WEBVTT - PGIM Lauds ‘Bulletproof’ CLOs as Credit Risks Rise 0:00:17.920 --> 0:00:20.400 Hello, and welcome to the Credit Edge, a Wiki markets podcast. 0:00:20.520 --> 0:00:23.720 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:23.560 --> 0:00:24.040 And I'm MATC. 0:00:24.079 --> 0:00:27.640 Woyner, a credit analyst covering industrials with Bloomberg Intelligence. This week, 0:00:27.680 --> 0:00:30.560 we're very pleased to welcome Gregory Peters, co, Chief Investment 0:00:30.600 --> 0:00:32.280 Officer of PGM Fixed Income. 0:00:32.760 --> 0:00:35.159 Are you Greg, I'm great, Thanks for having me. PGM 0:00:35.200 --> 0:00:35.440 is one. 0:00:35.400 --> 0:00:38.239 Of the world's largest investment managers, with one point fortullion 0:00:38.240 --> 0:00:41.199 in asset center management, of which fixed income AUM totals 0:00:41.240 --> 0:00:43.599 over inn billion, and so Greg is one of the 0:00:43.640 --> 0:00:47.320 co heads of the multisector team. Before joining PGM in 0:00:47.440 --> 0:00:50.000 twenty fourteen, he was Morgan Stanley's Global Director of Fixed 0:00:50.040 --> 0:00:54.080 Income and Economic Research and chief Global cross Asset Strategist, 0:00:54.680 --> 0:00:58.160 responsible for the firm's macro research and asset allocation strategies. 0:00:58.400 --> 0:01:01.480 And before that he was at Solomon as well as 0:01:01.520 --> 0:01:03.520 the US Treasury. So I think that's sort of a 0:01:03.560 --> 0:01:05.640 long way of saying I think when Greg speaks, we 0:01:05.680 --> 0:01:07.840 should all listen. So do you want to kick us off? 0:01:07.880 --> 0:01:10.120 James, Yeah, we have tons of questions for Greg, but 0:01:10.280 --> 0:01:13.000 first we will set the scene. Markets have rallied on 0:01:13.120 --> 0:01:15.560 hopes of trade deals, but there's still a huge amount 0:01:15.560 --> 0:01:18.440 of worry, not least about tariffs, but also about the 0:01:18.440 --> 0:01:23.520 budget deficit, the FED, riots in la and global geopolitical concerns. 0:01:23.880 --> 0:01:26.840 Despite this wall of angst and uncertainty, credit markets are 0:01:26.840 --> 0:01:29.880 projecting an air of complacency, with debt sbreads back below 0:01:29.880 --> 0:01:32.360 long term averages and likely to go tighter as demand 0:01:32.400 --> 0:01:35.080 for yield rises and net new supply of corporate bonds 0:01:35.120 --> 0:01:37.840 and loans remains muted, unless, of course, there's a big 0:01:37.959 --> 0:01:41.000 m and a comeback. Public credit markets are performing well, 0:01:41.080 --> 0:01:43.959 leading some to question the value proposition of private markets, 0:01:44.000 --> 0:01:46.720 and most people seem confident about the strength of corporate 0:01:46.760 --> 0:01:50.520 balance sheets. The end of American exceptionalism is another big theme. 0:01:50.680 --> 0:01:52.920 Global investors say they're looking more at Europe and at 0:01:52.920 --> 0:01:56.360 Asia as alternatives, but there are clear limitations when it 0:01:56.360 --> 0:01:59.160 comes to scale and liquidity there. So, Greg, what's your 0:01:59.200 --> 0:02:00.960 take our credit mark? It's fairly valued. 0:02:00.960 --> 0:02:02.520 Where do we go from here? Boy? 0:02:02.560 --> 0:02:05.440 That was a great intro. I found myself nodding to 0:02:06.040 --> 0:02:11.280 everything that you said. I think it is a valuation story. 0:02:11.800 --> 0:02:15.440 Heading into this year, we had a more optimistic view 0:02:15.760 --> 0:02:18.880 of the global economy of the US economy, and we. 0:02:18.840 --> 0:02:20.000 Were still cautious. 0:02:20.560 --> 0:02:23.239 And the reason why we were simply cautious is because 0:02:23.639 --> 0:02:24.600 risk reward. 0:02:24.480 --> 0:02:25.160 Was quite poor. 0:02:26.560 --> 0:02:29.880 You know, spreads are top kind of richest death style 0:02:29.919 --> 0:02:32.840 that we've seen over the past just call it thirty years. 0:02:34.040 --> 0:02:39.040 If you just oversimplify, spreads are you know, well below 0:02:39.120 --> 0:02:41.520 the average. And it feels to me, just based on 0:02:41.560 --> 0:02:46.840 your intro, that we have above average type of risk environment. 0:02:47.040 --> 0:02:53.200 So I do think credit spreads are too tight. I 0:02:53.200 --> 0:02:56.880 think this is a market where you're induced to take 0:02:57.000 --> 0:03:02.320 less risk. Button down your risk profile, roll and carry, 0:03:02.720 --> 0:03:06.120 don't go out the curve, don't necessarily go down the 0:03:06.120 --> 0:03:08.600 credit curve. But we can talk more about it because 0:03:08.600 --> 0:03:13.799 that's where the kind of the idiosyncratic opportunities lie. But yeah, 0:03:13.800 --> 0:03:16.000 I think you have to be cautious in here. 0:03:16.360 --> 0:03:17.720 Talking about the risk profile. 0:03:17.760 --> 0:03:19.400 So what sort of the house of you at PGM 0:03:19.440 --> 0:03:21.800 in terms of the big beautiful bill. Is it going 0:03:21.840 --> 0:03:23.919 to trigger a sort of net reduction to the deficit? 0:03:24.560 --> 0:03:27.280 I think President Trump has called out one point four 0:03:27.320 --> 0:03:30.280 one point five trillion lower or do you think it's 0:03:30.280 --> 0:03:32.679 going to push us further into the red to the 0:03:32.720 --> 0:03:34.920 tune of two and a half million. I wouldn't exactly 0:03:34.920 --> 0:03:38.240 call a four trillion dollar delta a small figure. So 0:03:38.600 --> 0:03:40.200 how do you see that playing out. What's the impact 0:03:40.240 --> 0:03:42.080 on demand for treasuries. 0:03:42.840 --> 0:03:44.600 Well, I have yet to see. 0:03:45.800 --> 0:03:51.160 Any think tank or independent study to suggest that this 0:03:51.200 --> 0:03:53.840 is a deficit reducer, so I'd be curious to see 0:03:53.840 --> 0:03:58.160 the math on that. So all roads lead to a 0:03:58.200 --> 0:04:02.520 greater amount of debt, a larger deficit, and I think 0:04:02.560 --> 0:04:06.880 the markets care a lot about it. This is one 0:04:06.880 --> 0:04:10.880 of these things. As we entered this year, tax reform, 0:04:10.960 --> 0:04:11.640 let's just call it. 0:04:11.680 --> 0:04:12.680 I'm doing air quotes. 0:04:12.760 --> 0:04:17.320 A tax reform was viewed as a market positive, you know, 0:04:17.400 --> 0:04:22.200 balancing out immigration and tariffs. But I think what you're 0:04:22.560 --> 0:04:25.400 realizing is that this comes out of cost, and the 0:04:25.440 --> 0:04:29.000 markets are the bond market is increasingly worried about that 0:04:29.120 --> 0:04:32.640 cost and the payback. And I think this is a 0:04:32.680 --> 0:04:36.240 situation where this bill will get passed in one way, 0:04:36.279 --> 0:04:40.480 shape or form, and I think the bond market is 0:04:40.520 --> 0:04:42.719 going to dislike it. 0:04:42.839 --> 0:04:45.400 So it means high yields at the long end, But 0:04:45.680 --> 0:04:49.960 it presumably doesn't make or it makes a recession less likely, 0:04:50.040 --> 0:04:51.799 does it? Because it's very supportive. 0:04:52.360 --> 0:04:52.680 It does. 0:04:52.720 --> 0:04:55.360 There's a decent amount of fiscal stimulus coming in now. 0:04:56.160 --> 0:04:59.440 I think that's lost on a lot of folks. So 0:04:59.480 --> 0:05:03.600 this will can continue to push the fiscal that I 0:05:03.680 --> 0:05:09.240 believe averts a recession. It's hard to it's hard to 0:05:09.279 --> 0:05:11.760 forecast the course because there's you know, so much in 0:05:11.800 --> 0:05:15.520 the way of unknowns and uncertainties. We have yet to 0:05:15.560 --> 0:05:20.440 see the impact of the tariffing strategy or shall I say, 0:05:20.880 --> 0:05:24.160 the change in the strategy that makes it really difficult 0:05:24.240 --> 0:05:28.680 for companies to plan. So the truth is we don't know. 0:05:28.800 --> 0:05:32.240 But the fiscal side, you know, does help. But the 0:05:32.279 --> 0:05:36.040 flip side of that is it's an ultimate curve steepener. 0:05:37.080 --> 0:05:39.960 Borrowing costs are going to go up. I think it 0:05:40.040 --> 0:05:44.800 keeps the FED on hold as well, and that puts 0:05:44.839 --> 0:05:49.080 more pressure on you know, a lot of these cap stacks. 0:05:48.960 --> 0:05:50.719 That most of the companies have shown that they can 0:05:50.880 --> 0:05:52.960 live with these high rates for quite a long time 0:05:53.000 --> 0:05:55.839 and they've done okay. And then on the other side, 0:05:55.960 --> 0:05:57.720 you know, there isn't a lot of supply, there's a 0:05:57.760 --> 0:06:01.720 lot of demand. So the sets up the credit, I mean, 0:06:01.720 --> 0:06:04.920 at least the consensus shows is pretty bullish, pretty optimistic. 0:06:05.160 --> 0:06:08.640 You're you're somewhat against that in terms of your well 0:06:08.680 --> 0:06:11.720 courtious view, but you know you're fighting against some pretty 0:06:11.720 --> 0:06:13.320 strong technicals there. How do you play that? 0:06:13.800 --> 0:06:19.280 I think technicals are ephemeral there, they'll they'll switch when 0:06:19.480 --> 0:06:21.560 you know, as soon as you count on technicals to 0:06:21.760 --> 0:06:25.159 save the day, a bad trade is not going to 0:06:25.200 --> 0:06:30.360 be rescued by bad technicals. I just don't think that 0:06:30.640 --> 0:06:35.520 as a fundamental analysis, and as an analyst, I'm just 0:06:35.760 --> 0:06:38.360 not sure that's a real part of the calculus. I'm 0:06:38.400 --> 0:06:41.760 not a trading desk, right, we are investors. That's different. 0:06:43.080 --> 0:06:48.479 I mean it helps on the margin, But you know 0:06:48.560 --> 0:06:51.880 what's different you talked about Obviously companies have. 0:06:51.880 --> 0:06:52.640 Been through a lot. 0:06:52.760 --> 0:06:57.320 There's a lot more resiliency in corporate America than I 0:06:57.360 --> 0:07:04.080 think initially perceived. But keep in mind revenues, cash flows, 0:07:04.120 --> 0:07:07.600 however you want to define it, we're pretty good, right. So, yeah, 0:07:07.680 --> 0:07:11.040 the cost of capital really jumped up. That cost of 0:07:11.120 --> 0:07:14.560 capital is not going down, So the delta the operating 0:07:14.640 --> 0:07:18.920 leverage around future cash flows is really quite high. And 0:07:19.080 --> 0:07:23.000 what we're seeing in the market is just tremendous differentiation 0:07:23.160 --> 0:07:28.360 based on that. So these highly levered capital structures haven't 0:07:28.400 --> 0:07:31.160 really been put to the test. Yet, if you see 0:07:31.520 --> 0:07:34.240 just economic activities slow, it doesn't even have to be 0:07:34.360 --> 0:07:37.240 zero or negative. That puts a lot of pressure on 0:07:37.320 --> 0:07:40.160 these companies, and I don't think that story has yet 0:07:40.160 --> 0:07:40.760 to unfold. 0:07:41.200 --> 0:07:43.720 I think going back to sort of maybe a little 0:07:43.720 --> 0:07:46.000 bit higher levels. So I think when the FED d 0:07:46.040 --> 0:07:49.040 first institute a QE back in two thousand and eight, 0:07:49.360 --> 0:07:51.800 if I pull up the HI function on the terminal 0:07:51.840 --> 0:07:54.600 and sort of regress the Fed's expanding balance, sheeversus returns 0:07:54.600 --> 0:07:57.600 for the SMP. It's almost a perfect corollary, which I 0:07:57.600 --> 0:08:00.920 think gave rise to the cloqualism don't fight the FED. Right, So, 0:08:01.200 --> 0:08:03.440 Treasury Secretary Prestident has said that he wants a ten 0:08:03.480 --> 0:08:05.920 year at four percent. He says he has tools available 0:08:05.920 --> 0:08:07.680 to him. We're at four and a half percent right 0:08:07.680 --> 0:08:09.640 now in the ten year. Do you think that that's 0:08:09.760 --> 0:08:12.840 possible to get there? Can he limit the auction size 0:08:12.880 --> 0:08:15.400 for the ten year or cut spending somewhere? Do you 0:08:15.480 --> 0:08:18.360 regulate or do we get there? You know, basically for 0:08:18.400 --> 0:08:21.960 the wrong reason, being that we're moving into an economic recession. 0:08:22.280 --> 0:08:26.000 There's a lot to kind of unpack there. You know, 0:08:26.080 --> 0:08:28.560 each of those are really quite different. I think it's 0:08:28.680 --> 0:08:33.319 very difficult for the US Treasury Department to have influence 0:08:33.520 --> 0:08:37.440 on kind of rate levels. I think rates are driven 0:08:37.520 --> 0:08:41.840 by fundamentals economic activity. You know, obviously growth and inflation. 0:08:43.559 --> 0:08:49.240 So one can kind of tweak the auction sizes schedule, 0:08:49.520 --> 0:08:52.160 but that doesn't change the fundamental fact that there's a 0:08:52.200 --> 0:08:56.560 tremendous amount of debt that needs to be refinanced, particularly 0:08:56.600 --> 0:09:00.440 as we enter twenty twenty six, that really are still 0:09:00.520 --> 0:09:05.040 ramp So I think it's really hard to do anything 0:09:05.080 --> 0:09:10.160 about that necessarily, And what you're also fighting is just 0:09:10.160 --> 0:09:13.319 an increase in term slash risk premium. I think it's 0:09:13.360 --> 0:09:15.880 a really hard task. I think the only way you 0:09:15.920 --> 0:09:21.760 really get base rates lower is through a recession, unfortunately, 0:09:22.920 --> 0:09:26.840 or fiscal prudence. If the markets had a better feeling 0:09:27.000 --> 0:09:32.440 around the fiscal sustainability, then I think rates would move lower. 0:09:32.920 --> 0:09:37.280 But we're seeing the opposite, and this bill isn't allaying 0:09:37.360 --> 0:09:39.239 any of those fiscal concerns. 0:09:39.559 --> 0:09:41.240 Can we talk a bit more about the dispersion you 0:09:41.280 --> 0:09:44.880 mentioned in terms of things all over the mat when 0:09:44.920 --> 0:09:47.079 you look at the problems you mentioned with high rates 0:09:47.120 --> 0:09:50.040 and the companies with worse economy, doesn't have to go 0:09:50.080 --> 0:09:53.120 into recession, but just the earnings start to suffer. I 0:09:53.160 --> 0:09:56.120 think the assumption broadly is that there is this liver 0:09:56.400 --> 0:09:58.840 small piece of the market like triple c's, which we 0:09:58.920 --> 0:10:01.000 all kind of know about. It's been this dumpsify that's 0:10:01.000 --> 0:10:04.240 been going on forever, and those things will blow up potentially, 0:10:04.320 --> 0:10:07.199 or they'll do Lem's, or they'll be some kind of restructuring, 0:10:07.960 --> 0:10:10.600 whereas the rest of the market will be fine. Is 0:10:10.640 --> 0:10:12.920 that too simplistic assumption? 0:10:13.760 --> 0:10:16.760 A little too simplistic if you throw in single bees, 0:10:16.800 --> 0:10:19.240 which is kind of the catch all right, you know 0:10:19.280 --> 0:10:22.240 a single bee can be two times levered and fourteen 0:10:22.280 --> 0:10:24.800 times levered, so you know there's a lot there's not 0:10:24.840 --> 0:10:27.200 a lot of informational content by just looking at kind 0:10:27.200 --> 0:10:27.880 of the credit rating. 0:10:27.880 --> 0:10:29.400 Then that's a big chunk of the market, right it 0:10:29.480 --> 0:10:31.480 is single bee It is what twenty thirty percent or 0:10:31.480 --> 0:10:32.000 something like that. 0:10:31.840 --> 0:10:34.200 That's the point. So yeah, so it's a big chunk. 0:10:34.920 --> 0:10:38.160 I think it's fascinating what's going on. So at the 0:10:38.200 --> 0:10:43.160 top line level, credit spreads are exceedingly tight, but underneath 0:10:43.160 --> 0:10:47.520 the surface, you're seeing dispersion in the triple C double 0:10:48.240 --> 0:10:49.320 single bee space. 0:10:49.960 --> 0:10:51.240 The widest in decades. 0:10:51.679 --> 0:10:54.400 So I use this analogy that always goes over poorly, 0:10:54.480 --> 0:10:57.640 but I'm going to use it anyway. Which is the 0:10:57.679 --> 0:11:00.640 high your market is like, or the levered finance market 0:11:00.800 --> 0:11:04.199 is like a duck. Right on top, it's very placid, 0:11:04.600 --> 0:11:07.680 but underneath the surface there's a tremendous amount of churn 0:11:07.760 --> 0:11:11.360 in activity. So what you're seeing on the high YULD 0:11:11.440 --> 0:11:16.280 side and dispersion front is this manifestation of companies with 0:11:17.040 --> 0:11:22.000 overlevered or levered cap structures that are very sensitive to 0:11:22.120 --> 0:11:26.280 changes in the revenue or cashlow profile that are getting 0:11:26.520 --> 0:11:28.120 really penalized. 0:11:27.480 --> 0:11:28.479 By the marketplace. 0:11:29.600 --> 0:11:33.480 What you're also seeing you mentioned the LME side, is 0:11:33.800 --> 0:11:37.040 a security price hits eighty and it just is in 0:11:37.080 --> 0:11:39.960 a vacuum. It just falls because the structure of the 0:11:39.960 --> 0:11:43.079 market is such where there's not a lot of players 0:11:43.720 --> 0:11:44.880 who are willing. 0:11:44.600 --> 0:11:46.439 To go through that process. Right. 0:11:46.440 --> 0:11:51.240 It's a long, arduous, costly process, legal fees, time, you know, 0:11:51.280 --> 0:11:54.640 you name it. So there's not a lot of willingness 0:11:55.360 --> 0:11:57.880 or appetite to kind of go through that process. 0:11:57.960 --> 0:12:00.520 So are you winning to go through that? Yeah? 0:12:00.880 --> 0:12:04.240 I mean we're we're a very big player, but in 0:12:04.280 --> 0:12:07.040 that space, you know, we think we have a competitive 0:12:07.040 --> 0:12:11.720 advantage in that space. It's something that we've been very 0:12:11.760 --> 0:12:12.439 involved in. 0:12:12.800 --> 0:12:15.560 What's the advantage of though, is at scale scale you need. 0:12:15.480 --> 0:12:16.440 Size and scale. Yep. 0:12:16.800 --> 0:12:19.000 You know, a lot of the distress players have been 0:12:19.000 --> 0:12:23.199 taken out kind of early and they've folded just because 0:12:24.000 --> 0:12:26.079 you know, the investments didn't go well. 0:12:26.120 --> 0:12:27.480 So there's not a lot of players. 0:12:27.480 --> 0:12:30.640 But you need size and scale, and we have size 0:12:30.640 --> 0:12:34.240 and scale at PGM. We have one hundred and fifty 0:12:34.240 --> 0:12:39.480 six credit analysts, which is enormous. We have the distress 0:12:39.520 --> 0:12:42.439 capabilities illegal all this stuff. But there's not a lot 0:12:42.480 --> 0:12:45.160 of players that do it. But if you can do it, 0:12:45.720 --> 0:12:47.720 the potential is really quite good. 0:12:47.880 --> 0:12:51.640 But the problem with these transactions, according to some analysis 0:12:51.640 --> 0:12:53.800 that we've seen, is that half these deals don't work out. 0:12:53.840 --> 0:12:56.440 You know, they end up going bankrupt anyway. So you know, 0:12:56.480 --> 0:12:58.600 how do you kind of look ahead, particularly in these 0:12:58.640 --> 0:13:01.840 times of very uncertain macro markets, you know, how do 0:13:01.880 --> 0:13:04.320 you look ahead and see this one's going to make it, 0:13:04.360 --> 0:13:06.360 this one isn't, and position yourself a quidity. 0:13:06.440 --> 0:13:07.360 Yeah, no, that's a good quote. 0:13:07.360 --> 0:13:10.040 We were just quoting that yesterday actually, So it's been 0:13:10.080 --> 0:13:13.280 a coin flip. Yes, you know, whether it works out, 0:13:14.040 --> 0:13:19.000 but I think it goes to asset value and looking 0:13:19.040 --> 0:13:23.400 at businesses that are good businesses, good assets that are 0:13:23.440 --> 0:13:27.400 over levered. So it's not a one hundred percent opportunity 0:13:27.400 --> 0:13:31.160 obviously based on your fifty percent hit rate quote, but 0:13:31.840 --> 0:13:36.240 if you're focused on certain elements of a business, namely 0:13:36.760 --> 0:13:42.040 asset rich, solid, you know, operating kind of environment that 0:13:42.200 --> 0:13:44.839 just has too much leverage, then those are the names 0:13:44.840 --> 0:13:46.240 that we like to play in. 0:13:46.440 --> 0:13:49.079 You don't be hunded the keys, So how do you 0:13:49.160 --> 0:13:51.760 avoid that situation? I mean, being the owner, you don't 0:13:51.720 --> 0:13:52.480 have to run a company. 0:13:53.080 --> 0:13:56.760 Well, you know it's about the exit, right, So no, 0:13:56.840 --> 0:13:58.880 we don't want to run the company. We tried that 0:13:58.920 --> 0:14:02.440 at Morgan Sally and didn't go so well. No, it's 0:14:02.480 --> 0:14:06.600 about refitting the capital structure to put this company in 0:14:06.640 --> 0:14:10.800 a better position to succeed, not taking the keys and 0:14:10.880 --> 0:14:14.360 running it right. So it's just kind of working through 0:14:14.679 --> 0:14:15.800 just from a pure. 0:14:15.600 --> 0:14:17.040 Capital structure standpoint. 0:14:17.200 --> 0:14:20.200 We've retraced back to pre tariff levels on both the 0:14:20.240 --> 0:14:22.200 IG and High Yield Corporates index, so I think we're 0:14:22.720 --> 0:14:25.400 eighty five over right now for IG and about three 0:14:25.480 --> 0:14:27.760 hundred over for high yield which to your point, is 0:14:28.200 --> 0:14:32.640 very tight historically. So are you guys embedding any quote 0:14:32.680 --> 0:14:34.840 sort of you know, potential left tail risk into your 0:14:34.840 --> 0:14:37.280 guys base case for twenty twenty five because we're in 0:14:37.280 --> 0:14:40.120 this nice window here where we have a moratorium on 0:14:40.640 --> 0:14:43.560 ninety day tariffs here, so you know what happens when 0:14:43.560 --> 0:14:45.360 this stuff potentially rolls out, or do we get a 0:14:45.400 --> 0:14:48.040 bunch of bilateral deals and having is going to be 0:14:48.040 --> 0:14:49.840 okay in two h Yeah. 0:14:50.480 --> 0:14:54.320 I've been surprised at how comfortable the market's been on 0:14:54.400 --> 0:15:00.360 the idea of a deal, right, A true trade deal 0:15:00.840 --> 0:15:04.760 is not a kind of a memoranda of understanding. So 0:15:04.880 --> 0:15:07.040 I've I've been shocked that the markets have just been 0:15:07.240 --> 0:15:10.280 this is great, We'll take it and move on. So 0:15:10.440 --> 0:15:14.640 I don't think this story has ended yet. The devil's 0:15:14.640 --> 0:15:18.920 into details. I think the market has been too swift 0:15:18.920 --> 0:15:21.600 and quick to just declare victory. 0:15:22.160 --> 0:15:23.360 And then you know, who knows. 0:15:23.480 --> 0:15:25.720 You know, maybe the whole point of April second was 0:15:25.800 --> 0:15:29.479 to make anything after that point, you know, completely consumable 0:15:29.520 --> 0:15:33.720 and digestible and acceptable. Right, So I don't know, but 0:15:34.160 --> 0:15:37.640 you have to follow the numbers, and you know, we 0:15:37.640 --> 0:15:39.920 don't have enough data yet to follow those numbers. But 0:15:40.240 --> 0:15:43.800 I've been, you know, surprised that the the the acceptance. 0:15:44.240 --> 0:15:48.080 But I think the tail risk is still quite quite pronounced. 0:15:48.720 --> 0:15:51.600 Our base case is one of muddling through, but the. 0:15:51.600 --> 0:15:53.200 Tails are as fat as. 0:15:53.000 --> 0:15:56.720 We've ever seen them. It just makes it really, really difficult. 0:15:56.800 --> 0:15:58.920 So I don't think you are getting paid for those 0:15:58.960 --> 0:16:03.640 tail risks. If you look at the pricing of credit 0:16:03.800 --> 0:16:07.320 just broadly defined, I think it's pricing in a model 0:16:07.400 --> 0:16:10.720 throw and mortal throw is great for credit, right, that's 0:16:10.760 --> 0:16:14.360 what you want. But you know, I would submit that 0:16:14.440 --> 0:16:18.240 the tail risk is higher than normal, and I want 0:16:18.280 --> 0:16:19.400 to get paid for that too. 0:16:19.560 --> 0:16:21.280 Credit also seems to be pricing in the idea that 0:16:21.320 --> 0:16:26.080 the Trump administration will be more pragmatic ultimately than comforted confrontational, 0:16:26.120 --> 0:16:28.440 and that you know, things do get very choppy, then 0:16:28.440 --> 0:16:31.640 that they will be this put taco trade. Ye, things 0:16:31.640 --> 0:16:33.840 will reverse and you know people are even putting levels 0:16:33.880 --> 0:16:36.200 on it, let's say one thirty for the IG spread. 0:16:36.440 --> 0:16:38.840 In terms of that, that's where you you know, stop 0:16:39.000 --> 0:16:42.040 because the administration does something differently to reverse that. So 0:16:42.440 --> 0:16:45.480 do you believe that you know there is limited downside 0:16:45.480 --> 0:16:47.800 in this market because of the way that the administration 0:16:47.920 --> 0:16:48.960 is watching the bond market. 0:16:49.120 --> 0:16:53.440 The market is in eternal search of free puts, right, 0:16:53.880 --> 0:16:56.880 so you know the Fed put, now the Trump put. 0:16:57.640 --> 0:16:59.880 I just don't know enough. I would not bank on 0:16:59.920 --> 0:17:04.000 that at no point intended. There's definitely this de escalation 0:17:04.440 --> 0:17:06.880 strategy at place, So I do think there's some element 0:17:06.960 --> 0:17:10.320 of it for sure. But you know, we haven't yet 0:17:10.359 --> 0:17:16.840 seen the data around the uncertainty feeding into the economics 0:17:16.880 --> 0:17:19.160 shet right. You know the economy is going to show 0:17:19.160 --> 0:17:22.080 some signs of strength because it pulled forward. I think 0:17:22.119 --> 0:17:25.879 that's more of a mirage than a reality. So I 0:17:25.920 --> 0:17:28.040 think there's going to be some headfakes along the way. 0:17:28.280 --> 0:17:32.560 But I just think that, you know, declaring like I 0:17:32.720 --> 0:17:35.920 changed my mind and swipe of a pen, I don't 0:17:35.960 --> 0:17:38.439 think that's a strategy. 0:17:37.920 --> 0:17:39.680 To allay those fears necessarily. 0:17:40.160 --> 0:17:41.879 So, I mean, this all makes absolute sense on a 0:17:41.920 --> 0:17:44.600 fundamental basis. But I go back to the point about technicals, 0:17:45.119 --> 0:17:47.240 which just every time there is a widening out, it 0:17:47.240 --> 0:17:49.960 snaps right back because there's so much cash out there 0:17:50.200 --> 0:17:53.639 looking to buy, regardless of all the problems that we 0:17:53.680 --> 0:17:57.800 are facing, and I am often puzzled by it. But again, 0:17:57.880 --> 0:17:59.639 it just thinks you can't fight the technicals. 0:18:00.119 --> 0:18:02.440 No, I think that's right for now. Could it go on? 0:18:02.480 --> 0:18:04.159 It's been going on for saving the years. 0:18:04.400 --> 0:18:07.960 Well, I've been a different macro environment too, but there's 0:18:08.000 --> 0:18:09.359 a lot of cash in the system. 0:18:09.840 --> 0:18:10.560 Absolutely. 0:18:10.760 --> 0:18:14.679 But if your thesis, not yours, but kind of like 0:18:14.760 --> 0:18:19.320 the generic you thesis, is that I'll be rescued by 0:18:19.320 --> 0:18:21.959 the technicals, I just have a hard time with that. 0:18:22.000 --> 0:18:24.560 And if I'm wrong, then I'm okay with that. Actually, 0:18:24.680 --> 0:18:28.040 things have a tendency of going on longer than I 0:18:28.040 --> 0:18:31.199 think we you know, anticipate oftentimes. I think this is 0:18:31.240 --> 0:18:34.639 one of those times. But given the TEL risk and 0:18:34.680 --> 0:18:39.199 everything else we mentioned, I'm not sure technicals what I 0:18:39.200 --> 0:18:41.840 would hang my hat on as an investment thesis. If 0:18:41.840 --> 0:18:43.800 I was a trading desk could be a different story. 0:18:44.800 --> 0:18:47.000 So for the PM's listening today, you know, what's your 0:18:47.000 --> 0:18:51.240 guys pre election for portfolio positioning? You guys EU over 0:18:51.320 --> 0:18:53.640 the US, are you short data? There is longer data 0:18:53.640 --> 0:18:56.120 paper to help temper those fiscal risks relating to those 0:18:56.160 --> 0:18:58.840 deficits and structure products? What does that what does that 0:18:58.880 --> 0:18:59.960 bias look like for you guys? 0:19:00.400 --> 0:19:04.280 Yeah, so we've been very button up on the risk side. 0:19:05.320 --> 0:19:09.720 So we love credit, so we have a a natural 0:19:09.720 --> 0:19:12.400 tendency of playing in credit. We think we're very good 0:19:12.400 --> 0:19:17.400 at it. But you think about from a scaling standpoint, 0:19:18.440 --> 0:19:21.520 we have the ability to you know, run one hundred 0:19:21.520 --> 0:19:22.920 percent of our risk threshold. 0:19:22.960 --> 0:19:24.080 E's actually we can go up. 0:19:23.960 --> 0:19:26.760 To one twenty if we really like it, you know, 0:19:26.880 --> 0:19:30.680 kind of spinal tap esque. We're at thirty now, so 0:19:30.760 --> 0:19:34.520 we're at the lower end of the range, and so 0:19:34.640 --> 0:19:39.119 how are we getting there? So it's a short maturity 0:19:39.240 --> 0:19:41.920 roll and carry and high yield fits that built too, 0:19:42.000 --> 0:19:44.840 So this is not an up and quality trade necessarily. 0:19:45.920 --> 0:19:47.440 You know, high yield. 0:19:47.280 --> 0:19:50.760 Carry is attractive carry, so we still like that, and 0:19:50.800 --> 0:19:54.960 then the structure product piece really fits in. So structure 0:19:55.000 --> 0:19:58.000 product is an area where you know, we feel in 0:19:58.080 --> 0:20:02.119 a portfolio construct, but it allows you to move up 0:20:02.119 --> 0:20:04.119 and out the efficient frontier. 0:20:04.640 --> 0:20:06.760 And they're the quintessential carry trades. 0:20:06.840 --> 0:20:09.640 You look at you know, double A, triple A colos, 0:20:10.040 --> 0:20:14.760 it's carry safe carry, and so that's that's what we're doing. 0:20:15.480 --> 0:20:18.920 I mean, Europe has been you know, slightly more cheap 0:20:18.960 --> 0:20:20.879 than the US. You know, a lot of that has 0:20:20.920 --> 0:20:23.600 to do with the proximity to what's going on in 0:20:23.720 --> 0:20:27.080 Ukraine and Russia. But it's it's it's small to this point. 0:20:27.080 --> 0:20:29.159 It was larger this time last year. That kind of 0:20:29.200 --> 0:20:31.640 valuation gap has you know, someone closed. 0:20:32.640 --> 0:20:33.359 But it's a. 0:20:34.920 --> 0:20:38.639 Portfolio that's more defensively positioned, i'd say, And we have 0:20:38.760 --> 0:20:42.320 more US treasuries in our portfolio than we've had in 0:20:42.359 --> 0:20:46.120 a long time as a defensive measure, because I want 0:20:46.160 --> 0:20:48.119 to be front footed, right, so I don't want to 0:20:48.119 --> 0:20:51.320 be locked in my risk if the markets. 0:20:50.960 --> 0:20:55.520 Do blow up, if there's a period of dislocation. 0:20:55.080 --> 0:20:56.919 We want to have the cash and the ability to 0:20:57.119 --> 0:20:57.879 kind of jump in. 0:20:58.840 --> 0:21:00.000 So we're biding our time. 0:21:00.080 --> 0:21:03.840 I'm laying in wait for that, and US kind of treasuries, 0:21:04.359 --> 0:21:06.360 you know, allow for that. What's lost on I think 0:21:06.400 --> 0:21:09.840 a lot of investors on the credit side is the 0:21:09.880 --> 0:21:15.480 swap spread, right. So the cheapness the yield that credit 0:21:15.520 --> 0:21:19.000 folks are so excited about really the byproduct of the 0:21:19.040 --> 0:21:22.480 swap spread more than the credit spread, right, So treasuries 0:21:22.520 --> 0:21:24.920 are cheap more than credit is cheap. 0:21:25.040 --> 0:21:26.879 And treasuries and thank you, by the way for being 0:21:26.880 --> 0:21:29.320