WEBVTT - Riskiest Junk-Bond Bets Pay Off; the AI Explosion 0:00:14.840 --> 0:00:17.840 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:18.200 --> 0:00:20.840 My name is James Crumby. I'm a senior editor at Bloomberg. 0:00:21.360 --> 0:00:23.439 This week, we're very pleased to welcome to the show 0:00:23.600 --> 0:00:27.360 Gary Gurramoti, who covers high yield bonds at Bloomberg News 0:00:27.360 --> 0:00:27.920 in New York. 0:00:28.240 --> 0:00:32.559 How are you, Gary, all well water anized opportunity. Thank 0:00:32.640 --> 0:00:33.320 you for having me. 0:00:33.960 --> 0:00:37.040 Gary truly is the guru of junk bonds, so we're 0:00:37.080 --> 0:00:38.640 delighted to have her on the show and get her 0:00:38.680 --> 0:00:42.160 take on the markets. We're also very pleased to welcome 0:00:42.200 --> 0:00:45.360 back Rob Schiffman, a credit analyst with Bloomberg Intelligence in 0:00:45.440 --> 0:00:47.440 New York. We'll be coming back to Rob a bit 0:00:47.520 --> 0:00:50.680 later in the show to discuss artificial intelligence and how 0:00:50.720 --> 0:00:54.320 it's affecting credit. So do stay with us. But first, 0:00:54.760 --> 0:00:58.120 Gary Gurramoti with Bloomberg News, you're all over the junk 0:00:58.120 --> 0:01:01.320 bond market. It's where the drama is. It's at one 0:01:01.360 --> 0:01:05.199 point four trillion dollar market that includes household names like Ford, 0:01:05.600 --> 0:01:09.720 American Airlines and Uber. Essentially, we're talking about risky companies 0:01:10.080 --> 0:01:12.640 raising debt in the bond market for a wide variety 0:01:12.640 --> 0:01:17.880 of things projects, acquisitions, refinancing, payment of dividends to shareholders. 0:01:18.440 --> 0:01:21.200 They're typically the companies, though, that run into trouble when 0:01:21.280 --> 0:01:24.319 interest rates jump or if there's a slowdown in the economy. 0:01:24.720 --> 0:01:27.399 They have less of a cushion when the going gets tough. 0:01:28.720 --> 0:01:32.200 But despite the huge surge in rates and therefore funding 0:01:32.240 --> 0:01:34.560 costs that we've seen over the last few years, not 0:01:34.680 --> 0:01:38.440 to mention a banking crisis in March, growing recession fears, 0:01:38.640 --> 0:01:41.679 slower earnings, and a whole load of proliferating macro and 0:01:41.720 --> 0:01:45.360 geopolitical risks, junk bonds have had a great year, haven't 0:01:45.360 --> 0:01:48.320 they so. Gary, You've been covering this for a long time. 0:01:48.360 --> 0:01:51.000 We've had the pleasure of working together for many years. 0:01:51.680 --> 0:01:54.000 What's the story. How are junk bond's doing so well 0:01:54.040 --> 0:01:55.240 against all the odds? 0:01:55.960 --> 0:01:58.840 First, I would just say I agree with you that 0:01:59.040 --> 0:02:04.400 with all this secession fears, rate high drama, banking crisis, 0:02:04.480 --> 0:02:07.800 financial system coming to a halt, US high held has 0:02:07.800 --> 0:02:11.280 been doing pretty well. But there's a mildly disagreement in 0:02:11.320 --> 0:02:14.840 the sense there are there are there is no recession fear. 0:02:15.000 --> 0:02:16.919 They were early in the year they were talking about 0:02:17.160 --> 0:02:21.279 likely recession, possible recession, end of the year, etcetera. Etcetera. 0:02:21.360 --> 0:02:24.680 But recession fears have really gone out of the window. 0:02:25.160 --> 0:02:31.320 Nobody's thinking of recession, not in the near term, not likely. 0:02:31.680 --> 0:02:36.160 They're talking of you know, soft landing, slow landing, slow growth, etcetera. 0:02:36.680 --> 0:02:40.200 Growth creeping near a halt, but not really a recession. 0:02:40.600 --> 0:02:44.600 And therefore Hyyel has benefited from this sort of what 0:02:44.680 --> 0:02:47.799 should I say, goldilocks, You have a stable growth sort 0:02:47.840 --> 0:02:54.160 of tugging along and no corporate corporate balancees look reasonably healthy, 0:02:54.800 --> 0:02:57.880 so I really and that explains why hyl has been 0:02:57.919 --> 0:03:01.680 performing well. Hi Heel is not as read's sensitive as 0:03:01.880 --> 0:03:05.519 investment grade are investment grade bonds are, and therefore Hireless 0:03:05.560 --> 0:03:07.760 outperformed investment grade as well. 0:03:07.800 --> 0:03:09.840 I definitely agree with you that markets don't seem to 0:03:09.840 --> 0:03:12.320 be pricing in any kind of recession. But in house 0:03:12.360 --> 0:03:15.680 economists Bloomberg Intelligence, they think that there will be a 0:03:15.680 --> 0:03:18.280 recession starting in the fourth quarter in the US. Maybe 0:03:18.320 --> 0:03:20.320 it's not going to be a deep recession, but you know, 0:03:20.680 --> 0:03:25.160 possibly just a mild, you know, shallow dip. But going 0:03:25.160 --> 0:03:28.080 back to the junk bond market, also surprising to me 0:03:28.120 --> 0:03:31.519 at least, is that the riskiest bonds those rated triple C. 0:03:31.720 --> 0:03:34.800 That's the lowest credit rating. They've done really really well 0:03:34.800 --> 0:03:36.360 this year that you know, they're up, you know, double 0:03:36.360 --> 0:03:39.880 digits again. Are you surprised by that? 0:03:40.600 --> 0:03:41.120 Not really. 0:03:41.360 --> 0:03:45.280 Again, Triple c's are are very small, about ten to 0:03:45.280 --> 0:03:47.800 twelve percent of the total index, so it's very it's 0:03:47.840 --> 0:03:51.600 a very small percent. Even something small, they always can 0:03:51.640 --> 0:03:54.080 do a lot better than the rest of the market. Second, 0:03:54.120 --> 0:03:58.280 triple cs are more sensitive to equity volatility rather than 0:03:58.400 --> 0:04:02.080 rates volatility. Equity volatility, if you're going to just check 0:04:02.120 --> 0:04:05.440 the index, historically they have been below twenty. You know, 0:04:05.480 --> 0:04:10.000 it's been practically very low volatility there. Equities have performed 0:04:10.080 --> 0:04:13.280 very well here today, and so triple c's are reflecting 0:04:13.320 --> 0:04:14.320 equity performance. 0:04:14.360 --> 0:04:14.920 That's one. 0:04:15.160 --> 0:04:17.640 Secondly, as I said, it's a very small person, here's 0:04:17.640 --> 0:04:21.120 a total index, so I see no surprise there. And Thirdly, 0:04:21.160 --> 0:04:24.200 as I just mentioned a few minutes ago, it is 0:04:24.320 --> 0:04:29.040 more great concern now than growth concerns. Actually, people are 0:04:29.040 --> 0:04:32.840 pretty much there, all the big dealers, everyone talking about 0:04:33.440 --> 0:04:37.599 soft landing, slow economy, including the FED. They don't expect 0:04:37.600 --> 0:04:41.640 a recession in the near term or an immediate future, 0:04:41.800 --> 0:04:47.560 so growth concerns not really top of the mind. Equity 0:04:47.600 --> 0:04:50.520 markets are doing pretty well. Triple c's are very small. 0:04:50.600 --> 0:04:54.320 Person is a total market, so it naturally will outperformance 0:04:54.360 --> 0:04:54.920 to the market. 0:04:55.400 --> 0:04:57.200 I still worry, though, because you know, triple c' is 0:04:57.240 --> 0:04:59.880 typically you know, they're the ones most likely to default 0:05:00.240 --> 0:05:01.880 on their debt when things get hard. We've seen a 0:05:01.920 --> 0:05:05.359 lot more bankruptcies this year, you know, so there is 0:05:05.680 --> 0:05:08.600 stress and as a funding costs jump, some of these 0:05:08.600 --> 0:05:10.039 companies just aren't going to be able to pay about 0:05:10.040 --> 0:05:12.600 the money. So I'm just wondering why, you know, markets 0:05:12.680 --> 0:05:14.680 just seem so blase about all this. 0:05:15.520 --> 0:05:18.520 I know that's a very predictable sort of response or question. 0:05:18.640 --> 0:05:21.640 People wonder triple c's are junkiest of junks and therefore 0:05:21.680 --> 0:05:25.599 they should default one default traits. Even the forecasts for 0:05:25.720 --> 0:05:29.200 default traits is not really very high. Even they predict 0:05:29.240 --> 0:05:33.040 about four percent five percent, when even the egregious default 0:05:33.080 --> 0:05:35.840 rate would be about five percent end of twenty twenty four, 0:05:35.920 --> 0:05:39.240 twenty twenty week, twenty twenty five, and that's not very 0:05:39.279 --> 0:05:43.680 high by historical standards. Number one two triple cs. Not 0:05:43.800 --> 0:05:46.240 the whole of triple c's is really bad. Triple cs 0:05:46.240 --> 0:05:49.600 are some sometimes technically triple c they are pretty reasonably 0:05:49.680 --> 0:05:52.680 good companies with high coupons, they're not necessarily going to 0:05:52.720 --> 0:05:56.240 default spike and default is not really expected. And the 0:05:56.320 --> 0:06:00.120 recent months we have seen that distressed universes also shrink. 0:06:00.839 --> 0:06:03.600 And with the economy, if the economy chugs along, you mean, 0:06:03.880 --> 0:06:06.159 you may see some default, but it's not going to 0:06:06.240 --> 0:06:08.520 really sort of bring the market down. It won't sort 0:06:08.560 --> 0:06:11.160 of crash the triple C market altogether. 0:06:11.960 --> 0:06:14.280 So we were kind of all wrong about worrying. I mean, 0:06:14.279 --> 0:06:16.480 there was a chicken licking and the sky was falling 0:06:16.520 --> 0:06:17.480 down earlier this year. 0:06:17.560 --> 0:06:20.359 Right, they always say it's a very cliche thing. You know, 0:06:20.440 --> 0:06:22.960 broken clock is right twice a day. So we may 0:06:23.160 --> 0:06:27.520 turn out to be right sometime someday, but not this year. 0:06:28.000 --> 0:06:29.359 And there's plenty of time for that. 0:06:29.880 --> 0:06:32.560 So we think that this continues this kind of performance. 0:06:35.440 --> 0:06:37.760 I you know, I'm not in the business of forecasting 0:06:37.839 --> 0:06:41.000 or predicting, but still I would say, I see no 0:06:41.240 --> 0:06:45.200 reason why there'll be a serious derailment or disruption. Why 0:06:45.560 --> 0:06:48.919 interstates have already pequed, they're not going to raise interest rates, 0:06:48.920 --> 0:06:52.480 so that they've ruled out almost higher for longer. The 0:06:52.960 --> 0:06:57.240 markets sort of uprising it in and growth is still 0:06:57.279 --> 0:06:59.960 okay for you. Perhaps four C will perhaps be still 0:07:00.040 --> 0:07:03.599 over than three Q. And earnings still look okay, though 0:07:03.640 --> 0:07:05.880 they are much lower than what they were in the 0:07:05.880 --> 0:07:10.280 earlier quarters. So corporate balance sheet looks pretty okay. Interest 0:07:10.320 --> 0:07:14.160 coverage may fall, but have no cause for concern. So 0:07:14.240 --> 0:07:17.320 I really don't see a major derailment in twenty twenty four, 0:07:17.400 --> 0:07:19.680 not in the fourth quarter. What happens in the first 0:07:19.760 --> 0:07:22.160 quart of twenty twenty four is again it's an open 0:07:22.280 --> 0:07:25.400 ended question. But even there one does not see a 0:07:25.440 --> 0:07:30.320 major disruption because economy is going to chug along, and 0:07:30.400 --> 0:07:33.400 if they say any serious disruption in the economy, you know, 0:07:33.600 --> 0:07:36.720 by the end of US quarter the FED will start 0:07:36.720 --> 0:07:38.960 cutting rates, though they are not thinking that. They're saying 0:07:39.000 --> 0:07:43.200 they will not cut rates. Markets think. Markets dually expect 0:07:43.240 --> 0:07:46.000 if there is going to be a serious disruption geopolitical 0:07:46.040 --> 0:07:50.640 disruption or major chaos, government shut down or gun or 0:07:50.680 --> 0:07:55.040 the counter doesn't pass the CR continuing resolution bill or 0:07:55.080 --> 0:07:58.400 does not pass the government budget, all this may cause 0:07:58.440 --> 0:08:02.480 some disruption, and FED intervene and try to not let 0:08:02.560 --> 0:08:05.880 things escalate. So I don't say anything happening till the 0:08:05.880 --> 0:08:08.760 first quarter of twenty twenty four. Nothing serious, there may 0:08:08.800 --> 0:08:11.720 be some volatility, spreads widening, and even now you see 0:08:11.760 --> 0:08:15.680 spreads around four hundred. Nothing, no sign of recession there. 0:08:16.240 --> 0:08:18.560 You're an economists. So one of my basic theories about 0:08:18.560 --> 0:08:19.880 this market, and you can tell me if it's all 0:08:19.920 --> 0:08:22.800 nonsense to you, is demand and supply that you know, 0:08:22.880 --> 0:08:26.960 there's consistent demand for yield, especially when the coupons are 0:08:27.000 --> 0:08:29.840 so high. Now double digits for stuff that you know 0:08:30.200 --> 0:08:32.480 previously not that long ago, you're getting five percent on it, 0:08:32.559 --> 0:08:36.000 so it looks really attractive. But meanwhile, the actual supply 0:08:36.040 --> 0:08:37.600 of this stuff has gone right down. I mean, this 0:08:37.640 --> 0:08:40.079 is a very bad year for issuance. So in that sense, 0:08:40.200 --> 0:08:42.800 I think the price just gets better and these things 0:08:42.800 --> 0:08:43.160 go up. 0:08:43.320 --> 0:08:45.880 There, you made my us you answered my question. So 0:08:45.880 --> 0:08:49.480 another important reason growth is not an important concern for 0:08:49.520 --> 0:08:53.800 the high yaled market. Equity volatility is pretty low, not really, 0:08:54.000 --> 0:08:58.200 not for any concern at all. And overall supply of 0:08:58.400 --> 0:09:02.080 new bands is very it's sort of maybe fifty percent 0:09:02.160 --> 0:09:04.840 about twenty twenty two, but that's a very low bar. 0:09:05.240 --> 0:09:08.280 It is still perhaps the lower since two thousand and 0:09:08.280 --> 0:09:11.240 eight or two thousand and nine, So supply is very thin. 0:09:11.440 --> 0:09:13.920 Economy is pretty robust. People have a lot of cash 0:09:13.960 --> 0:09:18.160 to invest in, so more demand fuel supply basic econ 0:09:18.200 --> 0:09:18.760 one oh one. 0:09:19.640 --> 0:09:21.440 On the supply side, though, you look at this stuff 0:09:21.559 --> 0:09:25.240 very closely, and everyone listening should should follow Gary on 0:09:25.320 --> 0:09:28.600 the terminal for her updates on the supply side, because 0:09:28.600 --> 0:09:31.360 it's essential stuff. What are you saying, what do you expect? 0:09:31.400 --> 0:09:33.360 Is there going to be a big increase next year 0:09:33.400 --> 0:09:35.000 and there's refinancing to do, right. 0:09:35.679 --> 0:09:38.800 I don't see a big sharp jump and used a 0:09:38.920 --> 0:09:42.240 junk band supply because, as I've always telled my colleagues 0:09:42.240 --> 0:09:46.080 and friends, supply comes for three to two broad reasons. 0:09:46.120 --> 0:09:49.280 One is funding acquisitions. 0:09:48.360 --> 0:09:49.480 Or leveraged buyouts. 0:09:49.559 --> 0:09:54.240 That's also broadly acquisitions, and second is refinancing outstanding bards. 0:09:54.600 --> 0:09:58.400 And third perhaps is you know, capital expenditure projects, et ceteraba. 0:09:58.520 --> 0:10:02.079 That's a third refinancing and repaying debt. 0:10:02.120 --> 0:10:03.880 So these are the two broad things. 0:10:03.840 --> 0:10:07.319 And see in the first category of acquisitions and LBOs 0:10:07.400 --> 0:10:10.520 you find they are very far and few and fewer 0:10:10.520 --> 0:10:13.600 and far between. They don't see very large number of 0:10:13.640 --> 0:10:16.640 them because of high cost of borrowing, not easy for 0:10:16.880 --> 0:10:20.360 private equity guys to buy companies and make money. There 0:10:20.480 --> 0:10:24.079 margins are every thin, so that's not super attractive high. 0:10:23.880 --> 0:10:24.720 Cost of borrowing. 0:10:24.840 --> 0:10:28.760 So given that LBOs and acquisitions are fewer in number, 0:10:29.080 --> 0:10:32.520 the reason for issuing new bonds is sort of not 0:10:32.760 --> 0:10:37.600 very exciting. So refinancing people talk of, and I was 0:10:37.640 --> 0:10:41.080 just looking at refinancing numbers. This could differ from day 0:10:41.080 --> 0:10:47.960 to day, and you wort three hundred billion expected roughly 0:10:48.000 --> 0:10:50.920 about till end of twenty twenty five. If I bring 0:10:50.960 --> 0:10:54.080 a twenty twenty four is I don't think much is 0:10:54.120 --> 0:10:58.360 really two twenty twenty four. So we're already refinancing all 0:10:58.360 --> 0:11:02.720 the outstanding bonds, pretty steady and so rEFInd and therefore 0:11:02.760 --> 0:11:06.199 I don't see a big jump and supply you may 0:11:06.280 --> 0:11:08.320 see it pretty much now it's going it's going to 0:11:08.320 --> 0:11:11.160 be about less than two hundred this time, two hundred million, 0:11:11.520 --> 0:11:14.320 maybe next year around the same, a little more couple 0:11:14.400 --> 0:11:18.120 of more LBOs, and I don't know if I'm carrying on, 0:11:18.200 --> 0:11:21.840 But you also see acquisitions and LBOs have another source 0:11:21.920 --> 0:11:25.760 of funding. They're dependent on high bonds and now and 0:11:25.880 --> 0:11:28.800 leverage loans. Now you will see a third source of 0:11:28.880 --> 0:11:32.040 funding is jet lending of what they call private credit. 0:11:32.520 --> 0:11:36.800 So even the fewer and far between LBOs are also 0:11:36.960 --> 0:11:39.720 sort of going into the private credit world, so that 0:11:39.840 --> 0:11:42.120 again takes out of bond supply bond is. 0:11:42.120 --> 0:11:45.040 Shoes, and again low supply means higher price. 0:11:44.880 --> 0:11:46.320 Higher price, and better returns. 0:11:46.960 --> 0:11:48.920 Let's just go back to the macro signals. I mean, 0:11:48.720 --> 0:11:50.600 I'm really interested in this concept of you know, the 0:11:50.640 --> 0:11:53.880 spreads being way lower than they should be if if 0:11:53.920 --> 0:11:57.920 anyone expects a recession. So presumably junk bond markets don't 0:11:57.920 --> 0:12:01.120 expect recession. But what else the signals from the market 0:12:01.360 --> 0:12:01.920 you're seeing. 0:12:04.040 --> 0:12:06.800 I'm not seeing any recession signals. Spreads are pretty tight, 0:12:06.880 --> 0:12:10.079 people are comparing, people complaining the spreads are very tight, 0:12:10.200 --> 0:12:14.840 not enough to give. And yields are pretty decent under 0:12:14.880 --> 0:12:17.920 ten percent, and you know, even triple CS is about 0:12:18.000 --> 0:12:21.600 under fourteen percent, pretty high yield, which is making attractive 0:12:21.679 --> 0:12:26.120 for that So that even that high yields narrow spreads 0:12:26.360 --> 0:12:28.880 do not suggest that there is a recession at all. 0:12:29.200 --> 0:12:32.920 And demand for junk bonds also high yield, I should 0:12:33.000 --> 0:12:36.960 say junk is a very sort of trivializing the bond market. 0:12:37.920 --> 0:12:44.000 I think also shows that there's a willingness for embracing risks. 0:12:44.080 --> 0:12:46.079 Risk appetite is still pretty robust. 0:12:46.520 --> 0:12:50.600 So although all these things don't indicate capital market open, 0:12:50.720 --> 0:12:52.840 is still open. People can still come in and borrow 0:12:52.920 --> 0:12:56.920 money for a price. So access to capital markets, willingness 0:12:56.960 --> 0:13:02.480 to embrace risk, tight spread, it's all these indicate to 0:13:02.520 --> 0:13:05.480 me that there is no sign of any immediate recession, 0:13:05.520 --> 0:13:06.760 not in the near term. 0:13:07.200 --> 0:13:09.719 What would it take, though, to derail the rally? What 0:13:09.760 --> 0:13:11.840 are you mostly worried about in terms of your I mean, 0:13:11.880 --> 0:13:15.360 you sound quite upbeat and optimistic about this market. But 0:13:15.400 --> 0:13:17.440 what worries you about the outlook? 0:13:19.360 --> 0:13:24.480 Sudden unexpected geopolitical tension? If this Israel Hamas conflict expands 0:13:24.480 --> 0:13:28.080 into Middle East thing, that was one thing. Oil prices 0:13:28.200 --> 0:13:30.880 it's been up and down. It's been pretty high. Now 0:13:31.000 --> 0:13:35.080 will it go? What happens and what happens to China's growth? 0:13:35.160 --> 0:13:37.880 If China really slows down, I think the fear of 0:13:37.960 --> 0:13:42.200 China's slowing down seems more exaggerated. But if China slows down, 0:13:42.320 --> 0:13:46.880 something happens in Europe that could detail market. But I 0:13:47.040 --> 0:13:51.480 still don't see a major disruption at all from any 0:13:51.559 --> 0:13:54.120 I cannot see where can it come from? High leverage? No, 0:13:54.280 --> 0:13:56.880 leverage is still not high. It is not what it 0:13:57.040 --> 0:13:59.320 used to be in two thousand and six, seven and eight, 0:14:00.080 --> 0:14:03.840 So leverage is pretty under control. Economy is chugging along. 0:14:04.280 --> 0:14:07.480 People have the willingness to embrace risk. Federal Reserve is 0:14:07.520 --> 0:14:10.280 watching like a hawk is on the sort of watching 0:14:10.000 --> 0:14:13.960 anything untoward. They're going to introvene. There's no doubt about that, 0:14:14.080 --> 0:14:17.600 whatever they say. So given all these things, I do 0:14:17.720 --> 0:14:21.120 not know where will the disruption come from. Unless there 0:14:21.160 --> 0:14:25.040 is an unexpected geopolitical tension, some bank failure. Nobody thought 0:14:25.080 --> 0:14:28.760 a regional bank would fail. Something that nobody is watching happens, 0:14:29.480 --> 0:14:33.040 we could see something. But otherwise I see some here 0:14:33.120 --> 0:14:35.760 and there, up and down, but no major derailment. 0:14:36.160 --> 0:14:37.800 And even some of those things you mentioned, I mean 0:14:37.840 --> 0:14:41.800 they have resulted in better prices on junk bonds because 0:14:41.920 --> 0:14:44.000 you know, oil goes up, that's positive for high yelk. 0:14:44.000 --> 0:14:46.560 There's a lot of energy in the index. The other 0:14:46.600 --> 0:14:48.400 one is that you know, if you see problems in 0:14:48.440 --> 0:14:49.920 other parts of the world, often there's a kind of 0:14:50.320 --> 0:14:53.800 flight to the US as a kind of you know, 0:14:54.000 --> 0:14:56.480 home bias, just to just as a kind of haven. 0:14:57.240 --> 0:14:59.360 So all these things you mentioned, the potential risks that 0:14:59.480 --> 0:15:01.400 she have, you know, and also we had a banking 0:15:01.480 --> 0:15:03.320 crisis and the market just bounced right back. 0:15:03.560 --> 0:15:05.200 So you seem to be agreeing with me that I mean, 0:15:05.360 --> 0:15:08.280 no major disruption do you expect in the near term, 0:15:08.320 --> 0:15:10.680 As I said, something very unexpected, We can't think of. 0:15:11.120 --> 0:15:13.960 I cannot think of anything in the fourth quarter. At 0:15:14.080 --> 0:15:16.480 least you may have thin supply here and there's some 0:15:16.600 --> 0:15:20.240 volatility MisOr spread widening. Even the forecast was spread windening. 0:15:20.360 --> 0:15:23.560 Morgan Stanley was talking about fifty to seventy five basis 0:15:23.600 --> 0:15:26.320 on from end of September, which is four fifty four 0:15:26.360 --> 0:15:28.720 to seventy five, which is hardly and that is not 0:15:28.920 --> 0:15:34.040 any sign of recession. So interest coverage is dropping, yes, 0:15:34.120 --> 0:15:38.680 but nothing to worry about yet. Refinancing is still getting done, 0:15:38.880 --> 0:15:40.960 markets are still open, so I don't know where the 0:15:41.000 --> 0:15:42.760 disruption is going to come from. 0:15:43.160 --> 0:15:45.960 I just as a you know, a journalist who covers credit, 0:15:46.000 --> 0:15:48.320 I spend my time just worrying about bad things that 0:15:48.320 --> 0:15:50.600 could happen. But that's just me true. 0:15:50.640 --> 0:15:53.200 As a journalist, I do want something to be writing about. 0:15:53.560 --> 0:15:56.120 But as I said, market primary market is shut down 0:15:56.160 --> 0:15:59.360 for a whole for a whole week in October. Kick 0:15:59.400 --> 0:16:02.400 off to the four quarter was not great. Because of 0:16:02.480 --> 0:16:05.960 all this fear about higher for longer and people who've 0:16:05.960 --> 0:16:09.120 been talking about one more rate hike that'll make things worse. 0:16:09.960 --> 0:16:13.760 So all these things made and the sudden this Middle 0:16:13.800 --> 0:16:16.960 East conflict, all these things made people worry as to 0:16:17.000 --> 0:16:17.960 what is going to happen. 0:16:18.040 --> 0:16:19.320 Will there be a recession? 0:16:19.640 --> 0:16:22.560 But then FED officials quickly sort of came out and 0:16:22.600 --> 0:16:25.600 said that we are at the peak, unlikely to raise rates, 0:16:26.200 --> 0:16:29.840 and soft landing is what they all expect. So all 0:16:29.880 --> 0:16:32.640 these things again reassured the market and their story coming 0:16:32.680 --> 0:16:35.239 back to, you know, September. 0:16:35.840 --> 0:16:38.160 So before we talk to Rob Schiffman at Bloomberg Intelligence, 0:16:38.200 --> 0:16:40.000 tell us Gary, what else is on your radar? What 0:16:40.000 --> 0:16:42.400 else should we we've been watching for in junk bonds 0:16:42.600 --> 0:16:43.960 or higher bonds as your protocol? 0:16:45.200 --> 0:16:48.840 No, I think the higher bonds will end the year beating. 0:16:49.000 --> 0:16:51.800 I mean triple z's will beat so they corporate fixed income, 0:16:51.840 --> 0:16:52.840 they're going to be the best. 0:16:52.680 --> 0:16:54.040 Performing as a class. 0:16:54.640 --> 0:16:59.080 And of course leverage loans will always beat high bonds. 0:16:59.080 --> 0:17:03.000 I think leverage loans will do well and the HILD 0:17:03.040 --> 0:17:05.560 market is going to be pretty steady and chugging along. 0:17:05.640 --> 0:17:09.280 I see nothing to worry about in the market. 0:17:09.760 --> 0:17:11.840 And the bears will be just destroyed. 0:17:12.080 --> 0:17:14.679 They're waiting for it to happen and they have to 0:17:14.680 --> 0:17:15.119 come and go. 0:17:16.119 --> 0:17:18.680 Great stuff. Gary Guren Murty from Bloomberg News, thank you 0:17:18.760 --> 0:17:19.200 so much. 0:17:19.040 --> 0:17:22.200 For joining us, and thank you for having me read. 0:17:22.000 --> 0:17:24.199 All of gary scoops on the Bloomberg terminal and of 0:17:24.240 --> 0:17:28.440 course at Bloomberg dot Com. Pay attention to junk bonds everyone. Now, 0:17:28.440 --> 0:17:31.600 I'm delighted to welcome back to the credit Edge Rob Schiffman, 0:17:31.840 --> 0:17:35.080 who covers tech credit for Bloomberg Intelligence based in New York. 0:17:35.320 --> 0:17:36.120 How's it going, Rob? 0:17:36.359 --> 0:17:36.800 Awesome? 0:17:37.720 --> 0:17:38.040 Great? 0:17:38.080 --> 0:17:40.160 So, as we all know, the big theme in markets 0:17:40.200 --> 0:17:43.520 right now is artificial intelligence. Black Rock calls it a 0:17:43.640 --> 0:17:47.800 mega force for investors, but it's not really new. Stanley 0:17:47.880 --> 0:17:50.439 Kubrick was all over it in nineteen sixty eight with 0:17:50.520 --> 0:17:53.480 his sci fi classic two thousand and one, A Space Odyssey. 0:17:53.880 --> 0:17:55.679 Great film, by the way, I watched it again on 0:17:55.720 --> 0:17:59.439 the plane recently. So we've been talking about and mostly 0:17:59.480 --> 0:18:02.760 fretting over AI for at least the last fifty five years, 0:18:03.119 --> 0:18:07.119 and the machines haven't beatn us yet. But Rob, what 0:18:07.160 --> 0:18:10.080 does it all mean for credit? We're starting to see 0:18:10.080 --> 0:18:12.800 a bit more electronic trading of bonds. And I'm sure 0:18:12.840 --> 0:18:15.760 there's more people using chat GPT to write their daily 0:18:15.800 --> 0:18:19.120 market wraps. But how's it affecting the world? Do you cover? 0:18:19.440 --> 0:18:20.080 What's the scoop? 0:18:20.160 --> 0:18:20.320 Rob? 0:18:20.600 --> 0:18:24.879 Sure? Well, listen. Six months ago when we had our 0:18:24.960 --> 0:18:28.639 last chat, I told you spreads were a lot wider 0:18:29.600 --> 0:18:31.640 and there was a much more concern about a recession, 0:18:32.160 --> 0:18:36.320 that technology credits had never been better positioned than they 0:18:36.359 --> 0:18:41.399 were today. And I'll tell you six months later, technology 0:18:41.400 --> 0:18:44.600 credits have never been better positioned than they were than 0:18:44.600 --> 0:18:47.679 they are today. And a big part of that is 0:18:47.800 --> 0:18:54.000 the semiconductor space, where demand is just starting to boom. 0:18:54.480 --> 0:18:59.080 And I think that an explosion of AI has really 0:18:59.480 --> 0:19:05.200 hit the market in terms of concept and hope more 0:19:05.240 --> 0:19:08.720 so than fundamentals at this point. But I do think 0:19:08.720 --> 0:19:12.840 that there's a path for a large segment of the 0:19:12.920 --> 0:19:17.720 semiconductor space, both from the developers as well as the foundries, 0:19:18.520 --> 0:19:24.360 to take enormous advantage of a growing pie of revenues 0:19:24.440 --> 0:19:27.680 and cash flow over an extended period of time. You're 0:19:27.720 --> 0:19:31.679 spot on, Listen, Is AI really something new? The answer 0:19:31.720 --> 0:19:35.640 is no. Computing power has always made an enormous difference 0:19:35.680 --> 0:19:40.560 in how everybody lives and works, and there's always been 0:19:40.600 --> 0:19:46.880 this massive rapid advancement of how things change over time 0:19:46.920 --> 0:19:50.480 with technology. I do think the real benefit though, from 0:19:50.480 --> 0:19:53.080 a credit perspective, is that this is not just going 0:19:53.119 --> 0:19:56.000 to change how people live their lives, or how work 0:19:56.080 --> 0:19:59.400 is done, or how commuting is done, or how healthcare 0:19:59.680 --> 0:20:03.000 the act on the healthcare system changes, but we're really 0:20:03.040 --> 0:20:05.679 going to see I think a boom from a fundamental 0:20:05.680 --> 0:20:09.639 standpoint over the next few years that's supportive of both 0:20:09.840 --> 0:20:11.120 credit and equity. 0:20:11.600 --> 0:20:14.240 Let's talk about some names though, that you cover in video. 0:20:14.760 --> 0:20:17.359 What is it is, how important is it to credit investors? 0:20:17.400 --> 0:20:18.359 And how are they using AI? 0:20:18.640 --> 0:20:22.359 Yeah, so listen, why is everybody talking about in Vidia 0:20:23.119 --> 0:20:28.480 and not talking about so many other chip designers? And 0:20:28.520 --> 0:20:31.200 the real reason is that right now in Vidia has 0:20:31.320 --> 0:20:36.520 a stranglehold on the most powerful AI chips. Effectively, they're 0:20:36.560 --> 0:20:39.960 dominating seventy percent of the market. And the type of 0:20:40.280 --> 0:20:46.280 financial guidance that they've given creates a path towards numbers 0:20:46.520 --> 0:20:50.280 from revenue to ebitdata free cash flow in terms of 0:20:50.320 --> 0:20:53.800 growth rates that really haven't been seen before. I mean 0:20:53.920 --> 0:20:57.159 back in the early two thousands and the days of 0:20:57.200 --> 0:20:59.879 the dot com boom. You know, there were hopes that 0:21:00.600 --> 0:21:04.280 at least from a valuation perspective, that you know, eyeballs 0:21:04.400 --> 0:21:07.480 would be followed by dollars, and in this case, we're 0:21:07.520 --> 0:21:11.760 starting to see the dollars lead. So Nvidia's ramp up 0:21:11.840 --> 0:21:14.680 in terms of free cash flow, for instance, over the 0:21:14.760 --> 0:21:17.800 next five years might be going from you know, two 0:21:17.920 --> 0:21:20.879 three billion of free cash flow to fifty billion a 0:21:20.920 --> 0:21:23.600 free cash flow five years from now. This is real, 0:21:23.720 --> 0:21:28.840 This is no longer just theoretical. They're not going to 0:21:28.880 --> 0:21:31.000 be the only winners here though. In fact, I think 0:21:31.040 --> 0:21:34.840 there's winners across the board, from the cloud players, whether 0:21:34.960 --> 0:21:41.520 that's Amazon, Google, Microsoft, to hardware providers i e. Apple, 0:21:42.280 --> 0:21:46.360 to a whole host of foundaries, whether that's Taiwan, Semi 0:21:47.240 --> 0:21:50.919 or Micron, or even an Intel, which is a separate 0:21:50.960 --> 0:21:53.160 story and of itself but is likely to catch up. 0:21:53.359 --> 0:21:55.679 And then you layer on top of that all the 0:21:55.720 --> 0:21:58.800 other designers, whether it's somebody like an NXP or an 0:21:58.880 --> 0:22:03.560 AMD or an Intel itself. There's a tremendous room for growth, 0:22:03.760 --> 0:22:06.520