WEBVTT - Panic in the Bond Disco 0:00:13.560 --> 0:00:16.880 Hello, and welcome to What Goes Up a Bloomberg Weekly 0:00:16.920 --> 0:00:20.720 Markets podcast. I'm Sarah Plantzek, a reporter on the Cross 0:00:20.720 --> 0:00:23.520 Asset team, and I'm Mike Reagan, a senior editor on 0:00:23.560 --> 0:00:26.240 the Markets Team. This week on the show, the beloved 0:00:26.280 --> 0:00:30.720 trade of is being tested or session fears have faded. 0:00:31.120 --> 0:00:35.280 Sentiment has turned incrementally more positive, and that's set in 0:00:35.320 --> 0:00:38.519 Bonn yield higher and it's now pressuring stock investors that 0:00:38.520 --> 0:00:41.640 were before playing defense. Is this the start of something 0:00:41.680 --> 0:00:45.440 new or is it just a false dawn? And as always, 0:00:45.440 --> 0:00:48.319 will end the episode with our tradition the Craziest Thing 0:00:48.440 --> 0:00:51.559 I Saw in Markets this week? Sarah, I presume you're 0:00:51.560 --> 0:00:53.519 prepared for that second. I am prepared, but I have 0:00:53.560 --> 0:00:56.080 a feeling that you have a very special one I got. 0:00:56.120 --> 0:00:58.400 I have a very special edition of the Craziest Thing 0:00:58.480 --> 0:01:00.560 I Saw in Markets this week. But let's get right 0:01:00.560 --> 0:01:03.640 to it. I mean, sort of a crazy week in 0:01:03.680 --> 0:01:07.120 the bond market. We're seen a really notable back up 0:01:07.160 --> 0:01:11.440 in yields, and luckily, by happenstance, we happen to have 0:01:11.560 --> 0:01:14.920 the perfect guest to help us break it down. From 0:01:15.040 --> 0:01:18.399 p G I am, we have Robert Tip, who is 0:01:18.440 --> 0:01:21.399 the chief investment strategist at p G. I am Robert, 0:01:21.440 --> 0:01:23.120 Welcome to the show. Thank you, good to be here. 0:01:23.160 --> 0:01:24.520 And it's good to have a Jersey guy. I would 0:01:24.520 --> 0:01:26.480 say to at least do you work in Jersey and Newark? 0:01:26.560 --> 0:01:29.480 If if my notes are credit, well I'm quite diverse. 0:01:29.520 --> 0:01:32.240 I commute from a Westchester so I drive through you know, 0:01:32.319 --> 0:01:35.240 quite a range of geography that's very regional. Yeah, that's 0:01:35.280 --> 0:01:38.440 a nightmare of a community I imagined. No comment, Well 0:01:38.480 --> 0:01:40.280 it's not, you know, at least it's not the most 0:01:40.319 --> 0:01:44.360 common commonly trodden path. And also joining us this week, 0:01:44.360 --> 0:01:47.720 commuting all the way from Greenwich Village, we have Chris ag, 0:01:47.920 --> 0:01:51.160 the executive editor of Markets at Bloomberg. Chris, welcome back 0:01:51.200 --> 0:01:53.560 to the show. Thanks for having me, Mike, thanks for 0:01:53.600 --> 0:01:56.240 identifying where I live. That's true. Anyone looking for Chris 0:01:56.280 --> 0:02:00.960 you can find pretty big, right. Well, you've got people 0:02:01.080 --> 0:02:04.280 looking for you, Chris, based on some of our Trump stories. Yes, 0:02:06.760 --> 0:02:11.880 so Trump fans and debt collectors can find Chris Navy. Robert, 0:02:11.919 --> 0:02:14.040 I gotta sort of pat you on the back, pat 0:02:14.080 --> 0:02:15.680 your team on the back. So I was looking at 0:02:15.720 --> 0:02:18.160 some of the returns on the funds this year, especially 0:02:18.200 --> 0:02:21.000 the p g i AM Total Return bond Fund up 0:02:21.040 --> 0:02:24.839 ten year to date. Wow. But not only that, it's 0:02:24.960 --> 0:02:28.720 it's uh performance compared to peers is really impressive. A 0:02:28.760 --> 0:02:30.520 one year basis, according to our date, it's in the 0:02:30.600 --> 0:02:34.080 ninety percentile. Five years, it's in the eighty nine percentile. 0:02:34.760 --> 0:02:37.480 What's going right? I mean, obviously we've had this ferocious 0:02:37.560 --> 0:02:40.320 rally and bonds, but what are you guys doing especially 0:02:40.440 --> 0:02:43.560 right to have these really great numbers? Sure, well, thanks, 0:02:43.800 --> 0:02:46.560 you know, we're taking a long term approach, So we're 0:02:46.560 --> 0:02:51.760 looking at the overall backdrop the macro economy, policy, monetary, 0:02:51.840 --> 0:02:55.040 fiscal not just in the US, but globally and so 0:02:55.120 --> 0:02:57.639 much so these days what happens in the bond market 0:02:57.720 --> 0:03:01.400 is really a global phenomena. The balance of borrowing and 0:03:01.480 --> 0:03:04.880 lending is really driven almost more so by the amount 0:03:04.919 --> 0:03:07.799 of savings coming out of foreign countries than what's going 0:03:07.840 --> 0:03:10.840 on here just domestically in the US that would impact 0:03:11.360 --> 0:03:15.040 you know, a general intermediate bond fund. And so when 0:03:15.040 --> 0:03:18.040 we look at the big picture, even just in the US, 0:03:18.160 --> 0:03:21.119 the markets quite sensitive to interest rates, and when they've 0:03:21.160 --> 0:03:25.000 been up well north of two percent, the economy has 0:03:25.040 --> 0:03:27.200 really kind of bogged down a bit, especially the interest 0:03:27.280 --> 0:03:29.760 rate sensitive sector, and give you the message that the 0:03:29.800 --> 0:03:33.760 equilibrium interest rate here is lower than most people think. 0:03:34.480 --> 0:03:37.520 And when we look abroad, the money is pouring across 0:03:37.560 --> 0:03:40.080 the trance and most places have negative rates. People are 0:03:40.120 --> 0:03:43.000 paying to park their money in these countries, or if 0:03:43.000 --> 0:03:46.320 they're buying long dated securities, they might be zero yield 0:03:46.680 --> 0:03:49.720 um long term, zero coupon bonds, you know, that have 0:03:49.920 --> 0:03:53.160 an asymmetric looking risk we term profile. And so the 0:03:53.160 --> 0:03:55.320 money has come over here as well, even if on 0:03:55.360 --> 0:03:58.840 a hedge basis, when they eliminate currency risk, they end 0:03:58.920 --> 0:04:02.720 up with a negative UH yield on a standstill basis, 0:04:02.760 --> 0:04:06.480 but at least over here yields are well north of zero. 0:04:06.600 --> 0:04:09.240 Maybe you have some upside as well as downside, and 0:04:09.280 --> 0:04:11.720 so I think you know, that's driven us to a 0:04:11.800 --> 0:04:15.280 secular view that rates would be declining, and we've positioned 0:04:15.320 --> 0:04:18.240 for that. Is there anything in this so often the 0:04:18.279 --> 0:04:21.800 bond market this week that sort of changes your your 0:04:21.920 --> 0:04:23.800 stance on on all of that. Is is it a 0:04:23.839 --> 0:04:26.520 turning point or is this just sort of a little 0:04:26.520 --> 0:04:29.120 bit of a correction in a very much an overbought 0:04:29.120 --> 0:04:33.159 treasury market. Well, I wish I could give you the answer, UM, 0:04:33.200 --> 0:04:35.279 But you know what, what we've seen over the years 0:04:35.360 --> 0:04:38.279 in the secular bowle market that we've had in bonds 0:04:38.320 --> 0:04:40.960 for forty years, At any given point in time, you 0:04:41.000 --> 0:04:46.000 may have a cyclical upturn and expectations and views of 0:04:46.080 --> 0:04:50.640 economies around the world have become pretty morose, and uh 0:04:50.800 --> 0:04:52.839 so you can get a backup in the bond market 0:04:52.920 --> 0:04:55.599 driven by technical conditions. And I think to a large extent, 0:04:55.680 --> 0:04:57.919 what we've seen so far is kind of an equal 0:04:57.920 --> 0:05:00.719 and opposite reaction to the panic by that we saw 0:05:01.560 --> 0:05:04.480 not too long ago. And we'll have to see if 0:05:04.480 --> 0:05:08.720 the fundamentals follow through, um, but our base case would 0:05:08.800 --> 0:05:13.560 be that the range safe for the tenure treasury is 0:05:13.680 --> 0:05:15.520 maybe one and a half to two and a half, 0:05:15.760 --> 0:05:19.159 but probably more likely something more like one to two, 0:05:19.720 --> 0:05:22.599 and that we're going to see these fundamentals reassert themselves 0:05:22.600 --> 0:05:25.279 and cause rates to stabilize or maybe even fall again. 0:05:25.640 --> 0:05:28.279 So we did see a pretty major backup and yield 0:05:28.360 --> 0:05:31.479 this week, the tenure once again approaching two percent, which 0:05:31.480 --> 0:05:33.719 is a level we hadn't seen in at least a 0:05:33.760 --> 0:05:37.400 couple of months. Because when you think about your lower 0:05:37.480 --> 0:05:40.160 for longer thesis. Much of that does have to do 0:05:40.680 --> 0:05:44.720 with where yields are overseas. Does that just mean that 0:05:44.760 --> 0:05:48.120 there is a cap on where US treasury yield can 0:05:48.200 --> 0:05:50.640 go going forward, because no matter what, as long as 0:05:50.680 --> 0:05:53.440 they're higher than yields overseas, you're always going to have 0:05:53.480 --> 0:05:56.560 some sort of demand. I think creates a friction. And 0:05:56.640 --> 0:05:58.760 so what we've seen in the sell off is the 0:05:58.800 --> 0:06:02.400 treasuries have sold off less than foreign bonds. And in 0:06:02.520 --> 0:06:08.960 these UH that the key global markets j g B s, buons, UH, 0:06:09.080 --> 0:06:11.920 European bonds, Japanese bonds, there has been a sell off 0:06:12.080 --> 0:06:15.119 and UH, you know, there there's a whiff of change 0:06:15.120 --> 0:06:17.080 in the air. And both of these places. In Japan 0:06:17.279 --> 0:06:19.880 they've been trying to steep in their yield curve, push 0:06:19.960 --> 0:06:22.279 up long term yields to lead more on the table 0:06:22.360 --> 0:06:25.320 for insurers, for banks UH and in Europe you have 0:06:25.360 --> 0:06:28.960 a change of of of leadership at the e c B. 0:06:29.680 --> 0:06:33.520 So people you know, questioning will there be this unflinching 0:06:33.640 --> 0:06:37.560 commitment to incredibly low rates and quee going forward. And 0:06:37.640 --> 0:06:41.679 so I think the level of yields is spread being 0:06:41.880 --> 0:06:46.360 at at you know, your nine type percentile of multidecade 0:06:47.680 --> 0:06:51.159 levels relative to much higher than these four yields. That 0:06:51.240 --> 0:06:54.640 creates a cushion, but it doesn't create a lid. I 0:06:54.640 --> 0:06:56.240 wanted to dig in a little bit on the I 0:06:56.279 --> 0:06:58.359 was looking at the p G I am Total Return 0:06:58.480 --> 0:07:00.160 bond Fund. I think it's one of your big gets 0:07:00.160 --> 0:07:03.039 straight about fifty billion in assets, UM. And I was 0:07:03.040 --> 0:07:05.360 looking at sort of the allocations and the holdings. Now, 0:07:05.400 --> 0:07:06.920 this is our data is at the as of the 0:07:07.000 --> 0:07:10.920 end of August, so not necessarily current, but a couple 0:07:10.920 --> 0:07:17.440 of things really caught my eye. Uh, mortgages corporate about 0:07:17.440 --> 0:07:21.680 eighteen percent government. But looking at the individual top holdings, 0:07:21.920 --> 0:07:26.040 there were a few US D euro swaps uh usd 0:07:26.480 --> 0:07:31.040 uh British pounds swap, so walk us through UM and 0:07:31.080 --> 0:07:32.960 I think those were all about like four or five 0:07:33.440 --> 0:07:37.000 of the allocation, so pretty big positions. UM. Now, I'm 0:07:37.000 --> 0:07:38.920 a stock guy, so I don't necessarily know what's going 0:07:38.960 --> 0:07:41.000 on with these, but my guess is these are these 0:07:41.000 --> 0:07:45.800 are basically bets on rate spreads, yield spreads narrowing between 0:07:46.320 --> 0:07:49.080 the US and Europe. Is that is that the safe 0:07:49.080 --> 0:07:52.600 way to describe it. Our risk or principally domestic and 0:07:52.720 --> 0:07:57.160 a currency risk, foreign interest rate risk, is going to 0:07:57.240 --> 0:08:01.040 be very limited, and so uh, notes of of swaps 0:08:01.040 --> 0:08:03.240 that will be used in the fund will be issues 0:08:03.280 --> 0:08:07.000 selection driven. So we may find that a US issue 0:08:07.080 --> 0:08:10.000 are issues and euros maybe at a wider spread than 0:08:10.040 --> 0:08:12.880 in the US. We buy that bond and we hedge 0:08:12.880 --> 0:08:16.400 it back to the US. Now we have had, um, 0:08:16.440 --> 0:08:18.680 you know, at different points in time, uh, you know, 0:08:18.720 --> 0:08:22.280 small positions and for an interest rate risk or even 0:08:22.280 --> 0:08:24.480 fcs on for on the foreign currency side, but those 0:08:24.480 --> 0:08:26.640 tend to be very small, not not as large as 0:08:26.800 --> 0:08:30.600 as that magnitude generally, Right, Chris, come in here and 0:08:30.640 --> 0:08:33.040 give us the equity view, because it's not only yields 0:08:33.120 --> 0:08:35.160 that have been rising this week. I mean stocks have 0:08:35.240 --> 0:08:38.679 been rising and pretty forcefully to it that. Yeah, um, 0:08:39.640 --> 0:08:41.600 I feel like stocks are happy to see yields go up. 0:08:41.600 --> 0:08:44.600 I mean the big equity perspective on that is that 0:08:45.160 --> 0:08:47.920 something going on with bonds and yields in the curve 0:08:48.280 --> 0:08:52.040 means recessions coming. So anything that kind of undoes that argument. 0:08:52.040 --> 0:08:54.360 Now you're saying that just as big an issue would 0:08:54.360 --> 0:08:56.679 be fields getting too high at this point kind of 0:08:56.720 --> 0:08:58.559 reminds me of a saying we have on the desk, 0:08:58.800 --> 0:09:03.760 which is whatever the hell happens, it's bad, But I 0:09:03.800 --> 0:09:05.760 guess we shouldn't get too comfortable with the relief for 0:09:05.880 --> 0:09:08.200 feeling over seeing a little bit of unwinding in the 0:09:08.240 --> 0:09:10.560 curve and all of these uh, you know, sort of 0:09:10.640 --> 0:09:14.280 unbelievably reliable recession indicators. What is true that you know, 0:09:14.440 --> 0:09:18.720 the the good news that's that's boosting the equity market, 0:09:19.520 --> 0:09:23.400 whether it was less worse than feared earnings or some 0:09:23.480 --> 0:09:27.080 optimism on the trade front, that that's it's bad for 0:09:27.160 --> 0:09:29.400 yields until yields get too hind they begin to choke 0:09:29.480 --> 0:09:31.920 off what's going in the equity market. But so far 0:09:31.960 --> 0:09:35.280 we're in the sweet spot where you have some concerns 0:09:35.280 --> 0:09:38.679 on the right side, but rising risk appetite and not 0:09:38.880 --> 0:09:42.800 economic optimism to outweigh, you know, the rising discount rates. 0:09:42.840 --> 0:09:45.760 So is the last few weeks in markets? How much 0:09:45.760 --> 0:09:50.040 would you attribute it to, uh, the trade optimism and 0:09:50.040 --> 0:09:52.240 how much would you attribute it to the FED apparently 0:09:52.280 --> 0:09:55.840 being on hold but yet still uh, sort of doing 0:09:55.920 --> 0:09:58.240 what it can to keep the repo market, uh, in 0:09:58.400 --> 0:10:01.440 order with with this short term treasury purchases, I mean, 0:10:01.480 --> 0:10:02.880 how big of a deal is to FED at least 0:10:02.880 --> 0:10:05.160 in the rates market right now. Yeah, I mean I 0:10:05.240 --> 0:10:07.840 think those are those are excellent points. I think that 0:10:08.200 --> 0:10:11.560 the risk on makes people wonder, you know, g is 0:10:11.600 --> 0:10:14.240 it really over for bond? Should I have more equities? 0:10:14.280 --> 0:10:16.520 And on the retail side there have been a lot 0:10:16.520 --> 0:10:20.560 of outflows from equities, so there's some of that. I 0:10:20.600 --> 0:10:25.640 think though we have shifted in market environment from one 0:10:25.679 --> 0:10:30.160 where central banks had wound down their quantitative purchases. There 0:10:30.240 --> 0:10:34.440 their quei buys, and that was bad for risk I 0:10:34.440 --> 0:10:36.960 mean what we saw, for example in two thousand nine, 0:10:37.000 --> 0:10:40.600 in these previous instances of aggressive quei is it dampened 0:10:40.600 --> 0:10:45.640 equity volatility, It pushed up stock markets, it pushed down volatility, 0:10:45.720 --> 0:10:48.160 and we had moved away from that. Last year was 0:10:48.200 --> 0:10:52.400 a very volatile year where risk product had a hard 0:10:52.400 --> 0:10:54.800 time going anywhere and there was much less liquidity coming 0:10:54.840 --> 0:10:59.240 into the system. So now we've gone back into bill buying, 0:10:59.480 --> 0:11:02.280 you know, UH and a rising FED balance sheet. The 0:11:02.320 --> 0:11:05.680 e CB is back in buying. Bank of Japan is 0:11:05.679 --> 0:11:08.240 is slowing their purchases, but at a very slow rate, 0:11:08.280 --> 0:11:11.240 and at the same time they are in a way 0:11:11.600 --> 0:11:17.439 remodeling their policy because they feel they will be incredibly 0:11:17.440 --> 0:11:22.640 accommodative for even longer than anticipated. So I think the accommodation, 0:11:22.640 --> 0:11:26.439 the aquidity liquidity injection has tended to bear steep in 0:11:26.480 --> 0:11:28.160 the curve a little bit, and we're seeing some of 0:11:28.200 --> 0:11:30.720 that here. At the same time, you look at the 0:11:30.800 --> 0:11:33.840 data that's come in so far for the fourth quarter 0:11:34.040 --> 0:11:36.760 and kind of distill it down to these UH now 0:11:36.880 --> 0:11:40.520 casts that the FED does. The Atlanta FEDS GDP now model, 0:11:40.559 --> 0:11:43.960 I think is that like zero point nine percent growth 0:11:44.080 --> 0:11:46.160 for the fourth quarter. The New York FEDS one is 0:11:46.160 --> 0:11:48.360 even lower. I think it's like zero point eight. So, 0:11:48.640 --> 0:11:51.880 you know, some of the lowest growth potentially we've seen 0:11:51.920 --> 0:11:54.679 in the cycle. Albeit you know models that tend to 0:11:54.760 --> 0:11:56.400 jump around a lot. There's still a lot of data 0:11:56.440 --> 0:11:59.400 to come in UH for the quarter, but our markets 0:11:59.400 --> 0:12:01.520 getting a little bit ahead of themselves on the optimism 0:12:01.559 --> 0:12:03.880 here this week, well, I think so, I mean, our 0:12:03.880 --> 0:12:06.640 base case of a one to two percent range would 0:12:06.640 --> 0:12:09.040 suggest you're getting near the top of the range. And 0:12:09.440 --> 0:12:14.360 as as you're highlighting this week, the news has not 0:12:14.480 --> 0:12:17.520 been really positive on the fundamental side in terms of 0:12:17.920 --> 0:12:22.360 what really matters for rates markets, which in some um 0:12:22.520 --> 0:12:25.520 some extent is really the real economy. Do people need 0:12:25.679 --> 0:12:29.520 to borrow a lot of money to invest durable goods. 0:12:30.040 --> 0:12:34.319 Big picture, those numbers are very flat. We had this 0:12:34.400 --> 0:12:40.040 week another poor industrial production figure coming from the European side, 0:12:40.840 --> 0:12:44.840 and so basically, you know, that would suggest that more 0:12:44.880 --> 0:12:47.520 likely than not, there was some exuberance when the rates 0:12:47.520 --> 0:12:49.560 were rallying, and then some people are asking themselves what 0:12:49.559 --> 0:12:52.600 were we doing? Uh? And and a little bit of 0:12:52.600 --> 0:12:54.920 panic selling here, Chris. So it seems as that the 0:12:54.920 --> 0:12:57.400 stock market is maybe getting a bit ahead of itself too. 0:12:57.400 --> 0:12:59.600 I mean, you just look at where we're seeing the 0:12:59.600 --> 0:13:02.640 output formans lately, and energy stocks are really on a 0:13:02.720 --> 0:13:04.880 tear this week. You look at other cyclical areas of 0:13:04.920 --> 0:13:09.760 the market. Is it possible that this is just beta chasing? Um? 0:13:10.320 --> 0:13:12.440 In a in a way, yes, I I feel like 0:13:12.440 --> 0:13:16.440 what's going on in the in the equity market reflects uh, 0:13:16.440 --> 0:13:19.240 this sort of standard word is rotation going on? That 0:13:19.240 --> 0:13:20.840 does a lot of people have been caught short by 0:13:20.840 --> 0:13:22.400 this routy And let's face it, if the if the 0:13:22.559 --> 0:13:26.079 if the markets stopped dead right here basically a year 0:13:26.120 --> 0:13:28.160 to date, no one would be no one would have 0:13:28.200 --> 0:13:30.520 any reason to complain. I'm sure they would complain in fact, 0:13:31.080 --> 0:13:36.880 um yeah, um, but uh, if you're a fund manager 0:13:36.960 --> 0:13:39.640 who's watched this happen and has been wedded to defensive 0:13:39.679 --> 0:13:43.440 shares or bond proxies, and now the bond markets rolling 0:13:43.679 --> 0:13:46.360 or some degree rolling over, and you're stuck with all 0:13:46.360 --> 0:13:48.800 of that stuff and you're watching everything take off. I mean, 0:13:48.840 --> 0:13:50.920 it's a sort of a self fulfilling prophecy. You're gonna 0:13:50.960 --> 0:13:53.520 you're gonna need to dive back in and grab some beta. 0:13:54.200 --> 0:13:57.200 It reminds me of a story your team had out 0:13:57.800 --> 0:14:03.200 this week about the percentage of active equity mutual fund 0:14:03.200 --> 0:14:07.199 managers who are beating they're getting killed. It was getting 0:14:07.200 --> 0:14:09.280 the benchmarker. I mean, they're they're always getting killed, but 0:14:09.280 --> 0:14:11.040 they're getting killed a little worse right now for some 0:14:11.080 --> 0:14:13.079 of these reasons. And it's a bad year I think 0:14:13.120 --> 0:14:15.720 probably to look bad. I mean everyone's gonna I mean, 0:14:16.000 --> 0:14:18.640 to the degree people care about performance, I feel like 0:14:18.679 --> 0:14:21.200 everyone should look at their returns in their foreign k 0:14:21.320 --> 0:14:24.840 and say, man, I made this year. But that's not 0:14:24.920 --> 0:14:28.520 how the professional class will look at it. And this 0:14:28.600 --> 0:14:30.680 is sort of the big sort of melt up thesis 0:14:30.840 --> 0:14:31.920 right now that there's going to be a lot of 0:14:31.920 --> 0:14:34.400 people diving back into the market in the next two 0:14:34.440 --> 0:14:38.320 months try to make those numbers. And it's like, lookout above. 0:14:38.400 --> 0:14:40.720 If that starts to happen, what do you think the 0:14:40.800 --> 0:14:43.320 chances that are. I mean, we're obviously seeing it to 0:14:43.400 --> 0:14:45.240 some degree. Does it continue through the t the end 0:14:45.240 --> 0:14:46.760 of the year. Walking in here, I probably would have 0:14:46.800 --> 0:14:50.160 said pretty good. As I listened to our guests and 0:14:50.240 --> 0:14:52.200 some of the signals coming from the boom market, I 0:14:52.200 --> 0:14:55.520 think that's ultimately the determined if the economy doesn't go anywhere. 0:14:55.600 --> 0:14:58.200 And what I know about is the economy is earnings, 0:14:58.200 --> 0:15:01.240 and earnings in the fourth quarter look like they're gonna suck, 0:15:01.640 --> 0:15:06.240 so uh, they're The ultimate determinant will be whether or 0:15:06.240 --> 0:15:08.440 not the macro picture is good enough for stocks. And 0:15:08.640 --> 0:15:10.800 you know, the supply demand and chasing beta things are 0:15:10.840 --> 0:15:12.960 a factor for a little while, but they won't they 0:15:13.000 --> 0:15:15.520 won't call the ultimate tune. Much of this reversal has 0:15:15.560 --> 0:15:17.840 been predicated on the idea that we are seeing a 0:15:17.880 --> 0:15:20.840 stabilization and growth. We could see a nice rebound in 0:15:21.760 --> 0:15:23.920 And I did do my homework, Robert. I dug up 0:15:23.960 --> 0:15:26.840 something that you said on Bloomberg Television last week and 0:15:26.960 --> 0:15:29.320 after the employment report, you said, this is a picture 0:15:29.400 --> 0:15:32.880 perfect soft lanning. It's what they're on track for talking 0:15:32.960 --> 0:15:36.760 about the federal reserve. Is that actually what we're seeing 0:15:36.840 --> 0:15:40.120 And if so, wouldn't that bode very well then for 0:15:40.240 --> 0:15:43.560 risk assets? I think so. And I think the comment 0:15:43.600 --> 0:15:48.320 I made was that he Powell has been criticized, you know, 0:15:48.360 --> 0:15:50.840 for how he's handled the press conferences, and I think 0:15:50.840 --> 0:15:55.320 they did a pretty flat footed last hike last year, 0:15:55.440 --> 0:15:56.960 you know, one too many, but I think in a 0:15:56.960 --> 0:15:58.920 way they kind of wanted to stick their finger in 0:15:58.920 --> 0:16:01.960 the eye of the President who had been badgering them, 0:16:02.680 --> 0:16:04.800 and so they managed to do that without doing too 0:16:04.840 --> 0:16:08.320 much damage. They've whipped around, they've cut three times, which 0:16:08.400 --> 0:16:11.360 was you know, going every meeting every six weeks, as 0:16:11.400 --> 0:16:13.640 opposed to when they were hiking, which you know, they 0:16:13.640 --> 0:16:17.160 were only moving once a quarter. So that quickly cut 0:16:17.880 --> 0:16:20.480 and they may be there for the soft landing. And 0:16:20.560 --> 0:16:24.480 so our hypothesis, Frank, for some time is that although 0:16:24.520 --> 0:16:27.480 this is a moribund economic backdrop, it is not as 0:16:27.600 --> 0:16:29.520 much growth as people would want to see. It is 0:16:29.560 --> 0:16:33.080 not a feel good economy for people that in the markets, 0:16:33.320 --> 0:16:36.800 you have a declining equilibrium interest rate, you have a 0:16:36.920 --> 0:16:41.600 very long business cycle. Because these central banks have prevented uh, 0:16:41.960 --> 0:16:45.920 really big financial accesses from building up, and they have 0:16:46.080 --> 0:16:48.720 not jumped in and crushed the economy with rate hikes, 0:16:48.760 --> 0:16:51.560 which is typically what kills it. So I think what's 0:16:51.640 --> 0:16:54.200 what's shocking to people is you are having a very 0:16:54.200 --> 0:16:58.280 extended cycle. They're on track to continue this, and so 0:16:58.400 --> 0:17:02.000 as a result, your eights are likely remain low, your 0:17:02.480 --> 0:17:06.600 period of spread sector outperformance continues, and your equity market 0:17:07.280 --> 0:17:11.120 continues to look quite competitive in terms of earnings, yields, 0:17:11.119 --> 0:17:15.040 and valuations relative to a bond market with yields this low. 0:17:15.680 --> 0:17:17.480 I feel like that there's a point to be made 0:17:17.480 --> 0:17:20.399 here about the stock market being an economic input onto itself. 0:17:20.440 --> 0:17:22.240 That's sort of a lucky break that they get here, 0:17:22.640 --> 0:17:25.119 that the one thing that could not the one that obviously, 0:17:25.119 --> 0:17:27.560 the consumer remains strong. One of the reasons the consumer 0:17:27.640 --> 0:17:29.520 remains storming. You saw this after the fourth quarter of 0:17:29.600 --> 0:17:33.480 last year when market tank some of the uh animal 0:17:33.520 --> 0:17:35.399 spirits kind of get beaten out. But right now a 0:17:35.440 --> 0:17:36.960 lot of people are sitting with a lot of money 0:17:37.000 --> 0:17:39.119 thanks to stock market. That's part of the big Eco 0:17:39.160 --> 0:17:57.480 bowl case. I'm glad you brought the consumer, Chris, that 0:17:57.640 --> 0:17:59.680 that brings me back to looking at the p g 0:17:59.800 --> 0:18:04.800 I total return return bond fund mortgages. Um, is it 0:18:05.000 --> 0:18:07.399 safe to say that you know a lot of what 0:18:07.440 --> 0:18:10.480 we've heard people talk about and seeing ourselves this year 0:18:10.560 --> 0:18:13.000 is Yeah, certain parts of the economy are very week. 0:18:13.080 --> 0:18:18.800 You have you have manufacturings week, the consumers still remain strong. Um, 0:18:19.760 --> 0:18:21.480 what are you looking at in the housing market? Is 0:18:21.480 --> 0:18:24.359 it just blue skies ahead? Uh? In the housing market, 0:18:24.480 --> 0:18:27.920 is there you know and is there still yield there? 0:18:28.000 --> 0:18:32.280 Considering Uh, you know some people are still looking at 0:18:32.320 --> 0:18:35.840 that market with a jaundiced eye after the financial crisis. Well, 0:18:35.880 --> 0:18:38.359 I think that in terms of the agency passed through market, 0:18:38.400 --> 0:18:41.080 we're seeing a little bit of value there after the 0:18:41.119 --> 0:18:44.280 FED has been rolling off and people have been scared 0:18:44.320 --> 0:18:47.480 out of that market a little bit. We're we're stabilizing 0:18:47.480 --> 0:18:50.280 at at attractive levels and and so we have you know, 0:18:50.400 --> 0:18:53.359 some intermittent exposure there. But most of what you're seeing 0:18:53.760 --> 0:18:57.120 in the mortgage categories is structured product that is actually 0:18:57.160 --> 0:19:01.040 away from residential. So you're gonna be looking at a 0:19:01.080 --> 0:19:04.879 good amount of commercial mortgage backed where those asset prices 0:19:04.880 --> 0:19:08.040 have been firmer, but also where we tend to be Uh, 0:19:08.119 --> 0:19:11.399 in the top position in the capital structure or in 0:19:11.520 --> 0:19:13.800 one of at any rate, one of the very highly 0:19:13.880 --> 0:19:17.439 rated ones unless uh, you know, in some exceptional cases 0:19:17.480 --> 0:19:21.680 there could be a single asset type situation that's that's 0:19:21.720 --> 0:19:24.159 mid rated, but there's much less of that, so predominantly 0:19:24.560 --> 0:19:28.399 high quality commercial and then a fair amount of collateralized 0:19:28.440 --> 0:19:34.960 loan obligation clos and uh, this is a sector where 0:19:35.000 --> 0:19:39.760 you are collateralized by below investment grade loans. So uh, 0:19:40.200 --> 0:19:43.680 an area that is not one of the best looking 0:19:43.720 --> 0:19:46.200 areas right here. That's an area that was technically very 0:19:46.240 --> 0:19:49.520 well supported because they're floating rate assets during the period 0:19:49.520 --> 0:19:52.040 of FED rate hikes, and now the FED is on 0:19:52.119 --> 0:19:55.639 hold and so retail money is going out of those funds. 0:19:55.880 --> 0:19:59.800 Loan prices are under pressure, and their concerns on asset. 0:20:00.280 --> 0:20:05.240 The underwriting was most aggressive there. But for diligent investors, 0:20:05.280 --> 0:20:07.919 I think, who can you know forge through the different 0:20:07.960 --> 0:20:10.600 managers what exactly is in these deals and then go 0:20:10.760 --> 0:20:12.760 right to the top of the capital structure, not in 0:20:12.760 --> 0:20:15.800 the middle, not at the bottom, that they are spreads 0:20:15.840 --> 0:20:19.520 available that are very competitive with intermediate and long term 0:20:19.600 --> 0:20:23.040 corporate bonds that are much lower rated than a triple 0:20:23.080 --> 0:20:26.159 a c L o U and have very competitive spreads 0:20:26.280 --> 0:20:27.760 the c L so I think it's a fair amount 0:20:27.760 --> 0:20:30.840 of that, uh where we're looking to get some some 0:20:30.920 --> 0:20:34.040 lower risk, lower beta spread at this point in the cycle. 0:20:34.760 --> 0:20:37.280 Do you see any product offerings out there that do 0:20:38.359 --> 0:20:42.560 make cause for concern for those who maybe aren't doing 0:20:42.600 --> 0:20:47.960 their due diligence we work, Yeah, Well, I think the 0:20:48.400 --> 0:20:52.600 loan area is one where you've had some uh you 0:20:52.600 --> 0:20:57.199 know changes. I mean there's almost a terminology misplacement at 0:20:57.200 --> 0:20:58.880 this point where a lot of those deals they don't 0:20:58.920 --> 0:21:02.160 go through banks at all. So at one point that 0:21:02.359 --> 0:21:05.879 market in its genesis, if you had an LBO, or 0:21:05.920 --> 0:21:08.399 you had a lower rated company, they may have a 0:21:08.560 --> 0:21:10.840 range of different financing options. They may go to the 0:21:10.880 --> 0:21:14.359 high yield market, they may borrow collateralized in the bank 0:21:14.400 --> 0:21:17.080 loan market and then that would be syndicated out, but 0:21:17.200 --> 0:21:19.159 that paper would be going through a major bank that 0:21:19.200 --> 0:21:23.800 would have a certain kind of underwriting process. Now, with 0:21:24.359 --> 0:21:28.040 the really large private equity pools out there and a 0:21:28.080 --> 0:21:31.119 lot of capital looking for deals, a lot of the 0:21:31.280 --> 0:21:33.920 loans are not going through a bank intermediary at all. 0:21:34.600 --> 0:21:37.080 There are a lot of very small deals, uh, and 0:21:37.560 --> 0:21:42.080 um um much wider range of credit quality. And so 0:21:42.560 --> 0:21:44.600 you know, as the economy is moderated a little bit, 0:21:44.640 --> 0:21:47.960 and you alluded to the stats on the economic side, 0:21:48.240 --> 0:21:52.800 you are seeing rising um UH a number of companies 0:21:52.880 --> 0:21:55.320 that are missing their earnings forecast and seeing their bonds 0:21:55.400 --> 0:21:59.359