Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at
Speaker 1: Bloomberg and Donna High across Acid reporter with Bloomberg and
Speaker 1: this week, well, on this show, we obviously like to
Speaker 1: talk about what's going up, and this year, one thing
Speaker 1: that's going up noticeably is interest rates on corporate bonds
Speaker 1: as well as their spreads above treasury yields. So what
Speaker 1: sort of signal is that setting about the economy and
Speaker 1: risks to other markets? And with the yields on investment
Speaker 1: grade bonds approaching five percent this month and almost thirteen
Speaker 1: year high, is there enough value there for investors to
Speaker 1: start boosting allocations to corporate debt. We'll get into it
Speaker 1: with a very well known credit markets veteran and one
Speaker 1: of our own Bloomberg editors who covers the space. But
Speaker 1: first Vil Donna, I feel like, guy, do owe you
Speaker 1: an apology? You do? Um? I do? Yeah? That is
Speaker 1: because we had a zoom call earlier to plan the podcast,
Speaker 1: and for some reason my video was not working. I
Speaker 1: my face was not showing up on video, and I
Speaker 1: had assumed you had figured out some way to have
Speaker 1: zoom block block my face on video, which I thought
Speaker 1: was something you would probably do. That would have been fun,
Speaker 1: That would have been really fun. But it turns out
Speaker 1: it was just I needed to upgrade some driver or
Speaker 1: something on my laptop, and the nice folks at the
Speaker 1: Bloomberg I T department, who are incredible by the way,
Speaker 1: they hooked me up. So I do apology. It's kind
Speaker 1: of a halfhearted apology though, because I think that if
Speaker 1: you could figure out a way to do that, you
Speaker 1: you probably would. Actually if any of like the Zoom
Speaker 1: uh you know, the CEOs or whoever the product managers
Speaker 1: at Zoom are listening, that could be a really fun
Speaker 1: feature for like, you know, blocking some of your friends
Speaker 1: or I don't know, it might be fun just blocking me,
Speaker 1: me blocking Mike Reagan basically, yeah, exactly. But I'm excited
Speaker 1: to say our Zoom is working totally well now, so
Speaker 1: we're able to perform the podcast here in in uh
Speaker 1: HD video I suppose, and uh I see our guests
Speaker 1: are are ready to get at it, So why don't
Speaker 1: you why do you bring him in? Tell us a
Speaker 1: little bit about the guests this week. Yeah, I was
Speaker 1: going to say that our guests were definitely not blocking,
Speaker 1: And so I do want to introduce Oxana Aaronov. She's
Speaker 1: a head of market Strategy of Alternative fixed Income at
Speaker 1: JP Morgan Asset Management. And also we have James Crombie,
Speaker 1: Senior editor A Bloomberg, both joining us this week. Thanks
Speaker 1: so much for joining us, Thanks for having me ye Axanna,
Speaker 1: can we maybe just start with you and I just
Speaker 1: I read your title title out loud, but maybe you
Speaker 1: can just tell us a bit more about your role
Speaker 1: at Jippy Morgan and what you do. Sure, absolutely so.
Speaker 1: I am part of a platform that is focused pretty
Speaker 1: much exclusively on absolute return investing and fixed income, and
Speaker 1: to be honest with you, you know, I think that's
Speaker 1: even a little bit of a misnomer, if you will,
Speaker 1: because fixed income until certainly maybe the last ten years
Speaker 1: or so, when the Fed and other central banks got
Speaker 1: very very involved in bond markets. Um pixicon has always
Speaker 1: been thought by investors as an absolute return asset class. Right.
Speaker 1: This is where investors put money to sleep well at night.
Speaker 1: This is the diversification part of their portfolios versus equities.
Speaker 1: This is the stay wealthy part of their portfolios. And
Speaker 1: that's really you know, been somewhat diluted, if you will,
Speaker 1: and maybe even lost. Over the last ten years, fix
Speaker 1: income has become a get rich asset class. We have
Speaker 1: really tried to preserve this focus on capital preservation first
Speaker 1: and then with that, what's the best return I can
Speaker 1: deliver And of course that's really come into the spotlight
Speaker 1: over the last well year to date, I should say.
Speaker 1: And what that does in terms of our focus versus
Speaker 1: you know, the focus of more traditional fixed income teams
Speaker 1: out there, is that UM. We really look at any
Speaker 1: fixed income opportunity or any investment opportunity, I should say,
Speaker 1: from both a long and short standpoint. In other words,
Speaker 1: typically when you ask a fixed income investor whether they
Speaker 1: like an investment opportunity or not, they're going to look
Speaker 1: at the yield and they're going to sort of base
Speaker 1: their decision on that, So they're looking at it from
Speaker 1: a long only standpoint. We always look at UM sectors
Speaker 1: across fixed income UM as well as alternative investment opportunities
Speaker 1: and even in very select cases private market opportunities from
Speaker 1: the standpoint of is this compensating me for the risk
Speaker 1: that I'm taking on, in which case I want to
Speaker 1: be long? Is this fair value? In which case I
Speaker 1: probably don't want to be in this trade, or is
Speaker 1: this so overvalue that I actually may want to be
Speaker 1: short or used this as a hedge versus another kind
Speaker 1: of risk in my portfolio. So we do pull a
Speaker 1: lot of livers on this team in terms of having
Speaker 1: a lot of flexibility to deliver returns. But our goal
Speaker 1: always is to think like bond investors, and bond investors
Speaker 1: should absolutely always be focused on capital preservation and with
Speaker 1: that in mind, what's the best return I can deliver?
Speaker 1: And I do wanna talk about what returns are sort
Speaker 1: of attractive to you and where you're seeing value or
Speaker 1: not UM, But I think before we get into that um,
Speaker 1: the credit markets are are important, uh, even to investors
Speaker 1: in other asset classes. I think they're often looked at
Speaker 1: as a signal, sort of a macro signal of of
Speaker 1: where the economy is going and what that might mean
Speaker 1: for you know, markets large, you know, risk your assets especially,
Speaker 1: you know, and I'm looking at some of the signals
Speaker 1: and say, the treasury market, the break even five year
Speaker 1: break even rate is actually coming down pretty aggressively, so
Speaker 1: perhaps signaling that that inflation, that hot inflation that we've
Speaker 1: been experiencing all year um, at least in the bond markets.
Speaker 1: View might might be cooling off, but those spreads are
Speaker 1: are widening still, um, And I'm curious, you know, what
Speaker 1: does that signal to you? I mean, it doesn't seem
Speaker 1: like they've widened out to the to the point where
Speaker 1: spreads loan would be a sort of macro risk to
Speaker 1: the economy. But they were you know, elevated and and
Speaker 1: they don't really appear to be coming down at the moment.
Speaker 1: So what what is the signal there about the economy
Speaker 1: to you? I mean, is it is it, you know,
Speaker 1: as obvious as a recession is on the way, or
Speaker 1: is it is it more nuanced? Well, I'm going to
Speaker 1: probably zoom out a little bit and express a little
Speaker 1: bit of skepticism around the bond market stability to be
Speaker 1: that kind of you know, predictive force, because if that
Speaker 1: were the case, then um, you know, yields have been
Speaker 1: at lower and lower and a new record lows for
Speaker 1: so many years, indicating a recession. I guess then if
Speaker 1: we really believe in the indicative or in the predictive
Speaker 1: function I said, should say of the bond market, and
Speaker 1: that of course it's not materialized that we had a
Speaker 1: pretty dramatic dip around the pandemic, but that was a
Speaker 1: very esoteric event. Outside of that, we haven't really seen
Speaker 1: the kind of recession that the bond market would have
Speaker 1: been predicting at these record low yields every year um so,
Speaker 1: and of course has to do with just the tremendous
Speaker 1: amount of meddling by central banks. So so, I think
Speaker 1: that has frankly, frankly distorted UM the bond markets ability
Speaker 1: to be that predictive or forecasting mechanism. Having said that,
Speaker 1: certainly we're seeing, um, you know, a leveling off of investment,
Speaker 1: not investment, of inflation expectations certainly around you know, the
Speaker 1: ten year break events have kind of stuck around in
Speaker 1: the mid twos, but you are seeing them climb up
Speaker 1: UM with respect to two year and five year break
Speaker 1: events and inflation expectations there are continuing to kind of
Speaker 1: tick up or remain elevated. In fact, the two year
Speaker 1: part of the curve, we still do not have a
Speaker 1: positive real return, right and that's, by the way, something
Speaker 1: that Powell and the Fed are very much focused on.
Speaker 1: But taking a step away from that for a second
Speaker 1: to talk about the spreads. But you asked about So, yes,
Speaker 1: we have seen, we have seen some spread widening. But
Speaker 1: to put it in perspective, we, uh, the last time
Speaker 1: we had a hiking cycle and a tiny bit of
Speaker 1: inflation was of course, the two thousand fifteen two thousand
Speaker 1: eteen hiking cycle UM, and we had inflation of like
Speaker 1: barely about two percent maybe, and the unemployment rate was
Speaker 1: higher UM and the cycling higgle, the hiking cycle was
Speaker 1: incredibly benign, right, I think we would all agree, And
Speaker 1: yet we still saw highield spreads for one go into
Speaker 1: the mid fives and we are barely crossing that threshold
Speaker 1: now with inflation at a four decade high, and no
Speaker 1: one can really tell you whether it is in fact
Speaker 1: moderating or it will continue to tick up and unemployment
Speaker 1: rates significantly below where we are doing the during the
Speaker 1: last much more benign hiking cycle. So I think that
Speaker 1: you know to call this UM certainly uh, you know,
Speaker 1: an opportunity to get invested, To call this a bargain
Speaker 1: from a spread standpoint, I think we're far from that,
Speaker 1: and we can talk more about you know, what would
Speaker 1: make this a bargain? What what needs to be reflected
Speaker 1: in the price but at this point, all the carnage
Speaker 1: we've seen in the bond markets, whether it's in the
Speaker 1: interest rate sensitive part of it or in the less
Speaker 1: interest rate sensitive part, Like how you, it's all been
Speaker 1: interest rate driven, very very little of it has actually
Speaker 1: been spread or credit risk driven, and we need to
Speaker 1: see that punch in order to start to talk about opportunities. James,
Speaker 1: I know you talked to a lot of investors um
Speaker 1: is ox on his view sort of the consensus is
Speaker 1: there is there sort of a you know, a counter
Speaker 1: argument to be made that you know, maybe spreads are
Speaker 1: due to come in. Well, there's no doubt that the
Speaker 1: performances he has been terrible. Um we're down yesterday on
Speaker 1: junk bonds, which has never happened before. You know, we've
Speaker 1: got records going about forty years UM and we've never
Speaker 1: seen such terrible returns. We've never been double digit returns
Speaker 1: by the time in the year. So you know, definitely
Speaker 1: it looks pretty scary out there. And I agree that
Speaker 1: if we slip into recession, then you know, the potential
Speaker 1: for defaults and principal loss and all the things that
Speaker 1: keep h fix income investors up at night worrying are
Speaker 1: going to be upon us. And you know, as as
Speaker 1: Oxana says, you know, spreads could go a lot wider
Speaker 1: get into recession based on history, but also default rates,
Speaker 1: but easily go into the double digits um if we
Speaker 1: get into a recession as well. So you know, there's
Speaker 1: a lot of worrying stuff out there and there is
Speaker 1: more distress um. But you know, you could also say
Speaker 1: that we're in much better shape than we were even
Speaker 1: a couple of years ago. Companies have taken advantage of
Speaker 1: the sheep out there too to turn out their maturities,
Speaker 1: you know, to push those into the future, so they
Speaker 1: don't really have much of an immediate worry in terms
Speaker 1: of you know, big payments coming due on their debt um.
Speaker 1: You know, at the same time, earnings have held up,
Speaker 1: so they've got cash. Particularly the investment grade companies, they've
Speaker 1: got a ton of cash on their balance sheets. They're
Speaker 1: buying back stuff, They're going to probably buy back bonds. Um.
Speaker 1: Credit ratings. You know, Oxana might have a view on
Speaker 1: whether they are good accurate predictus or not, but they're
Speaker 1: much higher now than they were in the past. You know,
Speaker 1: there's any about ten of the market that triples see now,
Speaker 1: which is the lowest rated stuff. So you know, really
Speaker 1: you could you could argue that there is no real stress,
Speaker 1: there's no rollover risk. Um. You know, of course we're
Speaker 1: going to lose some zombie companies along the way. They
Speaker 1: may blow up, but who cares about them? You know,
Speaker 1: they probably should have died a long time ago. You know,
Speaker 1: you might you might just say it's different this time,
Speaker 1: and that's been definitely a very popular view. And look,
Speaker 1: the reality is that the HIGHLD market and we and
Speaker 1: we talked about the HILD market because of course those
Speaker 1: are some of the best opportunities that tend to materialize
Speaker 1: out of the stress that we're seeing right um. And
Speaker 1: also it's a it's an interesting kind of harbinger, if
Speaker 1: you will. That's where stresses tend to appear first, and
Speaker 1: so it's an important part of the market to to consider.
Speaker 1: But it's also a relatively young market, right Hi. You'd
Speaker 1: really didn't exist at the current size and technicals until
Speaker 1: really well into the two thousand's, and the last time
Speaker 1: we had inflation even above you know slightly four was
Speaker 1: in the very early two thousands and it was a
Speaker 1: very different high old market back then. So we really
Speaker 1: don't have a ton of history to go on. You
Speaker 1: know that that corresponds to what we're going through now,
Speaker 1: which is essentially the FED hiking into a decelerating earnings environment. Right.
Speaker 1: We went from the FED hiking into um economy strength
Speaker 1: and strong earnings into now the FED is is hiking
Speaker 1: into a decelerating earnings environment. And what we know, or
Speaker 1: what we can say about a decelerating earnings environment that
Speaker 1: is also inflationary for the time being, is that profit
Speaker 1: margins are going to be squeezed because and particularly for
Speaker 1: high elituors which tympically do not have the pricing power
Speaker 1: and cannot necessarily offset their costs accordingly, and so their
Speaker 1: profit margins will be squeezed. And yes, exactly as you said,
Speaker 1: you're going to see some amount of these or all
Speaker 1: these zombie companies, a lot of which are lower rated,
Speaker 1: so you know, low beds or even triple seeds, and
Speaker 1: roughly ten anywhere between ten and of this market, by
Speaker 1: the ways, estimated to be zombie UM companies. They could
Speaker 1: sort of disappear, and you're right, no one should care
Speaker 1: about them. They shouldn't probably exist to begin with. But
Speaker 1: the reality is that when cracks like that appear in
Speaker 1: one part of the market, it tends to reverberate to
Speaker 1: the rest of the market. And an example I always
Speaker 1: like to give is where you have legitimate, very serious,
Speaker 1: fundamental issues in energy, but you have the entire high
Speaker 1: old sector completely repriced, even though you had no fundamental
Speaker 1: stress in technology and healthcare and gaming and lesion and
Speaker 1: a bunch of other sectors. It was all energy driven,
Speaker 1: but the entire market went to almost a thousand over
Speaker 1: And the last thing I will say on kind of
Speaker 1: descry to you know, let's get invested now, is again,
Speaker 1: we don't know what the future will bring, but it
Speaker 1: is fair to talk about the fact that liquidity will
Speaker 1: be reduced with the FED kind of removing itself, and
Speaker 1: broader market liquidity is very different today with the south
Speaker 1: side no longer playing the shock absorber that they used
Speaker 1: to be. It's also fair to um to say that, look,
Speaker 1: markets have to grapple with this kind of squeeze to
Speaker 1: to profit margins. But from a purely kind of quantitative standpoint,
Speaker 1: right the higher market right now is running at a
Speaker 1: spread duration of four point two roughly, and what that
Speaker 1: tells us is that it will take less than two
Speaker 1: hundred basis points of widening to wipe out that very
Speaker 1: juicy eight percent yield that everyone is salvating over now.
Speaker 1: And two hundred basis points or high, let me tell you,
Speaker 1: is not a lot. It can happen very very quickly.
Speaker 1: And so right now, with defaults at one percent, I
Speaker 1: think it is absolutely reasonable to expect them to go
Speaker 1: to long term averages of three and a half percent,
Speaker 1: if not through that average, and we haven't seen that yet.
Speaker 1: And it is when we start to see that reflected
Speaker 1: in the spreads that's really when those bargains are going
Speaker 1: to start to appear. I think it is way too
Speaker 1: early to talk about them now. So as a follow
Speaker 1: the last time we were in this mess much the
Speaker 1: FED came in and save the day, and that was
Speaker 1: a huge trade for a lot of people. Um, what
Speaker 1: are the chances that I don't extend to say the
Speaker 1: day again, but what are the chances they might just
Speaker 1: take the foot off the accelerator and help people out.
Speaker 1: Really important to talk about this because I think a
Speaker 1: lot of investors are treating this as yet another kind
Speaker 1: of blip in the mean reversion that the feed is
Speaker 1: engineered for close to fifteen years now, right. But the
Speaker 1: reality is that even in the pandemic, in the worst
Speaker 1: part of the FED got involved because you had blue
Speaker 1: chip companies truly struggle and unemployment soaring because they were
Speaker 1: laying off so many people, and so their involvement really
Speaker 1: was about supporting well capitalized, strong companies that fell on
Speaker 1: hard times because of a completely exogenous factor. You may
Speaker 1: re all that when one of the best programs included
Speaker 1: buying hid a t S how was met with very
Speaker 1: stringent questioning in Congress and there that ceased very quickly,
Speaker 1: but the market overall kind of took a cue that
Speaker 1: looked the FETE is. Therefore, we're in a very different
Speaker 1: environment today. The FETE has zero appetite to support you know,
Speaker 1: certainly the zombie companies, much less the rest of jun
Speaker 1: graded universe and credit. And really I think that the
Speaker 1: threshold for the FED to get involved is two fold.
Speaker 1: They will continue to choose inflation over growth. First of all,
Speaker 1: because they have no choice. They need to clam down
Speaker 1: on this inflation. It is the most regressive tax there is,
Speaker 1: and they do not want to find themselves in kind
Speaker 1: of the political corsairs. And I think Powell has made
Speaker 1: it very clear that it is important to him to
Speaker 1: him to go down in history as the person who
Speaker 1: contained inflation. So they will continue to choose inflation over
Speaker 1: growth as long as inflation remains an elevated problem. And
Speaker 1: the second thing is, I do not think they get
Speaker 1: involved in terms of any kind of support to the
Speaker 1: market until we see investment grades spreads go way north
Speaker 1: of two hundreds and right now we're roughly at one fifty.
Speaker 1: You know, we've been in the past and very serious,
Speaker 1: you know, like Great Financial Crisis invest from great spreads
Speaker 1: got closed as close to six hundred over. You do
Speaker 1: not think the FED gets involved until you know investment
Speaker 1: grade spreads probably start to push three hundred um. The
Speaker 1: FED is likely not getting involved at all as long
Speaker 1: as inflation continues to be the problem because the very thing,
Speaker 1: the only tool available to the FED is to tighten
Speaker 1: financial conditions, and by definition, tighter financial conditions mean less
Speaker 1: access to capital, mean and accelerated default rate. Right, all
Speaker 1: of these things that we as investors, or at least
Speaker 1: that you know equity investors bread, this is what the
Speaker 1: FED is trying to engineer. It's the only tool they
Speaker 1: have available to them. It's a blunt tool. So unfortunately,
Speaker 1: the fed foot is really not here for investors. So
Speaker 1: then the problem realized at the bottom end of the market.
Speaker 1: The junkie is risky, is most indebted companies that are
Speaker 1: probably having trouble with earnings the way the economy is changing,
Speaker 1: maybe their consumer related companies. But um, do we really
Speaker 1: care beyond that? I mean, is there a contagion effect?
Speaker 1: Is there a broader impact of of you know, that
Speaker 1: small part of the market blowing up? Absolutely, So it's
Speaker 1: not really just about that small part of the market.
Speaker 1: It's about the fact that the market will start to
Speaker 1: price in, and it hasn't yet, but we'll start to
Speaker 1: price in. What does it mean, um, that you know,
Speaker 1: the default rate moves towards an average of the historic
Speaker 1: average of three and a half percent. What does it
Speaker 1: mean that, you know, companies do not have access to
Speaker 1: cheat capital anymore? What does it mean that their profit
Speaker 1: margins are squeezed? You know, very little of that is
Speaker 1: actually in the price We're starting to see it, you know,
Speaker 1: kind of come into a spread and and and push
Speaker 1: spreads wider. But as the market reckons with this reality.
Speaker 1: You know, one of the things that I always hear
Speaker 1: about is, Oh, you know how you'll doesn't have a
Speaker 1: maturity wall that's imminent, right, this normantu like the next
Speaker 1: huge maturity wall is and thereafter. But the reality markets
Speaker 1: don't work like that, right, My markets don't wait for
Speaker 1: an event. Markets price in an event. And so if
Speaker 1: the market believes that a lot of these companies are
Speaker 1: going to have difficulty tapping UM capital markets to refinance themselves,
Speaker 1: that's going to come into prices way before that maturity
Speaker 1: will materializes. So you can have almost like recessionary pricing
Speaker 1: even without an actual recession, without actually you know, double
Speaker 1: digit defaults if you will UM. It's all sort of
Speaker 1: about expectations. And if expectations around recession and around a
Speaker 1: slowdown continue to build, you're going to continue to see
Speaker 1: spread widening. And as spread winding continues, what happens investors
Speaker 1: yank their money. So much of high old exposure is
Speaker 1: in mutual funds and ETFs, right, all of these instantaneously
Speaker 1: look with instruments, and as spreads widen, investors continue to
Speaker 1: yank their money. So selling begets more selling, pressure begets
Speaker 1: more pressure. Remember, you don't have the same liquidity underpinnings
Speaker 1: in this market that you used to UM. The cell
Speaker 1: side is not there to take these bonds off your hands.
Speaker 1: So price discovery becomes very, very violent. We've seen it
Speaker 1: all before and it's going to happen again. Is there
Speaker 1: a clear trigger on the horizon and is it earnings?
Speaker 1: Is that margins? Is it something else to do with
Speaker 1: the bed and what what really is on the horizon
Speaker 1: that could tip this over? And that's really the question
Speaker 1: I think on everyone's minds is sort of what is
Speaker 1: that capitulation tipping point right? And and we never can
Speaker 1: estimate or predict what that is. There's not been a
Speaker 1: single sort of point in past UM cycles, you know,
Speaker 1: or the part of the cycle where something breaks that
Speaker 1: you could kind of look forward and say, look, this
Speaker 1: is what it's going to be. So I don't think
Speaker 1: we're going to be able to predict it, but I
Speaker 1: think all of the components are certainly there, and the
Speaker 1: components being that it's just simply not reflected in the
Speaker 1: price yet UM And as it starts to you're gonna
Speaker 1: see reevaluation in terms of you know, do I really
Speaker 1: want this in my portfolio? I thought i'd be because
Speaker 1: remember a lot of people did get into high yeld
Speaker 1: at five percent or six percent, and now they're seeing
Speaker 1: nothing but losses. And this sort of entire generational investors.
Speaker 1: You know, if we were to get into investor psychology here, UM,
Speaker 1: this entire generation of investors is not really see the
Speaker 1: market that's been continuously challenging for a prolonged period of time.
Speaker 1: So UM, I think that anything can become that tipping point.
Speaker 1: But we haven't even touched on the geopolitical um tensions obviously,
Speaker 1: but something that sends the oil prices even higher. Oil
Speaker 1: prices have seen a reprieved recently. UM. It could be
Speaker 1: any number of things, but certainly you have the makings
Speaker 1: of this sort of capitulation, and we need to see
Speaker 1: that capitulation for our mandate to start to get aggressive
Speaker 1: and start to get invested in this market. And one
Speaker 1: other point I would like to make is that when
Speaker 1: you look at you know, if we use the nineteen
Speaker 1: eighties kind of on the bat or in nine seventies
Speaker 1: and early nineteen eighties UM as a sort of parallel
Speaker 1: to the investment environment that we're in right now in
Speaker 1: terms of the high inflation, UM, you can see that
Speaker 1: assets generally struggled, particularly on a real return basis right,
Speaker 1: It was a struggle to generate a positive real return
Speaker 1: and it will probably be you know, maybe somewhat similar
Speaker 1: this time around. So getting in at the right price
Speaker 1: is really important. Buying that you know, bond at a
Speaker 1: bargain price is really important. That's really maybe the difference
Speaker 1: between generating that positive long term real return and not.
Speaker 1: Just to talk to Mike's point about, you know, if
Speaker 1: you're not in these markets all day long from a
Speaker 1: cross assets white, why should you care about what's going
Speaker 1: on in credit right now? Why should you care about
Speaker 1: what's going on in credit right now? I mean, it's
Speaker 1: the backbone of everything that goes on in great question
Speaker 1: from a credit markets journalist, James, I gotta say, but
Speaker 1: that's a question a dumb guy like me should ask.
Speaker 1: But I appreciate it. I allow you for taking that
Speaker 1: bullet for me. Okay. So I mean, look, it's it's
Speaker 1: really the backbone of everything, all kind of risk taking, right,
Speaker 1: And it's the it's it's the sentiment of the investor,
Speaker 1: because if credit markets start to fall out of bed,
Speaker 1: it's certainly not going to be positive for equity markets.
Speaker 1: Right as the cost of capital rises, generally um, that
Speaker 1: is going to have dramatic impact on earnings. I mean,
Speaker 1: that's the kind of the direct mechanism that translates into,
Speaker 1: of course, your equity investment experience. So without a doubt,
Speaker 1: what happens in credit is incredibly important to the rest
Speaker 1: of the market. Well, you know what Oxon is, Sometimes
Speaker 1: a credit market stress can be so cute and so
Speaker 1: dangerous that it actually does either tip the economy into
Speaker 1: recession or perhaps exacerbate a recession. I sort of get
Speaker 1: the impression right now, though, that corporate balance sheets are
Speaker 1: are healthy enough that we don't necessarily have to really
Speaker 1: worry about either one of those issues. If we do
Speaker 1: get a recession, the effect on the from the credit
Speaker 1: markets might not be enough to really worsen it too bad.
Speaker 1: Is that? Is that too optimistic? Do you think? I
Speaker 1: think it's absolutely fair to say that corporate balance sheets
Speaker 1: are coming into this in as good a shape as
Speaker 1: we could probably desire, at least on the you know,
Speaker 1: somewhat higher, higher quality side of the credit market, right
Speaker 1: if we kind of leave those zombies and those really
Speaker 1: really um john Kie companies out of it. Yes, I
Speaker 1: think corporate balance sheets are are generally in good shape,
Speaker 1: and I think they're that you know, spreads are reflecting that,
Speaker 1: and that's really good. It goes back to what's in
Speaker 1: the price UM. But the the reality is that you
Speaker 1: can have recessionary pricing without an actual recession, and we've
Speaker 1: seen it happened time and time again. UM. And the
Speaker 1: other thing too is you can have UM stress and
Speaker 1: credit market exactly as you said, without necessarily a recession
Speaker 1: too in the broader economy. Right, So these two things,
Speaker 1: just like we've had strong financial markets UM and ascid
Speaker 1: appreciation even through periods of so so economic underpinnings right
Speaker 1: over the last twelve years, UM, we can now have
Speaker 1: the reverse. We can have you know, very anemic asset
Speaker 1: returns and asset growth against a backdrop of an okay
Speaker 1: UM economy. So UM one doesn't necessarily cause the other.
Speaker 1: I think that given that valuations are UM, you know,
Speaker 1: pretty strong, and we're we started this episode of you know,
Speaker 1: the hiking cycle and quantitative tightening which is now beginning
Speaker 1: and inflation. We started all of this. We came into
Speaker 1: all of this with elevated valuations and so it's unfortunately,
Speaker 1: it's it's going to be difficult to UM reset or
Speaker 1: it's going to take time to reset so that we
Speaker 1: can start earning those outsized returns. Everyone has gotten so
Speaker 1: used to UM. But certainly I agree with you. I
Speaker 1: think corporate balance sheets are are relatively in decent shape UM.
Speaker 1: But again, that pressure on profit margins will continue to
Speaker 1: drive spreads wider because it just needs to be reflected
Speaker 1: in the price, and at this point it is not.
Speaker 1: So what's the trade here then, A stand? I mean,
Speaker 1: we've talked in the past about going into cash, but
Speaker 1: in tempers and inflation environment, you're losing money on that cash.
Speaker 1: So what do you do? So I've been hearing about
Speaker 1: investors losing money on sitting in cash and that cash
Speaker 1: is trash for as long as I've been in this industry.
Speaker 1: But the reality is that if you have been in
Speaker 1: cash for the last you know, five years, you've essentially
Speaker 1: outperformed the Barkley the Bloomberg excuse me, Barkley's aggregate index
Speaker 1: UM over the year today, one year, three year, and
Speaker 1: depending on the day, yes, even five years and now
Speaker 1: to three years. That's a positive return versus a negative return.
Speaker 1: So I think that we have to sort of dispense
Speaker 1: with these absolutes and really think about it. This is
Speaker 1: like one of the craziest things to me, frankly, about
Speaker 1: how our industry functions. Because in fixed income you absolutely
Speaker 1: have very identifiable tops. When the tenure was at fifty
Speaker 1: basis point, it had nowhere to go but up. So
Speaker 1: why are we not, like, why aren't there wide splayer spread,
Speaker 1: you know, alarm bells um sounding off about this? Did
Speaker 1: you do you remember hearing that? No, that the rhetoric
Speaker 1: was the same cash it's trash and you should be invested,
Speaker 1: and because something else you yield more than treasury, you
Speaker 1: should buy that even though you know valuations there were
Speaker 1: equally over priced. So I think that instead of resorting
Speaker 1: to these absolutes, we have to really think about what's
Speaker 1: priced in and we have to think about Yes, inflation
Speaker 1: right now is a serious problem. And yes, you are
Speaker 1: earning eight percent in high yield versus you know, still
Speaker 1: significantly less in cash. But what is your price appreciation
Speaker 1: or what is your capital preservation potential? Right? And which
Speaker 1: of those are most important to you? Because maybe they're
Speaker 1: not important to you, but again to us, as absolute
Speaker 1: return investors, we focus on capital preservation first. And so
Speaker 1: given all of the push and pull forces in the
Speaker 1: markets today, we look at it and say, look, we
Speaker 1: think that the risks are skewed to the downside. So
Speaker 1: we prefer to have a lot of liquidity in our
Speaker 1: portfolio because right now it serves as a free option
Speaker 1: essentially on as any class in the world, and we
Speaker 1: think that the opportunities that will continue to get better
Speaker 1: on balanced, just like it has for the entire you know,
Speaker 1: six months of this year, and we've been hearing people
Speaker 1: about getting invested in January and February and March and
Speaker 1: in April, and it continues to get better, and we
Speaker 1: think that spreads will continue to go wider. So for
Speaker 1: us right now, again it's absolute return investors that are
Speaker 1: trying to manage and outperform cash irrespective of whether the
Speaker 1: regime is a benevolent one for bonds or not. Right
Speaker 1: we're not investing versus a market risk driven benchmark. We're
Speaker 1: investing versus capital preservation essentially, and so for us, we
Speaker 1: believe that a focus on capital preservation continues to be warranted,
Speaker 1: and we prefer to being very liquid structures at this
Speaker 1: point in a combination of liquidity, high quality floating rate
Speaker 1: to continue to like that trade and really for us,
Speaker 1: this is still a capital preservation part of the cycle,
Speaker 1: although I think we're closer to the end of it
Speaker 1: than we were a couple of months ago, and you know,
Speaker 1: probably in the next month or two, we're going to
Speaker 1: start to transition into the start to get aggressive, start
Speaker 1: to go after those returns part of the cycle UM
Speaker 1: as we see spreads widen and some of these more
Speaker 1: barish expectations get reflected in the price. But at this point,
Speaker 1: absolutely we think that capital preservation is still the name
Speaker 1: of the game. Why not in this environment by apple
Speaker 1: bonds for training at thirty points discounts to you know,
Speaker 1: there's someone very long dated obviously, but why not go
Speaker 1: into very high rated investment rate, very cheap bonds. So
Speaker 1: we don't have a problem with someone doing that if
Speaker 1: they're doing it in a portfolio that is ladder. Generally,
Speaker 1: I think that you know, right now a portfolio there
Speaker 1: is a ladder portfolio is an approach that we don't
Speaker 1: really have a ton of problem with. I think where
Speaker 1: investors are going to UM struggle is, you know, frankly,
Speaker 1: mutual funds, because mutual funds have a UM perpetual maturity
Speaker 1: and so unlike a physical bond that you own, right
Speaker 1: there's no maturity that you mature up to UM or
Speaker 1: down to. You're sort of stuck at that price until um,
Speaker 1: the market gives you a better one UM. And that's
Speaker 1: really where that's really why kind of the losses that
Speaker 1: mutual fund investors have experienced, the real losses that they
Speaker 1: went and tried to sell right now, they will have
Speaker 1: label turn those paper losses into real lasses UM. But
Speaker 1: we do not have a problem with someone buying you know,
Speaker 1: deeply discounted bonds at this point, UM and and putting
Speaker 1: them into a ladder portfolio. We think that's okay. UM.
Speaker 1: You know, deeply discounted stuff. There's really not a ton
Speaker 1: of it out there um at this point. And if
Speaker 1: something is deeply discounted right now, there's generally a pretty
Speaker 1: good reason for why it is trading at that price. UM.
Speaker 1: Some of the market, you know, sectors that we've been
Speaker 1: looking at that we think are starting to look more
Speaker 1: right for getting invested are kind of around the edges
Speaker 1: of fixing comp and have more equity correlated risks, So
Speaker 1: things like convertibles, things like closed down funds UM. Both
Speaker 1: of those tend to you know, track equity risk more
Speaker 1: closely and have a higher beta to equity, and we're seeing,
Speaker 1: you know, significant discounts there, and I think that that
Speaker 1: is maybe at the top of our shopping list in
Speaker 1: the foreseeable future. Um. But we'll see how how the
Speaker 1: rest of this market place out, Axana, Can I actually
Speaker 1: ask you to go back to the basics, if I
Speaker 1: can call it? That? I know in some notes recently
Speaker 1: you had been saying recession is the only thing that's
Speaker 1: capable of shutting down inflation, and at the same time
Speaker 1: you said there's no easy way out of this, and
Speaker 1: this is not yet in the price So maybe can
Speaker 1: you just go over what specifically you're actually projecting. Yeah,
Speaker 1: so we've gone that obviously through a number of years
Speaker 1: of central bank support, and it's been UM said many times,
Speaker 1: and I certainly believed that view as well, that really
Speaker 1: the only thing that could have shut down that central
Speaker 1: bank party, if you will, was inflation, and we didn't
Speaker 1: see it for many years, and therefore the central banks
Speaker 1: had no impetus to stop the support that they were
Speaker 1: providing to the markets into financial assets, and then we
Speaker 1: saw this inflation sort of you know, roar back to life, Um,
Speaker 1: and at this point it's really hard to see. How
Speaker 1: does it glide back down effortlessly the way you know
Speaker 1: FED um forecasts are promising us that it will UM.
Speaker 1: And even some former FED officials have come out and said, look,
Speaker 1: this is really not these these forecasts are not realistic.
Speaker 1: You know, we're not gonna see inflation glide back sort
Speaker 1: of effortlessly UM in a soft Lenning scenario by the
Speaker 1: end of next year. UM. Yes, it can go back
Speaker 1: to significantly lower levels, to single digit levels via recession.
Speaker 1: And some of the inflation mechanisms are nearly recessionary right
Speaker 1: in terms of inflation crimps consumer spending, makes it more
Speaker 1: difficult for consumers or or reduces consumer sentiment, I should say,
Speaker 1: And we're seeing that. UM. So it seems that the
Speaker 1: most natural way for this inflation to calm down is
Speaker 1: a recession. And that means again that has to be
Speaker 1: priced into credit valuations, which we're not really seeing yet. UM.
Speaker 1: Although I think the consensus in the marketplace right now
Speaker 1: is to the tune of we're going to see in
Speaker 1: recession in three but that's not really yet being reflected
Speaker 1: in the price I don't think UM. And if we
Speaker 1: do see a recession. Unfortunately, it will coincide with still
Speaker 1: elevated UM inflation levels. So it's not really clear to
Speaker 1: me that long dated bonds are going to be necessarily
Speaker 1: a great hedge in that environment for your risk, for
Speaker 1: the riskier parts of your portfolio. UM. And finally, you know,
Speaker 1: the said is as I said, you know, there are
Speaker 1: tools are quite blunt. The only thing they can do
Speaker 1: is tighten financial conditions, raise the cost of capital. And
Speaker 1: those things are you know, inadvertently perhaps, but they are
Speaker 1: also contributing to recession, risks becoming elevated and to the
Speaker 1: reality of recession, which is what Powell told us recently, right,
Speaker 1: he said that the possibility of recession is rising, as
Speaker 1: much as he doesn't want that to be the case. Um,
Speaker 1: he's being very transparent about that. You know. Uh. On
Speaker 1: one thing we haven't touched on, which is so important
Speaker 1: to credit markets is issuance. UM. And I have seen
Speaker 1: some stories recently of companies either sort of postponing or
Speaker 1: canceling deals or maybe tapping credit lines instead of issuing
Speaker 1: corporate bonds. How do you see that unfolding in the
Speaker 1: near future and and sort of what the effect on
Speaker 1: the market would be if people corporates get a little
Speaker 1: gun shy about issuance. Yeah, we saw you know that
Speaker 1: boots deal. Get next right, the Walgrains boots um deal,
Speaker 1: and we're going to see more of that. And essentially,
Speaker 1: you know, credit markets in terms of issuance, it's been
Speaker 1: very very slim um and and in many cases simply
Speaker 1: shot down. And on one hand, you know, there is
Speaker 1: an opinion out there that that is going to maybe
Speaker 1: keep spreads tighter because you still have some demand right
Speaker 1: for this paper, but it's not being issued at the
Speaker 1: same clips, so maybe the demand kind of overrides supply.
Speaker 1: But the reality is that what is a shutdown um
Speaker 1: credit market? Essentially right, noitions means that there's no bid
Speaker 1: at the price that the company wants to actually issue
Speaker 1: that debt. And I'll give you an example. A few
Speaker 1: weeks ago, I think it was Carnival Um that came
Speaker 1: to market and had to borrow at ten and quarter
Speaker 1: to ten and a half percent, whereas a few months
Speaker 1: before that, I would assume they're borrowing it was probably
Speaker 1: five to six percent. So a few months nearly doubled
Speaker 1: their cross of capital. And so you know, companies that
Speaker 1: can afford not to do that. They don't want to
Speaker 1: do that, but that's not really a healthy that's certainly
Speaker 1: not a healthy market. And in that environment, market participants
Speaker 1: will be pricing in the fact that, look, you can't
Speaker 1: finance yourself in this market, and that's also going to
Speaker 1: find its way into valuations and it's going to push
Speaker 1: spreads wider. And I don't think that that's actually a
Speaker 1: constructive um dynamic for credit market and AXNA. Just to
Speaker 1: wrap things up, since we tend to focus so much
Speaker 1: on the stock market on the podcast, I know our
Speaker 1: our colleague Katie Greifeld at Bloomberg she had written recently
Speaker 1: the rising rates across the fixed income landscape are chipping
Speaker 1: away at the there's no alternative mantra that we tend
Speaker 1: to hear in the stock markets. I wanted to ask
Speaker 1: you if credit is becoming more attractive than the stock
Speaker 1: market even so, Um, yes, I think the higher rates
Speaker 1: is certainly shipping away at Tina, there is not alternative,
Speaker 1: certainly chipping away of that. But again, just like you know,
Speaker 1: you don't simply but I mean, I don't know who
Speaker 1: are these people that are simply buying stocks for the
Speaker 1: divondend field, right I mean, it's all it's always about
Speaker 1: the price, and I think in fixed income it also
Speaker 1: has to be about the price. I think it is
Speaker 1: because we've forgotten that price matters, and investors were buying
Speaker 1: HI bonds at one oh seven or even higher, you know,
Speaker 1: many dollars above part that they're sitting on the losses
Speaker 1: that they're sitting on right now. So I think price
Speaker 1: absolutely still matters, and especially in an environment where we
Speaker 1: are at such tiny default levels that they almost have
Speaker 1: nowhere to go but up, which means that again, paper
Speaker 1: losses have the ability to become realized, you know, real
Speaker 1: actual losses. UM. I don't think you can look at
Speaker 1: the yield and isolation. I think at the end of
Speaker 1: the day, you have to really look at what it
Speaker 1: is priced in UM, your respect of what you're buying.
Speaker 1: Great stuff, box SONA. We UH really appreciate your insights. Uh,
Speaker 1: price matters. I'll tell you what matters on this podcast too,
Speaker 1: is the craziest things we all saw in markets. Uh.
Speaker 1: This week our tradition, and we can't let you go
Speaker 1: until we per year. Yours your favorite crazy thing of
Speaker 1: the week. I'll get us started though, rare attempt where
Speaker 1: I get us started. Um well, don as you know,
Speaker 1: one of my favorite asset classes are these ridiculous collectibles
Speaker 1: that people pay ridiculous amounts of money for it auction.
Speaker 1: I think I found the most ridiculous one of all
Speaker 1: time from the New York Times, better than the vh
Speaker 1: vhs you you had the other week that went for
Speaker 1: Here's the headline from the Times. Dead roaches that eight
Speaker 1: moon dust went off went up for auction. Then NASA objected.
Speaker 1: I'll read that again, dead roaches that eight moon dust
Speaker 1: went up for auction, and NASA objected. What happened is
Speaker 1: in ninety nine when uh, the U S astronauts landed
Speaker 1: on the Moon. If you do believe that that happened,
Speaker 1: there's some conspiracy theories out there that it did not happen.
Speaker 1: That's a that's a topic for a different podcast. But
Speaker 1: assuming it happened, Uh, they brought back a bunch of
Speaker 1: moon rocks and moon dust and they fed it to
Speaker 1: you know, uh, cockroaches and I guess you know mice
Speaker 1: and goldfish too, just see if it would be toxic
Speaker 1: to them. Um there, you know, is one of the
Speaker 1: experiments they performed afterward. Uh so one of the scientists
Speaker 1: who performed this experiment with the cockroaches. I don't know
Speaker 1: how they got them to eat the moon moon dust.
Speaker 1: Maybe they put some hot sauce on it or something.
Speaker 1: But she kept she kept the roaches. She determined that
Speaker 1: they were not harmful to the roaches, but she kept
Speaker 1: them in a safe for years and years, and then
Speaker 1: they went up first auction. Uh NASA heard about this
Speaker 1: and they put the kibosh on the auction, saying, those
Speaker 1: are our roaches. You cannot sell those roaches. But as
Speaker 1: you can probably guess, it's time to play prices, right
Speaker 1: and ask you what price do you think the highest
Speaker 1: bid was for these dead roaches that eight moon dust
Speaker 1: before the auction was canceled. It's kind of a tricky
Speaker 1: one because we don't have true price discovery. But first
Speaker 1: you go first. I mean, who would buy dead roaches?
Speaker 1: And where did she keep them? By the way, in
Speaker 1: a freezer in a fireproof safe in her basement. Oh
Speaker 1: my gosh. Okay, I will go with fifty five dollars
Speaker 1: on what's your bid for dead rutches that eate moon dust?
Speaker 1: Like you said, there's no price discovery in that market,
Speaker 1: single issue market, Um I have absolutely no idea, and
Speaker 1: I can't even imagin why anyone would want some dead roaches,
Speaker 1: no matter what they ate. Um, I have no idea.
Speaker 1: I'm gonna go with let's just for the sake of
Speaker 1: the why not. Okay, so you're out bidding Volda on
Speaker 1: the dead roaches. That James, what's your bid for the
Speaker 1: dead roaches? That eight moon does? Think? Uh? Six months
Speaker 1: ago probably a million bucks now, Tan Ground. That's a
Speaker 1: great point. It's a great point. You know, it is
Speaker 1: not a very satisfying one because we did not see
Speaker 1: the winning bid for the auction. NASA came in and
Speaker 1: spoiled it. High spid was forty So you guys, we're
Speaker 1: both pretty pretty close. Wow. They expected it to go
Speaker 1: much higher, of course, as auctioneers tend to. But so
Speaker 1: we were close here. You guys are pretty close. Roaches,
Speaker 1: I think James right though that a year or two
Speaker 1: ago they probably would have gotten seven figures. But uh,
Speaker 1: the times are tough now, you know. It's uh, it's
Speaker 1: it's a different market, different valuations across all asset classes,
Speaker 1: including dead roaches. About you, Bill Donna, what's the what's
Speaker 1: the craziest thing you've seen mine has to do with
Speaker 1: the CEO. There's this wonderful Bloomberg story that I read
Speaker 1: about Andrew for Micah. I hope I'm pronouncing his name right.
Speaker 1: He's a chief executive officer of Jupiter Fund Management. He
Speaker 1: had announced that he's leaving his company, and what he
Speaker 1: told Bloomberg is I just want to go sit at
Speaker 1: the beach and do nothing. I'm not thinking about anything else,
Speaker 1: which I love. It's like everybody's thinking this, but nobody
Speaker 1: wants to admit that. Nobody wants to say it. He
Speaker 1: just wants to sit at the beach. I think that's
Speaker 1: the sanest thing. I hear it all week, not the
Speaker 1: craziest things. Onto something. All these people on Twitter are like, oh,
Speaker 1: you know, I think he's based in the UK, like
Speaker 1: in America. CEO says like he'll retire, then he'll go
Speaker 1: back to doing like ten other jobs. This guy literally
Speaker 1: just wants to sit on the beach. I took my
Speaker 1: hat to him too. That guy's a role model for us,
Speaker 1: all I believe. How about you, ox On, have you
Speaker 1: seen anything crazy recently? So I certainly cannot top the roaches,
Speaker 1: but I will um and I you know, I think
Speaker 1: that The stuff that I see that is crazy is daily.
Speaker 1: But at the same time it is very um much
Speaker 1: more broad than anything that's kind of specific to this
Speaker 1: week or last week. And it is certainly in the
Speaker 1: phones in the realm of like, let's just be sane,
Speaker 1: you know, and and and and I want to offer
Speaker 1: some sanity here and for me that the stuff that
Speaker 1: really is crazy is how investors in fix income are
Speaker 1: so desperately trying to fight this FED. Right when the
Speaker 1: FED was on your side, the mantra was don't fight
Speaker 1: the FED, and so I offer the same advice. Now
Speaker 1: the FED is only at the starting point of this
Speaker 1: high cycling hiking cycle. We do not know what quantitative
Speaker 1: tipening is going to bring. Frankly, we didn't talk about that,
Speaker 1: but that's a wild card in and of itself. A
Speaker 1: recession fears are are rising um and the FED is
Speaker 1: telling you that they're choosing inflation over growth over and over.
Speaker 1: Don't fight the FED. But at the same time, to
Speaker 1: James's point, they did kind of set that precedent with
Speaker 1: the corporate credit facility in the pandemic and sort of
Speaker 1: broke the seal on that, uh, that idea of buying
Speaker 1: corporate credit. If if times get bet enough, is there
Speaker 1: is that in the price to some degree? Do you
Speaker 1: think that that they might one day return? I think
Speaker 1: that that is what's key keeping a lid on the
Speaker 1: spread widening for the time being. And I think, you know,
Speaker 1: we talked about what is going to be that tipping
Speaker 1: point for the capitulation. I think it's going to be
Speaker 1: this realization that, look, the FED put is a lot
Speaker 1: of basis point doubt if it's even alive anymore. It
Speaker 1: is not here now. It's not here for probably several
Speaker 1: hundred basis points of high whining certainly, and you know
Speaker 1: at least probably another hundred base points whining of investment grade.
Speaker 1: So it's it's not there for you. The feed is
Speaker 1: not there for you. This market has to learn to
Speaker 1: stand on its own fundamentals and on its own merit
Speaker 1: like it used to be. Yeah, I would say the
Speaker 1: second craziest thing I've seen this week Bildanna is we
Speaker 1: actually got James to come on the podcast for once.
Speaker 1: He's he was very shy about coming on, but but
Speaker 1: we got him on. So so James, your turn. What's
Speaker 1: the craziest thing you've seen in markets recently? A couple
Speaker 1: of things that fed today's saying they didn't know what
Speaker 1: inflation was. That's pretty scary crazy, um. But sticking with credit,
Speaker 1: I mean, I do look at bond prices all day
Speaker 1: long of geek um, and you rarely see bond prices
Speaker 1: moved in the morning when you come in more than
Speaker 1: a point or so if you stare it, you know
Speaker 1: the feed. Recently, we've seen bonds dropping ten points, twenty points,
Speaker 1: forty points in one trade, um, And that's that's crazy
Speaker 1: price action. That speaks to some of the points well
Speaker 1: eximate during this podcast. You know the Boston Beyond today
Speaker 1: ten points, those bonds yielding, how you distressed the still
Speaker 1: rated sorry single beat plus um. The same thing happened
Speaker 1: to Party City recently, whole bunch of retailers, and I'm
Speaker 1: pulling the bond white outs. We haven't seen this sort
Speaker 1: of price action. I don't think you know, you can
Speaker 1: disagree outside I've seen this sort of level extreme. I
Speaker 1: agree with you. I would also add to that, you
Speaker 1: know what you alluded to, what you just refer to.
Speaker 1: Those are bond prices that we can sort of very
Speaker 1: readily observed because they're in the public corporate space. But
Speaker 1: then there are parts of the bond market right where
Speaker 1: pricing is is much more over the counter, if you will, right,
Speaker 1: so um areas like mortgage credit, for example, there's a
Speaker 1: whole area out there where you know, the family and
Speaker 1: Freddie step back from providing guarantees to the number of
Speaker 1: mortgages and throw them back into the market to kind
Speaker 1: of live on their own um and price on their
Speaker 1: own without the government guarantee. And we're seeing um to
Speaker 1: various degree stresses in in that part of the mortgage market,
Speaker 1: even though we're not really seeing stress in the housing
Speaker 1: market yet yet. Mortgage rates are higher, and yes, we
Speaker 1: expect to slow down and housing, but certainly they're none
Speaker 1: of the systemic problems that existed there back in two
Speaker 1: thousand and eight. But we're seeing, yes, bonds that are
Speaker 1: off ten twenty points in this mortgage credit space. This
Speaker 1: is kind of like the non agency part, particularly the
Speaker 1: you know, lower than the most pristine parts of that market.
Speaker 1: So without a doubt, there are some canarreas. Usually how
Speaker 1: repricing broad repricing start, they start in more esoteric um
Speaker 1: parts of the market like that, and with kind of
Speaker 1: some you know, credits here and there, that are may
Speaker 1: be weaker and then transition to a broader repricing. So
Speaker 1: I think we're just at the starting of this. Is
Speaker 1: it a summer liquidity issue at all? To or now
Speaker 1: um liquid of the issue to the extent that it
Speaker 1: can be that it is, you know, seasonal, I think
Speaker 1: will be a huge issue. You know. One of the
Speaker 1: things that Jamie Diamond wrote a shareholder Leo alluded to
Speaker 1: the fact that market liquidity is very different. That sells
Speaker 1: to the cell side is not there for you like
Speaker 1: it used to be, and it makes for a significantly
Speaker 1: less liquid market. And just to give you an idea,
Speaker 1: you know, the top five corporate bond etf so things
Speaker 1: like l q D and g J and K and
Speaker 1: h y G like that, the top largest corporate bond ets,
Speaker 1: their total assets are several times bigger than the corporates
Speaker 1: the street is inventory. So these things, you know, start
Speaker 1: to really redeem in size, and you know, dramatically, there's
Speaker 1: really no other side to take that down, so you're
Speaker 1: gonna have very dramatic prices covery downwards. So, yes, liquidity
Speaker 1: plays a huge role. The way this market operates, the
Speaker 1: liquidity it has on any given day is so different
Speaker 1: than pre two eight and the FED plugged that hole
Speaker 1: repeatedly for a very long time, and they're not anymore.
Speaker 1: They're not at this time. So liquidity has completely shifted
Speaker 1: to the buy side, but the bye side is fully
Speaker 1: invested across the entire cycle. They have to sell something
Speaker 1: to buy something, and so we just think it's a
Speaker 1: completely different market and that's why we want to be
Speaker 1: the liquidity providers um that will be very, very sorely
Speaker 1: needed as this group pricing gets going well. Axada, We
Speaker 1: really again appreciate your insights. Hopefully we can have you
Speaker 1: back again sometime to talk markets again, and please bring
Speaker 1: Jamie Diamond along if if you see him, Tom Tom,
Speaker 1: He's invited to sounds great, Thanks so much, thank you,
Speaker 1: thanks very much. What Goes Up will be back next
Speaker 1: week and so then you can find us on the
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Speaker 1: Up is produced by Stacy Wang. The head of Bloomberg
Speaker 1: podcast is Francesco Levie. Thanks for listening. To see you
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