 00:29:23,920 Speaker 3: I think that that has a lot to do with it. 581 00:29:24,000 --> 00:29:26,600 Speaker 3: I think that positioning within the high old market has 582 00:29:26,640 --> 00:29:30,400 Speaker 3: been really tricky for the past three years. At this point, 583 00:29:30,680 --> 00:29:33,440 Speaker 3: at the beginning of twenty twenty three, every high yield 584 00:29:33,440 --> 00:29:36,880 Speaker 3: fund manager was worried about recession risk, was worried about 585 00:29:36,920 --> 00:29:40,880 Speaker 3: a default cycle, and because of that, stayed really up 586 00:29:40,880 --> 00:29:44,280 Speaker 3: in quality, stayed overweight cash. I had conversations with some 587 00:29:44,360 --> 00:29:46,600 Speaker 3: clients that were telling me that they were twenty to 588 00:29:46,640 --> 00:29:50,440 Speaker 3: thirty percent cash in their portfolios. And this was still 589 00:29:50,720 --> 00:29:53,360 Speaker 3: midway through twenty twenty three, when there had already been 590 00:29:53,440 --> 00:29:57,200 Speaker 3: a pretty significant recovery and spreads from recession fears from 591 00:29:57,200 --> 00:30:00,560 Speaker 3: the regional banks crisis. And that goes to the fact 592 00:30:00,600 --> 00:30:03,160 Speaker 3: that there was no supply. There was nothing to buy. 593 00:30:03,480 --> 00:30:05,520 Speaker 3: So if you're trying to add risk and there's no 594 00:30:05,600 --> 00:30:08,680 Speaker 3: supply and you're just sitting in cash, your portfolio drag 595 00:30:08,760 --> 00:30:12,160 Speaker 3: is going to be massive. Now Psychologically, I think a 596 00:30:12,200 --> 00:30:15,200 Speaker 3: lot of people have recalibrated risk. If anything, over the 597 00:30:15,240 --> 00:30:18,520 Speaker 3: course of twenty twenty four, every client from investment grade 598 00:30:18,520 --> 00:30:20,960 Speaker 3: at high yield was telling me they were adding risk, 599 00:30:21,040 --> 00:30:23,480 Speaker 3: they were a long credit risk. If they weren't, it 600 00:30:23,520 --> 00:30:26,080 Speaker 3: was because they were perma bears and they just were 601 00:30:26,120 --> 00:30:29,680 Speaker 3: waiting for the big one that did not ultimately manifest. 602 00:30:29,840 --> 00:30:32,040 Speaker 3: Who knows. Maybe this year not our base case, but 603 00:30:32,280 --> 00:30:34,640 Speaker 3: it's something to think about. So I think that the 604 00:30:34,680 --> 00:30:38,040 Speaker 3: technicals and the positioning side of things has really kind 605 00:30:38,040 --> 00:30:40,680 Speaker 3: of supported triple c's, and triple c's have also been 606 00:30:40,720 --> 00:30:44,560 Speaker 3: super bifurcated. You have that cohort of distressed issuers that's 607 00:30:44,680 --> 00:30:47,440 Speaker 3: ranged from call it five to ten percent of the 608 00:30:47,480 --> 00:30:50,560 Speaker 3: market for the past eighteen months or so, they've been 609 00:30:50,600 --> 00:30:53,440 Speaker 3: the really tricky ones, and everything else in the world 610 00:30:53,520 --> 00:30:56,240 Speaker 3: of triple C has tightened up quite significantly. 611 00:30:56,800 --> 00:30:59,360 Speaker 2: Just going back to the sectors, I don't know if 612 00:30:59,400 --> 00:31:01,320 Speaker 2: you omit. It's because there's so many you could or 613 00:31:01,400 --> 00:31:03,880 Speaker 2: could not like. But I don't think you spoke on 614 00:31:04,040 --> 00:31:10,680 Speaker 2: tech given China's supply chain position as tech exposed, how 615 00:31:10,720 --> 00:31:12,360 Speaker 2: exposed or how do you see that? 616 00:31:12,520 --> 00:31:16,640 Speaker 3: Yeah, so we actually think that tech proper is maybe 617 00:31:16,840 --> 00:31:20,440 Speaker 3: less exposed than everything else that is exposed to tech 618 00:31:21,000 --> 00:31:23,760 Speaker 3: when you think about the AI value chain. Sure, you 619 00:31:23,840 --> 00:31:29,520 Speaker 3: have these hyperscalers spending immense dollars on cappax, right, data 620 00:31:29,560 --> 00:31:33,880 Speaker 3: center investment, all of these things, but it doesn't really 621 00:31:33,960 --> 00:31:36,840 Speaker 3: move the needle for a lot of those issuers from 622 00:31:36,880 --> 00:31:41,120 Speaker 3: a ratings perspective, From a real cash flow perspective, they're 623 00:31:41,200 --> 00:31:43,560 Speaker 3: just so big and generate so much cash and are 624 00:31:43,560 --> 00:31:46,760 Speaker 3: so highly rated. What it does move the needle on 625 00:31:47,080 --> 00:31:51,680 Speaker 3: is everything else. Utilities that have been massively upgrading their 626 00:31:51,720 --> 00:31:55,680 Speaker 3: infrastructure so that they can supply electricity to these data centers, 627 00:31:56,200 --> 00:31:59,680 Speaker 3: natural gas, which is one of the big inputs for 628 00:31:59,760 --> 00:32:04,360 Speaker 3: the power generation, building materials, and construction. You know, when 629 00:32:04,360 --> 00:32:07,240 Speaker 3: you kind of give the mouse a cookie and then 630 00:32:07,480 --> 00:32:10,160 Speaker 3: the mouse has all of these other things. You know, 631 00:32:10,200 --> 00:32:12,640 Speaker 3: if you give some chips to China, they're going to 632 00:32:12,720 --> 00:32:14,560 Speaker 3: do it better and cheaper, and it's just going to 633 00:32:14,600 --> 00:32:18,480 Speaker 3: set off this domino effect within really the US market, 634 00:32:18,520 --> 00:32:20,680 Speaker 3: which has been very interesting, and so we see the 635 00:32:20,760 --> 00:32:24,560 Speaker 3: exposure there maybe less centered on tech, which has been 636 00:32:24,920 --> 00:32:27,160 Speaker 3: kind of the opinion of the equity market. And perhaps 637 00:32:27,160 --> 00:32:29,920 Speaker 3: that's the difference between the equity market and the credit 638 00:32:29,920 --> 00:32:33,120 Speaker 3: market is inequities. If you don't get that return on investment, 639 00:32:33,160 --> 00:32:36,520 Speaker 3: if you're not actually able to monetize the AI, that 640 00:32:36,680 --> 00:32:39,400 Speaker 3: is going to be a big problem for your multiples 641 00:32:39,440 --> 00:32:43,680 Speaker 3: going forward. Whereas for credit market, if you have been 642 00:32:43,800 --> 00:32:46,840 Speaker 3: building all this infrastructure and then you actually don't need 643 00:32:46,880 --> 00:32:49,360 Speaker 3: to power all these data centers and you don't get 644 00:32:49,400 --> 00:32:53,800 Speaker 3: to push through that rate to your local utility regulator. 645 00:32:54,160 --> 00:32:55,400 Speaker 3: That's going to be problematic. 646 00:32:57,160 --> 00:32:59,440 Speaker 1: There's been a sort of recent sea change in terms 647 00:32:59,440 --> 00:33:04,240 Speaker 1: of the globe investment thesis, sort of slightly away from 648 00:33:04,240 --> 00:33:07,800 Speaker 1: the US, this idea that US exceptionalism is maybe being 649 00:33:07,920 --> 00:33:10,959 Speaker 1: tested in lots of different ways, you know, politically, culture 650 00:33:11,160 --> 00:33:13,800 Speaker 1: and others. But are you seeing much of that in 651 00:33:13,880 --> 00:33:17,040 Speaker 1: terms of the day to day meetings you have with 652 00:33:17,320 --> 00:33:19,240 Speaker 1: people that are outside the US In terms of credit. 653 00:33:19,520 --> 00:33:22,720 Speaker 3: Absolutely. We have a wonderful strategist on our team based 654 00:33:22,720 --> 00:33:27,080 Speaker 3: in Singapore. She's been making the rounds in Korea, talking 655 00:33:27,120 --> 00:33:30,320 Speaker 3: to investors, you know, all over the Asia Pacific region, 656 00:33:30,960 --> 00:33:33,680 Speaker 3: and there's been a lot more focus on China again 657 00:33:33,920 --> 00:33:37,000 Speaker 3: and maybe getting back into some China trades, which is 658 00:33:37,320 --> 00:33:39,680 Speaker 3: very counter to what we've heard for the past couple 659 00:33:39,760 --> 00:33:46,480 Speaker 3: of years because US policy big question market, while Chinese policy, 660 00:33:46,600 --> 00:33:49,360 Speaker 3: you know, at least there's something being done to kind 661 00:33:49,360 --> 00:33:52,440 Speaker 3: of restimulate demand, or at least the government is saying 662 00:33:52,480 --> 00:33:55,880 Speaker 3: that they want to restimulate consumer demand. At the same 663 00:33:55,960 --> 00:33:59,080 Speaker 3: time the European markets. You know, there's that old saying, 664 00:33:59,360 --> 00:34:03,200 Speaker 3: if you know, the US sneezes everyone else catches the cold. 665 00:34:03,680 --> 00:34:06,480 Speaker 3: It doesn't feel like people are thinking about that right now. 666 00:34:06,560 --> 00:34:09,800 Speaker 3: In fact, the US seems to be sneezing an awful 667 00:34:09,840 --> 00:34:12,440 Speaker 3: lot lately, and the rest of the world is saying, well, 668 00:34:12,640 --> 00:34:15,400 Speaker 3: how do we mask up and try to defend ourselves 669 00:34:15,480 --> 00:34:20,280 Speaker 3: against this? And we're seeing that within German fiscal policy 670 00:34:20,360 --> 00:34:23,120 Speaker 3: and a massive sea change there right Like if we 671 00:34:23,160 --> 00:34:27,720 Speaker 3: had anticipated that there would be this willingness to add 672 00:34:27,760 --> 00:34:31,799 Speaker 3: debt to spend to avoid the debt break, that would 673 00:34:31,840 --> 00:34:34,239 Speaker 3: have been shocking to me at the beginning of the year. 674 00:34:34,800 --> 00:34:38,239 Speaker 3: But people are seeing that and looking at Europe as 675 00:34:38,400 --> 00:34:41,799 Speaker 3: maybe actually a more defensive place to be. And also 676 00:34:41,840 --> 00:34:44,640 Speaker 3: when you add in the nuance that Europe has not 677 00:34:44,680 --> 00:34:48,600 Speaker 3: been investing in the tech AI trade nearly to the 678 00:34:48,640 --> 00:34:51,680 Speaker 3: same magnitude of the US. I think there are these 679 00:34:52,080 --> 00:34:54,880 Speaker 3: kind of lookbacks to the energy blow up in the 680 00:34:55,000 --> 00:34:58,160 Speaker 3: US in twenty fourteen and twenty sixteen and twenty twenty. 681 00:34:58,200 --> 00:35:00,919 Speaker 3: It happened a lot over the past decade or so, 682 00:35:01,440 --> 00:35:05,560 Speaker 3: and thinking well, if European spreads remain tight to the 683 00:35:05,680 --> 00:35:09,040 Speaker 3: US in that period and we have the similar dynamic 684 00:35:09,120 --> 00:35:13,280 Speaker 3: of this kind of US centric bubble, maybe we actually 685 00:35:13,280 --> 00:35:16,480 Speaker 3: are more defensive, and also we know what the fiscal 686 00:35:16,520 --> 00:35:19,000 Speaker 3: plan is. We have better certainty there. 687 00:35:19,880 --> 00:35:22,160 Speaker 1: Going back to China, only a year ago, people were 688 00:35:22,200 --> 00:35:25,279 Speaker 1: telling me that was uninvestable. How do you invest now? 689 00:35:25,320 --> 00:35:27,399 Speaker 1: And what's the what's the play? Is it by cheap 690 00:35:27,480 --> 00:35:29,279 Speaker 1: real estate bonds or something that have blown up and 691 00:35:29,280 --> 00:35:31,000 Speaker 1: now you think they might recover and the government's going 692 00:35:31,040 --> 00:35:32,680 Speaker 1: to help you out. I mean, what's the what is 693 00:35:32,800 --> 00:35:35,680 Speaker 1: how do you approach China is as a global credit manager? 694 00:35:35,880 --> 00:35:39,360 Speaker 3: It is interesting that the memories seem very short term, 695 00:35:39,640 --> 00:35:42,440 Speaker 3: but you know, credit cycles, they can be boom bust, 696 00:35:42,680 --> 00:35:45,600 Speaker 3: they can be relatively short term. I do think that, 697 00:35:45,800 --> 00:35:48,719 Speaker 3: you know, looking at some of Chinese tech is a 698 00:35:48,719 --> 00:35:52,719 Speaker 3: place that people are aligning. I think that some of 699 00:35:52,760 --> 00:35:55,080 Speaker 3: the real estate people are looking at. I don't know 700 00:35:55,120 --> 00:35:57,960 Speaker 3: that necessarily all of it. There is kind of this 701 00:35:58,560 --> 00:36:04,080 Speaker 3: widespread accepted that the Chinese property market is a problem 702 00:36:04,400 --> 00:36:07,759 Speaker 3: with no clear indirect solution, and we would probably need 703 00:36:07,800 --> 00:36:11,200 Speaker 3: to see consumer momentum build a little bit more before 704 00:36:11,280 --> 00:36:15,120 Speaker 3: people were more confident around it. And also, you know, 705 00:36:15,160 --> 00:36:18,160 Speaker 3: if US exceptionalism is not on the table, then we're 706 00:36:18,200 --> 00:36:21,040 Speaker 3: going to have to go other places to look for opportunity. 707 00:36:21,480 --> 00:36:23,760 Speaker 1: But the problem is always that there's no scale they elsewhere, 708 00:36:23,800 --> 00:36:25,640 Speaker 1: you know, the US is you know, what is it 709 00:36:25,719 --> 00:36:29,160 Speaker 1: ninety percent of the of the assets, So you're going 710 00:36:29,200 --> 00:36:32,200 Speaker 1: to hit the wall eventually. That's just physics. 711 00:36:33,040 --> 00:36:35,680 Speaker 3: That is just hys X, that is for sure, and 712 00:36:36,239 --> 00:36:39,319 Speaker 3: that is you know, not just the scale, but the liquidity, 713 00:36:39,480 --> 00:36:43,279 Speaker 3: the regulations, kind of the transparency of the market. I 714 00:36:43,320 --> 00:36:46,000 Speaker 3: don't think that anyone is saying we need to abandon 715 00:36:46,040 --> 00:36:50,640 Speaker 3: the US entirely, but it's that incremental hero that they 716 00:36:50,800 --> 00:36:54,160 Speaker 3: have to add, and they're probably looking at this point 717 00:36:54,400 --> 00:36:58,080 Speaker 3: away from the US and towards a domestic market or 718 00:36:58,080 --> 00:37:01,200 Speaker 3: something else. Because also the reality is a lot of 719 00:37:01,280 --> 00:37:05,120 Speaker 3: non US investors are very overweight US credit and had 720 00:37:05,160 --> 00:37:08,520 Speaker 3: been getting overweight US credit risk. We're also hearing more 721 00:37:08,560 --> 00:37:13,400 Speaker 3: interest in US non credit asset classes like muni's, so 722 00:37:13,760 --> 00:37:16,160 Speaker 3: you know, away from corporates and into the muni market 723 00:37:16,440 --> 00:37:19,479 Speaker 3: or agency R and bs is another place that people 724 00:37:19,520 --> 00:37:22,080 Speaker 3: are saying, I can get kind of a similar yield 725 00:37:22,120 --> 00:37:24,960 Speaker 3: and shorter duration and no credit risk. Actually that feels 726 00:37:24,960 --> 00:37:26,719 Speaker 3: like an okay place to be right now. 727 00:37:27,040 --> 00:37:28,719 Speaker 1: So it does that ultimate to sort of bring it 728 00:37:28,719 --> 00:37:31,480 Speaker 1: full circles where we started does that ultimately effect demand 729 00:37:31,600 --> 00:37:34,040 Speaker 1: for corporate credit and then push spreads even wide. 730 00:37:34,680 --> 00:37:37,640 Speaker 3: Yeah, so demand is definitely slowing for corporate credit. When 731 00:37:37,640 --> 00:37:40,480 Speaker 3: we look at the pace of inflows this year compared 732 00:37:40,520 --> 00:37:44,160 Speaker 3: to the pace of inflows last year, it's definitely slower 733 00:37:44,200 --> 00:37:46,799 Speaker 3: than it was. I would not say that we've never 734 00:37:46,960 --> 00:37:50,959 Speaker 3: necessarily seen the big reversal, and so I would say 735 00:37:50,960 --> 00:37:54,319 Speaker 3: that from a spread perspective, we're more kind of this 736 00:37:54,640 --> 00:37:58,160 Speaker 3: equilibrium state and people are really confused as to which 737 00:37:58,200 --> 00:38:00,840 Speaker 3: way is it going to break? Actually going to gap 738 00:38:00,920 --> 00:38:04,839 Speaker 3: twenty basis points tighter again because Trump and Bessent are 739 00:38:04,880 --> 00:38:07,680 Speaker 3: going to say, oh, actually, haha, just kidding, tariffs was 740 00:38:07,680 --> 00:38:10,480 Speaker 3: an April School's joke. Maybe that's why April second is 741 00:38:10,800 --> 00:38:14,600 Speaker 3: the big dace Or are they going to double down 742 00:38:14,719 --> 00:38:16,560 Speaker 3: and there is no Trump put and there is no 743 00:38:16,640 --> 00:38:19,479 Speaker 3: power put and there's no puts at all, and people 744 00:38:19,560 --> 00:38:22,680 Speaker 3: are really going to have to recalibrate risk in portfolios. 745 00:38:23,120 --> 00:38:25,160 Speaker 3: It's been a very tricky question. 746 00:38:25,160 --> 00:38:27,279 Speaker 1: Which would presume be pushed a lot more cash into 747 00:38:27,360 --> 00:38:27,839 Speaker 1: China and. 748 00:38:27,800 --> 00:38:32,120 Speaker 3: Europe, presumably, but there is only so far that the 749 00:38:32,239 --> 00:38:35,760 Speaker 3: US can go without the rest of the world starting 750 00:38:35,800 --> 00:38:39,319 Speaker 3: to really come unraveled. Our EM sovereign strategist has just 751 00:38:39,360 --> 00:38:43,200 Speaker 3: been scratching his head because EM has performed really, really well, 752 00:38:43,239 --> 00:38:46,520 Speaker 3: and he thinks back to every other period in which 753 00:38:46,560 --> 00:38:50,000 Speaker 3: the US has had some volatility, and that EM has volatility, 754 00:38:50,120 --> 00:38:54,000 Speaker 3: and he's like, sure, the US fiscal picture looks much 755 00:38:54,080 --> 00:38:56,759 Speaker 3: more EM than a lot of the countries that I'm 756 00:38:56,760 --> 00:39:00,080 Speaker 3: now looking at, But is that really enough to to 757 00:39:00,280 --> 00:39:03,359 Speaker 3: totally change the dynamic where things should be trading. 758 00:39:03,360 --> 00:39:06,000 Speaker 1: And the political picture too. Perhaps so to continue on 759 00:39:06,000 --> 00:39:10,240 Speaker 1: that point, when you look globally, when you know everything, 760 00:39:10,280 --> 00:39:13,520 Speaker 1: you see what sort of sticks out for you in 761 00:39:13,600 --> 00:39:16,120 Speaker 1: terms of relative value? Right now, where are the sort 762 00:39:16,120 --> 00:39:17,760 Speaker 1: of points of interest? 763 00:39:18,080 --> 00:39:20,480 Speaker 3: Yeah, so relative value. We don't have a lot that 764 00:39:20,520 --> 00:39:23,560 Speaker 3: we are loving. We've remained neutral on the US broadly 765 00:39:23,760 --> 00:39:27,840 Speaker 3: syndicated loan space versus underwaight, US investment grade and high yield. 766 00:39:27,960 --> 00:39:31,720 Speaker 3: That was very much contingent on our FEDS holden rate steady. 767 00:39:31,760 --> 00:39:34,520 Speaker 3: You still have some spread there. That means that you're 768 00:39:34,520 --> 00:39:37,160 Speaker 3: probably going to have good supply and demand. You know, 769 00:39:37,239 --> 00:39:39,799 Speaker 3: clos have been front and center with the amount of 770 00:39:39,840 --> 00:39:42,640 Speaker 3: inflows this year, which is a very supportive technical to 771 00:39:42,719 --> 00:39:47,040 Speaker 3: broadly syndicated loans. We've also liked Euro high yield, which feels, 772 00:39:47,360 --> 00:39:50,040 Speaker 3: you know, a little shaky just given a view of 773 00:39:50,120 --> 00:39:52,959 Speaker 3: wider spreads in the US market. But Euro high yield 774 00:39:53,000 --> 00:39:55,560 Speaker 3: is also very different than the US high yield. It's 775 00:39:55,880 --> 00:39:58,520 Speaker 3: it is a much more up in quality asset class, 776 00:39:58,560 --> 00:40:01,000 Speaker 3: more like sixty five to seven twenty percent double B 777 00:40:02,360 --> 00:40:05,640 Speaker 3: versus the US I call it fifty five ish percent 778 00:40:05,760 --> 00:40:10,160 Speaker 3: double B. A lot of kind of subordinated notes from 779 00:40:10,480 --> 00:40:15,279 Speaker 3: investment grade issuers within the EUROHIIALD market, some domestic alignment, 780 00:40:15,719 --> 00:40:17,319 Speaker 3: you know, some places that you can be a little 781 00:40:17,320 --> 00:40:20,400 Speaker 3: bit insulated from some of the trade wars in tariffs, 782 00:40:20,440 --> 00:40:22,719 Speaker 3: and so we've seen that as a pretty good opportunity 783 00:40:22,800 --> 00:40:26,160 Speaker 3: that has really gotten some incremental momentum on the different 784 00:40:26,200 --> 00:40:29,560 Speaker 3: fiscal announcements that we've seen. And then outside of that, 785 00:40:29,840 --> 00:40:32,160 Speaker 3: there's not a lot of places to go within the 786 00:40:32,200 --> 00:40:34,880 Speaker 3: world of corporate credit. You know, we've been telling people 787 00:40:35,000 --> 00:40:39,800 Speaker 3: agency MBS looks pretty good. That's not actually my core market, 788 00:40:39,920 --> 00:40:41,840 Speaker 3: but when I just kind of look at the relval 789 00:40:42,000 --> 00:40:47,200 Speaker 3: and historically when USIG posts negative excess returns, which we're doing, 790 00:40:47,840 --> 00:40:52,080 Speaker 3: MBS outperforms. So that's definitely a place to consider and. 791 00:40:52,040 --> 00:40:54,560 Speaker 1: When you look at the economy, your view of the 792 00:40:54,560 --> 00:40:57,120 Speaker 1: economy seems to be more bearish than a lot of others. 793 00:40:57,200 --> 00:40:59,680 Speaker 1: But do you think there's anywhere else you'll particularly contrarian 794 00:40:59,719 --> 00:41:00,919 Speaker 1: right now in tons of old views? 795 00:41:01,400 --> 00:41:03,960 Speaker 3: Yeah, it's interesting. I feel like we came into the 796 00:41:04,040 --> 00:41:07,840 Speaker 3: year with a more bearish economic view, and now everybody 797 00:41:07,840 --> 00:41:11,000 Speaker 3: else has gotten more bearish, and we're like, wait, should 798 00:41:11,040 --> 00:41:12,960 Speaker 3: we be even more bearish now or should we get 799 00:41:13,080 --> 00:41:17,960 Speaker 3: positive again? Because you know, wherever the chorus is going, 800 00:41:18,200 --> 00:41:22,040 Speaker 3: we try to go the other way for sure. I 801 00:41:22,080 --> 00:41:25,400 Speaker 3: think that the core view of you can't have wider 802 00:41:25,440 --> 00:41:28,880 Speaker 3: spreads if yields are high, that has been something that 803 00:41:28,920 --> 00:41:32,880 Speaker 3: we get a lot of you know, conversation around, and 804 00:41:32,920 --> 00:41:35,040 Speaker 3: we think that you can have wider spreads if you 805 00:41:35,120 --> 00:41:38,560 Speaker 3: have higher yields, especially if people think that yields are 806 00:41:38,600 --> 00:41:41,360 Speaker 3: going to continue to move higher. I know that treasure 807 00:41:41,440 --> 00:41:44,839 Speaker 3: yields have come down a lot this year, especially from 808 00:41:44,880 --> 00:41:47,200 Speaker 3: that kind of early intra year peak that we hit. 809 00:41:47,600 --> 00:41:50,960 Speaker 3: But we still haven't figured out the fiscal side of things. 810 00:41:51,040 --> 00:41:53,000 Speaker 3: I don't know what a tax bill's going to look like. 811 00:41:53,080 --> 00:41:56,359 Speaker 3: Are we really not taxing tips and social Security? And 812 00:41:56,719 --> 00:42:00,000 Speaker 3: also lowering the corporate tax rate seems like a lot 813 00:42:00,320 --> 00:42:03,040 Speaker 3: going on there, and so we haven't capitulated on that 814 00:42:03,120 --> 00:42:06,440 Speaker 3: trade as well, and we feel a little bit better 815 00:42:06,480 --> 00:42:09,520 Speaker 3: about that because the market has not gone back to 816 00:42:09,719 --> 00:42:10,800 Speaker 3: the recent tenure. 817 00:42:10,880 --> 00:42:14,279 Speaker 1: Treasury lows great stuff when he sees our global head 818 00:42:14,280 --> 00:42:16,200 Speaker 1: of strategy at Credit Sites. It's been a pleasure of 819 00:42:16,239 --> 00:42:17,239 Speaker 1: having you on the Credit Edge Money. 820 00:42:17,280 --> 00:42:19,200 Speaker 3: Thanks, thank you for having me, and of. 821 00:42:19,080 --> 00:42:21,880 Speaker 1: Course we're very grateful to Matt Gogner from Bloomberg Intelligence. 822 00:42:21,880 --> 00:42:22,879 Speaker 1: Thank you for joining us today. 823 00:42:22,920 --> 00:42:23,839 Speaker 4: Matt, thanks for having me. 824 00:42:24,280 --> 00:42:26,640 Speaker 1: For more credit analysis. Read all of Matt Goyner's work 825 00:42:26,680 --> 00:42:29,640 Speaker 1: on the Bloomberg Terminal. Bloomberg Intelligence is part of our 826 00:42:29,640 --> 00:42:32,720 Speaker 1: research department, with five hundred analysts and strategists working across 827 00:42:32,760 --> 00:42:36,440 Speaker 1: all markets. Coverage includes over two thousand equities and credits 828 00:42:36,480 --> 00:42:39,480 Speaker 1: and outlooks on more than ninety industries and one hundred 829 00:42:39,520 --> 00:42:43,920 Speaker 1: market industries, currencies and commodities. Please do subscribe to the 830 00:42:43,920 --> 00:42:46,560 Speaker 1: Credit Edge wherever you got your podcasts. We're on Apples, 831 00:42:46,560 --> 00:42:49,920 Speaker 1: Spotify and all other good podcast providers, including the Bloomberg 832 00:42:50,040 --> 00:42:53,520 Speaker 1: Terminal at bpod Go. Give us a review, tell your friends, 833 00:42:53,600 --> 00:42:57,240 Speaker 1: or email me directly. At Jcrombie eight at Bloomberg dot Net. 834 00:42:57,719 --> 00:42:59,839 Speaker 1: I'm James Cromby. It's been a pleasure having you join 835 00:42:59,920 --> 00:43:01,959 Speaker 1: US US again next week on the credit Edge