1 00:00:18,079 --> 00:00:20,800 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:20,840 --> 00:00:23,480 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:24,000 --> 00:00:26,759 Speaker 1: This week, we're very pleased to welcome Andre Skiba, head 4 00:00:26,760 --> 00:00:29,720 Speaker 1: of US fixed Income for RBC Global Asset Management. How 5 00:00:29,720 --> 00:00:32,640 Speaker 1: are you, Andre, Very well, pleasure to be with you. 6 00:00:32,960 --> 00:00:34,560 Speaker 1: Thank you so much for joining us. Stay very excited 7 00:00:34,560 --> 00:00:37,040 Speaker 1: to have you on the show. Also delighted to have 8 00:00:37,120 --> 00:00:40,200 Speaker 1: back as our co host Mike Holland with Bloomberg Intelligence. 9 00:00:40,200 --> 00:00:43,240 Speaker 2: Hello, Mike, Hey, James, Hey Andre, Great to be here. 10 00:00:43,560 --> 00:00:46,080 Speaker 1: Great. So, just before we start talking, I just wanted 11 00:00:46,120 --> 00:00:48,080 Speaker 1: to say a few words about where we are now. 12 00:00:48,880 --> 00:00:52,000 Speaker 1: US markets are rallying as rates come down, the economy 13 00:00:52,040 --> 00:00:55,240 Speaker 1: keeps chugging along, and investors look forward to a new 14 00:00:55,320 --> 00:00:59,680 Speaker 1: US administration, which the bulls think will be very pro 15 00:00:59,760 --> 00:01:03,320 Speaker 1: grow and pro markets credit markets, and meanwhile on fire, 16 00:01:03,360 --> 00:01:05,479 Speaker 1: there's a ton of demand for yield. No one seems 17 00:01:05,520 --> 00:01:08,080 Speaker 1: to mind that bond spreads are the titus in twenty years, 18 00:01:08,400 --> 00:01:10,679 Speaker 1: but that doesn't mean there's no risk. The Fed is 19 00:01:10,720 --> 00:01:13,040 Speaker 1: cutting rates, but they are going much slower than most 20 00:01:13,080 --> 00:01:16,240 Speaker 1: people have been expecting, and treasury yields are stuck above 21 00:01:16,280 --> 00:01:19,120 Speaker 1: four percent, while the stated aims of the next government 22 00:01:19,240 --> 00:01:22,319 Speaker 1: all look very inflationary, signaling a period of higher for 23 00:01:22,360 --> 00:01:25,840 Speaker 1: longer interest rates, and that means elevated debt costs, which 24 00:01:25,880 --> 00:01:29,440 Speaker 1: will put borrowers in the weaker part of the market 25 00:01:29,480 --> 00:01:32,640 Speaker 1: in a difficult spot for next year. We've already seen 26 00:01:32,680 --> 00:01:35,800 Speaker 1: a ton of defaults and bankruptcies in private markets. There's 27 00:01:35,880 --> 00:01:39,600 Speaker 1: more mending and extending of bonds and loans, while some 28 00:01:40,360 --> 00:01:43,320 Speaker 1: lenders are having to get repaid with more debt, and 29 00:01:43,360 --> 00:01:47,320 Speaker 1: there's more of this so called payin kind activity, which 30 00:01:47,319 --> 00:01:49,440 Speaker 1: isn't always good news. And in the background, we have 31 00:01:49,480 --> 00:01:52,360 Speaker 1: a huge amount of geopolitical risk which will be amplified 32 00:01:52,360 --> 00:01:55,240 Speaker 1: by the Trump trade wars. Maybe that just makes US 33 00:01:55,240 --> 00:01:58,720 Speaker 1: assets even more compelling on a relative basis, but there's 34 00:01:58,720 --> 00:02:01,400 Speaker 1: seal potential for a lot more voldaceity across all credit markets. 35 00:02:01,480 --> 00:02:04,240 Speaker 1: So Andre, what does that mean for twenty twenty five? 36 00:02:04,280 --> 00:02:05,320 Speaker 1: Are you bullished for next year? 37 00:02:06,560 --> 00:02:09,480 Speaker 3: Well, we expect a lot of volatility, So we bullish 38 00:02:09,480 --> 00:02:13,440 Speaker 3: on volatility coming and hitting us soon as the market 39 00:02:13,520 --> 00:02:18,320 Speaker 3: grapples with the new administration and the new policy mix. 40 00:02:18,880 --> 00:02:22,320 Speaker 3: But we do believe that eventually, once the dust settles 41 00:02:22,520 --> 00:02:27,120 Speaker 3: and investors understand what this administration is trying to achieve 42 00:02:27,240 --> 00:02:30,280 Speaker 3: and what is the response of the Federal Reserve and 43 00:02:30,440 --> 00:02:34,959 Speaker 3: FOMC to this new policy mix. Once the dust settles, 44 00:02:35,000 --> 00:02:37,960 Speaker 3: we do think people will re engage with fixed income 45 00:02:38,360 --> 00:02:40,679 Speaker 3: and will like historically attractive yields. 46 00:02:40,880 --> 00:02:42,600 Speaker 1: But so, how does it take the dust settle? It 47 00:02:42,639 --> 00:02:44,280 Speaker 1: looks like there's a lot of dust coming. Is it 48 00:02:44,320 --> 00:02:46,480 Speaker 1: going to be years before we know what's going on? 49 00:02:47,160 --> 00:02:48,239 Speaker 4: Oh, God forbid. 50 00:02:48,720 --> 00:02:53,160 Speaker 3: We're hoping to have more clarity over the first few 51 00:02:53,200 --> 00:02:55,120 Speaker 3: months of the year, And to us, like the biggest 52 00:02:55,200 --> 00:03:00,280 Speaker 3: question is really to do with stands towards trade. During 53 00:03:00,320 --> 00:03:03,760 Speaker 3: the campaign, we've heard again and again the willingness to 54 00:03:04,840 --> 00:03:09,320 Speaker 3: consider ten percent tariffs on most trade partners and most 55 00:03:09,360 --> 00:03:16,200 Speaker 3: goods on top of tariffs regarding China, and if that 56 00:03:16,240 --> 00:03:20,280 Speaker 3: were to happen, it would have very negative implications both 57 00:03:20,320 --> 00:03:25,840 Speaker 3: in terms of inflation and fixed income in our opinion, If, however, 58 00:03:25,919 --> 00:03:30,920 Speaker 3: we get a more benign trade rhetoric playing through where 59 00:03:31,040 --> 00:03:34,920 Speaker 3: it's used as a transactional tool, for example, in the 60 00:03:34,920 --> 00:03:38,920 Speaker 3: context of questions about immigration, but there is no broader 61 00:03:39,040 --> 00:03:42,760 Speaker 3: escalation that has more of a global nature in that 62 00:03:42,920 --> 00:03:48,520 Speaker 3: world inflation is less likely to spike, and we do believe, 63 00:03:48,560 --> 00:03:52,960 Speaker 3: based on other conversations with people on the hill, people 64 00:03:52,960 --> 00:03:57,360 Speaker 3: in the incoming administration, that investors should have clarity which 65 00:03:57,400 --> 00:04:03,280 Speaker 3: of those two options incoming team chooses in the first 66 00:04:03,320 --> 00:04:04,560 Speaker 3: two three months of the year. 67 00:04:05,160 --> 00:04:08,880 Speaker 2: Hey, Andre, it's my colin here. Looking across your funds managed, 68 00:04:08,920 --> 00:04:11,000 Speaker 2: seems like you had a really strong year, right, you know, 69 00:04:11,000 --> 00:04:14,040 Speaker 2: you look at investment great returns around six percent, some 70 00:04:14,120 --> 00:04:17,160 Speaker 2: high yield and loan funds up nine, you know, approaching 71 00:04:17,200 --> 00:04:19,880 Speaker 2: ten percent. If as you think about you know, you 72 00:04:19,960 --> 00:04:24,120 Speaker 2: mentioned volatility and being long, you know, maybe being long 73 00:04:24,200 --> 00:04:26,960 Speaker 2: vol Is there a way that you execute that view 74 00:04:27,160 --> 00:04:31,760 Speaker 2: in your funds? I mean, are you able to cross funds, 75 00:04:31,760 --> 00:04:34,599 Speaker 2: you know, express views, maybe through index options or other 76 00:04:34,640 --> 00:04:37,600 Speaker 2: ways to capitalize on that volatility expectation? 77 00:04:38,160 --> 00:04:41,839 Speaker 3: Well from for most of the strategies that we manage 78 00:04:41,960 --> 00:04:48,160 Speaker 3: that benchmarked type strategies, the way to position for incoming 79 00:04:48,240 --> 00:04:54,200 Speaker 3: volatility is very simple. Reduce risk and rather than hedging 80 00:04:54,240 --> 00:05:00,960 Speaker 3: and wedging your portfolios adding layers of derivative protection, that 81 00:05:01,240 --> 00:05:03,800 Speaker 3: is a strategy that works for a short period of time. 82 00:05:03,839 --> 00:05:06,960 Speaker 3: But history shows again and again that if you want 83 00:05:07,040 --> 00:05:10,440 Speaker 3: to do risk, you need to sell bonds. If you 84 00:05:10,480 --> 00:05:13,359 Speaker 3: want to do risk, you need to reduce your exposure 85 00:05:13,400 --> 00:05:16,760 Speaker 3: to longer duration assets, and that is the best way 86 00:05:16,839 --> 00:05:21,640 Speaker 3: to weather any storms or pick up in volatility. So yes, 87 00:05:21,720 --> 00:05:26,880 Speaker 3: absolutely we see a role for the derivative solutions within 88 00:05:27,240 --> 00:05:31,320 Speaker 3: our strategies to address the spike in volatility, but it 89 00:05:31,400 --> 00:05:36,800 Speaker 3: can't be the main way to address that vole. The 90 00:05:36,839 --> 00:05:39,720 Speaker 3: main one is reduce risk, cut risk. 91 00:05:40,480 --> 00:05:42,960 Speaker 1: What does the return of volatility mean for spreads under 92 00:05:43,040 --> 00:05:46,440 Speaker 1: in a You know, we're hearing some very aggressive calls 93 00:05:46,440 --> 00:05:49,440 Speaker 1: for spreads to keep going tighter because there's not enough 94 00:05:49,440 --> 00:05:51,920 Speaker 1: supply and more demand, and you know, people really don't 95 00:05:51,920 --> 00:05:53,880 Speaker 1: care that much about spres. They care more about yield. 96 00:05:53,960 --> 00:05:58,039 Speaker 1: So one of our guests suggested that the ig US 97 00:05:58,080 --> 00:05:59,919 Speaker 1: could go to fifty five basis points, which is the 98 00:06:00,120 --> 00:06:02,600 Speaker 1: since nineteen ninety seven, and then we are someone on 99 00:06:02,600 --> 00:06:04,320 Speaker 1: the high ould side. They said that, well, that would 100 00:06:04,360 --> 00:06:06,200 Speaker 1: mean that junk we'll go to two twenty five, which 101 00:06:06,200 --> 00:06:06,920 Speaker 1: has never been seen. 102 00:06:07,680 --> 00:06:10,960 Speaker 3: It really depends on the environment we're going to have 103 00:06:11,360 --> 00:06:15,200 Speaker 3: ahead of us. If the more benign version of the 104 00:06:15,200 --> 00:06:20,880 Speaker 3: Trump administration happens and inflation does not see appward pressure, 105 00:06:21,160 --> 00:06:24,240 Speaker 3: which allows for the FED to cut rates. We do 106 00:06:24,320 --> 00:06:27,920 Speaker 3: believe there's an absolute ton of money that wants to 107 00:06:27,960 --> 00:06:30,760 Speaker 3: be put to work in further out the curve in 108 00:06:30,800 --> 00:06:33,600 Speaker 3: fixed income. Like we look at money market balances the 109 00:06:33,680 --> 00:06:37,240 Speaker 3: close to historical highs, So even if a fraction of 110 00:06:37,240 --> 00:06:41,520 Speaker 3: that goes into fixed income, it could have meaningful implications 111 00:06:41,600 --> 00:06:46,840 Speaker 3: for spreads. The same goes for foreign investors. We're hearing 112 00:06:46,920 --> 00:06:50,919 Speaker 3: again and again about the attractive level of yields in 113 00:06:51,120 --> 00:06:55,279 Speaker 3: US fixed income from our foreign clients. And even though 114 00:06:55,320 --> 00:06:58,360 Speaker 3: in some jurisdictions the hedging costs are a major issue, 115 00:06:58,800 --> 00:07:00,800 Speaker 3: there's still a ton of money to you put to work. 116 00:07:01,279 --> 00:07:04,560 Speaker 3: So yes, there is a possibility where in a very 117 00:07:04,600 --> 00:07:09,680 Speaker 3: benign trade scenario, in a world where, for example, the 118 00:07:09,760 --> 00:07:15,200 Speaker 3: new administration is successful in reducing deficit through all the 119 00:07:15,240 --> 00:07:19,000 Speaker 3: cost cutting measures that have been announced in that world, 120 00:07:19,040 --> 00:07:24,320 Speaker 3: spreads go aggressively tighter and a credit spread becomes just 121 00:07:24,400 --> 00:07:28,400 Speaker 3: a number. It just becomes a derivative of the heaviness 122 00:07:28,400 --> 00:07:31,200 Speaker 3: of flows coming into the asset class. But that is 123 00:07:31,240 --> 00:07:35,040 Speaker 3: clearly not our base case scenario. In our view, you 124 00:07:35,120 --> 00:07:37,760 Speaker 3: are much more likely to have a bit of a 125 00:07:37,800 --> 00:07:42,280 Speaker 3: wake up call for investors realizing that spreads don't just 126 00:07:42,320 --> 00:07:46,160 Speaker 3: go tighter ad infinitum, but actually there is such thing 127 00:07:46,200 --> 00:07:49,760 Speaker 3: as volatility. There is such thing as risk transfers that 128 00:07:49,880 --> 00:07:54,440 Speaker 3: push spreads wider as investors recognize a shift in the 129 00:07:54,480 --> 00:07:58,280 Speaker 3: policy mix and federal reserves posture towards the market. So 130 00:07:59,040 --> 00:08:02,280 Speaker 3: from our perspective, widening up spreads in the beginning of 131 00:08:02,320 --> 00:08:06,520 Speaker 3: the year, possibly even approaching one hundred basis points in 132 00:08:06,520 --> 00:08:09,480 Speaker 3: investment grade and definitely crossing three hundred basis points in 133 00:08:09,520 --> 00:08:13,240 Speaker 3: high yield is very much possible. So that that is 134 00:08:13,280 --> 00:08:15,080 Speaker 3: the scenario we're really positioning ourselves. 135 00:08:15,120 --> 00:08:17,240 Speaker 2: Full that would be against the view that we had 136 00:08:17,280 --> 00:08:19,200 Speaker 2: at our big credit conference a couple of weeks ago, 137 00:08:19,240 --> 00:08:21,640 Speaker 2: when Matt Brill from Invesco was pointing out that fifty 138 00:08:21,640 --> 00:08:24,600 Speaker 2: five basis point target. You know, it did seem this 139 00:08:24,880 --> 00:08:27,000 Speaker 2: seems to be a lot of bullishness, and I tend to, 140 00:08:27,040 --> 00:08:29,280 Speaker 2: as a credit analyst by trade, be a little more 141 00:08:29,360 --> 00:08:33,360 Speaker 2: negative and concerns. So I share your views on that. Andre, 142 00:08:33,800 --> 00:08:37,040 Speaker 2: I would like to kind of move aside and ask 143 00:08:37,040 --> 00:08:39,120 Speaker 2: you a little bit about market technicals. And you know, 144 00:08:39,200 --> 00:08:42,760 Speaker 2: I grew up in Loanland as a credit analyst, and 145 00:08:42,800 --> 00:08:44,600 Speaker 2: then I moved on to bonds. I've covered, you know, 146 00:08:45,120 --> 00:08:48,600 Speaker 2: all sorts of different asset classes on the credit side, 147 00:08:48,600 --> 00:08:51,040 Speaker 2: and I wonder, you know, looking at the market today, 148 00:08:51,200 --> 00:08:53,600 Speaker 2: we've got something like twelve or thirteen billion of new 149 00:08:53,679 --> 00:08:57,040 Speaker 2: high field issuance in healthcare high old bonds, you know, 150 00:08:57,160 --> 00:09:00,839 Speaker 2: maybe eighteen billion or so of private credit Bloomberg's tract 151 00:09:01,880 --> 00:09:04,680 Speaker 2: of healthcare related issues, and then one hundred and twenty 152 00:09:04,679 --> 00:09:06,440 Speaker 2: one hundred and fifty depending on how you cut it, 153 00:09:06,920 --> 00:09:10,160 Speaker 2: of a billion of loans. So the high old bond 154 00:09:10,240 --> 00:09:13,000 Speaker 2: market structurally, it seems like it's getting smaller, right, And 155 00:09:13,320 --> 00:09:16,800 Speaker 2: some of the riskier deals, the sponsor back deals, are 156 00:09:16,800 --> 00:09:19,240 Speaker 2: going to private credit. And I wonder if you see 157 00:09:19,240 --> 00:09:23,000 Speaker 2: that as supportive to the market, despite the risks that 158 00:09:23,040 --> 00:09:25,960 Speaker 2: are rising every day, it seems do you see that 159 00:09:26,040 --> 00:09:28,280 Speaker 2: as supportive to the market, you know, in twenty twenty five, 160 00:09:28,320 --> 00:09:29,479 Speaker 2: maybe on high yield. 161 00:09:30,120 --> 00:09:32,079 Speaker 4: It's definitely a possibility. 162 00:09:32,200 --> 00:09:36,520 Speaker 3: Like when we speak to investors across the US, everyone 163 00:09:36,559 --> 00:09:40,360 Speaker 3: hates high yield. Everyone moans about the fact that spreads 164 00:09:40,400 --> 00:09:45,679 Speaker 3: are very tight by historical standards, and that is almost 165 00:09:45,720 --> 00:09:49,160 Speaker 3: the mantra that we're here again and again. Well in 166 00:09:49,200 --> 00:09:51,960 Speaker 3: a way that creates a positive technical because you have 167 00:09:52,000 --> 00:09:55,320 Speaker 3: no hot money coming into high yield at this time. 168 00:09:55,640 --> 00:10:00,359 Speaker 3: It also helps that flows have stabilized in the highl 169 00:10:00,679 --> 00:10:04,120 Speaker 3: while you still have money coming into private credit space. 170 00:10:04,600 --> 00:10:09,400 Speaker 3: So it has been absolutely helpful to have capital flowing, 171 00:10:09,440 --> 00:10:13,440 Speaker 3: whether into private credit or into leverage loan market to 172 00:10:13,600 --> 00:10:19,920 Speaker 3: help address idiosyncratic issues that could be plaguing our sectors. 173 00:10:20,000 --> 00:10:28,080 Speaker 3: So issuers find refinancing solutions in markets other than where 174 00:10:28,080 --> 00:10:30,160 Speaker 3: they started in. So you might have had a bond 175 00:10:30,200 --> 00:10:33,280 Speaker 3: that you need to address and instead of refinancing that 176 00:10:33,360 --> 00:10:35,960 Speaker 3: in the bond market, you could have opportunities, be it 177 00:10:36,000 --> 00:10:38,680 Speaker 3: in leverage loan or in a private credit space, and 178 00:10:38,720 --> 00:10:44,240 Speaker 3: that's definitely something that reduces the likelihood of a spike 179 00:10:44,360 --> 00:10:49,920 Speaker 3: in defaults across the entire leverage finance stack. And while 180 00:10:49,960 --> 00:10:55,160 Speaker 3: the technicals are quite favorable with issuance not being too 181 00:10:55,160 --> 00:10:59,599 Speaker 3: heavy most of the activity being to do with refinancing 182 00:10:59,760 --> 00:11:05,640 Speaker 3: rather than new that funded acquisitions for example, all that 183 00:11:05,720 --> 00:11:11,600 Speaker 3: creates a relatively positive backdrop for high yield. Having said that, 184 00:11:12,400 --> 00:11:14,640 Speaker 3: let's not fool ourselves, there will be pockets of the 185 00:11:14,720 --> 00:11:19,760 Speaker 3: market where the where investors will punish too much leverage 186 00:11:21,120 --> 00:11:25,040 Speaker 3: no cash flow in a higher for longer world, or 187 00:11:25,240 --> 00:11:30,160 Speaker 3: very aggressive structures that are struggling in an economy that 188 00:11:30,280 --> 00:11:31,400 Speaker 3: might be slowing down a bit. 189 00:11:32,160 --> 00:11:33,240 Speaker 4: So I'm not. 190 00:11:33,200 --> 00:11:36,240 Speaker 3: Saying that across the entire stack of high yield it 191 00:11:36,320 --> 00:11:39,560 Speaker 3: will be a party. Across twenty twenty five. There will 192 00:11:39,600 --> 00:11:43,479 Speaker 3: be pockets that will feel pretty ugly. But from our perspective, 193 00:11:43,559 --> 00:11:48,120 Speaker 3: the fact that companies have multiple avenues to address the issues, 194 00:11:48,160 --> 00:11:51,880 Speaker 3: in multiple markets to go to to address these issues, 195 00:11:52,240 --> 00:11:54,160 Speaker 3: while at the same time there's not like a wave 196 00:11:54,200 --> 00:11:56,199 Speaker 3: of hot money that has hit high yield that might 197 00:11:56,240 --> 00:12:02,360 Speaker 3: reconsider its decision, creates a relatively positive backdrop. It doesn't 198 00:12:02,360 --> 00:12:04,839 Speaker 3: mean that spreads can't go wider. It just means that 199 00:12:04,960 --> 00:12:10,040 Speaker 3: it's very difficult to imagine very ugly price action in 200 00:12:10,160 --> 00:12:12,599 Speaker 3: high yield over the coming quarters. 201 00:12:13,160 --> 00:12:15,160 Speaker 1: You say, everyone hites high yeld, but that's done so 202 00:12:15,280 --> 00:12:18,160 Speaker 1: well in multiple seeds at fifteen percent this year, so 203 00:12:18,200 --> 00:12:21,160 Speaker 1: that must be attracting some of this kind of money. 204 00:12:21,200 --> 00:12:26,079 Speaker 3: Now, well, that's the irony of the situation that the 205 00:12:26,120 --> 00:12:28,920 Speaker 3: market that has done the best out of the public 206 00:12:29,000 --> 00:12:32,520 Speaker 3: market was the one that throughout the entire year everyone 207 00:12:32,640 --> 00:12:37,240 Speaker 3: was moaning about spreads being at unattractive levels and only 208 00:12:37,280 --> 00:12:41,440 Speaker 3: yields looking relatively attractive by historical standards. We're not seeing 209 00:12:41,480 --> 00:12:45,480 Speaker 3: an avalanche of money coming in. We have noticed that 210 00:12:45,640 --> 00:12:50,400 Speaker 3: a fair amount of investments in high yielding assets have 211 00:12:50,440 --> 00:12:53,200 Speaker 3: gone into private credit space, and that has been the 212 00:12:53,200 --> 00:12:57,160 Speaker 3: main beneficiary over the recent years of flows, with high 213 00:12:57,200 --> 00:13:03,439 Speaker 3: yield kind of being a far distant second or third 214 00:13:04,000 --> 00:13:08,040 Speaker 3: beneficiary in that respect. So we're not really seeing that 215 00:13:08,160 --> 00:13:09,120 Speaker 3: dynamic change. 216 00:13:09,840 --> 00:13:11,680 Speaker 1: And do you expect triple c is to continue to 217 00:13:12,240 --> 00:13:15,720 Speaker 1: perform at this level to make more double digit returns 218 00:13:15,760 --> 00:13:16,200 Speaker 1: next year? 219 00:13:16,640 --> 00:13:20,360 Speaker 3: It's difficult to envisage that you're going to have such 220 00:13:20,400 --> 00:13:24,559 Speaker 3: strong performance as you had this year. And part of 221 00:13:24,600 --> 00:13:27,360 Speaker 3: the strong performance in twenty twenty four was to do 222 00:13:28,280 --> 00:13:32,160 Speaker 3: with investors' positioning for more economic weakness and more vulnerability, 223 00:13:32,559 --> 00:13:35,920 Speaker 3: whereas US has again shown to be so resilient and 224 00:13:35,960 --> 00:13:41,120 Speaker 3: that has primarily benefited triple C issuers. But it's fair, 225 00:13:41,559 --> 00:13:43,800 Speaker 3: it's fair to admit that even though there are a 226 00:13:43,800 --> 00:13:46,599 Speaker 3: lot of Triple C credits that are getting to valuations 227 00:13:46,640 --> 00:13:51,240 Speaker 3: where it's difficult to be excited and it's pretty much 228 00:13:51,280 --> 00:13:54,079 Speaker 3: of a glass half full version of events that is 229 00:13:54,120 --> 00:13:57,520 Speaker 3: priced in rather than the more conservative scenario. You also 230 00:13:57,600 --> 00:14:00,400 Speaker 3: have quite a lot of situations, especially those in vault 231 00:14:00,880 --> 00:14:05,360 Speaker 3: battles between bondholders and companies or bondholders and other debt holders, 232 00:14:06,240 --> 00:14:09,360 Speaker 3: where you have quite binary outcomes and many of those 233 00:14:09,360 --> 00:14:14,360 Speaker 3: triples rate that issuers could see meaningful either price appreciations 234 00:14:14,400 --> 00:14:17,480 Speaker 3: of the clients depending on how those battles play out. 235 00:14:17,640 --> 00:14:20,760 Speaker 3: So that is one corner of the market, the big 236 00:14:20,840 --> 00:14:25,520 Speaker 3: kind of co op structures and you know creditor and 237 00:14:25,600 --> 00:14:30,160 Speaker 3: on creditor violence and issue on creditor violence where binary 238 00:14:30,160 --> 00:14:33,120 Speaker 3: outcomes are still possible in twenty twenty five, that could 239 00:14:33,240 --> 00:14:37,040 Speaker 3: significant impact returns in triple C stack. 240 00:14:38,280 --> 00:14:41,240 Speaker 2: Yeah, I mean if you look at Bouche Health, right, 241 00:14:41,280 --> 00:14:44,280 Speaker 2: we been talking about Bouche Health for a long time, 242 00:14:45,080 --> 00:14:47,200 Speaker 2: but you know, four years ago they talked about spinning 243 00:14:47,200 --> 00:14:50,760 Speaker 2: out Bauscham Home and really benefiting the equity holders of 244 00:14:50,800 --> 00:14:54,000 Speaker 2: that company to the detriment of bondholders. And it's been 245 00:14:54,400 --> 00:14:58,080 Speaker 2: a long road and they're still working on you know, 246 00:14:58,160 --> 00:15:00,040 Speaker 2: progress there, but it's been one of these the the 247 00:15:00,040 --> 00:15:02,960 Speaker 2: biggest contributors to you know, positive returns in the high 248 00:15:03,000 --> 00:15:04,960 Speaker 2: yield space, at least in high old healthcare. You know, 249 00:15:05,160 --> 00:15:07,120 Speaker 2: the bonds are up twenty thirty points the longer data 250 00:15:07,160 --> 00:15:09,800 Speaker 2: on securitage. The term loan is up something like eighteen 251 00:15:09,840 --> 00:15:13,160 Speaker 2: points this year. And I've had a lot of questions 252 00:15:13,160 --> 00:15:16,960 Speaker 2: from clients saying, you know, why does the co op 253 00:15:17,000 --> 00:15:21,160 Speaker 2: agreement drive a technical You know, there wasn't a ton 254 00:15:21,160 --> 00:15:24,120 Speaker 2: of fundamental change with BA or Bouschelt this year, right, 255 00:15:24,320 --> 00:15:25,240 Speaker 2: and if the bonds went. 256 00:15:25,200 --> 00:15:25,680 Speaker 4: Up like that. 257 00:15:25,880 --> 00:15:27,200 Speaker 2: A lot of folks are pointing to the co op 258 00:15:27,240 --> 00:15:29,600 Speaker 2: agreements saying, you know, if you're not trading and there's 259 00:15:29,640 --> 00:15:32,440 Speaker 2: folks picking off bonds on the side, you know, that's 260 00:15:32,480 --> 00:15:35,080 Speaker 2: just driving a positive technical And what does that look 261 00:15:35,160 --> 00:15:37,600 Speaker 2: like going forward? Is that something that co op agreements 262 00:15:37,640 --> 00:15:40,520 Speaker 2: is there's just the positive outcome of owning a bond 263 00:15:40,520 --> 00:15:42,320 Speaker 2: and going into an agreement like that. Is that something 264 00:15:42,360 --> 00:15:45,640 Speaker 2: that you've talked about with your investment committees or some 265 00:15:45,680 --> 00:15:46,440 Speaker 2: of your clients. 266 00:15:47,080 --> 00:15:51,280 Speaker 3: Well, we see two sides of this coin. On one side, 267 00:15:52,400 --> 00:15:54,960 Speaker 3: it's not just a question about co ops. It's also 268 00:15:54,960 --> 00:15:57,440 Speaker 3: a question whether you investeering commits you have a COP 269 00:15:57,520 --> 00:16:00,640 Speaker 3: because you might end up having different a mix compared 270 00:16:00,640 --> 00:16:03,760 Speaker 3: to the rest of the group. So that brings about 271 00:16:03,920 --> 00:16:07,960 Speaker 3: question about size and how large exposure would you like 272 00:16:08,040 --> 00:16:11,800 Speaker 3: to have to a particular issuer, which also comes with 273 00:16:11,960 --> 00:16:18,040 Speaker 3: its downside. So that's first aspect to highlight often differing economics. 274 00:16:18,280 --> 00:16:21,800 Speaker 3: The other one is a lot depends on what is 275 00:16:21,840 --> 00:16:26,080 Speaker 3: the starting position that investors had in a particular issuer. 276 00:16:26,640 --> 00:16:30,040 Speaker 3: If you have a name that was quite unloved, where 277 00:16:30,120 --> 00:16:35,880 Speaker 3: investors were frustrated with management, financial policy and the outcome 278 00:16:35,920 --> 00:16:39,920 Speaker 3: for the credit, and you have a co op forming, 279 00:16:39,960 --> 00:16:42,800 Speaker 3: that can lead to a positive price action because the 280 00:16:42,880 --> 00:16:47,440 Speaker 3: likelihood of negotiating better outcomes increases. Having said that, we 281 00:16:47,520 --> 00:16:51,200 Speaker 3: have plenty of examples of co ops that happened in 282 00:16:51,240 --> 00:16:54,200 Speaker 3: situations where you had an issuer that was a consensual 283 00:16:54,280 --> 00:17:01,040 Speaker 3: long for the market, and instead of boosting the valuations 284 00:17:01,080 --> 00:17:06,440 Speaker 3: further when a co op formed, the effect was the opposite, 285 00:17:06,640 --> 00:17:12,840 Speaker 3: where the marginal bias of those securities have essentially evaporated 286 00:17:12,840 --> 00:17:15,680 Speaker 3: because everyone was already pregnant. 287 00:17:15,240 --> 00:17:15,880 Speaker 4: With that risk. 288 00:17:16,480 --> 00:17:19,960 Speaker 3: And and that meant that on the follow through from 289 00:17:20,040 --> 00:17:24,280 Speaker 3: the co op forming, you had weaker trading of the 290 00:17:24,320 --> 00:17:29,239 Speaker 3: security in the weeks that followed. So initial positioning in 291 00:17:29,280 --> 00:17:35,120 Speaker 3: the name actually drives quite a lot of that response 292 00:17:35,200 --> 00:17:36,160 Speaker 3: to co opforming. 293 00:17:36,800 --> 00:17:39,080 Speaker 2: That makes a lot of sense. I wonder too, though 294 00:17:39,320 --> 00:17:42,080 Speaker 2: you know you've been doing this a while, when you 295 00:17:42,160 --> 00:17:44,600 Speaker 2: see a co op agreement or the rise and co 296 00:17:44,640 --> 00:17:47,160 Speaker 2: op agreements like we've seen in the last several years, 297 00:17:48,280 --> 00:17:52,080 Speaker 2: do you think that's indicative of sort of a trend 298 00:17:52,280 --> 00:17:57,440 Speaker 2: toward away from syndicated bonds. If you have to negotiate 299 00:17:57,480 --> 00:18:00,000 Speaker 2: with a bunch of you know, bond holders that previous 300 00:18:00,080 --> 00:18:02,600 Speaker 2: we could pit against each other, and now they're operating 301 00:18:02,640 --> 00:18:05,800 Speaker 2: as one unit more or less, why not just go 302 00:18:05,880 --> 00:18:07,960 Speaker 2: to the private debt market going forward? 303 00:18:08,680 --> 00:18:12,840 Speaker 3: I can see the attraction of that, and I agree 304 00:18:12,880 --> 00:18:19,040 Speaker 3: that having group of debtholders at sometimes diverging interest because, 305 00:18:19,080 --> 00:18:21,920 Speaker 3: for example, some of the holders could be in secured 306 00:18:21,960 --> 00:18:24,000 Speaker 3: part of the capital structure, some could be in the 307 00:18:24,080 --> 00:18:26,760 Speaker 3: unsecured part of the capital structure, and the objectives could 308 00:18:26,760 --> 00:18:30,040 Speaker 3: be different, and sometimes it's the same institution that has 309 00:18:30,040 --> 00:18:35,440 Speaker 3: holdings in both. That makes for a more complicated setup, 310 00:18:35,480 --> 00:18:40,760 Speaker 3: whereas reverting to a private market solution could be neater 311 00:18:40,920 --> 00:18:44,920 Speaker 3: for issuers going forward. And indeed, we actually have seen 312 00:18:45,000 --> 00:18:53,720 Speaker 3: examples of idiosyncratic stories where issuers facing pretty tricky circumstances 313 00:18:54,160 --> 00:18:56,520 Speaker 3: or a story that is not the easiest for the 314 00:18:56,600 --> 00:18:59,720 Speaker 3: market to absorb when down the route of private credit 315 00:18:59,800 --> 00:19:03,760 Speaker 3: rather than staying in the public markets to address the need, 316 00:19:03,880 --> 00:19:05,600 Speaker 3: so that trend can easily continue. 317 00:19:05,640 --> 00:19:07,720 Speaker 4: And also it's. 318 00:19:07,520 --> 00:19:09,880 Speaker 3: Fair to admit that for as long as money keeps 319 00:19:09,920 --> 00:19:12,960 Speaker 3: flowing into the private credit space, into the direct lending 320 00:19:13,600 --> 00:19:18,080 Speaker 3: private credit space, that market will have an incentive to 321 00:19:18,119 --> 00:19:21,680 Speaker 3: absorb some of those situations from public space, as all 322 00:19:21,680 --> 00:19:26,000 Speaker 3: this money is competing for opportunities to be invested into. 323 00:19:25,600 --> 00:19:30,719 Speaker 1: On the private side. Andre we're talking about a twenty 324 00:19:30,800 --> 00:19:33,480 Speaker 1: trillion dollar market now that doubles in size over the 325 00:19:33,480 --> 00:19:36,040 Speaker 1: next five years potentially, according to one of our guests, 326 00:19:36,320 --> 00:19:38,000 Speaker 1: does that mean a great opportunity for you? I mean, 327 00:19:38,000 --> 00:19:40,600 Speaker 1: in terms of the investor proposition, what we're being told 328 00:19:40,680 --> 00:19:43,320 Speaker 1: is that it's much more return and much less risk. 329 00:19:44,600 --> 00:19:48,560 Speaker 3: Well to us, it really depends on which corner of 330 00:19:48,600 --> 00:19:51,760 Speaker 3: the private credit space you're looking at, because you know, 331 00:19:51,800 --> 00:19:55,359 Speaker 3: when we're looking at that universe and you consider asset 332 00:19:55,359 --> 00:20:00,919 Speaker 3: classes like infrastructure, distressed investing, special situations, all those are 333 00:20:00,960 --> 00:20:05,800 Speaker 3: perfectly legitimate, very interesting areas that can easily grow and flourish. 334 00:20:06,480 --> 00:20:09,639 Speaker 3: Where we had concern over the recent years is in 335 00:20:09,680 --> 00:20:14,480 Speaker 3: the direct lending private credit space. Because to us, especially 336 00:20:14,480 --> 00:20:18,040 Speaker 3: when looking at an environment where higher for longer could 337 00:20:18,320 --> 00:20:22,520 Speaker 3: very much be the mantra for central bank in the 338 00:20:22,640 --> 00:20:29,639 Speaker 3: US that has meaningful negative implications for that asset class 339 00:20:29,960 --> 00:20:34,040 Speaker 3: when you think about this excluding ad backs, because that 340 00:20:34,560 --> 00:20:37,280 Speaker 3: is something that is very prevalent within the space. But 341 00:20:37,359 --> 00:20:40,320 Speaker 3: if you exclude ad backs and look at pure kind 342 00:20:40,359 --> 00:20:45,760 Speaker 3: of cash profitability, mid market leverage is running at six 343 00:20:45,800 --> 00:20:49,640 Speaker 3: and a half seven times, and when you're paying at 344 00:20:49,680 --> 00:20:53,400 Speaker 3: current level of rates, kind of double digit cost of funding, 345 00:20:54,160 --> 00:20:57,680 Speaker 3: you can straight away make a calculation that three quarters 346 00:20:57,680 --> 00:21:00,879 Speaker 3: of your EBITDA goals just to service your interest costs 347 00:21:01,280 --> 00:21:05,480 Speaker 3: before you spend any money on capex, on working capital, 348 00:21:05,720 --> 00:21:09,440 Speaker 3: on whether you have any tax obligations. So we see 349 00:21:09,440 --> 00:21:13,480 Speaker 3: a situation where structurally you have a space with very 350 00:21:13,480 --> 00:21:17,639 Speaker 3: little if any cash flow being generated, and that is 351 00:21:17,640 --> 00:21:22,000 Speaker 3: something that can last for a little while, but it's 352 00:21:22,040 --> 00:21:26,000 Speaker 3: not something that can be last for a multi year period. 353 00:21:26,240 --> 00:21:29,919 Speaker 3: And if indeed we staying a higher for longer in 354 00:21:29,960 --> 00:21:35,040 Speaker 3: the US because inflation remains sticky, we do see worries 355 00:21:35,200 --> 00:21:40,000 Speaker 3: about that space having very little financial flexibility, where most 356 00:21:40,040 --> 00:21:43,240 Speaker 3: of the issuers suffer the same problems of dealing with 357 00:21:43,400 --> 00:21:47,199 Speaker 3: double digit cost of funding with little cash flow to 358 00:21:47,280 --> 00:21:50,760 Speaker 3: show for, and you know, then you start thinking from 359 00:21:50,760 --> 00:21:57,000 Speaker 3: the perspective of privatecor responses in specific situations. Yes, you 360 00:21:57,000 --> 00:22:00,199 Speaker 3: can write a check and help to bail out a 361 00:22:00,240 --> 00:22:03,159 Speaker 3: particular issue or kick the can down the road. However, 362 00:22:03,240 --> 00:22:06,080 Speaker 3: if you're seeing that dynamic across your entire portfolio, then 363 00:22:06,119 --> 00:22:08,880 Speaker 3: you're going to be asking yourself twice, Okay, what kind 364 00:22:08,880 --> 00:22:11,359 Speaker 3: of an echo check did I write in the first place? 365 00:22:11,720 --> 00:22:17,000 Speaker 3: Have I already taken distributions from this investment? And if 366 00:22:16,480 --> 00:22:20,520 Speaker 3: the answer is yes, then why should I deal with 367 00:22:20,560 --> 00:22:25,320 Speaker 3: that problem that holders might have to deal with the 368 00:22:25,359 --> 00:22:31,080 Speaker 3: fallout from such circumstances. So we are concerned about how 369 00:22:32,000 --> 00:22:36,679 Speaker 3: direct lending private credit space would deal with a higher 370 00:22:36,680 --> 00:22:40,720 Speaker 3: for longer world where US economy is slowing down at 371 00:22:40,720 --> 00:22:45,159 Speaker 3: the same time, and absolutely there could be growth in 372 00:22:45,200 --> 00:22:48,280 Speaker 3: the future, but in the very near term that particularly 373 00:22:48,320 --> 00:22:51,840 Speaker 3: corner of the private credit space, we have a lot 374 00:22:51,880 --> 00:22:52,720 Speaker 3: of concern about. 375 00:22:52,960 --> 00:22:54,639 Speaker 1: Do you think there'll be a lot more defaults there? 376 00:22:55,160 --> 00:22:56,600 Speaker 4: Well, we're already seeing. 377 00:22:58,000 --> 00:23:04,600 Speaker 3: Action to help address challenges that are happening at the 378 00:23:04,640 --> 00:23:09,320 Speaker 3: stage with the rise of the payment in kind usage 379 00:23:09,480 --> 00:23:13,360 Speaker 3: within the space, but it's not a permanent solution, so 380 00:23:13,560 --> 00:23:18,119 Speaker 3: that's more symptomatic of the problems that are happening there. 381 00:23:18,200 --> 00:23:21,119 Speaker 3: And yes, if we live in this higher for longer 382 00:23:21,160 --> 00:23:24,600 Speaker 3: world where instead of cutting rates, FED might have to 383 00:23:24,640 --> 00:23:27,640 Speaker 3: even consider potentially hiking rates, which is not our base 384 00:23:27,680 --> 00:23:30,800 Speaker 3: case scenario, but it's not outside of the realm of possibility, 385 00:23:31,200 --> 00:23:35,240 Speaker 3: especially if that aggressive trade war were to happen in 386 00:23:35,280 --> 00:23:38,240 Speaker 3: that world. Yes, there's definitely going to be more pain 387 00:23:39,000 --> 00:23:44,080 Speaker 3: across the direct lending private credit as a class, and 388 00:23:44,119 --> 00:23:47,439 Speaker 3: we absolutely believe that you're much better off in public 389 00:23:47,520 --> 00:23:52,680 Speaker 3: markets because the leverage profile, the interest cover ratios are 390 00:23:52,720 --> 00:23:56,800 Speaker 3: just so much better and a lot of those pressures 391 00:23:56,840 --> 00:23:58,000 Speaker 3: are far less acute. 392 00:23:58,359 --> 00:24:00,560 Speaker 1: So across the board in private market, is you think 393 00:24:00,640 --> 00:24:04,800 Speaker 1: that there's there's more value in public even in the 394 00:24:04,880 --> 00:24:07,720 Speaker 1: sort of non distressed side of it, Well. 395 00:24:07,520 --> 00:24:11,400 Speaker 3: We were generally observed that when you're looking at returns, 396 00:24:11,400 --> 00:24:15,000 Speaker 3: we're not calling for a dramatic wave of the faults 397 00:24:15,040 --> 00:24:18,960 Speaker 3: within the asset class, but when you consider relatively high 398 00:24:18,960 --> 00:24:23,639 Speaker 3: fees within those products, net of fees and net of 399 00:24:23,960 --> 00:24:28,720 Speaker 3: some selective restructurings that have to happen, we think, you know, 400 00:24:28,800 --> 00:24:31,719 Speaker 3: it's quite easy to make numbers work for a public 401 00:24:31,760 --> 00:24:34,840 Speaker 3: alternative with much more liquidity and much more ability to 402 00:24:34,880 --> 00:24:36,119 Speaker 3: reposition if you want to. 403 00:24:36,640 --> 00:24:38,240 Speaker 4: So why take the risk? 404 00:24:38,720 --> 00:24:41,479 Speaker 2: That's a good question. I wonder. You know, there's been 405 00:24:41,520 --> 00:24:44,280 Speaker 2: a lot of commentary about some of these private lenders 406 00:24:44,560 --> 00:24:48,000 Speaker 2: moving up the rating spectrum and participating in investment grade 407 00:24:48,160 --> 00:24:51,880 Speaker 2: financing is oftentimes their project finance. But what's your view 408 00:24:51,920 --> 00:24:54,359 Speaker 2: on that? I mean, I've been covering high yield for 409 00:24:54,359 --> 00:24:56,200 Speaker 2: a very long time, and I've been covering a lot 410 00:24:56,240 --> 00:24:59,119 Speaker 2: of the companies that were sponsored by you know, some 411 00:24:59,160 --> 00:25:03,280 Speaker 2: of these private equity now private debt shops that now 412 00:25:03,280 --> 00:25:06,360 Speaker 2: are looking into investment grade. I wonder what's your take 413 00:25:06,400 --> 00:25:06,720 Speaker 2: on that. 414 00:25:07,440 --> 00:25:11,200 Speaker 3: Well, to us, it's really a function of how much 415 00:25:11,320 --> 00:25:14,679 Speaker 3: money has been invested in that space and that money 416 00:25:14,680 --> 00:25:17,560 Speaker 3: needs to be put to some use. And at the 417 00:25:17,600 --> 00:25:22,359 Speaker 3: same time, when you have very aggressive issuance in investment grade, 418 00:25:22,680 --> 00:25:26,240 Speaker 3: where some market observers are even estimating close to two 419 00:25:26,280 --> 00:25:30,199 Speaker 3: trillion that could be issued in twenty twenty five, that 420 00:25:30,240 --> 00:25:33,439 Speaker 3: would be on the higher end of the market expectations, 421 00:25:33,440 --> 00:25:37,840 Speaker 3: but that would be a huge increase compared to where 422 00:25:37,840 --> 00:25:41,399 Speaker 3: we were a few years ago. That creates opportunities for 423 00:25:41,560 --> 00:25:46,240 Speaker 3: some of money from other market segments to be put 424 00:25:46,280 --> 00:25:51,639 Speaker 3: to work, especially in slightly more complex moesoteric structures where 425 00:25:51,640 --> 00:25:55,760 Speaker 3: traditional investment grade investors are not as keen to a 426 00:25:55,840 --> 00:26:01,000 Speaker 3: jump on that bandwagon so much supply. Absolutely, it's opportunities 427 00:26:01,040 --> 00:26:04,680 Speaker 3: for money coming from various pockets to be put to work. 428 00:26:05,119 --> 00:26:06,480 Speaker 4: Yeah, it strikes me. 429 00:26:06,480 --> 00:26:10,639 Speaker 2: As a novel play where but like you said, if 430 00:26:10,640 --> 00:26:12,360 Speaker 2: you've raised enough money, you got to put it to work. 431 00:26:12,359 --> 00:26:14,320 Speaker 2: You're just going to expect lower returns over time. I 432 00:26:14,320 --> 00:26:17,600 Speaker 2: guess stepping back a little bit, you know, that's an 433 00:26:17,600 --> 00:26:20,159 Speaker 2: opportunity I guess for those those shops that are doing that. 434 00:26:20,320 --> 00:26:23,119 Speaker 2: But you know, in your shop and when you're talking 435 00:26:23,119 --> 00:26:27,480 Speaker 2: with investment committees, going from opportunities to risks, back to risks, 436 00:26:28,080 --> 00:26:30,840 Speaker 2: what are the two or three you know? I mean, 437 00:26:30,880 --> 00:26:33,720 Speaker 2: we have a lot of geopolitical risks, We have issues 438 00:26:33,760 --> 00:26:35,679 Speaker 2: across the board. What are the two or three that 439 00:26:35,720 --> 00:26:39,439 Speaker 2: are top of mind for you guys right now with 440 00:26:39,480 --> 00:26:41,720 Speaker 2: your investors, with your investment committees. 441 00:26:42,760 --> 00:26:45,840 Speaker 3: Well, I think the number one question that we're being 442 00:26:45,920 --> 00:26:51,479 Speaker 3: asked by our clients and prospect is what kind of 443 00:26:51,480 --> 00:26:54,080 Speaker 3: a rate cycle will we have in twenty twenty five? 444 00:26:54,920 --> 00:26:59,240 Speaker 3: Because that, depending on your risk appetite, will drive total 445 00:26:59,240 --> 00:27:02,159 Speaker 3: return outloads across fixed income. 446 00:27:02,600 --> 00:27:03,680 Speaker 4: If you're looking. 447 00:27:03,560 --> 00:27:09,000 Speaker 3: At high yield assets, then you're less reliant on what's 448 00:27:09,000 --> 00:27:11,119 Speaker 3: happening in the rate world. You know, your double B 449 00:27:11,240 --> 00:27:14,320 Speaker 3: assets are definitely more sensitive to that, but across how 450 00:27:14,480 --> 00:27:18,320 Speaker 3: other parts of the rating stack you are less vulnerable. 451 00:27:18,359 --> 00:27:20,360 Speaker 3: And you know that's one of the reasons why here 452 00:27:20,440 --> 00:27:24,439 Speaker 3: to date HYLD has done better than high grade in 453 00:27:24,480 --> 00:27:29,760 Speaker 3: this respect, but particularly for investment grade investors, when you're 454 00:27:29,760 --> 00:27:35,080 Speaker 3: looking at projections of total returns, actually it's far less 455 00:27:35,280 --> 00:27:37,879 Speaker 3: your decision about where spreads will be over the course 456 00:27:37,920 --> 00:27:42,359 Speaker 3: of the twenty twenty five but more what level of 457 00:27:42,440 --> 00:27:45,760 Speaker 3: tenure treasuries will we have that will drive your total 458 00:27:45,800 --> 00:27:50,800 Speaker 3: return expectations. So that's clearly number one question that we get, 459 00:27:50,840 --> 00:27:55,280 Speaker 3: and in that context, to us, this question is absolutely 460 00:27:55,280 --> 00:27:59,840 Speaker 3: intertwined with a discussion about the new Trump administration policy mix, 461 00:28:00,160 --> 00:28:02,720 Speaker 3: especially when it comes to trade and how that's going 462 00:28:02,720 --> 00:28:05,719 Speaker 3: to play out in early months of next year. So 463 00:28:05,760 --> 00:28:09,840 Speaker 3: that's that's first order of business, and the other one 464 00:28:10,359 --> 00:28:14,919 Speaker 3: that we're also hearing quite a lot from investors is 465 00:28:15,000 --> 00:28:16,880 Speaker 3: questions about US exceptionalism. 466 00:28:17,720 --> 00:28:21,280 Speaker 4: Is question whether given. 467 00:28:21,400 --> 00:28:25,159 Speaker 3: Broad malaise in so many other parts of the world 468 00:28:25,960 --> 00:28:31,240 Speaker 3: where enthusiasm about any growth recovery is diminishing fast. Even 469 00:28:31,280 --> 00:28:35,080 Speaker 3: in China, where we had this burst of optimism a 470 00:28:35,080 --> 00:28:38,080 Speaker 3: few weeks back, quite a bit of that is already fading. 471 00:28:39,120 --> 00:28:44,200 Speaker 3: Can US maintain an edge over other parts of the world, 472 00:28:44,800 --> 00:28:48,280 Speaker 3: and does that also mean that valuations of US assets 473 00:28:49,120 --> 00:28:52,320 Speaker 3: will be will remain at the premium compared to some 474 00:28:52,560 --> 00:28:57,240 Speaker 3: of the offshore alternatives, so that that whole idea of 475 00:28:57,360 --> 00:29:00,640 Speaker 3: US exceptionalism and continue in that story. Can continuing in 476 00:29:00,680 --> 00:29:04,560 Speaker 3: twenty twenty five is very much on top of investors' minds. 477 00:29:04,960 --> 00:29:07,720 Speaker 1: When you look at issuance. Andrea Youman mentioned this two 478 00:29:07,720 --> 00:29:12,120 Speaker 1: trillion dollar investment grade number. You know, we're hearing more 479 00:29:12,160 --> 00:29:15,719 Speaker 1: like I know one point six. But still even if 480 00:29:15,720 --> 00:29:18,200 Speaker 1: it if it is a high gross, the net still 481 00:29:18,200 --> 00:29:19,680 Speaker 1: seems to be quite low. I mean, there's so much 482 00:29:19,720 --> 00:29:23,720 Speaker 1: refinancing going on, there's maturities and all that. Is there 483 00:29:23,840 --> 00:29:26,880 Speaker 1: enough nets supply to make any difference in terms of 484 00:29:26,920 --> 00:29:28,120 Speaker 1: your forecast for next year? 485 00:29:28,960 --> 00:29:31,280 Speaker 3: And look, we agree on the one six one seven 486 00:29:31,360 --> 00:29:34,000 Speaker 3: is probably our base case, but there are market participants 487 00:29:34,440 --> 00:29:39,840 Speaker 3: investment banks that actually forecast closer to to trillion. You know, 488 00:29:39,880 --> 00:29:43,680 Speaker 3: I agree that given the size of the savings pools 489 00:29:43,720 --> 00:29:48,840 Speaker 3: globally and ability of US investors to move money from 490 00:29:48,880 --> 00:29:55,280 Speaker 3: money markets into further out the curve, absolutely there's more 491 00:29:55,320 --> 00:29:58,880 Speaker 3: than sufficient amount of resources to absorb that net issuance 492 00:29:59,520 --> 00:30:06,160 Speaker 3: in twenty However, that ability is dependent on broad macro 493 00:30:06,240 --> 00:30:12,360 Speaker 3: dynamic inflation dynamic FED dynamic cooperating as well. So if 494 00:30:12,640 --> 00:30:16,640 Speaker 3: we have a benign Trump administration, then placing one and 495 00:30:16,680 --> 00:30:20,560 Speaker 3: a half or two trillion of paper should not be 496 00:30:20,600 --> 00:30:23,320 Speaker 3: a problem for these markets. And actually that's been one 497 00:30:23,320 --> 00:30:26,720 Speaker 3: of the big surprises of this year, as we were 498 00:30:26,800 --> 00:30:31,760 Speaker 3: running issuance that was thirty forty percent ahead of estimates 499 00:30:31,800 --> 00:30:34,760 Speaker 3: and last year's numbers. None of the periods of heavy 500 00:30:34,800 --> 00:30:38,600 Speaker 3: issuance led to any meaningful indigestion from a spread perspective. 501 00:30:38,920 --> 00:30:40,800 Speaker 3: So clearly there was a lot of money being put 502 00:30:40,840 --> 00:30:44,560 Speaker 3: to work in anticipation of raidcuts ahead. But if you 503 00:30:45,160 --> 00:30:48,720 Speaker 3: take away that expectation of radcuts ahead and add to 504 00:30:48,800 --> 00:30:53,160 Speaker 3: that all the volatility associated with the new administration and 505 00:30:53,720 --> 00:30:57,720 Speaker 3: policymics being reflected in FED thinking as well, then placing 506 00:30:57,760 --> 00:31:03,200 Speaker 3: all that paper might become might become more difficult, and 507 00:31:03,240 --> 00:31:08,440 Speaker 3: the clearing level for all this supply could necessitate wider spreads. 508 00:31:08,480 --> 00:31:12,200 Speaker 3: There have been multiple periods in recent years where, for example, 509 00:31:12,240 --> 00:31:13,960 Speaker 3: when we had the spike in issuance to do with 510 00:31:14,080 --> 00:31:16,320 Speaker 3: M and A, something that very much could be the 511 00:31:16,320 --> 00:31:20,080 Speaker 3: case in twenty twenty five, as we see deregulation and 512 00:31:21,480 --> 00:31:26,760 Speaker 3: less objection from this administration to MNA activities, the clearing 513 00:31:26,840 --> 00:31:30,240 Speaker 3: level for getting these deals done in the market could 514 00:31:30,280 --> 00:31:33,040 Speaker 3: mean wider spreads. We have not been used to that 515 00:31:33,200 --> 00:31:35,880 Speaker 3: for a while, but there were clearly multiple environments in 516 00:31:35,920 --> 00:31:39,959 Speaker 3: recent years where market demanded more spread and was getting 517 00:31:39,960 --> 00:31:42,480 Speaker 3: more spread when all that M and A pipeline had 518 00:31:42,520 --> 00:31:43,120 Speaker 3: to be funded. 519 00:31:43,760 --> 00:31:48,520 Speaker 2: Pivoting maybe contrary to some sector sector views, maybe across 520 00:31:48,560 --> 00:31:50,880 Speaker 2: ig and maybe split it between high yield. Do you 521 00:31:51,040 --> 00:31:54,200 Speaker 2: have you know, favorable sectors that you look upon as 522 00:31:54,320 --> 00:31:56,800 Speaker 2: you know a performing Maybe in twenty twenty five, I 523 00:31:56,800 --> 00:31:59,239 Speaker 2: think about MySpace and high your healthcare twenty twenty three 524 00:31:59,320 --> 00:32:00,800 Speaker 2: is a real bad year for a lot of people, 525 00:32:01,080 --> 00:32:02,520 Speaker 2: A lot of analysts switch seats. 526 00:32:02,720 --> 00:32:02,959 Speaker 3: You know. 527 00:32:03,320 --> 00:32:06,720 Speaker 2: Twenty twenty four has been much better, largely driven by 528 00:32:07,080 --> 00:32:10,000 Speaker 2: improvement on hospitals and bouch Health and some other names 529 00:32:10,040 --> 00:32:14,160 Speaker 2: but you know, obviously the headline risk entered the room 530 00:32:14,360 --> 00:32:17,520 Speaker 2: with the new administration has muddeled the picture a bit. 531 00:32:17,560 --> 00:32:20,880 Speaker 2: For health care, I wonder maybe away from the healthcare 532 00:32:20,960 --> 00:32:23,600 Speaker 2: views or you know, across this high yield and investment, 533 00:32:23,800 --> 00:32:26,120 Speaker 2: what are some sectors that might stand out to you 534 00:32:26,200 --> 00:32:28,640 Speaker 2: as being particularly favorable or unfavorable. 535 00:32:29,080 --> 00:32:32,760 Speaker 3: Well, well, look at that through the lens of idiosyncratic 536 00:32:32,800 --> 00:32:36,120 Speaker 3: factors for that sector, so whether the narratives or twenty 537 00:32:36,160 --> 00:32:39,640 Speaker 3: five could be positive or not. But also valuations, there 538 00:32:39,680 --> 00:32:41,480 Speaker 3: are a lot of good sectors out there that that 539 00:32:41,600 --> 00:32:44,200 Speaker 3: trading at multi tight, So it's very difficult for me 540 00:32:44,280 --> 00:32:48,400 Speaker 3: to suggest to our clients that that is an attractive 541 00:32:48,960 --> 00:32:52,960 Speaker 3: area to put money to work. Whether there's literally no 542 00:32:53,360 --> 00:32:57,960 Speaker 3: spread upsite from our perspective. So when it comes to 543 00:32:58,040 --> 00:33:02,240 Speaker 3: investment grade, there are not that many pockets at this 544 00:33:02,360 --> 00:33:07,120 Speaker 3: stage where we see a lot of value left. Financials 545 00:33:07,440 --> 00:33:11,000 Speaker 3: still have pockets that look good, and the new administration 546 00:33:11,080 --> 00:33:16,120 Speaker 3: should be broadly quite positive for financials. So whether it's 547 00:33:16,840 --> 00:33:20,200 Speaker 3: money center banks or regional banks or more slightly more 548 00:33:20,280 --> 00:33:25,240 Speaker 3: esoteric financials, the new insurance platforms that are starting to 549 00:33:25,280 --> 00:33:26,720 Speaker 3: find more aggressively. 550 00:33:27,640 --> 00:33:29,360 Speaker 4: We see a fair. 551 00:33:29,240 --> 00:33:33,400 Speaker 3: Amount of value there, but clearly less than was the 552 00:33:33,440 --> 00:33:35,800 Speaker 3: case a year ago. 553 00:33:36,160 --> 00:33:39,000 Speaker 4: When it comes to other. 554 00:33:39,560 --> 00:33:47,080 Speaker 3: Sectors, we see value in TMT, but mainly in technology 555 00:33:47,120 --> 00:33:51,400 Speaker 3: and media because those are areas where investors have a 556 00:33:51,560 --> 00:33:54,640 Speaker 3: very strong disagreement in terms of direction of travel for 557 00:33:54,720 --> 00:33:57,320 Speaker 3: those sectors, when we're talking about broadcasting, when we're talking 558 00:33:57,360 --> 00:34:01,880 Speaker 3: about chip manufacturing. We love stories where there's a broad 559 00:34:01,920 --> 00:34:05,440 Speaker 3: disagreement in the market about the direction of travel because 560 00:34:05,440 --> 00:34:08,319 Speaker 3: that creates opportunities further down the line, and those are 561 00:34:08,440 --> 00:34:13,600 Speaker 3: one of the few that still have upside potential compared 562 00:34:13,680 --> 00:34:19,160 Speaker 3: to other alternatives. So I would highlight those two areas 563 00:34:19,239 --> 00:34:24,520 Speaker 3: as ones of focus for ourselves. What we don't like 564 00:34:25,040 --> 00:34:28,319 Speaker 3: in investment grade are essentially the tightest sectors that are 565 00:34:28,360 --> 00:34:31,279 Speaker 3: giving very little protection to investors. 566 00:34:31,320 --> 00:34:33,840 Speaker 4: So whether you're looking at. 567 00:34:34,600 --> 00:34:39,200 Speaker 3: Consumer staples or I'm sorry, Mike, healthcare, there is very 568 00:34:39,200 --> 00:34:41,160 Speaker 3: little left on the table. 569 00:34:41,719 --> 00:34:44,480 Speaker 2: I'm looking at un h spreads on a five year 570 00:34:44,560 --> 00:34:48,400 Speaker 2: CDX CDs are at forty you know, elevance the payers, 571 00:34:48,719 --> 00:34:51,040 Speaker 2: not that CDs is an accurate market, but you know, 572 00:34:51,080 --> 00:34:52,200 Speaker 2: those spreads are really tight. 573 00:34:52,239 --> 00:34:55,680 Speaker 3: In my view, yes, we would agree that there's not 574 00:34:55,840 --> 00:34:58,920 Speaker 3: much left on the table there, but actually, we also 575 00:34:59,040 --> 00:35:02,960 Speaker 3: think that cyclical are too expensive as well. So with 576 00:35:03,000 --> 00:35:05,839 Speaker 3: the exception of autos, which is one sector that has 577 00:35:05,880 --> 00:35:10,719 Speaker 3: repriced wider in recent weeks. And you know, even though 578 00:35:10,719 --> 00:35:12,920 Speaker 3: the pressures have been felt much more on the European 579 00:35:13,000 --> 00:35:17,400 Speaker 3: side than on the US side, that is one sector 580 00:35:17,440 --> 00:35:23,279 Speaker 3: that consistently trades wider because of heavy regular issuance. The 581 00:35:23,280 --> 00:35:27,319 Speaker 3: rest of the cyclicals to US looks very expensive, and 582 00:35:27,840 --> 00:35:31,879 Speaker 3: that universe is taking advantage of the fact that we've 583 00:35:31,880 --> 00:35:37,360 Speaker 3: seen limited issuance over the recent quarters. But we don't 584 00:35:37,400 --> 00:35:41,480 Speaker 3: really want to take the downside risks of that universe 585 00:35:41,640 --> 00:35:45,439 Speaker 3: on board and stay away from many capital goods, heavy 586 00:35:45,440 --> 00:35:49,719 Speaker 3: industrials names in the investment grade space. On the high 587 00:35:49,760 --> 00:35:53,839 Speaker 3: out side, the situation is a bit different because yes, 588 00:35:54,200 --> 00:35:59,520 Speaker 3: actually financials are also one of the more attractive asset classes. 589 00:35:59,560 --> 00:36:05,239 Speaker 3: But that's where parallels end, and the benefit for financials 590 00:36:05,280 --> 00:36:08,200 Speaker 3: in high yield is to do with the fact that 591 00:36:08,239 --> 00:36:12,280 Speaker 3: it's actually growing growing portion of the high old universe. 592 00:36:12,640 --> 00:36:15,440 Speaker 3: Financials used to be the kind of more esoteric falling 593 00:36:15,440 --> 00:36:19,600 Speaker 3: between the cracks part of US high old bond universe, 594 00:36:19,640 --> 00:36:23,240 Speaker 3: but we've seen a lot more issuance in various manifestations 595 00:36:23,280 --> 00:36:27,880 Speaker 3: of financials in high yield, and that space has grown 596 00:36:28,000 --> 00:36:31,759 Speaker 3: and that space has become more interesting. But away from that, 597 00:36:32,400 --> 00:36:40,360 Speaker 3: where we see value is across a broader range of issuers, 598 00:36:40,400 --> 00:36:45,080 Speaker 3: because some more growth sensitive issuers, but those that are 599 00:36:45,200 --> 00:36:49,759 Speaker 3: very focused on the US to look well positioned for 600 00:36:49,840 --> 00:36:53,239 Speaker 3: this new administration, for the benefits of lower taxes and 601 00:36:53,280 --> 00:36:57,760 Speaker 3: the regulation. So actually we're happy to dible thet out there. 602 00:36:58,040 --> 00:37:03,600 Speaker 3: We also like segments of the TMT market that are 603 00:37:03,680 --> 00:37:10,160 Speaker 3: less represented in investment grades. So for example, not all 604 00:37:10,200 --> 00:37:13,000 Speaker 3: but some investments on the satellite site, and I know 605 00:37:13,080 --> 00:37:17,080 Speaker 3: it's a painful sector for any highield investor looking over 606 00:37:17,120 --> 00:37:20,240 Speaker 3: the recent years, but we do see opportunities. They're differentiating 607 00:37:20,320 --> 00:37:26,040 Speaker 3: between the haves and have not. And finally, we also 608 00:37:26,120 --> 00:37:29,879 Speaker 3: see really interesting situations in some of those binary co 609 00:37:29,960 --> 00:37:35,719 Speaker 3: op stories that I mentioned earlier. In some circumstances, the 610 00:37:36,640 --> 00:37:40,520 Speaker 3: balance of risks between positive negative outcome is really pointing 611 00:37:40,560 --> 00:37:44,879 Speaker 3: towards being long those securities, whereas in other cases it's 612 00:37:44,920 --> 00:37:47,520 Speaker 3: more of a coin toss and you'd want. 613 00:37:47,360 --> 00:37:48,640 Speaker 4: To avoid those. 614 00:37:48,680 --> 00:37:54,080 Speaker 3: So highyield is in our opinion, much monuanced than the 615 00:37:54,160 --> 00:37:57,480 Speaker 3: case in investment grade. But there are also more opportunities 616 00:37:57,480 --> 00:37:59,960 Speaker 3: there to get to work. The final thing about high 617 00:38:00,000 --> 00:38:02,440 Speaker 3: field worth highlighting is because some of the strategies we 618 00:38:03,239 --> 00:38:06,799 Speaker 3: look after our global rather than us in nature that 619 00:38:07,520 --> 00:38:10,400 Speaker 3: there's a lot of value left on the table in 620 00:38:10,560 --> 00:38:14,560 Speaker 3: emerging market high yield space. So unlike in investment grade 621 00:38:14,600 --> 00:38:18,240 Speaker 3: where we find very little extra spread in investment grade 622 00:38:18,320 --> 00:38:22,120 Speaker 3: EM opportunities compared to develop market, once in high yield 623 00:38:22,400 --> 00:38:25,960 Speaker 3: there's a fair amount of value extra yield left on 624 00:38:26,000 --> 00:38:28,520 Speaker 3: the table for similar sectors, similar rated. 625 00:38:28,320 --> 00:38:30,600 Speaker 4: Issuers within EM high yield. 626 00:38:30,840 --> 00:38:34,280 Speaker 3: But you have to be cognizant there that you don't 627 00:38:34,360 --> 00:38:36,640 Speaker 3: operate in a vacuum, and you have to respect the 628 00:38:36,719 --> 00:38:41,120 Speaker 3: macro trends. So for example, recent developments in Brazil and 629 00:38:41,160 --> 00:38:44,680 Speaker 3: the trading of securities there have been heavily impacted by 630 00:38:44,680 --> 00:38:48,560 Speaker 3: the macro story. But generally speaking, if you're careful about 631 00:38:48,560 --> 00:38:51,480 Speaker 3: your selection in EM, if you don't get over your 632 00:38:51,480 --> 00:38:55,240 Speaker 3: skis and also recognize that in a higher for longer world, 633 00:38:55,520 --> 00:38:58,759 Speaker 3: that will not be a tailwind for EM assets. If 634 00:38:58,800 --> 00:39:02,080 Speaker 3: you carefully select opportunities there that could be a good 635 00:39:02,080 --> 00:39:04,520 Speaker 3: supplement to your high portfolio. 636 00:39:05,000 --> 00:39:07,160 Speaker 1: And once that is clear, I mean if you have 637 00:39:07,200 --> 00:39:09,560 Speaker 1: any kind of long term plan. I'm sure you do, 638 00:39:09,680 --> 00:39:11,759 Speaker 1: but can you share with us in terms of you know, 639 00:39:11,800 --> 00:39:14,200 Speaker 1: what's the best thing for next year? Where's the best 640 00:39:14,200 --> 00:39:14,880 Speaker 1: relative value? 641 00:39:15,719 --> 00:39:19,120 Speaker 3: Well, it depends what Trump administration does to us in 642 00:39:19,160 --> 00:39:23,000 Speaker 3: the first months of the year. But look, our view 643 00:39:23,120 --> 00:39:27,200 Speaker 3: and something that we've been telling our clients is that 644 00:39:27,680 --> 00:39:30,120 Speaker 3: once the dost settles, once we know exactly what the 645 00:39:30,160 --> 00:39:34,000 Speaker 3: policy mix is and what federal reserves response to that is, 646 00:39:34,680 --> 00:39:37,200 Speaker 3: it will be time to re engage. 647 00:39:36,840 --> 00:39:37,400 Speaker 4: With the market. 648 00:39:37,480 --> 00:39:42,160 Speaker 3: Because the global demand for US fixing comasets is tremendous 649 00:39:42,200 --> 00:39:45,400 Speaker 3: across various manifestations depending on your risk tolerance, all the 650 00:39:45,440 --> 00:39:46,760 Speaker 3: way from investment grade. 651 00:39:46,600 --> 00:39:47,800 Speaker 4: To high yield. 652 00:39:47,960 --> 00:39:50,000 Speaker 3: We do think there will be a ton of money 653 00:39:50,280 --> 00:39:52,320 Speaker 3: that will want to be put to work. 654 00:39:52,160 --> 00:39:53,520 Speaker 4: At higher yield levels. 655 00:39:54,080 --> 00:39:57,799 Speaker 3: And also reflecting on the fact that we are not 656 00:39:57,960 --> 00:40:01,239 Speaker 3: forecasting a recession in the US, we'll look at the 657 00:40:01,280 --> 00:40:06,080 Speaker 3: feedback from companies. We're looking at data across all of 658 00:40:06,120 --> 00:40:10,040 Speaker 3: the consumer cohorts and all that data still looks robust. 659 00:40:10,160 --> 00:40:14,799 Speaker 3: We're not seeing signs of any aggressive deterioration and that's 660 00:40:14,840 --> 00:40:15,960 Speaker 3: not our base case for. 661 00:40:17,480 --> 00:40:22,040 Speaker 4: Next year. So with that in mind, once that. 662 00:40:22,000 --> 00:40:25,040 Speaker 3: That settles and hopefully you have better entry points after 663 00:40:25,080 --> 00:40:28,200 Speaker 3: a period of volatility and maybe some risk transfer from 664 00:40:28,280 --> 00:40:32,920 Speaker 3: longer duration investors moving back to cash or shorter duration 665 00:40:33,000 --> 00:40:36,720 Speaker 3: assets that will create a good entry point that will 666 00:40:36,760 --> 00:40:42,800 Speaker 3: help propel strong, positive toll returns across the fixed income stack. 667 00:40:43,640 --> 00:40:47,080 Speaker 3: So that's really what we are positioning for. But we're 668 00:40:47,080 --> 00:40:50,480 Speaker 3: waiting it out first in shorter duration assets and then 669 00:40:50,600 --> 00:40:53,480 Speaker 3: ready to re engage once that policy clarity is gained. 670 00:40:53,960 --> 00:40:56,680 Speaker 1: But there could be an outcome which isn't so positive, 671 00:40:56,760 --> 00:40:58,680 Speaker 1: And in which case do you think there'll be a 672 00:40:58,719 --> 00:41:01,960 Speaker 1: major shakeout if Trump doesn't turn out to be so 673 00:41:02,120 --> 00:41:03,320 Speaker 1: benign after all? 674 00:41:03,560 --> 00:41:08,040 Speaker 3: Well, we're assuming that Trump not being benign is, in 675 00:41:08,080 --> 00:41:11,239 Speaker 3: our view, actually the more likely scenario rather than the 676 00:41:11,360 --> 00:41:15,759 Speaker 3: very benign expectation that the market has, So we do 677 00:41:15,880 --> 00:41:19,000 Speaker 3: expect fireworks in those first few months of the year. 678 00:41:19,080 --> 00:41:21,280 Speaker 3: But again, at the end of the day, we remember 679 00:41:21,320 --> 00:41:25,520 Speaker 3: that fundamentals of US economy are strong, and a lot 680 00:41:25,719 --> 00:41:28,000 Speaker 3: of the measures that could be worrying from a fixed 681 00:41:28,040 --> 00:41:34,560 Speaker 3: income perspective are actually often positive from equity perspective. So 682 00:41:34,840 --> 00:41:40,880 Speaker 3: when we're looking at lower taxes, deregulation, those should be 683 00:41:40,960 --> 00:41:44,759 Speaker 3: positive stimuli for the US and that is why, for 684 00:41:44,800 --> 00:41:46,799 Speaker 3: as long as we do not see recession as your 685 00:41:46,840 --> 00:41:50,280 Speaker 3: base case outcome, and it's definitely not our base case outcome, 686 00:41:51,120 --> 00:41:55,799 Speaker 3: we are happy to fade the noise, and once it 687 00:41:55,840 --> 00:41:59,759 Speaker 3: does settles, re engage with fixed income on a more 688 00:42:00,440 --> 00:42:05,440 Speaker 3: more broad basis. But yes, like we might be making 689 00:42:05,480 --> 00:42:09,520 Speaker 3: these decisions from a position where investors who entered the 690 00:42:09,600 --> 00:42:14,280 Speaker 3: year with the bullish sentiment are sitting on toll return 691 00:42:14,320 --> 00:42:17,760 Speaker 3: losses at that point, given move higher in treasury yields 692 00:42:17,960 --> 00:42:22,360 Speaker 3: and bond yields, But to us that eventually would be bought, 693 00:42:22,920 --> 00:42:25,520 Speaker 3: and it would be right to take advantage of those 694 00:42:25,520 --> 00:42:30,960 Speaker 3: better entry points given the broader, solid macro backdrop. 695 00:42:31,280 --> 00:42:33,680 Speaker 1: Do you expect positive returns in both highield and investment 696 00:42:33,680 --> 00:42:34,359 Speaker 1: grade next year? 697 00:42:34,480 --> 00:42:34,840 Speaker 4: Us? 698 00:42:35,400 --> 00:42:37,840 Speaker 3: I think it's easier to make the case for positive 699 00:42:37,880 --> 00:42:41,319 Speaker 3: returns in high yield given you have less rate sensitivity 700 00:42:41,320 --> 00:42:44,600 Speaker 3: and you know the starting yield of the acid class. So, 701 00:42:44,960 --> 00:42:47,200 Speaker 3: in a similar way as we were sharing with our 702 00:42:47,239 --> 00:42:51,080 Speaker 3: clients this year, our confidence in positive returns in high 703 00:42:51,120 --> 00:42:56,800 Speaker 3: yield is higher than confidence in positive returns in investment grade. 704 00:42:57,160 --> 00:43:00,640 Speaker 3: And particularly speaking of investment grade, looking at twenty twenty five, 705 00:43:00,960 --> 00:43:05,000 Speaker 3: we see a small chance of flatish to negative returns, 706 00:43:06,280 --> 00:43:10,960 Speaker 3: but in most scenarios we still see positive positive returns. 707 00:43:11,480 --> 00:43:14,479 Speaker 3: Just to give you an example, we see a risk 708 00:43:14,640 --> 00:43:17,120 Speaker 3: of and we've been sharing that for quite some time now, 709 00:43:17,320 --> 00:43:20,080 Speaker 3: of thirty year hitting five percent over the coming months, 710 00:43:20,440 --> 00:43:23,799 Speaker 3: and that probably would imply high force for the ten 711 00:43:23,880 --> 00:43:29,080 Speaker 3: year from that initially would lead to negative returns for 712 00:43:29,120 --> 00:43:32,360 Speaker 3: your fixed income portfolio, but as the year progresses, taking 713 00:43:32,360 --> 00:43:36,080 Speaker 3: into account the carry off the acid class, we think 714 00:43:36,160 --> 00:43:42,600 Speaker 3: that will returns shoot tilt into positive territory. And if 715 00:43:43,000 --> 00:43:48,000 Speaker 3: the trade storms abate and inflation starts behaving again, the 716 00:43:48,040 --> 00:43:52,000 Speaker 3: prospect of rate cuts returns as well. So in that 717 00:43:52,120 --> 00:43:55,560 Speaker 3: world you could potentially have quite a boost to your 718 00:43:55,560 --> 00:43:59,080 Speaker 3: returns in the second half of the year. But first, 719 00:43:59,120 --> 00:44:01,759 Speaker 3: let's survive the first half and then talk about what 720 00:44:01,800 --> 00:44:02,720 Speaker 3: happens in a second. 721 00:44:03,200 --> 00:44:04,440 Speaker 1: And do you worry it to all? I mean, I'm 722 00:44:04,480 --> 00:44:05,960 Speaker 1: interested in also Mike to feel on this, But do 723 00:44:06,040 --> 00:44:07,960 Speaker 1: you guys worry at all about the fact that there's 724 00:44:07,960 --> 00:44:10,480 Speaker 1: this weight of cash pushing down on not enough stuff 725 00:44:10,480 --> 00:44:13,200 Speaker 1: to buy in. There's such enthusiasm, such excitement, such a 726 00:44:13,280 --> 00:44:16,319 Speaker 1: biliance over a bulliance. You know, it's a to me, 727 00:44:16,400 --> 00:44:19,200 Speaker 1: it's it's smacks of complacency and setting us up for 728 00:44:19,480 --> 00:44:21,319 Speaker 1: trouble down the road. Do either of you worry about that? 729 00:44:21,920 --> 00:44:24,120 Speaker 2: Andrew, it's been talking a lot, I would say, I've 730 00:44:24,160 --> 00:44:27,280 Speaker 2: been speaking with a lot of clients about that technical dynamic, 731 00:44:27,320 --> 00:44:29,319 Speaker 2: and I speak to a lot of healthcare loan analysts. Right, 732 00:44:29,360 --> 00:44:32,800 Speaker 2: so a lot of the loans that there's managing and 733 00:44:33,440 --> 00:44:36,600 Speaker 2: covering have been transitioning to the private credit space. There 734 00:44:36,640 --> 00:44:38,520 Speaker 2: was just a loan deal last year or last week 735 00:44:38,560 --> 00:44:41,759 Speaker 2: where Canpasses that was just it was just paid off 736 00:44:41,800 --> 00:44:44,520 Speaker 2: and then moved private. So it seems like there's just 737 00:44:44,560 --> 00:44:46,800 Speaker 2: a from what I can see, a lot of demand 738 00:44:46,880 --> 00:44:50,120 Speaker 2: for low rated paper and it's de risking on the 739 00:44:50,200 --> 00:44:52,960 Speaker 2: high yield market. So in a way by taking out 740 00:44:52,960 --> 00:44:55,440 Speaker 2: the risk of your assets, so that should be bullish 741 00:44:55,480 --> 00:44:57,440 Speaker 2: for high yield, all things. 742 00:44:57,280 --> 00:44:59,640 Speaker 1: Equal, pushing the risk elsewhere, and that that's going to 743 00:44:59,640 --> 00:45:02,480 Speaker 1: bliw up and take us by surprise potentially. 744 00:45:02,920 --> 00:45:04,799 Speaker 2: Well, I think it's more manageable, right when you go 745 00:45:04,880 --> 00:45:08,319 Speaker 2: to a private credit lender and a sponsor, you can 746 00:45:08,360 --> 00:45:10,920 Speaker 2: negotiate with each other and it's not that costly bankruptcy 747 00:45:10,920 --> 00:45:12,520 Speaker 2: attorneys in there, and you have to pay. 748 00:45:12,800 --> 00:45:13,480 Speaker 1: An upbeat note. 749 00:45:13,520 --> 00:45:15,520 Speaker 3: What about you, Andre, I do agree there's a lot 750 00:45:15,560 --> 00:45:20,279 Speaker 3: of complacency out there, and I find it disconcerting when 751 00:45:20,840 --> 00:45:25,160 Speaker 3: sitting at roundtable dinners, most people assume spreads will be 752 00:45:25,320 --> 00:45:28,839 Speaker 3: range bound and returns will be positive and everything will 753 00:45:28,920 --> 00:45:31,840 Speaker 3: end up well. In most years, it does, but it 754 00:45:31,880 --> 00:45:35,319 Speaker 3: doesn't always have to be this way, and this is 755 00:45:35,360 --> 00:45:40,240 Speaker 3: one of the other reasons why while we were running 756 00:45:40,560 --> 00:45:44,040 Speaker 3: quite positive regarding our risk exposures so quite long risk 757 00:45:44,520 --> 00:45:49,560 Speaker 3: into the election, we felt that following the election, as 758 00:45:49,600 --> 00:45:53,120 Speaker 3: the rally got even more turbo charged, that was the 759 00:45:53,200 --> 00:45:56,560 Speaker 3: right time to d risk. So across both investment grade 760 00:45:56,640 --> 00:46:00,480 Speaker 3: and high yield portfolios, we have reduced our exposure too 761 00:46:00,480 --> 00:46:03,320 Speaker 3: longer duration assets to those that have rallied the most, 762 00:46:03,719 --> 00:46:08,640 Speaker 3: and redeployed all of those sales into shorter maturity, shorter 763 00:46:08,760 --> 00:46:14,720 Speaker 3: duration alternatives where we can enjoy still historically high carry 764 00:46:15,360 --> 00:46:20,720 Speaker 3: and sit out the next few weeks until the policy 765 00:46:20,760 --> 00:46:26,359 Speaker 3: mix is clear. So we're very happy to offload some 766 00:46:26,520 --> 00:46:30,560 Speaker 3: of the bonds trading at multi tights to other investors 767 00:46:30,600 --> 00:46:33,960 Speaker 3: who are still really built up about this market. But 768 00:46:34,040 --> 00:46:39,000 Speaker 3: we feel there's a fair amount of complacency there. But Hey, 769 00:46:39,080 --> 00:46:41,080 Speaker 3: that'll just creates someone on the other side of the 770 00:46:41,080 --> 00:46:42,799 Speaker 3: phone who will take the block of bonds from you. 771 00:46:43,280 --> 00:46:45,799 Speaker 1: Great stuff, Andrei skib ahead of US Fixed Income for 772 00:46:45,960 --> 00:46:48,360 Speaker 1: RBC Global Asset Management. It's been a pleasure having you 773 00:46:48,400 --> 00:46:49,120 Speaker 1: on the Credit Edge. 774 00:46:49,120 --> 00:46:50,719 Speaker 4: Many thanks, thank you so much. 775 00:46:50,840 --> 00:46:53,000 Speaker 1: All the best everyone, and of course to Mike Hollin 776 00:46:53,040 --> 00:46:55,200 Speaker 1: with Bloomberg Intelligence, thank you very much for being. 777 00:46:55,080 --> 00:46:55,479 Speaker 4: On the show. 778 00:46:55,680 --> 00:46:56,880 Speaker 2: Happy to be here, Thanks James. 779 00:46:56,960 --> 00:46:59,960 Speaker 1: Bloomberg Intelligence is part of Bloomberg's research department, with five 780 00:47:00,000 --> 00:47:03,080 Speaker 1: one hundred analysts and strategists working across all markets. Coverage 781 00:47:03,120 --> 00:47:05,319 Speaker 1: includes over two thousand equities and credits, as well as 782 00:47:05,320 --> 00:47:08,440 Speaker 1: outlooks on more than ninety industries and one hundred market indices, 783 00:47:08,520 --> 00:47:12,360 Speaker 1: currencies and commodities. Please do subscribe wherever you get your podcasts. 784 00:47:12,400 --> 00:47:16,040 Speaker 1: We're on Apple, Spotify, on all other good podcast providers, 785 00:47:16,120 --> 00:47:19,680 Speaker 1: including the Terminal at bpod Go. Give us a review, 786 00:47:19,680 --> 00:47:22,759 Speaker 1: tell your friends, or email me directly at Jcrombie eight 787 00:47:22,880 --> 00:47:26,120 Speaker 1: at Bloomberg dot net. I'm James Crombie. It's been a 788 00:47:26,120 --> 00:47:28,400 Speaker 1: pleasure having you join us again. Next time on the 789 00:47:28,400 --> 00:47:45,920 Speaker 1: Credit Edge.