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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 Bloomberg.

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Speaker 1: This week, we're very pleased to welcome Matt Brill, head

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Speaker 1: of North America investment grade credit at Invesco.

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Speaker 2: How are you doing, Matt, I'm doing great. Thanks are

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Speaker 2: you very well?

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Speaker 1: Thanks so much for joining us today. I'm very excited

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Speaker 1: to dig into your market views and the outlook. Also

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Speaker 1: delighted to welcome back Tollu Alamutu with Bloomberg Intelligence. Great

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Speaker 1: to see you again, Tollu.

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Speaker 3: Great to be here, James, thank.

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Speaker 1: You, Thank you. And just to set the scene a

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Speaker 1: bit here to start. Credit markets are rallying and debt

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Speaker 1: spreads remain tight. You're not getting very much compensation for

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Speaker 1: the risk of default or downgrade on corporate debt. The

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Speaker 1: mood is pretty uniformly bullish, though, especially on US assets,

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Speaker 1: and most people are very excited about private markets. Money

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Speaker 1: just keeps flowing in. Even real estate is coming back

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Speaker 1: into favor, with buyers seeing value and sellers getting more

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Speaker 1: realistic on valuation. Issuance is ramping up. There's a record

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Speaker 1: volume of bond and loan sales as companies take advantage

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Speaker 1: of the window to raise debt, front loading the fundraising

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Speaker 1: to avoid election volatility later on in the year. They

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Speaker 1: are accepting the fact that the FED isn't cutting rates

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Speaker 1: anytime soon, and increasingly borrowing at longer tenres. Most of

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Speaker 1: it's for refi, so it's not really relieving the demand

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Speaker 1: supply in balance. The bull case is founded on a

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Speaker 1: belief that the US economy will avoid recession, earnings remain solid,

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Speaker 1: and companies can handle the much higher borrowing costs, although

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Speaker 1: there's a cohort of very low quality issuers that may

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Speaker 1: still blow up. There's a lot to worry about commercial

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Speaker 1: real estate stress, war, geopolitics, elections, and there seems to

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Speaker 1: be quite a bit of complacency in credit markets, given

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Speaker 1: how tight spreads have become an eerie sense of calm,

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Speaker 1: and it's very hard to find anyone who's there is.

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Speaker 1: But what's your take that we keep hearing about the

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Speaker 1: Year of the bond, a golden age for credit? What

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Speaker 1: do you think?

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Speaker 4: Well, you know, I think it's it's kind of what

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Speaker 4: are you looking at from a from an outright standpoint

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Speaker 4: A you're looking at yield or are you looking at spread?

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Speaker 4: So if you're looking at yield, it is kind of

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Speaker 4: a golden age for bonds. It's higher yield than you've

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Speaker 4: really gotten for the last fifteen years. And if you're

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Speaker 4: looking at spreads or kind of the risk over treasuries.

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Speaker 2: Then then it does look a little bit tight.

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Speaker 4: It does look like you're not really getting paid to

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Speaker 4: take on this credit risk. That being said, you know,

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Speaker 4: companies are in really good shape. The economy is really strong.

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Speaker 4: We do expect it to slow a little bit here,

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Speaker 4: but overall we're bullish on total returns for bonds. I'm

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Speaker 4: not saying credit spreads are gonna go materially tighter, but

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Speaker 4: I think you're gonna make money on bonds for the

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Speaker 4: rest of the year, and then then you know, you

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Speaker 4: for a couple of years after that.

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Speaker 3: Matt, maybe I can ask a follow up question on

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Speaker 3: the bond return. So, I guess one of the issues

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Speaker 3: has been, you know about rate cuts and the expectations

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Speaker 3: changing versus I guess what they were maybe this time

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Speaker 3: last year or a little bit later. So are you

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Speaker 3: concerned then that maybe if we don't get the rate

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Speaker 3: cuts that people would like to see, that you don't

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Speaker 3: see the level of return basically that people will also

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Speaker 3: like to see.

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Speaker 4: So we think we're at a pretty good spot here

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Speaker 4: where the way that we're phrasing this is that you're

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Speaker 4: getting paid to weight, So you're getting paid to wait

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Speaker 4: for the FED to cut. So if the FED doesn't

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Speaker 4: cut anytime soon, you're getting your five and a half

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Speaker 4: ish percent coupon for US investment grade credit, you know,

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Speaker 4: pretty much anywhere on along the curve. We think that's

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Speaker 4: pretty good. So we think you're happy to get paid

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Speaker 4: to weight.

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Speaker 2: Now.

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Speaker 4: Certainly some people will get impatient and think, hey, I

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Speaker 4: got to get the FED to cut now because I

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Speaker 4: want to get double digit returns and bonds.

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Speaker 2: But you know, we're not. Really Yeah, that's kind of

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Speaker 2: the upside.

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Speaker 4: I'd say, that's kind of like the the the icing

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Speaker 4: on the cake, if you will, if you can get that.

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Speaker 2: So overall, if.

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Speaker 4: The FED cuts the end of this year, if the

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Speaker 4: FED cuts early twenty two, twenty five, you know that

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Speaker 4: that's fine. I think the key here is that the

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Speaker 4: FED is not going to hike.

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Speaker 2: Now.

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Speaker 4: If the FED puts hiking back on the table, then

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Speaker 4: then it kind of changes that that that dynamics a

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Speaker 4: little bit. But overall, our our thesis is just simply

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Speaker 4: that the worst is behind us. From inflationary standpoint, you're

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Speaker 4: getting paid to wait, and at some point here you're

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Speaker 4: going to get that kicker of the FED starting to cut.

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Speaker 3: Do you think that there's a risk then that that

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Speaker 3: patience might somehow run out, because obviously that, as James

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Speaker 3: mentioned at the start, there's geopolitical risk to consider. There's

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Speaker 3: obviously the US election that's generating headlines already all over

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Speaker 3: the world. But is there a risk that people run

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Speaker 3: out of patients just because of all these headlines and

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Speaker 3: that affects the returns of our asset class?

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Speaker 4: Yeah, I think I think there is a little bit

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Speaker 4: of of that going on right now, to be honest. Really,

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Speaker 4: more so about about a month ago, when you had

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Speaker 4: fairly weak CPI prints coming through or kind of elevated

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Speaker 4: CPI prints coming through, and it's some people and they said, hey,

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Speaker 4: you know, I thought this was supposed to be the

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Speaker 4: year of the bond. I thought we were going to

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Speaker 4: get you know, four to seven rate cuts, whatever.

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Speaker 2: It was going to be. And now all of a sudden,

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Speaker 2: you're telling me there might not be any on the table.

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Speaker 4: So people people got a little impatient people kind of

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Speaker 4: threw in the towel, if you will, rates went higher,

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Speaker 4: and then since then we've seen a little more stability

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Speaker 4: in terms of you know what, what's what's happened with

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Speaker 4: with the economy and with inflation.

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Speaker 2: So overall, I feel like kind.

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Speaker 4: Of got got people a little bit, you know, off

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Speaker 4: the off the ledge, if you will. So you know,

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Speaker 4: overall you've seen you know, people have kind of come

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Speaker 4: back to thinking, all right, we're not going to be

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Speaker 4: elevating inflation from here, and if and when it turns around,

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Speaker 4: I'm happy to jump in.

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Speaker 2: In the meantime, you know, you're you're.

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Speaker 4: Getting paid this coupon, and I think that that's the

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Speaker 4: key versus the past. In the past, you know, twenty

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Speaker 4: twenty twenty one, you're getting paid one and a half

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Speaker 4: to two and a half percent.

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Speaker 2: You really weren't getting paid to wait.

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Speaker 4: So you know, overall, if you can kind of just

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Speaker 4: limp along getting five and a half percent, I think

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Speaker 4: that's not going to really hurt anybody.

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Speaker 1: Is there any risks though we might go into recession?

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Speaker 4: Even a shallow one certainly is a risk. I mean,

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Speaker 4: you know, there's there's there's there's kind of the two

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Speaker 4: tail risks right now. One is that you get a recession,

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Speaker 4: and one is that you get kind of this no

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Speaker 4: landing where inflation just persists for longer. So we think

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Speaker 4: both are less than you know, call it maybe fifteen percent.

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Speaker 4: It's always hard to put actual percentages on these, but

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Speaker 4: there is a possibility. I am more fearful of a

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Speaker 4: of a hard stop than I am kind of the

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Speaker 4: no landing. If the no landing scenario is not great

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Speaker 4: for credit companies survive under an inflationary environment, it does

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Speaker 4: kind of call into the question of patients that to

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Speaker 4: Lewis was mentioning there. But overall, the no landing scenario

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Speaker 4: isn't isn't the worst one. A hard landing recession, you know,

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Speaker 4: is a concern. And credit spreads, you know, as we stated,

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Speaker 4: are not really getting you paid to take on those risks.

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Speaker 4: So our base case is not not for a recession.

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Speaker 4: If it happens, credit spreads are going to go wider.

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Speaker 4: I will point out that all in total returns will

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Speaker 4: actually be probably very positive during that period of time.

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Speaker 2: The other thing I point out is that.

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Speaker 4: A lot of companies for the last years have been

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Speaker 4: preparing for a recession, so you know, Jamie Diamond, what

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Speaker 4: was it at early twenty twenty three.

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Speaker 2: I think maybe even late twenty twenty two.

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Speaker 4: I was talking about, you know, the hurricane of economic

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Speaker 4: activity that was coming. A lot of companies have been

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Speaker 4: saying that a recession seemed to be on the horizon.

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Speaker 4: It's been the most predicted of recession basically in history.

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Speaker 4: So companies are not just standing by waiting for this

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Speaker 4: to happen. They're not been flat footed. They're really kind

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Speaker 4: of been preparing for a recession to occur. So they've

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Speaker 4: been improving their balance sheets. You mentioned earlier refinancing of debt,

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Speaker 4: so they're turning out their debt. They're not putting themselves

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Speaker 4: susceptible to any kind of near term debt maturities. They've

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Speaker 4: been paying down debt generally. You know, overall, companies are

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Speaker 4: kind of saying, hey, we don't know if recessions coming

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Speaker 4: or not, so let's get ready for it. And if

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Speaker 4: it does occur, I would argue, you know, you are

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Speaker 4: going to see spreads go wider, but it'll be much

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Speaker 4: less worse than it would be otherwise. You know, go

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Speaker 4: back to twenty twenty, there was no way to really

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Speaker 4: be prepared for a global pandemic. I mean, sure, certainly

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Speaker 4: some people out there in the world predicted it. They

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Speaker 4: probably also predicted a lot of other bad things happening

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Speaker 4: that never happened. But overall, companies weren't prepared for that,

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Speaker 4: So you could certainly understand why they wouldn't have been ready.

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Speaker 4: You know, it would be inexcusable not be ready for

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Speaker 4: a recession if you're a CFO, treasurer or CEO at

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Speaker 4: this point in the economic cycle.

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Speaker 3: Can I maybe ask a couple of follow up questions? First,

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Speaker 3: you mentioned a fifteen percent probability there is that for

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Speaker 3: a hard landing or no landing, and link to some

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Speaker 3: of the things that you just very helpfully mentioned about

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Speaker 3: companies being prepared. One of the issues I guess that

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Speaker 3: we've had this year is surprised us in a way

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Speaker 3: like NYCB. You know, some European banks also coming under pressure,

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Speaker 3: and agent banks as well coming under pressure because of

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Speaker 3: their exposure to commercial real estate. So is there a

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Speaker 3: risk you think that some CFOs probably aren't prepared for

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Speaker 3: that recessionary type scenario and you see some run into difficulties,

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Speaker 3: some companies run into difficulty.

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Speaker 2: Yes. The first part of the question.

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Speaker 4: We were kind of saying fifteen percent hard landing, fifteen

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Speaker 4: percent no landing. So that gives you kind of seventy

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Speaker 4: percent that you that you land the land.

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Speaker 2: The plane right in the middle of the runway.

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Speaker 4: And have that soft landing and everybody's happy. So seventy

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Speaker 4: percent is not foolproof, but but but it's more likely

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Speaker 4: than not in our opinion, And that's kind of how we're

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Speaker 4: positioning portfolios, you know, regarding you know, some of the

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Speaker 4: banking activity, it is a little harder, I would say,

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Speaker 4: for banks to prepare for economic crisises versus industrials. Industrials,

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Speaker 4: you know, are more of a predictability of cash flows

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Speaker 4: versus banks can be banks can be more of a

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Speaker 4: crisis of confidence. Silicon Valley Credit Swiss twenty twenty three.

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Speaker 4: You know, March of twenty twenty three certainly spooked everybody.

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Speaker 4: You had real losers at that time. There were real losses.

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Speaker 4: You know, we certainly acknowledged that and accept that. However,

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Speaker 4: you know that the positive coming out of that was

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Speaker 4: that company capital ratios are up significantly. Companies have really

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Speaker 4: kind of stockpiled liquidity. Companies have focused on ap quality,

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Speaker 4: focused on reserving for losses that may or may not come,

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Speaker 4: and we look at commercial real estate companies have really

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Speaker 4: really reserved for these losses.

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Speaker 2: Now they're going to happen.

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Speaker 4: I mean, I want to be clear, we're not saying that,

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Speaker 4: you know, the office market isn't going to have problems.

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Speaker 4: Possibly even the multi family apartment market may have problems

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Speaker 4: with overbuilding in certain parts of the country, we'll see,

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Speaker 4: but overall, you know, companies have reserved for this. So

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Speaker 4: you look at a lot of the big banks, they

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Speaker 4: have now reserved for losses of low double digits, so

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Speaker 4: you call it twelve to fourteen percent, and we point out,

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Speaker 4: you know, that's not just losses on office that's that's

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Speaker 4: losses on their entire commercial real estate portfolio. And so

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Speaker 4: that will include things like industrial which are doing really well.

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Speaker 4: That includes medical offices, which are often included as you know,

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Speaker 4: people just kind of broadly termed that office properties. But

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Speaker 4: medical offices are occupied and medical offices are doing quite well,

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Speaker 4: so there's pockets of strength within it. And kind of

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Speaker 4: when we stress that commercial real estate market, we all

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Speaker 4: will do things like sixty five eighty percent severities in

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Speaker 4: the commercial real estate space at at high level of

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Speaker 4: of of likelihood of defaults, and we still have hard

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Speaker 4: time getting kind of above that fifteen percent total losses.

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Speaker 4: So we do think banks have reserved for almost enough,

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Speaker 4: maybe not quite. They probably should continue to do it,

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Speaker 4: but they're not going to be blindsided, and I think

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Speaker 4: the key is there just for them not to not

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Speaker 4: to put their guard down. And overall, we're we've I

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Speaker 4: would describe this as kind of a slow bleed within

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Speaker 4: the commercial real estate market. Liquidity is is hard for

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Speaker 4: the real to get to get access to capital there,

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Speaker 4: but overall, long term leases in most of these most

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Speaker 4: of these situations result in losses down the road, but

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Speaker 4: they're not all hitting at once, which which is key.

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Speaker 4: Versus kind of a liquidity crunch or kind of a

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Speaker 4: credit crunch that you saw back in eight which all

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Speaker 4: hit at once. This is more of like, you know,

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Speaker 4: kind of a slow moving iceberg that you you kind

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Speaker 4: of see and eventually you know it's gonna be it's

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Speaker 4: gonna be losses, but you don't have to experience them

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Speaker 4: all at once.

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Speaker 3: I mean, you mentioned one of my favorite topics reads

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Speaker 3: of course, and you're you seem to be slightly more

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Speaker 3: constructive on the sector than maybe some other investors that

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Speaker 3: we've spoken to over the last few months. Within reachs,

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Speaker 3: you've obviously already mentioned to medical properties or medical related properties.

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Speaker 3: I guess are there other sort of subsectors within that

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Speaker 3: that you think that people should be looking at? And

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Speaker 3: so specifically on offices though, do you think that there

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Speaker 3: is enough differentiation between the well positioned ones, as in,

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Speaker 3: the ones with the highest quality offices you know, a

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Speaker 3: rated if you like, most efficient offices and the highest

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Speaker 3: rated ones and the ones that are just not in

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Speaker 3: that position at all that have much more work to

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Speaker 3: do on leverage and much more work to do on

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Speaker 3: improving their buildings and so on.

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Speaker 4: Yeah, so we think there is a real differentiation and

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Speaker 4: there is going to be winners and there's going to be.

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Speaker 2: A lot of losers.

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Speaker 4: But I think most people and most investors just think

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Speaker 4: there's only going to be losers. So when you think

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Speaker 4: there's only going to be losers, and you categorically are

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Speaker 4: unwilling to invest in an asset class, either because you

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Speaker 4: just think that the end is coming and you think

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Speaker 4: no one's going to survive, or you simply say window dressing.

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Speaker 4: I don't want to have to explain to anybody why

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Speaker 4: in the world I would own an office rate. You know,

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Speaker 4: we think that that provides value. If you're if you

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Speaker 4: are right that the world completely ends and nobody survives

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Speaker 4: here in the office property space, you know, then then

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Speaker 4: you really can't buy anything. I mean, there might be

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Speaker 4: a price, there's you know, we say, I'm saying that

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Speaker 4: there's no bad bonds, just bad prices.

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Speaker 2: There might not be any there might not be any good.

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Speaker 4: Bonds in the comercial office space if it's a cataclysmic

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Speaker 4: because some people think. However, you know, we think that

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Speaker 4: when you've painted such a broad brush, and some of

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Speaker 4: these companies it is these office rates. Some of them

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Speaker 4: are rated investment grade, some of them are hanging on

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Speaker 4: by a thread to investment grade. But they have a

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Speaker 4: lot of runway, and they have high quality properties that

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Speaker 4: can be changed into something else. Probably won't need to,

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Speaker 4: but they can be with time. They have real land

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Speaker 4: value in some instances. But the most important thing really

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Speaker 4: is that they have cash flow for now and they

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Speaker 4: have time, so they have time to figure it out.

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Speaker 4: What they don't have is, you know, the ability to

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Speaker 4: refinance their debt, and a lot of times they're just

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Speaker 4: not even able to get access to capital. There, no

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Speaker 4: one's going to be willing to lend the money. So

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Speaker 4: if we and others basically say here's what we will

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Speaker 4: lend it at in terms of a really high yield.

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Speaker 4: Here are the covenants we need to have in place.

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Speaker 4: Here are the kind of the the guardrails, if you will,

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Speaker 4: and the cash traps and everything that we can do

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Speaker 4: as lenders that say, here are our terms, and for

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Speaker 4: the rare time in this market, we're able to do that.

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Speaker 4: And most other asset classes, we're kind of takers of

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Speaker 4: kind of what the market is doing in terms of

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Speaker 4: covenants and kind of yield to a certain extent and

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Speaker 4: definitely spread. So overall, you know, this is an opportunity

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Speaker 4: for us to work with the banks, us to work

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Speaker 4: with the company and try to figure out how much

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Speaker 4: can we tracked out of these companies yet still allow

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Speaker 4: them to live. You know, if you if you take

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Speaker 4: too much blood out of the patient, you kill the patient.

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Speaker 2: You don't want to do that.

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Speaker 4: You want to you want to have it really set

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Speaker 4: up so that both sides can win. Give them enough

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Speaker 4: runway that they can win, give us enough yield that

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Speaker 4: we can live. With it, and I think that's really

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Speaker 4: a perfect balance right now that you're not seeing another places.

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Speaker 4: So at the end of the day, I think what

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Speaker 4: I would kind of categorize that as as there are opportunities,

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Speaker 4: but it takes a lot of research, and it does

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Speaker 4: take you know, having a longer term view, and you

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Speaker 4: can't simply be saying, you know, I'm just not going

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Speaker 4: to buy anything here because I don't want to have

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Speaker 4: to talk to my boss about it. You know, I

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Speaker 4: think these are opportunities that you'll look back in three

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Speaker 4: years and you'll say, I cannot believe we were getting

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Speaker 4: nine and a half ten and a half percent for

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Speaker 4: credits like that. But you know, it's not if people

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Speaker 4: call that the easy money at that point, and it

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Speaker 4: certainly isn't easy when you're going through it at this time.

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Speaker 3: No, definitely not easy. I mean, it's interesting that you

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Speaker 3: mentioned it doing the research on the office sector. I,

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Speaker 3: as Games alluded to at the start, I am part

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Speaker 3: of Bloomberg Intelligence, which is also part of the U

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Speaker 3: Search department here at Bloomberg, and you know, we have

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Speaker 3: lots of anists, around five hundred of us, and within

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Speaker 3: the real estate sector, we have spent quite a bit

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Speaker 3: of time looking at the office sector and at the

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Speaker 3: valuations of some of the bonds and so on, and

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Speaker 3: many of them are not trading anywhere like what the

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Speaker 3: ratings are. So you have situations where companies bonds are

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Speaker 3: yielding more than single bees even though they are still

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Speaker 3: rated trip le B. But you mentioned something that about

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Speaker 3: high yields and you said sort of nine ten percent.

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Speaker 3: Is that the sort of hurdle that you would be

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Speaker 3: looking at when you're looking to lend to some of

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Speaker 3: these companies or would it need to be even higher

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Speaker 3: than that? And when you think of that nine or

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Speaker 3: ten is that on a sort of secured basis or unsecured?

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Speaker 3: Is okay at that level?

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Speaker 4: Yeah, So we've worked with the banks and we've had

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Speaker 4: I can't give names, we've had several several transactions that

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Speaker 4: we've done unsecured in that, you know, nine and half

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Speaker 4: percent above yield. Now, they do have certain things for us,

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Speaker 4: which are you know, certain leverage covenants. They can't go

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Speaker 4: up with certain things we have, they can't secure a

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Speaker 4: certain amount of debt. We also have what we call steps,

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Speaker 4: meaning if they were to fall from investment grade to

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Speaker 4: high yield, we get paid anywhere from fifty to potentially

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Speaker 4: two hundred extra basis points, so you could be looking

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Speaker 4: at a coupon of you know, eleven percent if they

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Speaker 4: were to go to high yield. So all these things

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Speaker 4: we put in the bells and whistles working with the banks.

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Speaker 4: You know, I'll be honest, the companies at first don't

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Speaker 4: love it, and then they realize they don't have tons

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Speaker 4: of other options and we're willing to work with them,

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Speaker 4: and you know, they see us as as as a partner,

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Speaker 4: and so I think at the first first, and so

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Speaker 4: it starts slightly combat it. I'm not combat it, but

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Speaker 4: slightly you know, possibly like.

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Speaker 2: Get out of here. I'm not going to do that.

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Speaker 4: And then they think about it and they say, you

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Speaker 4: know what, Actually, you know, these guys are for real,

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Speaker 4: and if we can get this going, we can kick

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Speaker 4: the can down the road and then we can kind

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Speaker 4: of prove to the market that we're that we're not

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Speaker 4: as high credit risk as the market currently thinks. So

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Speaker 4: I think that that's kind of what we're trying to do.

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Speaker 4: And yeah, the yields are are significantly you know, are

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Speaker 4: extremely attractive. I would say since we've started doing a

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Speaker 4: lot of this, you know, six to twelve months ago

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Speaker 4: the yields have come in, but it's just a case

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Speaker 4: by case basis. There are a lot of them that

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Speaker 4: we've turned down. We've just simply said, hey, we just

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Speaker 4: we can't help you in this situation. But there are

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Speaker 4: some really good reats that are out there that had

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Speaker 4: struggled for capital in twenty twenty three and we've facilitated it,

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Speaker 4: and so have a few others out there.

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Speaker 1: So you're getting double digit yields. Is it a bund strutcher?

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Speaker 1: Is it as a ret loan? And also what are

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Speaker 1: the ten is like? And then are you able to

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Speaker 1: look these double digit yields in for a while? Do

403
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Speaker 1: you have any cold protection on that?

404
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Speaker 4: Yeah, so high single digits, double digits if if if

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Speaker 4: they go to if they go to high yield.

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Speaker 2: But yeah, so they're they're generally been about five years.

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Speaker 4: You know, most companies don't want to do longer than

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Speaker 4: five years because they simply don't want to pay that

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Speaker 4: coupon for too long. I would love to do ten

410
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Speaker 4: years or you know, or even longer in some instances,

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Speaker 4: but generally it's been about five years. If they do

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Speaker 4: not have calls so they so we want to make

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Speaker 4: sure that we structure it without calls, because you know,

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Speaker 4: the next year is probably the most important for these

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Speaker 4: for these for these rates, maybe even the next two years.

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Speaker 2: And so if you kind of.

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Speaker 4: Get through this period, if you can prove that the

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Speaker 4: office market isn't dead, that people are still going back

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Speaker 4: to the office, that people still need to work in

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Speaker 4: office properties, then I think that they will be in

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Speaker 4: much better shape.

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Speaker 2: However, we'll still be.

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Speaker 4: Getting our high single digit coupons that that we'll be

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Speaker 4: happy with, and the company will be happy to because

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Speaker 4: they got through the worst, and they'll probably try to

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Speaker 4: tender and buy them back from us at that time.

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Speaker 2: But you know, we'll cross that bridge when we get there.

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Speaker 4: But the key is that they cannot take it away

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Speaker 4: from us. We would not structure it with a call

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Speaker 4: just simply because there's too much risk to only get

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Speaker 4: this for six to twelve months. We want to make

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Speaker 4: sure we're getting you know, call it nine and a

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Speaker 4: half points times five years. You're you're pulling out almost

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Speaker 4: fifty points by the time it comes out to maturity.

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Speaker 3: Maybe I can ask us to follow up one of

436
00:19:57,000 --> 00:19:59,879
Speaker 3: the catchphrases. I guess that we have in the realist

437
00:20:00,200 --> 00:20:03,560
Speaker 3: sector is survive until twenty twenty five. I don't know

438
00:20:03,600 --> 00:20:05,720
Speaker 3: whether it applies in the US, but it's definitely come

439
00:20:05,800 --> 00:20:09,480
Speaker 3: up in Europe. And the reason for that is there's

440
00:20:09,520 --> 00:20:12,600
Speaker 3: a lot of debt maturity is in twenty five, because

441
00:20:12,600 --> 00:20:15,040
Speaker 3: there was a lot of debt issuance in twenty twenty.

442
00:20:15,560 --> 00:20:19,320
Speaker 3: And the hope is that by twenty twenty five that

443
00:20:19,640 --> 00:20:21,719
Speaker 3: the market will be even more open than it is

444
00:20:21,840 --> 00:20:25,480
Speaker 3: now and that people will truly be back in offices

445
00:20:25,640 --> 00:20:29,840
Speaker 3: and residential properties would have rallied in value and so on.

446
00:20:30,640 --> 00:20:33,600
Speaker 3: Do you think that there is a risk that does

447
00:20:33,640 --> 00:20:37,120
Speaker 3: not occur? And you know, obviously you said you have

448
00:20:37,160 --> 00:20:39,159
Speaker 3: some five year structures in place, but is there a

449
00:20:39,240 --> 00:20:41,560
Speaker 3: risk that you know, operating cash flows other countries might

450
00:20:41,560 --> 00:20:44,720
Speaker 3: be affected in twenty five, so they might have to

451
00:20:44,840 --> 00:20:48,399
Speaker 3: rethink paying those you know, high single digit, low double

452
00:20:48,400 --> 00:20:50,200
Speaker 3: digit coupons in twenty five.

453
00:20:51,119 --> 00:20:53,760
Speaker 4: So I hadn't heard the survive till twenty five, but

454
00:20:54,240 --> 00:20:55,320
Speaker 4: I might have to steal that one.

455
00:20:55,359 --> 00:20:58,720
Speaker 2: I like it. I think it's pretty spot on.

456
00:21:00,080 --> 00:21:01,640
Speaker 4: It might be we have to come up with runs

457
00:21:01,680 --> 00:21:03,800
Speaker 4: of twenty six because it might be a you know,

458
00:21:04,000 --> 00:21:05,960
Speaker 4: this is kind of a continuous game. We've been in

459
00:21:06,000 --> 00:21:10,160
Speaker 4: this COVID situation now or you know, COVID impact for

460
00:21:10,320 --> 00:21:13,960
Speaker 4: you know, four years. I see, I see people going

461
00:21:14,000 --> 00:21:15,520
Speaker 4: back to work. I do see what you know, we

462
00:21:15,560 --> 00:21:18,560
Speaker 4: watch it quite closely. In terms of UH lease extensions,

463
00:21:19,440 --> 00:21:22,600
Speaker 4: people are generally taking less space, but they are renewing

464
00:21:22,600 --> 00:21:25,800
Speaker 4: their leases, and you're seeing even areas like you know,

465
00:21:25,800 --> 00:21:27,960
Speaker 4: San Francisco has started to see some recent activity where

466
00:21:27,960 --> 00:21:30,399
Speaker 4: people are getting you know, excited to go back in

467
00:21:30,480 --> 00:21:31,240
Speaker 4: some of the bigger cities.

468
00:21:31,280 --> 00:21:33,240
Speaker 2: So I actually think if you.

469
00:21:33,240 --> 00:21:36,439
Speaker 4: Can kick the cam down the road long enough, eventually

470
00:21:36,680 --> 00:21:38,879
Speaker 4: you know you're going to have these major cities and

471
00:21:38,920 --> 00:21:39,880
Speaker 4: these major buildings.

472
00:21:40,960 --> 00:21:41,800
Speaker 2: You know, do well.

473
00:21:41,840 --> 00:21:46,560
Speaker 4: Now if you're buying all tertiary market kind of suburban,

474
00:21:47,200 --> 00:21:49,120
Speaker 4: I don't know. I don't know that there is going

475
00:21:49,160 --> 00:21:51,320
Speaker 4: to be a demand for that. So that's why again

476
00:21:51,359 --> 00:21:53,560
Speaker 4: it comes down to really going through the portfolio, looking

477
00:21:53,560 --> 00:21:57,240
Speaker 4: through it closely. I'm a believer that longer term, people

478
00:21:57,400 --> 00:21:59,480
Speaker 4: like to be around each other and want to be

479
00:21:59,720 --> 00:22:02,600
Speaker 4: an offices. We've caught we use the phrase IQ compounding

480
00:22:02,600 --> 00:22:05,760
Speaker 4: at Invesco. We do think IQ compounding works. You know,

481
00:22:05,760 --> 00:22:07,320
Speaker 4: you've got to be around each other in order to

482
00:22:07,320 --> 00:22:09,439
Speaker 4: have that happen. And I think a lot of companies

483
00:22:09,480 --> 00:22:11,880
Speaker 4: survive for a few years and then they start to think,

484
00:22:11,920 --> 00:22:13,719
Speaker 4: all right, you know, I can save money by not

485
00:22:13,760 --> 00:22:16,040
Speaker 4: having an office. But but what's the wor's what's where's

486
00:22:16,080 --> 00:22:17,560
Speaker 4: the revenue going to come from? You know, where's not

487
00:22:17,640 --> 00:22:20,600
Speaker 4: growth going to come from? And office space is a

488
00:22:20,600 --> 00:22:23,040
Speaker 4: significant expense for people or for companies. But at the

489
00:22:23,119 --> 00:22:25,000
Speaker 4: end of the day, you know, if you're in growth mode,

490
00:22:25,600 --> 00:22:27,280
Speaker 4: I do think people will be out in the office.

491
00:22:27,280 --> 00:22:30,680
Speaker 4: So survive till twenty five and whatever rhymes with twenty

492
00:22:30,720 --> 00:22:32,800
Speaker 4: six it might be might be the next VASI you

493
00:22:32,840 --> 00:22:33,520
Speaker 4: need to come up with.

494
00:22:34,240 --> 00:22:36,159
Speaker 1: At the same time that you as an investee, you

495
00:22:36,160 --> 00:22:37,359
Speaker 1: don't want to end up with a whole load of

496
00:22:37,359 --> 00:22:40,000
Speaker 1: busted offices in real estate that you can't do anything.

497
00:22:40,000 --> 00:22:41,800
Speaker 1: But so what's what's your hedge? What do you I mean,

498
00:22:41,840 --> 00:22:42,880
Speaker 1: how do you avoid the risk?

499
00:22:43,320 --> 00:22:43,720
Speaker 2: Yeah?

500
00:22:44,160 --> 00:22:46,399
Speaker 4: Yeah, And you know, I want to be clear, this

501
00:22:46,480 --> 00:22:49,320
Speaker 4: isn't like you know, the largest position in the portfolios.

502
00:22:49,359 --> 00:22:51,600
Speaker 4: I mean, this is where we're seeing value in a

503
00:22:52,160 --> 00:22:54,080
Speaker 4: in a market that is very tight. So you know,

504
00:22:54,119 --> 00:22:57,479
Speaker 4: we're we're we're doing this, you know, specifically, and you know,

505
00:22:57,960 --> 00:23:00,720
Speaker 4: fifty basis voytsier seventy five bases it's here. Add it

506
00:23:00,720 --> 00:23:02,520
Speaker 4: all up and it we think at the end of

507
00:23:02,560 --> 00:23:04,560
Speaker 4: the day, at the end of the year, it'll help

508
00:23:04,640 --> 00:23:07,280
Speaker 4: us contribute to alpha the portfolio, you know, twenty to

509
00:23:07,320 --> 00:23:09,119
Speaker 4: thirty basis points or something like that. This is not

510
00:23:09,240 --> 00:23:11,520
Speaker 4: going to make our year, but it's probably more of

511
00:23:11,560 --> 00:23:13,240
Speaker 4: a double than a lot of singles that you get

512
00:23:13,240 --> 00:23:15,000
Speaker 4: out there right now, where most of the market is

513
00:23:15,359 --> 00:23:18,399
Speaker 4: is kind of all about you know, hitting singles. So

514
00:23:18,760 --> 00:23:21,720
Speaker 4: you know, that's that's kind of you know, the opportunity

515
00:23:21,720 --> 00:23:22,440
Speaker 4: to set there.

516
00:23:23,200 --> 00:23:26,280
Speaker 1: On the banks. You seem to be interested in some

517
00:23:26,359 --> 00:23:30,320
Speaker 1: of the more riskier parts of that market. I either preferred.

518
00:23:30,760 --> 00:23:32,199
Speaker 1: Can you tell us, I mean to the sort of

519
00:23:32,240 --> 00:23:34,240
Speaker 1: more general listener what that is and how that works

520
00:23:34,240 --> 00:23:35,800
Speaker 1: in way, it's such an opportunity right now.

521
00:23:36,320 --> 00:23:39,320
Speaker 4: Yeah, So so we're we're very focused on fundamentals first.

522
00:23:39,400 --> 00:23:41,800
Speaker 4: So fundamentals. If we think fundamentals are good and going

523
00:23:41,880 --> 00:23:44,359
Speaker 4: to stay good, then we started thinking about things like

524
00:23:44,440 --> 00:23:47,800
Speaker 4: technicals and fundamentals for the banks. You know, yes, they

525
00:23:48,080 --> 00:23:50,840
Speaker 4: had a very rocky twenty twenty three. You know, there

526
00:23:50,920 --> 00:23:53,440
Speaker 4: was certainly a period of time where you know, it

527
00:23:53,520 --> 00:23:57,480
Speaker 4: was borderline panic and they got through it. Now they're

528
00:23:57,480 --> 00:23:59,040
Speaker 4: not out of the woods. They do have stuff commercial

529
00:23:59,160 --> 00:24:00,880
Speaker 4: estate losses that are going to hit. As we discussed,

530
00:24:01,320 --> 00:24:04,760
Speaker 4: they still have, you know, some other areas that could

531
00:24:04,840 --> 00:24:08,040
Speaker 4: hit if the consumer lending and things if the economy

532
00:24:08,040 --> 00:24:12,040
Speaker 4: were turned down. But we're generally constructive on the economy.

533
00:24:12,080 --> 00:24:14,080
Speaker 4: So we're generally structive on fundamentals, which then takes me

534
00:24:14,119 --> 00:24:14,760
Speaker 4: to the technicals.

535
00:24:14,880 --> 00:24:17,080
Speaker 2: And people love yield at the end of the day.

536
00:24:17,280 --> 00:24:20,520
Speaker 4: Investors love yield, and so where you're going to get

537
00:24:20,560 --> 00:24:21,600
Speaker 4: the most yield, you're going to.

538
00:24:21,600 --> 00:24:22,400
Speaker 2: Get it in preferreds.

539
00:24:22,800 --> 00:24:24,600
Speaker 4: You're going to get in sub debt, but were generally preferred,

540
00:24:24,680 --> 00:24:27,840
Speaker 4: so you know, the lower portion of the capital structure.

541
00:24:28,200 --> 00:24:32,399
Speaker 4: You're seeing lower areas of the capital structure in large,

542
00:24:33,359 --> 00:24:35,720
Speaker 4: big market cap banks, either the Big six or some

543
00:24:35,760 --> 00:24:38,600
Speaker 4: of the super regionals that are generally coming in that's

544
00:24:38,640 --> 00:24:41,720
Speaker 4: seven and a quarter to near eight percent yield. So

545
00:24:42,359 --> 00:24:45,280
Speaker 4: that yield is attracting investors, and as long as there

546
00:24:45,400 --> 00:24:49,000
Speaker 4: is a strong technical for and strong demand for that

547
00:24:49,119 --> 00:24:51,399
Speaker 4: portion of the market, we want to be involved. You know,

548
00:24:51,440 --> 00:24:53,359
Speaker 4: we want to take advantage of others. Really trying to

549
00:24:53,400 --> 00:24:55,840
Speaker 4: pile into the yield trade, and we want to be

550
00:24:55,880 --> 00:24:59,000
Speaker 4: the first one there. So that's kind of the domino effect,

551
00:24:59,040 --> 00:25:00,440
Speaker 4: if you will, and we want to be we want

552
00:25:00,480 --> 00:25:02,760
Speaker 4: to be first, and you know we've been we've been

553
00:25:02,840 --> 00:25:05,159
Speaker 4: adding to that for the last you know, six to

554
00:25:05,240 --> 00:25:09,280
Speaker 4: nine months, you know, post credit Swiss at one issue

555
00:25:09,359 --> 00:25:11,760
Speaker 4: of them basically being wiped out. You know, that's still

556
00:25:11,800 --> 00:25:13,919
Speaker 4: in you know, litigation and all that. We'll see all

557
00:25:13,960 --> 00:25:15,280
Speaker 4: that plays out. But at the end of the day,

558
00:25:15,600 --> 00:25:18,080
Speaker 4: you know, there was you know, there was basically, you know,

559
00:25:18,280 --> 00:25:20,679
Speaker 4: just an area of the market people never thought, oh Ian,

560
00:25:20,720 --> 00:25:22,320
Speaker 4: don't they never thought people didn't think they would lose

561
00:25:22,359 --> 00:25:24,240
Speaker 4: all their money, I guess, And it happened very quickly there.

562
00:25:24,600 --> 00:25:26,879
Speaker 4: So the eighty one markets shut down. But now we're

563
00:25:26,920 --> 00:25:28,840
Speaker 4: starting to see people, you know, starting to come back

564
00:25:28,880 --> 00:25:29,159
Speaker 4: into it.

565
00:25:29,280 --> 00:25:29,879
Speaker 2: Out of Europe.

566
00:25:30,160 --> 00:25:33,120
Speaker 4: You know, you've seen some coupons there, you know, nine

567
00:25:33,200 --> 00:25:35,119
Speaker 4: plus percent coupons and eighty one so those have been

568
00:25:35,119 --> 00:25:36,920
Speaker 4: absorbed easily. In the US they have been more like

569
00:25:37,440 --> 00:25:41,000
Speaker 4: seven to eight percent. So I think, you know, there

570
00:25:41,119 --> 00:25:43,240
Speaker 4: is more yield than you've ever had, yet people always

571
00:25:43,240 --> 00:25:45,479
Speaker 4: still want more, and that's where we are right now

572
00:25:45,560 --> 00:25:48,280
Speaker 4: where the economy feels good and technicals are strong. So

573
00:25:48,960 --> 00:25:52,720
Speaker 4: recently we've seen a few large regional banks, you know,

574
00:25:52,880 --> 00:25:55,480
Speaker 4: M and T Bank, Citizens Bank did twenty five dollars

575
00:25:55,560 --> 00:25:58,959
Speaker 4: par preferreds. You know, those were received very well by

576
00:25:59,000 --> 00:26:02,080
Speaker 4: the market. Dollar poor. Market is more for retail than

577
00:26:02,119 --> 00:26:05,960
Speaker 4: institutional investors, and retail investors are are getting more excited

578
00:26:05,960 --> 00:26:08,560
Speaker 4: about bonds, and they're certainly more excited about buying preferreds

579
00:26:09,000 --> 00:26:12,720
Speaker 4: with seven plus percent coupons. So you know, technically, you know,

580
00:26:12,760 --> 00:26:14,600
Speaker 4: those those are the markets I think you'll see more

581
00:26:14,640 --> 00:26:16,959
Speaker 4: issuanes out of, and I think you'll actually see them

582
00:26:17,000 --> 00:26:20,000
Speaker 4: get absorbed fairly quickly, because you know, these are these

583
00:26:20,040 --> 00:26:22,720
Speaker 4: are areas where just just a few years ago, you know,

584
00:26:22,840 --> 00:26:25,240
Speaker 4: preferred debt for some of the banks had four handles,

585
00:26:25,240 --> 00:26:27,399
Speaker 4: so call it four and five eights coupons, things like that,

586
00:26:28,040 --> 00:26:29,480
Speaker 4: you had, you had a lot of the high yield

587
00:26:29,520 --> 00:26:32,240
Speaker 4: market trading at a five and a half percent or less,

588
00:26:32,400 --> 00:26:34,960
Speaker 4: and now here you are getting you know, high quality,

589
00:26:35,520 --> 00:26:40,040
Speaker 4: investment grade large market cap banks that these securities might

590
00:26:40,040 --> 00:26:42,480
Speaker 4: be rated high yield, but the overall parent is rated

591
00:26:42,480 --> 00:26:45,359
Speaker 4: investment grade and you're getting seven to eight percent you know,

592
00:26:45,440 --> 00:26:47,680
Speaker 4: we think that those are are very attractive to put

593
00:26:47,720 --> 00:26:51,680
Speaker 4: into the portfolio until something changes fundamentally, which is why

594
00:26:51,680 --> 00:26:53,120
Speaker 4: you always need to make sure of this liquidity.

595
00:26:53,680 --> 00:26:56,040
Speaker 3: So that's always I guess I'm one of the sort

596
00:26:56,080 --> 00:26:59,840
Speaker 3: of big caveats that with banks, which are like my

597
00:27:00,280 --> 00:27:03,399
Speaker 3: favorite topic to be ever, be honest, because I'm by

598
00:27:03,520 --> 00:27:06,560
Speaker 3: training a bank analyst. One of the things the issues,

599
00:27:06,600 --> 00:27:09,760
Speaker 3: I guess is that things can change relatively quickly, and

600
00:27:10,840 --> 00:27:14,679
Speaker 3: with the credit situation, as you mentioned, it was literally

601
00:27:14,760 --> 00:27:19,600
Speaker 3: over a weekend a significant amount of hybrid eighty one

602
00:27:20,080 --> 00:27:23,920
Speaker 3: were written down to zero. So first question I guess

603
00:27:23,960 --> 00:27:29,280
Speaker 3: it is that are you concerned about regulatory intervention in

604
00:27:29,359 --> 00:27:32,480
Speaker 3: any way, especially maybe in the sort of regional bank

605
00:27:32,600 --> 00:27:38,000
Speaker 3: space and what that could mean for those deeply subordinated instruments.

606
00:27:38,040 --> 00:27:40,240
Speaker 3: And also, and I guess for the larger banks, the

607
00:27:40,320 --> 00:27:43,920
Speaker 3: question would be, with all this stuff about basil endgame

608
00:27:44,080 --> 00:27:46,720
Speaker 3: and so on, what do you think that that will

609
00:27:46,840 --> 00:27:49,520
Speaker 3: mean for issue? And so you're concerned that you're just

610
00:27:49,640 --> 00:27:53,240
Speaker 3: going to be to have a deluge of supply that

611
00:27:53,400 --> 00:27:58,000
Speaker 3: will you know, not support valuations in the way that

612
00:27:58,080 --> 00:27:58,520
Speaker 3: you would like.

613
00:27:58,640 --> 00:28:01,879
Speaker 4: Basically, yeah, so I think when the wave of supply comes.

614
00:28:02,400 --> 00:28:06,359
Speaker 4: You know, it does put pressure on the space, and

615
00:28:06,480 --> 00:28:09,440
Speaker 4: there's only so many buyers that that are willing to

616
00:28:09,480 --> 00:28:13,080
Speaker 4: traffic in this in this lower rated, higher risk area,

617
00:28:13,200 --> 00:28:14,920
Speaker 4: so you do have to worry about that.

618
00:28:15,560 --> 00:28:15,720
Speaker 2: You know.

619
00:28:15,840 --> 00:28:19,680
Speaker 4: Sometimes regulations can require more issuance by these banks in

620
00:28:19,720 --> 00:28:22,520
Speaker 4: the space, which which can be a concern. But the

621
00:28:22,560 --> 00:28:27,960
Speaker 4: flip side is some of the regulatory you know, instructions

622
00:28:28,119 --> 00:28:30,080
Speaker 4: or requirements are.

623
00:28:30,000 --> 00:28:31,120
Speaker 2: Actually good for creditors.

624
00:28:31,160 --> 00:28:36,360
Speaker 4: And I think you know, we we as fixed income investors,

625
00:28:36,680 --> 00:28:40,160
Speaker 4: we actually generally like regulation because we don't get the upside.

626
00:28:40,240 --> 00:28:42,080
Speaker 4: You know, if we're we're a stock and you tell

627
00:28:42,160 --> 00:28:44,560
Speaker 4: us that you can't make it this amount of money

628
00:28:44,560 --> 00:28:46,480
Speaker 4: and you can't take this kind of risk and whatever,

629
00:28:46,560 --> 00:28:48,920
Speaker 4: it actually probably caps the upside of owning that stock.

630
00:28:49,440 --> 00:28:51,520
Speaker 4: But for a bond, you know, we're just trying to

631
00:28:51,560 --> 00:28:53,640
Speaker 4: get our money back. We're trying to get our coupon,

632
00:28:53,960 --> 00:28:55,720
Speaker 4: trying to have the company survive and get the money back.

633
00:28:55,800 --> 00:29:00,000
Speaker 4: So in theory, the regulatory constraints that are put in

634
00:29:00,240 --> 00:29:03,520
Speaker 4: place are are supposed to be making it more likely

635
00:29:03,680 --> 00:29:05,840
Speaker 4: for these banks to exist and survive.

636
00:29:06,600 --> 00:29:09,080
Speaker 2: So if done correctly, regulation.

637
00:29:08,840 --> 00:29:11,440
Speaker 4: Is very good from a fixed income standpoint, so it

638
00:29:11,560 --> 00:29:14,000
Speaker 4: might create more supply because it sometimes causes them to

639
00:29:14,040 --> 00:29:17,520
Speaker 4: have loss absorbing capital issue more debt that if there

640
00:29:17,560 --> 00:29:20,000
Speaker 4: are problems, you know, they get wiped out rather than

641
00:29:20,080 --> 00:29:23,880
Speaker 4: the depositor and things like that. But overall it makes

642
00:29:23,920 --> 00:29:26,520
Speaker 4: it less likely there's ever any problems if it's done correctly.

643
00:29:26,600 --> 00:29:28,640
Speaker 4: So you know, I won't put a big blanket for

644
00:29:29,240 --> 00:29:34,440
Speaker 4: all regulation, but generally regulation can be good and is

645
00:29:34,520 --> 00:29:36,600
Speaker 4: good for fixed income. So we just hope that it's

646
00:29:36,600 --> 00:29:38,920
Speaker 4: done in a prudent manner, and then overall it just

647
00:29:38,960 --> 00:29:41,640
Speaker 4: makes it less less risk to the space, which is

648
00:29:41,720 --> 00:29:42,160
Speaker 4: good for US.

649
00:29:43,120 --> 00:29:44,960
Speaker 3: I just have a sort of photow up. I guess

650
00:29:45,480 --> 00:29:48,000
Speaker 3: on what you said. You know, in credit, our best

651
00:29:48,040 --> 00:29:55,640
Speaker 3: case is obviously par for these instruments. But when you

652
00:29:55,680 --> 00:29:58,840
Speaker 3: are also thinking about these bank proferred instruments and deep

653
00:29:58,880 --> 00:30:04,520
Speaker 3: subordinated instruments, are you thinking more about just the US

654
00:30:04,840 --> 00:30:06,640
Speaker 3: or are you also looking outside of that?

655
00:30:07,560 --> 00:30:08,480
Speaker 2: So we'll look globally.

656
00:30:08,640 --> 00:30:10,720
Speaker 4: You know, we we think, you know, we we've we

657
00:30:10,880 --> 00:30:14,920
Speaker 4: have bought significant amount of of preferred or sub debt

658
00:30:15,480 --> 00:30:18,040
Speaker 4: out of Canada, We've bought some things out of Japan,

659
00:30:19,120 --> 00:30:21,360
Speaker 4: and we've bought significant amount of out of Europe. Now

660
00:30:22,120 --> 00:30:25,800
Speaker 4: it's each each banking environment is going to have its

661
00:30:25,840 --> 00:30:30,200
Speaker 4: own regulatory environment, each each is going to have its

662
00:30:30,240 --> 00:30:33,800
Speaker 4: own economy. Now they're all correlated and connected. But you

663
00:30:33,880 --> 00:30:35,240
Speaker 4: know what, what you know we have we have the

664
00:30:35,280 --> 00:30:38,400
Speaker 4: strengths at a large, large organization like Invesco fixed income

665
00:30:38,440 --> 00:30:41,280
Speaker 4: that you know, we've got research analysts in every part

666
00:30:41,280 --> 00:30:44,720
Speaker 4: of the globe, so we're always looking what's out there,

667
00:30:44,920 --> 00:30:47,920
Speaker 4: and there's there's plenty of opportunities. We just want to

668
00:30:47,920 --> 00:30:50,520
Speaker 4: make sure from a portfolio construction standpoint that we understand

669
00:30:50,560 --> 00:30:52,160
Speaker 4: the correlation. We don't just want to pile risk on

670
00:30:52,240 --> 00:30:54,800
Speaker 4: top of risk on top of risk. But overall, you know,

671
00:30:54,920 --> 00:30:57,000
Speaker 4: we're there's no there's no area that we're unwilling to

672
00:30:57,080 --> 00:30:58,880
Speaker 4: look as long as we have a credit analyst that

673
00:30:58,920 --> 00:31:01,280
Speaker 4: that can dig into it and that region you.

674
00:31:01,320 --> 00:31:03,320
Speaker 1: Mentioned liquid as he met, which is obviously very important

675
00:31:03,320 --> 00:31:06,240
Speaker 1: as we go into a more volatile period potentially. What

676
00:31:06,320 --> 00:31:08,640
Speaker 1: about portfolio trades they seem to be picking up. Can

677
00:31:08,720 --> 00:31:11,640
Speaker 1: you talk a bit about what they are, how they work,

678
00:31:11,680 --> 00:31:13,000
Speaker 1: and why we seeing more of them now?

679
00:31:14,000 --> 00:31:18,320
Speaker 4: Yeah, so portfolio trades are essentially a fairly new invention.

680
00:31:19,240 --> 00:31:21,360
Speaker 4: I don't technically know what year there invented in probably

681
00:31:21,360 --> 00:31:23,640
Speaker 4: twenty eighteen or nineteen some around there that they've really

682
00:31:23,680 --> 00:31:24,440
Speaker 4: got more popular.

683
00:31:24,840 --> 00:31:27,360
Speaker 2: And essentially what they are is it's a basket of.

684
00:31:27,840 --> 00:31:31,680
Speaker 4: Bonds that is traded with the street, either buying or selling.

685
00:31:31,960 --> 00:31:34,400
Speaker 4: It's a basket of bonds that is sold in kind

686
00:31:34,440 --> 00:31:37,800
Speaker 4: of one transaction. So typically you're looking at you know,

687
00:31:37,960 --> 00:31:41,240
Speaker 4: seventy five to five hundred different line items that are

688
00:31:41,280 --> 00:31:45,360
Speaker 4: all packaged together and either sold or bought from a dealer.

689
00:31:45,920 --> 00:31:49,120
Speaker 4: And what's great about it is it's really moving of

690
00:31:49,280 --> 00:31:53,320
Speaker 4: risk back and forth, so you're not having to sell

691
00:31:53,400 --> 00:31:56,680
Speaker 4: each individual security that has its own idiosyncratic risk and

692
00:31:57,040 --> 00:31:59,040
Speaker 4: have to trade each one line on of my line at.

693
00:31:59,120 --> 00:32:02,640
Speaker 4: Them are essentially looking at, you know, what can they

694
00:32:02,760 --> 00:32:04,840
Speaker 4: do with this risk if they buy it. So, for example,

695
00:32:04,880 --> 00:32:06,960
Speaker 4: if I sell you know, two hundred fifty million dollars

696
00:32:07,000 --> 00:32:10,960
Speaker 4: a portfolio trade across five hundred bonds, that dealer is

697
00:32:11,160 --> 00:32:13,160
Speaker 4: likely going to they're going to buy it from us

698
00:32:13,280 --> 00:32:15,640
Speaker 4: in one price and one price for the whole portfolio,

699
00:32:15,640 --> 00:32:17,560
Speaker 4: and they're going to be in competition, but they're gonna

700
00:32:17,560 --> 00:32:20,440
Speaker 4: buy the whole thing all or none, which lets me

701
00:32:20,600 --> 00:32:22,720
Speaker 4: get down a lot of risk in one transaction, which

702
00:32:22,800 --> 00:32:24,680
Speaker 4: is great and the reason why they give a good

703
00:32:24,840 --> 00:32:27,200
Speaker 4: bid or why they give, you know, arguably the best

704
00:32:27,240 --> 00:32:30,080
Speaker 4: bid to do it in the portfolio trade is because

705
00:32:30,120 --> 00:32:33,120
Speaker 4: they can unload this risk very easily themselves. So they're

706
00:32:33,120 --> 00:32:36,120
Speaker 4: gonna look at things like LQD and other large ETFs

707
00:32:36,520 --> 00:32:38,960
Speaker 4: to figure out if they can take that basket that

708
00:32:39,040 --> 00:32:42,640
Speaker 4: I just sold them, deliver it to LQD and then

709
00:32:42,720 --> 00:32:46,400
Speaker 4: get shares or creations of LQD in exchange, so they're

710
00:32:46,400 --> 00:32:49,080
Speaker 4: going to end end up owning the ETF and then

711
00:32:49,080 --> 00:32:50,960
Speaker 4: they can just go take that that that these shares

712
00:32:50,960 --> 00:32:53,480
Speaker 4: of the ETF and and sell them so they can

713
00:32:53,560 --> 00:32:55,840
Speaker 4: they can do that kind of passing through. So they're

714
00:32:55,840 --> 00:32:57,320
Speaker 4: going to look through like what I have in my

715
00:32:57,400 --> 00:33:00,200
Speaker 4: portfolio versus how much is in LQD, how much which

716
00:33:00,240 --> 00:33:03,240
Speaker 4: can they you know, how how likely is LQD going

717
00:33:03,320 --> 00:33:06,240
Speaker 4: to just take that create in And then also they'll

718
00:33:06,280 --> 00:33:09,480
Speaker 4: they'll look at like unloading some of it on the side,

719
00:33:09,560 --> 00:33:10,880
Speaker 4: and what are they going to be left with? And

720
00:33:10,960 --> 00:33:13,200
Speaker 4: the more liquid and the more easy it is for

721
00:33:13,320 --> 00:33:16,040
Speaker 4: them to pass it through to either an ETF or

722
00:33:16,320 --> 00:33:20,280
Speaker 4: off their their off their their desk through a trading algorithm.

723
00:33:20,680 --> 00:33:23,080
Speaker 4: The better bid they're going to bid, and so the

724
00:33:23,160 --> 00:33:25,200
Speaker 4: better bid they're going to have for me. So this

725
00:33:25,440 --> 00:33:28,160
Speaker 4: is eliminated or very you know, reduce the bid ass

726
00:33:28,200 --> 00:33:32,600
Speaker 4: spread of transactions significantly. And so from my standpoint, I

727
00:33:32,720 --> 00:33:35,520
Speaker 4: can move blocks of risk very quickly. I can add

728
00:33:35,600 --> 00:33:38,480
Speaker 4: blocks of risk very quickly. The dealers can move or

729
00:33:38,560 --> 00:33:40,920
Speaker 4: add blocks of risk very quickly. It's just really kind

730
00:33:40,960 --> 00:33:44,160
Speaker 4: of a passing through of risk. And the quicker that

731
00:33:44,240 --> 00:33:47,600
Speaker 4: it can be done with the dealer making some a

732
00:33:47,640 --> 00:33:49,920
Speaker 4: little bit of money, and the faster they can do it,

733
00:33:50,000 --> 00:33:51,680
Speaker 4: they can turn that over over and over and over,

734
00:33:51,960 --> 00:33:53,560
Speaker 4: so they don't have to make as much on one

735
00:33:53,640 --> 00:33:55,280
Speaker 4: transaction that they had to do in the past. So

736
00:33:55,680 --> 00:33:57,960
Speaker 4: it's kind of like them them picking up pennies, but

737
00:33:58,040 --> 00:34:01,800
Speaker 4: with algorithms and really sophisticated technology that can enable me

738
00:34:02,240 --> 00:34:04,280
Speaker 4: to get downe risk. And this was not the case

739
00:34:04,480 --> 00:34:06,720
Speaker 4: just you know, three to five years ago. Like I said,

740
00:34:06,720 --> 00:34:08,440
Speaker 4: it's event in five years ago or so, but it's

741
00:34:08,560 --> 00:34:11,080
Speaker 4: really picked up in terms of volume. You know, there

742
00:34:11,160 --> 00:34:14,000
Speaker 4: was a transaction recently, I think JP Morgan was the

743
00:34:14,040 --> 00:34:14,520
Speaker 4: broker on it.

744
00:34:14,960 --> 00:34:16,320
Speaker 2: It was seven billion dollars.

745
00:34:16,400 --> 00:34:19,480
Speaker 4: It's the largest portfolio trade in history, So seven billion

746
00:34:19,560 --> 00:34:21,920
Speaker 4: dollars in one transaction. You know, that's an enormous amount

747
00:34:21,960 --> 00:34:25,600
Speaker 4: of risk to getting passed passed through. So overall that

748
00:34:25,719 --> 00:34:27,880
Speaker 4: that enables us as investors to know that if we're

749
00:34:27,920 --> 00:34:30,520
Speaker 4: in investment grade credit, we can get down it if

750
00:34:30,560 --> 00:34:31,880
Speaker 4: we want to, or we can get into it if

751
00:34:31,920 --> 00:34:34,680
Speaker 4: we want to, which I think actually could argue for

752
00:34:34,800 --> 00:34:38,040
Speaker 4: credit spreads being tighter on a permanent basis versus what

753
00:34:38,120 --> 00:34:40,880
Speaker 4: they were in the past, because liquidity premium is a

754
00:34:40,920 --> 00:34:42,920
Speaker 4: real thing. You need to get paid more to own

755
00:34:42,920 --> 00:34:45,799
Speaker 4: investment grade debt than treasuries because you can't trade them

756
00:34:45,800 --> 00:34:49,520
Speaker 4: as easily. However, the more commoditized it becomes, the quicker

757
00:34:49,600 --> 00:34:51,640
Speaker 4: that you can trade it, the less premium you need,

758
00:34:51,920 --> 00:34:53,400
Speaker 4: which means the less spread that you need.

759
00:34:54,280 --> 00:34:59,320
Speaker 3: I think those portfolio trades are extraordinarily interesting, and especially

760
00:34:59,320 --> 00:35:02,600
Speaker 3: the one with JP that you mentioned that that generated

761
00:35:02,800 --> 00:35:05,880
Speaker 3: a few headlines. But what would you then say is

762
00:35:06,040 --> 00:35:08,000
Speaker 3: the risk in all of this is it that this

763
00:35:08,160 --> 00:35:11,680
Speaker 3: becomes so commoditized that people don't really look at what's

764
00:35:11,719 --> 00:35:14,560
Speaker 3: within those portfoilios, and then you know, one day a

765
00:35:14,640 --> 00:35:17,880
Speaker 3: headline breaks on something that's significant within the portfolio and

766
00:35:17,960 --> 00:35:21,160
Speaker 3: then that causes everything to unravel. Is that one of

767
00:35:21,239 --> 00:35:23,400
Speaker 3: the risks or you don't think that that's an issue.

768
00:35:24,480 --> 00:35:25,839
Speaker 2: I think it's certainly a headline risk.

769
00:35:25,880 --> 00:35:28,120
Speaker 4: I would say that because the market is so big

770
00:35:28,239 --> 00:35:32,279
Speaker 4: and so diversified, you know, one individual credit wouldn't be

771
00:35:32,360 --> 00:35:35,040
Speaker 4: the risk. You know, you see, you know, I'm an

772
00:35:35,040 --> 00:35:38,840
Speaker 4: active manager, so for me, it helps to have passive

773
00:35:39,000 --> 00:35:42,080
Speaker 4: managers out there that I can kind of pass risk through.

774
00:35:42,520 --> 00:35:43,759
Speaker 4: But at the end of the day, you know, I

775
00:35:43,840 --> 00:35:45,560
Speaker 4: think I'm going to make more money being an active

776
00:35:45,600 --> 00:35:49,080
Speaker 4: manager by by having concentrations in certain areas, security selection

777
00:35:49,160 --> 00:35:53,080
Speaker 4: in certain areas, asset class dispersion, security selection, et cetera.

778
00:35:53,160 --> 00:35:57,520
Speaker 2: So overall, you know, I think active wins out in

779
00:35:57,560 --> 00:35:57,959
Speaker 2: that case.

780
00:35:58,280 --> 00:35:59,920
Speaker 4: But I think from a headline risk standpoint, you know,

781
00:36:00,040 --> 00:36:01,840
Speaker 4: people do need to be a little bit worried that

782
00:36:01,880 --> 00:36:04,120
Speaker 4: they don't just own, you know, just everything that's out there.

783
00:36:04,160 --> 00:36:05,960
Speaker 4: But it is diversi enough that I don't think it

784
00:36:06,000 --> 00:36:08,040
Speaker 4: would be enough to be a huge hit to any

785
00:36:08,080 --> 00:36:09,600
Speaker 4: individual investor out there.

786
00:36:10,719 --> 00:36:13,960
Speaker 1: On diversification. The sort of signal I got from Milk

787
00:36:14,040 --> 00:36:15,799
Speaker 1: and one of them was that everyone is really really

788
00:36:15,840 --> 00:36:20,920
Speaker 1: loaded up on us assets, you know, bonds, stocks, the currency, everything,

789
00:36:21,000 --> 00:36:23,800
Speaker 1: they love it. You know, it's American exceptionalism. But you know,

790
00:36:23,880 --> 00:36:26,200
Speaker 1: we're coming into a potentially choppy period for the US

791
00:36:26,440 --> 00:36:29,680
Speaker 1: and other regions relatively cheap. Is there any need to

792
00:36:29,800 --> 00:36:31,840
Speaker 1: diversify at this point geographically speaking?

793
00:36:32,680 --> 00:36:35,080
Speaker 4: Well, I think, you know, there are opportunities in Europe,

794
00:36:35,320 --> 00:36:37,640
Speaker 4: more so from a duration standpoint than i'd say credit

795
00:36:37,800 --> 00:36:41,480
Speaker 4: quality standpoint, because your ECB is going to be the

796
00:36:41,520 --> 00:36:44,040
Speaker 4: first to cut it appears, and you're likely to see

797
00:36:44,800 --> 00:36:47,760
Speaker 4: you know, potentially even more cuts out of the ECB

798
00:36:47,880 --> 00:36:50,040
Speaker 4: than you might get from the FED, So you could

799
00:36:50,080 --> 00:36:51,319
Speaker 4: get that duration impact there.

800
00:36:52,000 --> 00:36:53,759
Speaker 2: I think that will be good. We look at some

801
00:36:53,840 --> 00:36:54,960
Speaker 2: emerging markets right now.

802
00:36:56,000 --> 00:36:58,400
Speaker 4: Anything you know, commodities have been a little bit off

803
00:36:58,480 --> 00:37:02,320
Speaker 4: their highs, but overall, you know, most commodity rich countries,

804
00:37:02,800 --> 00:37:05,840
Speaker 4: you know, we think will do well. We're very you know,

805
00:37:05,960 --> 00:37:07,920
Speaker 4: focused on where the dollar is going. You know, we're

806
00:37:07,960 --> 00:37:11,480
Speaker 4: not generally buying uh local currency e M. Debt, but

807
00:37:11,600 --> 00:37:13,600
Speaker 4: but it's certainly going to impact the credit quality of

808
00:37:13,600 --> 00:37:15,840
Speaker 4: a lot of the of a lot of companies or

809
00:37:16,000 --> 00:37:18,560
Speaker 4: or sovereigns that we're going to buy within within emerging markets.

810
00:37:18,600 --> 00:37:20,960
Speaker 4: And you know, if the if the if the dollar

811
00:37:21,080 --> 00:37:23,240
Speaker 4: were to just have any kind of any kind of weakness,

812
00:37:23,280 --> 00:37:24,960
Speaker 4: you know, generally that would be that would be good

813
00:37:25,400 --> 00:37:25,920
Speaker 4: for em.

814
00:37:26,080 --> 00:37:28,360
Speaker 2: So we think there's opportunities around.

815
00:37:28,080 --> 00:37:30,279
Speaker 4: The globe, you know, as as I've said, you know,

816
00:37:30,320 --> 00:37:33,440
Speaker 4: credit spreads in the US are tight. It is, however,

817
00:37:33,520 --> 00:37:37,280
Speaker 4: the most liquid the highest quality in general, that's debatable,

818
00:37:37,320 --> 00:37:41,040
Speaker 4: but definitely the most liquid, easy to access market. So

819
00:37:41,880 --> 00:37:43,920
Speaker 4: you know, I think that that's a benefit. But you know,

820
00:37:43,960 --> 00:37:45,920
Speaker 4: there's gems that you can find around the globe, and

821
00:37:46,239 --> 00:37:49,080
Speaker 4: we looking for diversification out of Europe. We've seen some

822
00:37:49,280 --> 00:37:52,439
Speaker 4: interesting opportunities recently, you know, you know in Canada, which

823
00:37:52,440 --> 00:37:54,440
Speaker 4: I'd say Canada is kind of probably going to lead

824
00:37:55,560 --> 00:37:57,160
Speaker 4: the cut before the US as well.

825
00:37:58,400 --> 00:38:01,759
Speaker 3: You mentioned Europe and the likelihood of cuts here maybe

826
00:38:01,880 --> 00:38:07,600
Speaker 3: coming through quicker and uh more significantly than in the US.

827
00:38:08,440 --> 00:38:11,480
Speaker 3: Are there sectors or countries in Europe that you think

828
00:38:11,600 --> 00:38:13,840
Speaker 3: maybe look slightly more interesting than others that would it

829
00:38:13,920 --> 00:38:16,719
Speaker 3: still be real estate banks those sorts of sectors that

830
00:38:16,760 --> 00:38:19,880
Speaker 3: you're looking at or others, and then I have a

831
00:38:19,920 --> 00:38:21,279
Speaker 3: follow up on em.

832
00:38:21,120 --> 00:38:23,760
Speaker 4: Maybe more more so banks in the real estate and Europe.

833
00:38:24,200 --> 00:38:26,880
Speaker 4: But the banking space you know, has been on it

834
00:38:27,120 --> 00:38:28,719
Speaker 4: has been on a good run, and we think that

835
00:38:29,160 --> 00:38:31,920
Speaker 4: that probably continues. But yeah, post post credit Swiss, I

836
00:38:31,960 --> 00:38:34,719
Speaker 4: think that was kind of a you know, a real

837
00:38:34,800 --> 00:38:36,440
Speaker 4: inflection point where it was going to go one way

838
00:38:36,480 --> 00:38:39,040
Speaker 4: or another there. And you know, for US, you know

839
00:38:39,120 --> 00:38:42,719
Speaker 4: that they have some you know, some of the some

840
00:38:42,800 --> 00:38:46,279
Speaker 4: of the biggest, biggest banks in the world that maybe

841
00:38:46,280 --> 00:38:48,960
Speaker 4: aren't growing as much as some of the banks in

842
00:38:48,960 --> 00:38:51,399
Speaker 4: the US, but overall, you know, the credit quality still

843
00:38:51,520 --> 00:38:55,040
Speaker 4: is is good enough there. So you know, evaluations were

844
00:38:55,120 --> 00:38:57,040
Speaker 4: extreme versus industrials in Europe as well as in the

845
00:38:57,120 --> 00:38:58,000
Speaker 4: US that has come in.

846
00:38:58,600 --> 00:39:00,160
Speaker 2: You know, we're kind of in the later stage of

847
00:39:00,200 --> 00:39:00,680
Speaker 2: that trade.

848
00:39:01,000 --> 00:39:03,120
Speaker 4: I still do like it, but but it's no longer

849
00:39:03,520 --> 00:39:06,680
Speaker 4: kind of pound the table opportunity that we probably would

850
00:39:06,680 --> 00:39:08,759
Speaker 4: have seen before. But you know, it was a harder

851
00:39:08,800 --> 00:39:10,520
Speaker 4: trade to put on before than it is now as well.

852
00:39:11,200 --> 00:39:13,600
Speaker 3: And then on em which you mentioned, and you also

853
00:39:13,680 --> 00:39:17,080
Speaker 3: sort of talked about commodity exporters always. I guess the

854
00:39:17,239 --> 00:39:20,680
Speaker 3: comparison that people make between the commonti exporters and the

855
00:39:20,800 --> 00:39:23,399
Speaker 3: rest I guess, if you like, is there a part

856
00:39:23,440 --> 00:39:26,759
Speaker 3: of the Latin versus maybe senior versus Asia that you

857
00:39:26,880 --> 00:39:30,640
Speaker 3: are more comfortable in. And are you concerned within this

858
00:39:30,840 --> 00:39:34,239
Speaker 3: region as an emerging Europe Middle East Africa. Are you

859
00:39:34,320 --> 00:39:38,040
Speaker 3: concerned about geopolitical risk in any way or do you

860
00:39:38,120 --> 00:39:39,960
Speaker 3: think that that's already adequately priced in.

861
00:39:40,600 --> 00:39:43,880
Speaker 4: Yeah, so, yeah, I'd say, you know, any kind of

862
00:39:44,320 --> 00:39:47,279
Speaker 4: geopolitical risk around China, you know, certainly concerning I think

863
00:39:47,320 --> 00:39:51,920
Speaker 4: it's probably probably over you know, overstated from a market standpoint,

864
00:39:51,960 --> 00:39:54,200
Speaker 4: but but that that's probably going to stay on the table,

865
00:39:54,239 --> 00:39:56,160
Speaker 4: particularly during a relection season. You know, who knows what

866
00:39:56,520 --> 00:39:59,000
Speaker 4: politicians are going to say one way or another just

867
00:39:59,120 --> 00:40:03,400
Speaker 4: to you know, potentially create some headline risk there. But

868
00:40:03,600 --> 00:40:05,920
Speaker 4: but overall, you know, where we feel like is kind

869
00:40:05,920 --> 00:40:09,040
Speaker 4: of the the sweet spot for em right now would

870
00:40:09,080 --> 00:40:11,240
Speaker 4: be Latin America. So we we do, you know, particularly

871
00:40:11,280 --> 00:40:14,520
Speaker 4: like Mexico. We like Brazil both on a sovereign standpoint,

872
00:40:14,560 --> 00:40:17,520
Speaker 4: but also some of the higher quality companies within there

873
00:40:18,120 --> 00:40:20,360
Speaker 4: to US, they have enough commodity exposure. They also have

874
00:40:20,560 --> 00:40:24,680
Speaker 4: enough export exposure to the US which continues to do well,

875
00:40:24,800 --> 00:40:27,560
Speaker 4: so kind of getting a derivative of the US economy

876
00:40:27,680 --> 00:40:31,520
Speaker 4: with more uh more commodity exposure, which which we like,

877
00:40:32,239 --> 00:40:33,800
Speaker 4: so for us that that's kind of the area that

878
00:40:33,880 --> 00:40:37,800
Speaker 4: we've been we've been targeting. Credit in EM has come in,

879
00:40:37,920 --> 00:40:41,360
Speaker 4: but not as much so you're actually not seeing you know,

880
00:40:41,440 --> 00:40:44,360
Speaker 4: the kind of the lofty valuations in EM that you

881
00:40:44,440 --> 00:40:47,360
Speaker 4: are seeing in EM and high as you mean investment

882
00:40:47,360 --> 00:40:50,000
Speaker 4: grade and high yield. So overall, you know that that's

883
00:40:50,000 --> 00:40:51,960
Speaker 4: an area we're we're looking for. We just we just

884
00:40:52,000 --> 00:40:53,520
Speaker 4: want to make sure that you know, we're not too

885
00:40:53,600 --> 00:40:57,360
Speaker 4: late in the cycle that you exhaust all value and

886
00:40:57,560 --> 00:41:00,560
Speaker 4: and and domestic markets and then pile into merging market.

887
00:41:00,640 --> 00:41:02,160
Speaker 4: So you've got to be a little careful with that trade.

888
00:41:02,200 --> 00:41:04,759
Speaker 4: But but overall it still looks pretty good to us,

889
00:41:04,800 --> 00:41:06,760
Speaker 4: and specifically you know, Mexico and Brazil.

890
00:41:07,239 --> 00:41:08,680
Speaker 1: If you have to pick one thing that for the

891
00:41:08,719 --> 00:41:11,280
Speaker 1: next twelve months, what's your single best trade for credit

892
00:41:11,520 --> 00:41:14,920
Speaker 1: globally definuel question? I know, but one one thing you love,

893
00:41:15,000 --> 00:41:16,480
Speaker 1: I mean, is it is it the reads that you're

894
00:41:16,920 --> 00:41:19,080
Speaker 1: redium where there's a fearful or is it something else?

895
00:41:19,760 --> 00:41:22,400
Speaker 4: So I I I do, I do actually really like

896
00:41:22,560 --> 00:41:26,640
Speaker 4: that that that red that retrade specific specific credits that

897
00:41:26,719 --> 00:41:29,799
Speaker 4: can't can't be I can't even can't overstate that enough,

898
00:41:30,280 --> 00:41:32,839
Speaker 4: but that that's a you know, that's a smaller trade, right,

899
00:41:32,920 --> 00:41:34,560
Speaker 4: It's it's something that I think can can.

900
00:41:34,520 --> 00:41:35,880
Speaker 2: Add value to the portfolio.

901
00:41:36,280 --> 00:41:40,120
Speaker 4: The broader, more accessible trade is going to be bank

902
00:41:40,160 --> 00:41:40,520
Speaker 4: for ferds.

903
00:41:40,600 --> 00:41:40,719
Speaker 2: You know.

904
00:41:40,760 --> 00:41:43,120
Speaker 4: I think that you know, if you're if you're willing

905
00:41:43,160 --> 00:41:45,279
Speaker 4: to kind of do the homework, I think the reach

906
00:41:45,360 --> 00:41:49,000
Speaker 4: space can be really attractive. But with a broader brush,

907
00:41:49,200 --> 00:41:53,319
Speaker 4: with just a general rising tide, I think the bank

908
00:41:53,360 --> 00:41:56,399
Speaker 4: for ferreds, you know, will you're talking seven plus percent

909
00:41:56,520 --> 00:41:59,719
Speaker 4: coupons where I think if the economy does execute this

910
00:41:59,760 --> 00:42:02,560
Speaker 4: so landing your your total returns are going to be

911
00:42:02,640 --> 00:42:06,360
Speaker 4: you know, quite attractive there and and the volatility should

912
00:42:06,360 --> 00:42:07,640
Speaker 4: be a lot lower than what you've seen the last

913
00:42:07,640 --> 00:42:07,920
Speaker 4: two year.

914
00:42:08,000 --> 00:42:10,080
Speaker 2: So the ball has just been off the charts.

915
00:42:10,880 --> 00:42:14,120
Speaker 4: For anything in the bonds, but you know, particularly down

916
00:42:14,160 --> 00:42:16,400
Speaker 4: in capital structure, and so you know, I think you

917
00:42:16,640 --> 00:42:18,480
Speaker 4: have a better trend going forward there and that that'd

918
00:42:18,480 --> 00:42:19,320
Speaker 4: be the area that I would like.

919
00:42:19,880 --> 00:42:23,279
Speaker 1: Do you weary your toil that anything out there on

920
00:42:23,360 --> 00:42:28,480
Speaker 1: the horizon ian you know, frouth complacency elections, will you know,

921
00:42:28,560 --> 00:42:30,200
Speaker 1: there seems to be a lot till it's about to

922
00:42:30,320 --> 00:42:32,919
Speaker 1: at the beginning but what keeps you up in night worrying?

923
00:42:33,520 --> 00:42:36,480
Speaker 4: I'm worried about all the above, right, you know, bond investors,

924
00:42:36,600 --> 00:42:38,640
Speaker 4: we we we always have to prepare for the worst

925
00:42:38,719 --> 00:42:41,760
Speaker 4: and and and hope for the best. If we structure

926
00:42:41,800 --> 00:42:44,560
Speaker 4: the portfolio right, diverse, fied, right asset classes, right security

927
00:42:44,560 --> 00:42:47,880
Speaker 4: selection certainly can help mitigate that.

928
00:42:48,000 --> 00:42:49,400
Speaker 2: But but but but not completely.

929
00:42:50,360 --> 00:42:54,120
Speaker 4: To me, the biggest the biggest thing we can kind

930
00:42:54,160 --> 00:42:57,600
Speaker 4: of predict and we can't control it, but predict and

931
00:42:57,760 --> 00:43:00,960
Speaker 4: be ahead of is just what's gonna happen with the economy.

932
00:43:01,160 --> 00:43:04,839
Speaker 4: And and we are relentlessly watching inflation data, and we're

933
00:43:04,880 --> 00:43:08,719
Speaker 4: relentlessly watching consumer data, which you know, are somewhat contradictory

934
00:43:08,800 --> 00:43:12,160
Speaker 4: to each other, of making sure that we can execute

935
00:43:12,239 --> 00:43:14,680
Speaker 4: this soft landing as a US economy and a global

936
00:43:14,719 --> 00:43:17,840
Speaker 4: economy as well. If we see signs that that that

937
00:43:17,960 --> 00:43:20,160
Speaker 4: we can't, you know, then then we're gonna we're gonna

938
00:43:20,200 --> 00:43:22,560
Speaker 4: have to change the portfolio around. But for now, you know,

939
00:43:22,680 --> 00:43:26,360
Speaker 4: we certainly do buy into the soft landing. And you know,

940
00:43:26,400 --> 00:43:28,120
Speaker 4: there's a lot of risks are out there, but there's

941
00:43:28,160 --> 00:43:29,200
Speaker 4: there's always a lot of risks.

942
00:43:29,200 --> 00:43:31,080
Speaker 2: There are a lot of risks, you know, in October of.

943
00:43:31,120 --> 00:43:33,680
Speaker 4: Twenty twenty three and credits up and you're don't call

944
00:43:33,719 --> 00:43:36,399
Speaker 4: it ten percent since then? So when I go back

945
00:43:36,400 --> 00:43:38,960
Speaker 4: to the beginning, is where yields are. You know, the

946
00:43:39,040 --> 00:43:41,759
Speaker 4: paid to weight, you're paid to worry as well. So

947
00:43:42,000 --> 00:43:43,680
Speaker 4: you know you're paid to weight, you're paid to worry.

948
00:43:44,040 --> 00:43:46,759
Speaker 4: You're getting yields that you haven't gotten for a very

949
00:43:46,840 --> 00:43:50,320
Speaker 4: long time. And I think that that's, uh, you know

950
00:43:50,440 --> 00:43:52,720
Speaker 4: that that's that's a nice Uh, that's a nice feature

951
00:43:52,760 --> 00:43:54,280
Speaker 4: that we can we can argue for our asset classes.

952
00:43:54,280 --> 00:43:55,640
Speaker 2: We haven't been able to do for a very long time.

953
00:43:56,200 --> 00:43:58,400
Speaker 1: That when people look at yields and not spread, does

954
00:43:58,440 --> 00:44:00,440
Speaker 1: that not start to worry a bit? Given that spread

955
00:44:00,520 --> 00:44:02,880
Speaker 1: should should compensate you for something, right, I mean above

956
00:44:02,960 --> 00:44:03,880
Speaker 1: the treasury.

957
00:44:04,120 --> 00:44:07,080
Speaker 4: Certainly, certainly, I mean they should, they should compensate you.

958
00:44:07,680 --> 00:44:09,759
Speaker 4: I you know, you look at credit spreads, investment grade

959
00:44:09,800 --> 00:44:13,520
Speaker 4: eighty over, you know what defaults and history are something

960
00:44:13,600 --> 00:44:16,960
Speaker 4: like twenty five to thirty basis points of of of losses.

961
00:44:17,080 --> 00:44:20,680
Speaker 4: So you have been compensated. You generally are compensated more

962
00:44:20,760 --> 00:44:24,680
Speaker 4: because of liquidity risk, liquidity premium. You're you're compensated for

963
00:44:25,280 --> 00:44:28,200
Speaker 4: you you know, for for some other you know, for

964
00:44:28,320 --> 00:44:30,640
Speaker 4: some other features within the investment great credit market, but

965
00:44:30,960 --> 00:44:34,320
Speaker 4: you know, overall, even in a down scenario, I I

966
00:44:34,440 --> 00:44:37,839
Speaker 4: I do think you will make more money on a loss,

967
00:44:37,880 --> 00:44:41,880
Speaker 4: and just basis in investment credit now the volatility you know,

968
00:44:42,000 --> 00:44:44,440
Speaker 4: may may not may not be as fun, but overall,

969
00:44:44,520 --> 00:44:46,920
Speaker 4: you know, I still think you're paid to be in credit,

970
00:44:47,120 --> 00:44:50,200
Speaker 4: just maybe not as much as people want. I don't

971
00:44:50,239 --> 00:44:53,040
Speaker 4: think you're signing up for for more losses than you're

972
00:44:53,080 --> 00:44:54,400
Speaker 4: getting paid. I just think you know you have to

973
00:44:54,480 --> 00:44:56,760
Speaker 4: volatility adjust it and you may not be. But overall,

974
00:44:57,200 --> 00:44:59,440
Speaker 4: you know, I agree with your statement that you have

975
00:44:59,560 --> 00:45:01,479
Speaker 4: to be careful for when people only look at yield,

976
00:45:02,520 --> 00:45:04,920
Speaker 4: But you know, I I I would state that fundamentals

977
00:45:04,960 --> 00:45:09,080
Speaker 4: are good, companies are are are being conservative For the

978
00:45:09,160 --> 00:45:12,279
Speaker 4: most part, we have not seen large levering up transactions.

979
00:45:13,160 --> 00:45:16,399
Speaker 4: So you know, I'm not saying the sky is completely clear,

980
00:45:17,280 --> 00:45:20,520
Speaker 4: but to me, there are there are you are still better.

981
00:45:20,600 --> 00:45:22,560
Speaker 2: I think you were better. You're you're you're.

982
00:45:22,440 --> 00:45:25,000
Speaker 4: Better off being in credit than simply in treasuries. And

983
00:45:25,080 --> 00:45:28,160
Speaker 4: I and I think that that you're being compensated just enough.

984
00:45:28,520 --> 00:45:30,279
Speaker 4: So I always wish it was more but but but

985
00:45:30,400 --> 00:45:32,360
Speaker 4: you know, certainly, I think you are actually still getting

986
00:45:32,520 --> 00:45:34,160
Speaker 4: enough to be in credit versus treasuries.

987
00:45:34,640 --> 00:45:37,040
Speaker 1: Great stuff, Matt Brill, head of North America Investment Grade

988
00:45:37,080 --> 00:45:39,000
Speaker 1: Credit that's Invesco. It's been a pleasure having you on

989
00:45:39,040 --> 00:45:42,080
Speaker 1: the Credit Edge. Thank you, And of course to Tollu

990
00:45:42,160 --> 00:45:44,480
Speaker 1: Ali Mutu with Bloomberg Intelligence, thank you very much for

991
00:45:44,560 --> 00:45:45,120
Speaker 1: being on the show.

992
00:45:45,640 --> 00:45:47,400
Speaker 3: Great to be here. Thank you, James.

993
00:45:48,160 --> 00:45:51,960
Speaker 1: Check out all of Toulu's excellent analysis on the Bloomberg Terminal.

994
00:45:52,560 --> 00:45:56,120
Speaker 1: It's part of Bloomberg Intelligence coverage that includes over two

995
00:45:56,160 --> 00:45:58,640
Speaker 1: thousand equities and credits, as well as outlooks on more

996
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997
00:46:03,120 --> 00:46:05,520
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998
00:46:05,560 --> 00:46:09,040
Speaker 1: on Apple, Spotify, and all other good podcast providers, including

999
00:46:09,040 --> 00:46:11,880
Speaker 1: the Bloomberg Terminal. Give us a review, tell your friends,

1000
00:46:11,960 --> 00:46:15,520
Speaker 1: or email me directly at jcrombieight at Bloomberg dot net.

1001
00:46:16,480 --> 00:46:18,799
Speaker 1: I'm James Crombie. It's been a pleasure having you join

1002
00:46:18,880 --> 00:46:20,919
Speaker 1: us again next week on the Credit Edge.