Speaker 1: Strap on your parachute. It's time for What Goes Up
Speaker 1: with Sarah Ponzick and Mike Reagan. Hello and welcome to
Speaker 1: What goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah Ponzek,
Speaker 1: reporter on the Cross Asset team, and I'm Mike Reagan,
Speaker 1: a senior editor at Bloomberg. This week on the show,
Speaker 1: for a second time this year, yield on junk bonds
Speaker 1: in the US hit a record low this month. Investment
Speaker 1: grade credit spreads are extremely narrow to this ahead of
Speaker 1: a FED meeting next week, which is possibly, dare I
Speaker 1: say it, the last big risk event of So what's
Speaker 1: the outlook for corporate debt as the year comes to
Speaker 1: a close. We'll discuss. Sorry you're really chinxing us there
Speaker 1: with the last capitalized, last capitalized risk event of the year. Wow. Wow,
Speaker 1: I really hope not. I'm sitting at a completely wooden
Speaker 1: desk right now, and you can just imagine me knocking
Speaker 1: on the bottom of it, because I do it was
Speaker 1: a risk. We'll all know who to blame. We'll all
Speaker 1: know who to blame. But it's good to have you back.
Speaker 1: Sarah was off last week. I was I was trolling
Speaker 1: you a little bit while you were out. It's good
Speaker 1: to have you back. I'll make you You'll have to
Speaker 1: go back and uh and listen to that. To be
Speaker 1: completely honest, I I didn't have a chance. Uh, But
Speaker 1: now I'm going to have to go back later this
Speaker 1: evening and listen in so that I can get right
Speaker 1: back at you. Mike. Not surprisingly, it was about your
Speaker 1: proficiency with the craziest things. I was telling Katie Gray
Speaker 1: felt don't sweat it. Sarah sets a low bar for
Speaker 1: this stuff. I would imagine that Katie brought it. She
Speaker 1: she did pretty good. We'll see how our guests this
Speaker 1: week's do well. Of course, finish the episode with our
Speaker 1: tradition the craziest things we saw in markets. But first
Speaker 1: before that, we're shifting gears a little bit and we
Speaker 1: want to talk about the credit markets, which, like all
Speaker 1: markets this year, what a wild sort of round trip
Speaker 1: for the credit markets, uh, with the pandemic and then
Speaker 1: some support from the Fed. So to help us wrap
Speaker 1: our head is around it all. We are very happy
Speaker 1: to have the head of North American investment grade credit
Speaker 1: at Aviva Investors. His name is Josh Lomire. Josh, welcome
Speaker 1: to the show. Yeah, really really grateful to be on
Speaker 1: thank you. Yeah. Yeah. So we're Sarah and I are
Speaker 1: more of the the dummies in the stock market, uh
Speaker 1: end of things. So bear with us if some of
Speaker 1: our questions are are credit markets one on one, but
Speaker 1: I think some of our listeners could could benefit from
Speaker 1: that as well, Josh. As Sara put it out, the
Speaker 1: spreads have have really obviously come back in a lot
Speaker 1: since the FED stepped up to the plate. You know,
Speaker 1: I was looking at just the triple A spreads, which
Speaker 1: I know is not the hugest basket of credit out there,
Speaker 1: but wow, talk about a dramatic year that the spreads
Speaker 1: went up to correct me if I'm wrong, something like
Speaker 1: three thirty or so basis points in March back down
Speaker 1: about one thirty and change. Now. So I'm gonna ask
Speaker 1: you a question that's probably unanswerable, but give us your
Speaker 1: best guests. Where would these spreads be? Do you think
Speaker 1: if the SAID hadn't done what it's doing. I think
Speaker 1: that's the great epiphany we've all had this year or
Speaker 1: through the experience was you know, a lot people like
Speaker 1: to talk about economic cycles in terms of years, and
Speaker 1: we've we've experienced an entire economic cycles worth of volatility
Speaker 1: within within less than twelve months. From a spread per perspective,
Speaker 1: you know, to your point, we peaked in March and
Speaker 1: then you know, three hundreds well into the three hundreds,
Speaker 1: and we're officially now through where we started the year.
Speaker 1: So you wouldn't have thought that we're still in the
Speaker 1: middle of a pandemic. You wouldn't have thought we're still
Speaker 1: recovering from a pandemic if you just look at valuations today.
Speaker 1: And so from our perspective, what the Fed did, because
Speaker 1: you know, clearly they haven't really actually bought too many
Speaker 1: corporate bonds. They've they've only spent about nine billion dollars
Speaker 1: actually in in corporate bond purchases in a market that's
Speaker 1: actually issued one point seven five trillion dollars this year.
Speaker 1: And so we we've broke and every record known to
Speaker 1: man or woman in supply this year. It's mind boggling.
Speaker 1: Talk about getting your nine billions worth. Huh, But yeah, exactly,
Speaker 1: I guess it's just the notion that they're there and
Speaker 1: they've got the checkbook at hand if they need to
Speaker 1: do more, that's exactly right. It's it's a psychological healing
Speaker 1: that that can't be underestimated the impact and value that
Speaker 1: it's provided markets. It's knowing that they're willing and able,
Speaker 1: and they do have a big check book. They were
Speaker 1: willing to write a lot more than nine billion. That
Speaker 1: just happened to be all they needed to do, which
Speaker 1: which I think is brilliant policy talk, a big game.
Speaker 1: Spend as little as you have to to calm down
Speaker 1: markets and make sure they're functioning. And that's what we got,
Speaker 1: and that's been you know, they've been extremely responsive and
Speaker 1: helpful in that regard. So let's stay pretty broad. I mean,
Speaker 1: you talk about how unbelievably quick this cycle has been,
Speaker 1: and I find it amazing just to think about the
Speaker 1: fact that we have record low junk on yield, we
Speaker 1: have stocks at record highs, and yet we're talking, or
Speaker 1: we hear strategists investors talking about the fact that we
Speaker 1: are at the beginning of a new economic cycle. Yet
Speaker 1: from these historic levels, from your perspective looking out into
Speaker 1: the future, and when you think about constructing your own portfolios,
Speaker 1: how much has the outlook for even been pulled forward
Speaker 1: into and how much more is there to look forward to?
Speaker 1: I mean, especially if you do believe in the fact
Speaker 1: that we are at the beginning of a new economic cycle,
Speaker 1: even seeing financial markets where they are today. Yeah, I
Speaker 1: think that the great challenge, I think for investors today
Speaker 1: is to sadly not get too bogged down into the fundamentals.
Speaker 1: What great advice could have painted some pretty draconian pictures
Speaker 1: earlier in the year, even in March, after the FED
Speaker 1: came out and said we were gonna support markets, you
Speaker 1: aren't really going to know the extent of the true
Speaker 1: damage in the corporate sector till after third quarter earnings,
Speaker 1: really in September. Certain, you know, because even in in June,
Speaker 1: you know, even the June thirty kind of earning season,
Speaker 1: you were kind of right in the middle of where
Speaker 1: the crisis was really ramping up. So the willingness and
Speaker 1: ability of the market to to price out this virus
Speaker 1: and price in a recovery has been spectacular. But but
Speaker 1: I guess in perfect time site which we're all blessed with,
Speaker 1: what we've realized is the magnitude and the amount of
Speaker 1: stimulus that was just thrown at this problem, to the
Speaker 1: extent that inaggregate wages were actually higher through the crisis.
Speaker 1: And when you include the stimulus checks and all other
Speaker 1: things and unemployment, that the economy actually got a boost
Speaker 1: from a wages perspective, and people were stuck at home
Speaker 1: and still able to spend some money. And so I
Speaker 1: think when you look forward at what's going to happen,
Speaker 1: and you have more confidence in a in a vaccine,
Speaker 1: and you have some level measure of confidence that there
Speaker 1: will be some agreement on stimulus continuing looking forward with
Speaker 1: potentially you know, Yelling coming into Treasury, working with Powell
Speaker 1: at the FETE, there's a lot of stars that are
Speaker 1: aligning to say, we're still gonna do, in any scenario
Speaker 1: everything we can to try to make sure we're we're
Speaker 1: stimulating slash supporting our way into this recovery in twenty one.
Speaker 1: And so valuations, to your point, have absolutely really started,
Speaker 1: you know, all year, have really priced in that that
Speaker 1: upside outcome for markets. And I think we're in a
Speaker 1: position now with you know, the things just mentioned that
Speaker 1: we're probably in a position where the market is going
Speaker 1: to keep right on pricing into that, uh, that positive
Speaker 1: outlook around the vaccine and and and things starting to
Speaker 1: open up, you know, in the let's call it second
Speaker 1: half of next year. So I feel like, that's what
Speaker 1: everybody's you know, that's what the momentum and the valuations
Speaker 1: are telling us today. You know, Josh, my eyes were
Speaker 1: popping when I was reading about some of the fund
Speaker 1: flows into one of the Viva's. One of the funds
Speaker 1: you manage, the Global Investment Grade Corporate Bond Fund. Ay,
Speaker 1: you am doubled over the course of twenty I team
Speaker 1: doubled again in the first half of this year to
Speaker 1: seven and change billion. I mean, wow, what is going
Speaker 1: on here? Is it just the proverbial hunt for yield
Speaker 1: around the world? And is it? I mean, the sovereign
Speaker 1: bond market has basically gone away in many respects for
Speaker 1: some investors with negative yields or you know, in the
Speaker 1: US tenure yields you know blow one percent? Is it
Speaker 1: all just that hunt for yield? And is it? Is
Speaker 1: the i G market kind of playing the role that
Speaker 1: the sovereign bond market used to play for a lot
Speaker 1: of investors. Do you think you know, we talk a
Speaker 1: lot about the sixty Are you guys taking a bigger
Speaker 1: share of that forty? Do you think? Yeah? I like
Speaker 1: that question. It's really important, and it's when we think
Speaker 1: about a lot and I hope you're right. I hope
Speaker 1: we are taking a bigger chunk of that forty and
Speaker 1: kind of would be great. And so yeah, from an
Speaker 1: a u M growth perspective, I think there's some video
Speaker 1: syncresies we're doing as a manager in the market that
Speaker 1: are that are resonating with clients. But from a broader
Speaker 1: market demand perspective, you know, when you think about the crisis,
Speaker 1: what we saw a lot of if clients had a
Speaker 1: tactical asset allocation where they can where they can quickly
Speaker 1: move from treasuries to investment grade bonds, they did that
Speaker 1: or many people did do that, particularly because you know,
Speaker 1: rates rock bottomed at the same time spreads blue out.
Speaker 1: If you believed in the fedback stop, in the potential
Speaker 1: for for spreads to recover, that was a really nice
Speaker 1: trade for you at the time. And now that spreads
Speaker 1: are kind of getting back to the levels we're at today,
Speaker 1: the debate is now, you know, it's still it's still
Speaker 1: the same debate. We're not getting anything from our risk
Speaker 1: free rate, We're not getting any yield from government bonds,
Speaker 1: and so right now, you know, if you think about
Speaker 1: the Royal government bonds place, and this has been the
Speaker 1: great benefit of sixty forty over the years, it's the
Speaker 1: ability for government bonds to rally when other risk assets
Speaker 1: are selling off. And there's still you know, a component
Speaker 1: of that even at the levels were at for the
Speaker 1: thirty year asury. Today you can still rally basis points
Speaker 1: in an extreme scenario, which is a real positive outcome
Speaker 1: for those bonds. You're still getting a little bit of that,
Speaker 1: but you're not getting any carry and so really all
Speaker 1: you're getting for the most part is a little bit
Speaker 1: of downside protection and liquidity for a big part of
Speaker 1: the market. If if you're a foundation or an endowment
Speaker 1: and you have calls on your liquidity, you still have
Speaker 1: to have a big slug of your you know, your
Speaker 1: asset allocation in the most liquid assets on the market.
Speaker 1: And so I think what a lot of people are
Speaker 1: struggling with now, is am I content owning almost zero
Speaker 1: just to preserve that liquidity? And how much can I
Speaker 1: push into these other asset classes to generate something of
Speaker 1: a return. I want to go ahead and read one
Speaker 1: of the quotes from the notes that or sent over
Speaker 1: to us um from you before we actually started discussing
Speaker 1: on the episode. So you said subdued global growth, continued
Speaker 1: government and central bank support, and the relative safety of
Speaker 1: investment grade credit as an asset class may put it
Speaker 1: in a sweet spot in and I also imagine some
Speaker 1: of these factors that we've been discussing contribute to that
Speaker 1: quote unquote sweet spot as well. But really illustrate that
Speaker 1: for us, what does a sweet spot and investment grade
Speaker 1: credit these days actually even look like this? Yeah, the
Speaker 1: sweet spot to me is really an environment where companies
Speaker 1: are incredibly motivated still to repair their balance sheet. So,
Speaker 1: you know a lot of companies weren't infected nearly as
Speaker 1: much as you know, the sectors in the in the
Speaker 1: in the companies at the epicenter of the coronavirus, things
Speaker 1: like you know, airlines and hotels and in various aspects
Speaker 1: of retail. You know, they're they're still fighting, you know,
Speaker 1: fighting to survive in this type of environment. Others actor's
Speaker 1: might have taken a little bit of a hit, you know,
Speaker 1: in their ebit down, they're gonna you know, bounce right
Speaker 1: back up with with the recovery and so. But everybody
Speaker 1: took down lots of debt to build a cash hoard
Speaker 1: in that in that environment, and so the great debate
Speaker 1: of twenty one is gonna be what do they do
Speaker 1: with that cash? Are they going to pay it back?
Speaker 1: Are they going to give it to shareholders? Are they
Speaker 1: going to do him and A? Are they gonna are
Speaker 1: they just gonna buy back debt? And so we're in
Speaker 1: this environment where it's certainly in everyone's best in your
Speaker 1: interest to stabilize your leverage, stabilize your ratings, and and
Speaker 1: behave yourself. So that that's a positive. You know, even
Speaker 1: though the spreads look incredibly anemic right now, right where
Speaker 1: we're anywhere between let's call it the low one hundreds
Speaker 1: on spreads for investment grade, well you're talking about a
Speaker 1: base of you know, a treasury market that's you know,
Speaker 1: tenure treasuries at closet is only at one percent. And
Speaker 1: so if you're at one thirty on spreads on the
Speaker 1: index level and you're at one percent, you're still getting
Speaker 1: you know, your yield on a corporate bond is you know,
Speaker 1: in some instance as close to of your total yield
Speaker 1: is the corporate spread. And so to be in that
Speaker 1: sweet spot when you think about investment grade still being
Speaker 1: an asset class with very low default rates and still
Speaker 1: quite a bit of liquidity in the market, particularly with
Speaker 1: FED backing to keep the functioning in the liquidity of
Speaker 1: the market. Then you can see people say, look, I'm
Speaker 1: willing to take some money out of treasury is I'm
Speaker 1: willing to put more of my allocation into corporate bonds.
Speaker 1: Because of these factors, you're more than doubling your yield,
Speaker 1: You're still have a very low probability of default, and
Speaker 1: you're you're getting a much higher you know, spread for
Speaker 1: your for your money. And you're also in an asset
Speaker 1: class that's still pretty darn liquid and also uh low
Speaker 1: probability of default. And so that's what I refer to
Speaker 1: as kind of the the Goldilocks scenario for corporate bonds,
Speaker 1: and and that and that behavior, that balance sheet behavior
Speaker 1: is a big part of that. So how low could
Speaker 1: spreads go? Do you do you think? I mean, is
Speaker 1: it possible? So think of corporate bonds yielding a negative
Speaker 1: rate of inflation, a negative real real rate or is that?
Speaker 1: Is that a crazy notion? And at this point in
Speaker 1: the economic cycle, philosophically and theoretically, it's a crazy notion
Speaker 1: that may become a reality. Uh it's times yeah, um,
Speaker 1: And so yeah, did you jump to the crazy question party? Alright,
Speaker 1: it's kind of specially, it's kind of you know, I
Speaker 1: think we can't. We can keep going from here. And
Speaker 1: and this is where I make that common on fundamentals
Speaker 1: versus technicals. If if you focus on the fundamentals, we
Speaker 1: are recovering. The world's not ending, but we probably shouldn't
Speaker 1: be at these levels based on where we're at from
Speaker 1: an economic recovery perspective. But when we go back, there's
Speaker 1: two points I want to make on on why the
Speaker 1: market has as a significant ability to continue to grind
Speaker 1: in from here is because we had one point seven
Speaker 1: five trillion of new issues last year. That number is
Speaker 1: definitely going to go down. Not only did we have
Speaker 1: one point seven five chillion of new money coming in,
Speaker 1: we actually rallied through twenty nineteen levels with one point
Speaker 1: seven five trillion a new supply. So when you have
Speaker 1: a market, yeah, exact, mind boggling. And sir, you can't
Speaker 1: blame the Robin Hood kids for this either. I don't think.
Speaker 1: I don't think they're training. I don't know. I know
Speaker 1: a few of them, and they haven't talked to me
Speaker 1: about pedal and state. Um, so yeah, go ahead. Well,
Speaker 1: so there's always a risk, right, And uh, one thing
Speaker 1: you mentioned before that I found interesting is M and A.
Speaker 1: You know, and I assume there must be a bottleneck
Speaker 1: of M and A that hasn't been done this year
Speaker 1: because of you know what a crazy year it is.
Speaker 1: Do you see the potential for a big M and
Speaker 1: A boom and you know presumably that that requires company
Speaker 1: used to lever up and sort of have a little
Speaker 1: bit of deterioration and credit quality and maybe you'll see
Speaker 1: some spread widening. Then is that is that a real risk?
Speaker 1: You think it's a risk. I wouldn't call it the
Speaker 1: biggest risk because you know, what we do know is
Speaker 1: a lot of companies are flush with more cash than
Speaker 1: they need, and so there has to be a temptation
Speaker 1: to look at all the different means with which they
Speaker 1: can deploy that. And so I think you're going to
Speaker 1: continue to see what we have seen where if you
Speaker 1: think about going into the crisis, you know, there were
Speaker 1: a lot of companies really you know, that was the
Speaker 1: that was the m oh they they needed to do
Speaker 1: M and A to grow And that probably hasn't changed, right,
Speaker 1: And so if anything, it might give companies an opportunity
Speaker 1: because of the crisis to pick off firms slower to
Speaker 1: recovery steel market share when firms are struggling. But you know,
Speaker 1: the the rally and equity valuation certainly has taken some
Speaker 1: of that off the table where they're probably not getting,
Speaker 1: you know, a sweet deal today based on the recovery
Speaker 1: and value suations at the equity side. But if you're
Speaker 1: flushed with cash and you've already got it, you've already
Speaker 1: issued the debt, you've got one variable out of the equation,
Speaker 1: you've already locked in very cheap financing. So him and
Speaker 1: A may very well well be a great place to
Speaker 1: deploy that capital. I'm curious, you know, in the equity market,
Speaker 1: the idea there's been a few narratives around the election,
Speaker 1: and I got admit, it's a shifting narrative and and uh,
Speaker 1: you know, for a while there looked like everyone was
Speaker 1: excited about a blue wave. Now everyone's excited about the
Speaker 1: idea of a split government. I think that the moral
Speaker 1: of the story is people are excited about equities regardless,
Speaker 1: uh what's going on in Washington. But but how's it
Speaker 1: looked too from a as the perspective of a credit
Speaker 1: market investor, Is this divided government, this gridlock in Washington
Speaker 1: a good scenario? You know, it's to remove some of
Speaker 1: the regulation risks for for certain industries that sort of thing.
Speaker 1: Or where how are you you know, are you worried
Speaker 1: about the election and and the composition of the Congress
Speaker 1: next year at all? Uh? Thinking about it at all
Speaker 1: when it comes to credit. Yeah, I mean, if I
Speaker 1: think about it, I would say a split government is
Speaker 1: probably the most um will create the least volatility for
Speaker 1: from certainly from a regulatory perspective. And if you think
Speaker 1: about you know, what's driven euphori and risk assets, it's
Speaker 1: tax cuts, it's you know, less regulation, it's it's all
Speaker 1: these things that are no longer at risk of being
Speaker 1: materially disrupted in the short term. And so I think
Speaker 1: on the margin, that's a very helpful thing. Uh. And
Speaker 1: also I think you're also what we're seeing now is
Speaker 1: you're also gonna gonna hopefully get to a point where
Speaker 1: cooler heads prevail and people do come together in a
Speaker 1: bipartisan way and and work on the things that really
Speaker 1: matter and get some sort of stimulus package out, get
Speaker 1: some sort of keep moving the things that are really
Speaker 1: going to help the economy. And I've always said, even
Speaker 1: leading into the elections, you know what happens to the
Speaker 1: Blue Way, what happens with the you know this or that?
Speaker 1: And I said, look, the one thing we have going
Speaker 1: for us is that in any scenario, it almost doesn't
Speaker 1: matter in the very very short term, as long as
Speaker 1: we know, no matter what the administration is, the sole
Speaker 1: focus over the next six months is going to be
Speaker 1: getting us into this recovery. And I think that's still
Speaker 1: the case today. Last question before we get two crazy things,
Speaker 1: because I know Mike is itching over there at his
Speaker 1: home in New Jersey, but I feel like we cannot
Speaker 1: have a conversation about financial markets these days without mentioning stimulus.
Speaker 1: And we've had this unbelievable monetary backstop, We've had this
Speaker 1: unbelievable fiscal backstop, and now once again we have Capitol
Speaker 1: Hill and conversation about get another package? Will will it
Speaker 1: not get past what for it? Maybe? But even with
Speaker 1: all this money flowing through the system, it doesn't completely
Speaker 1: erase bankruptcy risk. So we just want to get a
Speaker 1: sense of how you still think about bankruptcy risk and
Speaker 1: if there are certain areas that you would completely steer
Speaker 1: clear of if there are areas that you like right
Speaker 1: now and you think companies are going to be able
Speaker 1: to go ahead and really get through this recovery even
Speaker 1: stronger on the other side eventually. Yeah, that's a great
Speaker 1: question because you know this this gets into what are
Speaker 1: you actually doing with your money? Right We're talking a
Speaker 1: lot about you know, momentum and technicals and stimulus impacting demand,
Speaker 1: but we always have to stay focused on fundamentals that
Speaker 1: they may not be driving markets for periods small, short
Speaker 1: periods of time, um, but they will always you know,
Speaker 1: get the last laugh, so to speak. And so from
Speaker 1: a fundamental perspective, you know what I think we we
Speaker 1: caution people on and this this came through with with
Speaker 1: you know, the things the Fed and the Treasury did
Speaker 1: with the corporate bond buying problem program is don't mistake
Speaker 1: the government's willingness to to roll maturities, extend debt, help
Speaker 1: you refinance for bailing companies out, because companies can and
Speaker 1: will still fail if they are bad businesses with very
Speaker 1: bleak outlooks, and so defaulting and bankruptcies is still a
Speaker 1: very real risk, particularly in sectors most impacted and by
Speaker 1: the coronavirus and facing a much uh steeper hill to
Speaker 1: climb to get their revenues back up to to kind
Speaker 1: of let's call it pre pandemic level. So um, the
Speaker 1: way we think about it is you should never lose
Speaker 1: sight of following the cash flows. So you know, some
Speaker 1: people are going to be willing to to buy a
Speaker 1: company just because the market was willing to extend them debt.
Speaker 1: That's a bad idea in some instances unless you really
Speaker 1: believe cash flows can ramp quite quickly on our recovery.
Speaker 1: So when we build a portfolio, and when we think
Speaker 1: about allocating risk, we look at the entire landscape and
Speaker 1: say where we actually getting paid to take risk today?
Speaker 1: If that, you know, plenty of things are rich, not
Speaker 1: very many things are cheap. But let's just set the
Speaker 1: entire credit market on on a on a level playing
Speaker 1: field and say relative to each other, where that where
Speaker 1: is their value? And I'm going to talk a little
Speaker 1: bit about how yield too in this answer. And so
Speaker 1: within the investment grade market, we think the most expensive
Speaker 1: part is triple B risk inside of five years, and
Speaker 1: that's because of the FED buying program. You know, if
Speaker 1: everybody thinks everything inside of five years is safe and
Speaker 1: can get built out. That's probably caused the inside of
Speaker 1: five year triple be part of the market to price
Speaker 1: extremely rich. So for that part of the investment grade market,
Speaker 1: we're actually buying a little bit of high quality short
Speaker 1: duration high yield. You're getting probably uh let's call it
Speaker 1: an extra two d basis points and or more of
Speaker 1: of spread to go into high quality, short duration high
Speaker 1: yield when when historically, fundamentally that relationship should probably be
Speaker 1: a lot closer to a hundred. So you're probably getting
Speaker 1: an extra hunter basis points of additional spread for the
Speaker 1: fundamental risk to buy some short duration high yield in
Speaker 1: the front end. Now, when you think about the other
Speaker 1: places to deploy some some risk in the investment grade market,
Speaker 1: because the zero to five year has been so bit
Speaker 1: up and so rich, now we like to push some
Speaker 1: of our triple b risk out to six, seven and
Speaker 1: eight years because you're still getting a much steeper spread.
Speaker 1: It hasn't bit up like been bit up like the
Speaker 1: five year, So you're getting a higher carry and a
Speaker 1: higher spread. And over the next eighteen to twenty four
Speaker 1: months you're going to become a five year bond and
Speaker 1: you're going to benefit from that price appreciation. So that
Speaker 1: part of the market, the middle of the belly of
Speaker 1: the curve for triple b's, is where we like more
Speaker 1: of our investment grade risk. And we still like owning
Speaker 1: more defensive positions in the long end of the curve
Speaker 1: because spreads are so tight, you're not getting a lot
Speaker 1: of good let's call it risk adjusted carry to own duration.
Speaker 1: It doesn't take a big move and spreads or interest
Speaker 1: rates to eat up all your carry in the longer part.
Speaker 1: So we like more defensive positions in the long end.
Speaker 1: So structurally that allocation makes sense to us. From a
Speaker 1: sector perspective, you're not going to be able to outperform
Speaker 1: from here these starting point levels if the market continues
Speaker 1: to rally by just owning all the safe stuff. So
Speaker 1: you gotta start to cherry pick where do I actually
Speaker 1: think I'm getting paid to take some beta risk, some
Speaker 1: higher beta risk. And so if you think about it,
Speaker 1: I like some defensive, higher quality corporates in the long end.
Speaker 1: But if I talk about sectors now, I still think
Speaker 1: it makes a lot of sense to own some consensus
Speaker 1: risk in healthcare, in telecom, and in banks, because they're
Speaker 1: just in a better place cash flow capital capitalization perspective,
Speaker 1: they churn off big money and they have interest in
Speaker 1: behaving from a balance sheet perspective, and you're still getting
Speaker 1: reasonable spreads in those sectors. So, but if you're gonna
Speaker 1: start to take some let's call it coronavirus beta risk,
Speaker 1: you've got hotels, you've got airlines, you've got energy, you've
Speaker 1: got retail. There's a lot to choose from it, and
Speaker 1: add and out of that list, we choose to take
Speaker 1: our we're choosing to take more of our risky beta
Speaker 1: risk in the energy sector. And so to end on,
Speaker 1: I'll say, why why do we like energy today from
Speaker 1: a higher beta perspective, Because that's a bit non consensus,
Speaker 1: although it's starting to become a little bit more consensus.
Speaker 1: Is because of all the sectors most impacted by economic
Speaker 1: growth in the coronavirus, energy is one of the few
Speaker 1: that actually has an oligopoly called OPEC plus working very
Speaker 1: hard and together to set a floor for oil prices.
Speaker 1: So if you've got a stabilizing force to really help
Speaker 1: keep your base commodity at a level where you're not
Speaker 1: hemorrhaging cash flows, that's incredibly helpful to buy you time
Speaker 1: for recovery. And I think after the last modity crisis
Speaker 1: we've had, coupled in with the coronavirus um crisis, you've
Speaker 1: seen an industry that's you know, been been slapped on
Speaker 1: the risk a few times now to say, you know,
Speaker 1: you've now officially have to learn how to live within
Speaker 1: your means and behave in a way that's very protective
Speaker 1: of your balance sheet. That that's that's really not spending
Speaker 1: on exploration and production unless you have a very clear
Speaker 1: line of sight that you're going to be making money
Speaker 1: off of it. And you're seeing a lot of really
Speaker 1: strong consolidation of these businesses where they're where they're where
Speaker 1: they're doing everything they can to clear the runway from
Speaker 1: a maturity perspective and and and bolster their balance sheets.
Speaker 1: And so you've got genuine interest, You've got coil prices
Speaker 1: that seemingly are stable because of the opequ plus UH
Speaker 1: supply containment, and those things are helping us get more
Speaker 1: comfortable with that sector having where you don't need a massive,
Speaker 1: meaningful economic recovery for that sector to continue to heal
Speaker 1: in mid stream scenario that we like within there as well,
Speaker 1: um just because it's always been more insulated from oil prices.
Speaker 1: So instead of the FED put, we've got the OPAC,
Speaker 1: even though it didn't that one time oil prices turned out. Yeah,
Speaker 1: I mean yeah, And I would say, you know, plus
Speaker 1: is a is a you know, as a large group
Speaker 1: of personalities that we can't guarantee will will continue to
Speaker 1: to to to all agree, uh, you know, at all times.
Speaker 1: But I think that it's in everyone's bested interest to
Speaker 1: support that the market and do what's best for the
Speaker 1: industry as a whole. And we're seeing that alignment, and
Speaker 1: you're seeing it in prices, you know, uh, you know,
Speaker 1: gradually getting up from forty to forty five, you know,
Speaker 1: even approaching fifty to you know, before we've even hit
Speaker 1: the true economic growth. It's interesting. So it's it sounds
Speaker 1: like almost a similar which I guess should not be
Speaker 1: that surprising, but a similar impulse as the sort of
Speaker 1: growth to value or mega cap to small cap rotation
Speaker 1: in the equity markets. Have you seen that sort of
Speaker 1: put into effect already has has that rotation? Uh, you know,
Speaker 1: is it too late to get in on That's that's
Speaker 1: sort of the sector cyclical rotation in the credit markets. Yeah,
Speaker 1: I know, I don't think so, because if you look
Speaker 1: at spreads and you look at relationships of spreads, you
Speaker 1: know they're there. You know, these sectors most affected by
Speaker 1: coronavirus certainly haven't recovered to pre pandemic levels like so
Speaker 1: many other sectors have, So so there's still some upside there.
Speaker 1: And I guess the other point is what we think
Speaker 1: about when we're managing our credit strategies is we never
Speaker 1: try to guess or time the market, and so we're
Speaker 1: always rotating our beta and rotating our sectors so that
Speaker 1: we're we always have the same amount of alatility and
Speaker 1: our portfolios at all times. It's just where are we
Speaker 1: allocating our beta risk and where are we allocating our
Speaker 1: defensive positions, so that we're doing that delicate tango of
Speaker 1: always making sure we're in the places we feel most
Speaker 1: compensated to take risk and moving out of the ones
Speaker 1: that that are transitioning. And so we're not we're certainly
Speaker 1: not stomping on the gas here saying we need to
Speaker 1: have a long risk position at the portfolio level, but
Speaker 1: we are transitioning some of this let's call it sleep
Speaker 1: well at night, you know, less impacted risk into a
Speaker 1: few more of the more exposed sectors, and and and
Speaker 1: and maybe playing a little bit deep more defense on
Speaker 1: the side as well to kind of help balance that out.
Speaker 1: The delicate tango. I like, that's a nice turn of phrase.
Speaker 1: I'm gonna be stealing that one. Josh'sah, that's good. And
Speaker 1: I think that is our que Sarah for the delicate,
Speaker 1: delicate tango of crazy things, the delicate tango into the crazy. Yeah,
Speaker 1: stand clear of the craziest things we sawn markets this week.
Speaker 1: I'm excited, Sarah, because we have so many offerings from
Speaker 1: listeners this week that it's a lot of fun. We
Speaker 1: we love to get offering, so I apologies if we
Speaker 1: don't get to all of them. I think, um, we
Speaker 1: were a bit overloaded with our crazy thing uh suggestions
Speaker 1: this week, but not a good one. So let's let's
Speaker 1: try to get through him quickly here and give shout
Speaker 1: out to everyone who's been listening and offering their crazy things.
Speaker 1: They why don't you get us started, Sarah with the listeners,
Speaker 1: all right, I'll get us started. And also just a reminder,
Speaker 1: we also have our Bloomberg Podcasts hotline, so if you
Speaker 1: want to give us a call, leave us a message.
Speaker 1: We can even play it on the show. Here. It
Speaker 1: from you yourself, and that number is six ft six
Speaker 1: three to four three for nine zero. Alright, So I'm
Speaker 1: just gonna run through a couple of these. I got
Speaker 1: a direct message on Twitter from a Comma Underscore one
Speaker 1: on one and she sent me a story from Bloomberg. UM,
Speaker 1: and the headline of that was oligarch son lost fifty
Speaker 1: million dollars treating at his university. And I'll just read
Speaker 1: you the top of this story. The son of a
Speaker 1: Russian oligarch said fifty million dollars in funds from his
Speaker 1: father didn't disappear because he was hiding the assets from
Speaker 1: his mother. The truth, he said was that he lost
Speaker 1: the money on quote risky trades while he was at university. UM.
Speaker 1: So there you go. It's not just your Robin Hood traders,
Speaker 1: or maybe he was using Robin and who knows, but
Speaker 1: but pretty unbelievable fifty million dollars. I gotta know what
Speaker 1: he was trading. How do you lose fifty Wow, that's
Speaker 1: that's I'd love to know what he was in on.
Speaker 1: I'll have to I'll have to get his contact information
Speaker 1: and reach out. That'll be the next saga. Alright, so
Speaker 1: moving on to the next one. This comes from at
Speaker 1: Hindsight Cap l lp uh. He says, here's a crazy
Speaker 1: thing that happened today, and this is wild. Micro Strategy
Speaker 1: issued a four hundred million dollar convertible bond to buy bitcoin.
Speaker 1: The convertible was oversubscribed. They're adding to their seven d
Speaker 1: eighty million dollar holding in an attempt to become a
Speaker 1: listed bitcoin vehicle. As if there weren't enough crazy things
Speaker 1: into love that. I love that one, Hindsight. I think
Speaker 1: that's that guy must be a fan of our own.
Speaker 1: John Authors, who runs an imaginary hedge fund called Hindsight
Speaker 1: Capital where he reads a year end uh column every
Speaker 1: every year looking. I guess it's, you know, to show
Speaker 1: how well you would do if if you could invest
Speaker 1: with Hindsight at the end of the year. Are you
Speaker 1: a buyer of a bond that's being issued to buy bitcoin?
Speaker 1: I think I know the answer is that investment. Yeah,
Speaker 1: I mean, I think I think we all know by now.
Speaker 1: Bond investors are paid to be paranoid, So pretty pretty crazy.
Speaker 1: And then um one last one at Reality Hurts tweeted
Speaker 1: at Mike and I and he said um g l
Speaker 1: s I, which is um Grandwunch Life Sciences UM Internet
Speaker 1: action is a solid hashtag craziest thing candidate. And I'll
Speaker 1: just to give you a sense of what happened the
Speaker 1: middle of this week Granwich Life Sciences sort. This was
Speaker 1: on Wednesday, UM and the way that Bloomberg puts it
Speaker 1: as day traders leap frogged each other to get in
Speaker 1: on the microcap drug developer socent gain in a single day.
Speaker 1: I'll take it. I'll take it all right. I got
Speaker 1: a good one over direct message on Twitter from Sam
Speaker 1: Kidston and let me get the chain of custody of
Speaker 1: this crazy thing correct. It was actually an Andrea Felsted
Speaker 1: column for Bloomberg Opinion that was tweeted by Adam Tuesday
Speaker 1: and said to me by Sam Kiston. I want to
Speaker 1: make sure everyone gets the proper credit or blame for
Speaker 1: this one. And this is a good one, Sarah, because
Speaker 1: it's got everything I love about a crazy thing. It's
Speaker 1: an alternative asset and it allows us to play a little,
Speaker 1: a little game of prices, right. And the column is
Speaker 1: about how popular dogs have gotten in the UK during
Speaker 1: during the quarantine. And I can totally sympathize anyone who's
Speaker 1: quarantining or locked down without a dog. I don't know
Speaker 1: what you're doing. I don't know how your pastners. You know,
Speaker 1: I can sympathize. I'm one of the dog buyers right right,
Speaker 1: you were, you were this crazy thing for Soonify. So
Speaker 1: dog prices have have really shot up in the UK,
Speaker 1: especially for for pure breads. So here's the prices, right,
Speaker 1: and you're you're on the hook for this too, Josh.
Speaker 1: How much do you think pure bred dog prices are
Speaker 1: up in the UK? Anyone? Sorry? How much do you think?
Speaker 1: I'm going to go ahead and guess they've doubled? So
Speaker 1: I'll say game, all right, I'm gonna keep my poker
Speaker 1: face on, Josh. What do you think you're taking the
Speaker 1: over under on that? I'm going over right, I'm gonna
Speaker 1: guess triple triple wow. Wow. I might sell you my dog, Josh,
Speaker 1: if I didn't say I was Mike. Mike's talking about
Speaker 1: quarantining with the dog. Clearly there's some day I don't
Speaker 1: just days where i'd sell him at a at a
Speaker 1: deep discount. We'll tell you that I've currently paid my
Speaker 1: oldest daughter to take him out for a walk so
Speaker 1: he doesn't interrupt the podcast. So that that tells you that, yeah,
Speaker 1: I'm gong one dogs. I said, maybe maybe I'm a
Speaker 1: seller at the right dog cats. It's a so I
Speaker 1: don't know acculding to the prices right laws? Who who?
Speaker 1: Who triple? John was? But some dogs have tripled in
Speaker 1: price though, um Cocker spaniels up hunter and seven percent,
Speaker 1: Jack Russell terriers up a border colleges a hundred nights.
Speaker 1: So you're right. So a lot of dogs have tripled
Speaker 1: in value this year. I don't know what the resell
Speaker 1: value is. But what are your what are your? I
Speaker 1: guess and if we can invest in in uh cocker spaniels,
Speaker 1: uh see if we can get an ETF that invests
Speaker 1: in cocker spaniels are a convertible or a convertible bond.
Speaker 1: It converts bitcoin when you go cous. The port of
Speaker 1: the columns is a lot of these dogs are out
Speaker 1: performing big poins. No, it's not. So that's a good one.
Speaker 1: That's that's a good crazy thing. Courtesy of Sam Kidston
Speaker 1: on Twitter. But Josh, how about you have you seen
Speaker 1: anything crazy this week? You know? My crazy thing? And
Speaker 1: I was looking this up as we uh. You know,
Speaker 1: as I was preparing for this conversation, and and I think,
Speaker 1: I'm still this is nothing incredibly new, but I'm still
Speaker 1: baffled by it. Um Why people don't just put money
Speaker 1: under their mattress, I don't know. But we have seventeen
Speaker 1: point eight five chillion dollars of negative yielding debt globally
Speaker 1: as we speak, seventeen point eight five chillion. It's hovering
Speaker 1: very near thirty percent of the global Egg Index. And
Speaker 1: and so from my perspective, you know, structurally that doesn't
Speaker 1: make sense. Structurally that doesn't work. You're not you're punishing,
Speaker 1: even though you're trying to bail out economies, you're punishing
Speaker 1: savers with these kinds of raids. And then the other
Speaker 1: thing I looked up because clearly a lot of that's
Speaker 1: in the in the developed markets, in in Western Europe,
Speaker 1: and I and I was like, oh, remember remember the
Speaker 1: sovereign crisis, uh in Europe a few years ago. Well now,
Speaker 1: low and behold old places like Spain, Italy, Portugal and
Speaker 1: even Greece are now having negative yielding debt out to
Speaker 1: five years. Greece has negative yilding doubt out to five years.
Speaker 1: So that's a pretty crazy thing from it. It's mind boggling.
Speaker 1: YEA patrol ten went negative this week for the first time.
Speaker 1: I mean, jush. The thing to me though, was how
Speaker 1: do you ever reverse that? How did the central banks
Speaker 1: unwind this? I don't see how it's possible. Yeah, I think, uh,
Speaker 1: I think the only way you you eventually unwind it.
Speaker 1: And thankfully a lot of this is you know, government's
Speaker 1: queueing que eating their own debt, so that's helpful. So
Speaker 1: from some extent you can just let it roll up
Speaker 1: and pay back. But you're right like that. That's one
Speaker 1: of the counter arguments to the what we hear about.
Speaker 1: You know, the potential for inflation is uh. You know,
Speaker 1: if you look at Europe, you look at Japan over
Speaker 1: the last number of decades um, you know, you you
Speaker 1: can't have of inflation without growth and and so it's
Speaker 1: you can certainly get rises in yields due to supply
Speaker 1: and demand fundamentals. If governments have so much paper they're
Speaker 1: trying to issue and buyers aren't showing up, that can
Speaker 1: shoot rates up. You can clearly have some structural inflation impacts.
Speaker 1: But yeah, you're it's going to be interesting to see
Speaker 1: how long this persists and whether we an aggregate continue
Speaker 1: down this path rates continue to get lower, or you know,
Speaker 1: with a few shocks and blips along the ways most
Speaker 1: likely outcome. Well, we've got a FED meeting to look
Speaker 1: forward to next week, and I'm sure we'll get powells
Speaker 1: take so plenty to look forward to, but we're going
Speaker 1: to have to leave it there. Uh, Josh Lomier, thank
Speaker 1: you so much for joining the show this week. Pleasure
Speaker 1: was all mine. What Goes Up. We'll be back next week.
Speaker 1: Until then, you can find us on the Bloomberg Terminal,
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Speaker 1: me at at Sarah pont Sack, Mike is that Reaganonymous,
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Speaker 1: thank you to Charlie Pellett of Bloomberg Radio and the
Speaker 1: voice of the New York City Subway System. What Goes
Speaker 1: Up is produced by Jordan Gospore. The head of Bloomberg
Speaker 1: podcast is Francesco Levie. Thanks for listening See you next time.