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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Bond traders are boosting wagers that the Fed is about

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Speaker 2: to signal deeper interest rate cuts next year than the

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Speaker 2: market anticipates. Wall Street is preparing for a potential rate

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Speaker 2: pause in January. We're going to talk about those implications

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Speaker 2: on private markets and public credit markets with Marathon Asset

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Speaker 2: Management CEO Bruce Richards. You have still inflation above the

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Speaker 2: Fed's target, yet the market is expecting another cut. What

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Speaker 2: does that mean to you in terms of the trajectory

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Speaker 2: of inflation going into a bigger easing cycle ahead, even

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Speaker 2: if that easing cycle is less than initially expected.

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Speaker 3: Nasionally, great question is open with So forty three straight

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Speaker 3: months core CPI is above three percent, forty three straight months,

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Speaker 3: it's rather remarkable. We haven't seen a stretch like this

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Speaker 3: in a really long time. In the last three months.

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Speaker 3: Three point three percent is the number. The Fed poal

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Speaker 3: won't tell us this, but they've given up on two percent.

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Speaker 2: Huh.

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Speaker 3: They've given up untio because they know the numbers three

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Speaker 3: and they know tariffs are coming and so that's gonna

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Speaker 3: keep it firm. They know proeconomic policies are coming, less

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Speaker 3: regulation and so that's gonna keep it firm. They know

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Speaker 3: it's not going back down to two, they can't.

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Speaker 1: Tell us that.

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Speaker 3: So what they're gonna tell us in today's FED meeting

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Speaker 3: is they're cutting rates twenty five base points. And so

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Speaker 3: from September eighteenth to December eighteen, today, exactly three months,

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Speaker 3: they will have reduced rates one hundred base points, probably

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Speaker 3: a bit much, given growth is above three percent this

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Speaker 3: quarter GDP expected by the Fed, and given where inflation is,

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Speaker 3: and so I think we'll see the dot plot go

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Speaker 3: from four today where it was previously, to three Next year.

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Speaker 3: You have eight meetings, there's only going to be two

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Speaker 3: maybe three cuts next year, and so most of the

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Speaker 3: time they're gonna be in pause. And that's gonna keep

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Speaker 3: the markets anxious next year because most of the times

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Speaker 3: they won't won't be easing, and the markets really like.

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Speaker 2: The c and ees. So what does this mean in

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Speaker 2: terms of the trajectory of inflation next year? If you're

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Speaker 2: a fixing come investor, inflation as killer and so do

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Speaker 2: you expect that it's going to be a higher than

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Speaker 2: anticipated And do you feel, like some investors do, of

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Speaker 2: a seventy style repeat.

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Speaker 3: I believe that our star. You know, the real rate

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Speaker 3: of rates is going to be higher, the nominal rate's

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Speaker 3: going to be higher. You know, FED is lower rates

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Speaker 3: after today one hundred base points. You have to tell

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Speaker 3: your notes gone up seventy five basis points. And so

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Speaker 3: the markets, the bond markets aren't believing the fed's language

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Speaker 3: as it relates to inflation. They take what the FED

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Speaker 3: gives them in terms of the FED easing. Equity markets

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Speaker 3: love it, Debt markets love it. It's great for the economy.

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Speaker 3: But real rates are higher.

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Speaker 1: Well, I think that's so interesting. I mentioned you mentioned

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Speaker 1: of course, at two pm today we'll have had one

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Speaker 1: hundred basis points of easing. The long end has just

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Speaker 1: been you know, it's been shocking to see that move,

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Speaker 1: and you know, you talk through the reasoning and what

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Speaker 1: that could, why it could be happening, But what does

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Speaker 1: it mean for other asset classes? When does the equity

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Speaker 1: market wake up to the fact that the long end

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Speaker 1: is saying, hello, look at the trajectory of where things

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Speaker 1: are going.

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Speaker 3: The first thing it means is and we haven't seen

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Speaker 3: front rates come down fifty one hundred base points and

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Speaker 3: long rates go up by fifty to one hundred base points.

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Speaker 3: We haven't seen this dynamic since nineteen nineties. It's not

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Speaker 3: happened since then. And what happened then was the commune

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Speaker 3: is strong. That's why rates were going up. Yet the

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Speaker 3: FED was easing, and so what happened credit spreads went

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Speaker 3: to their tightest levels ever. This is investment grade, triple bes,

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Speaker 3: double bees, high yield, all to their tightest levels ever.

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Speaker 3: So what we're going to and it's stayed there for

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Speaker 3: a year and a half, So what we're going to see.

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Speaker 3: The first knock on is the commedy's doing well, earnings

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Speaker 3: are doing well, and so the corporate credit spreads are

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Speaker 3: going to tighten in. But yet you can earn a

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Speaker 3: seven percent in liquid markets in both you know, high

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Speaker 3: yield and other structured credit instruments that are non investment grade.

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Speaker 3: And so it's a good rate, but yet it's really

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Speaker 3: tight spread because the credit risk is being mitigated.

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Speaker 1: Now, well that's what's happening now, right. I mean, you

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Speaker 1: have credit spreads across the spectrum at very very tight levels,

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Speaker 1: and you put it all together, you could make a

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Speaker 1: case for backing up the truck on investment grade and

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Speaker 1: on junk.

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Speaker 3: Are you making that case we've been buying, and we'll

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Speaker 3: continue to buy, and I think that you'll have a

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Speaker 3: low volatility environment for those types of assets. And so

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Speaker 3: do you want to back up the truck now? I

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Speaker 3: think you want to be equal weight now. But I

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Speaker 3: think that within your kind of fixed income allocation, you

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Speaker 3: want a nice, healthy allocation because I think the risk

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Speaker 3: factors down, the risk factors being credit risk, and you're

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Speaker 3: getting paid an average yield despite what's a tight spread.

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Speaker 2: So how do you invest through all of this At

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Speaker 2: the end of the day, this is the setup. You

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Speaker 2: believe that the rate is higher. At the end of

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Speaker 2: the day, you are seeing that diversions that you haven't

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Speaker 2: seen since the nineties. What do you do with that?

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Speaker 3: Well, first of all, I think it starts Sonali with

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Speaker 3: the sixty to forty model, right, and the sixty to

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Speaker 3: forty model is alive, and well, it's how every investor,

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Speaker 3: whether you're a wealth investor in high net worth or

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Speaker 3: whether you're an institutional investor, should think about investing the

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Speaker 3: sixty to forty model. And so within the sixty best

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Speaker 3: equities and that's public equities, and that's how we think

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Speaker 3: about it traditionally, but public equities have just had back

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Speaker 3: to back years of twenty five percent plus gains. You've

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Speaker 3: only had that twice in the nineties and the nineteen fifties,

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Speaker 3: and so it's probably not going to be repeated next

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Speaker 3: year because we've brought forward some of this price action.

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Speaker 3: And so I think this is the time where you

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Speaker 3: want to say, Okay, equities will make a seven percent

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Speaker 3: return in our historical return, and we'll really want to

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Speaker 3: lean into private equity, and so think about public and

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Speaker 3: private equity for the sixty percent model. Is how you

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Speaker 3: want to think about that?

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Speaker 2: Wreas we only have time for one more question left here,

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Speaker 2: But you said this thing in the commercial break that

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Speaker 2: I really want to get to. You told us you

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Speaker 2: think basal three end game is dead. You think that

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Speaker 2: that has serious implications for credit markets. Your conversations with

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Speaker 2: the banks right now bring us inside of them and

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Speaker 2: what that says about.

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Speaker 3: Where this is. So I do believe that BASWL free

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Speaker 3: end game is dead because I believe part of the

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Speaker 3: regulations that we're going to see, the regulatory relief that

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Speaker 3: we're going to see, is going to also transform into

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Speaker 3: what's happening in the banking system. Rather than have these

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Speaker 3: onerous rules placed yet on the banks. I think the

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Speaker 3: conversations that Jamie Diamond and Donald Trump and you know,

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Speaker 3: and and other people in the administration incoming administration that

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Speaker 3: with the bankers has has will.

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Speaker 1: Lead to that.

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Speaker 3: And I know the FED and Vice Fray mc barr

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Speaker 3: has a lot to say about this, but I believe

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Speaker 3: it's dead. And so what that means, it means the

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Speaker 3: cet one ratios of the banks, which are pretty strong

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Speaker 3: and pretty large. It's going to unleash a lot of

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Speaker 3: ability for the banks to be able to lend. The

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Speaker 3: number one place To're going to lend to isle lend

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Speaker 3: across the board, but they'll lend loan on loan, and

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Speaker 3: so folks like Marathon will get really attractive financing from

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Speaker 3: the banking system. And that attractive financing in the form

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Speaker 3: of lower rates that we're going to be borrowing at,

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Speaker 3: will help drive our private credit returns. And so the

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Speaker 3: forty model getting back to sixty forty is not only

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Speaker 3: forty percent fixed income, but half of that should be

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Speaker 3: in private credit direct lending. We're seeing twice the deal

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Speaker 3: flow that we're seeing today now this past quarter than

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Speaker 3: we did in the whole last year. And asset based

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Speaker 3: lending is alive and well and taking off in a

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Speaker 3: big way. And having that financing available from the banks

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Speaker 3: is your big boon to all of us in the

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Speaker 3: private credit markets.

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Speaker 1: All right, Bruce come back in twenty twenty five, will

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Speaker 1: you definitely? All right? Happy holidays, holidays, it's great to

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Speaker 1: see you. We've really covered a lot, so look forward

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Speaker 1: to speaking again. That is Bruce Richards. He is the

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Speaker 1: CEO of Marathon