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Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumby. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to welcome to the show

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Speaker 1: Gary Gurramoti, who covers high yield bonds at Bloomberg News

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Speaker 1: in New York.

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Speaker 2: How are you, Gary, all well water anized opportunity. Thank

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Speaker 2: you for having me.

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Speaker 1: Gary truly is the guru of junk bonds, so we're

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Speaker 1: delighted to have her on the show and get her

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Speaker 1: take on the markets. We're also very pleased to welcome

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Speaker 1: back Rob Schiffman, a credit analyst with Bloomberg Intelligence in

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Speaker 1: New York. We'll be coming back to Rob a bit

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Speaker 1: later in the show to discuss artificial intelligence and how

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Speaker 1: it's affecting credit. So do stay with us. But first,

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Speaker 1: Gary Gurramoti with Bloomberg News, you're all over the junk

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Speaker 1: bond market. It's where the drama is. It's at one

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Speaker 1: point four trillion dollar market that includes household names like Ford,

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Speaker 1: American Airlines and Uber. Essentially, we're talking about risky companies

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Speaker 1: raising debt in the bond market for a wide variety

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Speaker 1: of things projects, acquisitions, refinancing, payment of dividends to shareholders.

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Speaker 1: They're typically the companies, though, that run into trouble when

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Speaker 1: interest rates jump or if there's a slowdown in the economy.

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Speaker 1: They have less of a cushion when the going gets tough.

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Speaker 1: But despite the huge surge in rates and therefore funding

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Speaker 1: costs that we've seen over the last few years, not

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Speaker 1: to mention a banking crisis in March, growing recession fears,

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Speaker 1: slower earnings, and a whole load of proliferating macro and

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Speaker 1: geopolitical risks, junk bonds have had a great year, haven't

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Speaker 1: they so. Gary, You've been covering this for a long time.

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Speaker 1: We've had the pleasure of working together for many years.

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Speaker 1: What's the story. How are junk bond's doing so well

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Speaker 1: against all the odds?

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Speaker 2: First, I would just say I agree with you that

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Speaker 2: with all this secession fears, rate high drama, banking crisis,

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Speaker 2: financial system coming to a halt, US high held has

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Speaker 2: been doing pretty well. But there's a mildly disagreement in

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Speaker 2: the sense there are there are there is no recession fear.

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Speaker 2: They were early in the year they were talking about

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Speaker 2: likely recession, possible recession, end of the year, etcetera. Etcetera.

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Speaker 2: But recession fears have really gone out of the window.

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Speaker 2: Nobody's thinking of recession, not in the near term, not likely.

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Speaker 2: They're talking of you know, soft landing, slow landing, slow growth, etcetera.

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Speaker 2: Growth creeping near a halt, but not really a recession.

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Speaker 2: And therefore Hyyel has benefited from this sort of what

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Speaker 2: should I say, goldilocks, You have a stable growth sort

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Speaker 2: of tugging along and no corporate corporate balancees look reasonably healthy,

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Speaker 2: so I really and that explains why hyl has been

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Speaker 2: performing well. Hi Heel is not as read's sensitive as

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Speaker 2: investment grade are investment grade bonds are, and therefore Hireless

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Speaker 2: outperformed investment grade as well.

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Speaker 1: I definitely agree with you that markets don't seem to

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Speaker 1: be pricing in any kind of recession. But in house

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Speaker 1: economists Bloomberg Intelligence, they think that there will be a

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Speaker 1: recession starting in the fourth quarter in the US. Maybe

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Speaker 1: it's not going to be a deep recession, but you know,

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Speaker 1: possibly just a mild, you know, shallow dip. But going

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Speaker 1: back to the junk bond market, also surprising to me

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Speaker 1: at least, is that the riskiest bonds those rated triple C.

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Speaker 1: That's the lowest credit rating. They've done really really well

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Speaker 1: this year that you know, they're up, you know, double

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Speaker 1: digits again. Are you surprised by that?

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Speaker 3: Not really.

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Speaker 2: Again, Triple c's are are very small, about ten to

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Speaker 2: twelve percent of the total index, so it's very it's

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Speaker 2: a very small percent. Even something small, they always can

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Speaker 2: do a lot better than the rest of the market. Second,

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Speaker 2: triple cs are more sensitive to equity volatility rather than

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Speaker 2: rates volatility. Equity volatility, if you're going to just check

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Speaker 2: the index, historically they have been below twenty. You know,

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Speaker 2: it's been practically very low volatility there. Equities have performed

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Speaker 2: very well here today, and so triple c's are reflecting

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Speaker 2: equity performance.

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Speaker 3: That's one.

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Speaker 2: Secondly, as I said, it's a very small person, here's

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Speaker 2: a total index, so I see no surprise there. And Thirdly,

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Speaker 2: as I just mentioned a few minutes ago, it is

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Speaker 2: more great concern now than growth concerns. Actually, people are

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Speaker 2: pretty much there, all the big dealers, everyone talking about

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Speaker 2: soft landing, slow economy, including the FED. They don't expect

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Speaker 2: a recession in the near term or an immediate future,

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Speaker 2: so growth concerns not really top of the mind. Equity

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Speaker 2: markets are doing pretty well. Triple c's are very small.

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Speaker 2: Person is a total market, so it naturally will outperformance

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Speaker 2: to the market.

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Speaker 1: I still worry, though, because you know, triple c' is

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Speaker 1: typically you know, they're the ones most likely to default

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Speaker 1: on their debt when things get hard. We've seen a

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Speaker 1: lot more bankruptcies this year, you know, so there is

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Speaker 1: stress and as a funding costs jump, some of these

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Speaker 1: companies just aren't going to be able to pay about

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Speaker 1: the money. So I'm just wondering why, you know, markets

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Speaker 1: just seem so blase about all this.

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Speaker 2: I know that's a very predictable sort of response or question.

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Speaker 2: People wonder triple c's are junkiest of junks and therefore

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Speaker 2: they should default one default traits. Even the forecasts for

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Speaker 2: default traits is not really very high. Even they predict

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Speaker 2: about four percent five percent, when even the egregious default

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Speaker 2: rate would be about five percent end of twenty twenty four,

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Speaker 2: twenty twenty week, twenty twenty five, and that's not very

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Speaker 2: high by historical standards. Number one two triple cs. Not

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Speaker 2: the whole of triple c's is really bad. Triple cs

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Speaker 2: are some sometimes technically triple c they are pretty reasonably

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Speaker 2: good companies with high coupons, they're not necessarily going to

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Speaker 2: default spike and default is not really expected. And the

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Speaker 2: recent months we have seen that distressed universes also shrink.

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Speaker 2: And with the economy, if the economy chugs along, you mean,

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Speaker 2: you may see some default, but it's not going to

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Speaker 2: really sort of bring the market down. It won't sort

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Speaker 2: of crash the triple C market altogether.

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Speaker 1: So we were kind of all wrong about worrying. I mean,

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Speaker 1: there was a chicken licking and the sky was falling

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Speaker 1: down earlier this year.

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Speaker 2: Right, they always say it's a very cliche thing. You know,

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Speaker 2: broken clock is right twice a day. So we may

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Speaker 2: turn out to be right sometime someday, but not this year.

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Speaker 2: And there's plenty of time for that.

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Speaker 1: So we think that this continues this kind of performance.

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Speaker 2: I you know, I'm not in the business of forecasting

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Speaker 2: or predicting, but still I would say, I see no

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Speaker 2: reason why there'll be a serious derailment or disruption. Why

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Speaker 2: interstates have already pequed, they're not going to raise interest rates,

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Speaker 2: so that they've ruled out almost higher for longer. The

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Speaker 2: markets sort of uprising it in and growth is still

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Speaker 2: okay for you. Perhaps four C will perhaps be still

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Speaker 2: over than three Q. And earnings still look okay, though

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Speaker 2: they are much lower than what they were in the

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Speaker 2: earlier quarters. So corporate balance sheet looks pretty okay. Interest

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Speaker 2: coverage may fall, but have no cause for concern. So

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Speaker 2: I really don't see a major derailment in twenty twenty four,

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Speaker 2: not in the fourth quarter. What happens in the first

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Speaker 2: quart of twenty twenty four is again it's an open

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Speaker 2: ended question. But even there one does not see a

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Speaker 2: major disruption because economy is going to chug along, and

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Speaker 2: if they say any serious disruption in the economy, you know,

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Speaker 2: by the end of US quarter the FED will start

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Speaker 2: cutting rates, though they are not thinking that. They're saying

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Speaker 2: they will not cut rates. Markets think. Markets dually expect

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Speaker 2: if there is going to be a serious disruption geopolitical

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Speaker 2: disruption or major chaos, government shut down or gun or

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Speaker 2: the counter doesn't pass the CR continuing resolution bill or

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Speaker 2: does not pass the government budget, all this may cause

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Speaker 2: some disruption, and FED intervene and try to not let

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Speaker 2: things escalate. So I don't say anything happening till the

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Speaker 2: first quarter of twenty twenty four. Nothing serious, there may

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Speaker 2: be some volatility, spreads widening, and even now you see

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Speaker 2: spreads around four hundred. Nothing, no sign of recession there.

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Speaker 1: You're an economists. So one of my basic theories about

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Speaker 1: this market, and you can tell me if it's all

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Speaker 1: nonsense to you, is demand and supply that you know,

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Speaker 1: there's consistent demand for yield, especially when the coupons are

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Speaker 1: so high. Now double digits for stuff that you know

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Speaker 1: previously not that long ago, you're getting five percent on it,

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Speaker 1: so it looks really attractive. But meanwhile, the actual supply

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Speaker 1: of this stuff has gone right down. I mean, this

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Speaker 1: is a very bad year for issuance. So in that sense,

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Speaker 1: I think the price just gets better and these things

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Speaker 1: go up.

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Speaker 2: There, you made my us you answered my question. So

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Speaker 2: another important reason growth is not an important concern for

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Speaker 2: the high yaled market. Equity volatility is pretty low, not really,

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Speaker 2: not for any concern at all. And overall supply of

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Speaker 2: new bands is very it's sort of maybe fifty percent

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Speaker 2: about twenty twenty two, but that's a very low bar.

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Speaker 2: It is still perhaps the lower since two thousand and

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Speaker 2: eight or two thousand and nine, So supply is very thin.

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Speaker 2: Economy is pretty robust. People have a lot of cash

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Speaker 2: to invest in, so more demand fuel supply basic econ

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Speaker 2: one oh one.

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Speaker 1: On the supply side, though, you look at this stuff

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Speaker 1: very closely, and everyone listening should should follow Gary on

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Speaker 1: the terminal for her updates on the supply side, because

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Speaker 1: it's essential stuff. What are you saying, what do you expect?

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Speaker 1: Is there going to be a big increase next year

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Speaker 1: and there's refinancing to do, right.

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Speaker 2: I don't see a big sharp jump and used a

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Speaker 2: junk band supply because, as I've always telled my colleagues

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Speaker 2: and friends, supply comes for three to two broad reasons.

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Speaker 2: One is funding acquisitions.

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Speaker 3: Or leveraged buyouts.

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Speaker 2: That's also broadly acquisitions, and second is refinancing outstanding bards.

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Speaker 2: And third perhaps is you know, capital expenditure projects, et ceteraba.

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Speaker 2: That's a third refinancing and repaying debt.

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Speaker 3: So these are the two broad things.

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Speaker 2: And see in the first category of acquisitions and LBOs

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Speaker 2: you find they are very far and few and fewer

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Speaker 2: and far between. They don't see very large number of

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Speaker 2: them because of high cost of borrowing, not easy for

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Speaker 2: private equity guys to buy companies and make money. There

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Speaker 2: margins are every thin, so that's not super attractive high.

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Speaker 3: Cost of borrowing.

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Speaker 2: So given that LBOs and acquisitions are fewer in number,

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Speaker 2: the reason for issuing new bonds is sort of not

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Speaker 2: very exciting. So refinancing people talk of, and I was

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Speaker 2: just looking at refinancing numbers. This could differ from day

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Speaker 2: to day, and you wort three hundred billion expected roughly

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Speaker 2: about till end of twenty twenty five. If I bring

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Speaker 2: a twenty twenty four is I don't think much is

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Speaker 2: really two twenty twenty four. So we're already refinancing all

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Speaker 2: the outstanding bonds, pretty steady and so rEFInd and therefore

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Speaker 2: I don't see a big jump and supply you may

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Speaker 2: see it pretty much now it's going it's going to

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Speaker 2: be about less than two hundred this time, two hundred million,

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Speaker 2: maybe next year around the same, a little more couple

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Speaker 2: of more LBOs, and I don't know if I'm carrying on,

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Speaker 2: But you also see acquisitions and LBOs have another source

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Speaker 2: of funding. They're dependent on high bonds and now and

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Speaker 2: leverage loans. Now you will see a third source of

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Speaker 2: funding is jet lending of what they call private credit.

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Speaker 2: So even the fewer and far between LBOs are also

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Speaker 2: sort of going into the private credit world, so that

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Speaker 2: again takes out of bond supply bond is.

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Speaker 1: Shoes, and again low supply means higher price.

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Speaker 3: Higher price, and better returns.

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Speaker 1: Let's just go back to the macro signals. I mean,

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Speaker 1: I'm really interested in this concept of you know, the

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Speaker 1: spreads being way lower than they should be if if

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Speaker 1: anyone expects a recession. So presumably junk bond markets don't

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Speaker 1: expect recession. But what else the signals from the market

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Speaker 1: you're seeing.

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Speaker 2: I'm not seeing any recession signals. Spreads are pretty tight,

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Speaker 2: people are comparing, people complaining the spreads are very tight,

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Speaker 2: not enough to give. And yields are pretty decent under

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Speaker 2: ten percent, and you know, even triple CS is about

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Speaker 2: under fourteen percent, pretty high yield, which is making attractive

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Speaker 2: for that So that even that high yields narrow spreads

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Speaker 2: do not suggest that there is a recession at all.

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Speaker 2: And demand for junk bonds also high yield, I should

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Speaker 2: say junk is a very sort of trivializing the bond market.

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Speaker 2: I think also shows that there's a willingness for embracing risks.

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Speaker 3: Risk appetite is still pretty robust.

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Speaker 2: So although all these things don't indicate capital market open,

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Speaker 2: is still open. People can still come in and borrow

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Speaker 2: money for a price. So access to capital markets, willingness

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Speaker 2: to embrace risk, tight spread, it's all these indicate to

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Speaker 2: me that there is no sign of any immediate recession,

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Speaker 2: not in the near term.

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Speaker 1: What would it take, though, to derail the rally? What

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Speaker 1: are you mostly worried about in terms of your I mean,

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Speaker 1: you sound quite upbeat and optimistic about this market. But

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Speaker 1: what worries you about the outlook?

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Speaker 2: Sudden unexpected geopolitical tension? If this Israel Hamas conflict expands

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Speaker 2: into Middle East thing, that was one thing. Oil prices

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Speaker 2: it's been up and down. It's been pretty high. Now

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Speaker 2: will it go? What happens and what happens to China's growth?

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Speaker 2: If China really slows down, I think the fear of

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Speaker 2: China's slowing down seems more exaggerated. But if China slows down,

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Speaker 2: something happens in Europe that could detail market. But I

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Speaker 2: still don't see a major disruption at all from any

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Speaker 2: I cannot see where can it come from? High leverage? No,

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Speaker 2: leverage is still not high. It is not what it

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Speaker 2: used to be in two thousand and six, seven and eight,

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Speaker 2: So leverage is pretty under control. Economy is chugging along.

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Speaker 2: People have the willingness to embrace risk. Federal Reserve is

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Speaker 2: watching like a hawk is on the sort of watching

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Speaker 2: anything untoward. They're going to introvene. There's no doubt about that,

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Speaker 2: whatever they say. So given all these things, I do

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Speaker 2: not know where will the disruption come from. Unless there

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Speaker 2: is an unexpected geopolitical tension, some bank failure. Nobody thought

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Speaker 2: a regional bank would fail. Something that nobody is watching happens,

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Speaker 2: we could see something. But otherwise I see some here

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Speaker 2: and there, up and down, but no major derailment.

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Speaker 1: And even some of those things you mentioned, I mean

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Speaker 1: they have resulted in better prices on junk bonds because

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Speaker 1: you know, oil goes up, that's positive for high yelk.

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Speaker 1: There's a lot of energy in the index. The other

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Speaker 1: one is that you know, if you see problems in

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Speaker 1: other parts of the world, often there's a kind of

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Speaker 1: flight to the US as a kind of you know,

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Speaker 1: home bias, just to just as a kind of haven.

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Speaker 1: So all these things you mentioned, the potential risks that

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Speaker 1: she have, you know, and also we had a banking

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Speaker 1: crisis and the market just bounced right back.

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Speaker 2: So you seem to be agreeing with me that I mean,

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Speaker 2: no major disruption do you expect in the near term,

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Speaker 2: As I said, something very unexpected, We can't think of.

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Speaker 2: I cannot think of anything in the fourth quarter. At

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Speaker 2: least you may have thin supply here and there's some

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Speaker 2: volatility MisOr spread widening. Even the forecast was spread windening.

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Speaker 2: Morgan Stanley was talking about fifty to seventy five basis

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Speaker 2: on from end of September, which is four fifty four

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Speaker 2: to seventy five, which is hardly and that is not

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Speaker 2: any sign of recession. So interest coverage is dropping, yes,

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Speaker 2: but nothing to worry about yet. Refinancing is still getting done,

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Speaker 2: markets are still open, so I don't know where the

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Speaker 2: disruption is going to come from.

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Speaker 1: I just as a you know, a journalist who covers credit,

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Speaker 1: I spend my time just worrying about bad things that

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Speaker 1: could happen. But that's just me true.

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Speaker 2: As a journalist, I do want something to be writing about.

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Speaker 2: But as I said, market primary market is shut down

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Speaker 2: for a whole for a whole week in October. Kick

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Speaker 2: off to the four quarter was not great. Because of

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Speaker 2: all this fear about higher for longer and people who've

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Speaker 2: been talking about one more rate hike that'll make things worse.

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Speaker 2: So all these things made and the sudden this Middle

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Speaker 2: East conflict, all these things made people worry as to

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Speaker 2: what is going to happen.

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Speaker 3: Will there be a recession?

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Speaker 2: But then FED officials quickly sort of came out and

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Speaker 2: said that we are at the peak, unlikely to raise rates,

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Speaker 2: and soft landing is what they all expect. So all

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Speaker 2: these things again reassured the market and their story coming

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Speaker 2: back to, you know, September.

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Speaker 1: So before we talk to Rob Schiffman at Bloomberg Intelligence,

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Speaker 1: tell us Gary, what else is on your radar? What

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Speaker 1: else should we we've been watching for in junk bonds

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Speaker 1: or higher bonds as your protocol?

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Speaker 2: No, I think the higher bonds will end the year beating.

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Speaker 2: I mean triple z's will beat so they corporate fixed income,

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Speaker 2: they're going to be the best.

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Speaker 3: Performing as a class.

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Speaker 2: And of course leverage loans will always beat high bonds.

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Speaker 2: I think leverage loans will do well and the HILD

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Speaker 2: market is going to be pretty steady and chugging along.

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Speaker 2: I see nothing to worry about in the market.

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Speaker 1: And the bears will be just destroyed.

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Speaker 2: They're waiting for it to happen and they have to

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Speaker 2: come and go.

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Speaker 1: Great stuff. Gary Guren Murty from Bloomberg News, thank you

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Speaker 1: so much.

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Speaker 3: For joining us, and thank you for having me read.

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Speaker 1: All of gary scoops on the Bloomberg terminal and of

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Speaker 1: course at Bloomberg dot Com. Pay attention to junk bonds everyone. Now,

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Speaker 1: I'm delighted to welcome back to the credit Edge Rob Schiffman,

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Speaker 1: who covers tech credit for Bloomberg Intelligence based in New York.

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Speaker 1: How's it going, Rob?

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Speaker 4: Awesome?

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Speaker 2: Great?

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Speaker 1: So, as we all know, the big theme in markets

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Speaker 1: right now is artificial intelligence. Black Rock calls it a

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Speaker 1: mega force for investors, but it's not really new. Stanley

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Speaker 1: Kubrick was all over it in nineteen sixty eight with

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Speaker 1: his sci fi classic two thousand and one, A Space Odyssey.

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Speaker 1: Great film, by the way, I watched it again on

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Speaker 1: the plane recently. So we've been talking about and mostly

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Speaker 1: fretting over AI for at least the last fifty five years,

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Speaker 1: and the machines haven't beatn us yet. But Rob, what

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Speaker 1: does it all mean for credit? We're starting to see

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Speaker 1: a bit more electronic trading of bonds. And I'm sure

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Speaker 1: there's more people using chat GPT to write their daily

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Speaker 1: market wraps. But how's it affecting the world? Do you cover?

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Speaker 1: What's the scoop?

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Speaker 2: Rob?

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Speaker 4: Sure? Well, listen. Six months ago when we had our

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Speaker 4: last chat, I told you spreads were a lot wider

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Speaker 4: and there was a much more concern about a recession,

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Speaker 4: that technology credits had never been better positioned than they

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Speaker 4: were today. And I'll tell you six months later, technology

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Speaker 4: credits have never been better positioned than they were than

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Speaker 4: they are today. And a big part of that is

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Speaker 4: the semiconductor space, where demand is just starting to boom.

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Speaker 4: And I think that an explosion of AI has really

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Speaker 4: hit the market in terms of concept and hope more

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Speaker 4: so than fundamentals at this point. But I do think

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Speaker 4: that there's a path for a large segment of the

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Speaker 4: semiconductor space, both from the developers as well as the foundries,

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Speaker 4: to take enormous advantage of a growing pie of revenues

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Speaker 4: and cash flow over an extended period of time. You're

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Speaker 4: spot on, Listen, Is AI really something new? The answer

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Speaker 4: is no. Computing power has always made an enormous difference

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Speaker 4: in how everybody lives and works, and there's always been

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Speaker 4: this massive rapid advancement of how things change over time

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Speaker 4: with technology. I do think the real benefit though, from

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Speaker 4: a credit perspective, is that this is not just going

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Speaker 4: to change how people live their lives, or how work

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Speaker 4: is done, or how commuting is done, or how healthcare

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Speaker 4: the act on the healthcare system changes, but we're really

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Speaker 4: going to see I think a boom from a fundamental

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Speaker 4: standpoint over the next few years that's supportive of both

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Speaker 4: credit and equity.

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Speaker 1: Let's talk about some names though, that you cover in video.

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Speaker 1: What is it is, how important is it to credit investors?

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Speaker 1: And how are they using AI?

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Speaker 4: Yeah, so listen, why is everybody talking about in Vidia

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Speaker 4: and not talking about so many other chip designers? And

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Speaker 4: the real reason is that right now in Vidia has

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Speaker 4: a stranglehold on the most powerful AI chips. Effectively, they're

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Speaker 4: dominating seventy percent of the market. And the type of

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Speaker 4: financial guidance that they've given creates a path towards numbers

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Speaker 4: from revenue to ebitdata free cash flow in terms of

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Speaker 4: growth rates that really haven't been seen before. I mean

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Speaker 4: back in the early two thousands and the days of

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Speaker 4: the dot com boom. You know, there were hopes that

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Speaker 4: at least from a valuation perspective, that you know, eyeballs

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Speaker 4: would be followed by dollars, and in this case, we're

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Speaker 4: starting to see the dollars lead. So Nvidia's ramp up

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Speaker 4: in terms of free cash flow, for instance, over the

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Speaker 4: next five years might be going from you know, two

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Speaker 4: three billion of free cash flow to fifty billion a

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Speaker 4: free cash flow five years from now. This is real,

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Speaker 4: This is no longer just theoretical. They're not going to

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Speaker 4: be the only winners here though. In fact, I think

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Speaker 4: there's winners across the board, from the cloud players, whether

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Speaker 4: that's Amazon, Google, Microsoft, to hardware providers i e. Apple,

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Speaker 4: to a whole host of foundaries, whether that's Taiwan, Semi

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Speaker 4: or Micron, or even an Intel, which is a separate

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Speaker 4: story and of itself but is likely to catch up.

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Speaker 4: And then you layer on top of that all the

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Speaker 4: other designers, whether it's somebody like an NXP or an

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Speaker 4: AMD or an Intel itself. There's a tremendous room for growth,

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Speaker 4: because again, this is going to be an enormously growing pie.

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Speaker 4: That being said, though, in video really is the only

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Speaker 4: one from a fundamental standpoint, that's really starting to see

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Speaker 4: that increase in demand show up on their balance sheet.

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Speaker 4: The interesting thing, though, you know, I started off by

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Speaker 4: talking about how tech is so well positioned from a

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Speaker 4: credit perspective. You can make an argument that it's the

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Speaker 4: biggest names, the ones that I rattled off that are

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Speaker 4: the highest rated, that are going to benefit the most.

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Speaker 4: You know, the rich get richer in videos rated single A.

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Speaker 4: They're going to have so much excess free cash. I

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Speaker 4: think over the next few years the only option they're

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Speaker 4: going to have for their money is to give it

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Speaker 4: back to shareholders. It becomes an Apple Microsoft style story.

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Speaker 4: How much better can their credit get? Well? Listen, in theory,

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Speaker 4: if they wanted to be a double A credit, they

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Speaker 4: could be, but they don't need to be. They have

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Speaker 4: very few borrowing needs. They're going to have again a

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Speaker 4: build up in cash and listen, this is not just

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Speaker 4: me saying it. They announced an increase in their buyback

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Speaker 4: program by twenty five billion dollars. You know, I already

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Speaker 4: mentioned I think that they can grow free cash flow

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Speaker 4: to fifty billion in the next five years. So I

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Speaker 4: think that's just going to get sort of bigger and bigger.

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Speaker 4: So if you own in Vidia bonds, Congratulations, you're in

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Speaker 4: great shape. You're not getting a ton of yield. But

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Speaker 4: it's sort of like the it's sort of a microcosma

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Speaker 4: the rest of the tech space is that you're not

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Speaker 4: buying Apple bonds, or Google bonds, or Microsoft bonds or

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Speaker 4: in Video bonds because you think they're going to tighten dramatically.

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Speaker 4: You're buying them because you think that they're safe and

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Speaker 4: there's lower volatility in bond spreads, and that in times

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Speaker 4: of stress, whether that's higher recession concerns or increasing rate environment,

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Speaker 4: that your bond prices are going to hold in a

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Speaker 4: lot better than capable investment grade names. And that's what

436
00:24:02,240 --> 00:24:04,240
Speaker 4: I think is going to happen here. So in Video

437
00:24:04,280 --> 00:24:07,600
Speaker 4: becomes a great poster child for AI. They're going to

438
00:24:07,640 --> 00:24:11,159
Speaker 4: benefit from a credit perspective in terms of stability, and

439
00:24:11,200 --> 00:24:14,080
Speaker 4: from an equity perspective. Obviously, with a valuation now over

440
00:24:14,119 --> 00:24:17,240
Speaker 4: a trillion dollars, you know, the market is seeing those

441
00:24:17,280 --> 00:24:20,600
Speaker 4: same sort of dollar signs that we are, and quite frankly,

442
00:24:20,760 --> 00:24:22,880
Speaker 4: you know, buying back twenty five billion dollars a stock

443
00:24:22,920 --> 00:24:25,680
Speaker 4: for a trillion dollar equity doesn't really make a difference.

444
00:24:25,880 --> 00:24:28,800
Speaker 4: It's just a sign of I think, how good things

445
00:24:28,800 --> 00:24:29,840
Speaker 4: are to come.

446
00:24:30,240 --> 00:24:32,560
Speaker 1: But the stock has basically gone up five times in

447
00:24:32,640 --> 00:24:35,880
Speaker 1: one year. I'm old enough to remember the dot com

448
00:24:35,960 --> 00:24:38,720
Speaker 1: boom and bust. I start to worry when I see

449
00:24:38,760 --> 00:24:42,879
Speaker 1: that level of you know, enthusiasm and excitement over one stock.

450
00:24:43,320 --> 00:24:45,679
Speaker 1: It's just too good to be true. I mean, are

451
00:24:45,720 --> 00:24:47,280
Speaker 1: you not worried at all? The no risk?

452
00:24:47,560 --> 00:24:49,760
Speaker 4: Well, luckily I'm the credit guy and not the equity guy,

453
00:24:49,800 --> 00:24:52,000
Speaker 4: so I don't have to really worry about multiples. I

454
00:24:52,040 --> 00:24:55,240
Speaker 4: do think though, when you just think about justification about

455
00:24:55,720 --> 00:25:00,800
Speaker 4: why there's been such multiple expansion, it's again, it's one

456
00:25:00,880 --> 00:25:03,640
Speaker 4: is that it's it's not just a multiple, but it's

457
00:25:03,640 --> 00:25:07,440
Speaker 4: a multiple expansion on top of what's likely to be

458
00:25:07,480 --> 00:25:11,639
Speaker 4: a big earnings boom. And again, I you know, you

459
00:25:11,720 --> 00:25:14,280
Speaker 4: have to sort of wait and see it. But this

460
00:25:14,400 --> 00:25:18,560
Speaker 4: is not a promise of hope that you can monetize something.

461
00:25:18,880 --> 00:25:22,280
Speaker 4: They are already starting to monetize their chips. You know,

462
00:25:22,320 --> 00:25:27,240
Speaker 4: the cost of an Nvidia AI chip is multiples of

463
00:25:27,240 --> 00:25:30,640
Speaker 4: that of what would be a typical chip for standard

464
00:25:30,680 --> 00:25:36,359
Speaker 4: GPU in a cloud or an on premise based server,

465
00:25:36,560 --> 00:25:43,600
Speaker 4: so you have a higher margin product that's there's almost

466
00:25:43,640 --> 00:25:47,280
Speaker 4: a monopoly style business here, likely for the next few years,

467
00:25:47,560 --> 00:25:51,439
Speaker 4: where the demand is known and we're actually seeing it

468
00:25:51,520 --> 00:25:57,400
Speaker 4: flow through financials. The Again, this this is the beginning phases,

469
00:25:57,440 --> 00:26:00,439
Speaker 4: so you know there could be a lot that goes wrong.

470
00:26:01,480 --> 00:26:04,639
Speaker 4: That being said, clearly, Nvidia is the best positioned all

471
00:26:04,680 --> 00:26:09,280
Speaker 4: the semiconductor names that we cover from a credits perspective.

472
00:26:09,760 --> 00:26:12,639
Speaker 4: Let's say I'm wrong, and I'm wrong by fifty percent

473
00:26:12,680 --> 00:26:15,199
Speaker 4: that that free cash flow is not fifty billion in

474
00:26:15,240 --> 00:26:17,520
Speaker 4: five years, it's only twenty five billion. Let's say it's

475
00:26:17,520 --> 00:26:20,280
Speaker 4: only fifteen billion. I would argue it could still be

476
00:26:20,320 --> 00:26:24,440
Speaker 4: a single a credit. So the real concern would be, hey,

477
00:26:24,520 --> 00:26:26,600
Speaker 4: if you have growth rates that are slower and the

478
00:26:26,640 --> 00:26:29,600
Speaker 4: stock loses fifty percent of the value, do they start

479
00:26:29,600 --> 00:26:31,960
Speaker 4: buying a lot more stock and say, hey, let's be

480
00:26:32,040 --> 00:26:35,120
Speaker 4: like Oracle, Let's load the balance sheet up with debt

481
00:26:35,200 --> 00:26:37,840
Speaker 4: to buy back stock and fall a triple B. That's

482
00:26:37,880 --> 00:26:40,520
Speaker 4: the type of concern you can have as a credit analyst.

483
00:26:40,760 --> 00:26:44,720
Speaker 4: I think the probability of that in the near to

484
00:26:44,760 --> 00:26:48,120
Speaker 4: intermediate term the next two to three years is really

485
00:26:48,240 --> 00:26:52,840
Speaker 4: very very low, and it doesn't really make me pause.

486
00:26:53,440 --> 00:26:55,520
Speaker 4: I do think when you look at some of the

487
00:26:55,600 --> 00:26:58,639
Speaker 4: other names. You know, if you look across the board

488
00:26:59,240 --> 00:27:03,680
Speaker 4: at how equity and credit have performed this year. Credit's

489
00:27:03,720 --> 00:27:07,040
Speaker 4: been pretty stable, you know, Returns are basically close to zero.

490
00:27:07,520 --> 00:27:12,000
Speaker 4: Spreads are mildly tighter, you know, measured by basis points.

491
00:27:13,359 --> 00:27:15,120
Speaker 4: But equities are up dramatically.

492
00:27:15,200 --> 00:27:15,320
Speaker 2: Now.

493
00:27:15,359 --> 00:27:17,040
Speaker 4: Part of that is that they were down so much

494
00:27:17,320 --> 00:27:20,280
Speaker 4: last year. Part of that is that there's real hope

495
00:27:20,320 --> 00:27:24,240
Speaker 4: that there's a fundamental shift. I'm actually seeing that fundamental shift.

496
00:27:25,320 --> 00:27:29,879
Speaker 4: We're getting a lot of green shoots in terms of

497
00:27:30,000 --> 00:27:34,760
Speaker 4: return of revenue and cash flow growth in twenty twenty four.

498
00:27:35,440 --> 00:27:38,399
Speaker 4: So listen that credit markets are always a little bit

499
00:27:38,480 --> 00:27:41,240
Speaker 4: less excited than the equity markets and a little less violatile.

500
00:27:41,359 --> 00:27:43,399
Speaker 4: But I think credits telling you something that even with

501
00:27:43,880 --> 00:27:49,119
Speaker 4: a much higher rate environment, equity values don't have to

502
00:27:49,119 --> 00:27:52,320
Speaker 4: worry about credit as one of the reasons why they're

503
00:27:52,320 --> 00:27:52,960
Speaker 4: not going to go up.

504
00:27:53,320 --> 00:27:55,760
Speaker 1: What about AMD, I remember when they were junk. Now

505
00:27:55,760 --> 00:27:57,720
Speaker 1: they're the stars. How do they get there? And why

506
00:27:57,720 --> 00:27:59,080
Speaker 1: are they doing so well?

507
00:27:59,200 --> 00:28:01,879
Speaker 4: Yeah, you know, everyone does does a little bit different.

508
00:28:01,880 --> 00:28:04,200
Speaker 4: You know, it's so funny, like in technology, you tend

509
00:28:04,240 --> 00:28:06,919
Speaker 4: to talk about it as one giant group. But the

510
00:28:06,960 --> 00:28:11,960
Speaker 4: reality is no company does something exactly the same as another,

511
00:28:12,000 --> 00:28:15,720
Speaker 4: and even within semiconductors, it's it's meaningfully different. You know,

512
00:28:15,960 --> 00:28:18,280
Speaker 4: a MD had benefited over the years. You know five

513
00:28:18,359 --> 00:28:21,040
Speaker 4: years ago that they were single V and now they're

514
00:28:21,080 --> 00:28:24,679
Speaker 4: single A, and you know they were able to really

515
00:28:24,960 --> 00:28:28,399
Speaker 4: build a little bit better mousetrap than Intel and steal

516
00:28:28,640 --> 00:28:32,480
Speaker 4: a significant amount of market share when it comes primarily

517
00:28:32,520 --> 00:28:37,800
Speaker 4: to the PC market. And listen, you know the power

518
00:28:37,840 --> 00:28:41,000
Speaker 4: that's been needed, you know forgetting about AI. Think about

519
00:28:41,000 --> 00:28:46,160
Speaker 4: the last ten years about the power of gaming related

520
00:28:46,640 --> 00:28:51,840
Speaker 4: PCs and and how the explosion of both gaming and

521
00:28:52,280 --> 00:28:57,600
Speaker 4: at home PC use, particularly post COVID, has really exploded higher.

522
00:28:58,000 --> 00:29:00,440
Speaker 4: And I think what happens when you're a much bigger,

523
00:29:00,520 --> 00:29:05,000
Speaker 4: larger company, particularly like Intel, where you're both a designer

524
00:29:05,000 --> 00:29:07,600
Speaker 4: of chips and a manufacturer of chips, and you're spending

525
00:29:07,600 --> 00:29:12,080
Speaker 4: a tremendous amount of capital on foundriies, sometimes you take

526
00:29:12,160 --> 00:29:14,000
Speaker 4: the eye off, you know, you take your off the

527
00:29:14,000 --> 00:29:17,040
Speaker 4: ball when you're the industry leader. And AMD was just

528
00:29:17,080 --> 00:29:19,760
Speaker 4: able to create you know, a whole set of of chips.

529
00:29:20,080 --> 00:29:23,000
Speaker 4: You can talk to, you know, Equity team about the

530
00:29:23,240 --> 00:29:25,760
Speaker 4: real differences. You know, I'm just sort of the dumb

531
00:29:25,840 --> 00:29:28,720
Speaker 4: right hand side of the balancey guy. But really create

532
00:29:28,760 --> 00:29:31,160
Speaker 4: a little bit of better chips that created much more

533
00:29:31,160 --> 00:29:34,320
Speaker 4: demand that dramatically increase cash flow. The thing though, is

534
00:29:34,360 --> 00:29:37,440
Speaker 4: that you know, you can't stake your future on the

535
00:29:37,520 --> 00:29:43,720
Speaker 4: PC business. You know, PCs are extraordinarily cyclical. You know,

536
00:29:43,760 --> 00:29:47,160
Speaker 4: we're seeing that now in terms of during COVID. There's

537
00:29:47,240 --> 00:29:51,280
Speaker 4: such huge demand for PCs, both personal and enterprise, and

538
00:29:51,320 --> 00:29:54,120
Speaker 4: we've seen a significant drop over the last twelve to

539
00:29:54,120 --> 00:29:56,760
Speaker 4: eighteen months. So even if you have a bigger piece

540
00:29:56,800 --> 00:29:58,960
Speaker 4: of a smaller of a smaller pie, that that doesn't

541
00:29:58,960 --> 00:30:00,920
Speaker 4: really create the future. But the the real future is

542
00:30:00,920 --> 00:30:05,520
Speaker 4: going to be creating chips uh for enterprises, for servers,

543
00:30:05,560 --> 00:30:09,520
Speaker 4: for storage, for cloud computing, and taking a much bigger

544
00:30:09,560 --> 00:30:14,800
Speaker 4: piece of what is this cloud related enterprise business in particular.

545
00:30:15,240 --> 00:30:17,920
Speaker 4: Obviously the AI side has has the biggest upside, but

546
00:30:18,240 --> 00:30:20,000
Speaker 4: that's what that's what you're starting to see, you know,

547
00:30:20,080 --> 00:30:24,040
Speaker 4: names like you know NXP for instance, moving you know,

548
00:30:24,160 --> 00:30:29,480
Speaker 4: from graphics and gaming more towards the server side. You're

549
00:30:29,520 --> 00:30:31,240
Speaker 4: going to see a lot a lot more of that.

550
00:30:31,440 --> 00:30:35,440
Speaker 4: So the market is expanding certain parts of the market

551
00:30:35,480 --> 00:30:39,280
Speaker 4: are not uh a m D I think from a

552
00:30:39,360 --> 00:30:43,239
Speaker 4: credit perspective is sort of in the Nvidia category. How

553
00:30:43,320 --> 00:30:46,120
Speaker 4: much better can it get? Probably not that much better.

554
00:30:46,320 --> 00:30:48,800
Speaker 4: You know. What differentiates a name like that from other

555
00:30:48,840 --> 00:30:52,160
Speaker 4: credits is absolute size of debt. They just don't have

556
00:30:52,200 --> 00:30:55,680
Speaker 4: a lot of bonds outstanding, you know, in the scheme

557
00:30:55,800 --> 00:31:03,760
Speaker 4: of investment grade, they're almost a non player. It's just,

558
00:31:03,920 --> 00:31:06,760
Speaker 4: you know, you have a couple of billions of bonds outstanding.

559
00:31:07,160 --> 00:31:10,640
Speaker 4: You know, when we're comping that to names like Apple

560
00:31:10,680 --> 00:31:13,920
Speaker 4: with one hundred billion of bonds or the Intels or

561
00:31:13,960 --> 00:31:16,200
Speaker 4: Oracles of the world with fifty or seventy five or

562
00:31:16,200 --> 00:31:18,680
Speaker 4: eighty billion, you know, they're sort of a small player.

563
00:31:19,600 --> 00:31:21,760
Speaker 4: So it's really much more of an equity story that

564
00:31:21,880 --> 00:31:25,160
Speaker 4: being said to me, Names like an AMD that don't

565
00:31:25,160 --> 00:31:29,000
Speaker 4: have the free cash flow run rate that in Nvidia

566
00:31:29,040 --> 00:31:32,120
Speaker 4: have they could benefit in theory from issuing more bonds

567
00:31:32,160 --> 00:31:35,440
Speaker 4: and being more aggressive on a financial policy. I would

568
00:31:35,560 --> 00:31:38,200
Speaker 4: argue maybe the reason why they don't do that is

569
00:31:38,200 --> 00:31:40,200
Speaker 4: just simply the rate environment. Right, if we were back

570
00:31:40,240 --> 00:31:43,640
Speaker 4: two years ago, names like AMD probably would be issuing

571
00:31:43,680 --> 00:31:46,040
Speaker 4: more bonds. But when you have a you know, five

572
00:31:46,120 --> 00:31:49,520
Speaker 4: year trading close to five percent. You know, even if

573
00:31:49,520 --> 00:31:53,200
Speaker 4: your spreads are only one hundred basis points. You know,

574
00:31:53,320 --> 00:31:55,840
Speaker 4: over treasuries, you know, you're talking about six percent bonds

575
00:31:55,880 --> 00:31:58,240
Speaker 4: versus a few years ago. You know, these names were

576
00:31:58,240 --> 00:32:00,000
Speaker 4: issuing one percent and two percent bonds.

577
00:32:00,240 --> 00:32:02,680
Speaker 1: So rule should we expect less supply from tech in

578
00:32:02,760 --> 00:32:03,480
Speaker 1: tons of issuance?

579
00:32:03,760 --> 00:32:07,080
Speaker 4: Well, you know, there's less of a need. Over the

580
00:32:07,160 --> 00:32:08,960
Speaker 4: last couple of years, a lot of companies have done

581
00:32:08,960 --> 00:32:13,200
Speaker 4: a significant amount of refinancing. You're definitely seeing a drop

582
00:32:13,280 --> 00:32:17,400
Speaker 4: in both high yield and investment grade issuance. I think

583
00:32:17,440 --> 00:32:21,640
Speaker 4: that's likely to continue in the near term. The benefit

584
00:32:21,680 --> 00:32:23,880
Speaker 4: of this space and having such high credit quality is

585
00:32:23,880 --> 00:32:29,160
Speaker 4: that they you know, they don't need to borrow. And

586
00:32:29,200 --> 00:32:31,920
Speaker 4: I could say that about almost any name that I cover,

587
00:32:32,200 --> 00:32:36,440
Speaker 4: and that's a huge, you know, differentiating factor among but

588
00:32:36,480 --> 00:32:40,239
Speaker 4: you know, between this sector and others. It's why you know,

589
00:32:40,280 --> 00:32:43,760
Speaker 4: on a consolidated basis, high yield and IG tech trade

590
00:32:43,800 --> 00:32:47,520
Speaker 4: tighter than pretty much every other sector. It's because of

591
00:32:47,560 --> 00:32:51,719
Speaker 4: that financial flexibility. In terms of upcoming maturities, they're just

592
00:32:51,760 --> 00:32:54,120
Speaker 4: not that great over the next year. You know, it's

593
00:32:54,120 --> 00:32:56,840
Speaker 4: in the neighborhood of sixty five odd billion dollars, the

594
00:32:56,920 --> 00:32:59,120
Speaker 4: vast majority of which is coming from the largest credits

595
00:32:59,120 --> 00:33:03,440
Speaker 4: that don't really need to borrow. There there was the

596
00:33:03,480 --> 00:33:06,640
Speaker 4: potential for some large scale m and a related financing

597
00:33:07,880 --> 00:33:13,920
Speaker 4: broadcom buying VMware, of which thirty plus billion dollars was

598
00:33:15,200 --> 00:33:18,320
Speaker 4: a bridge facility, including eight billion dollars of assumed debt,

599
00:33:18,520 --> 00:33:21,280
Speaker 4: so forty billion dollars of new debt. They could have

600
00:33:21,320 --> 00:33:24,200
Speaker 4: easily went out and the deal's supposed to close at

601
00:33:24,200 --> 00:33:27,200
Speaker 4: the end of the month and just borrowed all that money.

602
00:33:28,200 --> 00:33:31,360
Speaker 4: The reality, though, is that it's cheaper and easier for

603
00:33:31,440 --> 00:33:34,440
Speaker 4: them to borrow from banks. So they replaced their thirty

604
00:33:35,080 --> 00:33:37,760
Speaker 4: thirty two billion dollar bridge with twenty eight billion dollars

605
00:33:37,840 --> 00:33:40,040
Speaker 4: of bank term loans. And could they turn that out

606
00:33:40,080 --> 00:33:43,320
Speaker 4: over time? Yeah, the answer is of course. But if

607
00:33:43,360 --> 00:33:44,920
Speaker 4: you can get a much lower rate and banks are

608
00:33:44,920 --> 00:33:47,480
Speaker 4: willing to write you the check, why term it out now?

609
00:33:47,520 --> 00:33:51,280
Speaker 4: So I think funding needs from that. That transaction, you know,

610
00:33:51,320 --> 00:33:53,200
Speaker 4: which people thought could have been the biggest deal of

611
00:33:53,200 --> 00:33:55,120
Speaker 4: the year, might end up being a zero this year.

612
00:33:55,600 --> 00:33:57,360
Speaker 4: Then on the other side, when you're talking about super

613
00:33:57,440 --> 00:34:00,480
Speaker 4: high quality, it looks like Microsoft event is going to

614
00:34:00,520 --> 00:34:03,160
Speaker 4: be able to buy Activision. It's sixty nine billion dollars

615
00:34:03,160 --> 00:34:05,840
Speaker 4: of cash. I mean that's sort of like again just

616
00:34:05,920 --> 00:34:07,920
Speaker 4: goes back to our theme of like who can write

617
00:34:07,920 --> 00:34:10,080
Speaker 4: a sixty nine billion dollar check? And they didn't have

618
00:34:10,120 --> 00:34:12,800
Speaker 4: any bank loans, they had no bridge wrote it. Because

619
00:34:12,800 --> 00:34:14,640
Speaker 4: they have one hundred plus billion dollars of cash on

620
00:34:14,680 --> 00:34:18,200
Speaker 4: the books, it would have made you know, a year

621
00:34:18,239 --> 00:34:20,359
Speaker 4: plus ago when they announced this, it would have made

622
00:34:20,400 --> 00:34:24,120
Speaker 4: sense just to turn that out or at least a

623
00:34:24,120 --> 00:34:26,240
Speaker 4: big chunk of it, add cash to the balance sheet,

624
00:34:26,480 --> 00:34:29,720
Speaker 4: continue to buy back you know, fifty sixty billion dollars

625
00:34:29,719 --> 00:34:32,439
Speaker 4: a stock each year, pay big dividends, and then still

626
00:34:32,440 --> 00:34:34,840
Speaker 4: be on the lookout for more M and A. But again,

627
00:34:34,880 --> 00:34:37,480
Speaker 4: in this sort of rate environment, you know, do they

628
00:34:37,480 --> 00:34:39,240
Speaker 4: really need to have one hundred billion on the books

629
00:34:39,320 --> 00:34:42,399
Speaker 4: right now? Probably not, And they can continue to buy

630
00:34:42,440 --> 00:34:44,600
Speaker 4: back just as much stock as they have without borrowing.

631
00:34:45,520 --> 00:34:48,600
Speaker 4: They don't have massive maturities coming up. So when we

632
00:34:48,719 --> 00:34:51,719
Speaker 4: just think about like the natural course of like what

633
00:34:51,800 --> 00:34:54,879
Speaker 4: A maturities look like over the next year, they're reasonably low.

634
00:34:55,160 --> 00:34:57,360
Speaker 4: What does M and A needs look like over the

635
00:34:57,400 --> 00:35:01,040
Speaker 4: next year, they're reasonably low. So so I think That's

636
00:35:01,080 --> 00:35:03,440
Speaker 4: one of the things that also benefits this space is

637
00:35:03,480 --> 00:35:08,279
Speaker 4: that we're seeing a meaningful decline in new issuance, and

638
00:35:08,360 --> 00:35:12,680
Speaker 4: that helps improve technicals. Everyone is sort of looking for

639
00:35:12,800 --> 00:35:17,359
Speaker 4: higher quality, higher yielding names. The tech space, particularly out

640
00:35:17,400 --> 00:35:20,240
Speaker 4: the curve, has historically offered that they've been pretty steep

641
00:35:20,280 --> 00:35:22,440
Speaker 4: curves because there's a lot of twenty and thirty year

642
00:35:22,480 --> 00:35:24,200
Speaker 4: paper out there, but there's not a lot of new

643
00:35:24,200 --> 00:35:27,960
Speaker 4: paper coming and I just don't see that happening at

644
00:35:28,040 --> 00:35:30,480
Speaker 4: least until early next year, and who knows what the

645
00:35:30,560 --> 00:35:32,160
Speaker 4: rate environment will be like then.

646
00:35:32,520 --> 00:35:34,319
Speaker 1: So before we wrap things up, well, where is the

647
00:35:34,400 --> 00:35:36,680
Speaker 1: value here? As you've noted, even though they have very

648
00:35:36,719 --> 00:35:40,640
Speaker 1: high credit ratings, most tech bonds have been trading below PA.

649
00:35:40,920 --> 00:35:43,560
Speaker 1: You know, Microsoft's rated triple A is one of the

650
00:35:43,560 --> 00:35:46,160
Speaker 1: few names that is yet some of its bonds look

651
00:35:46,200 --> 00:35:48,040
Speaker 1: like they're actually distressed when you look at the price,

652
00:35:48,880 --> 00:35:51,400
Speaker 1: even though there's no danger of default. So shouldn't everyone

653
00:35:51,440 --> 00:35:53,239
Speaker 1: be loading up where they can? It seems like a

654
00:35:53,239 --> 00:35:56,239
Speaker 1: screaming buy. Where would you say is the value in

655
00:35:56,280 --> 00:35:57,600
Speaker 1: the market right now? Credit market?

656
00:35:57,680 --> 00:35:57,839
Speaker 2: Yeah?

657
00:35:57,840 --> 00:36:00,440
Speaker 4: You know, we just put out a note highlighting you know,

658
00:36:00,560 --> 00:36:03,839
Speaker 4: ninety percent of the indexes that we cover high grade

659
00:36:03,840 --> 00:36:07,440
Speaker 4: and high yield tech bonds are trading below par and

660
00:36:07,760 --> 00:36:12,560
Speaker 4: the reality is the primary reason for that or rate moves.

661
00:36:13,120 --> 00:36:17,120
Speaker 4: You know, if you have a triple A or double

662
00:36:17,120 --> 00:36:21,680
Speaker 4: A bond trading in the fifties, that's not a it's

663
00:36:21,719 --> 00:36:25,000
Speaker 4: not a statement about credit quality whatsoever. It's purely math

664
00:36:25,520 --> 00:36:28,120
Speaker 4: and rates. If you look at spreads, spreads year to

665
00:36:28,200 --> 00:36:33,480
Speaker 4: date both in high yield and IG are tighter. Total

666
00:36:33,520 --> 00:36:37,880
Speaker 4: returns are reasonably flat because of rates. You know, the

667
00:36:37,960 --> 00:36:45,600
Speaker 4: vast majority of investment grade portfolio managers are hedging treasuries,

668
00:36:45,760 --> 00:36:48,279
Speaker 4: so it's really about spread, not about dollar price. So

669
00:36:49,000 --> 00:36:50,960
Speaker 4: it sort of makes you salivate, like I can buy

670
00:36:51,000 --> 00:36:53,960
Speaker 4: Apple for fifty eight cents on the dollar. Wow, that

671
00:36:54,040 --> 00:36:56,239
Speaker 4: seems like a home run. But the reality as your

672
00:36:56,280 --> 00:36:59,279
Speaker 4: yield is still reasonably low relative to others. So what's

673
00:36:59,320 --> 00:37:02,160
Speaker 4: the play. The play is that if you are concerned

674
00:37:02,280 --> 00:37:07,200
Speaker 4: about a recession, rate volatility or spread volatility, the tech

675
00:37:07,239 --> 00:37:11,200
Speaker 4: space remains a place to park your money and hide

676
00:37:11,440 --> 00:37:14,799
Speaker 4: and wait for a better day to invest. I do

677
00:37:14,840 --> 00:37:17,439
Speaker 4: think that there's a Barbell style strategy with owning super

678
00:37:17,520 --> 00:37:19,680
Speaker 4: high quality names the double as and triple a's that

679
00:37:19,960 --> 00:37:22,240
Speaker 4: we've talked about as well as moving down the curve.

680
00:37:22,239 --> 00:37:24,279
Speaker 4: You know, you can pick up pretty good incremental yield

681
00:37:24,640 --> 00:37:29,000
Speaker 4: for names like Broadcom or Oracle that have levered their

682
00:37:29,040 --> 00:37:31,440
Speaker 4: balance sheet meaningfully over the past couple of years but

683
00:37:31,520 --> 00:37:34,640
Speaker 4: really have little to no risk of falling to junk.

684
00:37:35,760 --> 00:37:38,040
Speaker 4: But you can pick up fifty or seventy five basis points,

685
00:37:38,080 --> 00:37:40,479
Speaker 4: depending upon what part of the curve you're looking at,

686
00:37:40,640 --> 00:37:43,160
Speaker 4: and that can create excess returns that could help create

687
00:37:43,800 --> 00:37:48,439
Speaker 4: outperformance within the space. In terms of high yield, there's

688
00:37:48,440 --> 00:37:52,400
Speaker 4: some you know, some higher quality names like Uber or

689
00:37:52,440 --> 00:37:54,879
Speaker 4: even names like Match that generate a lot of free

690
00:37:54,960 --> 00:37:58,720
Speaker 4: cash that could be rising towards investment grade. They trade

691
00:37:58,719 --> 00:38:01,120
Speaker 4: tight to peers. Though, listen, you're just going to hear

692
00:38:01,120 --> 00:38:03,279
Speaker 4: that over and over again from me talking about tech.

693
00:38:03,440 --> 00:38:06,200
Speaker 4: The vast majority of names trade tight to peers. Doesn't

694
00:38:06,200 --> 00:38:08,720
Speaker 4: mean you don't want to own them, but it certainly

695
00:38:08,760 --> 00:38:11,080
Speaker 4: means if you're going to own them. On the names

696
00:38:11,120 --> 00:38:15,840
Speaker 4: whose credit quality has lower volatility or has some upside.

697
00:38:16,080 --> 00:38:19,840
Speaker 4: But this is definitely a game where you're not looking

698
00:38:19,880 --> 00:38:22,120
Speaker 4: to hit home runs. You're looking to hit singles. And

699
00:38:22,120 --> 00:38:23,839
Speaker 4: I'll tell you you can make the hall of fame

700
00:38:23,840 --> 00:38:24,920
Speaker 4: by hitting a lot of singles.

701
00:38:25,160 --> 00:38:27,560
Speaker 1: You can just get your automated investment managers to do

702
00:38:27,600 --> 00:38:28,680
Speaker 1: all the work for you as well.

703
00:38:28,840 --> 00:38:32,279
Speaker 4: Eventually you'll have a computer talking a lot smarter than

704
00:38:32,320 --> 00:38:32,680
Speaker 4: I will.

705
00:38:33,080 --> 00:38:35,520
Speaker 1: Thank you very much. Rob Schiffman Bloomberg Intelligence. You can

706
00:38:35,520 --> 00:38:37,760
Speaker 1: read all of his great analysis on the Bloomberg Terminal.

707
00:38:37,840 --> 00:38:41,080
Speaker 1: Do check it out, and Rob's Bloomberg messages all bear

708
00:38:41,120 --> 00:38:43,680
Speaker 1: the legend tech is my life call me so do

709
00:38:43,760 --> 00:38:46,080
Speaker 1: take him up on that. Thanks Rob, Thanks James, hope

710
00:38:46,080 --> 00:38:47,719
Speaker 1: to see you back on the show soon before the

711
00:38:47,760 --> 00:38:50,560
Speaker 1: machines take over. And thanks again to Gary gour Murphy

712
00:38:50,800 --> 00:38:53,680
Speaker 1: from Bloomberg News. Read all of her great scoops on

713
00:38:53,760 --> 00:38:56,960
Speaker 1: the terminal and at Bloomberg dot com, and please do

714
00:38:57,040 --> 00:39:00,240
Speaker 1: subscribe where you get your podcasts. We're on Apple, Google

715
00:39:00,280 --> 00:39:03,040
Speaker 1: and Spotify. Give us a review, tell your friends or

716
00:39:03,040 --> 00:39:07,680
Speaker 1: email me directly at jcrombieight at Bloomberg dot net. That's

717
00:39:07,920 --> 00:39:10,319
Speaker 1: j C R O M B I E as in

718
00:39:10,360 --> 00:39:13,239
Speaker 1: my surname and the number eight at Bloomberg dot net.

719
00:39:13,640 --> 00:39:16,600
Speaker 1: Please do get in touch. I'm James CRUMBI. It's been

720
00:39:16,640 --> 00:39:19,120
Speaker 1: a pleasure having you join us again next week on

721
00:39:19,239 --> 00:39:20,080
Speaker 1: the credit edge