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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 Oded Manor, Global

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Speaker 1: head of Fixed Income Manager Research at black Rock. How

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Speaker 1: are you Oded?

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Speaker 2: Great? Hi, James, great being here.

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Speaker 1: Thank you so much for joining us TODA. We're very

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Speaker 1: excited to have you on the show, and also delighted

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Speaker 1: to see Jody Lewie with Bloomberg Intelligence.

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Speaker 2: How are you, Jody.

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Speaker 3: I'm doing fantastic, James, and I'm really excited to be

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Speaker 3: a part of our fantastic research department of five hundred

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Speaker 3: analysts and strategists working across all major world markets.

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Speaker 1: Credit markets are hanging on to gaines which haven't been

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Speaker 1: that great on the bond side, negative in some cases.

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Speaker 1: If you look at global indices, loans are doing better

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Speaker 1: than corporate bonds as rates stay high for longer than

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Speaker 1: anyone had been expecting at the start of this year,

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Speaker 1: which is good for floating rate assets, but also puts

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Speaker 1: a lot of strain on weak companies with highly levered

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Speaker 1: balance sheets. Debt spreads are very tight. You're not getting

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Speaker 1: very much compensation for the risk of default and downgrades

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Speaker 1: of corporate debt. The ball case is supported by strength

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Speaker 1: in the US economy, which is good for US companies,

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Speaker 1: but credit markets in Europe and Asia are actually doing

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Speaker 1: better than in the US, and there does seem to

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Speaker 1: be a fair amount of complacency given all the risks

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Speaker 1: debt defaults, bankruptcies, commercial real estate, stress, war, geopolitics, elections.

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Speaker 1: France is getting messy and everyone's loaded up on US

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Speaker 1: assets going into a very noisy presidential election. So I

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Speaker 1: want to start there. Odd, where do we go from here?

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Speaker 1: Is it as simple as just chasing yield, ignoring tight

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Speaker 1: spreads and hoping that the FED will jump in and

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Speaker 1: save us if we run into any trouble.

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Speaker 2: Well, there's a lot to unpack there. We're definitely right

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Speaker 2: now living in a very challenging times in ms of

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Speaker 2: in terms of investments, and I think before we kind

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Speaker 2: of understand, we'll dive in into how managers are positioned

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Speaker 2: themselves in terms of duration and in terms of credit.

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Speaker 2: It's kind of understand too first to map where we

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Speaker 2: are going from here. So you know, the FED and

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Speaker 2: as embarked on the most aggressive rate high cycles since

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Speaker 2: the Bulgar Area, in nineteen eighty, and yet the economy

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Speaker 2: is stay resilient. You know, the Fed move we're supposed to

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Speaker 2: push the economy in twenty twenty three into recession. That

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Speaker 2: didn't happen. It didn't happen for three main drivers. The

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Speaker 2: deployment of excess household savings, the massive deficit that the

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Speaker 2: US ran, and the influx of immigrations. All these three

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Speaker 2: factors are either fading or about to fade soon. Okay,

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Speaker 2: because we've seen already the weaker part of the consumer

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Speaker 2: in terms of credit rating starting to straggle, and we

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Speaker 2: see some increase in delinquencies there. The budget deficit is

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Speaker 2: lower than what it used to be last year and

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Speaker 2: it's probably not going to get bigger until a year

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Speaker 2: from now after the election and where there's going to

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Speaker 2: be Biden or Trump. We should expect immigration going forward

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Speaker 2: to be lower this next year than what was until now.

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Speaker 2: So the FED right now is in a race race

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Speaker 2: against type, hoping that inflation will fade faster than economic

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Speaker 2: than the economic environment that we're in. And there we

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Speaker 2: see some you know, managers have different of opinion who

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Speaker 2: is going to win because financial conditions are still very loose,

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Speaker 2: like For example, year today, twenty two percent of loans

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Speaker 2: will refinanced with an average coupon. Took down the average

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Speaker 2: coupon by fifty basis pon. That's literally upsetting what the

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Speaker 2: FED is trying to do. Okay, So kind of the

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Speaker 2: main messages with managers is that they expect to kind

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Speaker 2: of stay arranged bound this summer in terms of price movement,

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Speaker 2: both from rates and credit, but is down the road

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Speaker 2: called it like six to twelve month. They do expect

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Speaker 2: to see weakening in the economy, and they expect to

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Speaker 2: go up more of a little bit, more up in

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Speaker 2: quality and extend duration.

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Speaker 3: Great so dead. I mean, I think you know this,

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Speaker 3: This higher for longer range bound message is certainly something

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Speaker 3: that we're hearing even within Blackrock. I mean, Amanda Lineum,

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Speaker 3: who does macro credit research at your firm, spoke at

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Speaker 3: our BI Women and Finance panel on June eighteenth and

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Speaker 3: said something very similar this higher for longer twenty fifteen

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Speaker 3: in reverse type scenario. That said, with us seeing the

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Speaker 3: consumer weakening, I mean, what where are you thinking in

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Speaker 3: terms of what's next? You know, in terms of going

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Speaker 3: into twenty twenty five, how do you prepare yourself in.

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Speaker 2: Terms of durations or in terms of credit.

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Speaker 3: In terms of credit as well as in terms of duration.

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Speaker 3: I mean, you know, Amanda was definitely talking about staying

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Speaker 3: short in terms of the yield curve as well as

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Speaker 3: short in terms of duration. But what are you hearing

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Speaker 3: and what are you thinking?

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Speaker 2: Yeah, so definitely managers that we're speaking with hesitant right

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Speaker 2: now to extend duration. The long part of the curve

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Speaker 2: provided a lot of volatility, is highly correlated with credit,

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Speaker 2: actually to a level that we haven't since since the nineties,

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Speaker 2: and there's a lot of negative technicals going against it.

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Speaker 2: Right The budget is still high, so we're expecting high

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Speaker 2: supply of issuing in the long end. The FED is

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Speaker 2: buying less, and the job market still hasn't risen its

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Speaker 2: white flag. We're kind of getting mixed signals from the

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Speaker 2: job market. On one hand, we see softening data coming

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Speaker 2: from the quit rates, small business, small business hiring plate,

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Speaker 2: job Opening to Employment Household survey. The unemployment got over

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Speaker 2: the got higher than the twelve month moving average, which

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Speaker 2: usually is assigned for coming recession. Claims are arising. And

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Speaker 2: then on the other hand, payrolls and companies earning are

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Speaker 2: still going strong, so what managers would like to do

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Speaker 2: to see in order to feel kind of more confident

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Speaker 2: to extend duration because they got burned with that too

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Speaker 2: many times, is to see both signs of inflation wakening

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Speaker 2: and signs of the job marketing weakening. So that's on

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Speaker 2: the inflation side, any question of that before we get

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Speaker 2: to move to credit.

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Speaker 3: I always have questions, but I'd love to hear the

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Speaker 3: credit side.

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Speaker 2: So the credit side is tricky. Okay, let's start with

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Speaker 2: IG for example, USIG credit. Okay, this is the most

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Speaker 2: probably one of the most credit trade out there. Spreads

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Speaker 2: are very very thin. And yes, credit fundamentals are good.

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Speaker 2: But when you confront people and you tell them, yeah,

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Speaker 2: but spreads are very very thin, what is the likely

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Speaker 2: answer that you hear? What is the common answer that

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Speaker 2: we hear often just just look at the yield exactly,

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Speaker 2: all in yield, right, all in year is high. So

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Speaker 2: let's talk about this all in yield conceptions. Because I

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Speaker 2: remember just a few months ago, the narrative in the

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Speaker 2: market was tina, there is no alternative, but now there

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Speaker 2: is alternative. So one confused which one is that? And

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Speaker 2: I think you know, when you look at yield, let's

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Speaker 2: say the agg is five point four percent. Yes, it

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Speaker 2: is relatively high that that's a fact in the last

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Speaker 2: ten years. But we're talking about credit, right, So let's

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Speaker 2: look at at the Triple B. For example, the triple

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Speaker 2: be yield to worse right now is something around four

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Speaker 2: point five point six percent. Eighty percent of that yield

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Speaker 2: is coming from the Treasury site, which is the highest

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Speaker 2: share of contributions of treasuries to yield to works of

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Speaker 2: triple bees since the Great Financial Crisis. Given that spread

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Speaker 2: is so thin, and given the long duration of the

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Speaker 2: triple B, it's enough that spread will widen by seventeen

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Speaker 2: basis point one seven for all the essexs return to

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Speaker 2: be gone, okay, And that's why I think it's very

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Speaker 2: important for asset managers institutional investors who being paid to

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Speaker 2: manage money, not to settle with the all in all

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Speaker 2: in yield, but also to focus on excess returns because

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Speaker 2: if in the end of the year investment grade generate

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Speaker 2: let's say four percent and treasury with centuration generate five percent,

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Speaker 2: then we made a bad call, right because we got

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Speaker 2: lower return for higher risk.

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Speaker 1: And right now the access returns are lagging on the

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Speaker 1: investment grade US index. You know, it's not doing very well.

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Speaker 1: The kind of economic outlook, the use of the paint

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Speaker 1: at the beginning of this call, you know, it doesn't

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Speaker 1: suggest there's a lot of upside for investment grade credit.

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Speaker 1: It's very crowded, as you say, so there could be

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Speaker 1: some outflow. Are you expecting it to get much software

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Speaker 1: in the second half? As we as we look at IG, it's.

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Speaker 2: Harder to get you know, tighter than that we already

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Speaker 2: you know, kind of scratching the floor spreads are very

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Speaker 2: very tight. And it's, by the way, not just in IG.

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Speaker 2: The problem is even worse with the double bees and

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Speaker 2: single bees. They trade in the lowest level we've seen

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Speaker 2: in like twenty years. It's really becomes a tale of

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Speaker 2: two cities in high yield because on one hand you

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Speaker 2: have the triple c's that trade in very relatively high

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Speaker 2: spreads and for a good reason, and then you have

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Speaker 2: the single bas and double bas that traded like super

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Speaker 2: low spreads. And it's interesting because the move from triple

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Speaker 2: c's to single bee is relatively high. The differences between

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Speaker 2: rates between them, it's spread between them is relatively high.

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Speaker 2: It's like eighty five percentile, So I mean, only like

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Speaker 2: fifteen percent of the time in the last ten years

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Speaker 2: spread was between triple c's and single beas was higher

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Speaker 2: than that. But the move from single bit to double

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Speaker 2: B or the move from double bit to triple B

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Speaker 2: is very very low. It's like low single digits. And

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Speaker 2: you guys had an article about it also last week.

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Speaker 3: Can I jump in in here for a second. You

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Speaker 3: talk about the spread differential between the different levels of

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Speaker 3: high yield, and you know, I think my question for

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Speaker 3: you is that when you think about out the double

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Speaker 3: B territory, for example, and the fact that there's so

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Speaker 3: many companies that are in the cusp of getting upgraded, right,

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Speaker 3: they were beaten down during the pandemic, they're working towards

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Speaker 3: improving themselves back to investment grade level. We're also seeing

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Speaker 3: that the single A territory is actually larger than triple

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Speaker 3: B in some situations. And so the justification is our

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Speaker 3: companies just inherently stronger. Is the spread differential justified or

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Speaker 3: is it really just indicative of the times we're in

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Speaker 3: where everything is just trading too rich and we should

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Speaker 3: be worried about the whole Assic class.

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Speaker 2: Right, So a couple of things to unpack here. First

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Speaker 2: of all, you know, I don't like to compare index

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Speaker 2: spread over time the investment grade over time, like you

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Speaker 2: look at the like an investment grade now versus ten

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Speaker 2: years ago, because over time they've been changes within the

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Speaker 2: credits rating buckets. So usually what I do I strip.

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Speaker 2: I just look how triple B A trade versus themselves,

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Speaker 2: versus single a's and versus double B. Similar to A

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Speaker 2: how single A is trading versus triple B versus itself,

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Speaker 2: and versus two double A and so on. So when

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Speaker 2: you look at those and when you strip them all together,

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Speaker 2: it's just no matter how you cut it, except for

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Speaker 2: triple c's is treated very very tight. Okay, like triple

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Speaker 2: B traded at the top ten percentile. You know, single

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Speaker 2: B and double B as we said, low single digits.

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Speaker 2: So that's one thing. Second, is the spread differential justified

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Speaker 2: given the improvement that we've seen in their fundamental The

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Speaker 2: answer is no, because when you look at single bees

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Speaker 2: like for example, double b's and triple bs, we still

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Speaker 2: see fundamental differences in their leverage, in their interest coverage,

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Speaker 2: in free cash flows between double B two triple bees.

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Speaker 2: So the spread that we've seen now is just not justified.

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Speaker 2: But so you say, what's the point, right then, why

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Speaker 2: managers staying with double B onetages don't go to triple B. Well,

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Speaker 2: it's not always that easy, because first of all, we're

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Speaker 2: talking about two indexes that are different. The single the

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Speaker 2: double B index, for example, edge duration is three and

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Speaker 2: a half. The triple B index duration is doubled in

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Speaker 2: that it's like six point seven years. So you don't

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Speaker 2: get exactly it's not always easy to replace one by one.

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Speaker 2: Managers do do that, and we definitely see movement going

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Speaker 2: from double B to triple B. But sometimes it depends

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Speaker 2: on the mandate. You are limited of how much can

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Speaker 2: you go off benchmark and what's the availability of credit

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Speaker 2: that you can pick up.

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Speaker 1: So back to the tight spreads you mentioned, you know

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Speaker 1: that you say that that they should be probably wider

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Speaker 1: based on fundamentals. You know, it doesn't really make a

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Speaker 1: lot of sense when you just look at spread, but

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Speaker 1: you have to be invested. There's a lot of inflow,

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Speaker 1: there isn't a lot of net supply, so you know,

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Speaker 1: what do you do? What's what's the what's the trade?

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Speaker 2: So, you know, I think this is a type of

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Speaker 2: market when if you're not being patient. You're gonna seed.

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Speaker 2: You're gonna you're gonna basically plan the seed of mistakes,

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Speaker 2: and you're gonna rip those mistakes down the line six

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Speaker 2: months from now, twelve months from now, if you're gonna

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Speaker 2: just kind of chase this like extra fifty basis point,

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Speaker 2: thinking that you were able kind of to flip the

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Speaker 2: portfolio on a dime. When you start seeing first signs

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Speaker 2: of maybe recession, that usually doesn't happen. And usually those

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Speaker 2: managers who think they were able to flip the portfolio

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Speaker 2: on time usually massively underperformed. So everything they gain now

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Speaker 2: a little bit, they're gonna massively bring it back when

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Speaker 2: when the uh uh cycle turns.

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Speaker 1: So what do you do as a hedge?

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Speaker 2: So either you're gonna well, it depends, it depends on

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Speaker 2: your minded. Okay, So in a high yield we see

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Speaker 2: managers going up the quality going up quality, so they

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Speaker 2: do stay more like to try to overweight the double

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Speaker 2: B the single bee, try to underweight the triple c's.

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Speaker 2: And you see now with high yield managers, for example

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Speaker 2: mutual funds, only fifteen percent of US high yield managers

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Speaker 2: a higher yield than the benchmark because they tend to

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Speaker 2: underway those kind of more distress area of the market.

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Speaker 2: So you do have to kind of bite the bullet

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Speaker 2: in a way and tolerate some short term pain hopefully

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Speaker 2: for long term gain. Some of them try to go

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Speaker 2: a little bit off benchmark to other areas that provide

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Speaker 2: maybe interesting opportunities. For example, double B loans provide currently

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Speaker 2: spread that is one hundred basis point wider than double

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Speaker 2: B high yield. So why is that? Because sometimes there

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Speaker 2: is this like notion in the market. Everyone knows that

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Speaker 2: when rates fall, usually high yield does better than loans

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Speaker 2: and the paying but a lot of it is already

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Speaker 2: in the price right one hundred basis point difference between

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Speaker 2: double B loans and double B high yield. It's like

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Speaker 2: in the ninety six percentile versus the last ten years.

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Speaker 3: Oh Dan, you talk about the loans versus bonds, and

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Speaker 3: that's definitely a conversation that we're seeing a lot more

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Speaker 3: of that, plus private credit and just the blow up

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Speaker 3: of the private credit market so that all three are

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Speaker 3: relatively the same side at this point. We're also seeing

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Speaker 3: that the asset backed security market is one area where

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Speaker 3: a lot of investors are looking at for additional opportunity

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Speaker 3: beyond investment grade. And so where I mean, where do

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Speaker 3: you feel most comfortable when you're looking at the full

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Speaker 3: landscape across you know, all of the credit areas that

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Speaker 3: you could potentially look at, or is there some alternative

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Speaker 3: that you can sort of pull in that that stays

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Speaker 3: within your cap limit and still keeps you within what

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Speaker 3: you're supposed to be investing in.

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Speaker 2: So we talked about areas that are not interesting, well,

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Speaker 2: we think are very expensive. So the US investment grade

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Speaker 2: credit and high yield areas that trade are the more interesting,

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Speaker 2: definitely on a relative perspective. Is the securitized area Managers

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Speaker 2: tend to overweight nbs cnbs, yes, I said cnbs, and

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Speaker 2: then to lesser extend ABS rmbs and in the bottom

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Speaker 2: of clos and we can talk about each one of them.

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Speaker 2: But for example, let's take agency NBS versus investment grade. Okay,

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Speaker 2: So from valuation perspective, NBS spread relative to its own

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Speaker 2: history's traded seventy seven percentile, which means like high spread.

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Speaker 2: Also versus investment grade, it's read very high, actually in

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Speaker 2: the ninety five percent ninety five percentile. And that's interesting

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Speaker 2: because right now the spread you're getting on agency nbs

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Speaker 2: is higher than what you get in investment grade credit.

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Speaker 2: And yet agencynbs don't even have credit risk. So how

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Speaker 2: is it possible? Because first of all, mbs are suffering

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Speaker 2: from headwinds for technical reasons. Okay, the FED is unwinding

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Speaker 2: his NBS positioning, regional bank not buying mbs as much

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Speaker 2: as they used to, and that's how we got to

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Speaker 2: this point. And yet fundamentals, NBS fundamentals are very very strong.

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Speaker 2: Home prices in the US went up by fifty percent

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Speaker 2: just in the last five years. Mortgage rates went up

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Speaker 2: more than doubled in the last three years. You would

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Speaker 2: have expected to see home prices fall, and yet they,

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Speaker 2: roughly speaking, not everywhere, but on the average, keep going up.

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Speaker 2: In the last year, they went up six and a

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Speaker 2: half percent. And you say, like, well, how is it possible.

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Speaker 2: It was supposed to crush demand, and yet there is

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Speaker 2: a structural problem in the US that the US is

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Speaker 2: missing right now, roughly five million homes. Household formation is

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Speaker 2: keep ongoing, economy is resilient with influx, if immigration, all

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Speaker 2: these still support and home prices, there is much more

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Speaker 2: equity in homes nowadays than there was even ten years ago.

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Speaker 2: And on the other hand, on the credit side, corporate

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Speaker 2: credit side, we see companies increasing there. They have high

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Speaker 2: leverage than what there were like ten years ago. So

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Speaker 2: this is definitely an interesting area. Prepayment risk, which is

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Speaker 2: the highest, probably the most significant risk for agency nbs,

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Speaker 2: is very very low because most people already refinance in America,

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Speaker 2: they refinance there that their mortgages three years ago to

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Speaker 2: what to blow three percent, So they're very, very far

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Speaker 2: from prepayment risk. And if we hear a recession, it's

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Speaker 2: very likely that the investment get credit will significantly underperform

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Speaker 2: agencies because investment grade credit just doesn't doesn't price any

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Speaker 2: kind of risk of recession anytime soon.

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Speaker 3: Getting getting into the nitty gritty a little bit for

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Speaker 3: nbs and the movement of mortgages throughout the market, and

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Speaker 3: you touched on this a little bit of dead when

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Speaker 3: you talked about regional banks, and I know that there

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Speaker 3: is some there's some over you know, an over watching

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Speaker 3: by the agencies to ensure that regional banks are a

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Speaker 3: little bit more sound in terms of how they position

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Speaker 3: themselves when it comes to mortgages, and it's creating this

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Speaker 3: weird sort of dynamic and then you mentioned the FED

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Speaker 3: unwinding its position. Do you see that sort of cascading

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Speaker 3: a little bit more or do you see that being

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Speaker 3: an area to create more opportunity? Right, you know, once

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Speaker 3: we sort of get past this regional bank worry or

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Speaker 3: are we not pasted it yet? And with that with CMBs,

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Speaker 3: which you point out as an opportunity. Not to tack

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Speaker 3: on two questions for you, but where are you sort

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Speaker 3: of seeing that shakeout? I mean, commercial real estate is

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Speaker 3: definitely an area that people are a little bit concerned,

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Speaker 3: So I'm just curious as to what are your thoughts there.

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Speaker 2: Well, it's hard knowing exactly how much more pressure sure

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Speaker 2: and unrealized losses are there in the regional banks and

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Speaker 2: how much support they will get from central banks. So

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Speaker 2: that's definitely kind of a headwind that helps to there's

350
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Speaker 2: some worry that that those technicals that maybe those regional

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Speaker 2: bank will ufload ufload some of the nbs, and that

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Speaker 2: keeps the spread a bit higher. But again, if you

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Speaker 2: look it for fundamental reason, if you compare it fundamentals

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Speaker 2: for NBS and IG it's like you can even compare

355
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Speaker 2: between them and the evaluations are super attractive. Now, the

356
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Speaker 2: cnbas is super interesting area. Obviously it gets a lot

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Speaker 2: of a lot of headlines. But before we talk about

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Speaker 2: the kind of the males in the middle of America,

359
00:20:42,080 --> 00:20:47,400
Speaker 2: just then stand alone and the phantom buildings. Not everything

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Speaker 2: in cnbs are malls and offices, Okay, it's also multi families.

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Speaker 2: There is a sector of multi families. And we talked

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Speaker 2: about the strength and fundamentals of housing in America. Because

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Speaker 2: affordability is so awful, it's like the worst has been

364
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Speaker 2: forty years. There is very strong demands for rent and

365
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Speaker 2: so the fundamentals for multi family is very very strong,

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Speaker 2: and we see the delinquencies there are very very low.

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Speaker 2: So let's talk about the other side of cnbs. Okay,

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Speaker 2: the commercial real estate, those malls and offices. Definitely, there

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Speaker 2: is a lot of noise there. Some offices won't be

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Speaker 2: able to serve that that higher for longer is waiting

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Speaker 2: on them, you know, people working remotely. All that is correct,

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Speaker 2: but not all offices in America. Are all offices in

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Speaker 2: America horrible and going through vacancies. In fact, forty five

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Speaker 2: percent of all offices in America have zero vacancies, while

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Speaker 2: one percent of offices in America responsible for seventeen percent

376
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Speaker 2: of all vacancies, So there is a lot of dispersion

377
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Speaker 2: within CNBS. You can just go passive about it, right,

378
00:22:02,240 --> 00:22:04,960
Speaker 2: It's very important that you will have an active manager

379
00:22:05,760 --> 00:22:08,879
Speaker 2: that know how to separate between the wit and the

380
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Speaker 2: chef and pick up the right conduit or offices out there.

381
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Speaker 2: It's important to choose the location. It's important whether the

382
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Speaker 2: building is new or relatively old. So there are many

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Speaker 2: variables that we look when we're doing those kind of

384
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Speaker 2: manager research work that we do with CMBs managers.

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Speaker 3: Oh did you I'm gonna sort of focus in on

386
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Speaker 3: one of the questions or one of the comments that

387
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Speaker 3: you made about malls. You know, obviously all commercial real

388
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Speaker 3: estate is not made the same that said at our

389
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Speaker 3: State of the Consumer conference that we had a month ago.

390
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Speaker 3: One of the points that are my colleagues Lindsay Dutch

391
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Speaker 3: and Mike camp Loan, who cover retail as well as

392
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Speaker 3: reads that are mall reads, commented on is that the

393
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Speaker 3: bigger issue is there is actually not enough supply oftentimes.

394
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Speaker 3: So even though we are having a lot of retailers

395
00:23:08,600 --> 00:23:10,159
Speaker 3: go out of business, such as the bed bath and

396
00:23:10,200 --> 00:23:13,280
Speaker 3: beyond of the world. Those properties are getting scooped up

397
00:23:13,359 --> 00:23:16,320
Speaker 3: very quickly, and in fact they're seeing this influx of

398
00:23:16,359 --> 00:23:20,199
Speaker 3: brick and mortar more so than what's being told in

399
00:23:20,240 --> 00:23:23,760
Speaker 3: that narrative by the news, And so I sort of

400
00:23:23,840 --> 00:23:27,879
Speaker 3: wonder if there's actually a better story out there, or

401
00:23:27,960 --> 00:23:32,760
Speaker 3: if the data more so supports the opposite, that in fact,

402
00:23:32,880 --> 00:23:35,120
Speaker 3: malls are in more shape, and that we really should

403
00:23:35,160 --> 00:23:37,800
Speaker 3: be focusing on different areas of commercial real estate. Like

404
00:23:37,840 --> 00:23:40,280
Speaker 3: you said, multifamily, I.

405
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Speaker 2: Think you just need to put a little of effort

406
00:23:42,000 --> 00:23:44,800
Speaker 2: in security selection. There are more than any of them,

407
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Speaker 2: probably also class out there. Really to prefer urban over

408
00:23:48,200 --> 00:23:53,520
Speaker 2: suburban properties that I have been recently renovated geographies with

409
00:23:53,680 --> 00:23:57,920
Speaker 2: supportive business environment. Make sure that you have enough experience

410
00:23:58,000 --> 00:24:00,440
Speaker 2: analysts to cover this area, because it's hard funding to

411
00:24:00,560 --> 00:24:03,760
Speaker 2: have like like one size feed all answer to all

412
00:24:03,760 --> 00:24:06,360
Speaker 2: those all those examples. You really have to go one

413
00:24:06,359 --> 00:24:08,399
Speaker 2: by one with those things. Because for example, the Triple

414
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Speaker 2: A CNBS that got defaulted happened in New York City, right,

415
00:24:14,119 --> 00:24:16,159
Speaker 2: So that's like you're supposed to be a prime location,

416
00:24:16,200 --> 00:24:19,760
Speaker 2: but I was an old building. Uh wasn't the best

417
00:24:19,800 --> 00:24:22,840
Speaker 2: location in Manhattan. So it's just not enough to say, well,

418
00:24:23,119 --> 00:24:26,280
Speaker 2: you know, building in a triple A rated CNBS for

419
00:24:26,440 --> 00:24:28,840
Speaker 2: building in Manhattan, and it is good enough. You really

420
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Speaker 2: have to go and and go deeper. And with your

421
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Speaker 2: analysis on.

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Speaker 1: That, you mentioned that a couple of times the word recession,

423
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Speaker 1: which interests me because people have kind of moved on

424
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Speaker 1: from that. They talk much more about self landing. There's

425
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Speaker 1: a lot of happy talk about you know, we're going

426
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Speaker 1: to be okay. But you know, if you do look

427
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Speaker 1: at history of spreads, you know they should be dramatically

428
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Speaker 1: wider in the events of recession. You know, high yield

429
00:24:51,040 --> 00:24:53,439
Speaker 1: would would possibly double if you look at you know,

430
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Speaker 1: just the precedent of history, do you you know, what

431
00:24:57,040 --> 00:25:00,320
Speaker 1: what probability do you assign to a US RESUS session

432
00:25:00,359 --> 00:25:01,760
Speaker 1: and what would happen in that event.

433
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Speaker 2: It's very hard to time that, and I'm not going

434
00:25:05,640 --> 00:25:07,560
Speaker 2: to try to time that. I'm just looking at all

435
00:25:07,560 --> 00:25:10,879
Speaker 2: the variables that go that could get wrong, and how

436
00:25:10,960 --> 00:25:14,040
Speaker 2: much is pricing in the market, and it just doesn't

437
00:25:14,160 --> 00:25:20,840
Speaker 2: end up. You know, people think that usually spread are

438
00:25:20,840 --> 00:25:24,680
Speaker 2: going to widen ahead of recession. It doesn't happen. If

439
00:25:24,720 --> 00:25:27,000
Speaker 2: you actually look at history, you'll see that spread only

440
00:25:27,040 --> 00:25:32,199
Speaker 2: when once recession starts. So again I think when we

441
00:25:32,280 --> 00:25:34,840
Speaker 2: talked about kind of loans and high yield, you need

442
00:25:34,880 --> 00:25:39,199
Speaker 2: to adopt a little bit bit more disciplined and not

443
00:25:39,320 --> 00:25:42,800
Speaker 2: to buy into things that you think are just way

444
00:25:42,840 --> 00:25:47,119
Speaker 2: too doesn't give you a safety of margin if anything

445
00:25:47,160 --> 00:25:50,040
Speaker 2: goes wrong, and many things could go wrong. So it

446
00:25:50,040 --> 00:25:52,399
Speaker 2: doesn't have to play zero one right. You don't have

447
00:25:52,440 --> 00:25:55,760
Speaker 2: to go all defensive or fall in, but you can

448
00:25:55,800 --> 00:26:00,200
Speaker 2: start moving up in quality and look for areas of opportunity,

449
00:26:00,280 --> 00:26:03,560
Speaker 2: for example in securitized credits, so.

450
00:26:03,400 --> 00:26:06,640
Speaker 3: That beyond securitized credit, I mean, should we just put

451
00:26:06,680 --> 00:26:09,520
Speaker 3: all of our money into treasuries, lock in the rates now,

452
00:26:09,800 --> 00:26:12,399
Speaker 3: and just sit there while the market implodes. Should we

453
00:26:12,440 --> 00:26:15,520
Speaker 3: be looking internationally? I mean, where should we be playing

454
00:26:15,520 --> 00:26:18,280
Speaker 3: this if we're kind of throwing credit out the window

455
00:26:18,320 --> 00:26:21,879
Speaker 3: and saying credits too expensive right now? Or should we

456
00:26:21,920 --> 00:26:24,880
Speaker 3: be buying insurance? I mean, should be by buying protection

457
00:26:24,960 --> 00:26:26,879
Speaker 3: against double B or triple B.

458
00:26:28,119 --> 00:26:30,800
Speaker 2: So it's really depends on the mandate. It's really depends

459
00:26:30,840 --> 00:26:34,320
Speaker 2: on the kind of risk returned profile and your investment arise.

460
00:26:34,400 --> 00:26:36,720
Speaker 2: And it's hard to say like one, you know, one

461
00:26:36,760 --> 00:26:41,760
Speaker 2: answer that fits everyone it depends. If your investment are

462
00:26:41,800 --> 00:26:43,600
Speaker 2: rising just a couple of months of now, then sure

463
00:26:43,640 --> 00:26:46,640
Speaker 2: lock it in money market. But if your investment arising

464
00:26:46,760 --> 00:26:49,960
Speaker 2: is longer than that, that you probably want to have

465
00:26:50,320 --> 00:26:53,359
Speaker 2: a multi asset approach to that that include equity, that

466
00:26:53,400 --> 00:26:56,800
Speaker 2: include different sizes of fixed other areas of fixing cale

467
00:26:56,840 --> 00:26:59,800
Speaker 2: and being nimble to move where you see the relative

468
00:26:59,800 --> 00:27:02,480
Speaker 2: of tunities are so now, generally speaking, let's say you

469
00:27:02,480 --> 00:27:05,359
Speaker 2: can invest across the whole board. You would like to

470
00:27:05,560 --> 00:27:11,239
Speaker 2: underweight maybe high yield and investment grade, overweight nbs and

471
00:27:11,320 --> 00:27:14,000
Speaker 2: cnbs for example. By the way, when we're talking about CMBs,

472
00:27:14,000 --> 00:27:18,560
Speaker 2: if we do hit recession, we do expect CNBS prices

473
00:27:18,560 --> 00:27:21,920
Speaker 2: to fall, but they will likely fall less than high

474
00:27:21,960 --> 00:27:25,960
Speaker 2: yield because higher price. As we said, zero changes for recession.

475
00:27:26,960 --> 00:27:29,800
Speaker 2: So it's kind of a game of probabilities. Where are

476
00:27:29,800 --> 00:27:32,000
Speaker 2: my best risk return profile at each moment?

477
00:27:33,119 --> 00:27:35,760
Speaker 1: You rightly say being nimble, but you know, black Rock

478
00:27:36,160 --> 00:27:38,800
Speaker 1: literally manages trillions of dollars, which must be really hard

479
00:27:38,800 --> 00:27:42,040
Speaker 1: to move around. What's the liquidity risk? Came, how do

480
00:27:42,080 --> 00:27:44,000
Speaker 1: you actually execute?

481
00:27:44,880 --> 00:27:48,720
Speaker 2: Yeah, well, liquidity is super important, and yes, and why

482
00:27:48,760 --> 00:27:51,400
Speaker 2: black Rock manages a lot of money there's different accounts

483
00:27:51,400 --> 00:27:55,240
Speaker 2: with different kind of risk return profile and different underlying

484
00:27:55,400 --> 00:27:58,080
Speaker 2: liquidity bucket. But we definitely put a lot of emphasis

485
00:27:58,119 --> 00:28:01,600
Speaker 2: on liquidity and make sure that we stay in assets

486
00:28:01,640 --> 00:28:06,280
Speaker 2: that will be able to exit and move in fashionable time.

487
00:28:07,000 --> 00:28:10,959
Speaker 1: And the more liquid they're obviously more crowded those trades,

488
00:28:12,040 --> 00:28:14,639
Speaker 1: you're going to lose value on those. I'm just still

489
00:28:14,880 --> 00:28:17,520
Speaker 1: trying to get to, like, you know, what's what's the

490
00:28:17,560 --> 00:28:19,760
Speaker 1: bouncing act and how do you kind of differentiate yourself

491
00:28:19,880 --> 00:28:23,120
Speaker 1: within that. I mean, I'm curious to kind of learn

492
00:28:23,160 --> 00:28:24,080
Speaker 1: your edge.

493
00:28:24,760 --> 00:28:27,159
Speaker 2: Yeah, So maybe a word about manager research and what

494
00:28:27,240 --> 00:28:29,200
Speaker 2: we do, because I mean I talked many times I

495
00:28:29,240 --> 00:28:32,040
Speaker 2: said managers are seeing this, We see managers doing that.

496
00:28:32,400 --> 00:28:35,680
Speaker 2: So at blackbrok we manage three hundred and thirty five

497
00:28:35,760 --> 00:28:40,000
Speaker 2: billion dollars of institutional clients around the world. So that's

498
00:28:40,040 --> 00:28:43,720
Speaker 2: our CIO business. So clients meet the PM, they talk

499
00:28:43,760 --> 00:28:46,080
Speaker 2: about what is the restrict on profile that you're thinking about,

500
00:28:46,400 --> 00:28:50,240
Speaker 2: what are the guidelines, and then we manager research provide

501
00:28:50,280 --> 00:28:53,480
Speaker 2: the portfolio managers the building blocks to build a portfolio.

502
00:28:53,560 --> 00:28:56,360
Speaker 2: So for example, if they come with a fixing portfolio,

503
00:28:56,720 --> 00:29:02,120
Speaker 2: we're going to provide them the best strategies across secure government,

504
00:29:02,920 --> 00:29:05,560
Speaker 2: investment grade at high yels, loan, emerging markets, et cetera.

505
00:29:05,880 --> 00:29:09,560
Speaker 2: And those strategies can be aggressive, defensive, index like that

506
00:29:09,640 --> 00:29:14,400
Speaker 2: could have specific guidelines and so on. So our edge

507
00:29:14,720 --> 00:29:16,760
Speaker 2: is that giving our platform is so big and that

508
00:29:16,800 --> 00:29:19,920
Speaker 2: we keep best in class strategies, is that we speak

509
00:29:20,120 --> 00:29:23,600
Speaker 2: with the whole market. We are not confined to one

510
00:29:23,640 --> 00:29:27,320
Speaker 2: school of thought or a house view. We speak with

511
00:29:27,360 --> 00:29:29,960
Speaker 2: the best managers around the world in each of those

512
00:29:30,000 --> 00:29:32,480
Speaker 2: asset classes. And that's fascinating, that's very, very interesting.

513
00:29:33,320 --> 00:29:35,320
Speaker 3: Three hundred and thirty five billion. I mean, you know,

514
00:29:35,400 --> 00:29:39,920
Speaker 3: that's no small potatoes when you think about where we've

515
00:29:40,000 --> 00:29:43,360
Speaker 3: come over the past even ten twenty years, the cell

516
00:29:43,440 --> 00:29:47,480
Speaker 3: side has really shrunk, right, And so you know, just

517
00:29:47,720 --> 00:29:51,280
Speaker 3: kind of jumping on to James's point earlier about market liquidity,

518
00:29:51,960 --> 00:29:54,440
Speaker 3: I do sort of wonder that if there is some

519
00:29:54,480 --> 00:29:57,280
Speaker 3: sort of challenge, if everybody's sort of moving with the

520
00:29:57,320 --> 00:30:00,719
Speaker 3: same thought and then we all decide unmind, I mean,

521
00:30:00,760 --> 00:30:03,040
Speaker 3: are we banking on a fed put to sort of

522
00:30:03,120 --> 00:30:07,120
Speaker 3: be there if everything goes awry, or is there some

523
00:30:07,160 --> 00:30:10,640
Speaker 3: sort of way in which people have the ability to

524
00:30:10,760 --> 00:30:13,280
Speaker 3: unwind positions or rethink and pivot easily.

525
00:30:14,400 --> 00:30:18,120
Speaker 2: Yeah. So it's important really to as I say, to

526
00:30:18,160 --> 00:30:22,320
Speaker 2: stay nimble, to be able to invest across the board,

527
00:30:22,360 --> 00:30:25,760
Speaker 2: and not to be confined to a small asset class

528
00:30:25,800 --> 00:30:28,719
Speaker 2: or very limited asset class, because then there is very

529
00:30:28,760 --> 00:30:32,520
Speaker 2: limit to what you can do. So if you see

530
00:30:32,560 --> 00:30:35,160
Speaker 2: that one area is very expensive, try to move to

531
00:30:35,200 --> 00:30:39,160
Speaker 2: another area and so on, which is is very very important.

532
00:30:39,200 --> 00:30:41,840
Speaker 2: You don't want to be the last person kind of

533
00:30:42,000 --> 00:30:43,560
Speaker 2: you know, holding the hot potato.

534
00:30:44,280 --> 00:30:48,040
Speaker 1: You've talked a bit to me before this show about

535
00:30:48,080 --> 00:30:50,000
Speaker 1: how easy it is to beat the index. I'm curious

536
00:30:50,000 --> 00:30:50,840
Speaker 1: to know more about that.

537
00:30:51,680 --> 00:30:53,680
Speaker 2: Yeah, So that that's an interesting point. You know, when

538
00:30:53,680 --> 00:30:56,880
Speaker 2: we do the manager research, we try to make sure

539
00:30:57,040 --> 00:31:01,000
Speaker 2: that we compare different strategies to the right peer group,

540
00:31:01,480 --> 00:31:04,760
Speaker 2: which is not something in the right benchmark. Now, some

541
00:31:04,800 --> 00:31:09,240
Speaker 2: strategies are bucket in whether it's investment, whether it's an investment,

542
00:31:09,360 --> 00:31:13,960
Speaker 2: or whether it's in a morning star. Which are they

543
00:31:14,000 --> 00:31:17,960
Speaker 2: provide kind of the strategies returns of different asset classes.

544
00:31:18,120 --> 00:31:21,600
Speaker 2: Some of them are bucket with other strategies that just

545
00:31:21,800 --> 00:31:24,760
Speaker 2: it's not a good comparison. It's not exactly apples to apples.

546
00:31:25,040 --> 00:31:27,040
Speaker 2: So you want to make those changes. For example, you

547
00:31:27,040 --> 00:31:30,680
Speaker 2: can put like emerging markets corporate our bucket together with

548
00:31:30,760 --> 00:31:36,480
Speaker 2: Emerging markets sovereigns in in the Morning Star. Same thing

549
00:31:36,520 --> 00:31:43,600
Speaker 2: goes with benchmark. You want to make sure that you

550
00:31:44,440 --> 00:31:48,080
Speaker 2: don't give some strategies too much credit for beating a

551
00:31:48,080 --> 00:31:51,040
Speaker 2: benchmark that is easy to beat, and on the other hand,

552
00:31:51,040 --> 00:31:55,120
Speaker 2: you don't want to penalize other strategies that try that

553
00:31:55,320 --> 00:31:58,000
Speaker 2: struggle to beat or crash another benchmark that is hard

554
00:31:58,000 --> 00:32:01,680
Speaker 2: to beat, and that's something that is not many aware

555
00:32:01,800 --> 00:32:05,400
Speaker 2: of that. In fixed income, unlike equity, some of the

556
00:32:05,440 --> 00:32:09,840
Speaker 2: most liquid and efficient benchmarks are actually the benchmark that

557
00:32:09,840 --> 00:32:13,600
Speaker 2: are very easy to beat. For example, for example, let's

558
00:32:13,640 --> 00:32:16,160
Speaker 2: take the US ag okay, which is probably the most

559
00:32:16,240 --> 00:32:18,760
Speaker 2: common benchmark out there in fixed income, right, is the

560
00:32:18,760 --> 00:32:22,360
Speaker 2: benchmark for the core and corporus strategies. If you run

561
00:32:22,400 --> 00:32:26,120
Speaker 2: this benchmark on investment on the rolling three and five

562
00:32:26,200 --> 00:32:30,560
Speaker 2: years versus the universe, versus the core and corplus managers,

563
00:32:31,000 --> 00:32:33,840
Speaker 2: you would say that pretty much over the long term

564
00:32:34,160 --> 00:32:38,520
Speaker 2: it's in the bottom quartile. Now, why is that? Because

565
00:32:38,560 --> 00:32:42,720
Speaker 2: the benchmark is very liquid and very up in quality.

566
00:32:42,000 --> 00:32:46,040
Speaker 2: It's seventy percent triple as so let me tell you

567
00:32:46,080 --> 00:32:48,320
Speaker 2: a little secret how to beat it. What you need

568
00:32:48,360 --> 00:32:51,280
Speaker 2: to do is keep duration as the benchmark and just

569
00:32:51,400 --> 00:32:54,760
Speaker 2: underweight the triple A overweight corporate of triple bing and

570
00:32:54,840 --> 00:32:57,360
Speaker 2: single A. And over the time, over the long term,

571
00:32:57,400 --> 00:32:59,560
Speaker 2: over like call it three and five years, you'll be

572
00:32:59,600 --> 00:33:04,240
Speaker 2: fine upperform the benchmark. However, on the other hand, it's

573
00:33:04,320 --> 00:33:07,520
Speaker 2: much more difficult to beat the loan index, whether you're

574
00:33:07,520 --> 00:33:09,680
Speaker 2: talking about the Credit Suitz or the Morning Start, the

575
00:33:09,680 --> 00:33:13,000
Speaker 2: two of the leading in kind of indexes in loans.

576
00:33:13,400 --> 00:33:15,440
Speaker 2: And if you do the same exercise, if you run

577
00:33:15,760 --> 00:33:20,840
Speaker 2: those indexes versus quality the morning Star universe of loans,

578
00:33:20,840 --> 00:33:24,360
Speaker 2: you would see that these two benchmarks are constantly, almost

579
00:33:24,360 --> 00:33:28,080
Speaker 2: constantly in the top quartal. And why is that our

580
00:33:28,320 --> 00:33:32,520
Speaker 2: loan managers are less skillful than COREN core plus managers. No,

581
00:33:33,280 --> 00:33:37,200
Speaker 2: there are three reasons for that. First, fees for loan

582
00:33:37,440 --> 00:33:40,160
Speaker 2: strategies are much higher than callit COREN corplus. And there

583
00:33:40,200 --> 00:33:42,360
Speaker 2: are reasons for that. They are much more expenses for

584
00:33:42,520 --> 00:33:44,520
Speaker 2: you have to deal with back office of a lot.

585
00:33:44,560 --> 00:33:47,240
Speaker 2: There's a lot of back office settling work needs to

586
00:33:47,280 --> 00:33:49,240
Speaker 2: be done. You need to pay a lot for analysts

587
00:33:49,280 --> 00:33:52,000
Speaker 2: to protect you from credit risks. You need to pay

588
00:33:52,000 --> 00:33:54,680
Speaker 2: a lot for lawyers to try to protect you from

589
00:33:54,760 --> 00:33:57,080
Speaker 2: issue trying to impose a haircut on you, which has

590
00:33:57,120 --> 00:33:59,160
Speaker 2: become very popular in the year and a half last

591
00:33:59,200 --> 00:34:03,160
Speaker 2: year and a half. Loans take a lot of time

592
00:34:03,200 --> 00:34:05,760
Speaker 2: to settle, much more than bonds. Loans take between like

593
00:34:05,840 --> 00:34:09,600
Speaker 2: let's say, seven to fourteen days to settle. So if

594
00:34:09,640 --> 00:34:12,799
Speaker 2: you hold loans in a daily liquidity fund, you need

595
00:34:12,840 --> 00:34:16,760
Speaker 2: to make sure that you have enough liquidity bucket to

596
00:34:16,800 --> 00:34:20,040
Speaker 2: serve flows. So that means that loan managers, especially a

597
00:34:20,080 --> 00:34:25,359
Speaker 2: mutual fund, will hold more cash than other strategies. They

598
00:34:25,360 --> 00:34:28,920
Speaker 2: will usually hold some up in quality, show duration, high yield,

599
00:34:29,160 --> 00:34:32,720
Speaker 2: and usually hold some index products. All these over time,

600
00:34:32,880 --> 00:34:36,240
Speaker 2: way on performance, and last thing, there are some differences

601
00:34:36,320 --> 00:34:39,840
Speaker 2: between how the indexes calclated versus how mutual funds are calculate.

602
00:34:40,000 --> 00:34:42,080
Speaker 2: I don't want to get too technical of that, but

603
00:34:42,160 --> 00:34:45,319
Speaker 2: the point is that those three factors are the main

604
00:34:45,400 --> 00:34:47,360
Speaker 2: reason why for loan manager is very difficult to be

605
00:34:47,440 --> 00:34:48,120
Speaker 2: that benchmark.

606
00:34:48,600 --> 00:34:50,080
Speaker 1: And a lot of the market seems to be going

607
00:34:50,120 --> 00:34:51,840
Speaker 1: private at the moment. I mean, how much of that

608
00:34:51,960 --> 00:34:56,680
Speaker 1: is contributing to our performance? A performance of what well,

609
00:34:56,840 --> 00:34:58,960
Speaker 1: just the fund. I mean, if you can invest in

610
00:34:59,000 --> 00:35:01,440
Speaker 1: private assets and sacrifice a bit of liquidity, you can

611
00:35:01,560 --> 00:35:05,640
Speaker 1: get a big step up and yield. You know, private

612
00:35:05,760 --> 00:35:08,720
Speaker 1: credit just seems to be the big thing at the moment, right.

613
00:35:08,920 --> 00:35:12,520
Speaker 2: Private credit grew up four times in the last ten years.

614
00:35:12,560 --> 00:35:15,239
Speaker 2: It was four hundred and something ten years ago. Now

615
00:35:15,280 --> 00:35:18,320
Speaker 2: it's a billion, now it's one point six street And

616
00:35:18,440 --> 00:35:20,440
Speaker 2: as you said before, it's almost the same size as

617
00:35:20,440 --> 00:35:22,400
Speaker 2: the loan market. And definitely there is a lot of

618
00:35:22,440 --> 00:35:28,640
Speaker 2: concern that these market has grown maybe too fast, and

619
00:35:28,920 --> 00:35:31,719
Speaker 2: maybe the underwriting standard there are not as strong as

620
00:35:31,760 --> 00:35:35,200
Speaker 2: maybe other more kind of mature areas of the market.

621
00:35:36,400 --> 00:35:40,400
Speaker 2: So that's definitely a risk an area that you should

622
00:35:40,400 --> 00:35:41,000
Speaker 2: put an eye on.

623
00:35:42,160 --> 00:35:45,120
Speaker 3: I mean, with that odd if you think about, you know,

624
00:35:45,160 --> 00:35:48,040
Speaker 3: the two thousand and eight procession right clos and loans

625
00:35:48,080 --> 00:35:51,279
Speaker 3: in general, it was just an area that a lot

626
00:35:51,320 --> 00:35:54,960
Speaker 3: of investors kind of throughout right and then there were

627
00:35:55,040 --> 00:35:58,200
Speaker 3: certain requirements that came down the pike. There were certain

628
00:35:58,239 --> 00:36:02,040
Speaker 3: sort of ways in which you know their skin in

629
00:36:02,040 --> 00:36:04,640
Speaker 3: the game and what have you, and thoughts around that

630
00:36:04,719 --> 00:36:07,239
Speaker 3: element that's said, I think there's still a lot of

631
00:36:07,239 --> 00:36:11,919
Speaker 3: worriesome components related to the loan market that's a little

632
00:36:11,960 --> 00:36:15,080
Speaker 3: bit different than the high old bond market. How do

633
00:36:15,120 --> 00:36:17,359
Speaker 3: you sort of factor that in when when you're thinking

634
00:36:17,400 --> 00:36:19,560
Speaker 3: about it, how do you sort of factor that in?

635
00:36:19,840 --> 00:36:24,479
Speaker 3: Broadly speaking from a you know, liquidity standpoint and from

636
00:36:24,520 --> 00:36:26,480
Speaker 3: a transparency standpoint.

637
00:36:27,000 --> 00:36:29,520
Speaker 2: Yeah, the loan market has changed a lot in recent years.

638
00:36:30,800 --> 00:36:33,759
Speaker 2: Especially what we've seen is the increase in the B

639
00:36:34,040 --> 00:36:37,000
Speaker 2: minus bucket. Well, it depends whether you're looking at S

640
00:36:37,040 --> 00:36:39,920
Speaker 2: ANDPO motives, because that's that's a bit different, but that

641
00:36:39,960 --> 00:36:43,439
Speaker 2: bucket have increased in livingly in recent years. I got

642
00:36:43,440 --> 00:36:45,480
Speaker 2: to look like close to almost a quarter of the

643
00:36:45,520 --> 00:36:51,000
Speaker 2: benchmark And many people don't know, but like roughly like

644
00:36:51,200 --> 00:36:53,600
Speaker 2: somewhere sixty eight to almost two thirds of the of

645
00:36:53,680 --> 00:36:58,560
Speaker 2: the loan universes hold by clos and clos usually have

646
00:36:58,800 --> 00:37:02,000
Speaker 2: kind of limit of how much triple cs they can hold.

647
00:37:02,040 --> 00:37:04,000
Speaker 2: Usually it's a round seven and a half percent. So

648
00:37:04,160 --> 00:37:07,799
Speaker 2: there is always this kind of limitation of how much

649
00:37:08,600 --> 00:37:12,319
Speaker 2: strategies would like to buy B minus because they are

650
00:37:12,320 --> 00:37:14,239
Speaker 2: aware that they're gonna they don't want to fill up

651
00:37:14,280 --> 00:37:18,719
Speaker 2: that triple C bucket too much, and that on one hand,

652
00:37:18,719 --> 00:37:21,319
Speaker 2: on the other hand, we've seen it significant increase, so

653
00:37:21,360 --> 00:37:23,960
Speaker 2: there is really almost like a verification in the market

654
00:37:24,120 --> 00:37:26,680
Speaker 2: between the B minus and triple c's and in the

655
00:37:26,719 --> 00:37:30,880
Speaker 2: rest of the market. So the way to deal with

656
00:37:30,920 --> 00:37:33,120
Speaker 2: it is really to put a lot of emphasis on

657
00:37:33,280 --> 00:37:36,480
Speaker 2: security selection. Okay, make sure that you have a manager

658
00:37:36,480 --> 00:37:38,719
Speaker 2: that know don but they buy that. They also have

659
00:37:38,840 --> 00:37:44,400
Speaker 2: good lawyers that can fight the liability management exercise that

660
00:37:44,440 --> 00:37:47,160
Speaker 2: we've seen in the last year and a half. And

661
00:37:47,440 --> 00:37:49,160
Speaker 2: for those who don't know, if you heard that term

662
00:37:49,200 --> 00:37:57,520
Speaker 2: a lot lme liability management exercise roughly talking about companies

663
00:37:57,560 --> 00:38:01,279
Speaker 2: who trying to cut the debt by just like sometimes

664
00:38:01,520 --> 00:38:05,960
Speaker 2: threatening the loanholders that if you're not gonna cut your

665
00:38:06,000 --> 00:38:09,000
Speaker 2: dead then I'm gonna pull my assets to a subsidiary.

666
00:38:09,160 --> 00:38:13,279
Speaker 2: I'm gonna put a new loan holder ahead of you.

667
00:38:13,760 --> 00:38:15,480
Speaker 2: So you really need to make sure that you have

668
00:38:15,600 --> 00:38:18,480
Speaker 2: a managers to know and experience how to deal with

669
00:38:18,520 --> 00:38:21,760
Speaker 2: those things as opposed to take like maybe a passive

670
00:38:22,200 --> 00:38:26,280
Speaker 2: approach to it, or managers that is maybe less concerned

671
00:38:26,600 --> 00:38:27,600
Speaker 2: about those risks.

672
00:38:27,760 --> 00:38:32,040
Speaker 3: I believe it's called being j crude. Hmmm, Yes, that's

673
00:38:32,080 --> 00:38:34,920
Speaker 3: the that's the that's the common phrase that and creditor

674
00:38:34,960 --> 00:38:37,360
Speaker 3: on credit or violence is the other component that people

675
00:38:37,400 --> 00:38:38,080
Speaker 3: like to discuss.

676
00:38:38,200 --> 00:38:42,080
Speaker 2: But yeah, but you know, you mentioned CLO. It's probably

677
00:38:42,080 --> 00:38:46,200
Speaker 2: the most kind of we mentioned that it's gonna I

678
00:38:46,239 --> 00:38:49,360
Speaker 2: feel like in the last decade, it's like an evergreen recommendation.

679
00:38:49,480 --> 00:38:54,120
Speaker 2: Everyone always recommends clos, right, it's a popular space. But

680
00:38:54,920 --> 00:38:58,719
Speaker 2: just spread also there tightened so much they tightened by

681
00:38:58,800 --> 00:39:01,799
Speaker 2: half just from a year ago Triple A clos. Now

682
00:39:01,800 --> 00:39:05,080
Speaker 2: it is traded like spread off like ninety basis point.

683
00:39:05,400 --> 00:39:08,320
Speaker 2: The difference between triple A and double A clos also

684
00:39:09,239 --> 00:39:11,719
Speaker 2: is very very small right now, so they just don't

685
00:39:11,719 --> 00:39:14,000
Speaker 2: think it's kind of the worth going up to double

686
00:39:14,040 --> 00:39:16,319
Speaker 2: A and try to stay still up in quality with

687
00:39:16,360 --> 00:39:16,840
Speaker 2: the triple A.

688
00:39:17,600 --> 00:39:19,600
Speaker 1: Do you like cre C l os?

689
00:39:21,880 --> 00:39:25,240
Speaker 2: Again, know what you're buying, know very well what you're buying,

690
00:39:25,360 --> 00:39:27,960
Speaker 2: or with an expert managers who know what they're doing. Okay,

691
00:39:28,040 --> 00:39:30,560
Speaker 2: This is definitely not like a you know, a yes

692
00:39:30,640 --> 00:39:34,000
Speaker 2: no answer and definitely depends on the client in terms

693
00:39:34,000 --> 00:39:36,440
Speaker 2: of it's kind of restolerance.

694
00:39:36,960 --> 00:39:38,759
Speaker 1: Yeah, okay, just to zoom out a little bit, I

695
00:39:38,760 --> 00:39:42,840
Speaker 1: mean geographical diversification. Everyone is massively long US assets and

696
00:39:42,880 --> 00:39:44,680
Speaker 1: they came out of the milk and event recently just

697
00:39:44,719 --> 00:39:46,600
Speaker 1: talking about how you just needed to be in the

698
00:39:46,680 --> 00:39:49,040
Speaker 1: US and you stay away from everything else because it's scary.

699
00:39:49,080 --> 00:39:52,080
Speaker 1: But just having been in Europe recently, there does seem

700
00:39:52,120 --> 00:39:54,520
Speaker 1: to be an opportunity that you know, the assets seemed

701
00:39:54,520 --> 00:39:58,640
Speaker 1: relatively cheap. They are, you know, maybe higher quality in

702
00:39:58,680 --> 00:40:01,239
Speaker 1: some cases, why not diverse flying to other regions.

703
00:40:01,880 --> 00:40:05,960
Speaker 2: Right, So we talked about how tight spreads are in

704
00:40:06,000 --> 00:40:08,960
Speaker 2: the US rifle. Let's say Triple B they traded in

705
00:40:09,000 --> 00:40:12,759
Speaker 2: like the tenth percent in the last ten years. Eurotriple

706
00:40:12,800 --> 00:40:15,600
Speaker 2: B are treated in like forty seven percent, so much

707
00:40:15,640 --> 00:40:18,360
Speaker 2: wider than that, and the difference between them is in

708
00:40:18,400 --> 00:40:21,600
Speaker 2: the eighty five percent I meaning only fifteen percent of

709
00:40:21,640 --> 00:40:26,000
Speaker 2: the time the last decade, Triple B is in Europe

710
00:40:26,160 --> 00:40:29,600
Speaker 2: wider than they are right now versus the US. And

711
00:40:29,680 --> 00:40:32,399
Speaker 2: that was driven more recently in the last two years,

712
00:40:32,400 --> 00:40:36,120
Speaker 2: first before the war that started between Russia and Ukraine

713
00:40:36,200 --> 00:40:39,880
Speaker 2: that really gave it a push, and more recently the

714
00:40:39,920 --> 00:40:43,960
Speaker 2: announcement of the election in France. By the way, if

715
00:40:44,400 --> 00:40:46,040
Speaker 2: it's not just the Triple B, like if you look

716
00:40:46,080 --> 00:40:48,280
Speaker 2: at Double B right now, they're like more than forty

717
00:40:48,320 --> 00:40:50,920
Speaker 2: basis point higher than Double B in the US. Single

718
00:40:50,960 --> 00:40:53,040
Speaker 2: be is are one hundred and thirty basis point wider

719
00:40:53,080 --> 00:40:55,400
Speaker 2: than they are in the US, So obviously there's a

720
00:40:55,400 --> 00:40:58,840
Speaker 2: lot of uncertainy regarding the fund selection. That's a headwind.

721
00:40:59,160 --> 00:41:02,680
Speaker 2: The market is sorry that the far right doesn't have

722
00:41:02,719 --> 00:41:07,840
Speaker 2: the experience managing our country. Their policy is going against

723
00:41:07,840 --> 00:41:11,840
Speaker 2: the European Union, Green Agenda, generally going against the European

724
00:41:11,920 --> 00:41:15,880
Speaker 2: Union and even going against NATO. So there's definitely a

725
00:41:15,920 --> 00:41:19,319
Speaker 2: lot of uncertainty and worry about the market. And we've

726
00:41:19,320 --> 00:41:25,960
Speaker 2: seen that government yield, which usually trade roughly forty five

727
00:41:25,960 --> 00:41:29,239
Speaker 2: basis point wider than German yield, have widened too close

728
00:41:29,239 --> 00:41:33,359
Speaker 2: to eighty basis point in investment grade. We saw them

729
00:41:33,440 --> 00:41:36,319
Speaker 2: the French investment grade K and I did invite in

730
00:41:36,360 --> 00:41:41,120
Speaker 2: a lot by fifteen basis point, roughly fifty and eighty

731
00:41:41,160 --> 00:41:45,480
Speaker 2: one something like sixty eight basis point wider. Now, interestingly,

732
00:41:45,600 --> 00:41:48,920
Speaker 2: most of the sale happened actually from foreign investors, while

733
00:41:49,000 --> 00:41:52,000
Speaker 2: in more kind of recent days were actually seeing some

734
00:41:52,680 --> 00:41:56,680
Speaker 2: local French managers buying into this dip. So what we

735
00:41:56,719 --> 00:42:01,239
Speaker 2: see a lot of managers kind of not trying to

736
00:42:01,239 --> 00:42:03,520
Speaker 2: be too here right now with the French asset maybe

737
00:42:03,560 --> 00:42:08,080
Speaker 2: buying other assets that were sold in similarly or a

738
00:42:08,120 --> 00:42:11,520
Speaker 2: little bit less than that, and we're talking about a

739
00:42:11,680 --> 00:42:15,279
Speaker 2: US bank or Netherlands banks in the Netherland Bank in

740
00:42:15,320 --> 00:42:17,600
Speaker 2: the UK and kind of wait and see a little

741
00:42:17,640 --> 00:42:21,040
Speaker 2: bit how this will play out. But remember that we've

742
00:42:21,080 --> 00:42:25,520
Speaker 2: been in similar situations before. Remember the Brexit in twenty sixteen,

743
00:42:25,920 --> 00:42:29,240
Speaker 2: or even the election in Italy in September of twenty

744
00:42:29,280 --> 00:42:35,520
Speaker 2: twenty two. The market reaction was relatively short lived. We

745
00:42:35,560 --> 00:42:38,040
Speaker 2: saw spread widening and then they came back very fast

746
00:42:38,080 --> 00:42:40,719
Speaker 2: after that, even though it was a big those were

747
00:42:40,760 --> 00:42:42,560
Speaker 2: like relatively big shocks to the market.

748
00:42:43,440 --> 00:42:45,000
Speaker 1: So in this case, in the French election, does it

749
00:42:45,000 --> 00:42:46,520
Speaker 1: make you stay away or does it make you buy

750
00:42:46,520 --> 00:42:47,480
Speaker 1: the dips?

751
00:42:48,880 --> 00:42:51,560
Speaker 2: I think there are other interesting places to go that

752
00:42:51,600 --> 00:42:54,560
Speaker 2: you can go around eighty one. Of course Europe, you

753
00:42:54,640 --> 00:42:59,400
Speaker 2: don't really have to, you know, take the risk here there.

754
00:42:59,560 --> 00:43:02,680
Speaker 2: And I think what would be interesting is also make

755
00:43:02,719 --> 00:43:06,520
Speaker 2: sure to be nimble enough to maybe tap into this

756
00:43:06,680 --> 00:43:09,200
Speaker 2: market if the election, if the market start to freak

757
00:43:09,239 --> 00:43:11,600
Speaker 2: out right after the election and we see kind of

758
00:43:12,080 --> 00:43:13,480
Speaker 2: new jerk reaction in the market.

759
00:43:14,440 --> 00:43:16,319
Speaker 1: Given how as we started the call, you know how

760
00:43:16,400 --> 00:43:18,359
Speaker 1: how tight everything is in terms of spread and how

761
00:43:18,400 --> 00:43:20,160
Speaker 1: long everyone is in terms of you know, I G

762
00:43:21,080 --> 00:43:24,279
Speaker 1: has a very crowded trade, and we talked about you

763
00:43:24,320 --> 00:43:27,799
Speaker 1: know it being quite a market. Credit generally can can

764
00:43:27,880 --> 00:43:30,920
Speaker 1: change very quickly if there is volatility, If you know,

765
00:43:30,960 --> 00:43:33,640
Speaker 1: the VICS suddenly wakes up from its long standing slumber

766
00:43:34,000 --> 00:43:36,920
Speaker 1: and we get a bit of a jolt, does credit

767
00:43:37,000 --> 00:43:40,520
Speaker 1: suddenly freak out, as you said, and and potentially you know,

768
00:43:40,880 --> 00:43:43,200
Speaker 1: does it does itself significantly? And how do you hedge

769
00:43:43,200 --> 00:43:44,000
Speaker 1: against such an event?

770
00:43:45,000 --> 00:43:50,160
Speaker 2: Well, well, depending what the reasons are for the for

771
00:43:50,239 --> 00:43:52,440
Speaker 2: the for the sale of I think it's important to

772
00:43:52,680 --> 00:43:54,919
Speaker 2: understand there is a conception in the market that if

773
00:43:55,239 --> 00:43:58,279
Speaker 2: if the rate card trade, no matter what it's polish,

774
00:43:58,320 --> 00:44:04,960
Speaker 2: there is no theoretical or empirical evidence to that. It's

775
00:44:04,960 --> 00:44:08,560
Speaker 2: a common mistake to change one variable and assume all

776
00:44:08,600 --> 00:44:11,759
Speaker 2: else equal, because all else is not equal. Okay. In

777
00:44:11,760 --> 00:44:15,920
Speaker 2: the last like four FED rate cuts that we have

778
00:44:16,040 --> 00:44:19,719
Speaker 2: seen in the last thirty five years, so the FED

779
00:44:19,760 --> 00:44:23,680
Speaker 2: cut of nineteen ninety, of two thousand and one, two

780
00:44:23,719 --> 00:44:27,760
Speaker 2: thousand and seven, and twenty nineteen all will follow viruy

781
00:44:27,760 --> 00:44:30,840
Speaker 2: recession and we're all driven by some weakness in the

782
00:44:30,840 --> 00:44:34,759
Speaker 2: economy rather than by fading inflation. So the way to

783
00:44:34,840 --> 00:44:39,400
Speaker 2: hedge it if you are concerned about potential weakening that

784
00:44:39,440 --> 00:44:41,560
Speaker 2: we said that could happen like six months from now

785
00:44:41,600 --> 00:44:45,280
Speaker 2: and so on, is to start going up more in quality.

786
00:44:46,880 --> 00:44:49,920
Speaker 2: Is to what you can do instead of selling your

787
00:44:50,040 --> 00:44:52,000
Speaker 2: high yell because you're concerned you won't be able to

788
00:44:52,040 --> 00:44:54,919
Speaker 2: buy them back, is that you can sell CDX that's

789
00:44:54,960 --> 00:44:59,920
Speaker 2: super much more liquid than high yel bonds themselves, cash

790
00:45:00,040 --> 00:45:01,799
Speaker 2: bonds themselves. And we see managers do that.

791
00:45:02,680 --> 00:45:03,920
Speaker 1: And if you have to put your finger on the

792
00:45:03,960 --> 00:45:07,000
Speaker 1: one opportunity oded for the next let's say twelve months

793
00:45:07,040 --> 00:45:08,760
Speaker 1: in credit, what do you really love at the moment?

794
00:45:10,480 --> 00:45:14,239
Speaker 2: Again, I think CNBS is super interesting because everyone hates

795
00:45:14,280 --> 00:45:17,160
Speaker 2: it or many people hate it, right, It's like it's

796
00:45:17,160 --> 00:45:20,959
Speaker 2: like the opposite of IJ so you know, so that's

797
00:45:21,000 --> 00:45:24,560
Speaker 2: definitely a very interesting area to explore. But with that

798
00:45:24,600 --> 00:45:26,480
Speaker 2: you have to do really with the expert people with

799
00:45:26,600 --> 00:45:30,080
Speaker 2: expert portfolio managers and that have a very good research

800
00:45:30,120 --> 00:45:32,520
Speaker 2: team that they know exactly what they buy and can

801
00:45:32,600 --> 00:45:37,480
Speaker 2: run really like really test those those those positions. And

802
00:45:37,520 --> 00:45:39,399
Speaker 2: again I think if we're gonna hit if we were

803
00:45:39,440 --> 00:45:42,680
Speaker 2: to hit a recession, that market is already pricing a

804
00:45:42,680 --> 00:45:45,480
Speaker 2: lot of the negative news, Unlike many other parts of

805
00:45:45,480 --> 00:45:48,480
Speaker 2: the market, like high ledges price no researchion whatsoever, at

806
00:45:48,560 --> 00:45:50,560
Speaker 2: least not in the double B single B area.

807
00:45:51,320 --> 00:45:54,320
Speaker 1: Great stuff. Oded Manner, Global Head of Fixed Income Manager

808
00:45:54,360 --> 00:45:56,279
Speaker 1: Research at black Rock, It's been a pleasure having you

809
00:45:56,320 --> 00:45:57,719
Speaker 1: on the Credit Edge. Many thanks.

810
00:45:58,120 --> 00:45:59,440
Speaker 2: Likewise, thank you guys.

811
00:45:59,800 --> 00:46:03,160
Speaker 1: And to Jody Lurie with Bloomberg Intelligence, many thanks.

812
00:46:02,960 --> 00:46:04,640
Speaker 3: Thank you so much. James happy to be.

813
00:46:04,640 --> 00:46:08,160
Speaker 1: Here for more analysis. Read all of Jody's great work

814
00:46:08,280 --> 00:46:11,799
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815
00:46:11,800 --> 00:46:14,720
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819
00:46:26,200 --> 00:46:28,600
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820
00:46:28,640 --> 00:46:32,760
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821
00:46:32,840 --> 00:46:36,239
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822
00:46:36,280 --> 00:46:39,560
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823
00:46:39,560 --> 00:46:43,160
Speaker 1: Bloomberg dot net. I'm James Cromby. It's been a pleasure

824
00:46:43,200 --> 00:47:05,799
Speaker 1: having you join us again next week on the credit edge,