Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Lisa A.
Speaker 1: Brahmoids along with Tom Keene and Jonathan Ferrell, join us
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Speaker 1: We're just seeing one narrative after another torpedoed in actuality
Speaker 1: because of all of the different myriaded factors that are
Speaker 1: playing into this.
Speaker 3: It is mind spinning.
Speaker 2: Let's try and come up with a theory with Mandy Zoo,
Speaker 2: vice President, Global head of Derivative Markets Intelligence over at
Speaker 2: Sea by Markets. Mandy, goodmorning to you.
Speaker 3: Good morning. I'll take a stab at then the narrative
Speaker 3: ping pine.
Speaker 2: Or pickleball or whatever. But Ima wants to call it okay,
Speaker 2: Max Katna HSBC said this morning, Lixa quotes of it.
Speaker 2: I'll cite it right now. The Move index is the
Speaker 2: new risky asset fear gauge. What would you say back
Speaker 2: to that?
Speaker 4: So certainly bond volatility is the highest across asset classes
Speaker 4: right now, But I don't think it is the only
Speaker 4: measure that investors are looking at. And obviously I'm not
Speaker 4: just saying that because I worked for the c BOW,
Speaker 4: but I would say the VIX index more so than
Speaker 4: any other, is what traders have up on their screen.
Speaker 4: But to be fair, you know, I think right now
Speaker 4: we need to look across multiple asset classes, rates, equities, credit,
Speaker 4: right We recently launched the credit VIX and decease to
Speaker 4: give investors a better gauge to measure credit volatility. All
Speaker 4: of these are important asset classes to watch for as
Speaker 4: we kind of go into the potential end of cycle.
Speaker 4: You know, as we talk about recession versus soft land, is.
Speaker 2: There anything about the price action the most we saw
Speaker 2: last week that would give you some indication as to
Speaker 2: whether it's sustainable or not.
Speaker 3: So to me, the price action of the past not
Speaker 3: just last week, but.
Speaker 4: The past two month has been extremely telling in terms
Speaker 4: of what the pain points are in people's portfolio. And
Speaker 4: it's not to the downside, right the pullback that we
Speaker 4: saw in September. In October, we're very very orderly, and
Speaker 4: that's because coming into the fall, the consensus investor expectation
Speaker 4: was for a pullback, and what you really saw the
Speaker 4: pain wasat week in the snatback rally, right, we saw
Speaker 4: people actually scramble for that upside because they weren't positioned
Speaker 4: for it. So if you look at for example, SMP
Speaker 4: put call ratio hit almost one year low as people
Speaker 4: were kind of buying those upside calls to really get
Speaker 4: that upside exposure that.
Speaker 3: They don't have in their portfolio.
Speaker 1: I love this by the way, that the pain trade
Speaker 1: is when things do too well, and that people got
Speaker 1: knocked out because there was a rally well. I mean,
Speaker 1: this is sort of where we are in this moment
Speaker 1: of upside down and downside up. But my question to
Speaker 1: you is have we washed that out? Are we done
Speaker 1: with the positioning that causes the pain trade to be
Speaker 1: further upside.
Speaker 3: I don't think so.
Speaker 4: I think the again were talking about the narrative ping palm,
Speaker 4: but I do think the consensus and even though economists
Speaker 4: have shifted to soft landing, I think if you talk
Speaker 4: to investors, everyone is still so bearish and the positioning
Speaker 4: to me, it's going to take longer to really wash
Speaker 4: out than what we saw last week. And that's why
Speaker 4: we're seeing that durable demand for those upside calls in
Speaker 4: the S and P.
Speaker 1: When we talk about upside, are we talking big tech upside?
Speaker 1: That that basically is what people have not loved because
Speaker 1: they've believed that higher yields might take away some of
Speaker 1: that valuation. That people are being forced to buy those
Speaker 1: once again.
Speaker 4: I think part of it there certainly has been. I
Speaker 4: think one of the distinguishing features of this year's price
Speaker 4: action has been the incredible sector dispersion. And we talked
Speaker 4: of the narrative ping pong, the ping pong between sector leadership.
Speaker 4: Right last year tech down forty this year tech up,
Speaker 4: you know, thirty forty percent. That changing sector leadership. That
Speaker 4: high dispersion in the market is part of the reason
Speaker 4: why volatility in the equity market and the index level
Speaker 4: has been so muted, is because of those wild swings
Speaker 4: that we're seeing at the sector and the stock level.
Speaker 1: How correlated have the bond and stock moves been, in
Speaker 1: other words.
Speaker 5: Is they're just a direct read through.
Speaker 1: Lower yields stocks rally, higher yields stocks meander because people
Speaker 1: aren't positioned in them too much.
Speaker 4: So if we zoom out from just the past week
Speaker 4: and look at over the past year, it's been incredibly unstable,
Speaker 4: So that's I think the key feature is the equity
Speaker 4: bond correlation has not normalized to what people are used
Speaker 4: to and because of the instability, I think as one
Speaker 4: of the reasons we're seeing more and more people gravitate
Speaker 4: toward equity specific hedges or options, right because if fixed
Speaker 4: income is no longer diversifying your equity're risking your portfolio,
Speaker 4: you need to look at more specific hedges, so you know,
Speaker 4: buying those SMP puts or other types of hedges. I
Speaker 4: think that's kind of been the trend, and that's why,
Speaker 4: you know, option volumes have been hitting record highs all year.
Speaker 2: A note they just caught my eye from City Andrew Hanenhorst.
Speaker 2: He said soft patch not soft lending. There's a difference.
Speaker 2: He says, rather than a steady slowing of job growth
Speaker 2: and inflation, our near term projections suggests a temporary soft patch,
Speaker 2: elevated inflation is likely to be more evident in upcoming data.
Speaker 2: Last week's reloosening of financial conditions also argues, in his eyes,
Speaker 2: against the moderation and activity and inflation. Mandy does that
Speaker 2: argue that we should be much more nimble as we
Speaker 2: work through this. At least some kind of mentioned this,
Speaker 2: and we were quite snarky about it earlier on in
Speaker 2: the program. It's difficult to make projections for the next
Speaker 2: twelve months. You can't cling to a theory at the
Speaker 2: moment when everything seems to change. It's painful. In bombs,
Speaker 2: you'll get whip sword in one direction and the next
Speaker 2: week whip sword in the other. Does that argue to
Speaker 2: be nimble? And what does that look like from your perspective?
Speaker 3: Yeah, so I alluded to earlier.
Speaker 4: So absolutely, the heightened macro uncertainty means investors do need
Speaker 4: to be nimble, and the way they're doing that is
Speaker 4: through using options right. And the way that I like
Speaker 4: to explain is if there's no uncertainty and you know
Speaker 4: stocks are going up, you just buy the underlying, right,
Speaker 4: you just buy the delta one instrument. It's when you're
Speaker 4: uncertain when you want to find risk reward right. You
Speaker 4: want to know what you're at. You're at risk of
Speaker 4: losing if you're wrong.
Speaker 3: That argues for using options right.
Speaker 4: If you buy call option, you know going into the trade,
Speaker 4: the max that you can lose is the premium pede
Speaker 4: I think that's why. You know, again, in this uncertain
Speaker 4: macro environment, even though it hasn't translated into higher levels
Speaker 4: of VIX, VIX being thirty day measure of uncertainty, that
Speaker 4: long term uncertainty has definitely led to more and more
Speaker 4: people using options to kind of define that risk reward
Speaker 4: to help manage that portfolio volatility.
Speaker 2: You touched on it there, just slightly. Yes, when you
Speaker 2: talk about volume and options, are we talking about zero
Speaker 2: day to expire?
Speaker 5: No?
Speaker 4: No, no, So people often think, okay, it's everything's coming
Speaker 4: from zero day to xpreoptions volume across all tenors or
Speaker 4: are growing higher, but obviously zero day has been the
Speaker 4: fastest growing segment.
Speaker 2: You've made the argument that's not something we should worry about.
Speaker 3: No, And because it's balanced.
Speaker 4: So people who make the argument that zero day options
Speaker 4: or what's driving the market, they look at the gross
Speaker 4: volume the notional volume, and they say, well, look it's
Speaker 4: five hundred billion a day.
Speaker 3: Of course that's what's driving the market.
Speaker 4: But if fifty percent of that is by fifty percent
Speaker 4: of the customer selling, then there's that zero impact, right,
Speaker 4: So the balance of that trading matters, and what we
Speaker 4: see is that it's incredibly balanced and because that's the case,
Speaker 4: there's actually very minimal market disruption.
Speaker 2: Mandy, this was great. Always is Mandy Zoo of Cibo
Speaker 2: and Mandy, thank you, Thank you. Michael. I literally with
Speaker 2: the serround of table to Ryan. Michael, I wish people
Speaker 2: could see your face as that Beast team was faking
Speaker 2: just to get some reaction. It's going to see you can.
Speaker 6: It's great to be here, John, Lisa good talk to
Speaker 6: you again.
Speaker 2: Well, thank you, buddy. You've had earnings out this morning.
Speaker 2: We've been talking about this dividend of four hundred million euros.
Speaker 2: We've got to talk about this relationship with Boeing. I
Speaker 2: want to share a couple of quotes with you and
Speaker 2: then try and get some clarity. So you said in
Speaker 2: the last week, if anything, it's getting worse. I would
Speaker 2: have been reasonably confident up until about a month ago
Speaker 2: that we'd get fifty seven aircraft by the end of June.
Speaker 2: I'm not confident. We heard from your CFO this morning
Speaker 2: said the worst case scenario is that we'll end up
Speaker 2: with growth of forty seven aircraft next summer instead of
Speaker 2: fifty seven. Help me understand where things are. What did
Speaker 2: you want and what do you think you're going to get.
Speaker 7: Yeah, I mean our case, Boy are contracted to deliver
Speaker 7: as fifty seven aircraft by the end of April twenty fourth,
Speaker 7: in other words, fifty seven editional aircraft for summer twenty four.
Speaker 7: At the moment that has slipped by the Spirit production issues,
Speaker 7: in which it's all Boy's own production issues in Seattle.
Speaker 7: I think now it looks like we'll get the leave
Speaker 7: us maybe ten short by about the end of June.
Speaker 7: We'll hopefully we get forty five fifty aircraft by the
Speaker 7: end of June. We said the boy, we're not taking
Speaker 7: planes in July and August because frankly we're too busy,
Speaker 7: but we're reasonably hopeful that we'll get forty five to
Speaker 7: fifty aircraft front they will leave us short. I think
Speaker 7: that's inevitable at this point in time, which means we'll
Speaker 7: have slightly slower growth next summer, but we'll still add
Speaker 7: forty five aircraft. It'll still be enough to enable us
Speaker 7: to grow traffic from one hundred and eighty three million
Speaker 7: passengers this year to just over two hundred million passengers.
Speaker 2: It's for a number you have in mind whereby you
Speaker 2: would have to cut capacity the next summer.
Speaker 6: There isn't.
Speaker 7: I mean we haven't yet announced for the capacity will
Speaker 7: be next summer. As we said this morning, we have
Speaker 7: ninety percent of our summer twenty four capacity already on sales.
Speaker 7: Strongforward booking is good pricing, but we can't commit to
Speaker 7: the last ten percent until we get a better picture
Speaker 7: from Boei. I speak weekly with Dave Calhoun. I think
Speaker 7: he's doing a good job in difficult circumstances. I have
Speaker 7: less faith in the management in Seattle, but I think
Speaker 7: you know, we're working closely with them.
Speaker 6: We have our own people in Seattle, we.
Speaker 7: Have our own people in Spurting, Whichito and anything we
Speaker 7: can do to expedite these deliveries will do because growth
Speaker 7: is so strong in Europe.
Speaker 2: What is it about the management in Seattle what they're
Speaker 2: getting wrong?
Speaker 7: I think there isn't enough focus there on a daily
Speaker 7: basis on how do we get in with these aircraft out.
Speaker 7: Everybody is kind of ringing their hands blaming Wichita. You
Speaker 7: know a lot of the issues are in Seattle as well.
Speaker 7: They need a more crisis I would like to see
Speaker 7: greater crisis management in Seattle and greater.
Speaker 6: Focus on quality control. If you.
Speaker 7: You know, I don't understand how Wichita spirit and which
Speaker 7: we're able to have this succession amount of production problems
Speaker 7: if Boeing's quality control was up to speed.
Speaker 6: Do you have options options in terms of what.
Speaker 2: Do you do if you don't want to work with
Speaker 2: Boeing anymore?
Speaker 7: I no, no, no, Let's say we want to work
Speaker 7: with Boeing. We're Boeing's biggest customer by a mile in Europe.
Speaker 7: We're a committed Boeing customer. Now, I would buy Airbus
Speaker 7: aircraft if they were five percent cheaper per seat than Bowing,
Speaker 7: but Boeing continue to beat.
Speaker 6: Airbus on pricing.
Speaker 7: The seventy three seven Max is a phenomenal aircraft, like
Speaker 7: we've we now this summer, we've flown one hundred and
Speaker 7: twenty five of the Max eight aircraft. We're carrying four
Speaker 7: percent more pastors but burning sixteen percent less fuel. You know,
Speaker 7: they're transformative in terms of the engine and aircraft efficiency.
Speaker 7: We've ordered three hundred Max tens, which will I was
Speaker 7: to carry two hundred and twenty eight passengers per fight
Speaker 7: and burn twenty percent less fuel. So they're making great aircraft.
Speaker 7: It's just they're not making them. On time or delivering
Speaker 7: them in time.
Speaker 2: Is it fair to say though, this is a relationship
Speaker 2: you're stuck with regardless of what it delivers next year.
Speaker 6: I mean, yes, you know we're committed to Boeing.
Speaker 7: If you look around the world, the aircraft manufacturers, I
Speaker 7: mean airbusts are no better than Boeing at the moment.
Speaker 7: Airbus are way behind on their deliveries too. You have
Speaker 7: the Part and Whitney engine, which is going to be
Speaker 7: a real crisis next summer across the A three twenty
Speaker 7: fleet in Europe. Yeah, the Part and Whitney engine is
Speaker 7: going to ground a significant number of Airbus aircraft next summer,
Speaker 7: So all of the aircraft manufacturers are challenged. We're a
Speaker 7: very proud Boeing customer. I think Boeing will get its
Speaker 7: act together. It's just taking a bit longer than we
Speaker 7: had originally hoped.
Speaker 1: In the meantime, how far can you jack up prices
Speaker 1: if capacity is constrained?
Speaker 7: I mean I think that the real issue for at
Speaker 7: least is not how much would we jack up prices?
Speaker 7: How much will Loftanza or France, IAG or BA keep
Speaker 7: jacking up prices? And the answer is a lot. You
Speaker 7: know your control estimate. This summer, Europe's operated about ninety
Speaker 7: four percent of pre COVID opacity. That includes US growing
Speaker 7: by twenty five percent. So take Ryan Air away. Europe
Speaker 7: still at less than ninety percent of pre COVID capacity.
Speaker 6: That's not changing next year.
Speaker 7: The aircraft manufacturers are delivering aircraft late the part and
Speaker 7: whitneys will mean five ten percent of the airbus street
Speaker 7: will be grounded. And consolidation Loftans will buy al Italians,
Speaker 7: somebody else will buy Tap and there'll be even less
Speaker 7: capacity on offer.
Speaker 1: Okay, so this is good news for you because you
Speaker 1: don't have to really have to try too hard to
Speaker 1: be the lowest cost aircraft while still raising prices.
Speaker 8: How much you're going to raise prices next year.
Speaker 7: We're price passive, load factor active. I think what's happening
Speaker 7: is how much Ifthansa or France Kalem will drive up fares.
Speaker 7: I think by a double digit number next year, it'll
Speaker 7: send even more people in the direction of Ryanair. People
Speaker 7: want to keep flying, families want to go on holidays.
Speaker 7: They just don't want to pay Luftansa's outrageous prices. So
Speaker 7: I think fares that next year I mean my operating
Speaker 7: assumptions fares will go by a low double digit percentage
Speaker 7: again through the summer twenty four. It'll be the third
Speaker 7: year in a row, third summer in a row, we'll
Speaker 7: see double digit fare increases in Europe.
Speaker 1: This is the first year in the first time that
Speaker 1: you're initiating a dividend. Yep, it's a four hundred pounds dividend.
Speaker 1: It is the first time. Does this mean that you
Speaker 1: have nothing else to do with that money?
Speaker 6: Essentially?
Speaker 7: Yes, you know, I mean, so the first time we've
Speaker 7: done it. We've done special difference in share buybacks. We've
Speaker 7: done about seven billion in share buybacks and special dividends.
Speaker 6: But you know, we're.
Speaker 7: Clearly generating a lot of cash at the moment. We've
Speaker 7: paid down about two billion in debt. We're down to
Speaker 7: our last two billion in bond debt.
Speaker 6: We'll pay that down.
Speaker 7: Over the next three years, and we're generating more cash
Speaker 7: that we know what to do with.
Speaker 6: We have specifical requirements.
Speaker 7: Firstly was to do pay increases for our people who
Speaker 7: worked with us during COVID. Secondly was to pay down
Speaker 7: the bonds, and thirdly is to fund aircraft deliveries. But
Speaker 7: we're running out of the existing order. We take the
Speaker 7: last aircraft in December twenty twenty four. The first of
Speaker 7: the Max tens doesn't arrive Toll January twenty seven, so
Speaker 7: we're looking.
Speaker 6: Into two or three years.
Speaker 7: So we have effectively very little uses for cash, and
Speaker 7: I think it's a commitment on our part. We'll return
Speaker 7: to shareholders. We won't squander it the way many other
Speaker 7: airlines do in m and A or buying hotels or whatever,
Speaker 7: or as Delta or as Delta would do giving monstrous
Speaker 7: pay increases to its pilots over the next four or
Speaker 7: five years. We need to keep our cost low, keep
Speaker 7: our efficiency high, and keep passing on on Beata Blair
Speaker 7: first to our customers.
Speaker 2: Do you think scheholders then can expect more of the
Speaker 2: same of the next few years.
Speaker 7: I think so as long as trading continues. You know,
Speaker 7: who knows what's going to happen in Ukraine or in
Speaker 7: the Middle East. But as long as we get a
Speaker 7: reasonable wind on trading, then I think we will continue
Speaker 7: to be very cash generitive and we will return large
Speaker 7: amounts of cash to shareholders.
Speaker 2: It's hard to know what is going to happen in Ukraine,
Speaker 2: in the Middle East. I don't expect you to give
Speaker 2: us a protection. I do want to understand, though, Are
Speaker 2: you seeing things slow down in any way, shype or
Speaker 2: form when you start to see these things escalate anything,
Speaker 2: that's all no.
Speaker 7: I anyway, we saw the initial when Russia invade Ukraine
Speaker 7: in February twenty twenty two, twenty two or three account
Speaker 7: remember you know, there's a sudden downturn in all of
Speaker 7: our traffic into Poland, Romania, those countries.
Speaker 6: It recovered after two or three weeks. We've had to suspend.
Speaker 7: We're suspending all flights. We've about thirty flights a day
Speaker 7: into Tel Aviv. They've been suspended until Christmas. So we
Speaker 7: do want to see those those scenarios resolve themselves. But
Speaker 7: the ultimate underlying trend across Europe we've locked up everybody
Speaker 7: for two years in COVID. They all want to go back,
Speaker 7: traveling families, want to go on holidays. We've just completed
Speaker 7: the October midterm break. We were still full, and I
Speaker 7: think what people want is to travel more. But there's
Speaker 7: only ninety percent of the pre COVID capacity. So in
Speaker 7: Europe you've constrained capacity, enormous demand and that is resulting
Speaker 7: in very strong prices, not just for Rhynder but for
Speaker 7: all of the airlines.
Speaker 2: And you're noticing getting right down. I hate to describe
Speaker 2: it as tried down from Bight to ryan abbat United
Speaker 2: saying anything like that.
Speaker 7: Not at the moment, but you know, I think it's
Speaker 7: inevitable if the next year or two, if consumers are
Speaker 7: under pressure, I think you know you'll see the little
Speaker 7: and all these are the supermarkets.
Speaker 6: Ikea will do very well, in Rhine will do very well.
Speaker 1: So what about using some of the cash to make
Speaker 1: the experience nicer for people who might be frustrated.
Speaker 7: With At least it'd be impossible to make the experience
Speaker 7: on Rhinier any nicer. You know, aircraft on time flights
Speaker 7: the fewest cancelations of any airline in Europe. And I
Speaker 7: don't understand why people pay such ridiculous air force for
Speaker 7: a horrendous experience on Lofanza. Who lose your bag, miss
Speaker 7: your connection? On Ryanery It's efficient, it's cheap, it's.
Speaker 6: On time, and it is below.
Speaker 2: Like a man that four million people, once upon.
Speaker 7: A time, did you live like I had to do
Speaker 7: on a road show a year ago, I had to
Speaker 7: fly from Frankfurt to Zurich, which is only about a
Speaker 7: one and a half our flight. They stung me for
Speaker 7: nine hundred euros one way in economy and I was
Speaker 7: sitting at the back, in the middle seat, in front
Speaker 7: of the toilet on an adleweis a three twenty.
Speaker 6: I mean seven hundred years. I could fly all year
Speaker 6: round on Ryanier for seven hundred euros.
Speaker 2: Michael, it's got to say it, John Lisa, Michael Larry
Speaker 2: that the Ryan A CEO I at the line up
Speaker 2: joint just now had a macro credit recearch at a
Speaker 2: black Rock. I matter, don't worry. We're not going to
Speaker 2: be so about that. I do want to talk about
Speaker 2: supply if we can start there. We've got forty eight
Speaker 2: billion dollars a three year notes this week, we've got
Speaker 2: forty billion dollars a ten year notes. We've got some
Speaker 2: thirty year bonds twenty four billion dollars worth. These are big,
Speaker 2: big numbers. That's treasury supply. What's happening with credit supply
Speaker 2: going into year end?
Speaker 9: Good morning, Thank you both for having me so. As
Speaker 9: you know, credit supply had a bit of a flurry
Speaker 9: of activity in September. It calmed down in October. I
Speaker 9: do think with this tentative stability in the treasury market
Speaker 9: that corporates, CFOs and treasures may look to move ahead
Speaker 9: before the year end seasonal slow down. It will be
Speaker 9: an important test for the market how this treasury supply
Speaker 9: is digested, But as we know, the Treasury Secretary guided
Speaker 9: us towards the front end of the curve and not
Speaker 9: so much in duration in the refunding announcement last week.
Speaker 9: But I actually think, if nothing else, the past several
Speaker 9: months have shown corporates that this can be very episodic
Speaker 9: in terms of these windows opening, and so given that
Speaker 9: we know the maturity walls are coming up, I think
Speaker 9: for corporates it's better to issue early rather than late.
Speaker 9: We're expecting a big week in the IG market this week.
Speaker 9: I think expectations are a little lower in high yield,
Speaker 9: but I would not be surprised if we surprise to
Speaker 9: the upside in terms of those expectations, because I think
Speaker 9: it's just prudent for CFOs, which speaks.
Speaker 1: To kind of the opportunism that one that he get
Speaker 1: Desk told me about last week. He messaged me as
Speaker 1: soon as we saw this rally and he said, everyone's
Speaker 1: trying to come to market. I've gotten fifteen phone calls.
Speaker 1: Everyone's basically lined up. Is this going to be bad
Speaker 1: with credit spreads widening in the sort of counterintuitive way
Speaker 1: because we've got more supply.
Speaker 9: Yeah, I think the appetite is there, and I think
Speaker 9: we've had such light supply, especially in high yield year
Speaker 9: to date, and twenty two was a record a low
Speaker 9: level that I think the appetite for the market is there.
Speaker 9: I think where the real risk is is it that
Speaker 9: lowest quality cohort of the triple C market, that kind
Speaker 9: of lowest quality rung of high yield.
Speaker 8: Which are triple C issuers. There.
Speaker 9: I think we've seen some enhanced pressure where it's weak
Speaker 9: results coupled with refinancing needs have really pressured those capital structures.
Speaker 2: And even on.
Speaker 9: This rally in high yield spreads that we've seen over
Speaker 9: the past few trading sessions, triple c's have rallied, but
Speaker 9: they've lagged on the way in And I think it's
Speaker 9: the market telling you that there's an appetite for certain
Speaker 9: quality cohort in the credit market.
Speaker 8: Ig I think is there.
Speaker 9: In most market conditions, high yield is a bit more tentative,
Speaker 9: but for that lowest quality wrung, I think it's very
Speaker 9: case case specific and very idiosyncratic.
Speaker 1: Are people kind of just pricing in perfection here?
Speaker 8: Well?
Speaker 9: With high old spreads below four hundred, it's hard to
Speaker 9: argue that there's much risk premium added into the market
Speaker 9: at the moment. I think what we're seeing is a
Speaker 9: lot more focus on selectivity from our credit investors, so
Speaker 9: thinking about acid allocation between high yield and leverage loans,
Speaker 9: sector selection, issuer selection. I think we're high old spreads
Speaker 9: are at the moment. The path of least resistance is
Speaker 9: probably a little bit wider in terms of choppiness, with
Speaker 9: some of the headline risk ahead of us.
Speaker 8: But again, as we've talked.
Speaker 9: About before, where yields are, it's really difficult to see
Speaker 9: kind of high old spreads breaking out in this range
Speaker 9: of much wider from here, because when you every time,
Speaker 9: we tried to reach four forty last week and we
Speaker 9: kind of snapped back in, and so there is a
Speaker 9: bit of a tug of war between fundamentals and technicals,
Speaker 9: and even the most vulnerable fundamental pockets of the market
Speaker 9: have been the best performer, Like leverage.
Speaker 2: Loans, you mentioned the decision set between loans and say
Speaker 2: high yield. Help our audience understand what goes into making
Speaker 2: that kind of decision and whether that's changed in the
Speaker 2: last few weeks.
Speaker 9: So it has changed in the last few weeks for
Speaker 9: a few reasons. One is, if you think we're at
Speaker 9: the end of the rate hiking cycle, if you think
Speaker 9: we've seen stability in long end rates, you might think
Speaker 9: that the bulk of the loan outperformance is behind us
Speaker 9: at this point. And indeed that yield pick up that
Speaker 9: leverage loans were offering over high old bonds has narrowed.
Speaker 9: So what we are seeing is a bit more interest,
Speaker 9: say even within capital structures of investors saying Okay, well
Speaker 9: I'm in the loan, should I rotate into the high
Speaker 9: old bond or given the fundamental pressures of this higher
Speaker 9: for longer rate environment that we're expecting, are loans disproportionately
Speaker 9: impacted by that because they've been contending it with it
Speaker 9: for a longer time. Again, we don't view fixed rate
Speaker 9: bonds as immune from that in many instances, but I
Speaker 9: do think on the margin, given the strong performance of
Speaker 9: loans here to date, there is some refocusing on okay,
Speaker 9: as the bulk of that loan performance behind us.
Speaker 2: We read some life into that just a little bit more.
Speaker 2: We sort of big equity move last week. If you're
Speaker 2: looking at AG, and I know it's unique and it
Speaker 2: is syncratic, but ultimately just give us the thirty five
Speaker 2: thousand foot few. If you're looking down a capital structure
Speaker 2: right now, is the bias to be higher or lower
Speaker 2: in it?
Speaker 8: Actually?
Speaker 9: You know, I think the high end of the highield
Speaker 9: market has actually outperformed the low end of the IG market.
Speaker 9: So it's not as clear cut as saying be underweight
Speaker 9: high yield versus IG. There are a lot of nuances there.
Speaker 9: I do think for choice, I would prefer to be
Speaker 9: higher in quality within high yield in IG. I think
Speaker 9: moving down into that triple beat cohort is a relatively
Speaker 9: nice place to be. For the most part, the vast
Speaker 9: majority of those corporates are committed to maintaining investment grade ratings.
Speaker 9: You are picking up a bit of a spread pickup
Speaker 9: relative to the highest rate COHORT. I think that's important
Speaker 9: in this current environment, especially if we don't get a
Speaker 9: severe downturn in growth.
Speaker 1: So I don't mean to be overly basic about this,
Speaker 1: But when you take a step back, I do wonder
Speaker 1: if we do get coalesce around this higher for longer
Speaker 1: kind of idea, does it make sense that we're not
Speaker 1: going to get any kind of major default cycle, either
Speaker 1: in public credit or in private credit. If we're looking
Speaker 1: at benchmark rates that are five percentage points higher than
Speaker 1: when all of these companies were borrowing in bulk not
Speaker 1: so long ago.
Speaker 9: It's a great point, Lisa. So we are seeing a
Speaker 9: modest uptick in defaults. Were it just under five percent
Speaker 9: in the US when you combine high yield and leverage loans,
Speaker 9: that's well off the rock bottom levels of twenty twenty
Speaker 9: one and twenty twenty two. Do we break out to
Speaker 9: the levels that we saw in COVID eight and a
Speaker 9: half nine percent, I think, barring a severe downturn, I
Speaker 9: don't see it. Part of the reason is that corporates
Speaker 9: have entered this period in a really strong position. The
Speaker 9: other part is that the investor appetite, to your point, John,
Speaker 9: is there.
Speaker 8: And then third I.
Speaker 9: Would say, it's are actually shifting to a more balance
Speaker 9: sheet friendly posture. So we haven't seen a lot of
Speaker 9: debt funded M and A. We haven't seen a lot
Speaker 9: of debt funded share buybacks. They're still investing in capex,
Speaker 9: still investing in debt repayment in terms of uses of cash.
Speaker 9: But I do think corporates do have some discipline. I
Speaker 9: think the real risk is that if there's a severe
Speaker 9: downturn in growth coupled with just a capital market's freezing
Speaker 9: such that these corporates don't have access at any price,
Speaker 9: I think it's difficult. As for the private credit point,
Speaker 9: historically we look at losses between the two markets, and
Speaker 9: private credit losses have held in better than public credit losses.
Speaker 9: Part of that is because the enhanced flexibility that those
Speaker 9: corporates have.
Speaker 8: We think that holds true.
Speaker 9: But I think the point remains we're expecting an ongoing
Speaker 9: normalization higher in losses across all those asset classes, not extremely.
Speaker 2: Given where we know where the maturity will is. Can
Speaker 2: you identify what would be the least oportable time to
Speaker 2: have any economic downsid and is that what's basically on
Speaker 2: the horizon now?
Speaker 9: So I think probably the biggest risk is that if
Speaker 9: corporates try and time this opportunistically, they let the year
Speaker 9: end play out, they think the environment will be better
Speaker 9: in the first half of twenty twenty four and then
Speaker 9: we have some sort of shock, whether that's geopolitical, unforeseen
Speaker 9: risk contraction.
Speaker 8: We're watching bank lending.
Speaker 9: Very closely, although that has actually played out I think
Speaker 9: a bit more benign than we would have thought.
Speaker 3: That is the risk.
Speaker 9: I think that if corporates try to be almost too
Speaker 9: strategic about the timing and they cut it too close.
Speaker 9: We saw that on the financial crisis, where some corporates
Speaker 9: were shut out. So that's why I think, if I'm
Speaker 9: a CFO or treasure, better to issue early rather than late.
Speaker 2: At at least's point, maybe we get a lot more
Speaker 2: supply in the coming weeks and months based on what
Speaker 2: we've seen develop over the last few weeks.
Speaker 6: Matter.
Speaker 2: Thank you, always great. I'm out of line in that
Speaker 2: of black Rock. Joining us now is Judy Norman, the
Speaker 2: co director of the UCR Center on the US Politics. Judy,
Speaker 2: always wonderful to catch out with you. You've articulated this
Speaker 2: the pressure to articulate an endgame given what's developed for
Speaker 2: the last couple of weeks. Do you see sense that
Speaker 2: that pressure is ramping up once again over the weekend.
Speaker 10: Well, I think it is John and very much from
Speaker 10: the US increasingly on Israel, mostly behind the closed doors,
Speaker 10: but starting a little bit more publicly as well. And
Speaker 10: this has really been an issue since since the after
Speaker 10: October seventh, to try and forge out what would be
Speaker 10: next for Gaza after an Israeli operation. There are many
Speaker 10: different options that are considered, but really none of them
Speaker 10: seem to be very good for either Israelis or for Palestinians.
Speaker 8: Israelis and Palestinians are not.
Speaker 10: Looking for a reoccupation of Gaza.
Speaker 8: Some have floated the idea.
Speaker 10: Of the Palestinian Authority, the West Bank Governance having a
Speaker 10: role in Gaza, but they are very weak, very illegitimate,
Speaker 10: and also I think would not take on that role
Speaker 10: just yet. And the US is even exploring some options
Speaker 10: of saying having a multi national transition kind of a
Speaker 10: group there, some kind of almost like a peacekeeping force.
Speaker 10: But again all of these are very tentative options, and
Speaker 10: I think crucially right now is trying to identify what
Speaker 10: Gaza might look like after this in a way that
Speaker 10: is not just a continued downward spiral for both GUS
Speaker 10: ands and Israelis.
Speaker 2: Judy, as we can all see at the moment, the
Speaker 2: administration domestically facing pressure from all corners, Judy, from your position,
Speaker 2: can you identify any kind of success this administration is having,
Speaker 2: convincing the Israelis of having some kind of humanitarian pause,
Speaker 2: convincing it Israel of changing its approached somehow. Is there
Speaker 2: any kind of success you can identify?
Speaker 10: Yeah, John, So, I would say the US came out
Speaker 10: very strong in supportive Israel, and some in Israel have
Speaker 10: called this a sort of bear hog, a public embrace
Speaker 10: but also a private restraint and kind of some whispers
Speaker 10: in the ear. So this has started from the beginning,
Speaker 10: and I think most importantly Blincoln was pushing for a
Speaker 10: humanitarian pause over the weekend that does not look forthcoming
Speaker 10: at the moment.
Speaker 8: Some areas where they.
Speaker 10: Have had some success is starting to get a bit
Speaker 10: more aid into Gaza. There are currently about one hundred
Speaker 10: trucks now coming into the Gaza strip per day. Before
Speaker 10: the invasion, that was about five hundred trucks a day,
Speaker 10: so still much less than is needed, but more than
Speaker 10: was coming in for several weeks. The other area that
Speaker 10: they had some temporary success was getting communications reinstated in Gaza,
Speaker 10: but I understand over the weekend there have been more
Speaker 10: blackout so that seems a bit inconsistent. So I think
Speaker 10: that pressure for humanitarian pauses will continue. For Israel, I
Speaker 10: think they see that as perhaps halting the offensive, and
Speaker 10: they're halting their overall aim of ousting Hamas. But for
Speaker 10: others that is just seen as absolutely necessary for both
Speaker 10: getting aid into the Strip and getting people out.
Speaker 8: So I think Blincoln will.
Speaker 10: Keep focusing on that, And I would note now who
Speaker 10: suggested that if hostage is ur released, that might open
Speaker 10: up some room for a humanitarian pause. So I think
Speaker 10: we'll see more focus there in the coming days.
Speaker 1: Julie, what I've found more interesting rather than Tony Blinken
Speaker 1: going to Israel was all of the other meetings he's
Speaker 1: had on this particular tour right now, he's in Anchora
Speaker 1: and Turkey. There's a question over Bill Burns and his
Speaker 1: relationship with Jordan, the head of CIA, and his tour
Speaker 1: in the region. What is our sense right now of
Speaker 1: some of the regional countries and their position their involvement
Speaker 1: both in what's happening now negotiating with Hamas, but also
Speaker 1: some solution after this conflict is over.
Speaker 10: Sure, So I think there's a couple different facets to
Speaker 10: this one. Is again the short term, trying to get
Speaker 10: other Arab states to also back this idea of humanitarian pause.
Speaker 10: Most leaders are very forthright about calling for a full ceasefire,
Speaker 10: so of Lincoln was trying to get some space there
Speaker 10: as well as just keeping diplomatic channels open. The second
Speaker 10: was really in terms of trying to keep the conflict
Speaker 10: contained and trying to avoid flare ups in other Arab
Speaker 10: countries and in other areas, especially.
Speaker 8: Like Iraq where US.
Speaker 10: Troops are stationed and where there are Runi and proxy
Speaker 10: groups operating, So trying to kind of quell any potential flare.
Speaker 8: Ups and just further dispersal of this conflict.
Speaker 10: And the third, as you mentioned Lisa, is again trying
Speaker 10: to look ahead to what that endgame.
Speaker 8: Might be and what the role of Arab states might
Speaker 8: be within that.
Speaker 10: Again, would Arab states be part of some kind of
Speaker 10: multinational you know, transitional authority or force or something like that.
Speaker 8: Again, right now, I think most Arab leaders.
Speaker 10: Are reading the room pretty clearly with their own populations,
Speaker 10: who are very sympathetic to the Palestinian cause and are
Speaker 10: not going to stick out their neck too far for
Speaker 10: what the US is pushing for.
Speaker 8: But at the same time, you.
Speaker 10: Know, work quite closely with the US and some of
Speaker 10: these states with Israel as well, and so needing to
Speaker 10: kind of find that middle ground. So a lot of
Speaker 10: diplomacy happening that I think will be discontinuing wholeheartedly over
Speaker 10: these next couple of days.
Speaker 1: As President Biden lost the room with his own party
Speaker 1: at this point, given his approach on this.
Speaker 10: Conflict, I would say it's very clear that the Democrats
Speaker 10: have a lot of internal divisions over this conflict, and
Speaker 10: this isn't new to Biden, and I think he knew
Speaker 10: with an issue as difficult as Israel Palestine, you are
Speaker 10: probably never going to please everyone, especially in a party
Speaker 10: like the Democrats, which are pretty split on this issue.
Speaker 8: Now he's getting a.
Speaker 10: Lot of very vocal criticism from many on the left,
Speaker 10: from many progressives and for many on the pro Palestine side.
Speaker 8: But I think he's also getting a lot.
Speaker 10: Of support from more traditional liberal Democrats who appreciate the
Speaker 10: solidarity that he's shown towards Israel. So in some ways,
Speaker 10: again you're not going to please everyone. And again right
Speaker 10: now the US is trying to find a very difficult
Speaker 10: middle road and kind of thread this needle between supporting
Speaker 10: Israel but also trying to minimize casualties and think ahead
Speaker 10: to what might be next and what might be best
Speaker 10: for the region.
Speaker 2: It's going to be incredibly difficult for the president going
Speaker 2: into next year journey. Just to finish on that poll
Speaker 2: from the New York Times over the weekend, big leads
Speaker 2: for the former president Donald Trump in Arizona, Georgia, and Michigan, Nevada,
Speaker 2: and lead in Pennsylvania as well. Due to your thoughts
Speaker 2: on that as it came out over the weekend, Yeah.
Speaker 10: This is going to be a big wake up call
Speaker 10: for Democrats and for the Biden campaign. We've been seeing
Speaker 10: these neck and neck numbers for Biden and Trump for
Speaker 10: quite a while. But to really drill down to the
Speaker 10: six swing states and see that five out of the
Speaker 10: six Trump is leading with less than a year until
Speaker 10: the elections is quite notable.
Speaker 8: And again, this is a.
Speaker 10: Little bit different than past elections because both of these
Speaker 10: both of these men are known quantities everyone and someone
Speaker 10: like Trump, everything is out there already, so I don't
Speaker 10: see a lot of this necessarily changing. Obviously pulls a
Speaker 10: year out, our year out, but I think for Democrats
Speaker 10: who thought, you know, Trump was going to be an
Speaker 10: easy target or something like that. It's clear that Biden
Speaker 10: has a lot of work to do, and that's you know,
Speaker 10: it's going to be challenging for him to keep his
Speaker 10: coalition together. So I think we'll see some different strategies
Speaker 10: emerging pretty soon.
Speaker 2: Hi, Judy, Thank you. Judy Norman of the US Sales
Speaker 2: Center on US Politics.
Speaker 6: Thank you.
Speaker 5: Joining us now.
Speaker 1: I'm so glad to say. Is Ashley Allen, corporate credit
Speaker 1: research analyst at Franklin Templeton, who can weigh in maybe
Speaker 1: I'm Birkenstacks, But more importantly, thank you so much for
Speaker 1: being here, because to me, the big question really is
Speaker 1: how resilient is a consumer? After people have been saying
Speaker 1: that they're running out of their savings month after year
Speaker 1: after month, have we reached a point where you actually
Speaker 1: are seeing evidence of that?
Speaker 5: Maybe?
Speaker 11: And I think it's been maybe for a few months,
Speaker 11: to be fair, but I think we find ourselves in
Speaker 11: a really interesting situation right now, especially.
Speaker 5: Following three Q earnings.
Speaker 11: We just heard from a handful of staples companies from restaurants,
Speaker 11: consumers are still spending, especially on some things that they'll
Speaker 11: want to indulge in whether it's coffee, sweet treats in
Speaker 11: the grocery store, so that the data is backward looking,
Speaker 11: so we have to keep that in mind. But up
Speaker 11: until this point, again, resilient has been the word that
Speaker 11: economists are said over and over. They're still showing up
Speaker 11: to spend on the things that make them feel good.
Speaker 1: How much in some of the earning calls that you've
Speaker 1: been tracking and just some of the communication that you've
Speaker 1: had with corporate officers about what they see going forward,
Speaker 1: how much do they see this continuing in a durable fashion,
Speaker 1: just based on how much wages are increasing and the
Speaker 1: fact that the label market is strong.
Speaker 11: I don't think it's durable, at least at the same
Speaker 11: level that we have sustained thus far. A lot of
Speaker 11: the resilience that we've seen on the top line has
Speaker 11: been driven by price volumes, you know, let's call them
Speaker 11: flat plus or minus on either side, both in kind
Speaker 11: of the restaurant space, but also in staples. If you
Speaker 11: think about the CpG companies in the grocery store, volumes
Speaker 11: of kind of flat line, so where they can consumers
Speaker 11: have technically been pulling back from a volume perspective, They're
Speaker 11: consuming less companies have just realized that they can still
Speaker 11: benefit from taking price that likely can't continue forever going forward.
Speaker 1: Well, a lot of people will argue that a lot
Speaker 1: of the household balance shees look pretty good. So if
Speaker 1: people want to lever up to get a latte, a double,
Speaker 1: you know, mocacino, they can do that. Is that what
Speaker 1: we're actually seeing that people are just continuing with indulgences,
Speaker 1: but levering up to do so.
Speaker 11: Potentially, I don't necessarily it's always a maybe, right, I
Speaker 11: don't necessarily think that leveraging.
Speaker 5: Up to buy their latte.
Speaker 11: But I think if you have to look at the
Speaker 11: bigger picture macro, if you think about millennials broadly speaking,
Speaker 11: who maybe are waiting to buy their first home, if
Speaker 11: you can't do that right now, I would argue that,
Speaker 11: you know, spending seven bucks on a coffee isn't going
Speaker 11: to impact your ability to buy a home the same
Speaker 11: way the Fed would in.
Speaker 5: Regards to their rate policy.
Speaker 11: So I think from a consumer perspective, it's less so
Speaker 11: about them leveraging up, but a bit more about the
Speaker 11: bigger macro picture, what they are spending on and how
Speaker 11: they're supported by jobs. To be frank as well.
Speaker 1: So as an investor, do you recommend then consumer discretionaries
Speaker 1: that are the small luxuries in life that people seem
Speaker 1: pretty committed to.
Speaker 11: Yeah, so there is something called the lipstick effect, which
Speaker 11: we've seen before, specifically, you know, in regards to beauty,
Speaker 11: where women will still spend on small luxuries to make
Speaker 11: themselves filtered during times of economic stress.
Speaker 5: I think that same the pattern.
Speaker 11: Or thesis could easily be applied to sweet treats to
Speaker 11: think about, you know, oreos or cookies that we like
Speaker 11: as well as well as just the occasional splurge in
Speaker 11: regards to dining out and whether that's at you know,
Speaker 11: full price restaurant. Maybe you're okay spending you know, twenty
Speaker 11: bucks on your fast food meal that one time. They
Speaker 11: will indulge, especially during times at economic spress.
Speaker 1: Do you buy the holozempic argument.
Speaker 5: Not yet, it's tb D.
Speaker 11: I do think, you know, these drugs are really powerful
Speaker 11: for the individuals that they were originally designed to help,
Speaker 11: maybe those with type two diabetes or who are severely
Speaker 11: over overweight and obese. But consumer habits really die hard,
Speaker 11: and I think that it might take more than ozembic
Speaker 11: at least in its current form to change those patterns.
Speaker 1: So zooming out. We were just speaking with Veronica Clark
Speaker 1: over at City Group, and she was talking about how
Speaker 1: they expect a soft patch now and then a reacceleration
Speaker 1: and inflation because a lot of consumers just keep accepting
Speaker 1: prices where they are.
Speaker 3: Do you agree with that?
Speaker 1: Just based on sort of a company specific kind of analysis.
Speaker 11: I think that if consumers, if the can keep their
Speaker 11: wage gains that we've seen recently, if they can, if
Speaker 11: those can be persistent, there's a good chance that they
Speaker 11: will continue to accept the price gains. I think it's
Speaker 11: as a matter of who's going to blink first. Is
Speaker 11: it the consumers or is it going to be the
Speaker 11: corporations in regards to pulling back on price to drive
Speaker 11: volumes or consumers finally going to reach a point where
Speaker 11: they say, hey, you know what, I don't want to
Speaker 11: spend six bucks on a box of cereal anymore.
Speaker 5: I don't want to buy that seven dollars coffee.
Speaker 11: But as long as they're supported by jobs and some
Speaker 11: wage gains, I think you know they'll continue to spend.
Speaker 1: Which raises this question when you talk to corporate executives
Speaker 1: and they can pass along these costs. Are they then
Speaker 1: hiring more people?
Speaker 11: No, because at the end of the day, corporates are
Speaker 11: also responding to markets. Broadly speaking, they're trying to recover
Speaker 11: the margin that they lost over the past eighteen months
Speaker 11: or so when inflation and input cost really got out
Speaker 11: of control. Margins became compressed. At that time, profitability was hammered.
Speaker 11: They've benefited these past few quarters from those price increases
Speaker 11: in conjunction with falling input costs. Now, to be fair,
Speaker 11: those costs haven't completely reverted, but profitability has been.
Speaker 5: Strong from them.
Speaker 11: And for the most part this is very idiosyncratic, but
Speaker 11: companies have been rewarded when their bottom lines, of course
Speaker 11: have expanded or reverted to pre pandemic levels.
Speaker 1: So's it's just zooming out To wrap this all up,
Speaker 1: I guess there's this question of whether some of the
Speaker 1: legacy retail companies and whether the legacy service companies can
Speaker 1: continue to operate and thrive based on their capital structures
Speaker 1: and a borrowing costs that was a lot lower from
Speaker 1: another era that they were going to have to refinance
Speaker 1: at a higher rate, whether they are still incredible companies
Speaker 1: to invest in in a current environment. Are you basically
Speaker 1: saying that, yes, because they're able to pass along those
Speaker 1: costs to consumers that have continued to really go for
Speaker 1: the products that they're selling.
Speaker 11: Yes, they've been able to pass along the cost. But
Speaker 11: the maturity wall, broadly speaking, has been pushed out for
Speaker 11: several corporates, including those in retail indiscretionary names, and so
Speaker 11: you know, they have balance sheets these days in the
Speaker 11: cash fload to support you know, the interest expense that
Speaker 11: they have. Now, in three or four years, when their
Speaker 11: maturity wall comes to do, we'll see where we are
Speaker 11: and we can address it at that time. But at
Speaker 11: the moment, balance sheets are strong, the cash is coming in,
Speaker 11: they can make their payments, and they're passing along those
Speaker 11: higher prices.
Speaker 1: What are the strongest segments of retail right now?
Speaker 5: It's a great question.
Speaker 11: Broadly speaking, Beauty as a segment that's continuing to do well. Historically,
Speaker 11: pet has been a segment that's been strong, but we
Speaker 11: have seen some weakening there. It's probably a bit of
Speaker 11: a post pandemic trend that's reversing.
Speaker 1: But people are sick of spending their entire paycheck on fido.
Speaker 1: Ashley Allen, thank you, Thank you so much of Franklin Templeton.
Speaker 5: We really appreciate that.
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