Speaker 1: Hello, and welcome to Credit Edge of Weekly Markets Podcast.
Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to welcome Alan McKnight, chief
Speaker 1: investment officer at Regent's Bank. How are you Ellen?
Speaker 2: Doing great this morning, James, thanks for having me.
Speaker 1: Thank you so much for joining us today. We're very
Speaker 1: excited to hear your credit market views, and we're also
Speaker 1: delighted to have back on the show. Matt Goointner with
Speaker 1: Bloomberg Intelligence.
Speaker 3: Hello, Matt, Hi, everyone, thanks for having me back.
Speaker 1: So just set the scene a little bit here. Credit
Speaker 1: markets are projecting an air of calm. Spreads US super tight.
Speaker 1: There's not very much difference between investment grade and junk
Speaker 1: bonds when it comes to risk premia. On debt rated
Speaker 1: double B you're getting paid as much for default risk
Speaker 1: as you were in twenty nineteen. The gap between doubleby
Speaker 1: and triple B rated bonds hasn't been this tite since
Speaker 1: before the pandemic. The good old returns are okay, but
Speaker 1: it's not really the year of the bond a lot
Speaker 1: of people had expected. That's mostly because of rates which
Speaker 1: remain elevated, undermining total returns and also keeping pressure on
Speaker 1: weak companies that have a lot of debt. Shorter duration
Speaker 1: assets like high yield and floating rate loans are doing
Speaker 1: all right, though not as good as equities, and we've
Speaker 1: seen a ton of issuance, most of it for refinancing,
Speaker 1: so net supply is still thin and portfolio managers have
Speaker 1: a lot of cash to reinvest. That's a very bullish
Speaker 1: technical factor that we should discuss today. Credit markets are
Speaker 1: supported also by strength in the US economy, which is
Speaker 1: good for US companies, but corporate bonds in Europe and
Speaker 1: Asia are actually doing better than in America, boosting the
Speaker 1: case for geographic diversification. And while technically credit markets have legs,
Speaker 1: fundamentally there's more and more to worry about inflation, recession risk,
Speaker 1: debt defaults, bankruptcies, commercial real estate, stress, war, geopolitics. Plus
Speaker 1: everyone's loaded up on US assets going into a very
Speaker 1: noisy presidential election. I've used the word complacency a few
Speaker 1: times on this show, given market valuations, but then again,
Speaker 1: there's just this wall of cash. If you bet against it,
Speaker 1: you're potentially not You're potentially going to miss out on
Speaker 1: another big rally. So I want to start there, alan
Speaker 1: what's your take, What do you expect to see in
Speaker 1: credit markets in the second half. Where do we go
Speaker 1: from here?
Speaker 2: Well, I think as you laid out both the opportunities
Speaker 2: and the risk there right now, certainly the market has
Speaker 2: been incredibly tight this year, particularly in light of a
Speaker 2: slowing global economy, and so as we think about the
Speaker 2: back end of twenty four and start looking out into
Speaker 2: twenty five, we think that you could actually continue to
Speaker 2: do well on the investment grade side and on the
Speaker 2: high yield side, albeit we're going to see spreads widening
Speaker 2: a little bit as we get through the election and
Speaker 2: we start to really focus in on what policy is
Speaker 2: going to be. To your point, on the wall of
Speaker 2: cash that is sitting out there, it's really remarkable to
Speaker 2: us just how much capital is on the sidelines and
Speaker 2: is waiting to be deployed. And I think part of
Speaker 2: that is visible via the supply that we've seen in
Speaker 2: the credit markets, where we've seen up over twenty five
Speaker 2: percent on a year of year basis in terms of
Speaker 2: supply coming in, and the demand has been insatiable, and
Speaker 2: the coverage audit has been has not skipped a beat.
Speaker 2: And so I think to that end as we go
Speaker 2: to the end of the year next year, it does
Speaker 2: make us wonder will that wall of capital continue to
Speaker 2: fund these deals. We haven't seen a hiccup in it yet,
Speaker 2: but that's something that we're we're watching closely.
Speaker 3: This is a Matt with the Bloomberg Intelligence So I'm
Speaker 3: one of the five hundred analysts and strategies here with
Speaker 3: the Bloomberg's research department. When I look at WORP, which
Speaker 3: is our world indust rate probability function on the term,
Speaker 3: it looks like the consensus view for the FED to
Speaker 3: cut at the end of summer in September. That would
Speaker 3: mean that we'd have a historically long pause by the FED,
Speaker 3: which contrasts with BEA's chief rates strategist viewing late fall
Speaker 3: more likely, while we've I guess on the past who've
Speaker 3: highlighted cuts may not come till year end. So are
Speaker 3: you in the consensus camp Allen for a September move
Speaker 3: or what's regions of view?
Speaker 2: We are. We're in the consensus camp, which always makes
Speaker 2: us a little bit uncomfortable. It's a little prickly feeling
Speaker 2: to be in the consensus camp. And to your point,
Speaker 2: this is the second longest pause we've ever had and
Speaker 2: rivals number one, which is back in six oh seven,
Speaker 2: and so again as history as a precedent it it
Speaker 2: does give us a bit of pause around than a
Speaker 2: little bit of heartburn around. Okay, what does that mean
Speaker 2: when they do come with these cuts. But we do
Speaker 2: think September and December the most likely, and any sort
Speaker 2: of tailwind will come from the FMC having more data
Speaker 2: to support that in terms of with PCE later this week,
Speaker 2: with jobless claims continuing to rise and a broadly slowing
Speaker 2: economy may give them a little bit more ammunition to
Speaker 2: be able to do both of those.
Speaker 1: So when you say you think that credit markets can perform,
Speaker 1: you know through the rest of the year, Ellen, what
Speaker 1: do you mean by that? You're talking about much more
Speaker 1: total return or you think tighter spreads on what are
Speaker 1: we talking about here?
Speaker 2: More on the total return basis, because it would be
Speaker 2: hard for Press for them to get tighter spreads. I
Speaker 2: mean when you look at it on a twenty five
Speaker 2: years basis, average investment grades spread around one hundred and
Speaker 2: fifty bases points and we're at ninety more or less.
Speaker 2: So it's hard for us to envisionous getting back much lower,
Speaker 2: and same with high yield when you have a long
Speaker 2: term average of over five twenty on twenty five years
Speaker 2: and we're closer to three three ten right again, So
Speaker 2: we think it really is about total return, and I
Speaker 2: mean the benefit you have there too is just across
Speaker 2: the board. Is assuming we do get rate cuts this
Speaker 2: year and we do see rates coming down a little bit,
Speaker 2: on a total return base, we should see some in
Speaker 2: terms of just pricing where it is today and yields
Speaker 2: where they are, we should see benefit in portfolios.
Speaker 1: Does does that mean that we continue on this kind
Speaker 1: of low single digits track for the full year for
Speaker 1: IGN high y I.
Speaker 2: Think it does. It's not going to be a major rally.
Speaker 2: We're not going to see a big pickup, but compared
Speaker 2: to where it's been to your point at the outset,
Speaker 2: it has been a pretty mediocre. Here are certainly in
Speaker 2: comparison to equities.
Speaker 3: You noted the spread levels. So we actually had the
Speaker 3: head of a US highield strategy from b of A
Speaker 3: on a couple months ago, and he was sort of
Speaker 3: highlighting half of the high old market trading inside of
Speaker 3: two outer basis points, which is typically levels reserved for
Speaker 3: investment grade which you know, it could reflect maybe anticipated upgrades,
Speaker 3: but it could also be sort of investors or bond
Speaker 3: holders looking to position themselves from face or in safer
Speaker 3: names given the current interest rate environment or potential for
Speaker 3: economic volatility. So you know, with that dynamic in mind,
Speaker 3: how do you view spreads being this tight? And with that,
Speaker 3: what are some of the maybe core over or underweights
Speaker 3: that you guys have at this point for maybe the
Speaker 3: back half of twenty four and into next.
Speaker 2: Year certainly, So I think as you note there's those
Speaker 2: spreads are incredibly tight for the highest quality names, and
Speaker 2: I'd say we're bunched up with those folks as well,
Speaker 2: just in terms of we don't think you're really being
Speaker 2: paid to take on an order amount of risk out
Speaker 2: because there's not enough juice in it and the squeeze
Speaker 2: for you for you to do that. And so we've
Speaker 2: really tried to stay stay one higher quality and shorter
Speaker 2: duration and relate to those names. And I think as
Speaker 2: you think about the end of this year, so five
Speaker 2: plus months that we have left and into twenty five,
Speaker 2: I think we would look for an opportunity with any
Speaker 2: volatility to try to pick up maybe some of those
Speaker 2: some of the higher quality names. If we do see
Speaker 2: just a general weakness and the credit markets, we're not
Speaker 2: expecting that, but that would be a nice and pleasant
Speaker 2: surprise we could get a little bit of that in
Speaker 2: terms of being able to pick up something. And then
Speaker 2: to that end, I think what we've seen is we've
Speaker 2: been in our core strategies. We've been overweight credit, higher
Speaker 2: quality credit, which has been allowed us to pick up
Speaker 2: a little bit of yield there without taking on undue risk.
Speaker 2: We haven't really wanted to chase on duration on either
Speaker 2: side either. We just were trying to stay pretty pretty
Speaker 2: conservative as the way I would describe it thus far, okay,
Speaker 2: and through the end of next year, through the end
Speaker 2: of this year and beginning of next year, I think
Speaker 2: that's gonna be the right spot.
Speaker 1: That quality trade though, and I mean everyone wants quality,
Speaker 1: and particularly on the high yield side. You know, double
Speaker 1: b's is a very very crowded trade. Is it not
Speaker 1: just getting you know, expensive in terms of you know
Speaker 1: what conversation you're actually getting for the risk of downgrade
Speaker 1: or you know, worse things happening.
Speaker 2: Now, that's a good point. I think we we challenge
Speaker 2: one another is around that of is it. Are we
Speaker 2: taking on more risk or undue risk by chasing quality?
Speaker 2: But when you think about what the alternative is and
Speaker 2: what pickup we may be able to receive for extending
Speaker 2: out a little bit more, it just hasn't hasn't seemed
Speaker 2: worth it to us. And I think the one big
Speaker 2: question mark for us would be do we see do
Speaker 2: we see default rates pick up even more so than
Speaker 2: they have so now let's say four to seven versus
Speaker 2: you know, long term average culture to four to one.
Speaker 2: Do we see those picking up? And if so, and
Speaker 2: what areas that might be presenting some opportunities. We're not
Speaker 2: there yet, though, And I think that's the thing is
Speaker 2: we've we're sitting on the sidelines waiting. We feel like
Speaker 2: this is the best place to wait until we can
Speaker 2: pick some of that up. But it hasn't come.
Speaker 1: And we've been waiting a long time for those defaults
Speaker 1: to come. And you know, really it seems potentially that
Speaker 1: there's an offramp for some of these companies. You know,
Speaker 1: if rates do come down relatively quickly, and you know,
Speaker 1: the liquidity returns to the market, and you know, the economy,
Speaker 1: soft lending, you know, all that stuff seems to be potential,
Speaker 1: you know, exit for those companies that were struggling. Why
Speaker 1: should we expect defaults to increase at this point.
Speaker 2: Well, I think there's just the reality of the lower
Speaker 2: quality names that while they have not reached that point yet,
Speaker 2: they're in close proximity in terms of a slowdown and
Speaker 2: from an economic perspective, and I think those names so
Speaker 2: if you think about using the equity comparable, you look
Speaker 2: at the small cap indices, and you look at the
Speaker 2: say the Russell two thousand, which over fifty percent of
Speaker 2: those names are non earners right now. They're actually unp offitable.
Speaker 2: There's a lot of names in that sort of realm
Speaker 2: that could be on the tipping point, particularly in light
Speaker 2: of when they have to refinance their debt and they
Speaker 2: just they're having to kick the can and make a shift. Again,
Speaker 2: that doesn't impact the higher quality names. In fact, some cases,
Speaker 2: that's going to push probably even more money into quality
Speaker 2: because people want to get as far away as they
Speaker 2: can't unless they're going to start picking it up, and
Speaker 2: they see more opportunity there. So again I think that's
Speaker 2: the nexus of it for us is around we don't
Speaker 2: think we're at a tipping point yet, but I think
Speaker 2: that's what we're watching more than anything else.
Speaker 1: Are there any sectors in those small caps you're particularly
Speaker 1: worried about when we talked a bit about consumer names
Speaker 1: and real estate in previous shows, Are they areas of
Speaker 1: stress that you see we do?
Speaker 2: And I think on the consumer side, those that are
Speaker 2: most exposed to the lower income consumer in the United
Speaker 2: States are going to be particularly hurt by that because
Speaker 2: as you've seen the spending levels, the discretionary spending with
Speaker 2: low income consumers the United States is really pulled back
Speaker 2: because they have been most impacted by higher it's higher
Speaker 2: fuel prices and higher food prices, and so those are
Speaker 2: the names we would skew away from as we look
Speaker 2: into the consumer we would be more on the staple side,
Speaker 2: which we think you have a little more opportunity there
Speaker 2: or again this concept of higher quality. But even in
Speaker 2: the retailers, where we haven't seen as much of a
Speaker 2: pullback in that spending and they're more targeted to the
Speaker 2: higher to middle income consumer in the United States, that
Speaker 2: seems to be a more conservative bet on that versus
Speaker 2: the low income consumer side that is being materially impacted
Speaker 2: right now.
Speaker 1: Right were just to play devil's advocate a little bit.
Speaker 1: I mean, some people do say that we've seen all
Speaker 1: the defaults in those sectors already because we've been through
Speaker 1: that very tough you know, COVID and post COVID period
Speaker 1: and rates have gone up and they've pushed all of
Speaker 1: that stuff into bankruptcy or into default. So is there
Speaker 1: really any left to do?
Speaker 2: I think there's still some out there. Unfortunately. I think
Speaker 2: there's still a little bit of a little bit of
Speaker 2: space there, primarily because what we've seen is down to
Speaker 2: the consumer level, they have been able to push things out,
Speaker 2: whether that be buy now, pay later, whether they have
Speaker 2: been able to put more on their cards. They've been
Speaker 2: able to extend it out a bit, and so it
Speaker 2: hasn't really flown through in terms of the impact on
Speaker 2: the balance sheets of these companies. But I think it
Speaker 2: will eventually get there. But what you see is this
Speaker 2: stark contrast, you know, the best of times the worst
Speaker 2: of times of those who've been able to manage through
Speaker 2: that at the corporate level. When you look at the walmarts,
Speaker 2: the costcos on the retailer side, even on a home
Speaker 2: deepont of loads that have been able to manage through
Speaker 2: that and continue to prosper through it versus those on
Speaker 2: the low income retailer side that if not that are
Speaker 2: already struggling there.
Speaker 3: So it's sort of in that same vein. If if
Speaker 3: there's a view that there's gonna be economic weakness and
Speaker 3: that the FED cutting rates in response to that, it seems,
Speaker 3: you know, logical that you'd sort of be positioning to
Speaker 3: invest in sectors or names with high barriers to entry
Speaker 3: wide economic modes. So credits with you know, very defensive characteristics,
Speaker 3: which I would think means posturing or having a bias
Speaker 3: more up rather than down in credit quality. So how
Speaker 3: far down the spectrum or you know, what rating wrongs
Speaker 3: are you guys comfortable being invested at if we have
Speaker 3: potential cuts from the FED and it's just not they're not
Speaker 3: able to sort of get that soft landing that many
Speaker 3: are sort of pricing in.
Speaker 2: Yeah, we've definitely skewed to the higher quality credits there. Again,
Speaker 2: in terms of how far are we going down, we're
Speaker 2: sticking on the investment grade side of things, and like
Speaker 2: so if you think about our total portfolio and our
Speaker 2: plus strategies that we manage, we have up to twenty
Speaker 2: percent that can be allocated on non investigrade, and we're
Speaker 2: down at the low end of that range, down closer
Speaker 2: to these seven eight percent range on that. So we've
Speaker 2: really we've really pulled back, you know, in terms of
Speaker 2: where we are. Our view has been that we're not
Speaker 2: picking up the commensurate amount of return outside of that
Speaker 2: to make it work. And so when you think of
Speaker 2: even those names, if you your point on those names
Speaker 2: that have the ability to weather through that, whether that
Speaker 2: be on the industrial side, when you think about the
Speaker 2: names like the Honeywells of this world, when you think
Speaker 2: about even on the consumer staple side, on the beverage
Speaker 2: side of the coach, the Pepsi's that kind of name. Again,
Speaker 2: you're not picking up much in terms of spread there,
Speaker 2: but we think that they're well positioned through that slowdown.
Speaker 2: And so that's what uns this idea that in the
Speaker 2: event that we do start to see a bit of
Speaker 2: a dislocation and or we just see what we would
Speaker 2: describe as instead of a grind down in the economic
Speaker 2: output so far, if it were to have more that
Speaker 2: wily coyote type of moment, you could then we'd be
Speaker 2: well positioned to be able to pivot a bit on
Speaker 2: some of those names, and we just hasn't been worth
Speaker 2: it to chase it this far.
Speaker 3: Yeah, I mean, we had Larry Colpon, who's the CEO
Speaker 3: of g Aerospace, on Bloomberg TV this morning highlighting, you know,
Speaker 3: some of his expectations for a rising defense betting here
Speaker 3: in abroad given the elevated threat environments? Is that part
Speaker 3: of your irrationale behind positive views for maybe certain sectors.
Speaker 3: Does that include industrials, does it include actual defense guys
Speaker 3: and you know, do you sort of share that view
Speaker 3: and does you know that change it all depending on
Speaker 3: who may or may not be in the White House
Speaker 3: a year end.
Speaker 2: Well, we do. I mean, we think that the industrial
Speaker 2: side is going to do well, and we think that
Speaker 2: that can do well, whether it regardless of which administration
Speaker 2: comes in and next January. But the reality is that
Speaker 2: within those and this within those, the industries associated with
Speaker 2: right now owning more defense right now we think is
Speaker 2: a positive because we think that broadly speaking, regardless of
Speaker 2: which side of the aisle you're on, that based on
Speaker 2: what is going on with Ukraine, what's going on in Gaza,
Speaker 2: and the continued tensions with China, that overall we will
Speaker 2: be spending more in that domain as well as other
Speaker 2: countries will be spending more in that domain. So that works.
Speaker 2: But then picking up some more on the industrial side
Speaker 2: as it relates to the infrastructure spin that is likely
Speaker 2: to occur as we go into twenty five. I think
Speaker 2: it's going to be more about where that infrastructure spind
Speaker 2: goes than if it happens at all. I don't think
Speaker 2: either party shown a real desire or proclivity to cut spending. Yeah,
Speaker 2: so I think it's just a more matter of which
Speaker 2: within each of those on the industry side, which you
Speaker 2: can pick up on, but I think that continues to
Speaker 2: do well so.
Speaker 3: Within the industrial space, or you know, maybe even like utilities,
Speaker 3: are there any sort of single name credits that you
Speaker 3: have sort of a high conviction in that could be
Speaker 3: positioned outperform and conversely maybe some names where you think
Speaker 3: that the upside downside is maybe skewed not as favorable.
Speaker 2: Yeah, so I would say one, you know, names like Honeywell,
Speaker 2: Lockheed Martin or names that we have owned, do own
Speaker 2: and feel good about because think they can both in
Speaker 2: terms of from the industrial side and then from the
Speaker 2: defense side. On the Lockheed side, less so on the
Speaker 2: names we've really been shining away from in terms of
Speaker 2: how we're running the portfolio. You know, we don't have
Speaker 2: long We are long only, and so we don't have
Speaker 2: anything that really other than quote unquote shortening against the index.
Speaker 2: But we're not actually taking on a negative view other
Speaker 2: than that. And so I think it's the way we've
Speaker 2: positioned it thus far is to try to be over
Speaker 2: allocated within industrials and then those credits within defense with
Speaker 2: the broadly industrial like the Honeywell has more of a
Speaker 2: broad multi business industrial for sure, industrial and multinational type
Speaker 2: of opportunities. And I think that's the thing too. We
Speaker 2: don't want to be as laser focused on any a
Speaker 2: really narrow interest in those because we think it's broad.
Speaker 2: The spending is going to be broad and it can
Speaker 2: lift all boats.
Speaker 1: And on the utility side, I mean, those bards tend
Speaker 1: to be much longer duration. They obviously got whacked by
Speaker 1: rates rising. Is there a sort of technical reason to
Speaker 1: buy those just because they got cheap on a surprise basis?
Speaker 2: I think there is. I mean I think that we
Speaker 2: like the overall view on the utilities as it relates
Speaker 2: to not just this end we've seen on the AI side,
Speaker 2: which has impacted many of them, but really the long
Speaker 2: term infrastructure type of play with these utilities, specifically those
Speaker 2: names as you see across the Sun Belt in the
Speaker 2: United States, of the continued growth in population and demographic
Speaker 2: shift into those areas, and the ability to generate or
Speaker 2: turn off of those not just on the consumer side
Speaker 2: as you've seen that population growth, but also from a
Speaker 2: from broader commercial side, as you've seen more companies moving
Speaker 2: to those areas, they're able to pick up new user
Speaker 2: you know, commercial and consumer type of clients. So that's
Speaker 2: been a net positive for them and for their ability
Speaker 2: to generate returns off of them.
Speaker 3: So I just to jump back in you kind of
Speaker 3: mentioned earlier, you know, if we get some event happening
Speaker 3: that's leading to some some spread widening and maybe some
Speaker 3: opportunities to jump in, can you maybe highlight you know,
Speaker 3: what are some of those levels that you're looking at
Speaker 3: where it's like, Okay, maybe the negativity has sort of
Speaker 3: gone too far and we like this as an entry point.
Speaker 3: We've signaled some levels of complacency going on right now.
Speaker 3: So where where does the complacency go away?
Speaker 1: For you?
Speaker 2: Well, if you had told me ten years ago that
Speaker 2: I would be saying that, you know, anywhere over one
Speaker 2: twenty one thirty investment grade would be intriguing to me
Speaker 2: because wow, that we've seen a nice wine that's tight,
Speaker 2: and yet that's the one thing that you almost you're
Speaker 2: suspending belief on something. And I think that's one of
Speaker 2: the challenges we faced. We've been doing this for a
Speaker 2: long time. As we think about the old adage from
Speaker 2: Mark Twain, if history doesn't repeat itself, but it rhymes, Yeah,
Speaker 2: we keep coming back to it, and that's what we
Speaker 2: would like to see it, you know, well above you know,
Speaker 2: the one twenty one thirty on investment grade getting closer
Speaker 2: just to the long term average for that to be
Speaker 2: intriguing in a perfect world and maybe be careful what
Speaker 2: you wish for we get above that. But the sort
Speaker 2: of decisive exogenoush factor they would have to create that,
Speaker 2: because it's not just the FED coming to table and
Speaker 2: saying we're not going to do cuts in September or
Speaker 2: we're not going to cut into Simber. We don't think
Speaker 2: that drives the level of widening. It would have to
Speaker 2: be something much more material in our view, and so
Speaker 2: that's what we keep watching around Okay, what else could
Speaker 2: that really be? You know, I mean, so it's like
Speaker 2: the whole scenario analysis around what those may be and do.
Speaker 2: There's not any one thing right now that we would
Speaker 2: point to to say, Okay, this is what is really
Speaker 2: going to drive that higher. It have to be a
Speaker 2: multitude of factors as it relates to those.
Speaker 1: It seems like though, from what you were saying earlier
Speaker 1: on that there is a big demand element here, just
Speaker 1: this endless wall of cash pushing against a limited supply.
Speaker 1: We're seeing it from you know, not just dedicated credit buyers,
Speaker 1: but also crossover buyers and also non US buyers. Everyone's
Speaker 1: piling and then you've got this sort of redemptions and
Speaker 1: maturities and so you've got this all those cash that
Speaker 1: needs to be recycled. Is there anything that you can
Speaker 1: see that might weaken the demand side of the argument?
Speaker 2: Well, I think one point you brought up there is
Speaker 2: a particular interest to us, and that's on the international
Speaker 2: buyers because there has been such a thirst for US
Speaker 2: yield and we've can you to see that it's been
Speaker 2: pretty consistent. So the question we have is as it
Speaker 2: relates to through the election and into twenty five of
Speaker 2: broader policy and what that may or may not do
Speaker 2: in terms of some of those buyers. Those buyers don't
Speaker 2: want to be punished for it. So they already own
Speaker 2: a significant amount of credit. So that's not as though
Speaker 2: they are going to in our view at least widely
Speaker 2: leave and flood and flood the space with a lot
Speaker 2: of with a lot of product. But are they going
Speaker 2: to be the net new buyer? And I think that's
Speaker 2: to your good question. I think it's around will they
Speaker 2: continue to be the net new buyer in an environment
Speaker 2: where policy is more strict of him. When you have
Speaker 2: a policy that relates to geopolitic geopolitical policy, tarifs and
Speaker 2: other things that may create consternation, you could see them
Speaker 2: being net less interested. So that's one category of capital
Speaker 2: that may be coming out. And then as it relates
Speaker 2: to within within the US of just okay, how much
Speaker 2: how much thirst is there? How much you know? And
Speaker 2: the funds that are out there right now. The only
Speaker 2: thing that gives us a bit of a silver lining
Speaker 2: there is the amount that's in cash right now that
Speaker 2: is looking for a home. I mean, you look at
Speaker 2: the data supporting that at the amount of cash money
Speaker 2: market funds and institutional cash, it is significant that could
Speaker 2: be deployed, and so I think that is the one
Speaker 2: counterbalance to some of the international component of those, but.
Speaker 1: That also leads I mean, when there's such excess demand
Speaker 1: for limited spy, you also get a lot of froth.
Speaker 1: So is there any kind of concern there that you're seeing,
Speaker 1: you know that you're seeing. I mean, we're always looking
Speaker 1: for things like more pick deals, more dividend deals, more
Speaker 1: of those sorts of very very speculative fundraisings. Is there
Speaker 1: anything that you're seeing right now that would worry you?
Speaker 2: I think the thing that gives us a bit of
Speaker 2: pause is less so on the cross markets than the
Speaker 2: idea on the private credit side and just what's been
Speaker 2: going on there and the amount of money that is
Speaker 2: there and our inability to get a really good look
Speaker 2: into that to determine how what the net impact would
Speaker 2: be if that money away, and how much how much
Speaker 2: that would impact the broader market, because I do think
Speaker 2: we've seen such a a wall of capital that has
Speaker 2: been moved into private capital in terms of the deals
Speaker 2: that they're doing, and just what is that, what's the
Speaker 2: net takeaway from that.
Speaker 1: Yeah, yeah, I mean it's certainly taken some supply out
Speaker 1: so that as technically it's had some impacts on pricing
Speaker 1: of public markets, but definitely an interesting one to watch.
Speaker 1: I just wanted to also ask you about some other
Speaker 1: credit I mean, there's there's so many, it's a it's
Speaker 1: a big broad universe. But beyond bonds, what about loans?
Speaker 1: You know, they've they've done very well. There's potentially some
Speaker 1: kind of cracks appearing in the thesis around you know,
Speaker 1: floating rate because rates are coming down, maybe that's not
Speaker 1: as compelling as it was. And then you've got a
Speaker 1: lot of people buying clos securitized credit. What what else
Speaker 1: are you looking at in terms of other parts of
Speaker 1: credit markets.
Speaker 2: Yeah, so we've been we really have not jumped into
Speaker 2: the foray on the COLO side ever since just has
Speaker 2: not been intrigued to us, but more because we haven't
Speaker 2: felt like, as long term buyers as much that there's
Speaker 2: been an opportunity set there, and so we've just said,
Speaker 2: you know, we'd rather just wait. That is one area
Speaker 2: where because of the sheer demand that we have seen
Speaker 2: in recent years, we just didn't feel compelled to have
Speaker 2: to chase after it. We just didn't think that that
Speaker 2: was worthy of of allocated additional capital on it. So
Speaker 2: I think that's one area where we've where we've remained restrained,
Speaker 2: if you will. But I think as we as we
Speaker 2: look out over the coming six to twelve months, it
Speaker 2: would be intriguing to see if we do see again,
Speaker 2: not a base case, but it broad a broad slow
Speaker 2: down if things just pick up steam. We have some
Speaker 2: challenges where there could be an opportunity set for us.
Speaker 2: We haven't. We haven't waded into it, but it would
Speaker 2: be of interest later on. And those would be almost
Speaker 2: when you think about you're sitting upon the terminal and
Speaker 2: you're watching the thing, the things that could become the
Speaker 2: opportunities that they haven't reached that level yet, but would
Speaker 2: be intriguing at that at that point.
Speaker 1: Okay, other parts of a B S. Are you looking
Speaker 1: at consumer abs or any of the other I mean,
Speaker 1: we've seen a lot of whole business All that stuff
Speaker 1: is that of interest at the moment people think that
Speaker 1: there's value there, So I'm wondering if you're seeing the same.
Speaker 2: Yeah, you know, it's interesting you talk about the on
Speaker 2: the consumer ARABS side and we have not been as
Speaker 2: interested there only because we felt like there's there's a
Speaker 2: reason that it's been undervalued, and you know what was
Speaker 2: the all that is that you could it could remain
Speaker 2: undervalue longer than you can remain solvent, right and uh.
Speaker 2: And so I think that's been one where we just
Speaker 2: in this and it's reflected in the comments earlier just
Speaker 2: about the consumer in the United States as well and
Speaker 2: specifically those who are having to wait into that we'd
Speaker 2: rather step away from that. So so we have so
Speaker 2: our exposure that has been you know, below the index
Speaker 2: and below our you know, our normal allocations there because
Speaker 2: we haven't felt like is we're getting paid for the
Speaker 2: inherent risk, right right?
Speaker 1: And I'm guessing you'd probably say the same about commercial
Speaker 1: real estate and all that stuff. But I would like
Speaker 1: to ask, you know, what, what risks do you think
Speaker 1: there are of like commercial real estate becoming a bigger problem,
Speaker 1: because you know, it's it's often spoken about, it's often
Speaker 1: talked about as something that could take down hundreds of
Speaker 1: banks in the US and be very very problematic, and
Speaker 1: yet we you know, it just seems to be you know,
Speaker 1: bubbling under the surface, and it hasn't really blown up,
Speaker 1: and people I think, you know, there are deals going on,
Speaker 1: their assets being brought their investors, they're picking up, but
Speaker 1: it's not blowing up. Are you worried about commercial real
Speaker 1: estate at all?
Speaker 2: We are, and we're worried about it from a slightly
Speaker 2: different point of view, which is one of it's it's
Speaker 2: less so for the banks. Would you think there's some
Speaker 2: mediosyncratic risk there for certain banks who are overexposed, and
Speaker 2: we've seen some of that over the last six months
Speaker 2: nine months, But broadly speaking, the ones who are going
Speaker 2: to be the most penalized by it in this in
Speaker 2: this marked to market and the quick dash to mark
Speaker 2: down values will be the private funds who have who
Speaker 2: have put a lot of money into these and have
Speaker 2: been unwilling to really mark these to market or unwilling
Speaker 2: to depends on what your point of view, so dadd
Speaker 2: you say, it all depends on whose bulls being gored,
Speaker 2: But it really is about when they have to start
Speaker 2: marketing those down and the investors associated with that, which
Speaker 2: are the large institutional investors and some of these funds
Speaker 2: that are going to start to get hit by that.
Speaker 2: That becomes a real challenge for them, but we don't
Speaker 2: think it's a systemic risk. Across the financial services industry
Speaker 2: and specifically in banking, it will hit a couple of
Speaker 2: smaller entities who have really over allocated to that sector
Speaker 2: and industry. I think it also will very much it
Speaker 2: is aligned with the region of the country and the
Speaker 2: world that you're in as associated with that, because I
Speaker 2: think the marks you're going to get in certain parts
Speaker 2: of the US that have continued to struggle from a
Speaker 2: growth perspective will look very different than some of the
Speaker 2: growth areas where they haven't built up as much. And
Speaker 2: there's probably a trade that can happen closer to the
Speaker 2: mark than in other areas.
Speaker 1: But it's not one that you're actively looking into at
Speaker 1: the moment.
Speaker 2: No, we're not. I think we would just have to
Speaker 2: see a much larger shift there. Again, we would have
Speaker 2: to see more owners mark down their properties that we
Speaker 2: just have not seen yet. It's just I think those
Speaker 2: could prevent some real opportunities for some of the own
Speaker 2: you know, some of the larger commercial real estate credits
Speaker 2: out there, but that's just not there yet. So opportunity
Speaker 2: but not the big not the complete systemic risk that
Speaker 2: I think some would consider okay.
Speaker 1: I mean, obviously we're right in the middle of the
Speaker 1: US election here, and things are changing by the minutes
Speaker 1: and will probably be different by the time we put
Speaker 1: this thing out. But I did want to ask you
Speaker 1: about the Trump trade. You know there are there is
Speaker 1: a lot of talk that you know, well, obviously trade
Speaker 1: is like volatility, and they like trading different narratives. Things
Speaker 1: are changing, so that's that's an opportunity to do something.
Speaker 1: But is there a big Trump trade in your view
Speaker 1: in terms of credit markets.
Speaker 2: I think it's really the influence of events when you
Speaker 2: think of the Trump trade, if you will, last two weeks,
Speaker 2: which has been as he's received the nomination at the
Speaker 2: Republican National Convention, a lot of the noises associated with
Speaker 2: President Biden and as that was coming on. But then
Speaker 2: you in the same lockstep, you had the FOMC, the
Speaker 2: fact that inflation looked to continue to come down, you
Speaker 2: saw jobless claims picking up, you saw the unemployment picking up.
Speaker 2: So I think it was not just that it wouldn't
Speaker 2: all be allocated to the Trump trade. There are those
Speaker 2: other items that were really given that tailwind credit markets
Speaker 2: and people saying okay, convergence of those would say, you know,
Speaker 2: the likelihood has certainly risen from the Trump perspective in
Speaker 2: terms of presidency, the likelihood of the FOMC doing something
Speaker 2: in the next five months high or at least as
Speaker 2: high as it had been. So again, those things have
Speaker 2: have factored in.
Speaker 1: The economists is saying that, you know, at least what
Speaker 1: has been verbalized from the Trump camp would be very
Speaker 1: inflationary if it was to he be enacted as policy,
Speaker 1: in which case you presume you want to buy low
Speaker 1: duration and leverage loans and all that stuff. But do
Speaker 1: you fear a renewal of, you know, a resumption in
Speaker 1: inflation if there is a big GOP suite in the
Speaker 1: November election.
Speaker 2: Yeah. Our base case isn't that we see a real
Speaker 2: pick up in inflation, more so that it's just going
Speaker 2: to continue to remain higher than the Fed would like.
Speaker 2: We just you know, we look at it as inflation
Speaker 2: took the elevator up. Now it's taking the escalator down,
Speaker 2: and it's almost like the slow escalator grinding lower because
Speaker 2: it's just not getting back to that two percent target
Speaker 2: anytime in the in your future. And nothing about the policies,
Speaker 2: at least as presented from either side right now would
Speaker 2: lead me to believe that that is going to change,
Speaker 2: that there's going to be a pickup. And even as
Speaker 2: we talk about this, you think of people talk about
Speaker 2: inflation coming down, the expectation still that it is rising
Speaker 2: at above average. It's still going you know, it hasn't
Speaker 2: gone back to where it was. You said that, you
Speaker 2: know the fantasyad is of pre pre COVID. We're still
Speaker 2: not going back to those levels. It's just not rising
Speaker 2: as fast as it did before. And I think that's
Speaker 2: where we struggle with seeing an environment that it will.
Speaker 1: So in terms of opportunity, when you look around all
Speaker 1: of the stuff you get to look at every day,
Speaker 1: not just in the US, is there something you particularly
Speaker 1: put your finger on now as an opportunities Is there
Speaker 1: something that you know of trade that you have very
Speaker 1: high conviction in that maybe others are missing.
Speaker 2: Well. I think as we think about it, there's this
Speaker 2: what did Voltaire say? Doubt is an unpleasant condition, but
Speaker 2: certainty is absurd. I think we don't feel real certain
Speaker 2: about any of the trades right now, other than what
Speaker 2: we've discussed before around a higher quality trade and waiting
Speaker 2: a bit until we get to see a bit more
Speaker 2: unearthed over the next six months. I think that's going
Speaker 2: to be the opportunity set and being able to have
Speaker 2: ready capital to deploy going into that because aren't that
Speaker 2: many fat pitches out there. There aren't many things where
Speaker 2: you'd say, wow, spreads are in dodibly wide. We have
Speaker 2: a real dislocation and we're willing to put money at
Speaker 2: really cheap levels. I mean, there are a few here
Speaker 2: and there, but even to the discussion earlier about the consumer,
Speaker 2: even on the ABS side, we would argue they're cheap
Speaker 2: for a reason, and so it doesn't it doesn't make
Speaker 2: us compelled to go out and chase that trade. We'd
Speaker 2: rather wait, be a bit more conservative on it, and
Speaker 2: then hopefully let some things come to us over the
Speaker 2: next six months and have enough capital be able gott
Speaker 2: and deploy that and not get hit as much as
Speaker 2: some others before we put that to work. And I
Speaker 2: think that's part of this too, where we haven't chased
Speaker 2: some of these deals even I mean, you look at
Speaker 2: the coverage on some of the deals that have come
Speaker 2: to market over the last month, let's say, and it's
Speaker 2: just the sheer amount of capital that's out there, but
Speaker 2: you know, just.
Speaker 3: I mean, the Bowing deal was like eight to ten
Speaker 3: times over subscribed. It's incredible, and.
Speaker 2: It just has to scratch in our head when you
Speaker 2: get the numbers back, you say, if we say that
Speaker 2: one more time, what did you do? The coverages on
Speaker 2: that one was the over subscription? And so I think
Speaker 2: that's where we'd rather be patient.
Speaker 1: Is that some way you think you particularly have an
Speaker 1: edge right now?
Speaker 2: It's interesting. I think it actually lies in that willingness
Speaker 2: to be patient and be more long term, because I
Speaker 2: think there's so many folks around us that get caught
Speaker 2: up in the whims and vagaries of the market. They
Speaker 2: just feel they have to get they have to put
Speaker 2: some money to work, and they have to try to
Speaker 2: pick up at the margin a little bit more yield
Speaker 2: to get that return. We're willing to wait, you know,
Speaker 2: and so in the short run that can be a
Speaker 2: little more punitive to returns because obviously you're you're not
Speaker 2: chasing it, so you're not going to see that in
Speaker 2: the short run. But over the long run, we think
Speaker 2: it's it's the most prudent course, and and with that
Speaker 2: you sort of get that, you know, the ben gram
Speaker 2: adage of the weighing machine rather than the voting machine.
Speaker 2: You know, we think people are chasing a lot of
Speaker 2: stuff right now. We think you better served to wait
Speaker 2: it out a little bit. Doesn't mean being out of
Speaker 2: the market. It just means skewing to be more conservative
Speaker 2: within it.
Speaker 1: And is that the best hedge against any potential volatility
Speaker 1: that could come down.
Speaker 2: We think so. And I think that's the one thing
Speaker 2: we believe is that volatility will pick up. It's just
Speaker 2: a matter of when, not if. And I think, as
Speaker 2: we've talked about in the past, this idea of how
Speaker 2: did you go broke gradually and then suddenly and it
Speaker 2: comes so quickly it's almost what we saw of late
Speaker 2: with the I'm talking about the equity side of the
Speaker 2: house with small caps. Small caps underperformed and unperformed until
Speaker 2: they didn't and then within a seven to day trading
Speaker 2: range those spiked and made up over a thousand basis
Speaker 2: points of return. I think that sort of thing that
Speaker 2: we'll see this volatility pick up, and being well positioned
Speaker 2: and more conservative will allow us to then put money
Speaker 2: to work rather than having to retrench or be on
Speaker 2: the side of a while. Now I've got is jettison
Speaker 2: some names to try to make room. I think we're
Speaker 2: actually in really good shape.
Speaker 1: What's the one thing you worry about most in terms
Speaker 1: of what might spark that volatility?
Speaker 2: I think it's the confluence of geopolitical issues that seemed
Speaker 2: to be even more not dire, but certainly more present
Speaker 2: than almost at any other time, and the interrelated nature
Speaker 2: of them, and the fact that I think markets are
Speaker 2: more global than they have ever been. And regardless of
Speaker 2: how folks may feel about that path going forward, you
Speaker 2: wake up in the morning in any given day and
Speaker 2: they're a host of things to be going and I
Speaker 2: think those are the things that can bring shocks, and
Speaker 2: those shocks can then force people's hands again and this
Speaker 2: idea that they suddenly don't have the hedge that they
Speaker 2: thought they meaning to jettison things, and it creates that spiral.
Speaker 2: And that spiral is twenty four to seven globally in
Speaker 2: terms of what that can do. And I think we
Speaker 2: saw that to a certain extent back in the in
Speaker 2: the spring, in the financial crisis, in a few areas,
Speaker 2: in certain banks. You know, again, it just it happened
Speaker 2: so rapidly that if you had told me that twenty
Speaker 2: years ago, that you could see that shift that I
Speaker 2: would have said, oh there's it's not possible, not physically possible,
Speaker 2: and yet that's where we were.
Speaker 1: Great stuff, and I'm mcnight, Chief Investment Officer at Regions Bank.
Speaker 1: It's been a pleasure having you on the Credit Edge. Minny.
Speaker 2: Thanks, thanks so much for having me today, and.
Speaker 1: Of course we're very grateful to Matt Goiitner from Bloomberg Intelligence.
Speaker 1: Thank you for joining us again.
Speaker 3: Matt, thanks everyone appreciate it.
Speaker 1: For more Credit analysis, read all of Matt Goyner's great
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