1 00:00:18,040 --> 00:00:20,760 Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast. 2 00:00:20,960 --> 00:00:23,400 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:23,680 --> 00:00:26,240 Speaker 1: This week, we're very pleased to welcome Kay Her, chief 4 00:00:26,280 --> 00:00:29,560 Speaker 1: investment officer for US fixed income at JP Morgan Asset Management. 5 00:00:29,560 --> 00:00:31,760 Speaker 2: How are you, Kay, I'm doing great, James, thank you 6 00:00:31,800 --> 00:00:32,239 Speaker 2: for having me. 7 00:00:32,400 --> 00:00:34,120 Speaker 1: Thanks so much for joining us, so we're very excited 8 00:00:34,159 --> 00:00:37,159 Speaker 1: to dig into your credit market views. Also delighted to 9 00:00:37,200 --> 00:00:39,879 Speaker 1: welcome back Julie Hung with Bloomberg Intelligence. Great to see 10 00:00:39,920 --> 00:00:40,640 Speaker 1: you again, Julie. 11 00:00:40,760 --> 00:00:44,479 Speaker 3: Hi, I'm Julie Hung, Bloomberg Intelligence, Consumer Staples, Credit Analyst, 12 00:00:44,560 --> 00:00:48,360 Speaker 3: part of Bloomberg's research department of five hundred analysts and strategists. 13 00:00:49,040 --> 00:00:50,960 Speaker 1: Just to set the scene a little bit, credit markets 14 00:00:50,960 --> 00:00:53,680 Speaker 1: are rallying. Debt spreads remain very tight. That means you're 15 00:00:53,720 --> 00:00:56,279 Speaker 1: not getting very much compensation for the risk of default 16 00:00:56,360 --> 00:00:59,320 Speaker 1: or downgrade on corporate debt, but the mood is bullish, 17 00:00:59,400 --> 00:01:02,000 Speaker 1: especially in the US. Most investors are very excited about 18 00:01:02,000 --> 00:01:04,000 Speaker 1: the high yields you can get on bonds that pay 19 00:01:04,080 --> 00:01:06,720 Speaker 1: very low coupons for most of the last ten years. 20 00:01:07,040 --> 00:01:09,440 Speaker 1: But if rates stay where they are or as many 21 00:01:09,480 --> 00:01:13,280 Speaker 1: expect fall. Fixed income investors should benefit. A FED hike 22 00:01:13,360 --> 00:01:16,720 Speaker 1: would probably cause some trouble, though. Meanwhile, issuance is ramping up. 23 00:01:16,760 --> 00:01:19,039 Speaker 1: There's been a record volume of bond and loan sales 24 00:01:19,080 --> 00:01:21,440 Speaker 1: as companies take advantage of the window to raise debt, 25 00:01:21,800 --> 00:01:25,600 Speaker 1: front loading fundraising to avoid any potential election volatility later 26 00:01:25,640 --> 00:01:28,280 Speaker 1: on this year, companies seem to have accepted that rates 27 00:01:28,280 --> 00:01:31,920 Speaker 1: aren't coming down anytime soon. Credit bulls believe that the 28 00:01:32,000 --> 00:01:35,080 Speaker 1: US economy will avoid recession, earnings will stay solid, and 29 00:01:35,160 --> 00:01:38,200 Speaker 1: companies are fine paying higher borrowing costs, although there's a 30 00:01:38,240 --> 00:01:41,120 Speaker 1: cohort of very low quality issuers that may still blow 31 00:01:41,200 --> 00:01:44,040 Speaker 1: up if rates don't fall. We talked last week about 32 00:01:44,120 --> 00:01:46,640 Speaker 1: two hundred billion dollars in junk bonds that look very 33 00:01:46,760 --> 00:01:49,720 Speaker 1: vulnerable at current rate levels. And there's a lot of 34 00:01:49,760 --> 00:01:55,120 Speaker 1: other stuff to worry about, commercial real estate, stress, war, geopolitics, elections. Overall, 35 00:01:55,160 --> 00:01:57,600 Speaker 1: I'm sensing a bit of complacency in credit markets, given 36 00:01:57,600 --> 00:02:00,320 Speaker 1: how tight spreads have become, even a bit of if 37 00:02:00,360 --> 00:02:02,120 Speaker 1: you consider some of the deals that are getting done 38 00:02:02,200 --> 00:02:04,559 Speaker 1: right now. But what do you think. Okay, we seem 39 00:02:04,560 --> 00:02:05,840 Speaker 1: to be hearing a lot about the year of the 40 00:02:05,840 --> 00:02:08,320 Speaker 1: bond a golden age for credit? What's your view? 41 00:02:09,960 --> 00:02:12,040 Speaker 2: So, James, you've said so much in your intro that 42 00:02:12,080 --> 00:02:14,440 Speaker 2: I've got to unpack a few of those things. First 43 00:02:14,440 --> 00:02:18,080 Speaker 2: of all, fixed income investors always have something to worry about. Remember, 44 00:02:18,120 --> 00:02:20,440 Speaker 2: there's always something that can go wrong, so we're always 45 00:02:20,480 --> 00:02:23,359 Speaker 2: losing sleep about things. I think you made a lot 46 00:02:23,400 --> 00:02:26,720 Speaker 2: of great points about spreads yields, but I think the 47 00:02:26,760 --> 00:02:29,600 Speaker 2: important thing to remember is that there's income and fixed 48 00:02:29,600 --> 00:02:32,280 Speaker 2: income again, and I think people shouldn't lose sight of that. 49 00:02:33,160 --> 00:02:36,040 Speaker 2: I would submit that the era of financial repression is over. 50 00:02:36,160 --> 00:02:39,880 Speaker 2: And yes, I absolutely agree that spreads compared to historical 51 00:02:40,040 --> 00:02:43,040 Speaker 2: levels look tight. But there's income and fixed income, and 52 00:02:43,080 --> 00:02:46,000 Speaker 2: there are attractive yields and various aspects of the investment 53 00:02:46,080 --> 00:02:49,280 Speaker 2: grade markets, and I think people should focus on that 54 00:02:49,360 --> 00:02:52,519 Speaker 2: instead of losing the plot on some of the macro 55 00:02:52,600 --> 00:02:54,120 Speaker 2: issues like the FED for example. 56 00:02:55,240 --> 00:02:57,640 Speaker 3: Okay, you know, I definitely agree with you that fixed 57 00:02:57,680 --> 00:03:00,840 Speaker 3: income investors there's always something to worry about on our 58 00:03:00,880 --> 00:03:03,760 Speaker 3: side compared to you know, the equity side, which you 59 00:03:03,800 --> 00:03:06,480 Speaker 3: know they seem to always be very optimistic and you know, 60 00:03:06,480 --> 00:03:09,480 Speaker 3: a little more bullish than we are. What do you 61 00:03:09,560 --> 00:03:12,320 Speaker 3: expect from the FED in terms of rate cuts this year. 62 00:03:13,960 --> 00:03:16,480 Speaker 2: Yeah, so, Jullie. First off, you may not know this 63 00:03:16,520 --> 00:03:18,280 Speaker 2: about me, but I spent three years as a credit 64 00:03:18,320 --> 00:03:21,520 Speaker 2: research channelist at JPMorgan Asset Management. Then I spent seventeen 65 00:03:21,600 --> 00:03:24,200 Speaker 2: years in equities, and about five years ago I moved 66 00:03:24,240 --> 00:03:27,480 Speaker 2: back to fixed income. I find that I actually prefer 67 00:03:27,600 --> 00:03:29,640 Speaker 2: to worry about what can go wrong. I'm better at 68 00:03:29,680 --> 00:03:35,080 Speaker 2: that thinking about what wonderful wings. Yeah, the worst case exactly. 69 00:03:35,720 --> 00:03:38,880 Speaker 2: So you know, in answer to your question, our expectation 70 00:03:39,040 --> 00:03:41,839 Speaker 2: is that the FED cuts probably two times this year 71 00:03:41,880 --> 00:03:44,720 Speaker 2: in the back half of the year. We've got a 72 00:03:44,720 --> 00:03:48,760 Speaker 2: FED focused on the dual mandate of inflation and employment, 73 00:03:49,240 --> 00:03:52,720 Speaker 2: and our view is that inflation has been coming down steadily, 74 00:03:54,360 --> 00:03:56,960 Speaker 2: arguably not as quickly as the FED would have Mutt liked. 75 00:03:57,000 --> 00:04:00,720 Speaker 2: There were some what we call seasonal issue use in 76 00:04:00,760 --> 00:04:04,320 Speaker 2: the first quarter, but we think inflation is moderating. Some 77 00:04:04,360 --> 00:04:07,280 Speaker 2: of the unemployment data has started to tick back up. 78 00:04:07,400 --> 00:04:11,040 Speaker 2: Admittedly it's four percent or under four percent. Longest period. 79 00:04:11,040 --> 00:04:14,000 Speaker 2: I think it's twenty nine months the longest period sub 80 00:04:14,040 --> 00:04:18,440 Speaker 2: four percent. But what we see is some underlying cracks 81 00:04:18,440 --> 00:04:21,760 Speaker 2: and small businesses, and we think that high real rates 82 00:04:21,760 --> 00:04:24,720 Speaker 2: are going to give the FED the opportunity to ease 83 00:04:25,400 --> 00:04:26,479 Speaker 2: to ease this year. 84 00:04:27,800 --> 00:04:30,320 Speaker 3: And what do you think the risk over recession this 85 00:04:30,440 --> 00:04:33,240 Speaker 3: year is and how would credit markets react to that. 86 00:04:34,160 --> 00:04:36,680 Speaker 2: Yeah, it's a good question. When we think about our 87 00:04:36,720 --> 00:04:39,320 Speaker 2: base case, we think that the US economy is in 88 00:04:39,360 --> 00:04:41,880 Speaker 2: a soft landing, and when we think about what the 89 00:04:41,920 --> 00:04:44,200 Speaker 2: market price is in over the next three to six months, 90 00:04:44,240 --> 00:04:47,360 Speaker 2: we think it's the most likely scenario remains a soft landing, 91 00:04:47,560 --> 00:04:50,560 Speaker 2: and to James's point, that is essentially what's priced into 92 00:04:50,600 --> 00:04:52,880 Speaker 2: the credit markets. You do feel a certain amount of 93 00:04:52,880 --> 00:04:55,480 Speaker 2: complacency when you look at spreads, and we can talk 94 00:04:55,520 --> 00:05:01,400 Speaker 2: about the fundamentals in a second, seventy percent we stay 95 00:05:01,400 --> 00:05:05,280 Speaker 2: in a soft landing, maybe the odds of a recession 96 00:05:05,360 --> 00:05:10,400 Speaker 2: or let's call it ten percent recession, five percent of crisis, 97 00:05:10,440 --> 00:05:15,240 Speaker 2: so maybe fifteen percent a scenario that could cause spreads 98 00:05:15,279 --> 00:05:18,240 Speaker 2: to widen, but would actually cause rates to rally. You'd 99 00:05:18,240 --> 00:05:21,159 Speaker 2: get a decline in treasury so the outlook for bonds 100 00:05:21,160 --> 00:05:25,440 Speaker 2: overall would actually probably be constructive in that. So we 101 00:05:25,480 --> 00:05:28,200 Speaker 2: think about that, you add seventy percent on a soft landing, 102 00:05:28,279 --> 00:05:32,280 Speaker 2: fifteen percent on either a recession or some form of 103 00:05:32,320 --> 00:05:36,120 Speaker 2: a crisis. That's eighty five percent that you can collect 104 00:05:36,160 --> 00:05:38,120 Speaker 2: a coupon. You know, the egg is yielding north of 105 00:05:38,160 --> 00:05:40,640 Speaker 2: five percent. Now you can buy core plus strategies or 106 00:05:40,680 --> 00:05:44,320 Speaker 2: even short duration type strategies with yields north of six percent, 107 00:05:44,760 --> 00:05:47,800 Speaker 2: even if you get you know, you're looking at the 108 00:05:47,920 --> 00:05:51,760 Speaker 2: yield plus some total return in there. The tougher scenario 109 00:05:51,800 --> 00:05:54,200 Speaker 2: for bonds would be the other side of the spectrum 110 00:05:54,200 --> 00:05:58,240 Speaker 2: from recession, which would be a reacceleration in inflation and 111 00:05:58,279 --> 00:06:01,240 Speaker 2: in growth, and that we think is a lower probability 112 00:06:01,320 --> 00:06:03,720 Speaker 2: let's call it fifteen percent you've got. You know, if 113 00:06:03,760 --> 00:06:05,960 Speaker 2: you think about that as a as a normal distribution, 114 00:06:06,240 --> 00:06:10,800 Speaker 2: something like eighty five percent is a constructive environment for bonds. 115 00:06:10,839 --> 00:06:14,280 Speaker 2: Fifteen percent is more problematic when you think about managing 116 00:06:14,360 --> 00:06:15,599 Speaker 2: bond portfolios. 117 00:06:15,880 --> 00:06:17,760 Speaker 1: So why do you need the extra headache k of 118 00:06:18,120 --> 00:06:20,760 Speaker 1: corporate debt? I mean, you're not getting your eighty five 119 00:06:20,960 --> 00:06:24,000 Speaker 1: basis points over treagies. Why not just T bills and chill? 120 00:06:25,200 --> 00:06:31,000 Speaker 2: Huh? So you know, I'll confess I opened, I resurrected 121 00:06:31,000 --> 00:06:33,840 Speaker 2: a Treasury direct account that I had many many years ago, 122 00:06:33,920 --> 00:06:35,640 Speaker 2: and I resurrected it a couple of years ago, and 123 00:06:35,680 --> 00:06:39,599 Speaker 2: I was absolutely rolling over treasury bills. The answer to 124 00:06:39,640 --> 00:06:43,000 Speaker 2: your question now though, and I started last year moving 125 00:06:43,040 --> 00:06:45,800 Speaker 2: those treasury bills into short duration core plus and into 126 00:06:45,839 --> 00:06:49,320 Speaker 2: core plus strategies lengthening duration. And I've been doing something 127 00:06:49,320 --> 00:06:51,039 Speaker 2: that I don't think a lot of people on the 128 00:06:51,040 --> 00:06:53,920 Speaker 2: bond side do, which is dollar cost averaging. I feel 129 00:06:53,920 --> 00:06:56,320 Speaker 2: like in the equity markets, everyone has accepted the fact 130 00:06:56,360 --> 00:06:59,000 Speaker 2: that they shouldn't try to time the market exactly, and 131 00:06:59,120 --> 00:07:01,320 Speaker 2: bond markets, we see so many people looking for the 132 00:07:01,480 --> 00:07:04,720 Speaker 2: exact perfect entry point. And I think what people are 133 00:07:04,720 --> 00:07:07,200 Speaker 2: forgetting And you see this in the data, James. We've 134 00:07:07,240 --> 00:07:10,840 Speaker 2: got six trillion dollars of cash sitting on the sidelines 135 00:07:10,840 --> 00:07:12,960 Speaker 2: in money market fund So there's an awful lot of 136 00:07:13,000 --> 00:07:15,880 Speaker 2: people who are in fact t billing and chilling. And 137 00:07:15,920 --> 00:07:18,520 Speaker 2: I think what they love is you sit there and 138 00:07:18,600 --> 00:07:21,080 Speaker 2: you think, my goodness, this is so comfortable. I can 139 00:07:21,120 --> 00:07:25,040 Speaker 2: get north of five percent yields with a duration of overnight. 140 00:07:25,160 --> 00:07:27,880 Speaker 2: This is I can't lose money this way. But if 141 00:07:27,920 --> 00:07:30,000 Speaker 2: you look, and you know, I think you all are 142 00:07:30,040 --> 00:07:33,360 Speaker 2: familiar with doctor David Kelly. He's got this great periodical. 143 00:07:33,400 --> 00:07:36,200 Speaker 2: You know, we call it the periodical elements of returns, 144 00:07:36,560 --> 00:07:40,080 Speaker 2: and cash tends to underperform over longer periods of time. 145 00:07:40,120 --> 00:07:43,600 Speaker 2: I think we've got a generation of investors who've seen 146 00:07:43,840 --> 00:07:46,520 Speaker 2: a one way bond bowl market with rates having gone 147 00:07:46,600 --> 00:07:50,200 Speaker 2: down to almost zero percent and then a very difficult 148 00:07:50,240 --> 00:07:53,720 Speaker 2: repricing two years ago, and they've got a form of 149 00:07:53,880 --> 00:07:57,000 Speaker 2: you know, forgive the term, but post traumatic stress disorder, 150 00:07:57,040 --> 00:07:59,040 Speaker 2: and they're afraid of both credit risk and they're afraid 151 00:07:59,040 --> 00:08:01,320 Speaker 2: of duration risk. I think we have a generation of 152 00:08:01,320 --> 00:08:05,720 Speaker 2: investors who've forgotten or never knew bond math and don't 153 00:08:05,720 --> 00:08:09,360 Speaker 2: fully understand that reinvestment risk is a real problem for people. 154 00:08:09,480 --> 00:08:14,239 Speaker 2: So if the FED starts easing, which is our base case, 155 00:08:14,320 --> 00:08:17,640 Speaker 2: later this year, then those bond yields that people those 156 00:08:17,720 --> 00:08:20,160 Speaker 2: money market yields is overnight yields that people are going 157 00:08:20,240 --> 00:08:23,000 Speaker 2: to get, are going to disappear. So they will have 158 00:08:23,040 --> 00:08:26,280 Speaker 2: missed the opportunity to lock in longer yields. 159 00:08:27,080 --> 00:08:31,160 Speaker 3: Okay, you had talked about soft landing, and I think 160 00:08:31,160 --> 00:08:35,040 Speaker 3: that's a very key term that we've kind of been 161 00:08:35,080 --> 00:08:39,040 Speaker 3: hearing the second half of last year, you know, through 162 00:08:39,080 --> 00:08:41,720 Speaker 3: the beginning of this year, I mean, heading into twenty 163 00:08:41,760 --> 00:08:46,720 Speaker 3: twenty four. You know, as a consumer staples analyst, you know, 164 00:08:46,720 --> 00:08:49,520 Speaker 3: we're always just looking at consumer behavior and what are 165 00:08:49,520 --> 00:08:52,920 Speaker 3: they doing? How are they driving the economy? And there 166 00:08:52,960 --> 00:08:55,160 Speaker 3: was this fear that they're just going to stop buying, 167 00:08:55,440 --> 00:08:59,320 Speaker 3: which we know, you know, consumers never stop buying. But 168 00:08:59,720 --> 00:09:02,320 Speaker 3: there's always that, you know, that fear that you know, 169 00:09:02,360 --> 00:09:06,719 Speaker 3: something's going to happen where unemployment is just out of 170 00:09:06,760 --> 00:09:10,120 Speaker 3: this world and you know, wages are are down and 171 00:09:10,160 --> 00:09:13,160 Speaker 3: it's just gonna like put the economy to a halt. 172 00:09:13,240 --> 00:09:17,559 Speaker 3: But we have not seen that yet, you know, looking 173 00:09:17,600 --> 00:09:21,000 Speaker 3: at the consumer and you know, we just had a 174 00:09:21,120 --> 00:09:23,000 Speaker 3: you know, consumer conference a couple of weeks ago, and 175 00:09:23,120 --> 00:09:25,160 Speaker 3: I do encourage our listeners to listen to the replay 176 00:09:25,160 --> 00:09:29,760 Speaker 3: because it was a very insightful consumer conference. But we're seeing, 177 00:09:30,040 --> 00:09:32,600 Speaker 3: you know, two different consumers. The lower income consumers are 178 00:09:32,640 --> 00:09:37,040 Speaker 3: are a little are a little more you know, hurt 179 00:09:37,120 --> 00:09:40,600 Speaker 3: by what's going on. The higher income consumers are still shopping. 180 00:09:42,040 --> 00:09:46,240 Speaker 3: What is your view on consumer spending behavior? Like where 181 00:09:46,240 --> 00:09:49,800 Speaker 3: do you see this going? Like, given everything's been going 182 00:09:49,840 --> 00:09:52,960 Speaker 3: on in the economy, all the headlines, you know, we 183 00:09:53,000 --> 00:09:55,760 Speaker 3: haven't seen rate cuts yet, Like, what is your view 184 00:09:55,800 --> 00:09:57,440 Speaker 3: on consumer purchasing behavior. 185 00:09:58,480 --> 00:10:01,080 Speaker 2: I think you've articulated it very very well, July. I 186 00:10:01,080 --> 00:10:04,199 Speaker 2: think the US consumer is, first of all, very resilient 187 00:10:04,360 --> 00:10:08,600 Speaker 2: in terms of as long as consumers are employed, they 188 00:10:08,640 --> 00:10:12,120 Speaker 2: continue they adjust their buying patterns in the face of inflation, 189 00:10:13,080 --> 00:10:15,640 Speaker 2: but they tend to continue to spend it spend. So 190 00:10:15,720 --> 00:10:18,200 Speaker 2: what we've seen and we can we can talk about 191 00:10:18,240 --> 00:10:19,880 Speaker 2: maybe some of the trends that we've seen in the 192 00:10:19,880 --> 00:10:22,400 Speaker 2: investment grade universe and some of the trends we're seeing 193 00:10:22,520 --> 00:10:28,280 Speaker 2: in the assetbacks in some terms of the securitized credit market. 194 00:10:28,480 --> 00:10:32,280 Speaker 2: But as you correctly knowe Julie, the consumer represents roughly 195 00:10:32,320 --> 00:10:35,800 Speaker 2: two thirds of US gross domestic product, and as a result, 196 00:10:35,840 --> 00:10:38,280 Speaker 2: we focus a lot on the consumer, and we see 197 00:10:38,320 --> 00:10:41,640 Speaker 2: exactly what you've noted, a bifurcation in the consumer and 198 00:10:42,200 --> 00:10:45,880 Speaker 2: in the investment grade universe in particular. What you see 199 00:10:45,920 --> 00:10:49,800 Speaker 2: is resilience, but bifurcation. So when you look at Walmart, 200 00:10:49,840 --> 00:10:53,760 Speaker 2: Walmart's continuing to take market share from high income households, 201 00:10:53,800 --> 00:10:56,600 Speaker 2: so that's income of over one hundred thousand dollars. More 202 00:10:56,600 --> 00:10:59,840 Speaker 2: than ninety percent of Americans have shopped at Walmart. With 203 00:10:59,880 --> 00:11:03,520 Speaker 2: the the last twelve months, either on their online platform 204 00:11:02,960 --> 00:11:07,679 Speaker 2: or in an actual store. And then if you look 205 00:11:07,679 --> 00:11:10,679 Speaker 2: at their revenues, Q one revenues grew at six percent 206 00:11:10,840 --> 00:11:14,120 Speaker 2: versus I think estimates were more like four point eight percent, 207 00:11:14,440 --> 00:11:18,080 Speaker 2: and IBADAD grew at almost thirteen percent versus estimates that 208 00:11:18,120 --> 00:11:20,760 Speaker 2: were six percent. And what was driving that was higher 209 00:11:20,880 --> 00:11:25,080 Speaker 2: volumes from grocery and from general merchandise. You see similar 210 00:11:25,120 --> 00:11:27,800 Speaker 2: things in dollar stores. So if you look at a 211 00:11:27,840 --> 00:11:30,920 Speaker 2: dollar Tree, for example, so an uplift in traffic coming 212 00:11:30,920 --> 00:11:35,199 Speaker 2: from higher income households. So absolutely you see bifurcation, and 213 00:11:35,240 --> 00:11:38,160 Speaker 2: you see some trade down. You know, you've seen continued 214 00:11:38,200 --> 00:11:41,160 Speaker 2: pressure in the home improvement stores, so lows in home 215 00:11:41,200 --> 00:11:44,360 Speaker 2: depot and we had been seeing some weakness and big 216 00:11:44,400 --> 00:11:48,360 Speaker 2: ticket discretionary purchases, so signs that consumers are remaining very 217 00:11:48,360 --> 00:11:51,920 Speaker 2: budget conscious. But just last week Costco reported earnings which 218 00:11:51,960 --> 00:11:55,080 Speaker 2: indicated some here's the term we haven't used in a while. 219 00:11:55,120 --> 00:11:58,160 Speaker 2: I'll go with green shoots. So some green shoots in 220 00:11:58,200 --> 00:12:01,200 Speaker 2: the consumer and starting to express some interest in buying 221 00:12:01,720 --> 00:12:06,560 Speaker 2: bigger ticket items, so durables and things like that. And 222 00:12:06,880 --> 00:12:11,520 Speaker 2: I think what's driving these trends are a couple of things. 223 00:12:11,920 --> 00:12:16,000 Speaker 2: Companies that are focused on the value proposition are leading 224 00:12:16,520 --> 00:12:18,800 Speaker 2: and I think when you look at those Walmart's result, 225 00:12:19,320 --> 00:12:23,000 Speaker 2: Walmart's had their price rollbacks were up something like forty 226 00:12:23,040 --> 00:12:26,360 Speaker 2: five percent on a year over year basis. Targets had 227 00:12:26,360 --> 00:12:28,560 Speaker 2: to come in and match that, cutting prices on something 228 00:12:28,600 --> 00:12:31,960 Speaker 2: like fifteen hundred items in everyday categories, and that's a 229 00:12:31,960 --> 00:12:34,960 Speaker 2: boon to consumers. Really lower prices. We know you we've 230 00:12:35,160 --> 00:12:38,840 Speaker 2: talked about inflation, We've talked about higher prices. And what's 231 00:12:38,960 --> 00:12:43,240 Speaker 2: interesting is where this is coming from. Walmart is self 232 00:12:43,320 --> 00:12:46,640 Speaker 2: funding that, So they're using price to drive traffic that's 233 00:12:46,720 --> 00:12:50,640 Speaker 2: driving earnings for them. And interestingly, what you ordinarily see 234 00:12:50,760 --> 00:12:54,920 Speaker 2: is the retailers pressuring the consumer staples companies to give them, 235 00:12:55,120 --> 00:12:58,080 Speaker 2: you know, give them more discounting, give them things like that. 236 00:12:58,160 --> 00:12:59,959 Speaker 2: And what you're actually seeing is if you look at 237 00:13:00,040 --> 00:13:03,320 Speaker 2: high qualities like Procter and Gamble, they've seen operating margin 238 00:13:03,440 --> 00:13:08,640 Speaker 2: increases in the first quarter driven by pricing, volume, productivity games. 239 00:13:08,640 --> 00:13:11,920 Speaker 2: And if you look at comparable companies, whether Kimberly, Clark, 240 00:13:12,000 --> 00:13:15,840 Speaker 2: or Pepsi, they had all had similar similar results. So 241 00:13:15,840 --> 00:13:18,280 Speaker 2: I think there have been some benefits of tapering inflation. 242 00:13:18,360 --> 00:13:21,040 Speaker 2: What you've seen of the companies that are leading on 243 00:13:21,120 --> 00:13:24,199 Speaker 2: price and rolling back prices or driving traffic, and that's 244 00:13:24,600 --> 00:13:27,920 Speaker 2: a further boon to consumer. So if they stay employed, 245 00:13:27,960 --> 00:13:33,000 Speaker 2: you've got this moderation in inflation. It's very constructive. I 246 00:13:33,040 --> 00:13:35,400 Speaker 2: think some of the warning signs and maybe this is 247 00:13:35,440 --> 00:13:39,199 Speaker 2: a segue to talk about it is on the Target 248 00:13:39,240 --> 00:13:44,319 Speaker 2: management call after Force first quarter earnings, they noted that 249 00:13:44,360 --> 00:13:47,800 Speaker 2: one in three Americans have maxed out or nearing credit 250 00:13:47,840 --> 00:13:51,000 Speaker 2: limits on at least one credit card. So those are 251 00:13:51,000 --> 00:13:55,040 Speaker 2: some of the warning signs that we're looking at, and 252 00:13:55,080 --> 00:13:57,400 Speaker 2: I'm happy to dive into that, or you can tell 253 00:13:57,440 --> 00:13:59,600 Speaker 2: me where you'd like to take this, Julia James. 254 00:13:59,440 --> 00:14:03,560 Speaker 3: Yeah, that's that's actually my next question about auto loans 255 00:14:03,559 --> 00:14:07,720 Speaker 3: and credit card loans and deficiencies. Again, like you know, 256 00:14:07,920 --> 00:14:11,080 Speaker 3: we're seeing a lot of differing views on that. 257 00:14:11,200 --> 00:14:12,080 Speaker 2: Some people are seeing. 258 00:14:14,160 --> 00:14:16,600 Speaker 3: You know, when you're looking at default rates on these 259 00:14:16,600 --> 00:14:20,200 Speaker 3: auto loans or credit card loans, they're higher than it 260 00:14:20,280 --> 00:14:23,359 Speaker 3: was last year, but then they're pretty flat to pre pandemic. 261 00:14:24,280 --> 00:14:26,720 Speaker 3: What have you been seeing in terms of like the 262 00:14:27,080 --> 00:14:29,880 Speaker 3: underlying performance of these loans. 263 00:14:31,080 --> 00:14:33,600 Speaker 2: Let's dig into this because I think it's actually really 264 00:14:33,640 --> 00:14:38,560 Speaker 2: really interesting. So, first off, low income low FICO consumers 265 00:14:38,640 --> 00:14:42,080 Speaker 2: continue to struggle. We've seen some stabilization in their level 266 00:14:42,120 --> 00:14:45,800 Speaker 2: of stress, but that's actually at lower levels than we 267 00:14:45,880 --> 00:14:49,680 Speaker 2: saw pre COVID, So some slowing wage growth, some slowing 268 00:14:49,720 --> 00:14:53,000 Speaker 2: wage growth, some pockets of sticky inflation. What we've seen 269 00:14:53,080 --> 00:14:56,000 Speaker 2: is excess savings have been depleted. On the other hand, 270 00:14:56,040 --> 00:14:58,480 Speaker 2: and this really goes back to your original question, Julie, 271 00:14:58,520 --> 00:15:01,800 Speaker 2: on the bifurcation of consumers. The other hand, middle income, 272 00:15:01,920 --> 00:15:06,360 Speaker 2: upper income higher fight go score consumer performance that has 273 00:15:06,440 --> 00:15:11,080 Speaker 2: been stronger. Interestingly right now, that's deteriorating at a faster rate, 274 00:15:11,360 --> 00:15:15,280 Speaker 2: but from very historically low levels. So if you think 275 00:15:15,320 --> 00:15:17,880 Speaker 2: about that, the upper end consumers, those tend to be 276 00:15:17,960 --> 00:15:20,680 Speaker 2: homeowners who are benefiting from the lock in effect of 277 00:15:20,760 --> 00:15:23,600 Speaker 2: low mortgage rates. They tend to be asset owners, so 278 00:15:23,600 --> 00:15:26,520 Speaker 2: they own real estate, they own stocks, and that's actually 279 00:15:26,560 --> 00:15:30,280 Speaker 2: performed very well. And higher income consumers also still have 280 00:15:30,360 --> 00:15:35,000 Speaker 2: access to excess savings from pre COVID levels. Lower end consumers, 281 00:15:35,040 --> 00:15:38,520 Speaker 2: back to that bifurcation concept, they're not benefiting from this. 282 00:15:38,560 --> 00:15:41,040 Speaker 2: They're struggling with a higher debt burden. They're struggling with 283 00:15:41,080 --> 00:15:45,160 Speaker 2: reduced excess savings and other headwinds. Think about the fact 284 00:15:45,200 --> 00:15:47,680 Speaker 2: that it looks like student loan repayments are going to 285 00:15:47,760 --> 00:15:50,720 Speaker 2: come back, and I think it's important to actually take 286 00:15:50,800 --> 00:15:53,400 Speaker 2: a couple of step backs and think about why we 287 00:15:53,560 --> 00:15:56,560 Speaker 2: are where we are. And one of the things that 288 00:15:56,920 --> 00:15:59,160 Speaker 2: we started talking about, gosh, I think it was in 289 00:16:00,280 --> 00:16:03,160 Speaker 2: twenty nineteen, twenty twenty, or actually I guess it was 290 00:16:03,160 --> 00:16:07,200 Speaker 2: two thousand and twenty twenty one we started talking about 291 00:16:07,440 --> 00:16:10,520 Speaker 2: is what I call fycoscore inflation. This is everybody's talking 292 00:16:10,520 --> 00:16:14,360 Speaker 2: about consumer price inflation, but fycoscore inflation is a really 293 00:16:14,400 --> 00:16:17,720 Speaker 2: interesting driver in the dynamic on the consumer side. So 294 00:16:17,760 --> 00:16:20,240 Speaker 2: if you go back and remember what happened in COVID, 295 00:16:20,680 --> 00:16:23,960 Speaker 2: you had stimulus payments, transfer payments from the government, you 296 00:16:24,040 --> 00:16:28,800 Speaker 2: had debt payment moratoriums, and different policies that actually created 297 00:16:29,160 --> 00:16:31,480 Speaker 2: what we viewed at the time and continue to see 298 00:16:31,520 --> 00:16:36,080 Speaker 2: as unsustainable positive credit performance, and that translated into pretty 299 00:16:36,120 --> 00:16:40,320 Speaker 2: significant fycoscore inflation to the tune of like fifty points. 300 00:16:40,480 --> 00:16:43,320 Speaker 2: So let's use some examples on this. Roughly half of 301 00:16:43,400 --> 00:16:46,160 Speaker 2: Americans have a FCO score. Who have fycoscores have a 302 00:16:46,160 --> 00:16:50,520 Speaker 2: fycoscore over seven hundred, and you know there's some fycoscore 303 00:16:51,440 --> 00:16:55,160 Speaker 2: inflation there, but median's roughly neutral. But when you're looking 304 00:16:55,200 --> 00:16:58,640 Speaker 2: at subprime borrowers, so four hundred to five hundred or 305 00:16:58,680 --> 00:17:01,960 Speaker 2: five hundred to six hundred, they were seeing scores go 306 00:17:02,280 --> 00:17:08,600 Speaker 2: up by fifty eighty one points, and that translated into 307 00:17:08,840 --> 00:17:12,880 Speaker 2: credit creation. So your five hundred borrower becomes a five 308 00:17:12,880 --> 00:17:18,000 Speaker 2: point fifty borrower, and then bank's credit card companies are 309 00:17:18,280 --> 00:17:21,119 Speaker 2: are much more willing to lend to them. So we 310 00:17:21,200 --> 00:17:25,280 Speaker 2: saw credit availability spike in twenty twenty one twenty two, 311 00:17:25,800 --> 00:17:29,359 Speaker 2: and credit card lenders in particular were increasing credit limits 312 00:17:29,480 --> 00:17:33,920 Speaker 2: very rapidly, so that drove down credit card utilization, which 313 00:17:33,960 --> 00:17:36,800 Speaker 2: we've now seen normalize over the six months. But if 314 00:17:36,840 --> 00:17:38,639 Speaker 2: you think about that, that at the time was a 315 00:17:38,720 --> 00:17:42,360 Speaker 2: very virtuous cycle. You stop making payments, you stop spending 316 00:17:42,400 --> 00:17:45,560 Speaker 2: on things because of the moratoriums, You get a transfer payment, 317 00:17:45,800 --> 00:17:48,840 Speaker 2: you look like a better consumer, Your bank gives you, 318 00:17:48,840 --> 00:17:51,240 Speaker 2: your credit card companies give you access to more credit. 319 00:17:51,320 --> 00:17:54,480 Speaker 2: That makes you look even better. But unfortunately there's a 320 00:17:54,560 --> 00:17:57,600 Speaker 2: reckoning on that, and we've started to see that reckoning. 321 00:17:58,320 --> 00:18:01,320 Speaker 2: And as I said, the subprime consumers were the ones 322 00:18:01,359 --> 00:18:04,720 Speaker 2: who saw the biggest benefit and credit scores, and that's 323 00:18:04,840 --> 00:18:08,800 Speaker 2: now where we've seen the most acute stress in consumer 324 00:18:08,880 --> 00:18:12,560 Speaker 2: performance data, and it's it's not surprising. I think it's 325 00:18:12,720 --> 00:18:15,000 Speaker 2: also important to remember that when you're looking at the 326 00:18:15,000 --> 00:18:17,920 Speaker 2: consumer and you're looking at the asset back market, the 327 00:18:17,960 --> 00:18:21,880 Speaker 2: probability of default is not linear. So a true five 328 00:18:21,960 --> 00:18:25,240 Speaker 2: hundred borrower, a true FYCO score borrower at five hundred, 329 00:18:25,600 --> 00:18:29,560 Speaker 2: has a fifty percent higher probability of default than a 330 00:18:29,600 --> 00:18:33,159 Speaker 2: true five point fifty borrower. So that inflation that I 331 00:18:33,200 --> 00:18:36,399 Speaker 2: talked about in FCO scores of you know, five hundred 332 00:18:36,400 --> 00:18:39,920 Speaker 2: borrowers going up in the eightieth percentile, up ninety three 333 00:18:39,960 --> 00:18:43,920 Speaker 2: points on a FICO score, that had a pretty material effect. 334 00:18:44,200 --> 00:18:47,080 Speaker 2: So I think it's important to understand some of the 335 00:18:47,160 --> 00:18:49,880 Speaker 2: backdrop and that's what's driving a lot of the trends 336 00:18:49,920 --> 00:18:52,359 Speaker 2: that we've seen. Let me pause there if you want 337 00:18:52,400 --> 00:18:52,920 Speaker 2: to jump in. 338 00:18:53,240 --> 00:18:56,120 Speaker 1: I wanted to ask, okay about the trade here, what's 339 00:18:56,200 --> 00:18:58,560 Speaker 1: the what are you positioning around it? I mean, you 340 00:18:58,600 --> 00:19:02,040 Speaker 1: talk about abs. We've seen huge issuance this year. It 341 00:19:02,080 --> 00:19:04,520 Speaker 1: could be a record year, even if things slow down 342 00:19:04,520 --> 00:19:07,040 Speaker 1: around the election. Is it offering better value than investment 343 00:19:07,080 --> 00:19:08,760 Speaker 1: grade debt right now corporate debt. 344 00:19:09,720 --> 00:19:13,000 Speaker 2: So the short answer to your question is we see 345 00:19:13,040 --> 00:19:14,960 Speaker 2: value in both, but we see a lot of value 346 00:19:14,960 --> 00:19:19,119 Speaker 2: in securitize credit and maybe so yes is the answer 347 00:19:19,119 --> 00:19:23,320 Speaker 2: to your question. You referenced yields in investment grade in 348 00:19:23,359 --> 00:19:25,720 Speaker 2: the low fives, and we talked about some of the 349 00:19:25,720 --> 00:19:29,280 Speaker 2: consumer and retail sectors. Their particular narrow Those sectors are 350 00:19:29,280 --> 00:19:32,720 Speaker 2: trading inside of the investment grade universe, so that's not 351 00:19:32,760 --> 00:19:36,320 Speaker 2: necessarily where we see the most opportunities. Some other sectors 352 00:19:36,359 --> 00:19:39,639 Speaker 2: have wider. When you look at asset BAC securities, you 353 00:19:39,680 --> 00:19:43,680 Speaker 2: can get high quality investment grade asset back yields north 354 00:19:43,720 --> 00:19:46,560 Speaker 2: of six percent, north of seven percent, depending on some 355 00:19:46,600 --> 00:19:48,640 Speaker 2: of the things that you're looking at. Do you think 356 00:19:48,640 --> 00:19:51,400 Speaker 2: about the trends that I just talked about. I think 357 00:19:51,440 --> 00:19:54,240 Speaker 2: we were relatively early before some of the issues and 358 00:19:54,240 --> 00:19:59,080 Speaker 2: sponsors understood this dynamic. We had calculated this credit score inflation, 359 00:19:59,560 --> 00:20:03,720 Speaker 2: and we started demanding either better pricing, better yields for 360 00:20:04,480 --> 00:20:06,240 Speaker 2: some of these things that we thought were more at risk, 361 00:20:06,440 --> 00:20:09,600 Speaker 2: or better credit enhancements. And what we've seen, though, is 362 00:20:09,680 --> 00:20:12,399 Speaker 2: this trend which we were I think thankfully early to 363 00:20:12,440 --> 00:20:15,399 Speaker 2: catch on to is now better understood in the market. 364 00:20:15,520 --> 00:20:19,600 Speaker 2: So what you've seen is the tightening of the credit boxes. 365 00:20:19,680 --> 00:20:25,040 Speaker 2: So essentially credit companies are giving consumers less rope so 366 00:20:25,080 --> 00:20:27,600 Speaker 2: they can do that. The damage has been done. A 367 00:20:27,640 --> 00:20:29,960 Speaker 2: lot of the damage has been done, and so you 368 00:20:30,040 --> 00:20:32,600 Speaker 2: saw weakness in some of the vintages of twenty one 369 00:20:32,720 --> 00:20:35,840 Speaker 2: twenty two, which we've talked about. Now you see kind 370 00:20:35,880 --> 00:20:39,399 Speaker 2: of twenty three twenty four with the tightening in the underwriting. 371 00:20:39,440 --> 00:20:44,800 Speaker 2: We've actually seen much higher performance in terms of credit. 372 00:20:44,840 --> 00:20:48,159 Speaker 2: In twenty twenty two, subprime defaults were kind of twenty 373 00:20:48,200 --> 00:20:50,680 Speaker 2: to thirty percent higher than what we would have expected 374 00:20:50,680 --> 00:20:53,760 Speaker 2: in a typical cycle, and that really is due to 375 00:20:53,760 --> 00:20:56,320 Speaker 2: the factors that we talked about, sort of too much 376 00:20:56,359 --> 00:20:59,640 Speaker 2: credit given to subprime borrowers in this FIICO credit score. 377 00:21:00,800 --> 00:21:07,800 Speaker 2: So we see attractive opportunities and asset backed securities we see, 378 00:21:08,000 --> 00:21:11,280 Speaker 2: you know, when you look it's an interesting topic to 379 00:21:11,359 --> 00:21:13,439 Speaker 2: go down this rabbit hole. When you look at the 380 00:21:13,560 --> 00:21:17,240 Speaker 2: ag you know it's it's I'm not a big fan 381 00:21:17,280 --> 00:21:21,159 Speaker 2: of passive. You can argue I'm talking my own book, 382 00:21:21,280 --> 00:21:27,360 Speaker 2: but we see active ETFs, mutual funds, et cetera. There's 383 00:21:27,440 --> 00:21:30,240 Speaker 2: tremendous flows going into passive ETF that go into the 384 00:21:30,359 --> 00:21:34,160 Speaker 2: AG and that doesn't actually offer the opportunity to invest 385 00:21:34,160 --> 00:21:37,080 Speaker 2: in sectors like asset backed securities. So there's a lot 386 00:21:37,119 --> 00:21:41,000 Speaker 2: of fixed income which provides yields that are beyond the 387 00:21:41,040 --> 00:21:43,800 Speaker 2: traditional AG type things that people are looking at. I 388 00:21:43,840 --> 00:21:47,159 Speaker 2: would say there's absolutely an element of caveat MTUR in 389 00:21:47,240 --> 00:21:49,920 Speaker 2: terms of uh looking at you need to do the 390 00:21:50,000 --> 00:21:52,760 Speaker 2: underlying credit work, you need to understand the dynamics. But 391 00:21:52,800 --> 00:21:55,840 Speaker 2: we've just talked about, but we absolutely see opportunities for 392 00:21:55,920 --> 00:21:56,840 Speaker 2: yield pick up there. 393 00:21:57,840 --> 00:22:01,280 Speaker 3: And going back to your comment about you know these 394 00:22:01,640 --> 00:22:06,320 Speaker 3: like they're they're giving them less rope to borrowers overall, 395 00:22:06,359 --> 00:22:06,960 Speaker 3: I realized that. 396 00:22:06,920 --> 00:22:09,959 Speaker 2: Was probably a horrible analogy, and I stopped where I 397 00:22:10,000 --> 00:22:10,760 Speaker 2: was going there. 398 00:22:13,480 --> 00:22:16,600 Speaker 3: Do you think that overall that that's a good thing though, 399 00:22:17,320 --> 00:22:20,399 Speaker 3: because you're absolutely kind of yeah, you know, avoiding the 400 00:22:20,440 --> 00:22:24,119 Speaker 3: financial crisis from back years ago. And do you think 401 00:22:24,200 --> 00:22:28,560 Speaker 3: that this will keep the ABS market attractive because your 402 00:22:28,680 --> 00:22:32,200 Speaker 3: underlying loans are a little I guess I quote unquote 403 00:22:32,240 --> 00:22:33,280 Speaker 3: better quality. 404 00:22:33,000 --> 00:22:38,040 Speaker 2: Safer exactly, Julie. The damage that's been done was really 405 00:22:38,040 --> 00:22:40,679 Speaker 2: done in the twenty twenty one twenty twenty two vintages 406 00:22:40,720 --> 00:22:43,360 Speaker 2: when this wasn't fully understood. I mean, if you if 407 00:22:43,359 --> 00:22:46,800 Speaker 2: you look at it in a in a in a 408 00:22:46,840 --> 00:22:49,880 Speaker 2: single case, that makes sense. Look, this borrower is presuming 409 00:22:49,920 --> 00:22:52,679 Speaker 2: that is performing better than we would have expected. Her 410 00:22:53,160 --> 00:22:56,440 Speaker 2: balance sheet has improved, she's got excess savings, her credit 411 00:22:56,520 --> 00:22:59,720 Speaker 2: utilization is lower. Let's increase her fight go score. That's logical. 412 00:23:00,680 --> 00:23:02,959 Speaker 2: But when you do that over a whole pool, and 413 00:23:03,040 --> 00:23:06,760 Speaker 2: so much of it was driven by pandemic type behaviors, 414 00:23:06,760 --> 00:23:10,080 Speaker 2: the transfer payments, the moratoriums on student loans, et cetera, 415 00:23:10,480 --> 00:23:13,479 Speaker 2: it becomes problematic. And that's what's driven the type of 416 00:23:13,520 --> 00:23:17,159 Speaker 2: delinquencies that we've seen, and I think that scared people 417 00:23:17,200 --> 00:23:20,400 Speaker 2: out of the asset back market, and I don't think 418 00:23:20,440 --> 00:23:23,680 Speaker 2: that's necessarily the case. I think going forward, as I 419 00:23:23,720 --> 00:23:26,840 Speaker 2: said that, there's been tightening of underwriting standards and I 420 00:23:26,880 --> 00:23:28,919 Speaker 2: think the outlook is better, but you still have to 421 00:23:28,960 --> 00:23:33,000 Speaker 2: do your work. In this sector. It's not as it's 422 00:23:33,040 --> 00:23:36,720 Speaker 2: not as transparent as investment grade corporates. When companies are 423 00:23:36,920 --> 00:23:40,440 Speaker 2: making regular quarterly announcements and there's a lot of transparency 424 00:23:40,440 --> 00:23:43,199 Speaker 2: and visibility on what's going on underneath, I think is 425 00:23:43,200 --> 00:23:45,200 Speaker 2: an important understanding what. 426 00:23:45,359 --> 00:23:47,800 Speaker 1: Some actual sections are were talking about here, Ka. We've 427 00:23:47,840 --> 00:23:50,800 Speaker 1: seen some big whole business securitizations where a company pledges 428 00:23:50,840 --> 00:23:54,280 Speaker 1: most of its assets as collateral, including franchise piece. For example, Subway, 429 00:23:54,680 --> 00:23:57,840 Speaker 1: the restaurant chain recently sold three point three five billion 430 00:23:57,880 --> 00:24:00,199 Speaker 1: of asset back bonds to help fund it's by that's 431 00:24:00,240 --> 00:24:02,520 Speaker 1: the biggest I think we've ever seen of it's kind, 432 00:24:02,840 --> 00:24:05,000 Speaker 1: and it may come back. But do you do you 433 00:24:05,240 --> 00:24:06,840 Speaker 1: are you talking about that kind of thing or is 434 00:24:06,880 --> 00:24:10,200 Speaker 1: it sub prime auta or data centers? A movie that 435 00:24:10,200 --> 00:24:13,240 Speaker 1: there are so many different things included in in abs, 436 00:24:13,280 --> 00:24:15,320 Speaker 1: So what are you thinking of when you think about Juncy. 437 00:24:16,240 --> 00:24:20,280 Speaker 2: It's an excellent question, James, and I must confess I 438 00:24:20,480 --> 00:24:28,479 Speaker 2: was a little surprised by the security. So you make 439 00:24:28,520 --> 00:24:32,720 Speaker 2: a great point, a great question. It feels like increasingly 440 00:24:32,880 --> 00:24:37,320 Speaker 2: anything can be securitized. And you're referring to a deal 441 00:24:37,359 --> 00:24:41,080 Speaker 2: that came last week that was hotly over subscribed. I 442 00:24:41,080 --> 00:24:45,040 Speaker 2: think there was substantial tightening the Subway deal, and it's, 443 00:24:45,040 --> 00:24:49,960 Speaker 2: as I understand it, the securitization of future franchisey payment 444 00:24:50,160 --> 00:24:54,160 Speaker 2: to Subway. I was actually talking to my counterpart our 445 00:24:54,280 --> 00:24:57,440 Speaker 2: colleagues in equities this morning to ask if they expected 446 00:24:57,480 --> 00:25:04,040 Speaker 2: that to be a source of financing for additional restaurant companies. 447 00:25:04,080 --> 00:25:06,080 Speaker 2: I think in the five year that came at one 448 00:25:06,240 --> 00:25:09,520 Speaker 2: thirty eight. So when you're looking at retailers probably inside 449 00:25:09,560 --> 00:25:13,960 Speaker 2: of eighty basis points over treasuries, it seems unlikely that 450 00:25:13,960 --> 00:25:17,080 Speaker 2: that's going to be a source of funding for investment 451 00:25:17,119 --> 00:25:21,159 Speaker 2: grade s and P five hundred type restaurant companies. But 452 00:25:21,240 --> 00:25:24,679 Speaker 2: I think this trend of increasing focus on securitization is 453 00:25:24,720 --> 00:25:28,040 Speaker 2: one we're going to see. The answer to your question 454 00:25:28,080 --> 00:25:30,240 Speaker 2: is we'll look at all of it. I think I 455 00:25:30,280 --> 00:25:34,040 Speaker 2: wouldn't categorically rule out any of those sectors. But you're right, 456 00:25:34,160 --> 00:25:38,520 Speaker 2: securitizations can be everything from business jets to revenue franchises 457 00:25:38,680 --> 00:25:43,400 Speaker 2: to old fashioned auto loans, consumer loans, credit card loans. 458 00:25:43,680 --> 00:25:46,040 Speaker 2: We've got a strong research team and we're digging in 459 00:25:46,080 --> 00:25:48,040 Speaker 2: the weeds on all of those things, and it really 460 00:25:48,080 --> 00:25:51,000 Speaker 2: comes to where we see relative value and where we 461 00:25:51,040 --> 00:25:55,160 Speaker 2: see where we see opportunities. But it's to your point, 462 00:25:55,320 --> 00:25:59,000 Speaker 2: much more it's a much more diverse market than looking 463 00:25:59,040 --> 00:26:05,520 Speaker 2: at retail investment grade issue or A or a consumer 464 00:26:05,560 --> 00:26:07,000 Speaker 2: products company or something like that. 465 00:26:07,200 --> 00:26:09,080 Speaker 1: But other sector is right now that you really like? 466 00:26:13,280 --> 00:26:17,920 Speaker 2: We're we see opportunities across the board. I think it's 467 00:26:18,000 --> 00:26:20,399 Speaker 2: less about a particular sector, I would say, and more 468 00:26:20,440 --> 00:26:21,879 Speaker 2: about individual credits. 469 00:26:22,280 --> 00:26:25,359 Speaker 1: And is there anywhere that you're particularly concerned maybe subprime 470 00:26:25,480 --> 00:26:27,720 Speaker 1: auto or I mean, we're not getting back to the 471 00:26:27,720 --> 00:26:30,520 Speaker 1: Bowie bonds of the you know, fifteen years ago, but 472 00:26:30,920 --> 00:26:32,680 Speaker 1: are we getting to As you said, anything could be 473 00:26:32,720 --> 00:26:35,840 Speaker 1: securitized and we've seen some art deals and that's the thing. 474 00:26:35,320 --> 00:26:36,959 Speaker 1: Is it getting very fruthy? 475 00:26:37,000 --> 00:26:37,080 Speaker 3: Now? 476 00:26:37,119 --> 00:26:37,960 Speaker 1: Are you starting to worry? 477 00:26:40,200 --> 00:26:42,840 Speaker 2: As I said at the outset, James, I always worry. 478 00:26:42,840 --> 00:26:46,520 Speaker 2: I'm actually paid to worry. But yes, when I see 479 00:26:46,560 --> 00:26:52,200 Speaker 2: securitization of franchisee payments on restaurants, that that feels later 480 00:26:52,320 --> 00:26:54,840 Speaker 2: cycle to me. When I think about where we are 481 00:26:54,880 --> 00:26:58,679 Speaker 2: in the economics cycle, that feels more challenged to me. 482 00:26:59,200 --> 00:27:01,720 Speaker 2: But I would I would counter that and bring you 483 00:27:01,760 --> 00:27:05,160 Speaker 2: back to the investment grade universe that we were talking about. 484 00:27:05,640 --> 00:27:08,320 Speaker 2: And when you look at corporates, while we've seen a 485 00:27:08,400 --> 00:27:14,520 Speaker 2: deceleration in revenue growth, you've seen actually from our bottom 486 00:27:14,600 --> 00:27:18,720 Speaker 2: up perspective, our investment grade analysts are expecting estimates over 487 00:27:18,720 --> 00:27:21,119 Speaker 2: the next four quarters for revenues to grow three to 488 00:27:21,160 --> 00:27:25,119 Speaker 2: four percent. You've actually seen some acceleration in EBITDAG growth. 489 00:27:25,240 --> 00:27:28,560 Speaker 2: So we saw Q one EBITDA and this is quoting 490 00:27:28,600 --> 00:27:33,760 Speaker 2: statistics on the US investment grade industrial companies for median performance. 491 00:27:33,800 --> 00:27:36,520 Speaker 2: You saw cash flow or EBITDAHN in the first quarter 492 00:27:36,840 --> 00:27:40,480 Speaker 2: trailing twelve twelve trailing twelve month basis up three point 493 00:27:40,600 --> 00:27:44,480 Speaker 2: nine percent. That's an acceleration from last quarter. You see 494 00:27:44,560 --> 00:27:46,640 Speaker 2: you know, you ask me about particular sectors. You see 495 00:27:46,680 --> 00:27:52,120 Speaker 2: strong cash flow momentum growth in tech, in healthcare, and energy. 496 00:27:52,840 --> 00:27:55,080 Speaker 2: And then I think kind of the third aspect of that, 497 00:27:55,240 --> 00:27:58,080 Speaker 2: what do we see happening in leverage in the investment 498 00:27:58,119 --> 00:28:00,840 Speaker 2: grade market. See, leverage is actually flat, so you see 499 00:28:00,880 --> 00:28:04,320 Speaker 2: improving cash flow, stable leverage. And if you look at 500 00:28:04,400 --> 00:28:07,240 Speaker 2: upgrade down grade ratios in the investment grade universe and 501 00:28:07,280 --> 00:28:09,760 Speaker 2: you look at the first quarter data, those have been 502 00:28:09,800 --> 00:28:14,800 Speaker 2: really strong. So something like two hundred billion dollars worth 503 00:28:14,840 --> 00:28:18,080 Speaker 2: of investment grade credits upgraded in the first quarter. It's 504 00:28:18,119 --> 00:28:21,159 Speaker 2: almost three percent of the index, which is meaningful. And 505 00:28:21,160 --> 00:28:26,000 Speaker 2: you've seen strong upgrades of exceeded downgrades every quarter for 506 00:28:26,040 --> 00:28:29,879 Speaker 2: the last two years, and I think a lot of 507 00:28:29,920 --> 00:28:33,600 Speaker 2: those upgrades really interestingly, James, are happening in the triple 508 00:28:33,640 --> 00:28:37,479 Speaker 2: B rated bucket. You've seen a decline in the share 509 00:28:37,680 --> 00:28:40,760 Speaker 2: of triple B minus debt and the index falling to 510 00:28:41,280 --> 00:28:46,160 Speaker 2: the lowest level since twenty eleven. You know, and triple 511 00:28:46,200 --> 00:28:49,520 Speaker 2: B rated buckets now almost half the IG It's about 512 00:28:49,560 --> 00:28:52,320 Speaker 2: forty six percent of the IG index. It's down more 513 00:28:52,360 --> 00:28:55,080 Speaker 2: than five percent from the peak. So I know you've 514 00:28:55,080 --> 00:28:57,520 Speaker 2: talked about at the outset, and I agreed with your 515 00:28:57,520 --> 00:29:02,520 Speaker 2: point that spreads are tight, but triple B is the 516 00:29:02,560 --> 00:29:05,280 Speaker 2: lowest percentage of the IG market. Single A is the 517 00:29:05,360 --> 00:29:09,000 Speaker 2: highest percentage of the IG market in more than a decade. 518 00:29:09,240 --> 00:29:13,720 Speaker 2: So there's some some real strength in in in the 519 00:29:13,760 --> 00:29:16,560 Speaker 2: fundamentals that we see, and I think some of that 520 00:29:16,640 --> 00:29:20,840 Speaker 2: actually does justify some tighter spreads. 521 00:29:21,160 --> 00:29:22,520 Speaker 1: But the one thing I do look at, and I'm 522 00:29:22,560 --> 00:29:24,600 Speaker 1: a real credit geek, I have to admit, okay, but 523 00:29:25,040 --> 00:29:28,760 Speaker 1: the spreads between spreads are just getting crushed. Everything's just converging. 524 00:29:28,840 --> 00:29:31,800 Speaker 1: So you're telling me that a triple B rated bond 525 00:29:31,880 --> 00:29:35,640 Speaker 1: is similar risks for single A across the board. It's just, 526 00:29:35,760 --> 00:29:38,160 Speaker 1: you know, I mean, that doesn't make sense to me. 527 00:29:39,280 --> 00:29:43,680 Speaker 2: So I think a couple of points. I respect your point, James, 528 00:29:43,720 --> 00:29:47,320 Speaker 2: and I can relate to your credit geekiness. I consider 529 00:29:47,400 --> 00:29:50,880 Speaker 2: myself one as well. But let's go back to a 530 00:29:50,920 --> 00:29:55,040 Speaker 2: couple of things. There are a lot of people yourself included, 531 00:29:55,120 --> 00:29:57,280 Speaker 2: it sounds like, who are focused on the tightness of 532 00:29:57,320 --> 00:30:01,239 Speaker 2: the IG market. Absolutely, you're right the old heuristic. And 533 00:30:01,400 --> 00:30:04,000 Speaker 2: I celebrated my twenty fifth anniversary at JP Morgan Asset 534 00:30:04,080 --> 00:30:07,280 Speaker 2: Management last week, so you can't see me on a podcast, 535 00:30:07,320 --> 00:30:09,160 Speaker 2: but I got plenty of gray hair that I've earned 536 00:30:09,160 --> 00:30:11,720 Speaker 2: in the fixed income markets, But the old heuristic was 537 00:30:12,520 --> 00:30:16,400 Speaker 2: you would want to buy investment grade credit at spreads 538 00:30:16,440 --> 00:30:18,920 Speaker 2: of you know, one hundred and seventy hundred and eighty 539 00:30:19,000 --> 00:30:21,600 Speaker 2: over to compensate for a risk of recession. And we 540 00:30:21,640 --> 00:30:25,400 Speaker 2: are or soft landing, but arguably late cycle. And when 541 00:30:25,440 --> 00:30:27,920 Speaker 2: you see spreads inside of one hundred basis points, it 542 00:30:27,960 --> 00:30:31,040 Speaker 2: absolutely causes pause to people. The two things that I 543 00:30:31,040 --> 00:30:35,640 Speaker 2: would remind people of are number one, we're in a 544 00:30:35,680 --> 00:30:38,680 Speaker 2: soft landing. In a soft landing, well, the first point 545 00:30:38,680 --> 00:30:41,479 Speaker 2: would be the fundamentals that I just just articulated. You've 546 00:30:41,520 --> 00:30:45,040 Speaker 2: got an investment grade universe. That is higher credit quality 547 00:30:45,040 --> 00:30:47,000 Speaker 2: than we've seen in about a decade. The same is 548 00:30:47,040 --> 00:30:49,000 Speaker 2: actually true in the high yield index, but it sounds 549 00:30:49,040 --> 00:30:50,840 Speaker 2: like you talked about that last week, so we won't 550 00:30:50,880 --> 00:30:53,160 Speaker 2: go down that tangent right now. But you've got higher 551 00:30:53,240 --> 00:30:55,960 Speaker 2: quality fundamentals. The other thing is you've got a soft landing. 552 00:30:56,080 --> 00:30:58,520 Speaker 2: In prior soft landings, you've actually seen so a couple 553 00:30:58,600 --> 00:31:04,600 Speaker 2: of things. Number one, IG spreads actually trade inside of 554 00:31:04,600 --> 00:31:07,320 Speaker 2: one hundred basis points something like a third of the time, 555 00:31:07,440 --> 00:31:14,360 Speaker 2: So this is not a completely frothy, never exists type environment. 556 00:31:14,440 --> 00:31:16,840 Speaker 2: This is roughly a third of the time. I think 557 00:31:16,880 --> 00:31:20,280 Speaker 2: what's unusual is it's highly unusual for the FED to 558 00:31:20,320 --> 00:31:24,400 Speaker 2: be able to achieve a soft landing. It's having pilot'slicense. 559 00:31:24,440 --> 00:31:27,280 Speaker 2: A nice soft landing is difficult to accomplish. You've got 560 00:31:27,280 --> 00:31:30,959 Speaker 2: all these tailwinds, all these turbulence, and all these different 561 00:31:31,000 --> 00:31:34,040 Speaker 2: things going on, and the FED, it appears for now, 562 00:31:34,120 --> 00:31:37,719 Speaker 2: has absolutely stuck a soft landing, which is terrific. And 563 00:31:37,760 --> 00:31:44,120 Speaker 2: that's an environment where high quality yield performs exceptionally well. 564 00:31:44,480 --> 00:31:48,400 Speaker 2: So the tights on investment grade that's a universe. So 565 00:31:48,560 --> 00:31:50,840 Speaker 2: let's call them now let's say eighty five basis points 566 00:31:50,880 --> 00:31:53,640 Speaker 2: eighty basis points. The tight on that all time is 567 00:31:53,680 --> 00:31:56,920 Speaker 2: sixty two basis points. I'm not necessarily saying that that's 568 00:31:56,920 --> 00:31:59,480 Speaker 2: where we're going. But if the FED does in fact 569 00:31:59,560 --> 00:32:03,600 Speaker 2: pull off the soft landing and we get a gentle 570 00:32:03,720 --> 00:32:13,120 Speaker 2: decline in UH and employment, gentle rise and unemployment, continued 571 00:32:13,200 --> 00:32:16,680 Speaker 2: moderation and inflation, you get the FED easing, You get 572 00:32:16,680 --> 00:32:18,840 Speaker 2: a distanversion of the yield curve. We are going to 573 00:32:18,920 --> 00:32:21,800 Speaker 2: have an avalanche of money into fixed income, and that 574 00:32:21,920 --> 00:32:25,280 Speaker 2: avalanche is going to flow into high quality UH fixed 575 00:32:25,320 --> 00:32:27,920 Speaker 2: income at attractive yields that people aren't going to see 576 00:32:27,920 --> 00:32:30,440 Speaker 2: again for a period of time. And I think that 577 00:32:30,480 --> 00:32:34,520 Speaker 2: could well propel and investment grades spreads tighter. Yeah, you 578 00:32:34,520 --> 00:32:37,680 Speaker 2: know that would be the book case. Not necessarily something 579 00:32:37,720 --> 00:32:39,400 Speaker 2: I make a lot. As I said, I'm more likely 580 00:32:39,440 --> 00:32:41,400 Speaker 2: to be worrying, but you know, I. 581 00:32:41,640 --> 00:32:44,280 Speaker 3: Agree with you that, you know, the credit fundamentals have 582 00:32:44,560 --> 00:32:47,440 Speaker 3: been better. And I think a lot of these companies 583 00:32:47,440 --> 00:32:50,040 Speaker 3: when you're looking at corporates, and you know, specifically like 584 00:32:50,120 --> 00:32:54,800 Speaker 3: for me, like Consumer Staples, they they got they got 585 00:32:54,840 --> 00:32:58,440 Speaker 3: scared after the pandemic. And you know, I'm going to 586 00:32:58,520 --> 00:33:00,880 Speaker 3: go back to you know, there's a big consumer conference 587 00:33:00,920 --> 00:33:03,840 Speaker 3: every year that they have. February twenty twenty, I attended 588 00:33:03,840 --> 00:33:07,400 Speaker 3: the last it's called Cagney, the Cagney Conference, and what 589 00:33:07,760 --> 00:33:10,960 Speaker 3: the CEOs and CFOs were saying at these conferences were Okay, 590 00:33:11,000 --> 00:33:13,240 Speaker 3: you know, everyone's asking them like, what's going on with China, 591 00:33:13,880 --> 00:33:15,520 Speaker 3: And all they could say is, well, we're watching it. 592 00:33:15,560 --> 00:33:18,560 Speaker 3: We're watching it. Then it's got to be less than 593 00:33:18,560 --> 00:33:20,600 Speaker 3: a month later, you know, we're in full pandemic mode. 594 00:33:20,640 --> 00:33:24,280 Speaker 3: Everything got shut down. Nobody expected it, and I think 595 00:33:24,520 --> 00:33:27,880 Speaker 3: there there was this push recently, like the past couple 596 00:33:27,840 --> 00:33:31,240 Speaker 3: of years, into let's focus on our balance sheet. Let's 597 00:33:31,240 --> 00:33:33,280 Speaker 3: make sure we have cash on hand, let's make sure 598 00:33:33,280 --> 00:33:36,680 Speaker 3: we're not overlevered, and you know, let's work towards our 599 00:33:36,960 --> 00:33:40,360 Speaker 3: net leverage ratios to keep you know, good credit ratings 600 00:33:40,400 --> 00:33:43,000 Speaker 3: in case we need to tap the bond markets. Because 601 00:33:43,520 --> 00:33:45,960 Speaker 3: they didn't expect the speed of the pandemic, they didn't 602 00:33:45,960 --> 00:33:47,920 Speaker 3: expect what was going to happen, and I think that 603 00:33:48,880 --> 00:33:50,360 Speaker 3: in a way it was a good thing because it 604 00:33:50,440 --> 00:33:52,920 Speaker 3: propelled them to focus a lot on the balance sheet 605 00:33:53,240 --> 00:33:56,200 Speaker 3: and to focus on you know, very good credit quality. 606 00:33:56,920 --> 00:34:00,840 Speaker 3: Just so they could avoid another situation. And like if 607 00:34:00,920 --> 00:34:04,120 Speaker 3: ebadized down they have a lot of debt that they 608 00:34:04,120 --> 00:34:07,400 Speaker 3: could avoid being downgraded. So I agree with you that 609 00:34:07,520 --> 00:34:09,680 Speaker 3: you know, we're seeing a lot of corporates just you know, 610 00:34:09,719 --> 00:34:11,960 Speaker 3: overall credit quality is just so much better than it 611 00:34:12,040 --> 00:34:13,040 Speaker 3: was a few years ago. 612 00:34:14,200 --> 00:34:16,759 Speaker 2: So Julie, I agree with everything you said, and I 613 00:34:16,800 --> 00:34:19,359 Speaker 2: would add a couple points if I may, If we 614 00:34:19,360 --> 00:34:22,000 Speaker 2: were to rewind the clock, and if you all had 615 00:34:22,040 --> 00:34:25,160 Speaker 2: had me on here in the fourth quarter of twenty nineteen, 616 00:34:25,400 --> 00:34:28,560 Speaker 2: or actually in January, so sort of late twenty nineteen 617 00:34:28,640 --> 00:34:31,960 Speaker 2: or early twenty twenty, I would have cited credit statistics 618 00:34:31,960 --> 00:34:36,440 Speaker 2: to you that were actually Alarming's too strong of a word, 619 00:34:36,520 --> 00:34:40,480 Speaker 2: but concerning what we had seen was a material deterioration 620 00:34:40,600 --> 00:34:43,480 Speaker 2: in credit metrics, whether you're looking at the IG universe 621 00:34:43,640 --> 00:34:47,680 Speaker 2: or the high yield universe. So you saw both gross 622 00:34:47,719 --> 00:34:51,520 Speaker 2: and net leverage had been achieved reached in twenty nineteen 623 00:34:51,640 --> 00:34:55,600 Speaker 2: early twenty twenty, pre pandemic. I'm talking about December January. 624 00:34:55,920 --> 00:34:59,680 Speaker 2: They reached levels that we hadn't seen really in a 625 00:34:59,680 --> 00:35:03,160 Speaker 2: psych So it struck us from a credit perspective, and 626 00:35:03,200 --> 00:35:05,319 Speaker 2: we agreed. I worry about things that I don't need 627 00:35:05,320 --> 00:35:07,879 Speaker 2: to worry about, but it struck us as we're late 628 00:35:08,000 --> 00:35:12,240 Speaker 2: cycle in an economy and companies have too much leverage. 629 00:35:12,280 --> 00:35:14,799 Speaker 2: So we had been taking risk out of portfolios at 630 00:35:14,840 --> 00:35:18,920 Speaker 2: that time, and I did not predict a pandemic that 631 00:35:19,040 --> 00:35:21,120 Speaker 2: was not on my radar. Same thing that you said 632 00:35:21,160 --> 00:35:24,359 Speaker 2: about what was going on at Cagney. But companies were 633 00:35:24,560 --> 00:35:29,680 Speaker 2: horribly positioned for the pandemic. They had too high leverage. 634 00:35:30,040 --> 00:35:33,080 Speaker 2: And then what you saw if we switched gears to 635 00:35:33,120 --> 00:35:35,760 Speaker 2: the high yield market, you saw a six percent default 636 00:35:35,800 --> 00:35:39,840 Speaker 2: rate in high yield in twenty twenty, which really demonstrates 637 00:35:40,120 --> 00:35:43,919 Speaker 2: how poorly positioned companies were for any type of slow down. 638 00:35:44,320 --> 00:35:46,520 Speaker 2: And I think what I would say is the entire 639 00:35:46,600 --> 00:35:50,440 Speaker 2: corporate universe found religion and if you look at the data, 640 00:35:50,800 --> 00:35:55,520 Speaker 2: extraordinary discipline. So what did you see? Dividends cut or curtailed, 641 00:35:55,800 --> 00:36:00,320 Speaker 2: share buyback programs cut, and you saw a renewed focus 642 00:36:00,480 --> 00:36:03,839 Speaker 2: on balance sheets. And what's really interesting to me given 643 00:36:03,920 --> 00:36:06,440 Speaker 2: my background in that time period is you see an 644 00:36:06,440 --> 00:36:10,960 Speaker 2: alignment of bondholders and equity holders of both looking for 645 00:36:11,000 --> 00:36:14,400 Speaker 2: you know, companies rewarded in the equity market for focusing 646 00:36:14,400 --> 00:36:16,920 Speaker 2: on their balance sheets. I mean that was the dawn 647 00:36:16,920 --> 00:36:21,040 Speaker 2: of for the first time in history, the energy companies, 648 00:36:21,440 --> 00:36:25,279 Speaker 2: exploration and production companies finally actually focusing on free cash flow, 649 00:36:25,400 --> 00:36:27,960 Speaker 2: not just growth for the sake of growth, and equity 650 00:36:28,000 --> 00:36:32,000 Speaker 2: markets doing that. So and you look at the underlying dynamics. 651 00:36:32,000 --> 00:36:34,880 Speaker 2: The high yield market had way too much concentration in 652 00:36:34,920 --> 00:36:39,279 Speaker 2: the energy market, so you have now a more diversified 653 00:36:39,320 --> 00:36:43,600 Speaker 2: corporate bond market, a management team, a team of CFOs 654 00:36:43,600 --> 00:36:47,080 Speaker 2: and CEOs who've been through a crisis. They all planned 655 00:36:47,160 --> 00:36:50,759 Speaker 2: and I did too. We had an expectation that the 656 00:36:50,880 --> 00:36:53,600 Speaker 2: recovery post COVID in terms of cash flow would have 657 00:36:53,640 --> 00:36:58,160 Speaker 2: been much slower and much longer, and companies have benefited 658 00:36:58,160 --> 00:37:01,960 Speaker 2: from that. But instead of immediately going wild with share 659 00:37:02,000 --> 00:37:05,799 Speaker 2: buybacks and massive dividend increases, they've actually been quite measured. So, 660 00:37:05,880 --> 00:37:10,279 Speaker 2: as we noted before, leverage remains remains flat. You know, 661 00:37:10,280 --> 00:37:12,840 Speaker 2: whether on a net leverage basis in the IG universe 662 00:37:12,880 --> 00:37:15,560 Speaker 2: it's something like one point nine times, So you know, 663 00:37:15,600 --> 00:37:17,400 Speaker 2: we've seen a little bit of re leveraging in the 664 00:37:17,400 --> 00:37:21,320 Speaker 2: single A space for some of the acquisitions like Conico 665 00:37:21,440 --> 00:37:24,480 Speaker 2: acquiring Marathon, but we think those companies are going to 666 00:37:24,600 --> 00:37:28,320 Speaker 2: continue to maintain single A and there remains a focus 667 00:37:28,000 --> 00:37:31,920 Speaker 2: on balance sheets, so that will fade. You know, everything 668 00:37:31,960 --> 00:37:34,600 Speaker 2: goes in cycles and people will get over the pandemic 669 00:37:34,640 --> 00:37:36,600 Speaker 2: and they will tell themselves that was a one off, 670 00:37:36,600 --> 00:37:39,480 Speaker 2: and we'll get excesses back into it. But we're we're 671 00:37:39,480 --> 00:37:42,000 Speaker 2: not seeing that type of behavior in the corporate market. 672 00:37:42,360 --> 00:37:45,719 Speaker 3: Yeah, yeah, I mean I definitely agree with that. You know, 673 00:37:45,760 --> 00:37:47,799 Speaker 3: we are seeing a little more comfort in taking on 674 00:37:47,880 --> 00:37:51,960 Speaker 3: more debt, but there is there also is this Okay, 675 00:37:52,000 --> 00:37:54,120 Speaker 3: if we lever up to do it acquisition, we're going 676 00:37:54,200 --> 00:37:57,080 Speaker 3: to pay that debt down as soon as possible. And 677 00:37:57,160 --> 00:37:59,400 Speaker 3: again that goes back to the whole like, let's focus 678 00:37:59,400 --> 00:38:00,000 Speaker 3: on credit quid. 679 00:38:01,600 --> 00:38:02,600 Speaker 2: Yeah, I agree with that. 680 00:38:04,480 --> 00:38:07,200 Speaker 1: It's okay when you look around at everything, you get 681 00:38:07,239 --> 00:38:08,920 Speaker 1: to see and I know it's very case by case 682 00:38:08,960 --> 00:38:10,879 Speaker 1: for you, but if you had to pick one thing 683 00:38:10,920 --> 00:38:13,439 Speaker 1: for the next let's say twelve months, where's the best 684 00:38:13,440 --> 00:38:15,400 Speaker 1: relative value for you? In credit? 685 00:38:16,640 --> 00:38:18,960 Speaker 2: Oh, I would put money in securitize credit. 686 00:38:19,440 --> 00:38:20,880 Speaker 1: And it's mostly around the consumer. 687 00:38:21,239 --> 00:38:24,160 Speaker 2: Yeah, asset back consumer. Yep, that's what I would do. 688 00:38:24,600 --> 00:38:24,920 Speaker 1: Okay. 689 00:38:24,920 --> 00:38:29,719 Speaker 2: I think with good research discipline, I think you get 690 00:38:29,920 --> 00:38:34,760 Speaker 2: very strong yield, strong carry, and I think the consumer 691 00:38:34,840 --> 00:38:36,600 Speaker 2: is going to be okay, especially if you've got good, 692 00:38:37,080 --> 00:38:38,920 Speaker 2: good credit research behind that. 693 00:38:39,880 --> 00:38:43,160 Speaker 1: And in terms of the problem areas that downgrade the defaults, 694 00:38:43,520 --> 00:38:45,000 Speaker 1: what are you most afraid of right now? 695 00:38:46,560 --> 00:38:51,000 Speaker 2: You know the general rule and having done this for 696 00:38:51,000 --> 00:38:53,920 Speaker 2: the last twenty five years is, and you touched on 697 00:38:54,000 --> 00:38:58,120 Speaker 2: it earlier in this podcast, James, is when there are excesses, 698 00:38:58,160 --> 00:39:02,000 Speaker 2: when too much money goes into a particular market, that 699 00:39:02,360 --> 00:39:08,080 Speaker 2: tends to weaken discipline and investment. So if you look 700 00:39:08,120 --> 00:39:11,000 Speaker 2: at the leverage load market, the high yield market, and 701 00:39:11,040 --> 00:39:14,480 Speaker 2: the private credit market, those are all roughly the same size. 702 00:39:14,560 --> 00:39:17,040 Speaker 2: So there's something like one point six trillion dollars that's 703 00:39:17,080 --> 00:39:20,560 Speaker 2: flowed into the private credit market. And I think some 704 00:39:20,719 --> 00:39:23,640 Speaker 2: of that will do just fine. I think there's been 705 00:39:23,680 --> 00:39:26,279 Speaker 2: so much money that's flowed into that market, I have 706 00:39:26,360 --> 00:39:28,719 Speaker 2: concerns about the credit quality in that and how that 707 00:39:28,760 --> 00:39:29,600 Speaker 2: will all turn out. 708 00:39:30,600 --> 00:39:33,200 Speaker 1: Is that particularly risky area right now? Private credit? I 709 00:39:33,200 --> 00:39:34,800 Speaker 1: mean a lot of people have flagged it. Even Jamie 710 00:39:34,800 --> 00:39:37,160 Speaker 1: Diamond has talked about it. But is it a big 711 00:39:37,600 --> 00:39:39,759 Speaker 1: concern of yours? Private credit specifically? 712 00:39:40,160 --> 00:39:43,720 Speaker 2: So fortunately for me, so two things. Yes, I agree 713 00:39:43,760 --> 00:39:47,400 Speaker 2: with Jamie, and secondly, fortunately for me, I focus on 714 00:39:47,440 --> 00:39:49,680 Speaker 2: the public market, so it's not something that I am 715 00:39:49,719 --> 00:39:52,920 Speaker 2: worried about in terms of investing on a daily basis 716 00:39:52,920 --> 00:39:57,200 Speaker 2: in our portfolios. But I worry about what delinquencies, what 717 00:39:58,239 --> 00:40:01,360 Speaker 2: amend and extend will look like that market, and whether 718 00:40:01,400 --> 00:40:03,759 Speaker 2: there will be consequences that will ripple through into the 719 00:40:03,840 --> 00:40:06,080 Speaker 2: high yield and the lever blone market. Those are where 720 00:40:06,200 --> 00:40:07,600 Speaker 2: where my concerns lie on that. 721 00:40:08,160 --> 00:40:11,399 Speaker 1: And given what we've discussed over the last forty minutes 722 00:40:11,440 --> 00:40:13,800 Speaker 1: or so, you don't seem that concerned about a serious, 723 00:40:13,840 --> 00:40:16,080 Speaker 1: sort of big risk off move that could cause some 724 00:40:16,120 --> 00:40:18,040 Speaker 1: big volatility a bit if there was. I mean, is 725 00:40:18,080 --> 00:40:19,799 Speaker 1: there any way to hedge that in credit right now? 726 00:40:21,000 --> 00:40:27,000 Speaker 2: That's a great question. You know traditional bond portfolio management. 727 00:40:27,080 --> 00:40:31,480 Speaker 2: Is you hedge risk off with duration in portfolios? We've 728 00:40:31,520 --> 00:40:33,799 Speaker 2: had what I would call wrong way correlation for a 729 00:40:33,840 --> 00:40:38,839 Speaker 2: period of time, I think, and as you've noted, volatility 730 00:40:38,840 --> 00:40:41,120 Speaker 2: has been pretty high in the broader bond markets. I 731 00:40:41,160 --> 00:40:44,200 Speaker 2: think that's a function of uncertainty about the FED. So 732 00:40:44,239 --> 00:40:47,200 Speaker 2: I think two things. Number one, when people gain confidence 733 00:40:47,200 --> 00:40:49,960 Speaker 2: that the FED in fact will ease that they absolutely 734 00:40:50,040 --> 00:40:52,160 Speaker 2: will not hike. They may stay on hold for longer 735 00:40:52,160 --> 00:40:54,640 Speaker 2: than people had originally expected, but I think that will 736 00:40:54,640 --> 00:40:57,160 Speaker 2: bring down volatility, and once the FED starts to ease, 737 00:40:57,239 --> 00:41:02,840 Speaker 2: I think that helps. That helps with concerns around that. 738 00:41:02,960 --> 00:41:05,640 Speaker 2: I think the other really interesting thing, and I hate 739 00:41:05,640 --> 00:41:12,440 Speaker 2: to say this because it promotes poor behavior, is you know, 740 00:41:12,760 --> 00:41:15,960 Speaker 2: you get some terrible risk off move some crisis. Look 741 00:41:15,960 --> 00:41:18,960 Speaker 2: at Silicon Valley Bank last year. I think everyone knew 742 00:41:18,960 --> 00:41:22,400 Speaker 2: there were some excesses and a lack of duration management 743 00:41:22,440 --> 00:41:24,520 Speaker 2: and on the part of some of the banks, But 744 00:41:24,560 --> 00:41:26,680 Speaker 2: the FED came in and essentially bailed them out. So 745 00:41:26,960 --> 00:41:31,279 Speaker 2: is there still a FED put? Probably so, But I 746 00:41:31,280 --> 00:41:33,239 Speaker 2: wouldn't say it's not fair to say that. I don't 747 00:41:33,239 --> 00:41:35,640 Speaker 2: worry about a risk off environment. I think we have 748 00:41:35,760 --> 00:41:40,319 Speaker 2: a particularly fraught geopolitical environment. We've got elections over the 749 00:41:40,320 --> 00:41:43,320 Speaker 2: weekend and three different emerging markets. We've got US elections 750 00:41:43,320 --> 00:41:46,759 Speaker 2: coming up. There's a fair amount of geopolitical conflict in 751 00:41:46,800 --> 00:41:50,120 Speaker 2: the world. I don't think it's I don't think it's 752 00:41:51,400 --> 00:41:53,920 Speaker 2: I wouldn't say there's zero percent chance of probability. I 753 00:41:54,320 --> 00:41:56,399 Speaker 2: think I said at the outset, you could easily five 754 00:41:56,440 --> 00:41:59,160 Speaker 2: percent chance of some sort of crisis that should be 755 00:41:59,239 --> 00:42:04,040 Speaker 2: a good environment for duration for treasuries. In that environment, 756 00:42:04,080 --> 00:42:05,959 Speaker 2: agency mortgages without perform as well. 757 00:42:06,800 --> 00:42:09,399 Speaker 1: Great stuff. Okay, her chief investment officer for US fixed 758 00:42:09,440 --> 00:42:11,800 Speaker 1: income at JP Morgan Asset Management. It's been a pleasure 759 00:42:11,880 --> 00:42:13,160 Speaker 1: having you on the Credit Edge Money. 760 00:42:13,200 --> 00:42:16,560 Speaker 2: Thanks, Thanks James, Thanks Julie, Thanks Gabe, and of. 761 00:42:16,480 --> 00:42:18,600 Speaker 1: Course Julie hung with Bloomberg Intelligence, thank you very much 762 00:42:18,640 --> 00:42:19,279 Speaker 1: for being on the show. 763 00:42:19,520 --> 00:42:20,799 Speaker 2: Thank you for having me back. 764 00:42:21,160 --> 00:42:24,640 Speaker 1: Bloomberg Intelligence is part of Bloomberg's research department, with five 765 00:42:24,719 --> 00:42:28,320 Speaker 1: hundred analysts and strategists working across all major markets. Coverage 766 00:42:28,360 --> 00:42:30,959 Speaker 1: includes more than two thousand equities and credits, and also 767 00:42:30,960 --> 00:42:33,840 Speaker 1: includes outlooks on more than ninety industries and one hundred 768 00:42:33,840 --> 00:42:37,520 Speaker 1: market industries, currencies, and commodities. Check it all out on 769 00:42:37,520 --> 00:42:40,600 Speaker 1: the Bloomberg terminal, and please do subscribe wherever you get 770 00:42:40,640 --> 00:42:44,120 Speaker 1: your podcasts. We're on Apples, Spotify, and all other good providers, 771 00:42:44,719 --> 00:42:47,560 Speaker 1: including the Bloomberg Terminal. Give us a review, tell your friends, 772 00:42:47,640 --> 00:42:51,400 Speaker 1: or email me directly at Jcromby eight at Bloomberg dot net. 773 00:42:52,239 --> 00:42:54,279 Speaker 1: I'm James Cromby. It's been a pleasure having you join 774 00:42:54,360 --> 00:43:03,560 Speaker 1: US again next week on the credit edge.