1
00:00:18,440 --> 00:00:21,080
Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast.

2
00:00:21,280 --> 00:00:23,680
Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.

3
00:00:24,079 --> 00:00:26,640
Speaker 1: This week, we're very pleased to welcome Megan Robson, head

4
00:00:26,640 --> 00:00:29,720
Speaker 1: of US credit strategy at BNP Parrybar. How are you, Megan,

5
00:00:30,120 --> 00:00:30,639
Speaker 1: doing great?

6
00:00:30,640 --> 00:00:31,520
Speaker 2: Thank you for having me.

7
00:00:31,720 --> 00:00:33,640
Speaker 1: Thank you so much for joining us today. We're excited

8
00:00:33,640 --> 00:00:35,879
Speaker 1: to dig into your market views and the outlook. We're

9
00:00:35,880 --> 00:00:38,720
Speaker 1: also delighted to welcome back Mike Holland with Bloomberg Intelligence

10
00:00:38,720 --> 00:00:39,240
Speaker 1: in New York.

11
00:00:39,320 --> 00:00:41,360
Speaker 3: How you do, Mike, great, Great to be here, James.

12
00:00:41,760 --> 00:00:43,360
Speaker 1: So just to set the scene a little bit here,

13
00:00:43,720 --> 00:00:46,720
Speaker 1: credit markets are hot. Bond spreads are the titus in

14
00:00:46,800 --> 00:00:48,680
Speaker 1: over two years, which means you don't get very much

15
00:00:48,680 --> 00:00:52,440
Speaker 1: compensation for the risk of default or downgrade. But even

16
00:00:52,479 --> 00:00:54,960
Speaker 1: though spreads are very thin, yields are higher than they've

17
00:00:54,960 --> 00:00:57,279
Speaker 1: been for a long while, making corporate bonds look more

18
00:00:57,280 --> 00:00:59,920
Speaker 1: attractive than they have in years. So demand is there

19
00:01:00,080 --> 00:01:02,640
Speaker 1: for high There are signs of froth in the marketplace,

20
00:01:02,640 --> 00:01:05,080
Speaker 1: which we'll talk about a bit later. At the same time,

21
00:01:05,080 --> 00:01:07,920
Speaker 1: we're seeing record levels of debt issuance. US companies have

22
00:01:07,959 --> 00:01:10,280
Speaker 1: a lot of refinancing to do, and they're taking advantage

23
00:01:10,280 --> 00:01:12,600
Speaker 1: of the window to sell a ton of bonds, and

24
00:01:12,640 --> 00:01:15,679
Speaker 1: there's also a boom in private markets asset based finance

25
00:01:15,800 --> 00:01:18,840
Speaker 1: and structured debt. Treasurers and CFOs have a lot of

26
00:01:18,880 --> 00:01:22,080
Speaker 1: options open to them. But all of this bullishness seems

27
00:01:22,080 --> 00:01:24,360
Speaker 1: to be founded on a belief that the US economy

28
00:01:24,360 --> 00:01:27,280
Speaker 1: can avoid recession. Most companies can afford to pay the

29
00:01:27,319 --> 00:01:30,360
Speaker 1: higher costs of borrowing that are going right now, and

30
00:01:30,520 --> 00:01:32,360
Speaker 1: rate cuts are only a matter of time, so that

31
00:01:32,400 --> 00:01:35,240
Speaker 1: will mean easier money than possibly a lifeline for anyone

32
00:01:35,240 --> 00:01:38,560
Speaker 1: that is struggling to pay. On the other hand, there

33
00:01:38,600 --> 00:01:40,440
Speaker 1: also does seem to be a lot to worry about,

34
00:01:40,560 --> 00:01:47,480
Speaker 1: from commercial real estate and inflation to war, geopolitics and elections. So, Megan,

35
00:01:48,160 --> 00:01:49,760
Speaker 1: what do you make of all this? Is it really

36
00:01:49,800 --> 00:01:52,080
Speaker 1: the year of the bond or a golden age for credit?

37
00:01:52,080 --> 00:01:55,200
Speaker 1: As a lot of our guests keep saying, well.

38
00:01:54,760 --> 00:01:57,560
Speaker 2: Thank you again for having me, James, I think we

39
00:01:57,760 --> 00:02:01,360
Speaker 2: are of the view that it's like the credit soft

40
00:02:01,440 --> 00:02:06,280
Speaker 2: landing is approaching. So a lot of the high frequency

41
00:02:06,400 --> 00:02:10,120
Speaker 2: metrics that we track are giving us more and more

42
00:02:10,160 --> 00:02:13,360
Speaker 2: confidence that some of the downside risks that we were

43
00:02:13,360 --> 00:02:17,080
Speaker 2: worried about day to start the year are looking more

44
00:02:17,120 --> 00:02:21,560
Speaker 2: and more diminished. So I think you point out credit

45
00:02:21,600 --> 00:02:27,600
Speaker 2: spreads has tightened a lot, investor positioning has also gotten longer.

46
00:02:27,639 --> 00:02:33,320
Speaker 2: So I think two those two factors mean that the

47
00:02:33,360 --> 00:02:36,400
Speaker 2: appeal of credit has to be questioned. But at the

48
00:02:36,440 --> 00:02:38,880
Speaker 2: same time, we see a lot of signs on the

49
00:02:38,880 --> 00:02:43,440
Speaker 2: fundamental front, things like leverage coming down, cash balance is growing.

50
00:02:43,480 --> 00:02:48,360
Speaker 2: That that give us confidence that corporates can hold up

51
00:02:48,400 --> 00:02:51,440
Speaker 2: well and that investors will be able to make a

52
00:02:51,520 --> 00:02:54,480
Speaker 2: low but positive return in twenty twenty four.

53
00:02:55,000 --> 00:02:56,960
Speaker 1: So let's talk about rates because it seems that that

54
00:02:57,080 --> 00:03:01,239
Speaker 1: is so important right now to everybody's outlook, what's your view?

55
00:03:01,240 --> 00:03:04,320
Speaker 1: How many rate cuts? When does it start? What's the

56
00:03:04,320 --> 00:03:05,240
Speaker 1: outlook for policy?

57
00:03:05,840 --> 00:03:08,720
Speaker 2: So we have so BNP is calling for three rate

58
00:03:08,760 --> 00:03:12,000
Speaker 2: cuts in twenty twenty four. We still have the first

59
00:03:12,000 --> 00:03:15,600
Speaker 2: cut in June. I think after you know, as we're

60
00:03:15,639 --> 00:03:18,720
Speaker 2: taping this, we have just gotten CPI which came in

61
00:03:19,120 --> 00:03:22,680
Speaker 2: a little bit hotter than expected this morning this morning

62
00:03:22,720 --> 00:03:24,760
Speaker 2: on the core numbers. So I do think that the

63
00:03:25,520 --> 00:03:29,080
Speaker 2: balance of risks is going to be for fewer rate cuts.

64
00:03:30,040 --> 00:03:33,520
Speaker 2: But what we've said for credit is that even if

65
00:03:33,520 --> 00:03:35,600
Speaker 2: we were to get two rate cuts, we think that

66
00:03:36,360 --> 00:03:39,480
Speaker 2: investment grade, higher quality high yield should be able to

67
00:03:39,520 --> 00:03:43,920
Speaker 2: hold up. Okay, I think that if those cuts get

68
00:03:43,960 --> 00:03:47,560
Speaker 2: pushed out after the election, it could be a challenge

69
00:03:47,560 --> 00:03:51,240
Speaker 2: for some of the lower quality floating rate issuers. I

70
00:03:51,240 --> 00:03:53,840
Speaker 2: think that risk is not priced in yet, but is

71
00:03:53,880 --> 00:03:57,000
Speaker 2: something that could come into the debate as we get

72
00:03:57,040 --> 00:03:59,960
Speaker 2: closer to the June and July timeline.

73
00:04:00,560 --> 00:04:02,800
Speaker 1: So how much tits do you think spreads can go?

74
00:04:02,880 --> 00:04:05,520
Speaker 1: Because you know, in terms of history, we have to

75
00:04:05,520 --> 00:04:08,680
Speaker 1: go back more than two years to see spreads ties

76
00:04:08,680 --> 00:04:10,640
Speaker 1: around IG on high yield. But if you look at

77
00:04:10,640 --> 00:04:13,760
Speaker 1: the amount of spread in the yield, you know the

78
00:04:13,800 --> 00:04:16,240
Speaker 1: spread is percentage yield in IG, it's the lowest since

79
00:04:16,480 --> 00:04:19,440
Speaker 1: pre crisis. So you're not getting very much. But do

80
00:04:19,440 --> 00:04:21,679
Speaker 1: you think the spreads go titne on credit?

81
00:04:22,520 --> 00:04:27,160
Speaker 2: So I think we're calling for wider spreads for our

82
00:04:27,160 --> 00:04:29,760
Speaker 2: twenty twenty four forecast, so we have a ninety five

83
00:04:29,920 --> 00:04:33,840
Speaker 2: basis point forecast in IG. You know we're trading sub

84
00:04:33,920 --> 00:04:36,840
Speaker 2: nineties right now, and for high yield, we're calling for

85
00:04:36,880 --> 00:04:40,320
Speaker 2: a three fifty basis point number, which would also mean

86
00:04:41,040 --> 00:04:44,400
Speaker 2: a bit of widening from today's levels. So I do think, well,

87
00:04:44,440 --> 00:04:47,000
Speaker 2: there's a lot of positives going on. You do have

88
00:04:47,600 --> 00:04:49,839
Speaker 2: a growth back that's flowing, you do have an election

89
00:04:49,960 --> 00:04:53,360
Speaker 2: that's coming up, and so for the rest of the year,

90
00:04:53,360 --> 00:04:55,799
Speaker 2: I think you could see see modest widening. That's said,

91
00:04:56,400 --> 00:04:59,479
Speaker 2: heading into you know, the month of April. Now you

92
00:04:59,560 --> 00:05:03,240
Speaker 2: do have this very seasonally supportive month. So if we're

93
00:05:03,240 --> 00:05:06,440
Speaker 2: going to hit a tighter level on spread, I think

94
00:05:06,440 --> 00:05:09,320
Speaker 2: this is the month for investment grade anyway, where you

95
00:05:09,440 --> 00:05:14,479
Speaker 2: really have an optimal setup with supply potentially slowing, and

96
00:05:14,640 --> 00:05:18,080
Speaker 2: you could see us sort of test new types in

97
00:05:18,440 --> 00:05:21,000
Speaker 2: ig So I think we're thinking of a level of

98
00:05:21,160 --> 00:05:24,960
Speaker 2: around eighty basis points where tactically you could see credit

99
00:05:25,040 --> 00:05:28,120
Speaker 2: spreads wrap there and then you know, later in the

100
00:05:28,240 --> 00:05:31,320
Speaker 2: year see some modest widening. But overall, you know, we're

101
00:05:31,320 --> 00:05:34,160
Speaker 2: calling for a very tight range and credit spreads. We're

102
00:05:34,160 --> 00:05:37,880
Speaker 2: talking plus or minus ten basis point range for investment grade,

103
00:05:37,880 --> 00:05:39,960
Speaker 2: which is very low volatility.

104
00:05:40,279 --> 00:05:42,160
Speaker 1: Yeah, I mean on voltai, I mean, do you look

105
00:05:42,160 --> 00:05:45,000
Speaker 1: at credit spreads as a kind of compensation for the

106
00:05:45,120 --> 00:05:48,400
Speaker 1: risk of default or downgrade? Those according to textbooks anyway,

107
00:05:48,200 --> 00:05:50,640
Speaker 1: But now invest saying oh, it doesn't matter because the

108
00:05:50,680 --> 00:05:53,920
Speaker 1: yield is so high. Is that a problem somewhere down

109
00:05:53,960 --> 00:05:56,400
Speaker 1: the line if volatility does kick in, I mean, do

110
00:05:56,440 --> 00:05:58,760
Speaker 1: we all get a big shock that right? You know,

111
00:05:59,120 --> 00:06:01,320
Speaker 1: volatility comes back, can then spread sudden spike.

112
00:06:02,320 --> 00:06:06,760
Speaker 2: I think that for investment grades that they build argument

113
00:06:07,120 --> 00:06:11,240
Speaker 2: is particularly strong, and as you know, an investment grade,

114
00:06:11,240 --> 00:06:15,039
Speaker 2: the risk of default is much lower. For now the

115
00:06:15,480 --> 00:06:19,680
Speaker 2: upgrade to downgrade ratio and investment grade is generally trending

116
00:06:19,680 --> 00:06:23,839
Speaker 2: pretty positive. So for that market, I think that risks

117
00:06:23,880 --> 00:06:28,080
Speaker 2: of a major reset in spreads are relatively remote. But

118
00:06:28,600 --> 00:06:31,120
Speaker 2: you know, to your question on on high yield and loans,

119
00:06:31,160 --> 00:06:34,400
Speaker 2: I do think that risks are growing that you could

120
00:06:34,400 --> 00:06:38,960
Speaker 2: see reset and spreads if and sort of the obvious

121
00:06:38,960 --> 00:06:42,320
Speaker 2: trigger for us would be that debate of rate hikes

122
00:06:42,360 --> 00:06:44,839
Speaker 2: coming back onto the table. I know that right now

123
00:06:44,839 --> 00:06:46,800
Speaker 2: it's more of how many rate cuts are we going

124
00:06:46,839 --> 00:06:50,120
Speaker 2: to get? Where are they can start? But if if it,

125
00:06:50,480 --> 00:06:54,239
Speaker 2: if it conversation shifts to potentially no cuts or seeing

126
00:06:54,279 --> 00:06:57,440
Speaker 2: rate hikes, there will be a lot of issuers that

127
00:06:58,400 --> 00:07:02,599
Speaker 2: could face problems to twenty twenty five, and that will

128
00:07:02,600 --> 00:07:04,839
Speaker 2: be We've made a lot of progress in the maturity

129
00:07:04,880 --> 00:07:08,680
Speaker 2: wall for this year in twenty twenty four, but heading

130
00:07:08,720 --> 00:07:10,640
Speaker 2: into to next year, there's still a lot of wood

131
00:07:10,640 --> 00:07:13,040
Speaker 2: to chop, and if we don't get that relief and rate,

132
00:07:13,680 --> 00:07:15,920
Speaker 2: there will be issuers that are challenged.

133
00:07:16,800 --> 00:07:19,120
Speaker 1: But it sounds like you think that we are you know,

134
00:07:19,400 --> 00:07:23,200
Speaker 1: current spreads there is enough compensation for the risk.

135
00:07:23,880 --> 00:07:28,960
Speaker 2: I think that for our you know base case, I

136
00:07:28,960 --> 00:07:33,440
Speaker 2: would agree that spreads are compensating you for the risk

137
00:07:33,520 --> 00:07:36,880
Speaker 2: that we're seeing for the for the rest of the year.

138
00:07:36,920 --> 00:07:39,400
Speaker 2: I think you have to watch the tail risk for

139
00:07:39,520 --> 00:07:43,400
Speaker 2: potentially default risk coming back into the picture. But for

140
00:07:43,520 --> 00:07:47,200
Speaker 2: now we are calling for the so called quote unquote

141
00:07:47,240 --> 00:07:50,160
Speaker 2: credits off landing, which which means you don't get that

142
00:07:50,240 --> 00:07:54,120
Speaker 2: default spike, you don't get a downgrade wave, and you

143
00:07:54,240 --> 00:07:58,520
Speaker 2: essentially bypass the part of the credit cycle where where

144
00:07:58,680 --> 00:08:01,280
Speaker 2: you head into a down to So you think we've

145
00:08:01,480 --> 00:08:04,720
Speaker 2: we've moved from expansion Skipp's downturn and we're in this

146
00:08:04,840 --> 00:08:09,200
Speaker 2: recovery phase where spreads are tight, so it means returns

147
00:08:09,240 --> 00:08:12,320
Speaker 2: will be relatively low, but you also have low volatility,

148
00:08:12,800 --> 00:08:17,280
Speaker 2: and so we think spreads are compensating investors for that case.

149
00:08:17,720 --> 00:08:18,960
Speaker 1: So does that mean you just buy a ton of

150
00:08:18,960 --> 00:08:20,640
Speaker 1: triple c's because they are the only things that haven't

151
00:08:20,680 --> 00:08:23,040
Speaker 1: really tightened a huge amount. I mean you just just

152
00:08:23,240 --> 00:08:25,680
Speaker 1: lean into that, you know, sort of equity like risk

153
00:08:25,720 --> 00:08:26,240
Speaker 1: of triple C.

154
00:08:27,160 --> 00:08:30,200
Speaker 2: So we have a nuanced view on triple c's. I

155
00:08:30,200 --> 00:08:34,520
Speaker 2: think that we actually like shorting some of the single

156
00:08:34,520 --> 00:08:37,840
Speaker 2: bee and triple C names that have have tightened a lot.

157
00:08:37,920 --> 00:08:41,680
Speaker 2: So you're essentially have a bifurcation in the triple C market.

158
00:08:42,920 --> 00:08:46,680
Speaker 2: A lot of roughly twenty five to thirty percent are

159
00:08:46,720 --> 00:08:49,760
Speaker 2: trading at you know, the tights of the cycle for

160
00:08:50,120 --> 00:08:53,280
Speaker 2: triple c's and single bs, so some of them trading

161
00:08:53,320 --> 00:08:56,600
Speaker 2: through the high yield index. More broadly, we are looking

162
00:08:56,640 --> 00:08:59,840
Speaker 2: for opportunities to sell those names. In short, some of

163
00:08:59,840 --> 00:09:05,480
Speaker 2: those names where if rate cuts do seem to be

164
00:09:05,520 --> 00:09:07,120
Speaker 2: pushed off more and more, I think there could be

165
00:09:07,120 --> 00:09:10,280
Speaker 2: a sell off there. We do have a preference for

166
00:09:10,400 --> 00:09:12,880
Speaker 2: some of the triple c's in the five hundred to

167
00:09:12,920 --> 00:09:16,120
Speaker 2: eight hundred basis point neighborhood in terms of spread, so

168
00:09:16,440 --> 00:09:19,839
Speaker 2: we think there could be opportunity for those to rally further,

169
00:09:20,240 --> 00:09:23,280
Speaker 2: and that's the place where there's upside. And then the

170
00:09:23,320 --> 00:09:25,679
Speaker 2: rest of triple c's are really trading distressed, and they

171
00:09:25,720 --> 00:09:30,280
Speaker 2: have reasons they're trading wide, and we don't recommend investors

172
00:09:30,320 --> 00:09:34,160
Speaker 2: adding to those to that part of the triple C market.

173
00:09:35,080 --> 00:09:37,840
Speaker 1: So at these current higher for longer rates, you know,

174
00:09:37,920 --> 00:09:41,280
Speaker 1: some of these large triple C capital structures are unsustainable,

175
00:09:41,640 --> 00:09:45,000
Speaker 1: do you expect I mean you mentioned self landing fewer

176
00:09:45,040 --> 00:09:48,439
Speaker 1: defaultse potentially, but then there seems to be this burning

177
00:09:48,480 --> 00:09:51,840
Speaker 1: issue in the triple C space of more defaults potentially

178
00:09:51,840 --> 00:09:54,440
Speaker 1: if rates just don't go down, I think it's right.

179
00:09:54,480 --> 00:09:58,480
Speaker 2: I think we will. So we have forecasted that about

180
00:09:58,480 --> 00:10:01,520
Speaker 2: twenty triple C issuers will have to come to market

181
00:10:02,360 --> 00:10:07,240
Speaker 2: this year to refinance. And you've seen a few, you know,

182
00:10:07,280 --> 00:10:11,160
Speaker 2: with triples ratings well received by the market, but you

183
00:10:11,200 --> 00:10:14,440
Speaker 2: haven't seen that story that triple C issuer that that

184
00:10:14,559 --> 00:10:18,080
Speaker 2: is more questionable credit come and successfully price the deal.

185
00:10:18,480 --> 00:10:21,960
Speaker 2: I think we really need to see that really to

186
00:10:22,040 --> 00:10:24,760
Speaker 2: really embrace and overweight to triple c's. And until we

187
00:10:24,840 --> 00:10:29,079
Speaker 2: see a few names come to market price of refinancing,

188
00:10:29,679 --> 00:10:33,160
Speaker 2: the market would gain confidence and that would be time

189
00:10:33,200 --> 00:10:36,160
Speaker 2: where the rest of the triple c's could rally. But

190
00:10:36,200 --> 00:10:40,400
Speaker 2: I think for now we recommend not overweighting that segment.

191
00:10:40,480 --> 00:10:44,040
Speaker 2: Not necessarily that you're going to see a big spike

192
00:10:44,120 --> 00:10:47,160
Speaker 2: in default, but you will see some issues with those

193
00:10:47,320 --> 00:10:50,559
Speaker 2: triple C unless growth it really holds up well and

194
00:10:50,960 --> 00:10:53,280
Speaker 2: we get the rate cuts that people are hoping for.

195
00:10:53,840 --> 00:10:55,560
Speaker 3: Megan, this is Mike con I just wanted to jump

196
00:10:55,559 --> 00:10:58,199
Speaker 3: in and we'll comment a little bit about the triple

197
00:10:58,240 --> 00:10:59,960
Speaker 3: C space. I mean, we put out a note early

198
00:11:00,160 --> 00:11:04,480
Speaker 3: this week on Bousch, Right, So Bousch has got a

199
00:11:04,559 --> 00:11:08,800
Speaker 3: twenty five maturity in November and then in December. And

200
00:11:08,880 --> 00:11:12,360
Speaker 3: it's interesting that you know, the near dated bonds and

201
00:11:12,400 --> 00:11:14,720
Speaker 3: then capital structure, of which there's a lot of bonds

202
00:11:14,720 --> 00:11:17,199
Speaker 3: trading in the you know, forty cent range. The near

203
00:11:17,280 --> 00:11:20,360
Speaker 3: dated bonds are trading in the nineties, you know, implying

204
00:11:20,400 --> 00:11:23,040
Speaker 3: eleven to fifteen percent yield to call if they were

205
00:11:23,080 --> 00:11:26,080
Speaker 3: to address the bonds in November, a year ahead of

206
00:11:26,360 --> 00:11:29,679
Speaker 3: maturity before they come current. But this is one of

207
00:11:29,720 --> 00:11:32,160
Speaker 3: those names I think you're speaking of where we just

208
00:11:32,280 --> 00:11:35,120
Speaker 3: we don't have it's it's almost too hairy to have

209
00:11:35,200 --> 00:11:38,760
Speaker 3: a good view into what's going to happen because of

210
00:11:39,360 --> 00:11:44,000
Speaker 3: extenuating circumstances around patent litigation and some other issues there

211
00:11:44,000 --> 00:11:46,640
Speaker 3: But what I find interesting, and having reviewed some of

212
00:11:46,640 --> 00:11:50,480
Speaker 3: your work, is you know, commentary about private credit coming

213
00:11:50,559 --> 00:11:53,440
Speaker 3: in and sort of picking up some of the pieces.

214
00:11:53,520 --> 00:11:56,200
Speaker 3: I mean, KKR came in and did a receivables facility

215
00:11:56,240 --> 00:12:02,240
Speaker 3: for Bousch and essentially gave them a little bit more liquidity.

216
00:12:02,320 --> 00:12:04,520
Speaker 3: And we'll see what they do between now and the

217
00:12:04,559 --> 00:12:07,120
Speaker 3: year end. But I think that you know, with about

218
00:12:07,120 --> 00:12:09,680
Speaker 3: eighteen billion or it close to twenty billion of bonds,

219
00:12:09,720 --> 00:12:13,400
Speaker 3: that will be something to watch into your end, you know,

220
00:12:13,440 --> 00:12:16,120
Speaker 3: particularly as I thought of this with James was talking

221
00:12:16,160 --> 00:12:18,440
Speaker 3: and you were talking earlier about yields. You look at

222
00:12:18,440 --> 00:12:21,680
Speaker 3: the all in yield for United they're thirty four bonds,

223
00:12:21,720 --> 00:12:24,800
Speaker 3: it's five percent, and some of these bonds that bouch

224
00:12:24,840 --> 00:12:29,040
Speaker 3: Health is addressing are five percent bonds. And I just

225
00:12:29,080 --> 00:12:32,839
Speaker 3: think about relative risk and relative spread here today, and

226
00:12:33,160 --> 00:12:35,760
Speaker 3: I can understand a bit why you seem to prefer

227
00:12:35,800 --> 00:12:40,080
Speaker 3: in some of your notes ig healthcare as a defensive space.

228
00:12:40,360 --> 00:12:42,439
Speaker 2: You know, I think you know some of your comments

229
00:12:42,440 --> 00:12:47,200
Speaker 2: and private credit, I think absolutely it has supported a

230
00:12:47,200 --> 00:12:50,840
Speaker 2: lot of issuers in need of liquidity, especially last year

231
00:12:50,880 --> 00:12:55,520
Speaker 2: when you know, high capital markets were closed and or

232
00:12:55,800 --> 00:12:58,360
Speaker 2: not entirely closed. But more challenging for some of the

233
00:12:58,440 --> 00:13:01,000
Speaker 2: lower quality issuers, and you're seeing the credit step in.

234
00:13:02,040 --> 00:13:05,120
Speaker 2: I think that's that's definitely positive for for some issuers

235
00:13:05,120 --> 00:13:08,000
Speaker 2: in terms of pushing out default UH. I think it's

236
00:13:08,040 --> 00:13:13,120
Speaker 2: also a sign that you're seeing some some fraud and

237
00:13:13,120 --> 00:13:16,600
Speaker 2: and pushing spread even tighter as you see these these

238
00:13:17,160 --> 00:13:22,520
Speaker 2: private credit investors in public investors compete for for deals,

239
00:13:22,679 --> 00:13:26,480
Speaker 2: and I think the sort of covenants that are that

240
00:13:26,520 --> 00:13:28,880
Speaker 2: are being printed, you need to kind of watch the

241
00:13:29,040 --> 00:13:32,679
Speaker 2: covenant quality as all of the cash is chasing some

242
00:13:32,760 --> 00:13:37,160
Speaker 2: of these uh, some of the deals that have opportunity

243
00:13:37,200 --> 00:13:40,960
Speaker 2: to yield. In terms of you know your question. On

244
00:13:41,800 --> 00:13:44,800
Speaker 2: the investment grade space, I think a really interesting theme

245
00:13:44,840 --> 00:13:47,640
Speaker 2: for investment grade over next year is going to be

246
00:13:47,720 --> 00:13:51,600
Speaker 2: de leveraging. And people are are very concerned about higher

247
00:13:51,640 --> 00:13:56,280
Speaker 2: rates and not being a negative, but it's actually resulting

248
00:13:56,320 --> 00:14:00,360
Speaker 2: in some positive credit trends in places like investment where

249
00:14:00,400 --> 00:14:04,280
Speaker 2: issuers have the ability to deleverage or pay down their debt.

250
00:14:05,040 --> 00:14:07,960
Speaker 2: Healthcare is one of our top picks in the space

251
00:14:09,080 --> 00:14:12,080
Speaker 2: of investment grade where you have really high free cash

252
00:14:12,120 --> 00:14:17,160
Speaker 2: flow companies. Last earnings during the last earning cycle really

253
00:14:17,280 --> 00:14:20,320
Speaker 2: came out and said we're lowering our leverage targets and

254
00:14:20,320 --> 00:14:23,400
Speaker 2: we're actively going to pay down debt. I think healthcare.

255
00:14:23,440 --> 00:14:27,000
Speaker 2: You also have seen our bottom up forecast for investment

256
00:14:27,000 --> 00:14:30,200
Speaker 2: grade healthcare. We're about eighty percent of the way through

257
00:14:30,680 --> 00:14:34,200
Speaker 2: twenty twenty four issuance, and so you have this deleveraging trend.

258
00:14:34,240 --> 00:14:37,520
Speaker 2: But also they've already issued a lot of their supply.

259
00:14:37,800 --> 00:14:42,000
Speaker 2: So it's one of our higher conviction views as an

260
00:14:42,000 --> 00:14:45,360
Speaker 2: overweight for the rest of the year in the investment

261
00:14:45,400 --> 00:14:45,960
Speaker 2: grade space.

262
00:14:46,600 --> 00:14:48,520
Speaker 3: Yeah, I tend to agree with that. I think, you know,

263
00:14:48,640 --> 00:14:51,200
Speaker 3: I've covered the space for nearly two decades now, and

264
00:14:51,200 --> 00:14:53,960
Speaker 3: I remember about ten years ago we had a slew

265
00:14:54,320 --> 00:14:59,440
Speaker 3: of regulatory impacts in the space, particularly with pharma and

266
00:14:59,480 --> 00:15:02,200
Speaker 3: also with the Affordable Care Act and all that going on.

267
00:15:02,280 --> 00:15:05,520
Speaker 3: Right we're ten years later, twelve years later, and you know,

268
00:15:05,560 --> 00:15:09,200
Speaker 3: you're starting to see United become the target of regulatory

269
00:15:09,280 --> 00:15:12,200
Speaker 3: actions in terms of antitrust, and you're seeing pushback on

270
00:15:12,240 --> 00:15:14,440
Speaker 3: some of these big pharma names. I wonder, you know,

271
00:15:14,480 --> 00:15:17,080
Speaker 3: we're two hundred and nine days away from the US election.

272
00:15:17,880 --> 00:15:21,480
Speaker 3: Regulatory risk is rising in healthcare. I mean, what are

273
00:15:21,520 --> 00:15:23,640
Speaker 3: the I guess what are your concerns. What would your

274
00:15:23,720 --> 00:15:26,160
Speaker 3: concerns be about that call? What would your you know,

275
00:15:26,800 --> 00:15:27,800
Speaker 3: contrarian view be.

276
00:15:27,920 --> 00:15:31,920
Speaker 2: Yeah, so you bring up you bring up a great point.

277
00:15:32,040 --> 00:15:35,440
Speaker 2: I think that not much in the way of policy

278
00:15:35,560 --> 00:15:38,680
Speaker 2: risk is priced into the market at all, and especially

279
00:15:38,680 --> 00:15:41,840
Speaker 2: in healthcare. So one way to see that in our

280
00:15:41,920 --> 00:15:46,200
Speaker 2: the metrics re tract is through sector dispersion. So call out,

281
00:15:46,280 --> 00:15:50,560
Speaker 2: let's call out two sectors like healthcare but also financials,

282
00:15:50,840 --> 00:15:54,600
Speaker 2: would be could potentially see you know, enormous regulatory impacts

283
00:15:54,920 --> 00:15:59,120
Speaker 2: as the election approaches, but sector dispersion and investment grades

284
00:15:59,120 --> 00:16:02,400
Speaker 2: that the at the lowest that we've seen in several years,

285
00:16:02,400 --> 00:16:06,800
Speaker 2: meaning that you know, spreads are not differentiation across the

286
00:16:06,840 --> 00:16:10,560
Speaker 2: different areas pharma and healthcare included. So yeah, I think

287
00:16:10,600 --> 00:16:14,200
Speaker 2: that heading to and and I'm sure you're you have

288
00:16:14,800 --> 00:16:17,560
Speaker 2: a much greater depth of knowledge on the policy front,

289
00:16:17,600 --> 00:16:20,560
Speaker 2: but I think that farmer drug regulation is something we're

290
00:16:20,560 --> 00:16:23,560
Speaker 2: watching closely as a risk given that you could see

291
00:16:23,760 --> 00:16:28,200
Speaker 2: some compromise between UH Democrats and Republicans on this areas

292
00:16:28,280 --> 00:16:32,440
Speaker 2: as a potential way to to raise to raise to

293
00:16:32,520 --> 00:16:36,200
Speaker 2: raise money and not have to deficit spend as much

294
00:16:36,240 --> 00:16:39,360
Speaker 2: as they otherwise would have, So it's definitely a risk

295
00:16:39,480 --> 00:16:41,600
Speaker 2: on the on the horizon, I think it will depend

296
00:16:41,640 --> 00:16:44,480
Speaker 2: if we get a red wave or blue waves in

297
00:16:44,600 --> 00:16:49,640
Speaker 2: something that we continue to monitor. How are you thinking

298
00:16:49,680 --> 00:16:54,040
Speaker 2: about the election risk for for high yield healthcare?

299
00:16:54,160 --> 00:16:57,160
Speaker 3: Yeah, you know, for high yield it's it's a it's

300
00:16:57,160 --> 00:16:59,480
Speaker 3: a different boat. There's a lot of more idiosyncratic risks

301
00:16:59,480 --> 00:17:02,040
Speaker 3: in the space. But I think if we're talking IG healthcare,

302
00:17:02,320 --> 00:17:04,480
Speaker 3: you know, I look back to what happened, you know,

303
00:17:04,480 --> 00:17:06,040
Speaker 3: about a decade ago when a lot of the pharmer

304
00:17:06,080 --> 00:17:08,480
Speaker 3: companies were getting hit with whistleblower lawsuits from paying out

305
00:17:08,480 --> 00:17:11,840
Speaker 3: a couple of billion dollars for off label marketing and

306
00:17:11,880 --> 00:17:16,359
Speaker 3: other practices that were that are forbidden and they you know,

307
00:17:16,440 --> 00:17:20,240
Speaker 3: paid out billions and nothing, it didn't impact their credit profile.

308
00:17:20,359 --> 00:17:22,919
Speaker 3: So they can be the target a lot of times,

309
00:17:22,960 --> 00:17:26,359
Speaker 3: you know, United can take lumps and be accused of

310
00:17:26,800 --> 00:17:29,320
Speaker 3: anti trust and they continue to chug long. And there's

311
00:17:29,320 --> 00:17:33,679
Speaker 3: a reason why, you know, IG healthcare is dominated by

312
00:17:33,680 --> 00:17:35,959
Speaker 3: payers that you have yields around eighty to one hundred

313
00:17:36,200 --> 00:17:38,280
Speaker 3: around the tenure. And then you look at HTA, which

314
00:17:38,320 --> 00:17:40,560
Speaker 3: is continuing to grow. It's IG now and it's it's

315
00:17:40,560 --> 00:17:43,600
Speaker 3: a one fifty one sixty over. So I've had a

316
00:17:43,640 --> 00:17:45,119
Speaker 3: lot of questions about folks saying, you know, I'm a

317
00:17:45,160 --> 00:17:48,600
Speaker 3: little concerned about regulatory stuff hitting the payers of the

318
00:17:48,640 --> 00:17:51,800
Speaker 3: next you know, six twelve months. Should I be better

319
00:17:52,000 --> 00:17:54,000
Speaker 3: Would I be better positioned in HDA as a provider

320
00:17:54,160 --> 00:17:56,040
Speaker 3: because they can kind of control their markets and kind

321
00:17:56,040 --> 00:18:00,239
Speaker 3: of do some better negotiating than other smaller hospital providers. So,

322
00:18:00,359 --> 00:18:03,440
Speaker 3: you know, I think I think you highlighted some real

323
00:18:03,520 --> 00:18:06,200
Speaker 3: risks and ig in high yield in terms of REFI

324
00:18:06,359 --> 00:18:10,240
Speaker 3: risks and the cost associated with you know, you know,

325
00:18:10,680 --> 00:18:13,160
Speaker 3: forir case and point for about Bousch's got a five

326
00:18:13,320 --> 00:18:15,840
Speaker 3: and three quarters bond, a couple five percent bonds coming

327
00:18:15,880 --> 00:18:18,399
Speaker 3: to and what are those repriced if they get them repriced,

328
00:18:18,440 --> 00:18:21,080
Speaker 3: if they're able to do some sort of liability management

329
00:18:21,200 --> 00:18:23,359
Speaker 3: exercise in the next several months, which people have been

330
00:18:23,400 --> 00:18:25,520
Speaker 3: shattering about and other news sites have been talking about,

331
00:18:25,720 --> 00:18:27,760
Speaker 3: where does that price ten eleven?

332
00:18:28,160 --> 00:18:32,000
Speaker 2: Yeah, I think load level digit seems very very conceivable.

333
00:18:32,280 --> 00:18:35,639
Speaker 2: I think in the what we've been calling is the

334
00:18:35,680 --> 00:18:41,040
Speaker 2: REFI finalty, or the difference between your yield and the

335
00:18:41,080 --> 00:18:45,200
Speaker 2: coupon that you're refinancing. For Triple C space is still

336
00:18:45,240 --> 00:18:48,879
Speaker 2: around four hundred to five hundred basis points. So in

337
00:18:49,000 --> 00:18:53,800
Speaker 2: terms of the cost an issuer has to incremental cost

338
00:18:53,840 --> 00:18:57,600
Speaker 2: of interest expenses is still pretty substantial for Triple c's,

339
00:18:57,640 --> 00:19:00,280
Speaker 2: which will be a headwind. And I think it's it's

340
00:19:00,359 --> 00:19:04,880
Speaker 2: why despite all of this you know, polishness and view

341
00:19:04,920 --> 00:19:08,120
Speaker 2: of a soft landing, that you haven't seen investors really

342
00:19:08,119 --> 00:19:11,399
Speaker 2: embraced the overweight to triple c's because there's there's still

343
00:19:11,440 --> 00:19:15,600
Speaker 2: this question of a refy in comparison for a single

344
00:19:15,600 --> 00:19:19,119
Speaker 2: BEE or a double B issuer, that refi penalty is

345
00:19:19,240 --> 00:19:23,280
Speaker 2: one hundred to two hundred basis points to refy. The

346
00:19:23,280 --> 00:19:26,960
Speaker 2: the vintages of that we expect to be done this year.

347
00:19:27,040 --> 00:19:31,640
Speaker 2: So there is a pretty meaningful difference between Triple c's

348
00:19:31,680 --> 00:19:33,240
Speaker 2: and the rest of the market for sure.

349
00:19:33,480 --> 00:19:35,720
Speaker 1: For sure, So from an investor's downpoint, Megan, is it

350
00:19:35,760 --> 00:19:38,359
Speaker 1: fair to say just buy everything except for triple c's.

351
00:19:40,200 --> 00:19:43,440
Speaker 2: So we haven't talked about about floating, you know, high

352
00:19:43,520 --> 00:19:47,080
Speaker 2: yield versus loans. But one of our our bigger, bigger

353
00:19:47,119 --> 00:19:50,560
Speaker 2: convictions is in the leverage finance bass, the leverage loan market,

354
00:19:50,720 --> 00:19:54,679
Speaker 2: and especially the double B leverage loan market. So I

355
00:19:54,680 --> 00:19:58,000
Speaker 2: think that loans have lagged the spread rally you've seen

356
00:19:58,040 --> 00:20:00,960
Speaker 2: in high yield, and you have this basis point pick

357
00:20:01,040 --> 00:20:03,879
Speaker 2: up on a spread basis, but also all in yield

358
00:20:04,359 --> 00:20:09,000
Speaker 2: for loans, and some of those names are very large issuers.

359
00:20:09,000 --> 00:20:11,320
Speaker 2: Credit quality still looks okay. They should be able to

360
00:20:11,800 --> 00:20:16,119
Speaker 2: pay interest even though it's floating rate, and as an investor,

361
00:20:16,359 --> 00:20:18,640
Speaker 2: if you don't get as many rate cuts, you're still

362
00:20:18,640 --> 00:20:22,359
Speaker 2: benefiting from from that floating rate carry. So that's one

363
00:20:22,400 --> 00:20:26,119
Speaker 2: of our top convictions. I think within IG we like

364
00:20:26,200 --> 00:20:29,280
Speaker 2: triple b's, so this is slightly out of consensus just

365
00:20:29,320 --> 00:20:33,320
Speaker 2: given how much triple b's have already rallied. But we

366
00:20:33,480 --> 00:20:36,520
Speaker 2: still like keeping the overweight to the triple B space

367
00:20:36,960 --> 00:20:41,600
Speaker 2: and think that compression can go further. As in April,

368
00:20:41,640 --> 00:20:44,919
Speaker 2: the supply should be low, and also I think yield

369
00:20:44,920 --> 00:20:48,680
Speaker 2: buyers will continue to add to investment grade, which should

370
00:20:48,680 --> 00:20:52,600
Speaker 2: support that trade. One spot in high yield that we

371
00:20:52,640 --> 00:20:57,520
Speaker 2: also like is media. I think that this is we

372
00:20:57,520 --> 00:21:01,680
Speaker 2: still find the sector interesting. This is probably out of consensus.

373
00:21:01,680 --> 00:21:05,120
Speaker 2: I think there's a view that sort of media will

374
00:21:05,480 --> 00:21:10,960
Speaker 2: struggle indefinitely as people continue to transition away from traditional

375
00:21:11,000 --> 00:21:15,159
Speaker 2: media like TV. We think that acceleration will be slower

376
00:21:15,200 --> 00:21:18,800
Speaker 2: than expected, and also the political landscape should be a

377
00:21:18,840 --> 00:21:22,520
Speaker 2: positive for the media sector. So far, the trade hasn't worked,

378
00:21:22,560 --> 00:21:25,000
Speaker 2: but we're sticking with it and are confident you could

379
00:21:25,000 --> 00:21:28,080
Speaker 2: see kind of a pickup in political ad spend later

380
00:21:28,160 --> 00:21:31,880
Speaker 2: this year supporting high yield media. I think those are

381
00:21:31,880 --> 00:21:35,680
Speaker 2: some of our top trades that we're thinking about right now.

382
00:21:36,280 --> 00:21:38,320
Speaker 1: On the triple bs, though, do you not worry that,

383
00:21:38,440 --> 00:21:40,280
Speaker 1: you know the good signs of rolling now, the cfo

384
00:21:40,320 --> 00:21:41,639
Speaker 1: is are going to start spending, They're going to do

385
00:21:41,800 --> 00:21:44,000
Speaker 1: M and A, They're going to do shareholder friendly activity

386
00:21:44,040 --> 00:21:46,120
Speaker 1: that maybe risks of downgrade.

387
00:21:46,960 --> 00:21:50,639
Speaker 2: It's a great question. I think for now, the motivation

388
00:21:50,800 --> 00:21:53,159
Speaker 2: is very high for triple b's to protect that rating,

389
00:21:53,400 --> 00:21:55,639
Speaker 2: so you don't want to be downgraded and have to

390
00:21:55,840 --> 00:22:00,240
Speaker 2: pay the penalty to double b's. And looking at our

391
00:22:00,280 --> 00:22:03,440
Speaker 2: supply forecast, you know we've had five over five hundred

392
00:22:03,440 --> 00:22:05,560
Speaker 2: billion issued in first quarter. We think a lot of

393
00:22:05,680 --> 00:22:07,640
Speaker 2: the front lank, so for the rest of the year,

394
00:22:08,000 --> 00:22:10,560
Speaker 2: we're not expecting a lot of supply in the triple

395
00:22:10,600 --> 00:22:13,440
Speaker 2: B space. As you mentioned, M and A is probably

396
00:22:13,480 --> 00:22:17,680
Speaker 2: the wild card. We do forecast a pickup an M

397
00:22:17,760 --> 00:22:21,080
Speaker 2: and A relative to last year, but we're not expecting

398
00:22:21,960 --> 00:22:25,760
Speaker 2: a really big surge, so I think that eagle to

399
00:22:25,880 --> 00:22:27,560
Speaker 2: M and A, I don't think it's enough to push

400
00:22:27,600 --> 00:22:33,240
Speaker 2: spreads wider, and credit quality is starting from a point

401
00:22:33,240 --> 00:22:36,400
Speaker 2: that's strong enough where we think it probably is manageable

402
00:22:36,440 --> 00:22:38,960
Speaker 2: for most issuers in the triple B space.

403
00:22:39,400 --> 00:22:42,040
Speaker 1: And what about duration? Is this the time given higher

404
00:22:42,080 --> 00:22:44,719
Speaker 1: for longer that you saw taking some more duration.

405
00:22:45,640 --> 00:22:50,560
Speaker 2: So I think that the sweet spot in investment grade,

406
00:22:50,600 --> 00:22:54,560
Speaker 2: we've argued is the three to seven year part of

407
00:22:54,640 --> 00:22:58,600
Speaker 2: the credit curve, and this tends to have lower volatility,

408
00:22:58,720 --> 00:23:03,080
Speaker 2: so it's a little bit more defensive, and you know,

409
00:23:03,080 --> 00:23:06,120
Speaker 2: if the market is mostly long, then you are set

410
00:23:06,160 --> 00:23:09,320
Speaker 2: up for negative surprise. So we like being in three

411
00:23:09,320 --> 00:23:12,200
Speaker 2: to seven year where you're not so exposed to say,

412
00:23:12,200 --> 00:23:14,680
Speaker 2: a sell off in the long end should we get one,

413
00:23:15,160 --> 00:23:17,520
Speaker 2: and you're not as vulnerable to the one to three

414
00:23:17,760 --> 00:23:22,520
Speaker 2: your component that that could be more tied to fed pricing.

415
00:23:22,640 --> 00:23:27,520
Speaker 2: So within IG three to seven year is our favorite spot.

416
00:23:27,560 --> 00:23:30,240
Speaker 2: And you also are starting to see more roll down

417
00:23:32,000 --> 00:23:34,920
Speaker 2: in that space as the curve credit curve or sorry,

418
00:23:34,960 --> 00:23:39,480
Speaker 2: the treasury curve steepens and that's a high conviction view

419
00:23:39,520 --> 00:23:42,280
Speaker 2: from BNP, we'll see a steeper curve, and I think

420
00:23:42,280 --> 00:23:44,600
Speaker 2: that three to seven year IG is a place to

421
00:23:44,640 --> 00:23:45,520
Speaker 2: capitalize on that.

422
00:23:45,800 --> 00:23:48,960
Speaker 1: Okay, great so on issue Ince Megan, it has obviously

423
00:23:48,960 --> 00:23:52,840
Speaker 1: been a big first quarter slower this month, but there's

424
00:23:52,840 --> 00:23:55,000
Speaker 1: a massive window open for wishers. Why don't they just

425
00:23:55,080 --> 00:23:57,800
Speaker 1: keep jamming jamming the market and selling more buns? Why

426
00:23:57,920 --> 00:23:59,640
Speaker 1: why doesn't it continue at the same pace.

427
00:24:01,119 --> 00:24:05,719
Speaker 2: So I think a lot of issuance was catching up

428
00:24:05,760 --> 00:24:09,879
Speaker 2: from from last year, but also anecdotally from issuers is

429
00:24:10,000 --> 00:24:13,879
Speaker 2: pulling forward ahead of potentially risks later this year like

430
00:24:14,359 --> 00:24:19,240
Speaker 2: the election or just the unknown. So given the fact

431
00:24:19,240 --> 00:24:23,240
Speaker 2: that spreads have hit and tights, you look at PAUL

432
00:24:23,280 --> 00:24:26,919
Speaker 2: and yields, yes, they're still elevated. That they are materially

433
00:24:26,960 --> 00:24:29,800
Speaker 2: lower from October when we had the peak and yield

434
00:24:29,920 --> 00:24:33,159
Speaker 2: so at least one hundred basis points lower for many issuers.

435
00:24:33,720 --> 00:24:38,240
Speaker 2: That's all contributed to we think issuers coming in first

436
00:24:38,320 --> 00:24:42,000
Speaker 2: quarter rather than later in the year. But remember there's

437
00:24:42,040 --> 00:24:47,160
Speaker 2: still a pretty material penalty for borrowing at these at

438
00:24:47,200 --> 00:24:50,560
Speaker 2: these levels, and so I think if issuers have a choice,

439
00:24:51,160 --> 00:24:56,240
Speaker 2: they will not continue to opportunistically borrow in this type

440
00:24:56,280 --> 00:24:59,360
Speaker 2: of environment where yields are much higher than what they've

441
00:24:59,359 --> 00:24:59,960
Speaker 2: paid in the past.

442
00:25:00,600 --> 00:25:03,879
Speaker 3: I wonder, Megan, like, you know, we're talking about the

443
00:25:03,920 --> 00:25:06,000
Speaker 3: CPI numbers this morning, and you're talking about you said

444
00:25:06,000 --> 00:25:09,160
Speaker 3: earlier about mentioned you know, maybe the narrative would change,

445
00:25:09,200 --> 00:25:11,080
Speaker 3: and I think about all the stuff we said on

446
00:25:11,080 --> 00:25:13,560
Speaker 3: the call so far about you know, I mean, first

447
00:25:13,640 --> 00:25:16,320
Speaker 3: quarter issues for Augie Healthcare was off the charts record

448
00:25:16,440 --> 00:25:19,600
Speaker 3: right and pulling forward this stuff, you know, rates are

449
00:25:20,640 --> 00:25:24,520
Speaker 3: you know where they are right now? And I guess

450
00:25:24,320 --> 00:25:27,520
Speaker 3: it's to a point it's almost like what look at

451
00:25:27,520 --> 00:25:29,359
Speaker 3: what they're doing, not what they're saying. And in the

452
00:25:29,400 --> 00:25:32,240
Speaker 3: media with with the with issue ince with the corporates

453
00:25:32,280 --> 00:25:34,760
Speaker 3: and but also with the FED, what's your view like,

454
00:25:34,840 --> 00:25:36,440
Speaker 3: you know, I guess you only had a couple of

455
00:25:36,440 --> 00:25:38,600
Speaker 3: minutes to digest the news from this morning, But is

456
00:25:38,640 --> 00:25:43,879
Speaker 3: your view going to change based upon view on you know,

457
00:25:43,960 --> 00:25:47,199
Speaker 3: corporate fundamentals going to change looking forward based upon this

458
00:25:47,240 --> 00:25:48,240
Speaker 3: new information today?

459
00:25:48,880 --> 00:25:53,280
Speaker 2: I think so With CPI, I do think that the

460
00:25:53,280 --> 00:25:57,400
Speaker 2: the chances of a June rate cut are are definitely

461
00:25:57,440 --> 00:26:01,480
Speaker 2: going to be reduced and be pushed to lie. The

462
00:26:01,600 --> 00:26:05,800
Speaker 2: risk then becomes September would be the next window for

463
00:26:05,960 --> 00:26:09,679
Speaker 2: a rate cut, and there is debate around will the

464
00:26:09,680 --> 00:26:12,760
Speaker 2: FED go in September given that it is so close

465
00:26:12,840 --> 00:26:17,040
Speaker 2: to the election. So I think for markets, as a

466
00:26:17,080 --> 00:26:21,280
Speaker 2: conversation shifts, this would be get the first cut until November.

467
00:26:21,680 --> 00:26:25,680
Speaker 2: I think if that scenario starts to come into view,

468
00:26:26,119 --> 00:26:30,639
Speaker 2: I do think that lower quality loans will be vulnerable.

469
00:26:30,720 --> 00:26:34,000
Speaker 2: So if you have single B, triple C loans, their

470
00:26:34,000 --> 00:26:37,000
Speaker 2: interest cost is doubled. I think there is this hope

471
00:26:37,080 --> 00:26:39,639
Speaker 2: that we're getting these rate cuts. I think companies are

472
00:26:39,680 --> 00:26:42,639
Speaker 2: counting on that. I think PD sponsors are counting on that.

473
00:26:43,200 --> 00:26:47,280
Speaker 2: And if that doesn't come, If that doesn't come and

474
00:26:47,320 --> 00:26:49,560
Speaker 2: it's not clear that we're going to get that, then

475
00:26:49,760 --> 00:26:51,399
Speaker 2: that's the area of the market that I would be

476
00:26:51,520 --> 00:26:55,600
Speaker 2: worried about repricing. But for higher quality credit, I think

477
00:26:56,040 --> 00:26:59,560
Speaker 2: one to two rate cuts will be just fine, will

478
00:26:59,560 --> 00:27:03,640
Speaker 2: be enough. It doesn't change our sort of soft landing view,

479
00:27:03,640 --> 00:27:06,800
Speaker 2: but I do think that lower quality and there's certain

480
00:27:06,840 --> 00:27:09,240
Speaker 2: parts of the market that will really struggle. Got it

481
00:27:09,359 --> 00:27:09,919
Speaker 2: that's helpful.

482
00:27:10,359 --> 00:27:12,440
Speaker 1: Is there any way you think that you're particularly contrarian

483
00:27:12,720 --> 00:27:15,320
Speaker 1: or I mean you mentioned a few of consensus views,

484
00:27:15,359 --> 00:27:17,920
Speaker 1: but anything else you think you'd raise in that context

485
00:27:17,920 --> 00:27:19,720
Speaker 1: mage in terms.

486
00:27:19,520 --> 00:27:23,920
Speaker 2: Of out of consensus. So I think, you know, financials

487
00:27:24,080 --> 00:27:27,240
Speaker 2: were it seems like most of the market is overweight

488
00:27:27,600 --> 00:27:31,480
Speaker 2: financials in investment grade. We're a little bit more cautious,

489
00:27:31,480 --> 00:27:36,359
Speaker 2: so neutral to underweight in that space. And I think

490
00:27:36,680 --> 00:27:41,000
Speaker 2: the view has been a lot of financials guided their

491
00:27:41,000 --> 00:27:43,440
Speaker 2: net income margins in last time we got those that

492
00:27:43,600 --> 00:27:47,199
Speaker 2: guidance was January. That was based on the assumption of

493
00:27:47,320 --> 00:27:50,840
Speaker 2: six rate cuts. As we start to head into earnings

494
00:27:51,119 --> 00:27:54,280
Speaker 2: with banks kicking off on Friday, I think the big

495
00:27:54,280 --> 00:27:56,159
Speaker 2: banks could hold up fine, but a lot of the

496
00:27:56,160 --> 00:28:00,560
Speaker 2: regionals will likely have to lower their guidance based on

497
00:28:01,080 --> 00:28:03,919
Speaker 2: having higher deposit rates if we don't get those rate cuts.

498
00:28:03,960 --> 00:28:07,960
Speaker 2: And and so that's the spot that we're more cautious,

499
00:28:08,000 --> 00:28:10,960
Speaker 2: I think than consensus. And then also I think the

500
00:28:11,440 --> 00:28:14,040
Speaker 2: media overweight is something we do get a lot of

501
00:28:14,080 --> 00:28:19,359
Speaker 2: pushback on, but stand by and trying to think what

502
00:28:19,440 --> 00:28:23,720
Speaker 2: else I think it's it's it's difficult in the in

503
00:28:23,760 --> 00:28:28,359
Speaker 2: the recovery phase of the cycle because you know investors

504
00:28:28,400 --> 00:28:33,200
Speaker 2: are long, you have ninety percent are sorry. Our positioning

505
00:28:33,200 --> 00:28:37,840
Speaker 2: indicator for the market is in the ninetieth percentile, so

506
00:28:38,120 --> 00:28:42,080
Speaker 2: most investors are long. Everyone is clustered together. Consensus is there,

507
00:28:42,120 --> 00:28:47,000
Speaker 2: and it means that it means that the range of

508
00:28:47,040 --> 00:28:51,400
Speaker 2: outcomes is sort of narrow in what people expect, and

509
00:28:51,480 --> 00:28:53,680
Speaker 2: so to be out of consensus, you either have to

510
00:28:53,680 --> 00:28:56,520
Speaker 2: be kind of short credit or really long the triple

511
00:28:56,560 --> 00:28:59,280
Speaker 2: C segment, I think are the two ways to stand

512
00:28:59,280 --> 00:29:01,840
Speaker 2: out in a major way that and we're not in

513
00:29:01,880 --> 00:29:03,120
Speaker 2: either of those camps at this point.

514
00:29:03,440 --> 00:29:05,240
Speaker 1: I mean, that's what worries me most about this point

515
00:29:05,440 --> 00:29:09,160
Speaker 1: of the cycles, that everyone is so uniformly bullish, everyone's

516
00:29:09,200 --> 00:29:11,560
Speaker 1: so excited about credit, and that's when I start to

517
00:29:11,560 --> 00:29:13,440
Speaker 1: get concerned. But I'll ask you both, you know, what,

518
00:29:13,440 --> 00:29:15,600
Speaker 1: what are you both worried about? Mike's what's your on

519
00:29:15,640 --> 00:29:17,440
Speaker 1: your biggest concern list?

520
00:29:18,360 --> 00:29:21,320
Speaker 3: My my biggest concerns right now kind of the known

521
00:29:21,400 --> 00:29:25,440
Speaker 3: unknowns and unknown unknowns in healthcare. You know, I think

522
00:29:25,640 --> 00:29:30,200
Speaker 3: the pressure on United Health through the anti trust does

523
00:29:30,360 --> 00:29:32,360
Speaker 3: cast a shadow over M and A in the space.

524
00:29:32,600 --> 00:29:35,160
Speaker 3: Usually U n H is a buyer of not last resort,

525
00:29:35,240 --> 00:29:37,600
Speaker 3: but you know, they're usually a bitter in every big

526
00:29:37,760 --> 00:29:42,160
Speaker 3: healthcare transaction, So with them potentially sidelined, which they weren't

527
00:29:42,240 --> 00:29:45,280
Speaker 3: by the way they bought some Steward. If MPW and

528
00:29:45,280 --> 00:29:48,080
Speaker 3: Stewart is a high uel distressed sort of scenario, let's

529
00:29:48,080 --> 00:29:50,120
Speaker 3: go playing out right now. And United stepped in, so

530
00:29:50,200 --> 00:29:52,640
Speaker 3: they did do a deal. But my concern is with

531
00:29:52,760 --> 00:29:54,880
Speaker 3: healthcare if there's a slow down in M and A

532
00:29:54,960 --> 00:29:59,640
Speaker 3: and higher rates can can contrive that also regulatory you know,

533
00:29:59,760 --> 00:30:02,640
Speaker 3: they're cycles of regulatory pressure that come and go, and

534
00:30:02,680 --> 00:30:05,719
Speaker 3: I feel like we're entering another one at three three months,

535
00:30:05,760 --> 00:30:07,880
Speaker 3: you know, six months ahead of an election. I feel

536
00:30:07,880 --> 00:30:10,360
Speaker 3: like there could be some changes after that. There's not

537
00:30:10,360 --> 00:30:13,040
Speaker 3: gonna be a ton of regulatory change between now and then,

538
00:30:13,160 --> 00:30:14,920
Speaker 3: so after that, I'm concerned.

539
00:30:15,520 --> 00:30:16,840
Speaker 1: Megan, Yeah, I.

540
00:30:16,840 --> 00:30:19,200
Speaker 2: Think from from my end, aside from the Fed which

541
00:30:19,240 --> 00:30:23,040
Speaker 2: we've which we've discussed, and the election not being priced

542
00:30:23,080 --> 00:30:26,800
Speaker 2: in and sort of coming into credit investors' use, I

543
00:30:26,800 --> 00:30:32,600
Speaker 2: think something around the technicals and sort of upturning this

544
00:30:32,880 --> 00:30:36,400
Speaker 2: you know, endless bid for investment grade. It is something

545
00:30:36,840 --> 00:30:40,440
Speaker 2: I think about a lot. And last year we were

546
00:30:40,440 --> 00:30:44,360
Speaker 2: watching closely the Bank of Japan and moves around their

547
00:30:44,400 --> 00:30:48,280
Speaker 2: policy as they've as they shifted from sort of negative

548
00:30:48,280 --> 00:30:52,800
Speaker 2: interest rate policy to starting to tighten policy, Will some

549
00:30:52,880 --> 00:30:56,320
Speaker 2: of the Asia domiciled investors sort of rotate out of

550
00:30:56,400 --> 00:31:01,520
Speaker 2: investment grade? I think for now the answer is that

551
00:31:01,520 --> 00:31:04,880
Speaker 2: that is not happening, but it's a tail risk that

552
00:31:05,200 --> 00:31:08,880
Speaker 2: we're still watching, where if rates become high enough in Japan,

553
00:31:09,480 --> 00:31:12,480
Speaker 2: do you start to see some selling of investment grade

554
00:31:12,480 --> 00:31:17,360
Speaker 2: by those investors and rotating back into Jgb's is a

555
00:31:17,400 --> 00:31:20,520
Speaker 2: tail risk we've got our eye on, and.

556
00:31:20,520 --> 00:31:22,880
Speaker 1: On the bank's call that you're slightly more conscious than

557
00:31:22,920 --> 00:31:24,760
Speaker 1: the consensus. I mean, has that got anything to do

558
00:31:24,800 --> 00:31:25,840
Speaker 1: with commercial real estate?

559
00:31:26,560 --> 00:31:31,440
Speaker 2: So I think in an idiosyncratic I would say most

560
00:31:31,440 --> 00:31:34,160
Speaker 2: of our bank's call is related to sort of the

561
00:31:34,200 --> 00:31:37,680
Speaker 2: deposit deposit costs that regionals are going to have to pay.

562
00:31:38,120 --> 00:31:42,840
Speaker 2: But also on an idiosyncratic level, the commercial real estate

563
00:31:42,960 --> 00:31:46,760
Speaker 2: is still a concern and we're watching closely if that

564
00:31:46,880 --> 00:31:51,479
Speaker 2: expands out of offices into multifamily, and I think we'll

565
00:31:51,520 --> 00:31:55,440
Speaker 2: get a sense of that during this earning season as

566
00:31:55,760 --> 00:32:00,480
Speaker 2: we get an update on loan losses and lost patients

567
00:32:00,520 --> 00:32:03,160
Speaker 2: for the rest of the year. But most of the

568
00:32:03,920 --> 00:32:08,160
Speaker 2: bank's call is based on more of the macro environment.

569
00:32:08,320 --> 00:32:11,080
Speaker 2: But credit certainly is a concern, and we think we'll

570
00:32:11,120 --> 00:32:15,040
Speaker 2: weigh on the sector over time in the coming years.

571
00:32:15,440 --> 00:32:17,880
Speaker 1: And just to wrap things up, Megan, you've done some

572
00:32:17,920 --> 00:32:20,160
Speaker 1: fantastic work on the US election. I really enjoyed your

573
00:32:20,320 --> 00:32:22,000
Speaker 1: notes on that, and we all know how much fun

574
00:32:22,120 --> 00:32:27,000
Speaker 1: Biden Trump contests can be. What's the risk of serious

575
00:32:27,080 --> 00:32:31,240
Speaker 1: volatility that causes a big move you know that affects

576
00:32:31,760 --> 00:32:35,840
Speaker 1: anything in risk assets, and how would you hedge against that?

577
00:32:36,240 --> 00:32:40,040
Speaker 2: It's a great question. So I think that the biggest

578
00:32:40,120 --> 00:32:43,880
Speaker 2: risk we're watching is a red wave, and I think

579
00:32:43,920 --> 00:32:49,680
Speaker 2: that that could be the Trump a Trump victory, along

580
00:32:49,720 --> 00:32:54,440
Speaker 2: with a Republican House and Senate. And I think one

581
00:32:54,440 --> 00:32:58,400
Speaker 2: of the larger risks that we're watching is around tariffs,

582
00:32:58,640 --> 00:33:02,440
Speaker 2: and so I think is proposed to extreme measures around tariffs,

583
00:33:02,440 --> 00:33:05,680
Speaker 2: and although they're potentially unlikely to be to be fasked

584
00:33:05,720 --> 00:33:07,720
Speaker 2: in full, I think you do have to take them

585
00:33:07,760 --> 00:33:12,080
Speaker 2: seriously in terms of how they could impact the market

586
00:33:12,120 --> 00:33:16,920
Speaker 2: and companies. Somewhat against our base case assumption. I think

587
00:33:17,360 --> 00:33:21,200
Speaker 2: if this scenario did play out, you would see investment

588
00:33:21,200 --> 00:33:24,800
Speaker 2: grade actually more vulnerable than high yield if we were

589
00:33:24,840 --> 00:33:28,800
Speaker 2: to get real tariff policy path And the reason behind

590
00:33:28,840 --> 00:33:31,400
Speaker 2: that is investment grade issuers tend to have a lot

591
00:33:31,400 --> 00:33:35,400
Speaker 2: of a lot more exposure to foreign revenues, so if

592
00:33:35,400 --> 00:33:39,680
Speaker 2: you saw retalite totally tariffs, you'd see a bigger impact there.

593
00:33:39,720 --> 00:33:42,320
Speaker 2: So I think it is really a name by name risk,

594
00:33:42,400 --> 00:33:47,280
Speaker 2: but IG sectors like basics, media, retail in some tech

595
00:33:47,840 --> 00:33:51,800
Speaker 2: we see as facing slightly elevated risks in the in

596
00:33:51,840 --> 00:33:53,760
Speaker 2: the tariff scenario.

597
00:33:54,560 --> 00:33:57,280
Speaker 1: Great stuff, Megan rubsonhead of US Credit Strategy, yet bem

598
00:33:57,320 --> 00:33:58,840
Speaker 1: Perry boy, it's been a pleasure having you on the

599
00:33:58,840 --> 00:34:01,640
Speaker 1: Credit Edge. Many thanks, thank you for having me, and

600
00:34:01,720 --> 00:34:04,000
Speaker 1: to Mike Colin with Bloomberg Intelligence, thank you very much

601
00:34:04,040 --> 00:34:04,680
Speaker 1: for being on the show.

602
00:34:04,800 --> 00:34:05,040
Speaker 2: Thanks.

603
00:34:05,480 --> 00:34:08,600
Speaker 1: Check out all of Mike's excellent analysis on the Bloomberg Terminal,

604
00:34:08,600 --> 00:34:11,080
Speaker 1: and please do subscribe wherever you get your podcasts. We're

605
00:34:11,120 --> 00:34:14,960
Speaker 1: on Apple, Spotify and all other good podcast providers, including

606
00:34:14,960 --> 00:34:17,760
Speaker 1: the Bloomberg Terminal. Give us a review, tell your friends,

607
00:34:17,840 --> 00:34:21,760
Speaker 1: or email me directly at jcrombieight at Bloomberg dot net.

608
00:34:22,480 --> 00:34:24,560
Speaker 1: I'm James Cromby. It's been a pleasure having you join

609
00:34:24,640 --> 00:34:33,360
Speaker 1: us again next week on the Credit Edge.