WEBVTT - Fed’s QT Ghosts Are Haunting Powell 0:00:01.360 --> 0:00:05.680 This is Bloomberg Business Wait inside from the reporters and 0:00:05.880 --> 0:00:09.479 editors who bring you America's most trusted business magazine, plus 0:00:09.520 --> 0:00:13.680 global business, finance and tech news. The Bloomberg Business Week 0:00:13.720 --> 0:00:23.600 Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio. 0:00:24.600 --> 0:00:26.360 All right, everybody, we are just going to go right 0:00:26.400 --> 0:00:29.600 to it, because we do have the star in the studio, 0:00:29.880 --> 0:00:32.559 Lizkapla McCormick. She's here and we have all been obsessing 0:00:32.640 --> 0:00:35.640 about your story. So our conversation continues, and she is, 0:00:35.680 --> 0:00:38.680 of course Bloomberg News Chief correspondent for Global macro Markets 0:00:38.720 --> 0:00:41.440 here in our Bloomberg Interactive Brokers studio. Liz, I do 0:00:41.520 --> 0:00:43.320 mean it sincerely that like when we read through a 0:00:43.320 --> 0:00:45.879 story like yours, it's not superficial. I learn more and 0:00:45.880 --> 0:00:48.320 more about kind of how the FED works, how kind 0:00:48.320 --> 0:00:50.440 of our financial system works when it comes to stresses 0:00:50.520 --> 0:00:53.519 or lack there up. So really appreciate it. So talk 0:00:53.520 --> 0:00:54.320 to us a little bit more. 0:00:54.320 --> 0:00:55.880 I learned more and more about what I don't know 0:00:56.720 --> 0:00:57.920 and I don't understand. 0:00:58.080 --> 0:00:59.920 It is so true. It's like, oh my god, this 0:01:00.200 --> 0:01:02.600 has explained something else that's going on. So talk to 0:01:02.680 --> 0:01:05.319 us about your story. And the FED balance sheet was 0:01:05.360 --> 0:01:08.319 so important in terms of assessing it and also understanding 0:01:08.360 --> 0:01:10.880 about as chair Palell tries to roll it off a 0:01:10.920 --> 0:01:11.319 little bit. 0:01:11.680 --> 0:01:13.640 Right, Yeah, well, thank you for those kind words. I 0:01:13.640 --> 0:01:15.959 feel like that's what I try to do, take the 0:01:16.000 --> 0:01:17.720 weird wonky stuff and make it beatable. 0:01:17.959 --> 0:01:18.319 Yeah. 0:01:18.360 --> 0:01:21.240 A lot of good colleagues and good editors. But yeah. 0:01:21.280 --> 0:01:25.280 So it's interesting because you probably heard Chairman Pal and 0:01:25.319 --> 0:01:29.360 his recent congressional testimony. A lot of politicians they just 0:01:29.440 --> 0:01:31.479 hate the big balance sheet. So they were saying, are 0:01:31.480 --> 0:01:33.520 you going to get it down faster? Or why can't we? 0:01:33.520 --> 0:01:35.480 We don't like that you do Q so fast and 0:01:35.560 --> 0:01:38.200 QT takes so long. And I had been looking at 0:01:38.200 --> 0:01:40.399 this story for a while, the balance sheet roll off, 0:01:40.680 --> 0:01:43.480 and he was saying, which is very smart of him, 0:01:43.560 --> 0:01:46.720 like basically there's a lot involved, Like, yes, we want 0:01:46.720 --> 0:01:49.279 to get the balance sheet down, we know that's our goal, 0:01:49.640 --> 0:01:52.600 but we don't want another twenty nineteen Rebo crisis, which 0:01:52.640 --> 0:01:55.320 happened when they were doing QT and things got too 0:01:55.400 --> 0:01:58.880 restrictive in the banking system. Let's just say simply, so, 0:01:58.960 --> 0:02:01.480 as they roll dead off their balance sheet, you know 0:02:01.520 --> 0:02:03.560 that money has to be pulled out of the system, 0:02:03.680 --> 0:02:06.040 and if it comes from bank reserves, then we could 0:02:06.080 --> 0:02:08.560 get more tightening and liquidity. And I think, Matt, I 0:02:08.560 --> 0:02:11.320 heard you talking earlier even about you know, treasury bill 0:02:11.360 --> 0:02:13.720 issuance coming. That's you know, as they build up their 0:02:13.720 --> 0:02:17.000 cash balance again after that nightmare of the debt ceiling. 0:02:17.639 --> 0:02:19.760 We had that going on. So now we've got the 0:02:19.800 --> 0:02:22.799 FED who's trying to get that balance sheet down. Their 0:02:22.840 --> 0:02:24.400 pace is about a trillion a year. 0:02:24.440 --> 0:02:27.680 It sounds like a lot, it's a lot, but the balance. 0:02:27.320 --> 0:02:30.760 Heat is darn big, right, you know, But that they 0:02:30.800 --> 0:02:33.600 don't want reserves in the banking system to get too restrictively. 0:02:33.760 --> 0:02:36.160 It looks like they're moving pretty quickly already. Like if 0:02:36.200 --> 0:02:39.440 I type up FED space bow on the Bloomberg terminal, 0:02:39.440 --> 0:02:41.400 I can see that we were over eight and a 0:02:41.440 --> 0:02:45.560 half trillion and we're pretty quickly approaching seven and a 0:02:45.560 --> 0:02:49.480 half trillion, you know, within the span of just about 0:02:49.520 --> 0:02:53.320 one year. So what's the problem with this? When they 0:02:53.320 --> 0:02:56.400 when they reduce their balance sheet, essentially they let the 0:02:56.440 --> 0:03:00.120 bonds mature, right, and they don't use that money need 0:03:00.200 --> 0:03:02.240 to go out and buy new bonds. How does that 0:03:02.320 --> 0:03:04.560 suck liquidity out of the system. Well, it can come 0:03:04.600 --> 0:03:05.320 in a couple of ways. 0:03:05.320 --> 0:03:07.480 That's why. To be honest, it's made this a little 0:03:07.480 --> 0:03:11.960 more precarious because the Fed uh normally think about assets 0:03:11.960 --> 0:03:15.440 and liabilities on a balance sheet. The bonds are assets liabilities, 0:03:15.720 --> 0:03:18.120 you know things that if nothing else changes, assets go down, 0:03:18.200 --> 0:03:20.720 liabilities have to go down. So like a key liability 0:03:20.760 --> 0:03:23.000 is bank reserves because if bank want their money, Fed 0:03:23.040 --> 0:03:25.200 has to get it back to them. So one way 0:03:25.400 --> 0:03:28.799 is the assets go down and bank reserves would go 0:03:28.919 --> 0:03:32.000 down as people like treasury selling depth people buy this stuff. 0:03:32.200 --> 0:03:34.240 But now we have this other thing called the Fed's 0:03:34.280 --> 0:03:37.240 Reverse Repo facility, another place that a lot of money 0:03:37.240 --> 0:03:40.040 market funds like they put their money there so they. 0:03:39.920 --> 0:03:42.160 Can buy some of this. So that's on the liability side. 0:03:42.320 --> 0:03:46.840 Yes, both the r rps and the reserves are on 0:03:46.880 --> 0:03:47.760 the liability side. 0:03:47.800 --> 0:03:51.160 So and that got huge up to almost two trillions, amazing. 0:03:51.160 --> 0:03:52.960 Remember when they first came out with this, you know, 0:03:53.160 --> 0:03:54.840 it was back when Bill Dudley was at the New 0:03:54.920 --> 0:03:56.840 York FED and he was like, we don't want this 0:03:56.880 --> 0:03:59.160 to be too big, and it's really big. I mean, 0:03:59.160 --> 0:04:02.280 it's working, it's how them money market funds really love it. 0:04:02.600 --> 0:04:03.920 But so you know, the. 0:04:04.240 --> 0:04:07.000 More comes out of our RP as the FED you know, 0:04:07.080 --> 0:04:09.880 winds down the balance sheet, the less bank reserves go down. 0:04:10.440 --> 0:04:13.240 But we and we've seen that move pretty fast now. 0:04:13.280 --> 0:04:16.880 But people were warning, you know, money market funds might 0:04:17.000 --> 0:04:20.200 like keeping their cash in bank reserves and the bill body. 0:04:20.000 --> 0:04:22.960 And that's helped with the Fed's balance sheet liquidity, right. 0:04:22.800 --> 0:04:25.960 Yes, because it's like one of those liabilities has to move. 0:04:26.000 --> 0:04:28.560 So if our rps go down, then reserves don't have 0:04:28.600 --> 0:04:30.479 to go down as much. It's just kind of like 0:04:30.560 --> 0:04:33.080 the math and the way it works. So, like Chairman 0:04:33.120 --> 0:04:36.000 Powell was saying on Congress, like so far this is 0:04:36.000 --> 0:04:38.160 what we see. And I feel like he was very 0:04:38.240 --> 0:04:40.599 humble in a good way, and he said, but I 0:04:40.600 --> 0:04:41.960 mean I remember writing it down. 0:04:42.120 --> 0:04:43.080 He really said that. 0:04:43.160 --> 0:04:45.880 Like he said, we didn't see it coming in twenty nineteen, 0:04:45.960 --> 0:04:47.920 you know, like we thought we were doing okay. So 0:04:48.000 --> 0:04:50.520 he was like saying, it's it's not easy. We're trying 0:04:50.520 --> 0:04:52.800 to be careful. We want a buffer of bank reserves 0:04:52.800 --> 0:04:54.839 in the system. And of course, like you guys have 0:04:54.839 --> 0:04:56.480 been talking, we got so much else going on, right 0:04:56.520 --> 0:04:58.640 We got the FED who raised rates over you know, 0:04:58.680 --> 0:05:01.960 five hundred basis points over a year, we've got all 0:05:02.000 --> 0:05:06.000 these other dimensions and we really don't need a REPO crisis, 0:05:06.160 --> 0:05:08.640 you know, so, and the FED wants QT to keep 0:05:08.640 --> 0:05:10.680 winding down. So I mean, like I said, we tried 0:05:10.720 --> 0:05:12.760 to be very common fair. There's a lot of people 0:05:12.800 --> 0:05:15.280 saying it's going well now FED, could you know they 0:05:15.320 --> 0:05:16.840 want this QT to just run in the back? 0:05:17.040 --> 0:05:18.800 Can I ask you something? The FED is always doing 0:05:18.839 --> 0:05:21.919 this right, This is the management of the Fed's balance 0:05:21.960 --> 0:05:24.040 sheet well scale, but well that's what I'm gonna say. 0:05:24.160 --> 0:05:26.159 What's different is it because of the scale and the 0:05:26.200 --> 0:05:28.400 size of the balance sheet that makes it more difficult? 0:05:28.640 --> 0:05:31.640 Well, you know, so they're not always doing QT in 0:05:31.680 --> 0:05:35.600 a sense. They're either doing q E stability because sometimes 0:05:35.600 --> 0:05:37.880 they left the balance sheet stable for a while, or 0:05:37.920 --> 0:05:39.719 they're doing QT making it smaller. 0:05:39.760 --> 0:05:41.039 But again it's. 0:05:40.839 --> 0:05:43.760 Not at this magnitude, right because in the old days, 0:05:43.800 --> 0:05:45.560 when they didn't have the system they have now, there 0:05:46.120 --> 0:05:48.200 was not even trillions on the balance sheet. But now 0:05:48.200 --> 0:05:50.160 they're working in a different schema, so they're allowed to 0:05:50.160 --> 0:05:53.480 have a big balance sheet, but it's gotten bigger and bigger. 0:05:53.520 --> 0:05:57.760 But so it's the magnitude and that I think We're 0:05:57.880 --> 0:06:00.400 just such a precarious time the FED, but it also 0:06:00.600 --> 0:06:03.880 doesn't want their tools going in opposite directions. They're tightening 0:06:03.920 --> 0:06:06.360 with rates so far, you know, they haven't stopped. They 0:06:06.360 --> 0:06:09.560 said it's not a pause, it was a skip in June. 0:06:09.600 --> 0:06:13.000 People think more is coming and they have this QT tightening. 0:06:13.360 --> 0:06:14.960 They want in the background not. 0:06:14.920 --> 0:06:17.320 To create it slow it down at any point. Right, No, 0:06:17.480 --> 0:06:19.239 they haven't, but they could. 0:06:19.279 --> 0:06:21.480 That's another thing they could do. Say they start seeing, 0:06:21.760 --> 0:06:23.720 you know, kind of creaks in the system that bank 0:06:23.800 --> 0:06:27.640 reserves are getting tight. Some people have said the FED 0:06:27.680 --> 0:06:29.600 could say we're going to slow down the roll off. 0:06:29.680 --> 0:06:31.800 We're going to roll off maybe half of what we're doing. 0:06:32.080 --> 0:06:34.800 So there are maneuvers that the FED can do. I 0:06:34.839 --> 0:06:38.320 think Pal and Lori Logan from the Dallas FED spoke 0:06:38.400 --> 0:06:40.839 recently and said, for now, we think things are working well, 0:06:41.240 --> 0:06:43.560 you know, kind of plowing along. But I think a 0:06:43.600 --> 0:06:46.760 lot on the street are saying, just got to kind 0:06:46.760 --> 0:06:48.360 of keep head on the list of all. 0:06:48.240 --> 0:06:52.200 The things we're worrying about. So, but now that treasuries 0:06:52.200 --> 0:06:56.360 are actually yielding something, it's got to be so much 0:06:56.360 --> 0:06:58.800 more attractive for money market funds to move out of 0:06:58.839 --> 0:07:01.719 the reverse repo facility and buy them for a return. 0:07:01.920 --> 0:07:02.120 Right. 0:07:02.160 --> 0:07:04.440 Well, yeah, now that there's more bills because remember what 0:07:04.480 --> 0:07:06.719 the debt ceiling, there wasn't enough to buy it. Seems 0:07:06.760 --> 0:07:09.920 like the government is so big. But the money market 0:07:10.000 --> 0:07:13.080 funds have nearly six trillion in assets now, so they 0:07:13.120 --> 0:07:15.440 had a lot. So you're right, Matt, you know, the 0:07:16.040 --> 0:07:19.320 bill rates were more attractive. But somebody was saying, what also, 0:07:19.680 --> 0:07:22.040 I feel like there's so many variables here. What also 0:07:22.240 --> 0:07:25.760 is like unsure is money market funds are doing what 0:07:25.800 --> 0:07:30.080 they call extending their maturity. Right, they're buying bills. Reverse 0:07:30.120 --> 0:07:33.200 repos are overnight money. They keep rolling it over. But 0:07:33.280 --> 0:07:35.600 people say, you know, hey, if you think the Fed's 0:07:35.640 --> 0:07:37.680 going to raise three more times, why would a money 0:07:37.720 --> 0:07:39.920 market fund want to lock up right now when in 0:07:39.960 --> 0:07:42.600 three months they could get a better rate. So that's 0:07:42.600 --> 0:07:45.240 why some people are warning maybe they'll stop buying as 0:07:45.320 --> 0:07:47.320 much and keep their money in rope, kind of like 0:07:47.360 --> 0:07:49.840 we were saying, keeping cash on hand, because hey, if 0:07:49.840 --> 0:07:52.000 the FED goes to six percent, I'd rather buy three 0:07:52.040 --> 0:07:55.280 month T bills at six percent. So that's why I 0:07:55.280 --> 0:07:58.560 feel like there's a lot of uncertainty and the Fed's 0:07:58.600 --> 0:08:01.040 being very cautious to watch and look at the market 0:08:01.080 --> 0:08:02.480 metrics and not have a blow up. 0:08:02.760 --> 0:08:04.880 I love this quote in the story, saying everything is 0:08:04.880 --> 0:08:08.360 okay is like calling the game after the first quarter. So, 0:08:08.760 --> 0:08:11.400 I mean, I always think about somebody listening who maybe 0:08:11.560 --> 0:08:14.800 isn't s savvy or just kind of understanding why this 0:08:14.840 --> 0:08:15.760 should matter. 0:08:15.960 --> 0:08:16.480 As we are. 0:08:18.240 --> 0:08:21.120 Actually every time, I you're right, every time I reasoned realism, 0:08:21.280 --> 0:08:23.920 like I know nothing. I know nothing, I mean, but 0:08:24.440 --> 0:08:26.800 so help somebody who's sitting in the car and just 0:08:26.840 --> 0:08:28.600 like pulled over because they'm like, help me, I don't 0:08:28.640 --> 0:08:31.240 understand this. So what is it that they have to 0:08:31.400 --> 0:08:33.800 understand about the importance of something like this and what 0:08:33.880 --> 0:08:34.480 you write about? 0:08:34.679 --> 0:08:37.319 Right? Well? I always think of my father, who's in 0:08:37.360 --> 0:08:38.880 his late eighties and a G. E. 0:08:39.000 --> 0:08:39.560 Stock guy. 0:08:39.600 --> 0:08:41.080 He always says, I love what you do. 0:08:41.160 --> 0:08:42.880 I don't know what any of it means. 0:08:43.200 --> 0:08:44.120 But it's good stuff. 0:08:44.120 --> 0:08:45.960 But I try to explain to him Dad, like things 0:08:46.040 --> 0:08:49.000 like this mean if the banks get under pressure, right, 0:08:49.080 --> 0:08:52.280 and it's more costly for them to borrow, they don't 0:08:52.320 --> 0:08:55.880 have enough cash buffer, you know, bad things could happen, right, 0:08:56.000 --> 0:08:59.480 you know, there's less liquidity, the financial system could be 0:08:59.520 --> 0:09:02.240 more on a vulnerable like that to me is the 0:09:02.280 --> 0:09:05.640 broad thing because remember in twenty nineteen, the FED didn't 0:09:05.679 --> 0:09:08.200 want to have to plow money into the system like 0:09:08.240 --> 0:09:10.400 they did when repos blew up, so they kind of 0:09:10.440 --> 0:09:15.679 had to go counter It creates volatility uncertainty, especially now 0:09:15.720 --> 0:09:18.960 inflation is still a huge problem, right, So the Fed 0:09:19.000 --> 0:09:21.480 definitely doesn't want to have to kind of come in and. 0:09:21.480 --> 0:09:22.319 Rush and jet. 0:09:22.360 --> 0:09:24.559 I mean they did it during the regional banking crisis. 0:09:24.600 --> 0:09:26.199 They will do what they have to do. They kind 0:09:26.240 --> 0:09:28.640 of back, you know, they are not that resort they 0:09:28.640 --> 0:09:29.440 are they did that. 0:09:29.800 --> 0:09:31.520 Is there something in the big banks when they report 0:09:31.600 --> 0:09:33.680 then in regards to this and just got about forty 0:09:33.679 --> 0:09:35.960 five seconds that you're going to be like listening out 0:09:36.000 --> 0:09:37.760 for that might give you some clues. 0:09:38.080 --> 0:09:41.079 Well, yeah, I mean they'll talk about reserve levels. Is 0:09:41.080 --> 0:09:43.120 there I don't think we're there yet. You know, there's 0:09:43.120 --> 0:09:44.640 still like three chillion in reserves. 0:09:44.640 --> 0:09:45.920 But if they're talking about. 0:09:45.720 --> 0:09:48.800 A little bit reserve scarcity or that they want more 0:09:48.880 --> 0:09:52.240 cushion because they're concerned about the outlook, you know, that'll 0:09:52.240 --> 0:09:54.120 be things that my kind of hint at, you know, 0:09:54.520 --> 0:09:57.240 or is the financial and tighter lending standards, all that 0:09:57.320 --> 0:09:58.560 kind of stuff. We'll be watching. 0:09:58.720 --> 0:10:00.880 That's what I watch for tighter land standards, I know, 0:10:01.200 --> 0:10:03.680 and I still want to buy more cars. 0:10:04.400 --> 0:10:05.400 They're cheaper now, right. 0:10:05.440 --> 0:10:06.120 I don't have any. 0:10:06.000 --> 0:10:07.480 Money, so I have to borrow to do that. 0:10:08.040 --> 0:10:11.760 Leverage, leverage, leverage. I hope it doesn't cost a lot. Truly, 0:10:11.840 --> 0:10:13.760 we mean it. It's we all get smarter when we 0:10:13.800 --> 0:10:16.600 read your stories. This is Kapa McCormick. She's Bloomberg News 0:10:16.640 --> 0:10:20.560 Chief correspondent for Global Macro Markets. Her story, by the way, 0:10:20.640 --> 0:10:22.840 it is among the most read on the Bloomberg has 0:10:22.880 --> 0:10:25.679 been there all day and it really says a lot 0:10:25.679 --> 0:10:27.199 about kind of the environment we are. And just to 0:10:27.320 --> 0:10:29.719 remind you of some other pressures that are out there, matt. 0:10:29.720 --> 0:10:32.320 Yeah, absolutely. I mean this is nothing to you. I 0:10:32.320 --> 0:10:36.160 think tightening financial conditions, which is what the FED wants 0:10:36.200 --> 0:10:39.640 to do, right, yes, type up f con go and 0:10:40.240 --> 0:10:41.320 they still have ways to go. 0:10:41.480 --> 0:10:44.600 Slow down, everybody, slow down, all right, Carol Masser along 0:10:44.640 --> 0:10:46.880 with Matthew Miller and for Tim Stenevick, you're listening and 0:10:46.880 --> 0:10:49.760 watching Bloomberg Business Week on this Monday on radio, on 0:10:49.840 --> 0:10:52.360 YouTube on Bloomberg Originals. This is Bloomberg. 0:10:57.600 --> 0:11:01.480 You're listening to the Bloomberg Business Weeks. Catch us live 0:11:01.520 --> 0:11:05.160 weekday afternoons from three to six Eastern Listen on Bloomberg 0:11:05.200 --> 0:11:08.640 dot com, the iHeartRadio app, and the Bloomberg Business app, 0:11:08.920 --> 0:11:20.839 or watch us live on YouTube go. 0:11:22.000 --> 0:11:25.760 She don't know, all right, Everybody, we mentioned earlier about 0:11:25.760 --> 0:11:29.679 the FEDS top banking regulator moving app cap requirements, especially 0:11:29.679 --> 0:11:31.160 for the big banks. This as we get ready for 0:11:31.160 --> 0:11:32.840 those big banks to report. This is what we were 0:11:32.880 --> 0:11:35.600 all just talking about. So we wanted to get kind 0:11:35.600 --> 0:11:37.680 of a check on the overall environment. Matt, get ready 0:11:37.679 --> 0:11:40.319 for that your earning season. 0:11:40.400 --> 0:11:44.160 Yeah, very much, looking forward, although it doesn't happen till Friday, right, Yeah, 0:11:44.320 --> 0:11:46.319 we are. We gonna be looking forward to Friday every 0:11:46.400 --> 0:11:48.520 day this week. We just started. It's only Monday. 0:11:48.679 --> 0:11:53.000 Hey guys, rewind, rewind, repeat, rewind repeat. That's how this 0:11:53.040 --> 0:11:54.600 week is going to be, all right. So let's see 0:11:54.640 --> 0:11:57.320 what our guest has to say. Robertogoss is Senior Managing Director, 0:11:57.400 --> 0:12:00.480 head of the bank, loan and clo Platform at Pretium, 0:12:00.679 --> 0:12:02.400 which I think will be very interesting to see what 0:12:02.440 --> 0:12:04.800 she has to say. It's a specialized investment firm with 0:12:04.840 --> 0:12:07.920 approximately fifty billion in assets under management. They focus on 0:12:08.000 --> 0:12:12.880 US residential real estate, residential credit, and corporate credit. In December, 0:12:12.960 --> 0:12:14.800 she was named one of the most Notable Women on 0:12:14.840 --> 0:12:16.960 Wall Street by Crane's New York Business. She joins us 0:12:17.240 --> 0:12:19.480 on Zoom in New York City. ROBERTA, nice to have 0:12:19.520 --> 0:12:23.079 you here with Matt and myself. Welcome, Welcome, How do 0:12:23.120 --> 0:12:25.800 you see the environment from your vantage point? And remind 0:12:25.880 --> 0:12:29.320 us exactly what you see and what you do at Pretium? 0:12:30.520 --> 0:12:33.280 Sure, so, Hi, Carol and Matt, thank you for having 0:12:33.280 --> 0:12:39.640 me this afternoon. So my group invests in leverage loans, 0:12:39.800 --> 0:12:47.520 so predominantly instruments that make up LBOs and leverage credit. 0:12:48.520 --> 0:12:49.880 Very diverse group of. 0:12:49.840 --> 0:12:56.040 Industries, but I think very impacted by, as you said, 0:12:56.080 --> 0:13:01.880 the earnings cycles so far this year that's been above expectations. 0:13:01.920 --> 0:13:05.480 I think most companies have exceeded expectations. And I also 0:13:05.640 --> 0:13:09.920 think the regional bank crisis and the health of banks 0:13:09.920 --> 0:13:12.200 has been a big impact over the course of this 0:13:12.320 --> 0:13:15.800 year and pricing in the loan market more generally. 0:13:16.440 --> 0:13:21.240 So, how have leverage loans been doing, especially as everybody's 0:13:21.800 --> 0:13:26.240 so freaked out about commercial real estate, you know, and 0:13:26.320 --> 0:13:28.960 a lot of those loans, I guess were floating rates, 0:13:29.000 --> 0:13:32.920 so borrowers got in near zero and now they're looking 0:13:32.960 --> 0:13:37.760 at not near zero, yes. 0:13:36.920 --> 0:13:37.840 At zero. Yeah. 0:13:38.800 --> 0:13:42.320 So leverage loans this year have actually performed quite well 0:13:43.240 --> 0:13:46.440 through the first half of the year, the leverage loan 0:13:46.480 --> 0:13:49.800 index close to seven percent, six and three quarter percent, 0:13:52.880 --> 0:13:57.240 but that was with some degree of volatility. So as 0:13:57.320 --> 0:14:02.800 we went through the region bank crisis in March, the 0:14:02.920 --> 0:14:06.000 loan market went from a high of ninety four to 0:14:06.080 --> 0:14:09.560 a low of ninety two and have largely recovered back 0:14:09.600 --> 0:14:15.319 to the highs of February. That has been almost entirely 0:14:15.400 --> 0:14:20.160 driven by corporate earnings as we went through Q four 0:14:20.200 --> 0:14:24.120 and Q one. But I would expect a little more 0:14:24.240 --> 0:14:27.720 volatility as we go through the back half of this year, 0:14:28.840 --> 0:14:31.240 but I don't believe it will be as noted as 0:14:31.240 --> 0:14:32.360 we saw in March. 0:14:33.880 --> 0:14:38.040 Really is that because companies were doing so well that 0:14:38.080 --> 0:14:41.760 they're able to continue to meet their you know, to 0:14:42.160 --> 0:14:46.640 make payments. Because if you borrowed money FIRS say four percent, 0:14:46.840 --> 0:14:48.720 and now you're paying twelve. 0:14:48.560 --> 0:14:50.840 That's that's problematic, painful, right. 0:14:52.000 --> 0:14:59.840 It is what is really driving the sort of exceeding 0:15:00.000 --> 0:15:03.320 expectations over the course of this year, is that we 0:15:03.560 --> 0:15:07.640 already experienced a lot of volatility through twenty twenty one 0:15:07.760 --> 0:15:11.200 and twenty twenty two. And I've talked about this in 0:15:11.240 --> 0:15:15.440 the past, which is this is largely a function of 0:15:16.240 --> 0:15:24.600 corporate margins, which were dramatically compressed over the last really 0:15:24.720 --> 0:15:28.720 twenty four months. We're starting to see as inflation starts 0:15:28.760 --> 0:15:33.440 to ease, that's helping on the margin side, even as 0:15:33.480 --> 0:15:38.280 we're seeing the top line start to decelerate. On the 0:15:38.800 --> 0:15:46.120 interest rate impact, yes, we've seen libor effectively go from 0:15:46.200 --> 0:15:51.320 zero to mid five and a half percent over the 0:15:51.400 --> 0:15:58.960 last year. And most I would say fifty to sixty 0:15:59.040 --> 0:16:03.920 percent of most companies total loans outstanding in the loan 0:16:04.000 --> 0:16:08.040 market are hedged. That being said, there's some companies that 0:16:08.080 --> 0:16:15.640 are completely unhedged, but most leverage companies raise liquidity well 0:16:15.680 --> 0:16:19.320 ahead of expectations and need. 0:16:20.240 --> 0:16:22.080 So, in other words, a lot we're already doing that. 0:16:23.200 --> 0:16:27.040 Yes, so we've seen companies, as a result of the 0:16:27.080 --> 0:16:33.560 inflation pressures, really try to raise cash out of working capital, 0:16:34.520 --> 0:16:40.360 so raise liquidity, raise liquidity in the loan market, and 0:16:40.440 --> 0:16:45.360 I think the majority of businesses are well positioned even 0:16:45.440 --> 0:16:50.160 with sort of continued rate hike expectations over the balance 0:16:50.160 --> 0:16:50.680 of this year. 0:16:51.000 --> 0:16:53.800 So I am curious, what's the demand, what's the default 0:16:53.880 --> 0:16:57.160 rate that you are seeing, give us an idea and 0:16:57.160 --> 0:16:59.920 what it tells you about, maybe more broadly, the hell 0:17:00.120 --> 0:17:01.320 of maybe the corporate market. 0:17:01.760 --> 0:17:02.440 Yeah. 0:17:02.640 --> 0:17:06.040 So I think one of the indicators that we look at, 0:17:06.160 --> 0:17:08.280 or one of the stats we look at every day, 0:17:09.600 --> 0:17:12.439 is the number or the percentage of loans that are 0:17:12.480 --> 0:17:19.200 trading below ninety so ninety being a level where stress 0:17:19.440 --> 0:17:24.919 starts to become a concern for a company. In the 0:17:25.080 --> 0:17:27.600 mid sort of lows of March when we were in 0:17:27.640 --> 0:17:32.280 the midst of the banking crisis, that percentage reached over 0:17:32.400 --> 0:17:38.320 twenty percent since then, and as of this week that 0:17:38.440 --> 0:17:43.560 number has reduced to thirteen percent. So we still think 0:17:43.640 --> 0:17:47.840 that defaults are on the rise. We're calling for three 0:17:47.920 --> 0:17:50.960 and a half percent this year, so effectively a doubling 0:17:51.000 --> 0:17:54.679 from when we are where we are mid year, and 0:17:54.720 --> 0:17:58.760 then accelerating next year to four and a half percent. 0:18:00.560 --> 0:18:05.920 And I think one of the key differentiators this year 0:18:06.080 --> 0:18:09.080 is going to be what's the expectation on the recovery 0:18:09.119 --> 0:18:14.240 from those defaults, which we believe will be substantially lower 0:18:14.240 --> 0:18:15.640 than the historic average. 0:18:16.240 --> 0:18:19.520 We're calling not great, right, not great, not. 0:18:19.560 --> 0:18:28.040 Great, but we think that uh, you know, uh, earnings 0:18:28.080 --> 0:18:33.000 will continue to drive the market. We've seen very little 0:18:33.080 --> 0:18:37.640 primary supply. I think the one big announcement last week 0:18:37.680 --> 0:18:40.639 and this goes to your commentary around banks or banks 0:18:40.680 --> 0:18:46.480 prepared to lend the large money center banks underwrote or 0:18:46.640 --> 0:18:49.280 was it was announced a very large lb O, the 0:18:49.359 --> 0:18:53.760 first we've seen over the last couple of years, UH 0:18:55.200 --> 0:18:58.440 to be announced with the acquisition of World Pay out 0:18:58.440 --> 0:19:03.399 of Fidelity National Information Systems, with the expectation that that 0:19:03.560 --> 0:19:07.199 will bring somewhere on the order of nine billion dollars 0:19:07.240 --> 0:19:09.800 of new debt to our markets. 0:19:09.800 --> 0:19:11.880 Do you think that's going to continue? Is that going 0:19:11.920 --> 0:19:15.000 to be Is that the beginning of a new trend? 0:19:15.960 --> 0:19:16.960 I believe it could be. 0:19:17.200 --> 0:19:17.480 Yes. 0:19:17.680 --> 0:19:21.800 So this is a deal that's slated for after Labor Day, 0:19:23.240 --> 0:19:27.480 and I think that this could be a signal for 0:19:28.359 --> 0:19:30.240 more new transactions to come. 0:19:30.480 --> 0:19:30.680 Yes. 0:19:31.800 --> 0:19:34.240 Cooret, Well, something to mark our calendars. Keep an eye on. 0:19:34.680 --> 0:19:35.080 Roberta. 0:19:35.119 --> 0:19:36.879 Thank you so much, Come back soon, ROBERTA. 0:19:36.960 --> 0:19:37.200 Goss. 0:19:37.520 --> 0:19:40.439 She's senior managing director, head of the bank, Loan and 0:19:40.480 --> 0:19:44.199 coll platform at Predium, joining us on Zoom from New 0:19:44.280 --> 0:19:46.000 York City. I love things like that because it just 0:19:46.000 --> 0:19:48.800 gives me another view, right, unlike the health of how 0:19:48.840 --> 0:19:50.480 things are, yeah, or how things are. 0:19:50.359 --> 0:19:53.920 Out there, especially considering how interested in private credit you are. 0:19:53.960 --> 0:19:58.199 I am an investor. Can they solve everything? Matt? 0:19:58.680 --> 0:19:59.760 No, definitely. 0:20:00.560 --> 0:20:03.240 Can we have a clearer picture of what they're trying 0:20:03.320 --> 0:20:05.320 to do? Apparently not. 0:20:06.440 --> 0:20:10.000 You're listening to the Bloomberg Business Week Podcast. Catch us 0:20:10.040 --> 0:20:14.040 live weekday afternoons from three to six Easter on Bloomberg Radio, 0:20:14.240 --> 0:20:17.520 the Bloomberg Business App, and YouTube. You can also listen 0:20:17.600 --> 0:20:20.720 live on Amazon Alexa from our flagship New York station, 0:20:21.160 --> 0:20:23.960 Just Say Alexa play Bloomberg eleven thirty. 0:20:25.920 --> 0:20:29.480 Well, talk about a pretty successful launch, Matt. It's been 0:20:29.560 --> 0:20:33.680 confirmed on meta platform rocketing to one hundred million users 0:20:34.320 --> 0:20:38.919 in less than a week. The threads threads, threads sorry 0:20:39.040 --> 0:20:41.760 answer to Twitter Yeah, threads Yeah. 0:20:42.160 --> 0:20:46.119 I you know, I've been thinking about for the last 0:20:46.160 --> 0:20:49.920