WEBVTT - JPMorgan Sees Value in Asset-Backed Consumer Debt 0:00:18.040 --> 0:00:20.760 Hello, and welcome to the Credit Edge, a weekly markets podcast. 0:00:20.960 --> 0:00:23.400 My name is James Crombie. I'm a senior editor at Bloomberg. 0:00:23.680 --> 0:00:26.240 This week, we're very pleased to welcome Kay Her, chief 0:00:26.280 --> 0:00:29.560 investment officer for US fixed income at JP Morgan Asset Management. 0:00:29.560 --> 0:00:31.760 How are you, Kay, I'm doing great, James, thank you 0:00:31.800 --> 0:00:32.239 for having me. 0:00:32.400 --> 0:00:34.120 Thanks so much for joining us, so we're very excited 0:00:34.159 --> 0:00:37.159 to dig into your credit market views. Also delighted to 0:00:37.200 --> 0:00:39.879 welcome back Julie Hung with Bloomberg Intelligence. Great to see 0:00:39.920 --> 0:00:40.640 you again, Julie. 0:00:40.760 --> 0:00:44.479 Hi, I'm Julie Hung, Bloomberg Intelligence, Consumer Staples, Credit Analyst, 0:00:44.560 --> 0:00:48.360 part of Bloomberg's research department of five hundred analysts and strategists. 0:00:49.040 --> 0:00:50.960 Just to set the scene a little bit, credit markets 0:00:50.960 --> 0:00:53.680 are rallying. Debt spreads remain very tight. That means you're 0:00:53.720 --> 0:00:56.279 not getting very much compensation for the risk of default 0:00:56.360 --> 0:00:59.320 or downgrade on corporate debt, but the mood is bullish, 0:00:59.400 --> 0:01:02.000 especially in the US. Most investors are very excited about 0:01:02.000 --> 0:01:04.000 the high yields you can get on bonds that pay 0:01:04.080 --> 0:01:06.720 very low coupons for most of the last ten years. 0:01:07.040 --> 0:01:09.440 But if rates stay where they are or as many 0:01:09.480 --> 0:01:13.280 expect fall. Fixed income investors should benefit. A FED hike 0:01:13.360 --> 0:01:16.720 would probably cause some trouble, though. Meanwhile, issuance is ramping up. 0:01:16.760 --> 0:01:19.039 There's been a record volume of bond and loan sales 0:01:19.080 --> 0:01:21.440 as companies take advantage of the window to raise debt, 0:01:21.800 --> 0:01:25.600 front loading fundraising to avoid any potential election volatility later 0:01:25.640 --> 0:01:28.280 on this year, companies seem to have accepted that rates 0:01:28.280 --> 0:01:31.920 aren't coming down anytime soon. Credit bulls believe that the 0:01:32.000 --> 0:01:35.080 US economy will avoid recession, earnings will stay solid, and 0:01:35.160 --> 0:01:38.200 companies are fine paying higher borrowing costs, although there's a 0:01:38.240 --> 0:01:41.120 cohort of very low quality issuers that may still blow 0:01:41.200 --> 0:01:44.040 up if rates don't fall. We talked last week about 0:01:44.120 --> 0:01:46.640 two hundred billion dollars in junk bonds that look very 0:01:46.760 --> 0:01:49.720 vulnerable at current rate levels. And there's a lot of 0:01:49.760 --> 0:01:55.120 other stuff to worry about, commercial real estate, stress, war, geopolitics, elections. Overall, 0:01:55.160 --> 0:01:57.600 I'm sensing a bit of complacency in credit markets, given 0:01:57.600 --> 0:02:00.320 how tight spreads have become, even a bit of if 0:02:00.360 --> 0:02:02.120 you consider some of the deals that are getting done 0:02:02.200 --> 0:02:04.559 right now. But what do you think. Okay, we seem 0:02:04.560 --> 0:02:05.840 to be hearing a lot about the year of the 0:02:05.840 --> 0:02:08.320 bond a golden age for credit? What's your view? 0:02:09.960 --> 0:02:12.040 So, James, you've said so much in your intro that 0:02:12.080 --> 0:02:14.440 I've got to unpack a few of those things. First 0:02:14.440 --> 0:02:18.080 of all, fixed income investors always have something to worry about. Remember, 0:02:18.120 --> 0:02:20.440 there's always something that can go wrong, so we're always 0:02:20.480 --> 0:02:23.359 losing sleep about things. I think you made a lot 0:02:23.400 --> 0:02:26.720 of great points about spreads yields, but I think the 0:02:26.760 --> 0:02:29.600 important thing to remember is that there's income and fixed 0:02:29.600 --> 0:02:32.280 income again, and I think people shouldn't lose sight of that. 0:02:33.160 --> 0:02:36.040 I would submit that the era of financial repression is over. 0:02:36.160 --> 0:02:39.880 And yes, I absolutely agree that spreads compared to historical 0:02:40.040 --> 0:02:43.040 levels look tight. But there's income and fixed income, and 0:02:43.080 --> 0:02:46.000 there are attractive yields and various aspects of the investment 0:02:46.080 --> 0:02:49.280 grade markets, and I think people should focus on that 0:02:49.360 --> 0:02:52.519 instead of losing the plot on some of the macro 0:02:52.600 --> 0:02:54.120 issues like the FED for example. 0:02:55.240 --> 0:02:57.640 Okay, you know, I definitely agree with you that fixed 0:02:57.680 --> 0:03:00.840 income investors there's always something to worry about on our 0:03:00.880 --> 0:03:03.760 side compared to you know, the equity side, which you 0:03:03.800 --> 0:03:06.480 know they seem to always be very optimistic and you know, 0:03:06.480 --> 0:03:09.480 a little more bullish than we are. What do you 0:03:09.560 --> 0:03:12.320 expect from the FED in terms of rate cuts this year. 0:03:13.960 --> 0:03:16.480 Yeah, so, Jullie. First off, you may not know this 0:03:16.520 --> 0:03:18.280 about me, but I spent three years as a credit 0:03:18.320 --> 0:03:21.520 research channelist at JPMorgan Asset Management. Then I spent seventeen 0:03:21.600 --> 0:03:24.200 years in equities, and about five years ago I moved 0:03:24.240 --> 0:03:27.480 back to fixed income. I find that I actually prefer 0:03:27.600 --> 0:03:29.640 to worry about what can go wrong. I'm better at 0:03:29.680 --> 0:03:35.080 that thinking about what wonderful wings. Yeah, the worst case exactly. 0:03:35.720 --> 0:03:38.880 So you know, in answer to your question, our expectation 0:03:39.040 --> 0:03:41.839 is that the FED cuts probably two times this year 0:03:41.880 --> 0:03:44.720 in the back half of the year. We've got a 0:03:44.720 --> 0:03:48.760 FED focused on the dual mandate of inflation and employment, 0:03:49.240 --> 0:03:52.720 and our view is that inflation has been coming down steadily, 0:03:54.360 --> 0:03:56.960 arguably not as quickly as the FED would have Mutt liked. 0:03:57.000 --> 0:04:00.720 There were some what we call seasonal issue use in 0:04:00.760 --> 0:04:04.320 the first quarter, but we think inflation is moderating. Some 0:04:04.360 --> 0:04:07.280 of the unemployment data has started to tick back up. 0:04:07.400 --> 0:04:11.040 Admittedly it's four percent or under four percent. Longest period. 0:04:11.040 --> 0:04:14.000 I think it's twenty nine months the longest period sub 0:04:14.040 --> 0:04:18.440 four percent. But what we see is some underlying cracks 0:04:18.440 --> 0:04:21.760 and small businesses, and we think that high real rates 0:04:21.760 --> 0:04:24.720 are going to give the FED the opportunity to ease 0:04:25.400 --> 0:04:26.479 to ease this year. 0:04:27.800 --> 0:04:30.320 And what do you think the risk over recession this 0:04:30.440 --> 0:04:33.240 year is and how would credit markets react to that. 0:04:34.160 --> 0:04:36.680 Yeah, it's a good question. When we think about our 0:04:36.720 --> 0:04:39.320 base case, we think that the US economy is in 0:04:39.360 --> 0:04:41.880 a soft landing, and when we think about what the 0:04:41.920 --> 0:04:44.200 market price is in over the next three to six months, 0:04:44.240 --> 0:04:47.360 we think it's the most likely scenario remains a soft landing, 0:04:47.560 --> 0:04:50.560 and to James's point, that is essentially what's priced into 0:04:50.600 --> 0:04:52.880 the credit markets. You do feel a certain amount of 0:04:52.880 --> 0:04:55.480 complacency when you look at spreads, and we can talk 0:04:55.520 --> 0:05:01.400 about the fundamentals in a second, seventy percent we stay 0:05:01.400 --> 0:05:05.280 in a soft landing, maybe the odds of a recession 0:05:05.360 --> 0:05:10.400 or let's call it ten percent recession, five percent of crisis, 0:05:10.440 --> 0:05:15.240 so maybe fifteen percent a scenario that could cause spreads 0:05:15.279 --> 0:05:18.240 to widen, but would actually cause rates to rally. You'd 0:05:18.240 --> 0:05:21.159 get a decline in treasury so the outlook for bonds 0:05:21.160 --> 0:05:25.440 overall would actually probably be constructive in that. So we 0:05:25.480 --> 0:05:28.200 think about that, you add seventy percent on a soft landing, 0:05:28.279 --> 0:05:32.280 fifteen percent on either a recession or some form of 0:05:32.320 --> 0:05:36.120 a crisis. That's eighty five percent that you can collect 0:05:36.160 --> 0:05:38.120 a coupon. You know, the egg is yielding north of 0:05:38.160 --> 0:05:40.640 five percent. Now you can buy core plus strategies or 0:05:40.680 --> 0:05:44.320 even short duration type strategies with yields north of six percent, 0:05:44.760 --> 0:05:47.800 even if you get you know, you're looking at the 0:05:47.920 --> 0:05:51.760 yield plus some total return in there. The tougher scenario 0:05:51.800 --> 0:05:54.200 for bonds would be the other side of the spectrum 0:05:54.200 --> 0:05:58.240 from recession, which would be a reacceleration in inflation and 0:05:58.279 --> 0:06:01.240 in growth, and that we think is a lower probability 0:06:01.320 --> 0:06:03.720 let's call it fifteen percent you've got. You know, if 0:06:03.760 --> 0:06:05.960 you think about that as a as a normal distribution, 0:06:06.240 --> 0:06:10.800 something like eighty five percent is a constructive environment for bonds. 0:06:10.839 --> 0:06:14.280 Fifteen percent is more problematic when you think about managing 0:06:14.360 --> 0:06:15.599 bond portfolios. 0:06:15.880 --> 0:06:17.760 So why do you need the extra headache k of 0:06:18.120 --> 0:06:20.760 corporate debt? I mean, you're not getting your eighty five 0:06:20.960 --> 0:06:24.000 basis points over treagies. Why not just T bills and chill? 0:06:25.200 --> 0:06:31.000 Huh? So you know, I'll confess I opened, I resurrected 0:06:31.000 --> 0:06:33.840 a Treasury direct account that I had many many years ago, 0:06:33.920 --> 0:06:35.640 and I resurrected it a couple of years ago, and 0:06:35.680 --> 0:06:39.599 I was absolutely rolling over treasury bills. The answer to 0:06:39.640 --> 0:06:43.000 your question now though, and I started last year moving 0:06:43.040 --> 0:06:45.800 those treasury bills into short duration core plus and into 0:06:45.839 --> 0:06:49.320 core plus strategies lengthening duration. And I've been doing something 0:06:49.320 --> 0:06:51.039 that I don't think a lot of people on the 0:06:51.040 --> 0:06:53.920 bond side do, which is dollar cost averaging. I feel 0:06:53.920 --> 0:06:56.320 like in the equity markets, everyone has accepted the fact 0:06:56.360 --> 0:06:59.000 that they shouldn't try to time the market exactly, and 0:06:59.120 --> 0:07:01.320 bond markets, we see so many people looking for the 0:07:01.480 --> 0:07:04.720 exact perfect entry point. And I think what people are 0:07:04.720 --> 0:07:07.200 forgetting And you see this in the data, James. We've 0:07:07.240 --> 0:07:10.840 got six trillion dollars of cash sitting on the sidelines 0:07:10.840 --> 0:07:12.960 in money market fund So there's an awful lot of 0:07:13.000 --> 0:07:15.880 people who are in fact t billing and chilling. And 0:07:15.920 --> 0:07:18.520 I think what they love is you sit there and 0:07:18.600 --> 0:07:21.080 you think, my goodness, this is so comfortable. I can 0:07:21.120 --> 0:07:25.040 get north of five percent yields with a duration of overnight. 0:07:25.160 --> 0:07:27.880 This is I can't lose money this way. But if 0:07:27.920 --> 0:07:30.000 you look, and you know, I think you all are 0:07:30.040 --> 0:07:33.360 familiar with doctor David Kelly. He's got this great periodical. 0:07:33.400 --> 0:07:36.200 You know, we call it the periodical elements of returns, 0:07:36.560 --> 0:07:40.080 and cash tends to underperform over longer periods of time. 0:07:40.120 --> 0:07:43.600 I think we've got a generation of investors who've seen 0:07:43.840 --> 0:07:46.520 a one way bond bowl market with rates having gone 0:07:46.600 --> 0:07:50.200 down to almost zero percent and then a very difficult 0:07:50.240 --> 0:07:53.720 repricing two years ago, and they've got a form of 0:07:53.880 --> 0:07:57.000 you know, forgive the term, but post traumatic stress disorder, 0:07:57.040 --> 0:07:59.040 and they're afraid of both credit risk and they're afraid 0:07:59.040 --> 0:08:01.320 of duration risk. I think we have a generation of 0:08:01.320 --> 0:08:05.720 investors who've forgotten or never knew bond math and don't 0:08:05.720 --> 0:08:09.360 fully understand that reinvestment risk is a real problem for people. 0:08:09.480 --> 0:08:14.239 So if the FED starts easing, which is our base case, 0:08:14.320 --> 0:08:17.640 later this year, then those bond yields that people those 0:08:17.720 --> 0:08:20.160 money market yields is overnight yields that people are going 0:08:20.240 --> 0:08:23.000 to get, are going to disappear. So they will have 0:08:23.040 --> 0:08:26.280 missed the opportunity to lock in longer yields. 0:08:27.080 --> 0:08:31.160 Okay, you had talked about soft landing, and I think 0:08:31.160 --> 0:08:35.040 that's a very key term that we've kind of been 0:08:35.080 --> 0:08:39.040 hearing the second half of last year, you know, through 0:08:39.080 --> 0:08:41.720 the beginning of this year, I mean, heading into twenty 0:08:41.760 --> 0:08:46.720 twenty four. You know, as a consumer staples analyst, you know, 0:08:46.720 --> 0:08:49.520 we're always just looking at consumer behavior and what are 0:08:49.520 --> 0:08:52.920 they doing? How are they driving the economy? And there 0:08:52.960 --> 0:08:55.160 was this fear that they're just going to stop buying, 0:08:55.440 --> 0:08:59.320 which we know, you know, consumers never stop buying. But 0:08:59.720 --> 0:09:02.320 there's always that, you know, that fear that you know, 0:09:02.360 --> 0:09:06.719 something's going to happen where unemployment is just out of 0:09:06.760 --> 0:09:10.120 this world and you know, wages are are down and 0:09:10.160 --> 0:09:13.160 it's just gonna like put the economy to a halt. 0:09:13.240 --> 0:09:17.559 But we have not seen that yet, you know, looking 0:09:17.600 --> 0:09:21.000 at the consumer and you know, we just had a 0:09:21.120 --> 0:09:23.000 you know, consumer conference a couple of weeks ago, and 0:09:23.120 --> 0:09:25.160 I do encourage our listeners to listen to the replay 0:09:25.160 --> 0:09:29.760 because it was a very insightful consumer conference. But we're seeing, 0:09:30.040 --> 0:09:32.600 you know, two different consumers. The lower income consumers are 0:09:32.640 --> 0:09:37.040 are a little are a little more you know, hurt 0:09:37.120 --> 0:09:40.600 by what's going on. The higher income consumers are still shopping. 0:09:42.040 --> 0:09:46.240 What is your view on consumer spending behavior? Like where 0:09:46.240 --> 0:09:49.800 do you see this going? Like, given everything's been going 0:09:49.840 --> 0:09:52.960 on in the economy, all the headlines, you know, we 0:09:53.000 --> 0:09:55.760 haven't seen rate cuts yet, Like, what is your view 0:09:55.800 --> 0:09:57.440 on consumer purchasing behavior. 0:09:58.480 --> 0:10:01.080 I think you've articulated it very very well, July. I 0:10:01.080 --> 0:10:04.199 think the US consumer is, first of all, very resilient 0:10:04.360 --> 0:10:08.600 in terms of as long as consumers are employed, they 0:10:08.640 --> 0:10:12.120 continue they adjust their buying patterns in the face of inflation, 0:10:13.080 --> 0:10:15.640 but they tend to continue to spend it spend. So 0:10:15.720 --> 0:10:18.200 what we've seen and we can we can talk about 0:10:18.240 --> 0:10:19.880 maybe some of the trends that we've seen in the 0:10:19.880 --> 0:10:22.400 investment grade universe and some of the trends we're seeing 0:10:22.520 --> 0:10:28.280 in the assetbacks in some terms of the securitized credit market. 0:10:28.480 --> 0:10:32.280 But as you correctly knowe Julie, the consumer represents roughly 0:10:32.320 --> 0:10:35.800 two thirds of US gross domestic product, and as a result, 0:10:35.840 --> 0:10:38.280 we focus a lot on the consumer, and we see 0:10:38.320 --> 0:10:41.640 exactly what you've noted, a bifurcation in the consumer and 0:10:42.200 --> 0:10:45.880 in the investment grade universe in particular. What you see 0:10:45.920 --> 0:10:49.800 is resilience, but bifurcation. So when you look at Walmart, 0:10:49.840 --> 0:10:53.760 Walmart's continuing to take market share from high income households, 0:10:53.800 --> 0:10:56.600 so that's income of over one hundred thousand dollars. More 0:10:56.600 --> 0:10:59.840 than ninety percent of Americans have shopped at Walmart. With 0:10:59.880 --> 0:11:03.520 the the last twelve months, either on their online platform 0:11:02.960 --> 0:11:07.679 or in an actual store. And then if you look 0:11:07.679 --> 0:11:10.679 at their revenues, Q one revenues grew at six percent 0:11:10.840 --> 0:11:14.120 versus I think estimates were more like four point eight percent, 0:11:14.440 --> 0:11:18.080 and IBADAD grew at almost thirteen percent versus estimates that 0:11:18.120 --> 0:11:20.760 were six percent. And what was driving that was higher 0:11:20.880 --> 0:11:25.080 volumes from grocery and from general merchandise. You see similar 0:11:25.120 --> 0:11:27.800 things in dollar stores. So if you look at a 0:11:27.840 --> 0:11:30.920 dollar Tree, for example, so an uplift in traffic coming 0:11:30.920 --> 0:11:35.199 from higher income households. So absolutely you see bifurcation, and 0:11:35.240 --> 0:11:38.160 you see some trade down. You know, you've seen continued 0:11:38.200 --> 0:11:41.160 pressure in the home improvement stores, so lows in home 0:11:41.200 --> 0:11:44.360 depot and we had been seeing some weakness and big 0:11:44.400 --> 0:11:48.360 ticket discretionary purchases, so signs that consumers are remaining very 0:11:48.360 --> 0:11:51.920 budget conscious. But just last week Costco reported earnings which 0:11:51.960 --> 0:11:55.080 indicated some here's the term we haven't used in a while. 0:11:55.120 --> 0:11:58.160 I'll go with green shoots. So some green shoots in 0:11:58.200 --> 0:12:01.200 the consumer and starting to express some interest in buying 0:12:01.720 --> 0:12:06.560 bigger ticket items, so durables and things like that. And 0:12:06.880 --> 0:12:11.520 I think what's driving these trends are a couple of things. 0:12:11.920 --> 0:12:16.000 Companies that are focused on the value proposition are leading 0:12:16.520 --> 0:12:18.800 and I think when you look at those Walmart's result, 0:12:19.320 --> 0:12:23.000 Walmart's had their price rollbacks were up something like forty 0:12:23.040 --> 0:12:26.360 five percent on a year over year basis. Targets had 0:12:26.360 --> 0:12:28.560 to come in and match that, cutting prices on something 0:12:28.600 --> 0:12:31.960 like fifteen hundred items in everyday categories, and that's a 0:12:31.960 --> 0:12:34.960 boon to consumers. Really lower prices. We know you we've 0:12:35.160 --> 0:12:38.840 talked about inflation, We've talked about higher prices. And what's 0:12:38.960 --> 0:12:43.240 interesting is where this is coming from. Walmart is self 0:12:43.320 --> 0:12:46.640 funding that, So they're using price to drive traffic that's 0:12:46.720 --> 0:12:50.640 driving earnings for them. And interestingly, what you ordinarily see 0:12:50.760 --> 0:12:54.920 is the retailers pressuring the consumer staples companies to give them, 0:12:55.120 --> 0:12:58.080 you know, give them more discounting, give them things like that. 0:12:58.160 --> 0:12:59.959 And what you're actually seeing is if you look at 0:13:00.040 --> 0:13:03.320 high qualities like Procter and Gamble, they've seen operating margin 0:13:03.440 --> 0:13:08.640 increases in the first quarter driven by pricing, volume, productivity games. 0:13:08.640 --> 0:13:11.920 And if you look at comparable companies, whether Kimberly, Clark, 0:13:12.000 --> 0:13:15.840 or Pepsi, they had all had similar similar results. So 0:13:15.840 --> 0:13:18.280 I think there have been some benefits of tapering inflation. 0:13:18.360 --> 0:13:21.040 What you've seen of the companies that are leading on 0:13:21.120 --> 0:13:24.199 price and rolling back prices or driving traffic, and that's 0:13:24.600 --> 0:13:27.920 a further boon to consumer. So if they stay employed, 0:13:27.960 --> 0:13:33.000 you've got this moderation in inflation. It's very constructive. I 0:13:33.040 --> 0:13:35.400 think some of the warning signs and maybe this is 0:13:35.440 --> 0:13:39.199 a segue to talk about it is on the Target 0:13:39.240 --> 0:13:44.319 management call after Force first quarter earnings, they noted that 0:13:44.360 --> 0:13:47.800 one in three Americans have maxed out or nearing credit 0:13:47.840 --> 0:13:51.000 limits on at least one credit card. So those are 0:13:51.000 --> 0:13:55.040 some of the warning signs that we're looking at, and 0:13:55.080 --> 0:13:57.400 I'm happy to dive into that, or you can tell 0:13:57.440 --> 0:13:59.600 me where you'd like to take this, Julia James. 0:13:59.440 --> 0:14:03.560 Yeah, that's that's actually my next question about auto loans 0:14:03.559 --> 0:14:07.720 and credit card loans and deficiencies. Again, like you know, 0:14:07.920 --> 0:14:11.080 we're seeing a lot of differing views on that. 0:14:11.200 --> 0:14:12.080 Some people are seeing. 0:14:14.160 --> 0:14:16.600 You know, when you're looking at default rates on these 0:14:16.600 --> 0:14:20.200 auto loans or credit card loans, they're higher than it 0:14:20.280 --> 0:14:23.359 was last year, but then they're pretty flat to pre pandemic. 0:14:24.280 --> 0:14:26.720 What have you been seeing in terms of like the 0:14:27.080 --> 0:14:29.880 underlying performance of these loans. 0:14:31.080 --> 0:14:33.600 Let's dig into this because I think it's actually really 0:14:33.640 --> 0:14:38.560 really interesting. So, first off, low income low FICO consumers 0:14:38.640 --> 0:14:42.080 continue to struggle. We've seen some stabilization in their level 0:14:42.120 --> 0:14:45.800 of stress, but that's actually at lower levels than we 0:14:45.880 --> 0:14:49.680 saw pre COVID, So some slowing wage growth, some slowing 0:14:49.720 --> 0:14:53.000 wage growth, some pockets of sticky inflation. What we've seen 0:14:53.080 --> 0:14:56.000 is excess savings have been depleted. On the other hand, 0:14:56.040 --> 0:14:58.480 and this really goes back to your original question, Julie, 0:14:58.520 --> 0:15:01.800 on the bifurcation of consumers. The other hand, middle income, 0:15:01.920 --> 0:15:06.360 upper income higher fight go score consumer performance that has 0:15:06.440 --> 0:15:11.080 been stronger. Interestingly right now, that's deteriorating at a faster rate, 0:15:11.360 --> 0:15:15.280 but from very historically low levels. So if you think 0:15:15.320 --> 0:15:17.880 about that, the upper end consumers, those tend to be 0:15:17.960 --> 0:15:20.680 homeowners who are benefiting from the lock in effect of 0:15:20.760 --> 0:15:23.600 low mortgage rates. They tend to be asset owners, so 0:15:23.600 --> 0:15:26.520 they own real estate, they own stocks, and that's actually 0:15:26.560 --> 0:15:30.280 performed very well. And higher income consumers also still have 0:15:30.360 --> 0:15:35.000 access to excess savings from pre COVID levels. Lower end consumers, 0:15:35.040 --> 0:15:38.520 back to that bifurcation concept, they're not benefiting from this. 0:15:38.560 --> 0:15:41.040 They're struggling with a higher debt burden. They're struggling with 0:15:41.080 --> 0:15:45.160 reduced excess savings and other headwinds. Think about the fact 0:15:45.200 --> 0:15:47.680 that it looks like student loan repayments are going to 0:15:47.760 --> 0:15:50.720 come back, and I think it's important to actually take 0:15:50.800 --> 0:15:53.400 a couple of step backs and think about why we 0:15:53.560 --> 0:15:56.560 are where we are. And one of the things that 0:15:56.920 --> 0:15:59.160 we started talking about, gosh, I think it was in 0:16:00.280 --> 0:16:03.160 twenty nineteen, twenty twenty, or actually I guess it was 0:16:03.160 --> 0:16:07.200 two thousand and twenty twenty one we started talking about 0:16:07.440 --> 0:16:10.520 is what I call fycoscore inflation. This is everybody's talking 0:16:10.520 --> 0:16:14.360 about consumer price inflation, but fycoscore inflation is a really 0:16:14.400 --> 0:16:17.720 interesting driver in the dynamic on the consumer side. So 0:16:17.760 --> 0:16:20.240 if you go back and remember what happened in COVID, 0:16:20.680 --> 0:16:23.960 you had stimulus payments, transfer payments from the government, you 0:16:24.040 --> 0:16:28.800 had debt payment moratoriums, and different policies that actually created 0:16:29.160 --> 0:16:31.480 what we viewed at the time and continue to see 0:16:31.520 --> 0:16:36.080 as unsustainable positive credit performance, and that translated into pretty 0:16:36.120 --> 0:16:40.320 significant fycoscore inflation to the tune of like fifty points. 0:16:40.480 --> 0:16:43.320 So let's use some examples on this. Roughly half of 0:16:43.400 --> 0:16:46.160 Americans have a FCO score. Who have fycoscores have a 0:16:46.160 --> 0:16:50.520 fycoscore over seven hundred, and you know there's some fycoscore 0:16:51.440 --> 0:16:55.160 inflation there, but median's roughly neutral. But when you're looking 0:16:55.200 --> 0:16:58.640 at subprime borrowers, so four hundred to five hundred or 0:16:58.680 --> 0:17:01.960 five hundred to six hundred, they were seeing scores go 0:17:02.280 --> 0:17:08.600 up by fifty eighty one points, and that translated into 0:17:08.840 --> 0:17:12.880 credit creation. So your five hundred borrower becomes a five 0:17:12.880 --> 0:17:18.000 point fifty borrower, and then bank's credit card companies are 0:17:18.280 --> 0:17:21.119 are much more willing to lend to them. So we 0:17:21.200 --> 0:17:25.280 saw credit availability spike in twenty twenty one twenty two, 0:17:25.800 --> 0:17:29.359 and credit card lenders in particular were increasing credit limits 0:17:29.480 --> 0:17:33.920 very rapidly, so that drove down credit card utilization, which 0:17:33.960 --> 0:17:36.800 we've now seen normalize over the six months. But if 0:17:36.840 --> 0:17:38.639 you think about that, that at the time was a 0:17:38.720 --> 0:17:42.360 very virtuous cycle. You stop making payments, you stop spending 0:17:42.400 --> 0:17:45.560 on things because of the moratoriums, You get a transfer payment, 0:17:45.800 --> 0:17:48.840 you look like a better consumer, Your bank gives you, 0:17:48.840 --> 0:17:51.240 your credit card companies give you access to more credit. 0:17:51.320 --> 0:17:54.480 That makes you look even better. But unfortunately there's a 0:17:54.560 --> 0:17:57.600 reckoning on that, and we've started to see that reckoning. 0:17:58.320 --> 0:18:01.320 And as I said, the subprime consumers were the ones 0:18:01.359 --> 0:18:04.720 who saw the biggest benefit and credit scores, and that's 0:18:04.840 --> 0:18:08.800 now where we've seen the most acute stress in consumer 0:18:08.880 --> 0:18:12.560 performance data, and it's it's not surprising. I think it's 0:18:12.720 --> 0:18:15.000 also important to remember that when you're looking at the 0:18:15.000 --> 0:18:17.920 consumer and you're looking at the asset back market, the 0:18:17.960 --> 0:18:21.880 probability of default is not linear. So a true five 0:18:21.960 --> 0:18:25.240 hundred borrower, a true FYCO score borrower at five hundred, 0:18:25.600 --> 0:18:29.560 has a fifty percent higher probability of default than a 0:18:29.600 --> 0:18:33.159 true five point fifty borrower. So that inflation that I 0:18:33.200 --> 0:18:36.399 talked about in FCO scores of you know, five hundred 0:18:36.400 --> 0:18:39.920 borrowers going up in the eightieth percentile, up ninety three 0:18:39.960 --> 0:18:43.920 points on a FICO score, that had a pretty material effect. 0:18:44.200 --> 0:18:47.080 So I think it's important to understand some of the 0:18:47.160 --> 0:18:49.880 backdrop and that's what's driving a lot of the trends 0:18:49.920 --> 0:18:52.359 that we've seen. Let me pause there if you want 0:18:52.400 --> 0:18:52.920 to jump in. 0:18:53.240 --> 0:18:56.120 I wanted to ask, okay about the trade here, what's 0:18:56.200 --> 0:18:58.560 the what are you positioning around it? I mean, you 0:18:58.600 --> 0:19:02.040 talk about abs. We've seen huge issuance this year. It 0:19:02.080 --> 0:19:04.520 could be a record year, even if things slow down 0:19:04.520 --> 0:19:07.040 around the election. Is it offering better value than investment 0:19:07.080 --> 0:19:08.760 grade debt right now corporate debt. 0:19:09.720 --> 0:19:13.000 So the short answer to your question is we see 0:19:13.040 --> 0:19:14.960 value in both, but we see a lot of value 0:19:14.960 --> 0:19:19.119 in securitize credit and maybe so yes is the answer 0:19:19.119 --> 0:19:23.320 to your question. You referenced yields in investment grade in 0:19:23.359 --> 0:19:25.720 the low fives, and we talked about some of the 0:19:25.720 --> 0:19:29.280 consumer and retail sectors. Their particular narrow Those sectors are 0:19:29.280 --> 0:19:32.720 trading inside of the investment grade universe, so that's not 0:19:32.760 --> 0:19:36.320 necessarily where we see the most opportunities. Some other sectors 0:19:36.359 --> 0:19:39.639 have wider. When you look at asset BAC securities, you 0:19:39.680 --> 0:19:43.680 can get high quality investment grade asset back yields north 0:19:43.720 --> 0:19:46.560 of six percent, north of seven percent, depending on some 0:19:46.600 --> 0:19:48.640 of the things that you're looking at. Do you think 0:19:48.640 --> 0:19:51.400 about the trends that I just talked about. I think 0:19:51.440 --> 0:19:54.240 we were relatively early before some of the issues and 0:19:54.240 --> 0:19:59.080 sponsors understood this dynamic. We had calculated this credit score inflation, 0:19:59.560 --> 0:20:03.720 and we started demanding either better pricing, better yields for 0:20:04.480 --> 0:20:06.240 some of these things that we thought were more at risk, 0:20:06.440 --> 0:20:09.600 or better credit enhancements. And what we've seen, though, is 0:20:09.680 --> 0:20:12.399 this trend which we were I think thankfully early to 0:20:12.440 --> 0:20:15.399 catch on to is now better understood in the market. 0:20:15.520 --> 0:20:19.600 So what you've seen is the tightening of the credit boxes. 0:20:19.680 --> 0:20:25.040 So essentially credit companies are giving consumers less rope so 0:20:25.080 --> 0:20:27.600 they can do that. The damage has been done. A 0:20:27.640 --> 0:20:29.960 lot of the damage has been done, and so you 0:20:30.040 --> 0:20:32.600 saw weakness in some of the vintages of twenty one 0:20:32.720 --> 0:20:35.840 twenty two, which we've talked about. Now you see kind 0:20:35.880 --> 0:20:39.399 of twenty three twenty four with the tightening in the underwriting. 0:20:39.440 --> 0:20:44.800 We've actually seen much higher performance in terms of credit. 0:20:44.840 --> 0:20:48.159 In twenty twenty two, subprime defaults were kind of twenty 0:20:48.200 --> 0:20:50.680 to thirty percent higher than what we would have expected 0:20:50.680 --> 0:20:53.760 in a typical cycle, and that really is due to 0:20:53.760 --> 0:20:56.320 the factors that we talked about, sort of too much 0:20:56.359 --> 0:20:59.640 credit given to subprime borrowers in this FIICO credit score. 0:21:00.800 --> 0:21:07.800 So we see attractive opportunities and asset backed securities we see, 0:21:08.000 --> 0:21:11.280 you know, when you look it's an interesting topic to 0:21:11.359 --> 0:21:13.439 go down this rabbit hole. When you look at the 0:21:13.560 --> 0:21:17.240 ag you know it's it's I'm not a big fan 0:21:17.280 --> 0:21:21.159 of passive. You can argue I'm talking my own book, 0:21:21.280 --> 0:21:27.360 but we see active ETFs, mutual funds, et cetera. There's 0:21:27.440 --> 0:21:30.240 tremendous flows going into passive ETF that go into the 0:21:30.359 --> 0:21:34.160 AG and that doesn't actually offer the opportunity to invest 0:21:34.160 --> 0:21:37.080 in sectors like asset backed securities. So there's a lot 0:21:37.119 --> 0:21:41.000 of fixed income which provides yields that are beyond the 0:21:41.040 --> 0:21:43.800 traditional AG type things that people are looking at. I 0:21:43.840 --> 0:21:47.159 would say there's absolutely an element of caveat MTUR in 0:21:47.240 --> 0:21:49.920 terms of uh looking at you need to do the 0:21:50.000 --> 0:21:52.760 underlying credit work, you need to understand the dynamics. But 0:21:52.800 --> 0:21:55.840 we've just talked about, but we absolutely see opportunities for 0:21:55.920 --> 0:21:56.840 yield pick up there. 0:21:57.840 --> 0:22:01.280 And going back to your comment about you know these 0:22:01.640 --> 0:22:06.320 like they're they're giving them less rope to borrowers overall, 0:22:06.359 --> 0:22:06.960 I realized that. 0:22:06.920 --> 0:22:09.959 Was probably a horrible analogy, and I stopped where I 0:22:10.000 --> 0:22:10.760 was going there. 0:22:13.480 --> 0:22:16.600 Do you think that overall that that's a good thing though, 0:22:17.320 --> 0:22:20.399 because you're absolutely kind of yeah, you know, avoiding the 0:22:20.440 --> 0:22:24.119 financial crisis from back years ago. And do you think 0:22:24.200 --> 0:22:28.560