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Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumbie. I'm a senior editor at

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Speaker 1: Bloomberg and I'm.

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Speaker 2: Arnold Kakuda, senior credit analysts covering US banks at Bloomberg Intelligence.

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Speaker 2: So today this week, we'll please right please to welcome

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Speaker 2: Stephanie Doyle, portfolio manager for Investment grade corporate Strategies at

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Speaker 2: jp Morgan Asset Management. How are you, Stephanie, I'm great.

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Speaker 3: Thank you for having me on the podcast.

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Speaker 2: Great. So there's four point three trillion reasons we should

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Speaker 2: pay close attention to what Stephanie has to say. That's

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Speaker 2: the amount of assets that jpm's investment management division has

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Speaker 2: under supervision, with about a quarter of that devoted to

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Speaker 2: fixed income. And Stephanie manages both US and Global ID

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Speaker 2: coal repond strategies and is also a leader of developing

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Speaker 2: ESG capabilities for clients. So, James, we have a lot

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Speaker 2: of interesting topics that we can delve into today.

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Speaker 1: Yeah. Thanks, I don't think great to have you on

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Speaker 1: the show, Stephanie. I do want to start with tech

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Speaker 1: and AI, which is what everyone wants to talk about,

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Speaker 1: and that's about all they want to talk about. These days,

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Speaker 1: but specifically on funding. We estimate that five trillion dollars

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Speaker 1: needs to be spent over the next five years, and

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Speaker 1: that number just keeps going up. A lot of that

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Speaker 1: will have to be borrowed, A vast chunk of it

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Speaker 1: will end up in the high grade US dep market.

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Speaker 1: From your perspective, though, what are the opportunities as you

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Speaker 1: see and where are the biggest risks?

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Speaker 3: Yeah, I mean it's impossible to talk about investment grade

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Speaker 3: credit without talking about tech these days and the issuance

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Speaker 3: needs that they've come with and we'll need to come

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Speaker 3: with in the future. You know, it's interesting. I think

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Speaker 3: we continue to think about I'll just say from the start,

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Speaker 3: these high quality hyper skillers as having the operational strength,

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Speaker 3: the balance seat flexibility, you know, to absorb all of

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Speaker 3: this elevated spending. That that is our view. Withoutrificing ratings.

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Speaker 3: We haven't had a single downgrade to a hyper scaler,

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Speaker 3: with the exception of one on negative watch in the

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Speaker 3: middle of last year. So you know, these credits are

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Speaker 3: double a triple A for the most part rated entities,

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Speaker 3: and for the most part, I think it's really important

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Speaker 3: to remember not widely held in the fixed income space

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Speaker 3: before they really started issuing all of this debt. You know,

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Speaker 3: they've issued if you just look at the hyperscalers, around

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Speaker 3: one hundred and fifty billion dollars of Index eligible issuance

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Speaker 3: so far year to date. If you think about what

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Speaker 3: that number was a few years ago, it was fifteen

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Speaker 3: to twenty billion between all of them. So tech is

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Speaker 3: like seven percent of the index a few years ago.

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Speaker 3: Now it's eleven percent. You know in a few years

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Speaker 3: that number is going to be higher. So we tend

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Speaker 3: to think about tech almost the same way that we're

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Speaker 3: thinking about banks these days. Like, think about the banks right,

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Speaker 3: twenty five percent of the investment grade universe. They have

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Speaker 3: a ton of funding needs. They've had to maintain a

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Speaker 3: little more discipline over time, but they're issuing down the

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Speaker 3: capital structure. They're issuing across different currencies. We're seeing those

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Speaker 3: same tech names do the exact same thing so far

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Speaker 3: this year.

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Speaker 2: And then what in so, I think we've seen alphabet

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Speaker 2: come across right multiple currencies. Right, did do you think

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Speaker 2: how early innings are we with that? Or do you

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Speaker 2: think that we're kind of done with that?

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Speaker 3: We are just getting started? And you know, so I

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Speaker 3: can't talk about individual names unfortunately, but like it's interesting

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Speaker 3: because we've seen, you know, some names come that do

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Speaker 3: have these massive cap X needs, right, and they've been

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Speaker 3: very transparent with that over time. And you know, some

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Speaker 3: of these entities that are in the tech space but

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Speaker 3: aren't developing llms or really investing or doubling down in

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Speaker 3: their investment in AI, they're taking those hundreds of billions

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Speaker 3: of dollars and doing what the high quality hyperscillers used

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Speaker 3: to do and just announcing huge share buyback programs. So

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Speaker 3: that's why I think we have to, you know, kind

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Speaker 3: of set our mind to the fact that we're used

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Speaker 3: to these issuers investing hundreds of billions of dollars in

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Speaker 3: buybacks dividends. Now all of that is transitioning to CAPEX,

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Speaker 3: and we can talk a little bit about like where

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Speaker 3: they're generating revenue today. That's the big question everyone's asking,

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Speaker 3: Can all of this investment translate into revenue over time?

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Speaker 3: Our answer is we believe yes, But that is the

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Speaker 3: big question. If you believe in that, then I think

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Speaker 3: the issuance is an opportunity. If you don't believe in that,

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Speaker 3: or you think there's going to be one winner, at

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Speaker 3: the end of the day, then you know, probably not, does.

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Speaker 1: It where you were told that we're already and as

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Speaker 1: you said, we're only just getting started, but we're already

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Speaker 1: hitting multiple currencies. We're you know, doing all sorts of strutches.

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Speaker 1: We're hitting public, private, high yeald leverage loans. You know,

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Speaker 1: every possible part of the funding universe is being tapped.

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Speaker 1: One of the other big participants in this space, in Vesco,

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Speaker 1: described tapping the Canadian bond market the Canadian dollar market

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Speaker 1: as reaching for coins under the couch cushions, which suggests that,

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Speaker 1: you know, investors, we're already kind of hitting some limits.

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Speaker 1: The I mean, does that not where you right at

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Speaker 1: the beginning of this cycle?

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Speaker 3: You know, obviously, when you see a huge amount of

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Speaker 3: growth in a space like this, it's something to watch.

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Speaker 3: I think if you think about, like, what are we

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Speaker 3: really asking for from these entities or what are they

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Speaker 3: asking for of themselves. They want to be able to

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Speaker 3: generate revenue via AI in the future, right in order

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Speaker 3: to be able to do that, we kind of have

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Speaker 3: to allow them to build the scale. And it's not

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Speaker 3: just a US thing. I know, there's a lot of

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Speaker 3: US exceptionalism narrative around this, and it's not just a

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Speaker 3: US conversation, it's a global conversation. So you know to

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Speaker 3: the extent that they're issuing across all these different currencies,

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Speaker 3: and yes, we're seeing hyperscale. It's issue different currencies same day.

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Speaker 3: We had one a few weeks ago do a Canadian

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Speaker 3: deal that was the largest Canadian investment grade deal that

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Speaker 3: was ever done. The thirty year trunch was the largest

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Speaker 3: tranche ever priced in INCAD And those deals are being

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Speaker 3: taken down as opportunities. In some ways, I kind of

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Speaker 3: almost see it as some discipline from these issuers, if

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Speaker 3: I could kind of put it in a metaphor sense.

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Speaker 3: I feel like we're on this four lane highway right now,

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Speaker 3: and you have, you know, some tolls and a little

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Speaker 3: bit of revenue here, and they are being taken in

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Speaker 3: and we're starting to see that in earnings, and that's

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Speaker 3: where a lot of the SMP optimism's coming from. Frankly,

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Speaker 3: but those four lanes are starting to have a lot

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Speaker 3: of traffic. So what these issuers are doing is they're

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Speaker 3: trying to build a ten lane highway and that's going

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Speaker 3: to take some time. But I think that we have

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Speaker 3: to always remember the fact that when we think about

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Speaker 3: what these issuers are doing, a lot of what they're

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Speaker 3: building for, a lot of the demand that they are

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Speaker 3: building for is already on a waiting list, And that's

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Speaker 3: how we have to kind of continue to think about it.

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Speaker 3: The second thing that you know, helps me sleep at

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Speaker 3: night a little bit, because, yeah, these issuance you know,

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Speaker 3: needs are massive. They're not going to be smaller. They're

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Speaker 3: going to be larger over time. We're continuing to see

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Speaker 3: upgrades across the street for how much debt is really

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Speaker 3: needed to be issues from these guys. And you can

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Speaker 3: make the argument, you know, like certain hyperscolers could issue

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Speaker 3: these you know, debt twenty five percent more, fifty percent

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Speaker 3: more and still be free castional neutral. But they're still

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Speaker 3: really big numbers. It's like twenty percent of issuance here

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Speaker 3: to date, huge numbers. Right. So the other thing that

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Speaker 3: helps me sleep at night a little bit so far

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Speaker 3: is that you're starting to see these issuers come now,

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Speaker 3: they're doing these mega twenty five thirty billion dollar deals

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Speaker 3: and dollar and I'm looking at the over subscription rates,

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Speaker 3: I'm looking at how much concession they're coming with, and

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Speaker 3: that amount of concession over subscription is staying pretty constant.

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Speaker 3: You know, twenty five billion dollar deal after twenty five

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Speaker 3: billion dollar deal. So you know there's one that's kind

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Speaker 3: of looming right now, and in some ways I could

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Speaker 3: actually see that one last kind of like large deal

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Speaker 3: be a clearing event in dollar Some of these deals

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Speaker 3: are going to become opportunities at one point. It's just

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Speaker 3: you know, we're in this period of indigestion right now.

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Speaker 2: So how do you think is a better way to

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Speaker 2: play it? Like, so go with the A rated hyperscalers

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Speaker 2: or kind of you mentioned the infrastructure side, right this

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Speaker 2: is where a lot of the stuff is building. So

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Speaker 2: do you want to go on the more utilities infrastructure

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Speaker 2: build side. What do you think the better opportunity is there?

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Speaker 3: Yeah, I think that's the exact question that we're all

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Speaker 3: kind of trying to answer right in real time, because,

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Speaker 3: like I said, these hyper skals, these are debt indices, right,

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Speaker 3: So these hyperscalers didn't have a lot of debt five

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Speaker 3: years ago, and so now what we're seeing is they're

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Speaker 3: building out these debt stacks and they're becoming larger percentages

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Speaker 3: of the index. So people didn't really own you know,

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Speaker 3: long company A or Company B at all, and now

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Speaker 3: they're being forced to make that decision. So on the

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Speaker 3: one side, you're seeing these debt needs come. They're coming

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Speaker 3: across the curve that hasn't been something that we've really

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Speaker 3: seen at least from the industrial you know space for

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Speaker 3: quite a few years now, given where rates are. So

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Speaker 3: they're starting to introduce more duration into the market. That's

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Speaker 3: coming at a time when I was looking at thirty

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Speaker 3: year yields and investment grade today on like a ten

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Speaker 3: year look back, it's at the ninety seventh percentile. Like

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Speaker 3: some of these hyperscalers are double A credits coming with

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Speaker 3: six percent coupons in thirty years. That's where Hybridge trade,

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Speaker 3: That's where double B trades on a yield basis. So

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Speaker 3: do I think that there's opportunity name by name, depending

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Speaker 3: on you know, the fundamental backdrop, Absolutely on the complete

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Speaker 3: other side of the scale. And that's why I'm starting

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Speaker 3: to kind of think about it. And this is like

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Speaker 3: you know, real time, you know, thinking through, but I'm

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Speaker 3: starting to think about it almost as kind of a

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Speaker 3: Barbell trade. And you know, we've seen these these capital

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Speaker 3: structures be built out within the banks as well, and

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Speaker 3: I could see some similarities to that. But these like

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Speaker 3: data center project funding deals that are not index eligible,

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Speaker 3: they tend to be one forty four A. There's been

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Speaker 3: about fifty billion dollars of that type of issuance that's

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Speaker 3: come so far. There's an element of construction risk in

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Speaker 3: those deals. There's political risk, there's permitting risks. Every structure

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Speaker 3: is different. Some of them have call some of them don't.

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Speaker 3: Some of them have lease terms that extend pastor or

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Speaker 3: actually the bond extends past when the lease is actually up,

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Speaker 3: So you really have to read the fine print in those.

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Speaker 3: That's something that the market's still getting used to. But

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Speaker 3: there's opportunities in there as well, and in names that

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Speaker 3: we like where there's residual kickback, where they're you know,

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Speaker 3: under the underlying hyperscal or assigning long least terms that

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Speaker 3: they can't walk away from. There's opportunities on both ends

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Speaker 3: of the spectrum.

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Speaker 1: Just to be clear, our listens. So that's a fifty

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Speaker 1: billion dollar chunk of debt that's on top of the

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Speaker 1: one hundred and fifty billion you've already mentioned, and it's

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Speaker 1: going private. Why is it going private?

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Speaker 3: So this is a all of the above type of

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Speaker 3: debt issuance needs and you know, yes, it's kind of

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Speaker 3: interesting that the hyperscalers are willing to spend. We looked

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Speaker 3: through the average coupon on this like one four a

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Speaker 3: index ineligible almost private like structures is about one hundred

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Speaker 3: wide to where these hyperscalers are issuing on a spread basis,

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Speaker 3: to where they're issuing across the curve and investment grade

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Speaker 3: public debt, and so you know, some of the public

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Speaker 3: debt that's being funded via CAPEX could be used for

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Speaker 3: a multitude of different projects. Some of these hyperscalers are saying,

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Speaker 3: I have a data center that's based in this state,

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Speaker 3: in this town that has a little bit of project

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Speaker 3: risk that I need funding for today, and I need

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Speaker 3: the There could be complexity around that. You know, in

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Speaker 3: many cases these are club deals where you get a

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Speaker 3: lot of you know, demand that's basically built up before

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Speaker 3: the bond actually even comes. So there's benefits to the

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Speaker 3: flexibility of that. I don't think that we're going to

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Speaker 3: see next year or the year before that chunk be

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Speaker 3: bigger than the one hundred and fifty that we see

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Speaker 3: in public markets. I still think that's their primary way

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Speaker 3: of funding a lot of this stuff because it's being

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Speaker 3: taken down and they have a lot of room to grow.

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Speaker 3: But yes, you're going to see both.

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Speaker 1: And you mentioned it's kind of coming cheap. You know,

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Speaker 1: the concessions are up, but they're not you don't continue

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Speaker 1: to see them going up. And you see big order books,

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Speaker 1: but why not just wait because they're only getting cheaper

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Speaker 1: as you keep throwing more and more debt at this market.

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Speaker 3: Yeah, and you know, it's kind of interesting. So that

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Speaker 3: has been the argument for the last few weeks, because

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Speaker 3: the next deal is always you know, tomorrow or the

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Speaker 3: next day or the next day, and in fact, you know,

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Speaker 3: like so for April, let's just be giving you a

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Speaker 3: few numbers. So for April, we saw one hundred and

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Speaker 3: eighty five billion dollars of issuance in investment grade credit.

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Speaker 3: That's about a ninety five percent increase versus a four

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Speaker 3: year average, So massive increase if I think about and

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Speaker 3: we always have to think about net, right, which is

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Speaker 3: a bigger point I'll that I'll make down the line,

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Speaker 3: But on a net basis, that was about fifty billion.

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Speaker 3: If I were to think about April last year, we

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Speaker 3: had a net negative fifty billion dollar technical tailwind. So

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Speaker 3: do these deals matter? Do they matter which month they're

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Speaker 3: coming in? Yes, because a large hyperscale are issued on

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Speaker 3: the last day of April and now all of a

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Speaker 3: sudden in May it was going to be in one

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Speaker 3: hundred and eighty billion dollar a month. Now I'm hearing

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Speaker 3: dealers say it's going to be in one hundred and

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Speaker 3: fifty to one hundred and sixty billion dollar month. So

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Speaker 3: you can see where the pipelines are coming in. It

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Speaker 3: matters when they're coming, and it matters when the next

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Speaker 3: one's coming, right, So you know, like at a certain

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Speaker 3: point we are going to see we're starting to see

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Speaker 3: some more discipline from them where they're coming to market

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Speaker 3: and saying, hey, we are shooting Q two, We're not

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Speaker 3: going to come again to the market until Q four,

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Speaker 3: and so we're getting to that point where a lot

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Speaker 3: of this stuff is becoming opportunities. And even just walking

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Speaker 3: off the desk today coming to this podcast, we actually

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Speaker 3: saw a bunch of these deals start to clean up

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Speaker 3: a little bit. Because I feel like we've kind of

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Speaker 3: gotten through at least what the first wave of this

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Speaker 3: issuance looks like for the year.

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Speaker 2: So I'm going to push back a little bit here

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Speaker 2: in terms of you know, we've heard other folks maybe

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Speaker 2: like like an oak Tree or a Howard Marks. Okay,

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Speaker 2: so so AI very long term, Yes, strong demand, everybody's

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Speaker 2: using you know these llms chat bt anthropic, but are

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Speaker 2: these returns really kind of more equity like? And so

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Speaker 2: maybe that should be more of the source of funding, right,

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Speaker 2: Like who knows where this is going to go in

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Speaker 2: thirty years? Right, and look at all these different players.

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Speaker 2: Everybody's coming to market, but is there going to be

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Speaker 2: like a one winner and then everybody else kind of

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Speaker 2: you know, some side. So what do you say to

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Speaker 2: that in terms of like kind of the long term tech,

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Speaker 2: Maybe there's a little bit uncertainty, right, like maybe we

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Speaker 2: don't know who the winners will be, right in the

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Speaker 2: current winners of tech will they still be you know,

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Speaker 2: triple A, double A rated in the future.

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Speaker 3: So that's the question, right, And that's the question that

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Speaker 3: I ask my tech analysts every day Frankly, So you

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Speaker 3: know I can what I can say is, listen, thirty

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Speaker 3: years is hard, and thirty years is going to look different.

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Speaker 3: Let's think about maybe five year from now, right, maybe

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Speaker 3: five to ten years from now, there are six main

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Speaker 3: large language models out there that are building with scale

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Speaker 3: and have some reputation behind them, that have all different

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Speaker 3: type of specialties and things like that. In five to

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Speaker 3: ten years, are there going to be six? Probably not?

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Speaker 3: Are there going to be one? I would bet not? Right?

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Speaker 3: And so when I think about, you know, like, how

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Speaker 3: are these companies generating? Like what we ask from the

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Speaker 3: debt perspective is how are these companies generating revenue today?

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Speaker 3: And why are you building? Why is this CAPEX need

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Speaker 3: necessary to build the type of revenue that you're trying

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Speaker 3: to generate in five to ten years? Those are our questions, right,

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Speaker 3: And so what are they generating revenue on today? They're

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Speaker 3: renting the infrastructure. A lot of these companies that are

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Speaker 3: building out all these internal lms don't want to buy

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Speaker 3: AI chips at thirty k at chip, right, So they're

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Speaker 3: renting a lot of that infrastructure right now. That's revenue

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Speaker 3: generating the subscription models to the lms, they're getting more

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Speaker 3: ingrained in day to day people, Are you know, willing

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Speaker 3: to pay up to get a better version of that

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Speaker 3: model to use it in their day to day life

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Speaker 3: and efficiencies? You know, companies that sell ads, we hear

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Speaker 3: this all the time. Companies that sell adds. Every unit

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Speaker 3: of AI that's helping that AD become one percent more

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Speaker 3: efficient is translating to x amount of revenue for that

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Speaker 3: company today. So that's what when we ask these hyperscialers

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Speaker 3: how they're generating revenue today, that's what they're answering when

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Speaker 3: I think about how they're willing to generate revenue in

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Speaker 3: the future. A lot of that money today is being

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Speaker 3: spent on training models. A lot of that is going

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Speaker 3: to move to what we call inference or using it

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Speaker 3: write this email, design this part for me. That's kind

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Speaker 3: of the next step. And then a lot of these

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Speaker 3: autonomous agents, which my tech analysts could talk a lot

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Speaker 3: better than I could about, but you know, handle the

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Speaker 3: logistics for this business for me, run this factory line

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Speaker 3: for me. So that's where we're going. I think the

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Speaker 3: five to ten year I think we see transparency in

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Speaker 3: the five to ten year review, in the thirty year

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Speaker 3: of view, it's anyone's guest.

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Speaker 1: Got it that you're a believer, and you know Jake

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Speaker 1: momenized teams an institution. We heard Jamie Diamond speak earlier today.

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Speaker 1: He saw see a big believe of it. He also

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Speaker 1: admits that it's not all going to go right. You know,

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Speaker 1: some companies won't get this right, some buildings won't be

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Speaker 1: done properly or whatever, comparing it somewhat to the software

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Speaker 1: boom twenty five years ago. But what do you do

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Speaker 1: in terms of you know, hedging yourself, how do you

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Speaker 1: control the the you know, the big increase in sector exposure,

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Speaker 1: single name exposure, you know, how do you how do

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Speaker 1: you manage that? And then you know it's it's increasing

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Speaker 1: very quickly, as you say, so, so what point do

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Speaker 1: you hit limits on that?

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Speaker 3: Yeah? So I think that's why it's so important that

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Speaker 3: we're starting to see some discipline from these issuers. It's

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Speaker 3: kind of how we started the discussion. We have seen

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Speaker 3: some of them being willing to issue equity to defend ratings.

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Speaker 3: That's one that I think is actually pretty optimistic. You know,

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Speaker 3: I think the next catalyst for a lot of these

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Speaker 3: companies is to release twenty twenty seven CAPEX needs. If

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Speaker 3: we're seeing you know, CAPEX increase at the same rate

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Speaker 3: that we saw twenty twenty five to twenty twenty six,

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Speaker 3: I think that's probably a little bit of a red flag,

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Speaker 3: we should see a slowing in the increase of those

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Speaker 3: exps dictations. Companies that are currently buying back shares, I

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Speaker 3: think is another lever that they can pull. A lot

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Speaker 3: of them have gone to zero, but some of them

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Speaker 3: have not. But listen, that is why you're seeing these

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Speaker 3: companies issue across JPY, CAD, Swiss Frank do one hundred

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Speaker 3: billion dollars or one one hundred year sterling deals. You know,

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Speaker 3: it's because you know people are going to get full

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Speaker 3: on this stuff. So that's why I kind of like

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Speaker 3: that Barbell approach, Like pick the names that you really

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Speaker 3: like that are trading with steep tense thirty scurve and

368
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Speaker 3: have spread duration exposure to them. Skip the stuff that's

369
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Speaker 3: just trading a little cheaper than it used to but

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Speaker 3: it's still super rich when you compare it to everything

371
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Speaker 3: else in the index. And then on a on a

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Speaker 3: project by project basis almost pick the data center deals

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Speaker 3: that are one forty four a out of index and

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Speaker 3: offer you a pretty big pickup to where a lot

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Speaker 3: of the stuff is trading in IG and just make

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Speaker 3: sure that you have conviction behind those stories, like are

377
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Speaker 3: the patents and the and the projects already committed to,

378
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Speaker 3: Like you know, what's the first call day? When can

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Speaker 3: the issuer walk away? Who's the hyperscaler that's backing that project?

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Speaker 3: What kind of least terms are there? I mean, you know,

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Speaker 3: it's become really a bond by bond story. But the

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Speaker 3: Barbelle approach affords you, like you almost have a menu

383
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Speaker 3: of options of how you want to be exposed these

384
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Speaker 3: names instead of just being like I like this hyperscaler

385
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Speaker 3: at ten year, at sixty over, like that sixty over

386
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Speaker 3: is probably going to be sixty five or seventy year.

387
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Speaker 3: That's kind of where we're going right now.

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Speaker 1: And very long datd debt makes sense in that context.

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Speaker 1: I mean you mentioned one hundred year that we've seen

390
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Speaker 1: forty year and dollars. You know, who knows where we'll

391
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Speaker 1: be in forty years. We may all be living on

392
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Speaker 1: the moon. But you know, for a debt investor, does

393
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Speaker 1: that make sense to take that long risk?

394
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Speaker 3: Yeah, you know, I think it's kind of interesting, Like,

395
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Speaker 3: like I mentioned, the thirty year corporate index at a

396
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Speaker 3: yield of six percent is really attractive. So it's kind

397
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Speaker 3: of interesting, Like you're starting to see these issuers issue

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Speaker 3: duration for the first time. We haven't had a lot

399
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Speaker 3: of M and A and that's kind of because of tariffs.

400
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Speaker 3: Last year we saw a lot of those pipelines get

401
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Speaker 3: taken down, so we haven't had a lot of that

402
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Speaker 3: traditional like long in high quality, deep curve issuance, and

403
00:19:01,119 --> 00:19:04,760
Speaker 3: that's what we're seeing. And frankly, like I mentioned, you know,

404
00:19:04,800 --> 00:19:07,240
Speaker 3: the same hypersciller came in October and then came a

405
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Speaker 3: few weeks ago. The first time that they issued, they

406
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Speaker 3: issued at a twenty basis point curve on a tens

407
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Speaker 3: thirties basis. This time they issued out forty two basis points.

408
00:19:14,760 --> 00:19:18,120
Speaker 3: So am I being compensated for the differential on that? Yeah,

409
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Speaker 3: if they were issuing at the same tens thirties curve,

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Speaker 3: I would probably question the long end a little bit.

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Speaker 1: And just one more in protection. I mean, the CDs

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Speaker 1: has developed, there are more names in it. We just

413
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Speaker 1: had articles you know last year, but now you've got

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Speaker 1: more names. Do you use that markets a hedge?

415
00:19:31,040 --> 00:19:33,840
Speaker 3: We don't actively, but it's something that we watch, so

416
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Speaker 3: it's built into the way that we're viewing the risks

417
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Speaker 3: of these names, but we're not actively using it. We

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Speaker 3: could in the future.

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Speaker 2: And then would you say, like, part of the attractiveness

420
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Speaker 2: of this AI trade is it's almost like you know,

421
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Speaker 2: BAC usual ig we kind of look at where are

422
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Speaker 2: we in the credit cycle? You know, our default's going

423
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Speaker 2: to arise or not. And but would you say, like,

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Speaker 2: given all this uncertainty about you know, oil prices and

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Speaker 2: maybe like weaker economics, you know, the AI demand will

426
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Speaker 2: still be there, right that that's something that is kind

427
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Speaker 2: of non economic, you know dependent. So is that kind

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Speaker 2: of a key kind of theme going on there?

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Speaker 3: Yeah, I kind of like the way you put that. Actually,

430
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Speaker 3: So it's it's it's interesting to be able to invest

431
00:20:16,240 --> 00:20:19,359
Speaker 3: in the early innings of a cycle for something. A

432
00:20:19,440 --> 00:20:22,200
Speaker 3: lot of investment grade is very mature at this point,

433
00:20:22,240 --> 00:20:25,160
Speaker 3: a lot of and you know, like this earning season,

434
00:20:25,359 --> 00:20:27,960
Speaker 3: just to take a step back, I think nobody is

435
00:20:28,000 --> 00:20:31,280
Speaker 3: watching this earning season and getting nervous about credit right, Like,

436
00:20:31,320 --> 00:20:35,880
Speaker 3: we have seen very strong I think with a few caveats,

437
00:20:35,880 --> 00:20:38,960
Speaker 3: we're basically ninety percent of the way through. I'll take

438
00:20:38,960 --> 00:20:41,320
Speaker 3: a step back and say, I think this season was

439
00:20:41,359 --> 00:20:44,640
Speaker 3: set up for success. You know, you have the tariff comps,

440
00:20:44,920 --> 00:20:47,160
Speaker 3: you have the AIPA returns that a lot of these

441
00:20:47,200 --> 00:20:49,720
Speaker 3: companies and these mature sectors like autos, you know, like

442
00:20:49,840 --> 00:20:53,600
Speaker 3: utilities are starting to benefit from you have the one big,

443
00:20:53,640 --> 00:20:56,640
Speaker 3: beautiful built tailwinds now that are coming through, and then

444
00:20:56,640 --> 00:20:58,399
Speaker 3: you have the government shut down in Q four. So

445
00:20:58,480 --> 00:21:00,800
Speaker 3: all of this is building up a little you know,

446
00:21:00,840 --> 00:21:03,760
Speaker 3: optimism for the comps, right, and we see all of

447
00:21:03,840 --> 00:21:06,919
Speaker 3: these stats of like, oh, you know, we've seen eighty

448
00:21:06,960 --> 00:21:10,440
Speaker 3: percent of companies either meet or raise guidance for twenty

449
00:21:10,480 --> 00:21:13,199
Speaker 3: twenty six so far this year, and a lot of

450
00:21:13,200 --> 00:21:15,879
Speaker 3: them are raising guidance just by the benefit of the

451
00:21:15,920 --> 00:21:17,720
Speaker 3: strong Q one that they've had, Like if I were

452
00:21:17,720 --> 00:21:19,320
Speaker 3: to look at Q two to Q four, we're not

453
00:21:19,359 --> 00:21:22,040
Speaker 3: necessarily seeing that same optimism be built in. And a

454
00:21:22,040 --> 00:21:24,720
Speaker 3: lot of that's coming from the uncertainty from the war.

455
00:21:24,800 --> 00:21:28,280
Speaker 3: And so, you know, it's interesting. It's interesting to have

456
00:21:28,320 --> 00:21:31,359
Speaker 3: a sector that is twenty twenty five basis points cheap

457
00:21:31,359 --> 00:21:33,720
Speaker 3: to where it was a year ago that might actually

458
00:21:33,720 --> 00:21:36,080
Speaker 3: have a catalyst to perform here because the rest of

459
00:21:36,080 --> 00:21:39,639
Speaker 3: the market is close to the tights, with banks as

460
00:21:39,640 --> 00:21:42,879
Speaker 3: an exception. Actually, it is a gift that banks are

461
00:21:43,000 --> 00:21:46,359
Speaker 3: ten basis points wide, you know, to industrials.

462
00:21:45,800 --> 00:21:47,720
Speaker 2: All right, So maybe let's talk about that. We had

463
00:21:47,960 --> 00:21:52,320
Speaker 2: Lisa Coleman at our IG Credit conference in December. I think,

464
00:21:52,400 --> 00:21:54,840
Speaker 2: you know it spreads are type, but we like banks

465
00:21:55,680 --> 00:21:58,320
Speaker 2: and then particularly you know, even going down the capital structure.

466
00:21:58,359 --> 00:22:01,640
Speaker 2: So this year we've had and you know, Iran issuance

467
00:22:01,680 --> 00:22:04,199
Speaker 2: has been really high, but you know, bank earnings have

468
00:22:04,240 --> 00:22:07,080
Speaker 2: been really good. Right, So how do you see the space?

469
00:22:07,160 --> 00:22:09,919
Speaker 2: Do you guys still kind of favorite financials or what

470
00:22:09,960 --> 00:22:10,720
Speaker 2: are you used there?

471
00:22:10,960 --> 00:22:13,800
Speaker 3: Yeah, so maybe I can just give a pretty high

472
00:22:13,880 --> 00:22:16,440
Speaker 3: level rundown of the earning season. Then I'll get into

473
00:22:16,440 --> 00:22:18,600
Speaker 3: banks perst industrials, because that's kind of the question that

474
00:22:19,320 --> 00:22:22,200
Speaker 3: outside of tech banks kind of stands out as cheap

475
00:22:22,240 --> 00:22:24,800
Speaker 3: to So I'll talk about both of them. So, you know,

476
00:22:26,080 --> 00:22:28,520
Speaker 3: when I look at S and P five hundred xmag seven,

477
00:22:28,560 --> 00:22:31,360
Speaker 3: which is kind of our preferred way of looking at EPs,

478
00:22:31,440 --> 00:22:34,080
Speaker 3: EBITDA that's coming in at around for Q one, around

479
00:22:34,080 --> 00:22:38,240
Speaker 3: fifteen percent, let's call it. For EPs. We like to

480
00:22:38,359 --> 00:22:41,120
Speaker 3: screen out buybacks because we're debt investors and I want

481
00:22:41,119 --> 00:22:42,879
Speaker 3: to see where the actual EBITDA is coming in. So

482
00:22:42,920 --> 00:22:45,800
Speaker 3: for like the Median industrial this quarter it's been about

483
00:22:45,800 --> 00:22:48,119
Speaker 3: seven percent. Revenue is closer to five and a half.

484
00:22:48,440 --> 00:22:50,400
Speaker 3: When I look back, if I take COVID out, because

485
00:22:50,440 --> 00:22:52,680
Speaker 3: COVID was crazy and it had a lot of volatility,

486
00:22:52,960 --> 00:22:56,119
Speaker 3: we haven't seen earnings or revenue growth like this back

487
00:22:56,280 --> 00:22:59,520
Speaker 3: ten years. So you know, at least from like a

488
00:22:59,680 --> 00:23:03,159
Speaker 3: margin are another one. Margins increased to about sixteen percent

489
00:23:03,440 --> 00:23:07,840
Speaker 3: for the Median industrial and USIG. So you know, there's

490
00:23:07,880 --> 00:23:11,800
Speaker 3: a lot of optimism and frankly, industrials are priced for that.

491
00:23:12,400 --> 00:23:15,040
Speaker 3: And so what I think is that when I look

492
00:23:15,080 --> 00:23:18,560
Speaker 3: at the banks, and the banks obviously kick off earnings,

493
00:23:18,640 --> 00:23:22,240
Speaker 3: there's a lot of regulatory tailwinds for the banks that

494
00:23:22,280 --> 00:23:26,119
Speaker 3: are coming through. They all spoke about the relatively strong

495
00:23:26,160 --> 00:23:31,159
Speaker 3: consumer that we're seeing. We're seeing some decent loan growth

496
00:23:31,160 --> 00:23:34,600
Speaker 3: for the first quarter, in for the first quarter where

497
00:23:34,640 --> 00:23:36,480
Speaker 3: you could string a few quarters together in a row

498
00:23:36,520 --> 00:23:38,480
Speaker 3: like that, and we look, we're looking at the same

499
00:23:38,480 --> 00:23:41,359
Speaker 3: thing as everything else. Delinquencies, net chargeops, they've all been

500
00:23:41,359 --> 00:23:44,480
Speaker 3: stable for several years now. So the fact that and

501
00:23:44,520 --> 00:23:46,720
Speaker 3: you're starting to see it in the at one space.

502
00:23:46,760 --> 00:23:49,560
Speaker 3: So the most subordinated part of banks, both in Euro

503
00:23:49,640 --> 00:23:52,760
Speaker 3: and dollar, which have had a really strong two weeks

504
00:23:52,840 --> 00:23:55,200
Speaker 3: let's call it and beyond that a really strong year

505
00:23:55,240 --> 00:23:59,760
Speaker 3: to date. You know, so banks, the fact that senior

506
00:23:59,760 --> 00:24:03,240
Speaker 3: bank banks are still cheap to industrials and the way

507
00:24:03,320 --> 00:24:05,120
Speaker 3: that they have after for years and years and years

508
00:24:05,119 --> 00:24:08,199
Speaker 3: they traded through industrials. I feel like industrials are fairly

509
00:24:08,240 --> 00:24:12,240
Speaker 3: priced for the optimism and fundamentals. Banks are simply responding

510
00:24:12,240 --> 00:24:15,440
Speaker 3: to the fact that they front They front loaded their issuance.

511
00:24:15,480 --> 00:24:18,320
Speaker 3: They had a lot to do, you know, they got

512
00:24:18,359 --> 00:24:20,840
Speaker 3: through a lot of that. They tend to be spread

513
00:24:21,000 --> 00:24:24,440
Speaker 3: based issuers, so less, you know, concerned about the overall

514
00:24:24,520 --> 00:24:28,240
Speaker 3: yield backdrop. But it's our view that banks are just

515
00:24:28,359 --> 00:24:31,639
Speaker 3: kind of lagging because of that, and they're about to

516
00:24:31,680 --> 00:24:32,120
Speaker 3: clean up.

517
00:24:32,320 --> 00:24:34,160
Speaker 1: Do you like the BDC's at this point, they're pretty

518
00:24:34,200 --> 00:24:34,760
Speaker 1: cheap as well.

519
00:24:34,840 --> 00:24:37,119
Speaker 3: Yeah, you know, they're really cheap, but they're really small

520
00:24:37,160 --> 00:24:40,239
Speaker 3: percentage of the investment grade index. It's like, you know,

521
00:24:40,400 --> 00:24:44,119
Speaker 3: just a very small percentage, you know, of the overall index,

522
00:24:44,160 --> 00:24:45,040
Speaker 3: so it's not as much of it.

523
00:24:45,160 --> 00:24:48,600
Speaker 1: Okay, I'm hearing definitely the bullishness around earnings and everything else.

524
00:24:48,600 --> 00:24:51,760
Speaker 1: But how how long can it last? How sustainable is it?

525
00:24:51,760 --> 00:24:51,959
Speaker 3: I mean?

526
00:24:51,960 --> 00:24:54,159
Speaker 1: Its wars dragging on fuel prices are going up, We're

527
00:24:54,160 --> 00:24:56,480
Speaker 1: going to get supply chain issues, and we're heading into

528
00:24:56,520 --> 00:25:01,000
Speaker 1: a very tricky political period in this country. Consumer confidence,

529
00:25:01,040 --> 00:25:03,919
Speaker 1: I know, you talk that strong consume, but the confidence

530
00:25:04,000 --> 00:25:06,719
Speaker 1: is dropping. There's got to be some worry out there

531
00:25:06,720 --> 00:25:08,480
Speaker 1: about the fundamentals you're not seeing that.

532
00:25:09,200 --> 00:25:11,720
Speaker 3: I think that Q one was super strong. I think

533
00:25:11,760 --> 00:25:13,879
Speaker 3: because of all of the comp discussions that I said,

534
00:25:14,119 --> 00:25:18,000
Speaker 3: I think on a forward looking basis, we obviously have

535
00:25:18,040 --> 00:25:21,439
Speaker 3: a lot of cushion, but I think that they're every

536
00:25:21,520 --> 00:25:23,880
Speaker 3: day that this continues on. And you know, it's really

537
00:25:23,920 --> 00:25:27,520
Speaker 3: funny when we talk as a team, especially to my

538
00:25:27,600 --> 00:25:30,439
Speaker 3: macro team, it's like, you know, if this continues on

539
00:25:30,600 --> 00:25:32,520
Speaker 3: until the end of May, then we're really going to

540
00:25:32,520 --> 00:25:34,280
Speaker 3: have an issue. And then you know, you're kind of

541
00:25:34,320 --> 00:25:35,960
Speaker 3: in mid May, so then it becomes well, if this

542
00:25:36,000 --> 00:25:38,240
Speaker 3: continues on until the end of June, then I really

543
00:25:38,240 --> 00:25:39,919
Speaker 3: think that this is going to be a problem. And

544
00:25:40,000 --> 00:25:42,959
Speaker 3: so it was interesting to see the language that the

545
00:25:43,000 --> 00:25:46,240
Speaker 3: management teams used when they were talking about full your guidance,

546
00:25:46,280 --> 00:25:49,520
Speaker 3: because it felt like all of the CEOs in America

547
00:25:49,560 --> 00:25:52,240
Speaker 3: came together and said, you know what our guidance is

548
00:25:52,240 --> 00:25:54,720
Speaker 3: going to be based on is basically for the first

549
00:25:54,760 --> 00:25:57,359
Speaker 3: half of the year having this conflict let's call oil

550
00:25:57,359 --> 00:25:59,760
Speaker 3: in that ninety two one hundred ish type of level,

551
00:26:00,040 --> 00:26:02,160
Speaker 3: and then for the second half of the year, we're

552
00:26:02,160 --> 00:26:04,760
Speaker 3: going to have the straight of horr moves operating as usual.

553
00:26:05,119 --> 00:26:07,160
Speaker 3: And so that's kind of you're having half of year

554
00:26:07,440 --> 00:26:10,200
Speaker 3: super strained and half a year back to normal. We're

555
00:26:10,240 --> 00:26:13,000
Speaker 3: probably going to end up somewhere in the middle of that.

556
00:26:13,440 --> 00:26:16,600
Speaker 3: You know, like our energy analyst feels that if all

557
00:26:16,640 --> 00:26:20,479
Speaker 3: of this were to be you know, fixed or wrapped

558
00:26:20,600 --> 00:26:24,080
Speaker 3: up tomorrow, that you would see oil and you know,

559
00:26:24,200 --> 00:26:26,879
Speaker 3: kind of in that eighty plus or minus range, nowhere

560
00:26:26,920 --> 00:26:29,160
Speaker 3: near where it was before, but not as extreme as

561
00:26:29,160 --> 00:26:32,920
Speaker 3: it is today. And one of the questions that I'm

562
00:26:33,000 --> 00:26:36,160
Speaker 3: starting to press our consumer analysts on and they're all

563
00:26:36,200 --> 00:26:38,960
Speaker 3: over it, is, you know, every day that passes, like

564
00:26:39,160 --> 00:26:42,360
Speaker 3: how are you thinking about? What? Where's the line? Right?

565
00:26:42,400 --> 00:26:44,560
Speaker 3: Because we're already starting to see it a little bit.

566
00:26:44,600 --> 00:26:46,440
Speaker 3: In the consumer it tends to be that same case

567
00:26:46,480 --> 00:26:49,960
Speaker 3: shaped economy argument where you're seeing the low end consumer

568
00:26:50,080 --> 00:26:52,280
Speaker 3: really struggle in the high and consumer support a lot

569
00:26:52,280 --> 00:26:54,600
Speaker 3: of revenue growth that you're seeing for these companies. But

570
00:26:55,400 --> 00:26:57,800
Speaker 3: you know, like I don't know. I just think that

571
00:26:57,920 --> 00:27:00,240
Speaker 3: every single day that goes past, we're starting to see

572
00:27:00,240 --> 00:27:04,160
Speaker 3: some of those larger consumer companies worn about margin pressure

573
00:27:04,160 --> 00:27:06,800
Speaker 3: in the back half, and they should because every single

574
00:27:06,880 --> 00:27:11,080
Speaker 3: day that passes you have transportation costs increasing, sourcing becoming

575
00:27:11,080 --> 00:27:13,800
Speaker 3: more expensive, all the packaging costs are going up for

576
00:27:13,840 --> 00:27:16,119
Speaker 3: these companies. The other elephant in the room is that

577
00:27:16,160 --> 00:27:18,520
Speaker 3: a lot of investment grade companies are hedged for like

578
00:27:18,560 --> 00:27:20,800
Speaker 3: a three to six month window, so it's really the

579
00:27:20,800 --> 00:27:23,560
Speaker 3: back half and twenty twenty seven that's going to bear

580
00:27:23,720 --> 00:27:27,280
Speaker 3: the brunt of a lot of this. But for right now,

581
00:27:27,680 --> 00:27:31,000
Speaker 3: you know, like you know led by Tech, obviously the

582
00:27:31,280 --> 00:27:33,440
Speaker 3: fundamental backdrop is is super clean.

583
00:27:33,600 --> 00:27:35,160
Speaker 1: So what does it all do for spreads on because

584
00:27:35,160 --> 00:27:37,240
Speaker 1: you know, spreads have been very tight for a long time.

585
00:27:37,280 --> 00:27:38,919
Speaker 1: We've talked about that a lot on this show. But

586
00:27:38,920 --> 00:27:41,960
Speaker 1: they're trading right now near ninety eight levels, so it's

587
00:27:42,000 --> 00:27:44,800
Speaker 1: like thirty year tights, and they just seem to get

588
00:27:44,920 --> 00:27:47,000
Speaker 1: tighter all the time despite all of this sort of

589
00:27:47,080 --> 00:27:51,200
Speaker 1: macro noise in the background. And one of the main

590
00:27:51,200 --> 00:27:53,080
Speaker 1: theories that I keep coming up with, and you can,

591
00:27:53,240 --> 00:27:55,520
Speaker 1: you know, objects and correct me if I'm wrong, but

592
00:27:55,720 --> 00:27:58,160
Speaker 1: I think it's just more a question of more demand

593
00:27:58,240 --> 00:28:01,040
Speaker 1: than the new supply than anything else that's holding it

594
00:28:01,080 --> 00:28:04,400
Speaker 1: so tight. Obviously, the all in yield is very attractive

595
00:28:04,440 --> 00:28:06,760
Speaker 1: because underlying rates of good and a lot of people

596
00:28:06,840 --> 00:28:10,320
Speaker 1: just looking beyond the spread straight to the yield. But

597
00:28:10,480 --> 00:28:14,000
Speaker 1: if we're talking as we did earlier about the market

598
00:28:14,080 --> 00:28:16,439
Speaker 1: kind of coming into balance again, you know, with net

599
00:28:16,520 --> 00:28:19,440
Speaker 1: new supply very positive, and you know, if we get

600
00:28:19,480 --> 00:28:21,200
Speaker 1: more M and A that's going to add to the AI,

601
00:28:21,760 --> 00:28:25,199
Speaker 1: does that not tip the whole thing into into a

602
00:28:25,240 --> 00:28:28,520
Speaker 1: balance and maybe an excess that would therefore push out spreads.

603
00:28:29,400 --> 00:28:32,639
Speaker 3: I think so that is the question that everyone is

604
00:28:32,680 --> 00:28:36,119
Speaker 3: asking right now. I think that when we just taking

605
00:28:36,119 --> 00:28:38,480
Speaker 3: a step back, right and you see all of this

606
00:28:38,640 --> 00:28:41,480
Speaker 3: gross issuance increase and everyone is saying, oh, well, net

607
00:28:41,480 --> 00:28:43,240
Speaker 3: really matters, but that's going to be a lot higher

608
00:28:43,240 --> 00:28:45,280
Speaker 3: than it was last year. And just to take a

609
00:28:45,280 --> 00:28:48,560
Speaker 3: step back, so gross year to date is around eight

610
00:28:48,680 --> 00:28:51,960
Speaker 3: hundred and fifty billion, right last year that number was

611
00:28:51,960 --> 00:28:54,400
Speaker 3: closer to through April six hundred and fifty billion. We're

612
00:28:54,440 --> 00:28:57,520
Speaker 3: up about thirty percent. Right if you take into account

613
00:28:57,560 --> 00:29:00,520
Speaker 3: maturities and coupons, we have a billion ish of maturities,

614
00:29:00,520 --> 00:29:03,240
Speaker 3: five hundred billion of coupons, So that's about one point

615
00:29:03,240 --> 00:29:05,960
Speaker 3: five trillion just of maturities and coupons that need to

616
00:29:05,960 --> 00:29:08,920
Speaker 3: be reinvested back into the market in theory. So you know,

617
00:29:09,040 --> 00:29:12,720
Speaker 3: our call for the full year of twenty six is

618
00:29:12,720 --> 00:29:15,720
Speaker 3: around one point nine trillion, so that would be up

619
00:29:15,800 --> 00:29:19,080
Speaker 3: a fair amount versus last year. That would put NET

620
00:29:19,120 --> 00:29:21,360
Speaker 3: at around let's call it, three hundred and fifty to

621
00:29:21,400 --> 00:29:25,680
Speaker 3: four hundred billion on a net basis the last time

622
00:29:25,760 --> 00:29:27,680
Speaker 3: that we you know, if I look at like a

623
00:29:27,760 --> 00:29:31,320
Speaker 3: five year average for NET, it's around three twenty three thirty.

624
00:29:31,640 --> 00:29:33,600
Speaker 3: So yeah, I mean these numbers are large, but the

625
00:29:33,640 --> 00:29:36,400
Speaker 3: market is also large, and the market is showing you

626
00:29:36,800 --> 00:29:39,720
Speaker 3: by being as tight as we are and spreads even

627
00:29:39,800 --> 00:29:42,720
Speaker 3: with the supply backdrop that's changed so dramatically versus this

628
00:29:42,760 --> 00:29:45,239
Speaker 3: time last year, then it could absorb a lot of

629
00:29:45,240 --> 00:29:48,000
Speaker 3: the supply. That's one side of the equation. The other

630
00:29:48,080 --> 00:29:52,120
Speaker 3: side of the equation is just the extreme increase in

631
00:29:52,160 --> 00:29:54,960
Speaker 3: the amount of natural demand that our market has. Let's

632
00:29:55,000 --> 00:29:58,080
Speaker 3: take out coupons and maturities and let's just talk about flow,

633
00:29:58,640 --> 00:30:01,680
Speaker 3: right and so on. The interesting things that I've done

634
00:30:01,800 --> 00:30:04,680
Speaker 3: is I went back and you know, I looked at

635
00:30:04,720 --> 00:30:08,120
Speaker 3: the three volatile events post COVID. So we had Russia

636
00:30:08,240 --> 00:30:10,680
Speaker 3: Ukraine where the IG index got out to that like

637
00:30:10,760 --> 00:30:13,720
Speaker 3: one forty one sixty ish area for the whole year.

638
00:30:14,080 --> 00:30:17,040
Speaker 3: That was an outflow environment. So we had week after

639
00:30:17,080 --> 00:30:19,360
Speaker 3: week after week of negative total returns in the market

640
00:30:19,440 --> 00:30:22,720
Speaker 3: and an outflow dynamic that was not helping where spreads traded.

641
00:30:23,360 --> 00:30:26,320
Speaker 3: The second event was Liberation Day, where the index got

642
00:30:26,320 --> 00:30:28,959
Speaker 3: out to that one twenty ish type of level. At

643
00:30:29,040 --> 00:30:31,960
Speaker 3: that point, we were seeing retail demand come in and

644
00:30:32,200 --> 00:30:34,440
Speaker 3: we tend to look at three month rolling numbers of

645
00:30:34,560 --> 00:30:38,080
Speaker 3: around I don't know, like forty billions, So that's a

646
00:30:38,120 --> 00:30:41,200
Speaker 3: three and a half billion dollar weekly flow that's supporting

647
00:30:41,200 --> 00:30:44,840
Speaker 3: the market during the Iran warre and most recently we

648
00:30:44,880 --> 00:30:46,720
Speaker 3: got out to about ninety five. You can kind of

649
00:30:46,720 --> 00:30:49,200
Speaker 3: see where I'm going with this, right, every single time,

650
00:30:49,240 --> 00:30:52,000
Speaker 3: the volatility of what we're seeing, and we had a

651
00:30:52,000 --> 00:30:54,920
Speaker 3: pretty similar oil spike to Russia Ukraine, and obviously it's

652
00:30:55,000 --> 00:30:56,960
Speaker 3: it's not likely to be as sustained as that was,

653
00:30:57,040 --> 00:30:59,800
Speaker 3: but we're seeing the volatility dampen and where spreads can go.

654
00:31:00,080 --> 00:31:02,520
Speaker 3: And the reason for that is because we're currently running

655
00:31:02,520 --> 00:31:06,480
Speaker 3: at about eighty to one hundred billion dollars of rolling flow,

656
00:31:06,640 --> 00:31:08,640
Speaker 3: So that's about a seven and a half billion dollar

657
00:31:08,720 --> 00:31:11,440
Speaker 3: average on a weekly basis, so more than double where

658
00:31:11,440 --> 00:31:14,240
Speaker 3: it was even a year ago. So if that demand

659
00:31:14,360 --> 00:31:18,400
Speaker 3: continues to support the market spreads, are everyone's going to say,

660
00:31:18,480 --> 00:31:20,440
Speaker 3: you know, everyone's going to move to that. We're at

661
00:31:20,720 --> 00:31:23,440
Speaker 3: five point five and a quarter on yield, that's pretty

662
00:31:23,480 --> 00:31:27,280
Speaker 3: good eightieth percentile. You know, you're starting to see just

663
00:31:27,720 --> 00:31:30,239
Speaker 3: a lot of that. The path of least resistance if

664
00:31:30,280 --> 00:31:33,680
Speaker 3: the demand stays where it is, feels flat to tighter.

665
00:31:33,720 --> 00:31:35,840
Speaker 3: And that's why I think we're kind of still positive

666
00:31:35,880 --> 00:31:38,200
Speaker 3: on this despite all of the risks that we're talking about.

667
00:31:38,280 --> 00:31:40,080
Speaker 1: Is there anything on the demand side that you worry about,

668
00:31:40,160 --> 00:31:43,520
Speaker 1: for example, foreign demand slipping away, Asian demand getting more

669
00:31:43,520 --> 00:31:47,840
Speaker 1: into local jet Japanese for example, credit markets you know,

670
00:31:48,000 --> 00:31:50,360
Speaker 1: race of rely cheap there, or just the sort of

671
00:31:50,400 --> 00:31:55,360
Speaker 1: global repatriation of money, the you know, diversification geographically, the

672
00:31:55,360 --> 00:31:57,520
Speaker 1: the Middle East war having you know, that region having

673
00:31:57,560 --> 00:31:59,880
Speaker 1: to pull back out of foreign markets. Do you think

674
00:31:59,880 --> 00:32:03,760
Speaker 1: that might be a significant factor in the demand.

675
00:32:04,240 --> 00:32:06,280
Speaker 3: It's always a risk, and we had these same conversations

676
00:32:06,280 --> 00:32:09,040
Speaker 3: a year ago around tariffs when the concept of like

677
00:32:09,200 --> 00:32:12,280
Speaker 3: US exceptionalism was being challenged and all of that, and

678
00:32:12,320 --> 00:32:14,200
Speaker 3: we saw it for a little bit there and then

679
00:32:14,240 --> 00:32:17,200
Speaker 3: we saw it come right back last year and so

680
00:32:17,280 --> 00:32:19,320
Speaker 3: this year. Yeah, I mean foreign demand is a huge

681
00:32:19,320 --> 00:32:23,440
Speaker 3: part of the puzzle for this, I think, frankly, with

682
00:32:23,520 --> 00:32:28,280
Speaker 3: the FED on hold for now and the ECB and

683
00:32:28,440 --> 00:32:32,200
Speaker 3: you know other central banks in a hiking mode that

684
00:32:32,360 --> 00:32:36,800
Speaker 3: helps hedging costs for every dollar invested, and you know,

685
00:32:36,920 --> 00:32:40,120
Speaker 3: like for for some instances you start there's a reason

686
00:32:40,200 --> 00:32:43,760
Speaker 3: why these these deals are doing well in CAD and

687
00:32:43,840 --> 00:32:46,280
Speaker 3: in other currencies. It's because there's demand for this stuff

688
00:32:46,280 --> 00:32:49,640
Speaker 3: and this is where it's coming. So you know, no,

689
00:32:49,920 --> 00:32:52,240
Speaker 3: I think we've seen, if anything, I think we've seen

690
00:32:52,280 --> 00:32:54,840
Speaker 3: a little bit more recently of a resurgence in foreign

691
00:32:54,880 --> 00:32:56,720
Speaker 3: demand for IG at these yield levels.

692
00:32:57,080 --> 00:32:59,440
Speaker 2: So if I had to pin down like the strong

693
00:32:59,480 --> 00:33:02,680
Speaker 2: demand for or I corporate credit, would you say, it's

694
00:33:02,720 --> 00:33:06,720
Speaker 2: it's yield and a healthy economy. Is that kind of

695
00:33:06,720 --> 00:33:09,120
Speaker 2: the key things that underpinned.

696
00:33:09,240 --> 00:33:12,640
Speaker 3: Yeah, I think it's the attractive all in yield versus history.

697
00:33:13,480 --> 00:33:16,560
Speaker 3: The other thing is that investment grade versus cash just

698
00:33:16,600 --> 00:33:18,600
Speaker 3: the yield differential of that is the highest that it's

699
00:33:18,600 --> 00:33:22,120
Speaker 3: been since twenty twenty two. I think versus alternatives, it's

700
00:33:22,160 --> 00:33:24,280
Speaker 3: not just the outright yield, but versus alternatives, I think

701
00:33:24,320 --> 00:33:28,280
Speaker 3: it's attractive. And like I said, this earning season has

702
00:33:28,480 --> 00:33:31,440
Speaker 3: underpinned the fact that you know, a lot of people

703
00:33:31,880 --> 00:33:35,200
Speaker 3: talk about tech, and I think what we're seeing is

704
00:33:36,040 --> 00:33:39,239
Speaker 3: a group of industries. We're seeing three categories. Right. We're

705
00:33:39,240 --> 00:33:41,880
Speaker 3: seeing tech, which is off the charts in terms of growth.

706
00:33:42,720 --> 00:33:45,440
Speaker 3: We're seeing a group of industries that are growing in

707
00:33:45,480 --> 00:33:50,520
Speaker 3: the mid to high single digits. Energy, you know, cap goods,

708
00:33:51,360 --> 00:33:55,920
Speaker 3: parts of transportation, healthcare, pharma that are really doing very solid.

709
00:33:56,320 --> 00:33:59,280
Speaker 3: I could talk about a lot of the like fundamental

710
00:33:59,360 --> 00:34:01,800
Speaker 3: support that we're seeing in those sectors. And then you

711
00:34:01,880 --> 00:34:04,920
Speaker 3: have this third cohort of sectors that are the worry

712
00:34:04,960 --> 00:34:09,560
Speaker 3: me at night sectors autos, consumer retail that were really

713
00:34:09,960 --> 00:34:11,920
Speaker 3: you know, a year ago, we were modeling a lot

714
00:34:12,000 --> 00:34:14,640
Speaker 3: of these companies and trying to figure out, you know,

715
00:34:14,719 --> 00:34:17,279
Speaker 3: what percentage of revenues were imported because of the whole

716
00:34:17,280 --> 00:34:21,520
Speaker 3: tariff debacle. Those companies are starting to recover and we're

717
00:34:21,560 --> 00:34:24,320
Speaker 3: starting to see some fundamental strength come through in those companies,

718
00:34:24,600 --> 00:34:27,799
Speaker 3: and so you have a cohort that's recovering, you have

719
00:34:27,840 --> 00:34:31,759
Speaker 3: a cohort that is really solid in that load to

720
00:34:31,800 --> 00:34:34,480
Speaker 3: mid single digit ebitdog growth, and you have tech that's

721
00:34:34,480 --> 00:34:36,319
Speaker 3: a little bit of a wildcard, but is growing at

722
00:34:36,320 --> 00:34:38,719
Speaker 3: such a rate that it's really you know, supporting the

723
00:34:38,760 --> 00:34:41,279
Speaker 3: equity market at least. Let's say, so when I think

724
00:34:41,320 --> 00:34:44,400
Speaker 3: about those three, the backdrop of those three a skewed

725
00:34:44,440 --> 00:34:46,520
Speaker 3: a lot more positively than we have in the past.

726
00:34:46,560 --> 00:34:48,000
Speaker 3: If I were on a year ago, we would be

727
00:34:48,000 --> 00:34:50,200
Speaker 3: talking about a lot of the downside for some sectors

728
00:34:50,239 --> 00:34:51,879
Speaker 3: and a lot of the upside for others. Right now,

729
00:34:51,880 --> 00:34:54,360
Speaker 3: it's kind of hard to find where that downside would be.

730
00:34:55,320 --> 00:34:58,680
Speaker 2: So in a case of like a weaker economy, let's

731
00:34:58,800 --> 00:35:01,839
Speaker 2: you know, start cutting rates. That's great for fixed income

732
00:35:01,880 --> 00:35:04,200
Speaker 2: in general, right and then and then I guess there's

733
00:35:04,239 --> 00:35:07,319
Speaker 2: a room for you know, spreads to widen, obviously, but

734
00:35:07,360 --> 00:35:09,200
Speaker 2: then kind of the rate cuts that we need, there's

735
00:35:09,280 --> 00:35:11,200
Speaker 2: room for rates to come down, right, that's the argument.

736
00:35:11,239 --> 00:35:13,120
Speaker 2: But but then is it only in that kind of

737
00:35:13,120 --> 00:35:15,760
Speaker 2: scenario right where where you might see kind of demand

738
00:35:15,760 --> 00:35:18,520
Speaker 2: pull back or what else could I mean, you just

739
00:35:18,600 --> 00:35:20,960
Speaker 2: laid the back up for why things are kind of

740
00:35:20,960 --> 00:35:22,960
Speaker 2: good for the next you know, in the neodren.

741
00:35:22,640 --> 00:35:25,759
Speaker 3: Let's say, yeah, I think there are a few key

742
00:35:25,840 --> 00:35:28,239
Speaker 3: risks that we watch. So one of the things that

743
00:35:28,280 --> 00:35:31,680
Speaker 3: we watch really closely is how retail demand tracks total

744
00:35:31,719 --> 00:35:34,759
Speaker 3: returns on a rolling basis. So if rates were to

745
00:35:34,840 --> 00:35:38,640
Speaker 3: sell off meaningfully right and total returns were to have

746
00:35:38,680 --> 00:35:40,560
Speaker 3: a draw down in that kind of one to two

747
00:35:40,600 --> 00:35:42,400
Speaker 3: and a half percent type of level, that would be

748
00:35:42,440 --> 00:35:44,680
Speaker 3: a risk for our market, because yes, yields would go

749
00:35:44,680 --> 00:35:47,560
Speaker 3: to the one hundredth percentile of attractiveness going back in

750
00:35:47,640 --> 00:35:49,600
Speaker 3: the same look backs that we're looking at. But you know,

751
00:35:49,640 --> 00:35:52,080
Speaker 3: if total returns turn negative, we tend to see retail

752
00:35:52,120 --> 00:35:54,680
Speaker 3: pull back, and retail, as I just went through, is

753
00:35:54,760 --> 00:35:57,920
Speaker 3: kind of the support function that we're looking for right now,

754
00:35:57,920 --> 00:36:01,279
Speaker 3: and is what is keeping a lit on spreads through

755
00:36:01,320 --> 00:36:04,359
Speaker 3: all the volatility that we're seeing. So that's one thing,

756
00:36:05,040 --> 00:36:09,400
Speaker 3: you know, I think that in actually kind of interestingly,

757
00:36:09,920 --> 00:36:12,879
Speaker 3: like if the FED is on hold. I've always said

758
00:36:12,880 --> 00:36:14,960
Speaker 3: this right for investment grade credit. One of the things

759
00:36:14,960 --> 00:36:17,240
Speaker 3: that we do in g FIX is we look across

760
00:36:17,360 --> 00:36:20,040
Speaker 3: different scenarios on a quarterly basis, and we're thinking about

761
00:36:20,080 --> 00:36:24,560
Speaker 3: above trend growth, probability, subtrend growth, recession and crisis. And

762
00:36:24,640 --> 00:36:26,919
Speaker 3: what I care about and what I'm thinking the most

763
00:36:26,920 --> 00:36:28,640
Speaker 3: about is you would think it would be how much

764
00:36:28,680 --> 00:36:30,960
Speaker 3: is in that above trend category. I actually want to

765
00:36:31,000 --> 00:36:34,160
Speaker 3: see a lot in that subtrend category, right. I don't

766
00:36:34,200 --> 00:36:36,279
Speaker 3: want things to be too hot and I don't want

767
00:36:36,320 --> 00:36:38,640
Speaker 3: things to be too cold. So in the environment that

768
00:36:38,640 --> 00:36:40,279
Speaker 3: we're in right now, it's almost kind of like the

769
00:36:40,320 --> 00:36:42,959
Speaker 3: sweet spot for investment grade because you have a FED

770
00:36:43,000 --> 00:36:46,520
Speaker 3: on hold. You know, you have the potential for a

771
00:36:46,560 --> 00:36:49,160
Speaker 3: FED to cut, but there's no really immediate reason for

772
00:36:49,200 --> 00:36:51,640
Speaker 3: the FED to be cutting. And then that subtrend kind

773
00:36:51,640 --> 00:36:54,480
Speaker 3: of mid single digit EBIT done revenue, you know, margins

774
00:36:54,480 --> 00:36:57,400
Speaker 3: at twenty year highs type of level. That's actually the

775
00:36:58,200 --> 00:37:01,000
Speaker 3: best case scenario for investment greene like a humming along

776
00:37:01,120 --> 00:37:02,520
Speaker 3: subtrend type of economy.

777
00:37:03,040 --> 00:37:05,240
Speaker 2: Would you argue kind of like late cycle and stuff

778
00:37:05,280 --> 00:37:07,799
Speaker 2: like that, Right, So it's almost like, you know, we've

779
00:37:07,840 --> 00:37:11,319
Speaker 2: delayed a recession. I guess many times it stuff like that.

780
00:37:11,360 --> 00:37:13,960
Speaker 2: So is that like, are we kind of you know,

781
00:37:14,600 --> 00:37:16,719
Speaker 2: if people would have put in money now, right? Is

782
00:37:16,760 --> 00:37:19,120
Speaker 2: it kind of like coming in late inning spreads are tight,

783
00:37:19,520 --> 00:37:21,480
Speaker 2: you know, is that something to look out for, or

784
00:37:21,920 --> 00:37:24,759
Speaker 2: you still think that the yield picture looks pretty good,

785
00:37:24,800 --> 00:37:27,160
Speaker 2: so you'll be protected at least for a little bit.

786
00:37:27,239 --> 00:37:29,839
Speaker 2: In case we do go to this scenario of all right,

787
00:37:30,000 --> 00:37:32,160
Speaker 2: I think things might be kind of you might go

788
00:37:32,160 --> 00:37:32,960
Speaker 2: a little bit soft.

789
00:37:33,239 --> 00:37:35,680
Speaker 3: I don't know. I think you could have made the argument.

790
00:37:36,040 --> 00:37:38,439
Speaker 3: You know, I've heard that argument for like years now,

791
00:37:38,480 --> 00:37:40,880
Speaker 3: and you know every single time I wish I invested

792
00:37:40,880 --> 00:37:44,080
Speaker 3: five basis points ago. So I don't know. I'm still

793
00:37:44,120 --> 00:37:47,080
Speaker 3: pretty optimistic. I think it's definitely turning into a bit

794
00:37:47,120 --> 00:37:49,640
Speaker 3: of a carry type of environment and you're starting to

795
00:37:49,680 --> 00:37:52,719
Speaker 3: see that and where the demand profile is going. But

796
00:37:52,800 --> 00:37:55,040
Speaker 3: I think where yields are just where break evens are

797
00:37:55,080 --> 00:37:58,440
Speaker 3: for yields widening, It's just it's investment. Great credit is

798
00:37:58,480 --> 00:38:01,560
Speaker 3: solid and they'll all in backdrop. Just makes it part

799
00:38:01,560 --> 00:38:05,720
Speaker 3: of the conversation for institutional and retail investors.

800
00:38:05,760 --> 00:38:07,879
Speaker 1: Frankly, you know, where credit people, then we worry about

801
00:38:07,920 --> 00:38:10,400
Speaker 1: all sorts of stuff. So you know, stagflation that hasn't

802
00:38:10,440 --> 00:38:13,640
Speaker 1: gone away, that risk, the risk of the FED actually hiking,

803
00:38:14,280 --> 00:38:16,120
Speaker 1: you know, people are talking about that. More is that

804
00:38:16,280 --> 00:38:21,200
Speaker 1: completely off your radar in terms of possibilities.

805
00:38:21,480 --> 00:38:23,840
Speaker 3: It's not off the radar, it's not on our base case.

806
00:38:25,120 --> 00:38:27,880
Speaker 3: You know, the inflation reading this morning was kind of interesting.

807
00:38:27,920 --> 00:38:30,799
Speaker 3: Inflation is going to be elevated, you know, because of

808
00:38:30,800 --> 00:38:32,920
Speaker 3: the war. I think if you strip out the impact

809
00:38:32,920 --> 00:38:36,880
Speaker 3: of the government shutdown which resulted in a hot shelter print,

810
00:38:36,880 --> 00:38:41,480
Speaker 3: it's not as pronounced. There's limited evidence of pass through

811
00:38:41,480 --> 00:38:45,160
Speaker 3: from like higher energy prices outside of airfares and oil.

812
00:38:45,760 --> 00:38:48,319
Speaker 3: So that's something that that's a key watch. But you know,

813
00:38:49,160 --> 00:38:52,040
Speaker 3: the FED hiking and going down that path is a risk.

814
00:38:52,080 --> 00:38:54,279
Speaker 3: It would be bad for investment grade, but it's not

815
00:38:54,320 --> 00:38:55,239
Speaker 3: our base case right now.

816
00:38:55,520 --> 00:38:58,439
Speaker 1: So we've heard the bull case definitely for investment grade.

817
00:38:58,480 --> 00:39:03,040
Speaker 1: You know, it involves better earnings, better you know, credit

818
00:39:03,120 --> 00:39:08,120
Speaker 1: quality generally a steady economy, you know, no real change

819
00:39:08,120 --> 00:39:12,000
Speaker 1: in rates, and also good liquidity portfolios rating all that

820
00:39:12,040 --> 00:39:14,520
Speaker 1: stuff is worth something. But how tight do you think

821
00:39:14,760 --> 00:39:17,040
Speaker 1: spreads could go in terms of investment grade US?

822
00:39:17,600 --> 00:39:20,359
Speaker 3: So we're trading out around eighty basis points right now.

823
00:39:20,400 --> 00:39:23,200
Speaker 3: Like I mentioned in the peak, I ran conflict, Like

824
00:39:23,280 --> 00:39:25,680
Speaker 3: in mid March, we got to the ninety five ish level.

825
00:39:27,160 --> 00:39:30,560
Speaker 3: I think all in tights are in the sixties coming

826
00:39:30,600 --> 00:39:33,239
Speaker 3: into the we're about five to seven basis points off

827
00:39:33,280 --> 00:39:34,960
Speaker 3: the tights of the year. I think we could easily

828
00:39:34,960 --> 00:39:37,480
Speaker 3: get back to that, and then I think we're going

829
00:39:37,560 --> 00:39:40,759
Speaker 3: to challenge, you know, some of some of this. Two

830
00:39:40,760 --> 00:39:43,320
Speaker 3: things have to happen for us to move tighter. Banks

831
00:39:43,320 --> 00:39:44,879
Speaker 3: have to start to perform, and I think that there's

832
00:39:44,880 --> 00:39:48,600
Speaker 3: a runway for that, especially in the senior space. And

833
00:39:48,680 --> 00:39:50,759
Speaker 3: the second thing is that we have to have some

834
00:39:50,840 --> 00:39:53,160
Speaker 3: kind of catalyst that we get past with a lot

835
00:39:53,160 --> 00:39:55,560
Speaker 3: of this hyper scaler issuance. If you look at just

836
00:39:56,360 --> 00:40:00,320
Speaker 3: single A spread moves, the hyper scalers are all thirty

837
00:40:00,360 --> 00:40:03,000
Speaker 3: wider and everything else is five to ten tighter. It's

838
00:40:03,080 --> 00:40:07,480
Speaker 3: it's I'm actually I've actually been frankly surprised at the

839
00:40:07,560 --> 00:40:10,239
Speaker 3: fact that we're not seeing some spillover into some of

840
00:40:10,280 --> 00:40:13,040
Speaker 3: the retail companies, into some of the rails, like those

841
00:40:13,080 --> 00:40:14,440
Speaker 3: parts of the market that tend to be that like

842
00:40:14,520 --> 00:40:17,680
Speaker 3: high triple B type of level. So it just shows

843
00:40:17,719 --> 00:40:20,640
Speaker 3: you that that demand backdrop is still there. If those

844
00:40:20,760 --> 00:40:22,840
Speaker 3: names start to perform and get anywhere, let's say they

845
00:40:22,880 --> 00:40:26,080
Speaker 3: even retrace half of the widening, that they've had on

846
00:40:26,400 --> 00:40:28,480
Speaker 3: not no longer seven percent of the index, but more

847
00:40:28,520 --> 00:40:30,359
Speaker 3: like eleven percent of the index. It's going to start

848
00:40:30,360 --> 00:40:33,480
Speaker 3: to move index level. So between those two things, that's

849
00:40:33,560 --> 00:40:35,960
Speaker 3: kind of how you get back into the low seventies.

850
00:40:36,160 --> 00:40:38,560
Speaker 1: Does it leave you looking for other options outside of

851
00:40:38,600 --> 00:40:40,560
Speaker 1: investment grade? I mean, do you go into structure or

852
00:40:40,600 --> 00:40:43,120
Speaker 1: floaters or hybrids or what do you do? You like

853
00:40:43,200 --> 00:40:46,080
Speaker 1: other stuff beyond just pure playing vanilla credit?

854
00:40:46,560 --> 00:40:50,239
Speaker 3: Yeah, I'm I what we were talking as a team

855
00:40:50,280 --> 00:40:52,440
Speaker 3: about this today actually, So we were looking at double

856
00:40:52,440 --> 00:40:55,440
Speaker 3: B triple B in like the sixty ish type of

857
00:40:55,520 --> 00:40:58,120
Speaker 3: level call a five year raverage more like one hundred

858
00:40:58,120 --> 00:41:00,160
Speaker 3: basis points of pickup that you get. Double B is

859
00:41:00,200 --> 00:41:03,160
Speaker 3: trading around six percent yield. So I keep hearing that

860
00:41:03,160 --> 00:41:05,800
Speaker 3: that six percent, like always keeps coming back around to me, like,

861
00:41:06,200 --> 00:41:08,480
Speaker 3: as so, you have investment grade as five at five

862
00:41:08,520 --> 00:41:11,319
Speaker 3: and a quarter, you have thirty year investment grade at

863
00:41:11,360 --> 00:41:14,520
Speaker 3: six percent, which I think is pretty attractive. You have

864
00:41:14,640 --> 00:41:16,400
Speaker 3: double D at six percent, and then if you just

865
00:41:16,400 --> 00:41:18,880
Speaker 3: look at hybrids and buy a basket of energy and

866
00:41:19,000 --> 00:41:23,880
Speaker 3: utility hybrids non call five, you're getting around six percent

867
00:41:23,920 --> 00:41:27,360
Speaker 3: for that. So would I rather buy investment grade companies

868
00:41:27,400 --> 00:41:29,799
Speaker 3: down in the cap structure that are participating in the

869
00:41:29,840 --> 00:41:33,480
Speaker 3: AI build out have solid balance sheets, you know, are

870
00:41:33,520 --> 00:41:35,400
Speaker 3: having a lot of tailwinds from a lot of things

871
00:41:35,480 --> 00:41:38,440
Speaker 3: right now in the energy and utility space versus double

872
00:41:38,480 --> 00:41:41,400
Speaker 3: b's at a pretty tight level to triple b's. Absolutely,

873
00:41:41,480 --> 00:41:44,560
Speaker 3: So we like hybrids. The high yield index in and

874
00:41:44,600 --> 00:41:47,400
Speaker 3: of itself at seven percent, I think is attractive, you know,

875
00:41:48,200 --> 00:41:51,080
Speaker 3: certain cohorts of it, and then outside of that, we're

876
00:41:51,120 --> 00:41:54,719
Speaker 3: really trying to focus on getting the bank trade right

877
00:41:54,800 --> 00:41:57,239
Speaker 3: at this point. Yeah, I mean that's what we're focused on.

878
00:41:57,239 --> 00:41:59,520
Speaker 1: Okay, you're most investment grade, but you can you have

879
00:41:59,560 --> 00:42:03,040
Speaker 1: the option to go down into high yields.

880
00:42:02,719 --> 00:42:04,480
Speaker 3: If you out, and some of our portfolios we can.

881
00:42:04,560 --> 00:42:07,520
Speaker 2: Okay, And is there a specific what's kind of the

882
00:42:07,560 --> 00:42:11,440
Speaker 2: metric you know, like banks versus industrials? What sort of

883
00:42:11,440 --> 00:42:14,840
Speaker 2: a like like a key I guess target level if

884
00:42:14,880 --> 00:42:18,120
Speaker 2: you have one or framework that you look at. Yeah.

885
00:42:18,160 --> 00:42:21,040
Speaker 3: So one of the things that we watch pretty closely

886
00:42:21,160 --> 00:42:23,840
Speaker 3: is banks on a ratio basis as a percentage of

887
00:42:23,880 --> 00:42:27,000
Speaker 3: the index spread, and then banks as a percentage of

888
00:42:27,040 --> 00:42:30,600
Speaker 3: industrial spread. Similar maturity, So call it in a ten

889
00:42:30,680 --> 00:42:33,719
Speaker 3: year bucket, and so banks are trading wide to industrials

890
00:42:33,880 --> 00:42:36,120
Speaker 3: right now. For years and years and years they traded

891
00:42:36,160 --> 00:42:38,600
Speaker 3: through let's call it pre COVID. Then you had twenty

892
00:42:38,640 --> 00:42:42,040
Speaker 3: twenty two where banks really over issued and underperformed by

893
00:42:42,400 --> 00:42:44,919
Speaker 3: ten twenty thirty basis points of different parts of that year.

894
00:42:45,360 --> 00:42:48,520
Speaker 3: They've come back, but they haven't fully retraced, and so

895
00:42:48,600 --> 00:42:50,879
Speaker 3: it's interesting that you're seeing at ones do as well

896
00:42:50,880 --> 00:42:53,439
Speaker 3: as they're doing without banks catching up. So I feel

897
00:42:53,440 --> 00:42:55,640
Speaker 3: like that's the next window. But if we were to

898
00:42:55,680 --> 00:42:58,560
Speaker 3: see banks, I don't know, flat to the index on

899
00:42:58,600 --> 00:43:01,120
Speaker 3: a ratio basis, I think that looks pretty good, you know,

900
00:43:01,360 --> 00:43:05,000
Speaker 3: trading out like ninety percent of index os for a

901
00:43:05,000 --> 00:43:08,120
Speaker 3: bank index, and remember it's a little shorter in duration

902
00:43:08,239 --> 00:43:11,239
Speaker 3: than an industrial index, you know, kind of gets it

903
00:43:11,280 --> 00:43:13,279
Speaker 3: back to fair value. I think bank should at least

904
00:43:13,360 --> 00:43:14,520
Speaker 3: be at fair value right now.

905
00:43:14,680 --> 00:43:18,040
Speaker 2: And then the spreads that you're kind of quoting, is

906
00:43:18,080 --> 00:43:20,600
Speaker 2: that the July index that you're looking.

907
00:43:20,360 --> 00:43:22,520
Speaker 3: At all, So we're using we for the most part

908
00:43:22,600 --> 00:43:23,680
Speaker 3: use Bloomberg Barclays.

909
00:43:23,760 --> 00:43:26,799
Speaker 2: Yeah, yeah, I think it's pretty similar, right, but just to.

910
00:43:27,400 --> 00:43:28,720
Speaker 3: July tends to be a little wider.

911
00:43:29,239 --> 00:43:32,360
Speaker 1: But yeah, Okay, given the scale of your platform, you know,

912
00:43:32,400 --> 00:43:35,880
Speaker 1: four point three trillion dollars is said, how easy or

913
00:43:35,880 --> 00:43:38,120
Speaker 1: difficult is it to move in and out of positions

914
00:43:38,120 --> 00:43:40,719
Speaker 1: and find value Given that you've got all that other

915
00:43:40,760 --> 00:43:43,440
Speaker 1: money flowing in and everybody wants the same products and

916
00:43:43,480 --> 00:43:46,279
Speaker 1: the same you know, relative value, how do you how

917
00:43:46,280 --> 00:43:47,840
Speaker 1: do you get what you want from the market?

918
00:43:48,160 --> 00:43:50,719
Speaker 3: Yeah, I mean the new issue market has been helpful recently,

919
00:43:50,920 --> 00:43:53,360
Speaker 3: Like you keep having I feel like the deal size

920
00:43:53,400 --> 00:43:56,040
Speaker 3: has just gotten larger, the over subscription amounts are higher

921
00:43:56,040 --> 00:43:58,239
Speaker 3: and the concessions lower. So that's not good from a

922
00:43:58,239 --> 00:44:00,680
Speaker 3: relative value standpoint, but it allows you to get invested

923
00:44:00,719 --> 00:44:04,400
Speaker 3: in what you want to buy, you know, like portfolio

924
00:44:04,440 --> 00:44:07,719
Speaker 3: trading has picked up massively. That has been super helpful.

925
00:44:08,800 --> 00:44:12,080
Speaker 3: And then you know, like just being able to That's

926
00:44:12,120 --> 00:44:14,440
Speaker 3: why I kind of like what these tech firms are doing,

927
00:44:14,560 --> 00:44:17,120
Speaker 3: issuing almost giving you a menu of options. You know,

928
00:44:17,160 --> 00:44:20,080
Speaker 3: it's not all index eligible stuff. You can invest in

929
00:44:20,120 --> 00:44:23,600
Speaker 3: different parts of the relative value chain if you want

930
00:44:23,640 --> 00:44:26,320
Speaker 3: to be more risk or less risk. So we're finding

931
00:44:26,320 --> 00:44:30,680
Speaker 3: a ton of opportunities for the flow and it's been

932
00:44:30,719 --> 00:44:32,080
Speaker 3: a wild ride this year so far.

933
00:44:32,160 --> 00:44:33,920
Speaker 1: And the books you mentioned they are massive for some

934
00:44:33,960 --> 00:44:37,880
Speaker 1: of these tech deals. But my observation going back, you know,

935
00:44:37,960 --> 00:44:39,960
Speaker 1: a long time looking at this stuff, is that the

936
00:44:40,040 --> 00:44:43,360
Speaker 1: more kind of inflated these things become, the more people

937
00:44:43,440 --> 00:44:46,000
Speaker 1: just put in orders for ten times what they actually

938
00:44:46,040 --> 00:44:47,640
Speaker 1: want because they know they're going to be scaled back.

939
00:44:47,760 --> 00:44:48,719
Speaker 1: How much of that's going on?

940
00:44:49,080 --> 00:44:50,399
Speaker 3: So how did I know you were going to ask

941
00:44:50,400 --> 00:44:52,279
Speaker 3: me that question? So I went back over time and

942
00:44:52,320 --> 00:44:55,439
Speaker 3: I've looked at all the hyper scaler deals, right, because

943
00:44:55,440 --> 00:44:57,160
Speaker 3: they can get into the hundreds of billions for a

944
00:44:57,200 --> 00:44:59,560
Speaker 3: twenty five billion dollar deal or a thirty billion dollar deal.

945
00:45:00,040 --> 00:45:02,600
Speaker 3: We looked at the rate at which you saw peak

946
00:45:02,640 --> 00:45:05,839
Speaker 3: book to where the book actually shuck out, and it's

947
00:45:05,840 --> 00:45:08,319
Speaker 3: been pretty consistent. I mean, you're always going to see

948
00:45:08,320 --> 00:45:10,480
Speaker 3: some drops, right, but we've seen we're seeing drops in

949
00:45:10,520 --> 00:45:14,040
Speaker 3: more like the ten to twenty ish billion dollar range

950
00:45:14,040 --> 00:45:15,839
Speaker 3: for a book that's one hundred billion for a thirty

951
00:45:15,840 --> 00:45:17,920
Speaker 3: billion dollar deal. That's really not that bad. There are

952
00:45:17,960 --> 00:45:21,480
Speaker 3: a few exceptions of that for the lower quality hyperscalers,

953
00:45:21,480 --> 00:45:23,320
Speaker 3: but for the most part, as the market is getting

954
00:45:23,440 --> 00:45:26,120
Speaker 3: more used to these deals in the size that they're

955
00:45:26,160 --> 00:45:28,560
Speaker 3: coming with the amount of concession that they're having people

956
00:45:28,600 --> 00:45:30,640
Speaker 3: know what they're getting and they're putting in real orders.

957
00:45:30,960 --> 00:45:32,560
Speaker 1: And do you think the concession is going to get

958
00:45:32,640 --> 00:45:35,200
Speaker 1: higher from here and the spreads are going to get

959
00:45:35,200 --> 00:45:36,480
Speaker 1: wider for these sorts of deals.

960
00:45:36,960 --> 00:45:39,120
Speaker 3: I think exactly what's happened so far is going to

961
00:45:39,120 --> 00:45:42,640
Speaker 3: continue to happen if we start to see a lack

962
00:45:42,719 --> 00:45:45,160
Speaker 3: of discipline come back through. So if we're seeing these

963
00:45:45,200 --> 00:45:47,239
Speaker 3: issuers come and say they're not going to issue until

964
00:45:47,280 --> 00:45:50,280
Speaker 3: Q four because they just came and they're coming in July,

965
00:45:50,920 --> 00:45:52,960
Speaker 3: you know you're going to see some more concession be

966
00:45:53,040 --> 00:45:55,799
Speaker 3: built in. But I actually think that, like I don't know,

967
00:45:55,920 --> 00:45:58,759
Speaker 3: five to seven basis points of concession feels right. It's

968
00:45:58,800 --> 00:46:00,960
Speaker 3: a little more than what you're getting for your average

969
00:46:01,120 --> 00:46:03,920
Speaker 3: high quality pharma deal that's coming, even if it's large,

970
00:46:04,600 --> 00:46:06,560
Speaker 3: not as much concession as a risky credit and that

971
00:46:06,800 --> 00:46:09,280
Speaker 3: kind of like ten to fifteen basis points type of level.

972
00:46:10,160 --> 00:46:12,560
Speaker 3: But you are going to see I think, steeper curves,

973
00:46:12,760 --> 00:46:15,120
Speaker 3: and so the same amount of concession on a curve

974
00:46:15,160 --> 00:46:17,239
Speaker 3: that's double what it was three months ago is still,

975
00:46:17,239 --> 00:46:20,879
Speaker 3: in my view, kind of concession, you know, but it's

976
00:46:20,960 --> 00:46:22,319
Speaker 3: just being built in a different way.

977
00:46:22,440 --> 00:46:24,440
Speaker 1: So when you look at everything you're doing, Stephanie, it's

978
00:46:24,440 --> 00:46:27,240
Speaker 1: a huge area. But where is the best relative value

979
00:46:27,280 --> 00:46:29,040
Speaker 1: right now? What's your edge? Where do you think you're

980
00:46:29,040 --> 00:46:29,680
Speaker 1: going to get alpha?

981
00:46:30,280 --> 00:46:33,759
Speaker 3: Yeah, so we like the banks here. I think that

982
00:46:34,239 --> 00:46:36,359
Speaker 3: we could squeeze a little more out of them, even

983
00:46:36,360 --> 00:46:41,160
Speaker 3: though you know, everything is relatively compressed. I think as

984
00:46:41,200 --> 00:46:45,279
Speaker 3: the year goes on, especially given for every day that

985
00:46:45,320 --> 00:46:47,600
Speaker 3: passes with the war going on, you're going to start

986
00:46:47,600 --> 00:46:50,320
Speaker 3: to see a little more dispersion creep through. If you

987
00:46:50,360 --> 00:46:52,760
Speaker 3: look at excess returns on a year to date basis,

988
00:46:52,880 --> 00:46:56,560
Speaker 3: energy has been the outperformer. Unsurprisingly, I don't think that

989
00:46:56,560 --> 00:47:00,359
Speaker 3: that's going to stop anytime soon. And so you know,

990
00:47:00,520 --> 00:47:03,480
Speaker 3: like I said, we believe that even if the war

991
00:47:03,480 --> 00:47:06,319
Speaker 3: were to end tomorrow, energy is pretty well supported as

992
00:47:06,320 --> 00:47:09,040
Speaker 3: a sector. From here, there's been a lot of call

993
00:47:09,080 --> 00:47:11,719
Speaker 3: it three to five year structural damage that's been done

994
00:47:11,760 --> 00:47:13,880
Speaker 3: that's going to have to be rebuilt, and it's happening

995
00:47:13,920 --> 00:47:15,640
Speaker 3: at the same time when you're seeing a lot of

996
00:47:15,680 --> 00:47:18,960
Speaker 3: discipline I think from the EMP companies in ig So,

997
00:47:19,080 --> 00:47:21,640
Speaker 3: I think they're in a sweet spot relatively and still

998
00:47:21,640 --> 00:47:25,399
Speaker 3: trade wide to the index. And then you know, It's

999
00:47:25,440 --> 00:47:30,000
Speaker 3: all about trying to get the tech issuance correct and

1000
00:47:30,400 --> 00:47:32,680
Speaker 3: realize when the catalyst is for them to start to

1001
00:47:32,680 --> 00:47:34,680
Speaker 3: perform a little bit. You're going to have pockets of

1002
00:47:35,960 --> 00:47:38,880
Speaker 3: supportive supply dynamics. They tend to be in the summer

1003
00:47:38,920 --> 00:47:42,920
Speaker 3: and heading into that September period. So participating in those

1004
00:47:43,000 --> 00:47:45,319
Speaker 3: and being tactical around them, I think will be a

1005
00:47:45,360 --> 00:47:47,640
Speaker 3: big addition this year, hopefully for us.

1006
00:47:47,880 --> 00:47:50,959
Speaker 1: The CEO, Jamie Diamond, we should get him on the show,

1007
00:47:52,400 --> 00:47:55,520
Speaker 1: has taught today well this week about too much exuberants

1008
00:47:55,600 --> 00:47:58,080
Speaker 1: in the markets that you know, some of this risk

1009
00:47:58,160 --> 00:48:00,560
Speaker 1: isn't being priced. And he's also the one has talked

1010
00:48:00,560 --> 00:48:03,759
Speaker 1: about cockroaches in credit. Obviously you're on the IG side,

1011
00:48:03,760 --> 00:48:07,200
Speaker 1: so you're not really going low quality. But if all

1012
00:48:07,280 --> 00:48:08,960
Speaker 1: this stuff happens, I mean he says that there will

1013
00:48:09,000 --> 00:48:10,920
Speaker 1: be a shakeout and it will be worse than people expect.

1014
00:48:11,320 --> 00:48:14,520
Speaker 1: Surely that's going to rip through everything you know, including IG.

1015
00:48:14,760 --> 00:48:16,480
Speaker 1: So how do you prepare for that?

1016
00:48:17,120 --> 00:48:19,480
Speaker 3: Yeah? I think listen. I think a lot of those

1017
00:48:19,480 --> 00:48:22,960
Speaker 3: comments that have been made are in regards to the

1018
00:48:23,000 --> 00:48:27,200
Speaker 3: private credit space. You know, any time that you see

1019
00:48:27,400 --> 00:48:30,040
Speaker 3: this amount of growth in a space like that you know,

1020
00:48:30,080 --> 00:48:33,439
Speaker 3: there's always going to be good and bad borrowers, and

1021
00:48:33,760 --> 00:48:36,399
Speaker 3: I think that a lot of this growth. It's something

1022
00:48:36,400 --> 00:48:38,319
Speaker 3: to remember, right A lot of this growth that we're

1023
00:48:38,320 --> 00:48:40,759
Speaker 3: seeing in private credit is coming from other areas, so

1024
00:48:40,840 --> 00:48:43,560
Speaker 3: like high yield loans banks. It's a lot of this

1025
00:48:43,640 --> 00:48:46,600
Speaker 3: is a redistribution of debt that would have been coming already,

1026
00:48:46,840 --> 00:48:48,879
Speaker 3: and so that that's what to remember. On that side,

1027
00:48:48,880 --> 00:48:52,839
Speaker 3: we still don't see private credit as systemic in its

1028
00:48:52,920 --> 00:48:56,560
Speaker 3: risk profile, but you know, I think the war is

1029
00:48:56,600 --> 00:48:59,439
Speaker 3: another key risk that might shake out some of these

1030
00:48:59,440 --> 00:49:03,839
Speaker 3: weaker borrowers that are getting a lot of tailwinds right

1031
00:49:03,880 --> 00:49:07,120
Speaker 3: now from the fundamental side. So looking at those issuers

1032
00:49:07,160 --> 00:49:10,200
Speaker 3: that you know, we're on the cusp of being downgraded

1033
00:49:10,200 --> 00:49:12,800
Speaker 3: before all this happened, that might be seeing some benefits

1034
00:49:12,880 --> 00:49:16,279
Speaker 3: right now, you know, and re examining them is probably

1035
00:49:16,320 --> 00:49:17,160
Speaker 3: where we're going next.

1036
00:49:17,400 --> 00:49:20,160
Speaker 1: Great stuff, Stephanie Doyle, JP, Organistic Management. It's been a

1037
00:49:20,160 --> 00:49:21,680
Speaker 1: real pleasure having you on the Credit Edge Money.

1038
00:49:21,680 --> 00:49:22,839
Speaker 3: Thanks, thank you so much.

1039
00:49:23,080 --> 00:49:25,399
Speaker 1: And to Arnold Kakudo of Bloomberg Intelligence, thank you very.

1040
00:49:25,400 --> 00:49:26,000
Speaker 3: Much for joining us.

1041
00:49:26,160 --> 00:49:28,680
Speaker 1: Thanks for having me and from even more analysis, read

1042
00:49:28,680 --> 00:49:31,000
Speaker 1: all of Ronold's great work on the Bloomberg Terminal. Bloomberg

1043
00:49:31,040 --> 00:49:33,319
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1044
00:49:33,320 --> 00:49:36,560
Speaker 1: analysts and strategists working across all markets. Coverage includes over

1045
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1046
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1047
00:49:43,160 --> 00:49:45,359
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1048
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1050
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1051
00:49:54,680 --> 00:49:58,480
Speaker 1: at Jcromby eight at Bloomberg dot net. I'm James Crumby.

1052
00:49:58,520 --> 00:50:00,239
Speaker 1: It's been a pleasure having you join us again next

1053
00:50:00,280 --> 00:50:10,160
Speaker 1: week on the Credit Edge