Speaker 1: Hello, and welcome to the Credit Edge, a Wiki markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2: And I'm MATC.
Speaker 3: Woyner, a credit analyst covering industrials with Bloomberg Intelligence. This week,
Speaker 3: we're very pleased to welcome Gregory Peters, co, Chief Investment
Speaker 3: Officer of PGM Fixed Income.
Speaker 2: Are you Greg, I'm great, Thanks for having me. PGM
Speaker 2: is one.
Speaker 3: Of the world's largest investment managers, with one point fortullion
Speaker 3: in asset center management, of which fixed income AUM totals
Speaker 3: over inn billion, and so Greg is one of the
Speaker 3: co heads of the multisector team. Before joining PGM in
Speaker 3: twenty fourteen, he was Morgan Stanley's Global Director of Fixed
Speaker 3: Income and Economic Research and chief Global cross Asset Strategist,
Speaker 3: responsible for the firm's macro research and asset allocation strategies.
Speaker 3: And before that he was at Solomon as well as
Speaker 3: the US Treasury. So I think that's sort of a
Speaker 3: long way of saying I think when Greg speaks, we
Speaker 3: should all listen. So do you want to kick us off?
Speaker 1: James, Yeah, we have tons of questions for Greg, but
Speaker 1: first we will set the scene. Markets have rallied on
Speaker 1: hopes of trade deals, but there's still a huge amount
Speaker 1: of worry, not least about tariffs, but also about the
Speaker 1: budget deficit, the FED, riots in la and global geopolitical concerns.
Speaker 1: Despite this wall of angst and uncertainty, credit markets are
Speaker 1: projecting an air of complacency, with debt sbreads back below
Speaker 1: long term averages and likely to go tighter as demand
Speaker 1: for yield rises and net new supply of corporate bonds
Speaker 1: and loans remains muted, unless, of course, there's a big
Speaker 1: m and a comeback. Public credit markets are performing well,
Speaker 1: leading some to question the value proposition of private markets,
Speaker 1: and most people seem confident about the strength of corporate
Speaker 1: balance sheets. The end of American exceptionalism is another big theme.
Speaker 1: Global investors say they're looking more at Europe and at
Speaker 1: Asia as alternatives, but there are clear limitations when it
Speaker 1: comes to scale and liquidity there. So, Greg, what's your
Speaker 1: take our credit mark? It's fairly valued.
Speaker 2: Where do we go from here? Boy?
Speaker 4: That was a great intro. I found myself nodding to
Speaker 4: everything that you said. I think it is a valuation story.
Speaker 4: Heading into this year, we had a more optimistic view
Speaker 4: of the global economy of the US economy, and we.
Speaker 2: Were still cautious.
Speaker 4: And the reason why we were simply cautious is because
Speaker 4: risk reward.
Speaker 2: Was quite poor.
Speaker 4: You know, spreads are top kind of richest death style
Speaker 4: that we've seen over the past just call it thirty years.
Speaker 4: If you just oversimplify, spreads are you know, well below
Speaker 4: the average. And it feels to me, just based on
Speaker 4: your intro, that we have above average type of risk environment.
Speaker 4: So I do think credit spreads are too tight. I
Speaker 4: think this is a market where you're induced to take
Speaker 4: less risk. Button down your risk profile, roll and carry,
Speaker 4: don't go out the curve, don't necessarily go down the
Speaker 4: credit curve. But we can talk more about it because
Speaker 4: that's where the kind of the idiosyncratic opportunities lie. But yeah,
Speaker 4: I think you have to be cautious in here.
Speaker 2: Talking about the risk profile.
Speaker 3: So what sort of the house of you at PGM
Speaker 3: in terms of the big beautiful bill. Is it going
Speaker 3: to trigger a sort of net reduction to the deficit?
Speaker 3: I think President Trump has called out one point four
Speaker 3: one point five trillion lower or do you think it's
Speaker 3: going to push us further into the red to the
Speaker 3: tune of two and a half million. I wouldn't exactly
Speaker 3: call a four trillion dollar delta a small figure. So
Speaker 3: how do you see that playing out. What's the impact
Speaker 3: on demand for treasuries.
Speaker 2: Well, I have yet to see.
Speaker 4: Any think tank or independent study to suggest that this
Speaker 4: is a deficit reducer, so I'd be curious to see
Speaker 4: the math on that. So all roads lead to a
Speaker 4: greater amount of debt, a larger deficit, and I think
Speaker 4: the markets care a lot about it. This is one
Speaker 4: of these things. As we entered this year, tax reform,
Speaker 4: let's just call it.
Speaker 2: I'm doing air quotes.
Speaker 4: A tax reform was viewed as a market positive, you know,
Speaker 4: balancing out immigration and tariffs. But I think what you're
Speaker 4: realizing is that this comes out of cost, and the
Speaker 4: markets are the bond market is increasingly worried about that
Speaker 4: cost and the payback. And I think this is a
Speaker 4: situation where this bill will get passed in one way,
Speaker 4: shape or form, and I think the bond market is
Speaker 4: going to dislike it.
Speaker 1: So it means high yields at the long end, But
Speaker 1: it presumably doesn't make or it makes a recession less likely,
Speaker 1: does it? Because it's very supportive.
Speaker 2: It does.
Speaker 4: There's a decent amount of fiscal stimulus coming in now.
Speaker 4: I think that's lost on a lot of folks. So
Speaker 4: this will can continue to push the fiscal that I
Speaker 4: believe averts a recession. It's hard to it's hard to
Speaker 4: forecast the course because there's you know, so much in
Speaker 4: the way of unknowns and uncertainties. We have yet to
Speaker 4: see the impact of the tariffing strategy or shall I say,
Speaker 4: the change in the strategy that makes it really difficult
Speaker 4: for companies to plan. So the truth is we don't know.
Speaker 4: But the fiscal side, you know, does help. But the
Speaker 4: flip side of that is it's an ultimate curve steepener.
Speaker 4: Borrowing costs are going to go up. I think it
Speaker 4: keeps the FED on hold as well, and that puts
Speaker 4: more pressure on you know, a lot of these cap stacks.
Speaker 1: That most of the companies have shown that they can
Speaker 1: live with these high rates for quite a long time
Speaker 1: and they've done okay. And then on the other side,
Speaker 1: you know, there isn't a lot of supply, there's a
Speaker 1: lot of demand. So the sets up the credit, I mean,
Speaker 1: at least the consensus shows is pretty bullish, pretty optimistic.
Speaker 1: You're you're somewhat against that in terms of your well
Speaker 1: courtious view, but you know you're fighting against some pretty
Speaker 1: strong technicals there. How do you play that?
Speaker 4: I think technicals are ephemeral there, they'll they'll switch when
Speaker 4: you know, as soon as you count on technicals to
Speaker 4: save the day, a bad trade is not going to
Speaker 4: be rescued by bad technicals. I just don't think that
Speaker 4: as a fundamental analysis, and as an analyst, I'm just
Speaker 4: not sure that's a real part of the calculus. I'm
Speaker 4: not a trading desk, right, we are investors. That's different.
Speaker 4: I mean it helps on the margin, But you know
Speaker 4: what's different you talked about Obviously companies have.
Speaker 2: Been through a lot.
Speaker 4: There's a lot more resiliency in corporate America than I
Speaker 4: think initially perceived. But keep in mind revenues, cash flows,
Speaker 4: however you want to define it, we're pretty good, right. So, yeah,
Speaker 4: the cost of capital really jumped up. That cost of
Speaker 4: capital is not going down, So the delta the operating
Speaker 4: leverage around future cash flows is really quite high. And
Speaker 4: what we're seeing in the market is just tremendous differentiation
Speaker 4: based on that. So these highly levered capital structures haven't
Speaker 4: really been put to the test. Yet, if you see
Speaker 4: just economic activities slow, it doesn't even have to be
Speaker 4: zero or negative. That puts a lot of pressure on
Speaker 4: these companies, and I don't think that story has yet
Speaker 4: to unfold.
Speaker 3: I think going back to sort of maybe a little
Speaker 3: bit higher levels. So I think when the FED d
Speaker 3: first institute a QE back in two thousand and eight,
Speaker 3: if I pull up the HI function on the terminal
Speaker 3: and sort of regress the Fed's expanding balance, sheeversus returns
Speaker 3: for the SMP. It's almost a perfect corollary, which I
Speaker 3: think gave rise to the cloqualism don't fight the FED. Right, So,
Speaker 3: Treasury Secretary Prestident has said that he wants a ten
Speaker 3: year at four percent. He says he has tools available
Speaker 3: to him. We're at four and a half percent right
Speaker 3: now in the ten year. Do you think that that's
Speaker 3: possible to get there? Can he limit the auction size
Speaker 3: for the ten year or cut spending somewhere? Do you
Speaker 3: regulate or do we get there? You know, basically for
Speaker 3: the wrong reason, being that we're moving into an economic recession.
Speaker 4: There's a lot to kind of unpack there. You know,
Speaker 4: each of those are really quite different. I think it's
Speaker 4: very difficult for the US Treasury Department to have influence
Speaker 4: on kind of rate levels. I think rates are driven
Speaker 4: by fundamentals economic activity. You know, obviously growth and inflation.
Speaker 4: So one can kind of tweak the auction sizes schedule,
Speaker 4: but that doesn't change the fundamental fact that there's a
Speaker 4: tremendous amount of debt that needs to be refinanced, particularly
Speaker 4: as we enter twenty twenty six, that really are still
Speaker 4: ramp So I think it's really hard to do anything
Speaker 4: about that necessarily, And what you're also fighting is just
Speaker 4: an increase in term slash risk premium. I think it's
Speaker 4: a really hard task. I think the only way you
Speaker 4: really get base rates lower is through a recession, unfortunately,
Speaker 4: or fiscal prudence. If the markets had a better feeling
Speaker 4: around the fiscal sustainability, then I think rates would move lower.
Speaker 4: But we're seeing the opposite, and this bill isn't allaying
Speaker 4: any of those fiscal concerns.
Speaker 1: Can we talk a bit more about the dispersion you
Speaker 1: mentioned in terms of things all over the mat when
Speaker 1: you look at the problems you mentioned with high rates
Speaker 1: and the companies with worse economy, doesn't have to go
Speaker 1: into recession, but just the earnings start to suffer. I
Speaker 1: think the assumption broadly is that there is this liver
Speaker 1: small piece of the market like triple c's, which we
Speaker 1: all kind of know about. It's been this dumpsify that's
Speaker 1: been going on forever, and those things will blow up potentially,
Speaker 1: or they'll do Lem's, or they'll be some kind of restructuring,
Speaker 1: whereas the rest of the market will be fine. Is
Speaker 1: that too simplistic assumption?
Speaker 4: A little too simplistic if you throw in single bees,
Speaker 4: which is kind of the catch all right, you know
Speaker 4: a single bee can be two times levered and fourteen
Speaker 4: times levered, so you know there's a lot there's not
Speaker 4: a lot of informational content by just looking at kind
Speaker 4: of the credit rating.
Speaker 1: Then that's a big chunk of the market, right it
Speaker 1: is single bee It is what twenty thirty percent or
Speaker 1: something like that.
Speaker 4: That's the point. So yeah, so it's a big chunk.
Speaker 4: I think it's fascinating what's going on. So at the
Speaker 4: top line level, credit spreads are exceedingly tight, but underneath
Speaker 4: the surface, you're seeing dispersion in the triple C double
Speaker 4: single bee space.
Speaker 2: The widest in decades.
Speaker 4: So I use this analogy that always goes over poorly,
Speaker 4: but I'm going to use it anyway. Which is the
Speaker 4: high your market is like, or the levered finance market
Speaker 4: is like a duck. Right on top, it's very placid,
Speaker 4: but underneath the surface there's a tremendous amount of churn
Speaker 4: in activity. So what you're seeing on the high YULD
Speaker 4: side and dispersion front is this manifestation of companies with
Speaker 4: overlevered or levered cap structures that are very sensitive to
Speaker 4: changes in the revenue or cashlow profile that are getting
Speaker 4: really penalized.
Speaker 2: By the marketplace.
Speaker 4: What you're also seeing you mentioned the LME side, is
Speaker 4: a security price hits eighty and it just is in
Speaker 4: a vacuum. It just falls because the structure of the
Speaker 4: market is such where there's not a lot of players
Speaker 4: who are willing.
Speaker 2: To go through that process. Right.
Speaker 4: It's a long, arduous, costly process, legal fees, time, you know,
Speaker 4: you name it. So there's not a lot of willingness
Speaker 4: or appetite to kind of go through that process.
Speaker 2: So are you winning to go through that? Yeah?
Speaker 4: I mean we're we're a very big player, but in
Speaker 4: that space, you know, we think we have a competitive
Speaker 4: advantage in that space. It's something that we've been very
Speaker 4: involved in.
Speaker 1: What's the advantage of though, is at scale scale you need.
Speaker 2: Size and scale. Yep.
Speaker 4: You know, a lot of the distress players have been
Speaker 4: taken out kind of early and they've folded just because
Speaker 4: you know, the investments didn't go well.
Speaker 2: So there's not a lot of players.
Speaker 4: But you need size and scale, and we have size
Speaker 4: and scale at PGM. We have one hundred and fifty
Speaker 4: six credit analysts, which is enormous. We have the distress
Speaker 4: capabilities illegal all this stuff. But there's not a lot
Speaker 4: of players that do it. But if you can do it,
Speaker 4: the potential is really quite good.
Speaker 1: But the problem with these transactions, according to some analysis
Speaker 1: that we've seen, is that half these deals don't work out.
Speaker 1: You know, they end up going bankrupt anyway. So you know,
Speaker 1: how do you kind of look ahead, particularly in these
Speaker 1: times of very uncertain macro markets, you know, how do
Speaker 1: you look ahead and see this one's going to make it,
Speaker 1: this one isn't, and position yourself a quidity.
Speaker 2: Yeah, no, that's a good quote.
Speaker 4: We were just quoting that yesterday actually, So it's been
Speaker 4: a coin flip. Yes, you know, whether it works out,
Speaker 4: but I think it goes to asset value and looking
Speaker 4: at businesses that are good businesses, good assets that are
Speaker 4: over levered. So it's not a one hundred percent opportunity
Speaker 4: obviously based on your fifty percent hit rate quote, but
Speaker 4: if you're focused on certain elements of a business, namely
Speaker 4: asset rich, solid, you know, operating kind of environment that
Speaker 4: just has too much leverage, then those are the names
Speaker 4: that we like to play in.
Speaker 1: You don't be hunded the keys, So how do you
Speaker 1: avoid that situation? I mean, being the owner, you don't
Speaker 1: have to run a company.
Speaker 4: Well, you know it's about the exit, right, So no,
Speaker 4: we don't want to run the company. We tried that
Speaker 4: at Morgan Sally and didn't go so well. No, it's
Speaker 4: about refitting the capital structure to put this company in
Speaker 4: a better position to succeed, not taking the keys and
Speaker 4: running it right. So it's just kind of working through
Speaker 4: just from a pure.
Speaker 2: Capital structure standpoint.
Speaker 3: We've retraced back to pre tariff levels on both the
Speaker 3: IG and High Yield Corporates index, so I think we're
Speaker 3: eighty five over right now for IG and about three
Speaker 3: hundred over for high yield which to your point, is
Speaker 3: very tight historically. So are you guys embedding any quote
Speaker 3: sort of you know, potential left tail risk into your
Speaker 3: guys base case for twenty twenty five because we're in
Speaker 3: this nice window here where we have a moratorium on
Speaker 3: ninety day tariffs here, so you know what happens when
Speaker 3: this stuff potentially rolls out, or do we get a
Speaker 3: bunch of bilateral deals and having is going to be
Speaker 3: okay in two h Yeah.
Speaker 4: I've been surprised at how comfortable the market's been on
Speaker 4: the idea of a deal, right, A true trade deal
Speaker 4: is not a kind of a memoranda of understanding. So
Speaker 4: I've I've been shocked that the markets have just been
Speaker 4: this is great, We'll take it and move on. So
Speaker 4: I don't think this story has ended yet. The devil's
Speaker 4: into details. I think the market has been too swift
Speaker 4: and quick to just declare victory.
Speaker 2: And then you know, who knows.
Speaker 4: You know, maybe the whole point of April second was
Speaker 4: to make anything after that point, you know, completely consumable
Speaker 4: and digestible and acceptable. Right, So I don't know, but
Speaker 4: you have to follow the numbers, and you know, we
Speaker 4: don't have enough data yet to follow those numbers. But
Speaker 4: I've been, you know, surprised that the the the acceptance.
Speaker 4: But I think the tail risk is still quite quite pronounced.
Speaker 4: Our base case is one of muddling through, but the.
Speaker 2: Tails are as fat as.
Speaker 4: We've ever seen them. It just makes it really, really difficult.
Speaker 4: So I don't think you are getting paid for those
Speaker 4: tail risks. If you look at the pricing of credit
Speaker 4: just broadly defined, I think it's pricing in a model
Speaker 4: throw and mortal throw is great for credit, right, that's
Speaker 4: what you want. But you know, I would submit that
Speaker 4: the tail risk is higher than normal, and I want
Speaker 4: to get paid for that too.
Speaker 1: Credit also seems to be pricing in the idea that
Speaker 1: the Trump administration will be more pragmatic ultimately than comforted confrontational,
Speaker 1: and that you know, things do get very choppy, then
Speaker 1: that they will be this put taco trade. Ye, things
Speaker 1: will reverse and you know people are even putting levels
Speaker 1: on it, let's say one thirty for the IG spread.
Speaker 1: In terms of that, that's where you you know, stop
Speaker 1: because the administration does something differently to reverse that. So
Speaker 1: do you believe that you know there is limited downside
Speaker 1: in this market because of the way that the administration
Speaker 1: is watching the bond market.
Speaker 4: The market is in eternal search of free puts, right,
Speaker 4: so you know the Fed put, now the Trump put.
Speaker 4: I just don't know enough. I would not bank on
Speaker 4: that at no point intended. There's definitely this de escalation
Speaker 4: strategy at place, So I do think there's some element
Speaker 4: of it for sure. But you know, we haven't yet
Speaker 4: seen the data around the uncertainty feeding into the economics
Speaker 4: shet right. You know the economy is going to show
Speaker 4: some signs of strength because it pulled forward. I think
Speaker 4: that's more of a mirage than a reality. So I
Speaker 4: think there's going to be some headfakes along the way.
Speaker 4: But I just think that, you know, declaring like I
Speaker 4: changed my mind and swipe of a pen, I don't
Speaker 4: think that's a strategy.
Speaker 2: To allay those fears necessarily.
Speaker 1: So, I mean, this all makes absolute sense on a
Speaker 1: fundamental basis. But I go back to the point about technicals,
Speaker 1: which just every time there is a widening out, it
Speaker 1: snaps right back because there's so much cash out there
Speaker 1: looking to buy, regardless of all the problems that we
Speaker 1: are facing, and I am often puzzled by it. But again,
Speaker 1: it just thinks you can't fight the technicals.
Speaker 2: No, I think that's right for now. Could it go on?
Speaker 1: It's been going on for saving the years.
Speaker 4: Well, I've been a different macro environment too, but there's
Speaker 4: a lot of cash in the system.
Speaker 2: Absolutely.
Speaker 4: But if your thesis, not yours, but kind of like
Speaker 4: the generic you thesis, is that I'll be rescued by
Speaker 4: the technicals, I just have a hard time with that.
Speaker 4: And if I'm wrong, then I'm okay with that. Actually,
Speaker 4: things have a tendency of going on longer than I
Speaker 4: think we you know, anticipate oftentimes. I think this is
Speaker 4: one of those times. But given the TEL risk and
Speaker 4: everything else we mentioned, I'm not sure technicals what I
Speaker 4: would hang my hat on as an investment thesis. If
Speaker 4: I was a trading desk could be a different story.
Speaker 3: So for the PM's listening today, you know, what's your
Speaker 3: guys pre election for portfolio positioning? You guys EU over
Speaker 3: the US, are you short data? There is longer data
Speaker 3: paper to help temper those fiscal risks relating to those
Speaker 3: deficits and structure products? What does that what does that
Speaker 3: bias look like for you guys?
Speaker 4: Yeah, so we've been very button up on the risk side.
Speaker 4: So we love credit, so we have a a natural
Speaker 4: tendency of playing in credit. We think we're very good
Speaker 4: at it. But you think about from a scaling standpoint,
Speaker 4: we have the ability to you know, run one hundred
Speaker 4: percent of our risk threshold.
Speaker 2: E's actually we can go up.
Speaker 4: To one twenty if we really like it, you know,
Speaker 4: kind of spinal tap esque. We're at thirty now, so
Speaker 4: we're at the lower end of the range, and so
Speaker 4: how are we getting there? So it's a short maturity
Speaker 4: roll and carry and high yield fits that built too,
Speaker 4: So this is not an up and quality trade necessarily.
Speaker 2: You know, high yield.
Speaker 4: Carry is attractive carry, so we still like that, and
Speaker 4: then the structure product piece really fits in. So structure
Speaker 4: product is an area where you know, we feel in
Speaker 4: a portfolio construct, but it allows you to move up
Speaker 4: and out the efficient frontier.
Speaker 2: And they're the quintessential carry trades.
Speaker 4: You look at you know, double A, triple A colos,
Speaker 4: it's carry safe carry, and so that's that's what we're doing.
Speaker 4: I mean, Europe has been you know, slightly more cheap
Speaker 4: than the US. You know, a lot of that has
Speaker 4: to do with the proximity to what's going on in
Speaker 4: Ukraine and Russia. But it's it's it's small to this point.
Speaker 4: It was larger this time last year. That kind of
Speaker 4: valuation gap has you know, someone closed.
Speaker 2: But it's a.
Speaker 4: Portfolio that's more defensively positioned, i'd say, And we have
Speaker 4: more US treasuries in our portfolio than we've had in
Speaker 4: a long time as a defensive measure, because I want
Speaker 4: to be front footed, right, so I don't want to
Speaker 4: be locked in my risk if the markets.
Speaker 2: Do blow up, if there's a period of dislocation.
Speaker 4: We want to have the cash and the ability to
Speaker 4: kind of jump in.
Speaker 2: So we're biding our time.
Speaker 4: I'm laying in wait for that, and US kind of treasuries,
Speaker 4: you know, allow for that. What's lost on I think
Speaker 4: a lot of investors on the credit side is the
Speaker 4: swap spread, right. So the cheapness the yield that credit
Speaker 4: folks are so excited about really the byproduct of the
Speaker 4: swap spread more than the credit spread, right, So treasuries
Speaker 4: are cheap more than credit is cheap.
Speaker 1: And treasuries and thank you, by the way for being
Speaker 1: the first credit edge guest to mention spinal tap. I'm
Speaker 1: very happy to hear that reference, you'll get the short
Speaker 1: end of the treasury curve, are you you're not going
Speaker 1: out long on mean, we've told you talk about the
Speaker 1: long end being somewhat more Yeah.
Speaker 4: Yeah, so we want to be closer to FED policy
Speaker 4: than further away. The back end of the curve is
Speaker 4: driven by you know, all these other uncontrollable type of factors,
Speaker 4: and that manifests itself in that risk turm premium. So yeah,
Speaker 4: it's uh, it's more kind of ten years and in
Speaker 4: so it's not taking a duration bet as much much
Speaker 4: as it is taking a liquidity stance.
Speaker 1: I don't see that's you know, leverage loans, repackaged floating rate.
Speaker 1: Does that mean that you don't expect any rate cuts
Speaker 1: this year?
Speaker 4: Well, so we penciled in from you know, god, it's
Speaker 4: been forever now kind of two two, maybe three now
Speaker 4: maybe it's one to two. Uh, you know, our view
Speaker 4: all along has been kind of higher for longer. I
Speaker 4: don't see the same scope and capacity for FED cutting rates.
Speaker 2: Uh.
Speaker 4: You know, if you look at the market reaction for
Speaker 4: you know, any swoon up until recently, it was the
Speaker 4: instantaneous rate cuts, right, So you look at kind of
Speaker 4: what happened when we had the regional bank situation. I
Speaker 4: think within you know, six hours, eight cuts were priced in.
Speaker 4: You know, this is a time when I think the
Speaker 4: inflation rate was over six percent. You know, I think,
Speaker 4: so this this muscle memory, this this outdated playbook, whatever
Speaker 4: you want to call you know, I think investors are
Speaker 4: not really thinking about what they fed objective function is,
Speaker 4: and that's being an inflation fighter. So I think it's
Speaker 4: hard to be aggressive on the rate cut side or
Speaker 4: at all when inflation is, you know, well above their
Speaker 4: target and mandate.
Speaker 1: You also got the president and Smett said the treasury sector,
Speaker 1: you're talking about pushing rates down somehow. We'll see how
Speaker 1: that goes.
Speaker 3: But so obviously the theme is obviously very defensive. So
Speaker 3: within at least the corporate credit portion of the portfolio,
Speaker 3: are you guys under overweight any particular sectors? And given
Speaker 3: the defensive nature of the posturing, and do you guys
Speaker 3: like single a's like a GI aerospace or defense names
Speaker 3: or are you guys wanting to go down to something
Speaker 3: that looks like a Boeing at a sort of low
Speaker 3: low ig Like how do you guys, how you guys
Speaker 3: positioning that I.
Speaker 2: Love how you snuck in Boeing there very smooth. I
Speaker 2: like that.
Speaker 4: I would say this cycle, if you can call a cycle,
Speaker 4: is less kind of sector sectorial driven than previous cycles.
Speaker 4: What we're seeing is just real differentiation by leverage. I
Speaker 4: think the consumer segment is a fascinating segment to evaluate.
Speaker 4: So what we're seeing is the you know, the larger
Speaker 4: public kind of consumer retailers. They're obviously concerned and talking
Speaker 4: about tariffs, but they are eating that, so to speak,
Speaker 4: in their margin, and margins are quite skinny to begin
Speaker 4: with to build market share. If you look at more
Speaker 4: of the levered operators, namely kind of LBO type of names,
Speaker 4: they're telling us that they're actually passing that through. And
Speaker 4: why are they passing it through because they have no choice, right,
Speaker 4: they have to cover their capital costs, right, which are
Speaker 4: pre substantial. I'm not sure how that's going to play
Speaker 4: out necessarily, but I think the consumer is smart enough
Speaker 4: to realize, you know, I'm going to go here versus there.
Speaker 2: The fact that you.
Speaker 4: Have you know, X amount of leverage more than you
Speaker 4: know this institution. I don't care. I care about the price.
Speaker 4: And so this case shaped type of experience that we're
Speaker 4: seeing on the consumer side. So this is a long
Speaker 4: winded way of saying, I don't know if it's so
Speaker 4: sector specific. Obviously we have biases around you know, you know,
Speaker 4: different sectors, of course, But I just find it fascinating
Speaker 4: that the differentiation across all these different you know, views
Speaker 4: of the credit market is by leverage, not by sector,
Speaker 4: which is very different.
Speaker 2: Right.
Speaker 4: You look at twenty fifteen, it was all about energy.
Speaker 4: You look at kind of late nineties, two thousand, it
Speaker 4: was all about tech and telecom. Now it's really about
Speaker 4: how much leverage do you have, and it's indiscriminate.
Speaker 2: Years and years and years of really.
Speaker 4: Low rates, it just kind of lifted, you know, across
Speaker 4: It was indiscriminate, right, didn't matter what segment of the
Speaker 4: economy you're in. You know, you got cheap costs of capital,
Speaker 4: and you know that's that's wor it's playing out.
Speaker 1: I'd say, so you expect more defaults in the consumers,
Speaker 1: that's to whether it have been LBOs.
Speaker 2: I would expect that to be the case.
Speaker 4: Yeah, I think, you know, retail is kind of fickle
Speaker 4: in the best of times, very exposed to consumer behaviors,
Speaker 4: you know, of course, and so I would expect, you know,
Speaker 4: higher than what we've seen before.
Speaker 1: Any other sectors that stick out in terms of high
Speaker 1: leverage and getting penalized by the market.
Speaker 4: Well, you know, I think the other sector that we're
Speaker 4: focused on, well well too, I guess one is the
Speaker 4: chemical sector. So the chemical sector is you know, under pressure.
Speaker 4: You know, it's been dominated by China. You know over
Speaker 4: the past n number of years. There's lots of chatter
Speaker 4: if it's a structural shift, and you know, will these
Speaker 4: chemical companies suffer through it like they have in the past.
Speaker 4: Our view is you know, much more kind of negative
Speaker 4: around that, you know, just some kind of see the
Speaker 4: same same ability to operate. So that's an area that
Speaker 4: we're concerned about.
Speaker 2: You know. The other is the hospitality space.
Speaker 4: Right if you think about immigration as an example that
Speaker 4: you know, as a very targeted part of the market
Speaker 4: where immigration is quite important and as as that turns,
Speaker 4: not only are they running out of workers, but they
Speaker 4: have to pass those costs along and once again consumers
Speaker 4: are very sensitive. Right, So you know, those are you
Speaker 4: know areas that we're you know, we're quite focused on.
Speaker 4: But there's you know, there's positives too, right, I mean
Speaker 4: there's all this talk around you know, AI investment. You know,
Speaker 4: we're on the bond side, so we you know, don't
Speaker 4: have the same kind of sexy story so to speak,
Speaker 4: you know, but it manifests in a couple of ways.
Speaker 4: The way that I think is really interesting is the
Speaker 4: power you know, the merchant power space is is a
Speaker 4: space that we like a lot. The regulated utilities is
Speaker 4: going to take more time, right because they have to
Speaker 4: go through and pass that along. But the demand for electricity,
Speaker 4: you know is you know, plus one percent for the
Speaker 4: first time in decades.
Speaker 2: Right, that's not.
Speaker 4: Going to you know, move lower anytime soon. And just
Speaker 4: think that's a real opportunity.
Speaker 3: Does that include like themes about the energy transition. I
Speaker 3: think you've had Caterpillars tilted some pretty bullish views for
Speaker 3: their mining business over the next five to ten years,
Speaker 3: whether it's copper, li theum, all of these important metals
Speaker 3: that are needed to facilitate this huge transition. Is that
Speaker 3: something you guys are expressing in the portfolio or are
Speaker 3: you not necessarily.
Speaker 4: Is not necessarily it's a more complicated story, yeah, right.
Speaker 4: You know, these are high cyclical type of commodities, So
Speaker 4: I think that's a very different story. You know, ultimately
Speaker 4: you're taking cyclical risk there structural things that you mentioned,
Speaker 4: but I think, you know, the sickle aspect is still
Speaker 4: quite pronounced.
Speaker 1: I'm interested in your Vie's also on private credit because
Speaker 1: a lot of people we've had on this show have
Speaker 1: just talked about it endlessly, and you know, it's seemingly
Speaker 1: this great, very safe, very high return product that everybody's
Speaker 1: piling into at the moment. The guests we've had have
Speaker 1: talked about equity like returns, although we kind of saw
Speaker 1: a shift later last year where we had one large
Speaker 1: asset manager on talking about the relative value between public
Speaker 1: and private and talking about, you know, there should be
Speaker 1: about two hundred basis points on the leverage side difference,
Speaker 1: you know, in terms of pick up for the illiquidity
Speaker 1: that seems to be going away. So what's your view
Speaker 1: in terms of, you know, the value between the two markets.
Speaker 4: Yeah, so, I you know, would start out by saying,
Speaker 4: I think over time it's going to be a single market.
Speaker 4: You know, this demarcation between public and private will fade.
Speaker 4: I go back to my experience when I was you know,
Speaker 4: in lever finance high yield at the time and you know,
Speaker 4: loans were the new shiny thing, and why were they
Speaker 4: so popular, Well, they had great sharp ratios because they
Speaker 4: didn't get marked and they were senior in the cap.
Speaker 1: Structure pretty much how private credit is today pretty.
Speaker 4: Much and loans, to be fair, loans aren't even considered
Speaker 4: as security. So it's more complicated, right, just structurally contracts
Speaker 4: right then, yeah, yeah, yeah, so so so I think
Speaker 4: over time that that'll just continue to fade. I'll tell
Speaker 4: you that we get refinanced out of our public deals
Speaker 4: into privates and privates in the public, so it's already
Speaker 4: being blurred.
Speaker 2: So you have to have a view.
Speaker 4: But I think there's been you know, maybe a little
Speaker 4: too much excitement on the private side. You know, I
Speaker 4: think there's real value in pockets, but you know, the
Speaker 4: value that I see is more on the below investment
Speaker 4: grade side it syncratically, of course, and then on the
Speaker 4: ass the asset base an ant side, which is where
Speaker 4: I think there's more opportunities. You know, at this point
Speaker 4: in time on.
Speaker 1: How I mean, you have to wonder that about the
Speaker 1: sustainability of the capital structure when you know, those borrowers
Speaker 1: that are going to that market because they have to
Speaker 1: paying you know, substantially high rates. How much longer can
Speaker 1: they fold? And it's floating as well, So are we
Speaker 1: not instead of setting them up for failure?
Speaker 2: Well, time will tell.
Speaker 4: If you look at leverage in the system, there's a
Speaker 4: lot more leverage, you know, in the levered loan market
Speaker 4: and in the private credit market. I think the trap
Speaker 4: that acid allocators are falling into is that they're looking
Speaker 4: at the empiricals and the empiricals.
Speaker 2: Are way out of date.
Speaker 4: Right, So the history around both lever loans and private
Speaker 4: credit is they have a lower incidence of default and
Speaker 4: higher recoveries. I'm not convinced that's going to be the
Speaker 4: case going forward. If you look at kind of distressed activity,
Speaker 4: default activity, you know, you've been seeing the private space running.
Speaker 2: Higher rate than the public space. You know.
Speaker 4: The issue on the private side is that it's not
Speaker 4: until you experience an impairment.
Speaker 2: That you have to recognize it.
Speaker 4: So it just takes longer kind of inherently to to
Speaker 4: play out. But you know, we're seeing these companies struggle
Speaker 4: just based on you know, their higher costs of capital
Speaker 4: and a little little hit to their cash flows. They
Speaker 4: can't afford that hit. The cash flows, So you know,
Speaker 4: we'll see about the wherewithal of the industry to you know,
Speaker 4: put more money into these you know situations. But you know,
Speaker 4: not all the sponsors of these different private credits have
Speaker 4: that wherewithal.
Speaker 1: Is there enough of a pickup though to justify the
Speaker 1: lack of liquidity, lack of transparency, all of the other
Speaker 1: things you can't see, is that is there enough in
Speaker 1: private when you when you're shown a deal, could you
Speaker 1: don't just get a broady syndicated leverage loan that pays
Speaker 1: you just as much and you know has a transparency.
Speaker 1: Why wouldn't you just say, say, in the public market.
Speaker 4: It depends on your liability and your liquidity needs. So
Speaker 4: if you have just kind of in theory ten years
Speaker 4: locked up capital, then you're less worried about the liquidity
Speaker 4: aspect of it.
Speaker 1: If you had, are you getting the pickup over the
Speaker 1: private even to justify that?
Speaker 4: Well, right, if you're not worried about liquidity, then yes.
Speaker 4: If you are, then maybe not. But you know, there
Speaker 4: is a trade off when you go into private credit.
Speaker 4: You know, even with less and inappropriate pickup, there's other things
Speaker 4: that go away, like acid allocation or relative value. You
Speaker 4: you're not as front footed, right, You're you're kind of
Speaker 4: stuck in that allocation. Whereas if you're in the public market,
Speaker 4: you know, let's say kind of a single asset barrower
Speaker 4: deal looks cheap to one corporate credit deal that you have,
Speaker 4: you can swap out and take advantage, right, you have
Speaker 4: that ability. But on the private side, you're just stuck.
Speaker 4: You can't take advantage of that. So I think that's
Speaker 4: something that is often lost from an acid allocation standpoint.
Speaker 4: But I also think, you know, a lot of these
Speaker 4: acid allocation models need to change, right, you know, you know,
Speaker 4: everything is a form of a mean variance model, which
Speaker 4: is to say, you know, it's volatility based, right, And
Speaker 4: I mean I've seen private credit presentations, not from USC
Speaker 4: of course, with like sharp ratios of eight x, pretty impressive,
Speaker 4: like come on, like you know, like you know, that's
Speaker 4: obviously not the case. But there's some version of that
Speaker 4: gets placed into these these acid allocation mean variance models
Speaker 4: and they look good, right, And so I think there
Speaker 4: needs to be kind of a future adjustment to adequately
Speaker 4: understand what the asset allocation and thus the spread should be.
Speaker 2: Is two hundred enough? Is it one fifty is it,
Speaker 2: you know, so on and so forth.
Speaker 1: And when you say convergence that the two will converge,
Speaker 1: how long does it take and what does it look like?
Speaker 1: Does it mean that it's just exactly the same as
Speaker 1: leverage loans on now? Ultimately, I just.
Speaker 4: Think they'll they'll there'll be differences, of course, like there's
Speaker 4: a difference between you know, lever loan, HI you bond.
Speaker 4: But players think of that as one big sandbox. Right
Speaker 4: when we look at deals, we look at it versus
Speaker 4: loans and bonds. Companies issue oftentimes and loans and bonds.
Speaker 4: So I just think it's it'll be a single leve
Speaker 4: fin market, not a very separated private credit.
Speaker 1: But will the private credit be more broady, syndicated and
Speaker 1: traded with muks and you know all of that stuff
Speaker 1: that you get in the leverage loan market.
Speaker 4: I think it's going that way. You know, the push
Speaker 4: tour words ETFs in this space is you know, pushing
Speaker 4: it along.
Speaker 2: Now.
Speaker 4: I think this is a good news bad news story
Speaker 4: as well as any time you get retail involved in
Speaker 4: a niche market, you know, the emphasis and onus changes.
Speaker 4: Right when private credit investors are just dealing with institutional
Speaker 4: savvy investors. The hurdle is different. Once you push it
Speaker 4: into the retail space. There's a much closer examination, and
Speaker 4: it'll be curious to see how it holds off upon
Speaker 4: closer examination.
Speaker 1: So all of the stuff you look at, Greg, globally,
Speaker 1: we probably hadn't hits on it all. But I'm interested
Speaker 1: in your idea of relative value right now?
Speaker 2: Where is the value?
Speaker 1: I mean, we've talked about how tight spreads are in
Speaker 1: US credit, We've talked about a bit of the value
Speaker 1: proposition in Europe. It's a big weld out there. There
Speaker 1: are many other products. What do you what do you
Speaker 1: think whe's the value?
Speaker 2: Yeah?
Speaker 4: My caveat is there's not a tremendous amount of value.
Speaker 4: There's no real highly dislocated asset as far as I
Speaker 4: can tell. So it's all on the margin and marginally
Speaker 4: what I see is structure products is being dislocated and attractive.
Speaker 2: Most clos cnbs less.
Speaker 4: So I think you know that's changed unless you go
Speaker 4: into the single assets single barwer space, which is basically
Speaker 4: lending on property. There's some you know, interesting opportunities there,
Speaker 4: but yeah, I would say, you know, clos broadly defined
Speaker 4: anything structured still trades a little more cheaply because of
Speaker 4: the time and effort it takes to explain it to someone, right,
Speaker 4: you know, it's it's true, it's one of these things.
Speaker 1: Then people are still still thinking that cl those are
Speaker 1: the same as CDOs that blew the world.
Speaker 4: Four letter words. Yeah, yeah, you know it was. Obviously
Speaker 4: it's a very different market. And even then, to be fair,
Speaker 4: the COLO space behave exactly as it was supposed to
Speaker 4: in the global financial crisis, and now it is even
Speaker 4: better protected more subordination, and so you know, we think
Speaker 4: these structures are bold.
Speaker 1: But if you're worried about the loans though underlying it,
Speaker 1: I mean, do you think there's enough diversity in the
Speaker 1: basket to protect you against that?
Speaker 2: I do?
Speaker 4: I mean, to put it in perspective, if you own
Speaker 4: a triple a colo you have, I'll just round up
Speaker 4: because it doesn't matter forty percent subordination underneath you. So
Speaker 4: a lot has to go wrong. I mean, the world
Speaker 4: almost effectively has to end for that to be touched
Speaker 4: at the top. I think the structure and the subordination
Speaker 4: is what you're really participating.
Speaker 2: In, not the underlying loans itself.
Speaker 4: I know it sounds kind of funny to say, but
Speaker 4: when you're that senior with that much protection, you know,
Speaker 4: the loan market could really come upon hard times and
Speaker 4: these structures will be fine as you go down less.
Speaker 2: So right, it's just kind of the lost absorption nature
Speaker 2: of it.
Speaker 4: So triple b's not so much, uh, you know, even
Speaker 4: single a's but you know, definitely triple as you're fine.
Speaker 1: Yeah, although we did see a triple A. I think
Speaker 1: the c NBS that didn't make it. That was recently
Speaker 1: so no old triple as.
Speaker 4: That was a savsby deal, right, so that didn't have
Speaker 4: the diversification piece to it.
Speaker 2: Yeah, But point well taken.
Speaker 4: This is why this is why it trades more, chiefly
Speaker 4: because there's always a you know, you know, a story
Speaker 4: about it.
Speaker 1: Yes, yes, yes, and it sounds you'll edge right, you've
Speaker 1: been doing this for a long time. We've had a
Speaker 1: great conversation. You've seen you've seen it all. How do
Speaker 1: you differentiate your self?
Speaker 4: I think there's there's a few ways. One is just discipline.
Speaker 4: I think being longer term focus is.
Speaker 2: A competitive advantage.
Speaker 4: You know, we talked about the technical side, and the
Speaker 4: technical side helps on the margin for sure, But you know,
Speaker 4: when you're running close to nine hundred billion of assets.
Speaker 4: You know, you need to be fundamentally focused, and we're
Speaker 4: very good on the fundamental focus side. So you know,
Speaker 4: whether it's corporate credit, whether structure, products, it all starts,
Speaker 4: you know, with fundamentals, and we have an extremely deep,
Speaker 4: well resourced team to you know, allow us to do
Speaker 4: that and allow us to do it you know pretty well.
Speaker 4: So I think our competitive advantages is, you know, the
Speaker 4: long term nature of it and the deep understanding of
Speaker 4: credit and structure, and you put that together, it's a
Speaker 4: pretty powerful duo.
Speaker 2: I think.
Speaker 1: Give them the new cycle that we have trouble seeing longer
Speaker 1: than the end of the week. So what does long
Speaker 1: term mean to you?
Speaker 4: It's definitely longer than the news cycle, which is I
Speaker 4: don't know, twenty seconds now. I mean we take you know,
Speaker 4: at least a twelve month few And you know that's
Speaker 4: not to say, you know, we're blind to what's happening
Speaker 4: around us, like we modulate and we take advantage, but
Speaker 4: you know, we think about things and you know, longer
Speaker 4: term increments, and that's particularly in the case of credit,
Speaker 4: you know, credit, I try not we try not to
Speaker 4: worry about the vagaries of of you know, the week
Speaker 4: or the month and just you know, take a longer
Speaker 4: term perspective, and that has a tendency of you know,
Speaker 4: proving itself out.
Speaker 1: Do you worry about anything, particularly Greg, We've had people
Speaker 1: worry about all sorts of things on the show, and
Speaker 1: we are credit people, and you know that's over there
Speaker 1: looking very worried. So what what keeps you up at night?
Speaker 4: Well, there's a lot that you know keeps me up.
Speaker 4: But I think what keeps me up on the credit
Speaker 4: side is there's not a lot of history recent history
Speaker 4: of credit issues. Say that differently, you know, it's not
Speaker 4: a well experienced market. There hasn't been a true credit
Speaker 4: cycle since honestly, you know, thirty years. So you know,
Speaker 4: I think there's a tendency for investors to be dismissive
Speaker 4: around the downside of credit, you know, whether it's the
Speaker 4: Taco put or the Fed put, whatever you want to
Speaker 4: call it. You know, rescuing bad capital structures in bad position.
Speaker 1: Even in twenty twenty that barely lasted, it was.
Speaker 4: We have it was, yeah, it was not even three weeks, right,
Speaker 4: so we have not seen a sustained downtrade and what
Speaker 4: words me is when and if that does happen.
Speaker 2: I do think the next credit.
Speaker 4: Cycle will be a more classic one, whatever that means.
Speaker 4: But it's not going to be you know, reinflated instantaneously
Speaker 4: by the FED or by the fiscal. Right you put
Speaker 4: those two things together. You have a FED that's constrained
Speaker 4: by inflation. You have the fiscal constrained by you know,
Speaker 4: the current state of the fiscal which suggests to me
Speaker 4: that credit is you know, going to drift much lower
Speaker 4: than what we've seen and when.
Speaker 2: If we do hit a patch here.
Speaker 4: So I worry about the behaviors of the market in that.
Speaker 4: And you know, you talked about l E and you
Speaker 4: know the knives are going to be much sharper in
Speaker 4: the capacity to absorb the downgrades is going to be
Speaker 4: much less, And so I worry about credit really becoming
Speaker 4: dislocated in a meaningful way. The flip side of that,
Speaker 4: I'm also excited about it.
Speaker 1: Well, plussibly could trigger the end of the cycle. I mean,
Speaker 1: because as we've talked about, it goes on forever and
Speaker 1: we've thrown everything else it and the bad news just
Speaker 1: keeps coming, but spreads just keep getting tights of.
Speaker 4: No the doorability of the economy, and these companies are real.
Speaker 4: But the trap is just because it didn't happen doesn't
Speaker 4: mean it can't happen.
Speaker 2: And you know, we'll see.
Speaker 4: But these things take time, and it's important to remember that,
Speaker 4: you know, these companies are financing themselves at a much
Speaker 4: higher rate than they have in a long time, and
Speaker 4: and it just takes time to play out, and so
Speaker 4: that operating leverage piece, I think is missed. That cushion
Speaker 4: to absorb those cash flows moving lower is not what
Speaker 4: it once was.
Speaker 1: Great stuff. Greg Peters, co, Chief investment Officer at PGM
Speaker 1: Fixed Income. Many thanks for joining us on the credit edge.
Speaker 1: Thank you, and of course we're very grateful to Matt
Speaker 1: Gooyner from Bloomberg Intelligence. Thanks for joining us today. Thanks
Speaker 1: for having me back for more credit and market analysis
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