1 00:00:17,480 --> 00:00:20,080 Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast. 2 00:00:20,360 --> 00:00:22,880 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:23,320 --> 00:00:26,080 Speaker 1: This week, we're very pleased to welcome Jeremy Forster, portfolio 4 00:00:26,160 --> 00:00:28,600 Speaker 1: manager at Wellington Management. How are you, Jeremy. 5 00:00:29,600 --> 00:00:31,800 Speaker 2: I'm doing well today, James. Thank you for having me on. 6 00:00:32,240 --> 00:00:34,080 Speaker 1: Thank you so much for joining us. We're very excited 7 00:00:34,080 --> 00:00:36,640 Speaker 1: to dig into your market views and the outlook. Also 8 00:00:36,720 --> 00:00:40,519 Speaker 1: delighted to welcome back Arnold Kakuda with Bloomberg Intelligence. Great 9 00:00:40,520 --> 00:00:41,440 Speaker 1: to see you again, Arnold. 10 00:00:41,479 --> 00:00:42,640 Speaker 3: Oh yeah, happy to be here. 11 00:00:43,520 --> 00:00:45,120 Speaker 1: So just to set the scene a little bit here, 12 00:00:45,320 --> 00:00:48,800 Speaker 1: credit markets are rallying and debt'spreads remain tight. Investors aren't 13 00:00:48,800 --> 00:00:51,920 Speaker 1: getting very much compensation for the risk of default or downgrade. 14 00:00:52,200 --> 00:00:56,320 Speaker 1: The mood is pretty uniformly bullish, especially on US assets, 15 00:00:56,360 --> 00:00:59,400 Speaker 1: and most people are very excited about private markets. The 16 00:00:59,440 --> 00:01:03,000 Speaker 1: money really is flowing into that. Even real estate seems 17 00:01:03,000 --> 00:01:05,839 Speaker 1: to be coming back into favor, with buyers seeing value 18 00:01:05,840 --> 00:01:09,640 Speaker 1: and sellers getting more realistic on the valuations. Issuers, meanwhile, 19 00:01:09,640 --> 00:01:11,800 Speaker 1: are piling in. There's a record amount of bond and 20 00:01:11,920 --> 00:01:14,840 Speaker 1: loan sales as companies take advantage of the window to 21 00:01:14,920 --> 00:01:18,679 Speaker 1: raise debt, front loading it to avoid election volatility coming 22 00:01:18,760 --> 00:01:21,480 Speaker 1: later in the year. Potentially, they're accepting the fact that 23 00:01:21,480 --> 00:01:24,600 Speaker 1: the FED isn't cutting rates anytime soon, and increasingly borrowing 24 00:01:24,600 --> 00:01:28,040 Speaker 1: at longer tenures. The Ball case, though, seems to be 25 00:01:28,040 --> 00:01:31,039 Speaker 1: founded on a belief that the US economy will avoid recession, 26 00:01:31,480 --> 00:01:34,440 Speaker 1: earnings will remain solid, most companies can handle the higher 27 00:01:34,480 --> 00:01:37,480 Speaker 1: borrowing costs, although there's a cohort of very low quality 28 00:01:37,520 --> 00:01:40,880 Speaker 1: issuers that may well blow up, and there is still 29 00:01:40,920 --> 00:01:43,000 Speaker 1: a lot of stuff to worry about, from commercial real 30 00:01:43,120 --> 00:01:46,960 Speaker 1: estate to wars, geopolitics, and elections as I just mentioned. 31 00:01:47,200 --> 00:01:50,559 Speaker 1: So I'm sensing kind of a bit of complacency in credit, 32 00:01:50,560 --> 00:01:54,280 Speaker 1: given how tight spreads have become. There's an eerie sense 33 00:01:54,280 --> 00:01:56,320 Speaker 1: of calm, and it's very hard to find anyone who's 34 00:01:56,320 --> 00:01:58,840 Speaker 1: really bearish at the moment. But what's your take, Jeremy, 35 00:01:58,880 --> 00:02:00,400 Speaker 1: A lot of guests on this show telling it's the 36 00:02:00,480 --> 00:02:02,800 Speaker 1: Year of the Bond, a golden age for credit. 37 00:02:03,200 --> 00:02:07,200 Speaker 2: Do you agree? I agree with the Year of the Bond, 38 00:02:08,360 --> 00:02:13,440 Speaker 2: and I still like credit generally, but I would say 39 00:02:13,560 --> 00:02:18,280 Speaker 2: our view is more nuanced in that we think the 40 00:02:18,360 --> 00:02:21,800 Speaker 2: return relative to the risk you're taking for incremental credit 41 00:02:22,560 --> 00:02:26,080 Speaker 2: has really come down. So when we're thinking about yields 42 00:02:26,080 --> 00:02:29,560 Speaker 2: at these levels, though, I agree that the market has 43 00:02:29,919 --> 00:02:33,280 Speaker 2: swung pretty notably from expecting a series of cuts this 44 00:02:33,400 --> 00:02:36,520 Speaker 2: year to flirting with the idea that the FED will 45 00:02:36,560 --> 00:02:39,840 Speaker 2: be on hold the entire year, to even potentially increasing. 46 00:02:40,680 --> 00:02:44,320 Speaker 2: But when we're looking at longer dated yields, I really 47 00:02:44,360 --> 00:02:47,760 Speaker 2: think that the level that we're seeing is an excess 48 00:02:47,800 --> 00:02:51,720 Speaker 2: of what the Fed's likely to deliver over the intermediate term. 49 00:02:51,800 --> 00:02:55,359 Speaker 2: And so when we're allocating, we still want to have 50 00:02:55,639 --> 00:03:00,440 Speaker 2: a pro cyclical position within our portfolios, certainly, but I 51 00:03:00,480 --> 00:03:03,919 Speaker 2: do think yields in general look a lot better here 52 00:03:03,960 --> 00:03:07,440 Speaker 2: at these current levels, and are anticipating that bond returns 53 00:03:07,480 --> 00:03:10,720 Speaker 2: as we look forward will be compelling for investors. 54 00:03:11,320 --> 00:03:13,320 Speaker 1: So then, in terms of the Year of the bond, 55 00:03:13,360 --> 00:03:15,440 Speaker 1: is that just because the returns will be the best 56 00:03:15,480 --> 00:03:18,960 Speaker 1: since on a pre crisis or what's the supposed why 57 00:03:18,960 --> 00:03:20,120 Speaker 1: do we think it's the year of the bond? 58 00:03:21,280 --> 00:03:24,640 Speaker 2: Well, I think we've been faced with obviously, twenty twenty 59 00:03:24,639 --> 00:03:28,239 Speaker 2: two was a tough year for bonds in general. Twenty 60 00:03:28,280 --> 00:03:31,119 Speaker 2: twenty three tens entered the year and exited the year 61 00:03:31,520 --> 00:03:36,480 Speaker 2: ten year treasury yields at similar levels, and so that 62 00:03:36,640 --> 00:03:38,520 Speaker 2: was a year where you know, we were really trying 63 00:03:38,560 --> 00:03:41,480 Speaker 2: to get our coupon and you had some spread compression 64 00:03:41,520 --> 00:03:44,720 Speaker 2: coming through. I think when we're looking into twenty twenty four, 65 00:03:45,960 --> 00:03:50,000 Speaker 2: there's been a normalization of the growth environment, and I 66 00:03:50,040 --> 00:03:54,760 Speaker 2: think what really came through was that twenty twenty three 67 00:03:54,960 --> 00:03:59,760 Speaker 2: we saw a much stronger cyclical improvement in the growth. 68 00:04:00,960 --> 00:04:03,920 Speaker 2: So GDP ended up coming in roughly a full percentage 69 00:04:03,920 --> 00:04:07,320 Speaker 2: point higher than I think most people were anticipating. And 70 00:04:07,400 --> 00:04:11,080 Speaker 2: through twenty twenty three we also had three of the 71 00:04:11,120 --> 00:04:15,560 Speaker 2: five largest bank failures in the US, we saw mortgage 72 00:04:15,640 --> 00:04:19,200 Speaker 2: rates increase again, and we had one of the large 73 00:04:19,200 --> 00:04:22,400 Speaker 2: European broker dealers go bust. So I think we've gone 74 00:04:22,480 --> 00:04:26,480 Speaker 2: through a period where expectations, certainly on the credit side, 75 00:04:26,880 --> 00:04:32,240 Speaker 2: had reset, and so corporate treasurers CFOs and CEOs are 76 00:04:32,240 --> 00:04:36,360 Speaker 2: being more prudent with their balance sheet and spreads are 77 00:04:36,400 --> 00:04:39,240 Speaker 2: more likely to be in a range trading environment. And 78 00:04:39,279 --> 00:04:41,840 Speaker 2: what we're spending a lot of time talking about is 79 00:04:42,320 --> 00:04:45,520 Speaker 2: where inflation is going to deliver and how the federal 80 00:04:45,560 --> 00:04:47,919 Speaker 2: respond to that, but really how growth is going to 81 00:04:48,160 --> 00:04:50,800 Speaker 2: play out as we look out over the next few 82 00:04:50,920 --> 00:04:54,919 Speaker 2: years here, and when we're looking at especially corporate balance sheets, 83 00:04:55,040 --> 00:04:59,520 Speaker 2: we see them being really strong, exceptionally strong in investment 84 00:04:59,560 --> 00:05:02,640 Speaker 2: grade terms. So even though we're not seeing a ton 85 00:05:02,760 --> 00:05:07,200 Speaker 2: of spread, we do think there's enough intrinsic spread price 86 00:05:07,680 --> 00:05:11,520 Speaker 2: for the risk of default. So from that perspective, I'm 87 00:05:11,560 --> 00:05:13,720 Speaker 2: not really too worried about credit, but I don't want 88 00:05:13,760 --> 00:05:17,520 Speaker 2: to have a large overweight position and investment grade credit 89 00:05:17,960 --> 00:05:20,440 Speaker 2: just because I know spreads can really widen out here 90 00:05:22,279 --> 00:05:25,120 Speaker 2: if we hit any potholes in the economy. 91 00:05:26,240 --> 00:05:29,320 Speaker 3: Great. Hey, Jeremy, this is Arnold Kakuta from Bluemberg Intelligence 92 00:05:29,839 --> 00:05:32,720 Speaker 3: Credit analysts covering banks. You know, one of the things 93 00:05:32,760 --> 00:05:35,919 Speaker 3: that we've been talking about is you know the discount 94 00:05:36,320 --> 00:05:39,159 Speaker 3: right that that bank financials have had, you know, versus 95 00:05:39,160 --> 00:05:42,239 Speaker 3: the corporate So we we've liked that space. We've we've 96 00:05:42,320 --> 00:05:45,400 Speaker 3: seen it kind of grind tighter. So is that something 97 00:05:45,400 --> 00:05:49,000 Speaker 3: that you guys also see or is there kind of 98 00:05:49,000 --> 00:05:51,880 Speaker 3: a limit to how how this action can continue or not? 99 00:05:53,920 --> 00:05:57,040 Speaker 2: We agree with you, And when we're looking at banks, 100 00:05:57,200 --> 00:05:59,360 Speaker 2: I certainly that's one of the areas where we're still 101 00:05:59,360 --> 00:06:02,760 Speaker 2: allocating more or of our corporate capital. I would say 102 00:06:03,680 --> 00:06:07,679 Speaker 2: relative to history across sectors, we still see US banks 103 00:06:07,680 --> 00:06:12,159 Speaker 2: as providing some compelling opportunities. I would say European banks 104 00:06:12,160 --> 00:06:16,560 Speaker 2: as well, some of the Yankees. We see profitability improving 105 00:06:16,600 --> 00:06:19,360 Speaker 2: there as rates have moved higher and some of their 106 00:06:19,400 --> 00:06:24,440 Speaker 2: issuance needs are allowing us attractive opportunities to dellocate a 107 00:06:24,440 --> 00:06:27,520 Speaker 2: little bit of capital there. But we're still, you know, 108 00:06:27,760 --> 00:06:30,120 Speaker 2: not out of the woods. When we think about commercial 109 00:06:30,120 --> 00:06:33,520 Speaker 2: real estate and when we think about deposits in general, 110 00:06:33,600 --> 00:06:36,240 Speaker 2: I would say we really need to pull apart the 111 00:06:36,440 --> 00:06:40,839 Speaker 2: bank universe into three different parts. The large money center 112 00:06:40,880 --> 00:06:45,000 Speaker 2: banks we think have great balance sheets here. If anything, 113 00:06:45,240 --> 00:06:48,360 Speaker 2: they're probably getting closer to being able to provide back 114 00:06:48,400 --> 00:06:52,120 Speaker 2: a little bit of capital. So probably not the incremental 115 00:06:52,160 --> 00:06:56,320 Speaker 2: place where we're adding exposure, but still a place that 116 00:06:56,360 --> 00:06:59,359 Speaker 2: we like compared to the other sectors. The regional banks, 117 00:07:00,440 --> 00:07:03,679 Speaker 2: really we think you have to do some strong credit 118 00:07:03,760 --> 00:07:07,719 Speaker 2: analysis there to understand what the risks are on the 119 00:07:07,720 --> 00:07:11,640 Speaker 2: individual bank balance sheets. And then in the smaller regionals, 120 00:07:11,640 --> 00:07:13,640 Speaker 2: in the smaller community banks, we think that's an area 121 00:07:13,680 --> 00:07:16,600 Speaker 2: where you're going to continue to see pressure, especially from 122 00:07:16,840 --> 00:07:21,200 Speaker 2: commercial real estate, but also deposit outflows and then HB. 123 00:07:21,320 --> 00:07:23,640 Speaker 3: So how do you think about sort of you know, 124 00:07:23,760 --> 00:07:27,920 Speaker 3: the the I guess, you know, we had liked the financials. 125 00:07:28,120 --> 00:07:31,720 Speaker 3: We still do, right, but I guess the thesis coming 126 00:07:31,760 --> 00:07:34,240 Speaker 3: in was, Okay, maybe we'll have some rate cuts, you 127 00:07:34,280 --> 00:07:36,520 Speaker 3: know that you know, the pressure in terms of these 128 00:07:36,600 --> 00:07:39,560 Speaker 3: unrealized losses might come down. But you know, we've continued 129 00:07:39,600 --> 00:07:42,760 Speaker 3: to have this higher for longer narrative, right, and you've 130 00:07:42,760 --> 00:07:45,640 Speaker 3: talked about some of these issues with the regionals and 131 00:07:45,640 --> 00:07:48,640 Speaker 3: and and you know, the the cre exposure and whatnot 132 00:07:49,360 --> 00:07:52,960 Speaker 3: concerns there. So you know, is is that a concern 133 00:07:53,040 --> 00:07:55,160 Speaker 3: for you that you know, if we do continue in 134 00:07:55,200 --> 00:07:58,680 Speaker 3: this higher for longer environment, you know Vick's kind of rising, 135 00:07:59,320 --> 00:08:01,600 Speaker 3: you know, we've called it. You know, financial bond spreads 136 00:08:01,600 --> 00:08:03,720 Speaker 3: have been strong like bull right, and it's almost like 137 00:08:03,960 --> 00:08:06,520 Speaker 3: kind of ignoring, you know, corporate bonds, kind of ignoring 138 00:08:06,560 --> 00:08:08,760 Speaker 3: what's going on in other parts of the market. So 139 00:08:09,800 --> 00:08:13,360 Speaker 3: are there any concerns for you going forward? 140 00:08:13,520 --> 00:08:15,440 Speaker 2: I don't think there Isn't the money center banks if 141 00:08:15,440 --> 00:08:18,760 Speaker 2: we're in a higher for longer environment, I think the 142 00:08:18,920 --> 00:08:21,920 Speaker 2: net interest margins there are still fine. And I think 143 00:08:21,960 --> 00:08:25,720 Speaker 2: if anything, the little bit of volatility we've been getting 144 00:08:25,920 --> 00:08:30,960 Speaker 2: in fixed income markets provides ample opportunities for especially the 145 00:08:30,960 --> 00:08:34,400 Speaker 2: broker dealers to be able to monetize some of that 146 00:08:34,520 --> 00:08:38,520 Speaker 2: in trading revenues. When we're thinking about the regional banks, 147 00:08:38,559 --> 00:08:41,800 Speaker 2: the higher for longer is more of an issue. Those 148 00:08:41,960 --> 00:08:46,680 Speaker 2: are areas where there is a higher need to finance 149 00:08:46,720 --> 00:08:50,000 Speaker 2: yourself at what are more expensive deposit rates, and I 150 00:08:50,040 --> 00:08:53,880 Speaker 2: think you do have more commercial real estate exposure. I 151 00:08:54,120 --> 00:08:57,679 Speaker 2: don't worry as much that that's a near term problem. 152 00:08:57,760 --> 00:09:00,520 Speaker 2: And in fact, if you look at the FEDS HA data, 153 00:09:01,200 --> 00:09:04,680 Speaker 2: which is the weekly data on bank balance sheets, we 154 00:09:04,720 --> 00:09:08,040 Speaker 2: can see that commercial real estate is still even growing 155 00:09:08,080 --> 00:09:10,520 Speaker 2: this year. It's not growing at the near double digit 156 00:09:10,600 --> 00:09:12,679 Speaker 2: rates we've seen over the last several years, but it's 157 00:09:12,679 --> 00:09:15,240 Speaker 2: still growing in the three to four percent. So I've 158 00:09:15,280 --> 00:09:18,840 Speaker 2: been somewhat surprised that banks haven't been pulling back their 159 00:09:18,880 --> 00:09:23,679 Speaker 2: exposure more dramatically there. But as you go through time, 160 00:09:23,800 --> 00:09:27,280 Speaker 2: if we're existing at these type of interest rate levels, 161 00:09:27,600 --> 00:09:31,320 Speaker 2: it's harder to refinance for a lot of those commercial 162 00:09:31,320 --> 00:09:34,720 Speaker 2: real estate deals that may have been underwritten at much 163 00:09:34,920 --> 00:09:39,280 Speaker 2: lower interest rates, and those debt service coverage ratios are 164 00:09:39,280 --> 00:09:43,040 Speaker 2: getting worse and worse, and you're also starting to see 165 00:09:43,080 --> 00:09:46,320 Speaker 2: those LTVs kind of move higher. So when you do 166 00:09:46,400 --> 00:09:49,520 Speaker 2: get to the refinancing cycle, you're going to have to 167 00:09:49,520 --> 00:09:53,040 Speaker 2: be putting more capital up, and that in general is 168 00:09:53,080 --> 00:09:56,240 Speaker 2: going to be a disinflationary trend. So when we're thinking 169 00:09:56,280 --> 00:09:59,640 Speaker 2: about the kind of headwinds to inflation going forward, I 170 00:09:59,679 --> 00:10:01,480 Speaker 2: do think that's one of the ones that will be 171 00:10:01,600 --> 00:10:04,560 Speaker 2: in the background, is that we've got capital that's going 172 00:10:04,600 --> 00:10:07,840 Speaker 2: to need to refinance a lot of these assets. You've 173 00:10:07,840 --> 00:10:10,199 Speaker 2: got capital that's going to need to help finance the 174 00:10:10,280 --> 00:10:13,760 Speaker 2: US government as well, and those are going to allow 175 00:10:13,880 --> 00:10:17,040 Speaker 2: inflation to abate a little bit, which then will allow 176 00:10:17,080 --> 00:10:20,559 Speaker 2: the FED to kind of remove some of the restrictive 177 00:10:20,559 --> 00:10:23,640 Speaker 2: policy that we have in place right now. Got it. 178 00:10:24,120 --> 00:10:27,280 Speaker 3: And then I think we've had a prior guest ry 179 00:10:27,400 --> 00:10:29,560 Speaker 3: James that that that had come on and kind of 180 00:10:29,559 --> 00:10:31,840 Speaker 3: talked about, you know, and this is what the banks 181 00:10:31,880 --> 00:10:35,079 Speaker 3: are saying, you know, potential signs of increasing M and 182 00:10:35,160 --> 00:10:37,520 Speaker 3: A right. And then in corporate bond world, we worry 183 00:10:37,520 --> 00:10:41,080 Speaker 3: about oh, these big, large, you know, leveraging transactions. But 184 00:10:41,120 --> 00:10:43,920 Speaker 3: I think so far, what we've seen is that risk 185 00:10:43,960 --> 00:10:46,839 Speaker 3: has been pretty muted, you know, with a lot of 186 00:10:46,920 --> 00:10:50,240 Speaker 3: equity financing involved, or you know, kind of the regulatory 187 00:10:50,320 --> 00:10:53,640 Speaker 3: risk FTC being really harsh. So is that something that 188 00:10:53,720 --> 00:10:56,360 Speaker 3: also kind of comes into play for you Do you 189 00:10:56,400 --> 00:10:58,240 Speaker 3: see kind of this M and A risk for for 190 00:10:58,360 --> 00:11:02,000 Speaker 3: corporates and you know, how do you think about that? 191 00:11:02,920 --> 00:11:05,160 Speaker 2: Right now, we're not seeing as much M and A risk. 192 00:11:05,360 --> 00:11:08,040 Speaker 2: I do think if we start seeing the FED being 193 00:11:08,040 --> 00:11:11,320 Speaker 2: able to ease policy rates that is not due to 194 00:11:11,440 --> 00:11:14,520 Speaker 2: a major cyclical downturn. So something that looks like a 195 00:11:14,559 --> 00:11:17,839 Speaker 2: recession or the unemployment rate moving up by half a 196 00:11:17,880 --> 00:11:21,640 Speaker 2: point to a point, that you will see more M 197 00:11:21,679 --> 00:11:25,959 Speaker 2: and A transactions coming through. So I think the higher 198 00:11:26,080 --> 00:11:29,320 Speaker 2: rates in the current environment has been a barrier for 199 00:11:29,400 --> 00:11:31,760 Speaker 2: a lot of deals that maybe people are starting to 200 00:11:31,760 --> 00:11:34,559 Speaker 2: look at. And so if you're able to get base 201 00:11:34,679 --> 00:11:38,200 Speaker 2: rates down closer to four percent or something even below that, 202 00:11:38,200 --> 00:11:41,079 Speaker 2: that you'll probably kick start the M and A cycle again. 203 00:11:42,559 --> 00:11:47,120 Speaker 1: So in terms of the sort of big picture credit Jeremy, 204 00:11:47,120 --> 00:11:51,479 Speaker 1: you mentioned very very strong balance sheets at corporations. Fundamentals 205 00:11:51,640 --> 00:11:55,920 Speaker 1: sound like this solid, although you mentioned that spreads could widen, 206 00:11:56,000 --> 00:12:01,840 Speaker 1: possibly for technical reasons or exogenous shot. How do you position. 207 00:12:01,920 --> 00:12:04,760 Speaker 1: More broadly, I mean, if you really believe that this 208 00:12:04,880 --> 00:12:06,960 Speaker 1: growth is here to stay, should you not be leaning 209 00:12:07,000 --> 00:12:10,439 Speaker 1: into high yield risk buying all the way down to 210 00:12:10,480 --> 00:12:12,400 Speaker 1: triple C buying all the stuff that everyone else is 211 00:12:12,720 --> 00:12:15,480 Speaker 1: somewhat afraid of given the high for longer environment. 212 00:12:17,080 --> 00:12:20,360 Speaker 2: Yeah, I think it's an excellent question. And for the 213 00:12:20,360 --> 00:12:22,760 Speaker 2: portfolios that I manage, we have more of an up 214 00:12:22,760 --> 00:12:26,839 Speaker 2: and quality tilt, So we are allocating to double B 215 00:12:27,280 --> 00:12:30,880 Speaker 2: high yield names that we think really have investment grade 216 00:12:31,000 --> 00:12:36,040 Speaker 2: like balance sheets, are either candidates for upgrades or are 217 00:12:36,679 --> 00:12:39,640 Speaker 2: kind of smaller companies that may not have as much 218 00:12:39,679 --> 00:12:43,680 Speaker 2: coverage from the rating agencies and so end up with 219 00:12:43,720 --> 00:12:46,360 Speaker 2: the double B rating. I tend to be a little 220 00:12:46,360 --> 00:12:49,439 Speaker 2: bit more cautious when thinking about the triple C allocations 221 00:12:49,480 --> 00:12:53,040 Speaker 2: and really down and credit. I think we have seen 222 00:12:53,720 --> 00:13:02,000 Speaker 2: capital allocated and credit at probably more generous terms at 223 00:13:02,000 --> 00:13:05,360 Speaker 2: some of the lower quality spectrums. And I think we're 224 00:13:05,400 --> 00:13:10,080 Speaker 2: also seeing a different marketplace dynamic, especially in the triple 225 00:13:10,120 --> 00:13:14,080 Speaker 2: c's in some of the lower quality bank loan market 226 00:13:14,120 --> 00:13:18,040 Speaker 2: as well, where you're getting what people are calling credit 227 00:13:18,160 --> 00:13:22,240 Speaker 2: on credit or violence, but starting to see workout deals 228 00:13:22,240 --> 00:13:25,760 Speaker 2: and things like that. That aren't something that I feel 229 00:13:26,160 --> 00:13:30,319 Speaker 2: I have a strong edge it doing and or something 230 00:13:30,360 --> 00:13:33,199 Speaker 2: where you have a little bit of an information asymmetry, 231 00:13:33,240 --> 00:13:36,120 Speaker 2: So I'm trying to stay away from there. I think 232 00:13:36,120 --> 00:13:40,079 Speaker 2: that is an area where higher rates as well are 233 00:13:40,200 --> 00:13:44,480 Speaker 2: likely to erode the balance sheet over time through higher 234 00:13:44,480 --> 00:13:47,240 Speaker 2: finance and costs. But I think that's an area where 235 00:13:47,320 --> 00:13:51,079 Speaker 2: private credit really is coming in, and I think they 236 00:13:51,120 --> 00:13:54,840 Speaker 2: have the ability to invest across the capital stack, to 237 00:13:54,920 --> 00:14:00,360 Speaker 2: take positions on management, and so they're probably better placed 238 00:14:00,400 --> 00:14:04,640 Speaker 2: for some of the like lowest quality issuers compared to 239 00:14:05,320 --> 00:14:06,800 Speaker 2: where I might allocate capital. 240 00:14:07,600 --> 00:14:09,760 Speaker 1: So how do you find your edge then, Jeremy, in 241 00:14:09,800 --> 00:14:11,880 Speaker 1: terms of you know, we're talking about the financials that 242 00:14:11,960 --> 00:14:13,839 Speaker 1: to me and Donald may have used. It seems like 243 00:14:13,880 --> 00:14:16,200 Speaker 1: a very crowded trade at the moment. Everyone talks about 244 00:14:16,280 --> 00:14:19,040 Speaker 1: it as a as a good one, but but everyone 245 00:14:19,160 --> 00:14:22,480 Speaker 1: wants wants some of that. And then you know, the 246 00:14:22,960 --> 00:14:25,480 Speaker 1: the double bes that you just mentioned, they seem to 247 00:14:25,480 --> 00:14:27,680 Speaker 1: be quite in favor of the moment. So how do 248 00:14:27,720 --> 00:14:30,240 Speaker 1: you kind of differentiate yourself, I mean and give them 249 00:14:30,320 --> 00:14:33,880 Speaker 1: such low spreads? You know, and I were talking about 250 00:14:33,880 --> 00:14:35,600 Speaker 1: this before the show, why not just buy treasuries that 251 00:14:35,720 --> 00:14:38,400 Speaker 1: you know almost five percent, so. 252 00:14:38,440 --> 00:14:40,360 Speaker 2: We're doing some of that. I would say over the 253 00:14:40,440 --> 00:14:45,320 Speaker 2: year we have taken down our corporate credit exposure, so 254 00:14:45,840 --> 00:14:48,160 Speaker 2: doubleb's and banks are some of the areas where we 255 00:14:48,200 --> 00:14:51,680 Speaker 2: still have kind of an overweight relative to the benchmark, 256 00:14:51,720 --> 00:14:54,880 Speaker 2: which for most of our accounts is the Bloomberg US aggregate. 257 00:14:56,400 --> 00:14:59,840 Speaker 2: We are allocating more of our capital over to structured 258 00:14:59,840 --> 00:15:04,280 Speaker 2: and securitized credit, where we are seeing much more attractive 259 00:15:05,240 --> 00:15:08,320 Speaker 2: valuation and where we're able to take a differentiated view. 260 00:15:09,240 --> 00:15:13,800 Speaker 2: I can look at things like non qualified mortgages, which 261 00:15:13,960 --> 00:15:19,640 Speaker 2: are an advent post financial crisis, where these are borrowers 262 00:15:19,840 --> 00:15:23,600 Speaker 2: that are unable to get a normal qualified mortgage through 263 00:15:23,600 --> 00:15:27,239 Speaker 2: a Fanny and Freddy. A lot of these are investor 264 00:15:27,280 --> 00:15:31,440 Speaker 2: owned properties, but high FICHO scores relatively low loaned values. 265 00:15:31,880 --> 00:15:34,920 Speaker 2: Those bonds are trading in the eighty five dollars price 266 00:15:35,040 --> 00:15:38,960 Speaker 2: range and have a lot of variation from bond to 267 00:15:39,040 --> 00:15:42,920 Speaker 2: bond and deal to deal, where we can do rigorous 268 00:15:42,960 --> 00:15:46,960 Speaker 2: credit research and really understand what we think are going 269 00:15:47,000 --> 00:15:49,840 Speaker 2: to be much quicker prepaced, So those type of bonds 270 00:15:49,920 --> 00:15:52,920 Speaker 2: are kind of giving you anywhere around one hundred and 271 00:15:52,960 --> 00:15:56,240 Speaker 2: forty to one hundred and seventy spread, but we think 272 00:15:56,280 --> 00:15:58,120 Speaker 2: that we're probably going to get paid back a couple 273 00:15:58,160 --> 00:16:02,080 Speaker 2: of years sooner than the market is pricing right now, 274 00:16:02,520 --> 00:16:06,680 Speaker 2: and that that is going to lead to closer to 275 00:16:06,960 --> 00:16:08,320 Speaker 2: high single digit returns. 276 00:16:09,080 --> 00:16:11,920 Speaker 3: Okay, got it, This is Arnold again. Thanks Jeremy the 277 00:16:12,760 --> 00:16:15,240 Speaker 3: You just talked about getting into structured credit and stuff. 278 00:16:15,240 --> 00:16:17,960 Speaker 3: But you know, we've heard a lot about these increased 279 00:16:18,000 --> 00:16:20,760 Speaker 3: regulations for these banks and then the banks looking to 280 00:16:20,800 --> 00:16:23,600 Speaker 3: do kind of more of these like synthetic risk transfers 281 00:16:24,720 --> 00:16:27,280 Speaker 3: that that some of these private credit players are also 282 00:16:27,480 --> 00:16:30,560 Speaker 3: getting into. But is that also something that that you 283 00:16:30,600 --> 00:16:33,080 Speaker 3: could get into as well when when these banks are 284 00:16:33,160 --> 00:16:36,120 Speaker 3: kind of looking to transfer risk or or maybe you 285 00:16:36,160 --> 00:16:38,280 Speaker 3: sell some some loans on their portfolios. 286 00:16:39,800 --> 00:16:42,520 Speaker 2: Yeah, So more of the risk transfers that I've been 287 00:16:42,560 --> 00:16:46,080 Speaker 2: looking at are really the ones for liability driven investing. 288 00:16:46,720 --> 00:16:52,480 Speaker 2: So this is more coming from the insurance side, where 289 00:16:52,520 --> 00:16:56,200 Speaker 2: we're seeing a pretty notable pick up in what we 290 00:16:56,280 --> 00:17:01,120 Speaker 2: think makes sense from a de risking perspective. So those 291 00:17:01,760 --> 00:17:06,440 Speaker 2: risk transfers are really things that when we're estimating kind 292 00:17:06,480 --> 00:17:13,000 Speaker 2: of the corporate pension funding gaps right now, we estimate 293 00:17:13,080 --> 00:17:16,080 Speaker 2: for the Russell three thousand at least that in the 294 00:17:16,080 --> 00:17:19,359 Speaker 2: beginning of the year, funded ratios were close to ninety 295 00:17:19,400 --> 00:17:21,960 Speaker 2: seven percent, and now we're up over one hundred and 296 00:17:22,000 --> 00:17:25,080 Speaker 2: two percent, and that's the first time we've really had 297 00:17:25,160 --> 00:17:31,000 Speaker 2: that level of surplus since pre financial crisis, and so 298 00:17:31,280 --> 00:17:34,760 Speaker 2: we think it makes sense for pension plans specifically to 299 00:17:34,840 --> 00:17:38,879 Speaker 2: start de risking. I think that's going to be an 300 00:17:38,920 --> 00:17:42,760 Speaker 2: area where it's really helping to keep long corporate spreads 301 00:17:42,840 --> 00:17:48,160 Speaker 2: in check, and also a reason for keeping treasury yields 302 00:17:48,480 --> 00:17:50,600 Speaker 2: in check too. You noted earlier like should we just 303 00:17:50,600 --> 00:17:54,480 Speaker 2: be buying treasuries. We do see treasuries as being on 304 00:17:54,600 --> 00:17:57,040 Speaker 2: the cheaper side. You can look at that versus swaps. 305 00:17:57,080 --> 00:18:00,720 Speaker 2: You can look at longer dated yield year point of 306 00:18:00,760 --> 00:18:02,680 Speaker 2: the curve versus the ten year point of the curve. 307 00:18:03,680 --> 00:18:07,680 Speaker 2: So we're seeing more of that come through as risk 308 00:18:07,720 --> 00:18:11,440 Speaker 2: transfers that we think makes sense. But the synthetic one, 309 00:18:12,000 --> 00:18:18,120 Speaker 2: especially if you're transitioning over to the insurance side, we're 310 00:18:18,160 --> 00:18:22,800 Speaker 2: seeing some challenges of that in the court UH, and 311 00:18:22,880 --> 00:18:26,200 Speaker 2: so we think it makes more sense for those corporate 312 00:18:26,200 --> 00:18:31,000 Speaker 2: pension plans really to be taking money away from the 313 00:18:31,160 --> 00:18:35,000 Speaker 2: risk assets and employing them in longer data corporate bonds 314 00:18:35,040 --> 00:18:37,359 Speaker 2: and longer dated treasuries. Got it. 315 00:18:38,320 --> 00:18:40,760 Speaker 3: You mentioned ld I, So you know, it harkens me 316 00:18:40,800 --> 00:18:43,760 Speaker 3: back to that the UK surprise that we got, you know, 317 00:18:44,000 --> 00:18:46,159 Speaker 3: a couple of years ago. But you know, just given 318 00:18:46,359 --> 00:18:49,000 Speaker 3: you know, the outlook for you know, both I guess 319 00:18:49,000 --> 00:18:51,280 Speaker 3: both presidential candidates. You know, we're going to continue to 320 00:18:51,320 --> 00:18:54,320 Speaker 3: have you know, big budget deficits. So do you see 321 00:18:54,400 --> 00:18:56,800 Speaker 3: you know, the chance of you know, I guess, you know, 322 00:18:56,960 --> 00:19:00,119 Speaker 3: rates long end rates potentially really rising, you know, in 323 00:19:00,160 --> 00:19:01,280 Speaker 3: the US potentially. 324 00:19:03,680 --> 00:19:07,720 Speaker 2: I think that's a risk. Certainly, both parties right now 325 00:19:07,760 --> 00:19:11,840 Speaker 2: seem very comfortable with deficit spending, uh and it'll likely 326 00:19:12,240 --> 00:19:14,840 Speaker 2: need to be the bond market that disciplines that somewhat. 327 00:19:15,000 --> 00:19:16,880 Speaker 2: I do think we're a little different than the UK 328 00:19:17,000 --> 00:19:21,000 Speaker 2: as far as the LDI problems that they experienced. We 329 00:19:21,040 --> 00:19:24,440 Speaker 2: don't have the same pooled collective vehicles that are using 330 00:19:24,480 --> 00:19:29,359 Speaker 2: a lot amount of leverage, so that reduces the risk somewhat. 331 00:19:30,160 --> 00:19:32,640 Speaker 2: And the US is just a larger and much deeper 332 00:19:32,680 --> 00:19:36,440 Speaker 2: market as well. So when we're thinking about the risks 333 00:19:36,480 --> 00:19:42,160 Speaker 2: of you know, yields moving in an abrupt point, I'm 334 00:19:42,200 --> 00:19:45,480 Speaker 2: not as worried about it. One of the other things 335 00:19:45,520 --> 00:19:49,879 Speaker 2: that recently happened, and this is came out with the 336 00:19:49,960 --> 00:19:52,960 Speaker 2: Treasury's quarterly refunding announcement at the beginning of the month, 337 00:19:53,760 --> 00:19:57,960 Speaker 2: is that they are ready to start doing buybacks. Now, 338 00:19:58,119 --> 00:20:02,359 Speaker 2: this is meant only for liquid purposes and will be 339 00:20:02,480 --> 00:20:05,399 Speaker 2: in small scale, but I do think that there is 340 00:20:05,480 --> 00:20:08,840 Speaker 2: the ability now as they get that program up and running, 341 00:20:09,200 --> 00:20:12,639 Speaker 2: to help limit some market volatility should we have some 342 00:20:12,800 --> 00:20:17,000 Speaker 2: type of event like the UK experienced. What happened in 343 00:20:17,040 --> 00:20:20,080 Speaker 2: the UK resulted in the Bank of England stepping in 344 00:20:20,119 --> 00:20:23,560 Speaker 2: to buy, similar to what happened in twenty twenty with 345 00:20:23,640 --> 00:20:26,600 Speaker 2: the FED stepping into buy when we had large liquidations 346 00:20:26,640 --> 00:20:30,879 Speaker 2: of treasuries into the beginning of the pandemic. And so 347 00:20:31,160 --> 00:20:34,000 Speaker 2: even if we're running at higher deficits, I think we 348 00:20:34,119 --> 00:20:37,280 Speaker 2: now have a couple of tools to help lessen those 349 00:20:37,840 --> 00:20:42,240 Speaker 2: kind of dramatic increases that would have been a risk factor, 350 00:20:42,600 --> 00:20:47,680 Speaker 2: you know, pre pandemic and even several quarters ago. Once 351 00:20:47,800 --> 00:20:50,520 Speaker 2: the Treasury has their new buyback program up and running. 352 00:20:50,560 --> 00:20:55,119 Speaker 2: And again the Treasury has been very pointed that that 353 00:20:55,280 --> 00:20:58,640 Speaker 2: is not what that program is used for. But in extremis. 354 00:20:59,040 --> 00:21:01,920 Speaker 2: At least you have the plumbing and framework in place 355 00:21:01,960 --> 00:21:03,720 Speaker 2: that if you needed to use it you could. 356 00:21:04,440 --> 00:21:06,280 Speaker 1: And I'm going to ask Arnold to explain since he 357 00:21:06,320 --> 00:21:08,919 Speaker 1: brought it up, ld I, tell us what does that 358 00:21:08,960 --> 00:21:12,520 Speaker 1: mean to the average listener out there, the non specialist. 359 00:21:13,880 --> 00:21:15,959 Speaker 3: I'll let you Dremmy do that. That's as mandate. 360 00:21:16,800 --> 00:21:20,800 Speaker 2: Sorry. So for ld I, it's a liability driven investing 361 00:21:21,520 --> 00:21:24,879 Speaker 2: and it's really for pensions in particular, but you can 362 00:21:24,880 --> 00:21:28,920 Speaker 2: think about it for the average retiree as well. You're 363 00:21:28,960 --> 00:21:31,840 Speaker 2: looking at what your cash flow needs are going to 364 00:21:31,880 --> 00:21:34,880 Speaker 2: be over a series of years. If you're a corporate 365 00:21:36,000 --> 00:21:39,360 Speaker 2: pension plan, you've got retirees that you're going to pay 366 00:21:39,359 --> 00:21:42,520 Speaker 2: out benefits to for the remainder of their life, which 367 00:21:42,560 --> 00:21:45,479 Speaker 2: means you're going to have cash flow obligations over that period. 368 00:21:46,160 --> 00:21:49,040 Speaker 2: You could have all of your money in kind of 369 00:21:49,119 --> 00:21:51,760 Speaker 2: risk assets in the equity market and have a lot 370 00:21:51,760 --> 00:21:55,560 Speaker 2: of volatility around that, or you can invest in longer 371 00:21:55,640 --> 00:21:59,120 Speaker 2: dated government bonds and corporate bonds that will pay steady 372 00:21:59,119 --> 00:22:02,480 Speaker 2: cash flows and then you use the coupon income to 373 00:22:02,560 --> 00:22:06,720 Speaker 2: help pay out to the pensioneers as the months go by. 374 00:22:07,480 --> 00:22:09,840 Speaker 3: Hey Trreum is there a like maybe it used to 375 00:22:09,920 --> 00:22:12,199 Speaker 3: be I don't know, like six to eight percent, was 376 00:22:12,240 --> 00:22:14,560 Speaker 3: that kind of a yield bogie on that, But in 377 00:22:14,600 --> 00:22:17,560 Speaker 3: a higher rate environment, does that change at all? 378 00:22:17,680 --> 00:22:21,200 Speaker 2: Or so A couple things have changed. That was certainly 379 00:22:21,280 --> 00:22:23,639 Speaker 2: the bogie that they were looking at, kind of like 380 00:22:24,640 --> 00:22:29,160 Speaker 2: in the pre financial crisis period. It was also aspirational 381 00:22:29,640 --> 00:22:33,040 Speaker 2: as we were coming out of the GFC. I think 382 00:22:33,200 --> 00:22:35,640 Speaker 2: plans were really hoping that you would get those type 383 00:22:35,680 --> 00:22:40,359 Speaker 2: of returns back. And a couple things have happened. One, 384 00:22:40,440 --> 00:22:44,400 Speaker 2: equity returns have been great, and corporates have started adding 385 00:22:44,440 --> 00:22:48,400 Speaker 2: more to those pension plans to make sure they get 386 00:22:48,440 --> 00:22:53,359 Speaker 2: back up to funded status in part to alleviate PBGC fees. 387 00:22:54,280 --> 00:22:56,440 Speaker 2: And so the funded status is in a much better place. 388 00:22:56,480 --> 00:22:59,400 Speaker 2: And I think most of those pension funds have reduced 389 00:22:59,440 --> 00:23:03,800 Speaker 2: those hurdle rates that they were anticipating and being underweight duration. 390 00:23:04,560 --> 00:23:07,920 Speaker 2: So having less of an allocation to bonds and less 391 00:23:07,960 --> 00:23:11,560 Speaker 2: of an allocation to specifically longer dated bonds than they 392 00:23:11,600 --> 00:23:14,520 Speaker 2: needed has been a winning trade for them over the 393 00:23:14,600 --> 00:23:18,560 Speaker 2: last several years. With twenty twenty two, those discount rates 394 00:23:18,640 --> 00:23:21,720 Speaker 2: or the rate at which you discount back those future 395 00:23:21,760 --> 00:23:25,000 Speaker 2: payments because it's increased so much the value of that 396 00:23:25,080 --> 00:23:30,080 Speaker 2: liability has dropped. That's brought those plans into better balance 397 00:23:30,880 --> 00:23:35,120 Speaker 2: and is allowing them to reduce some of their allocations 398 00:23:35,160 --> 00:23:39,520 Speaker 2: to risk assets and allocate back over to longer duration assets. 399 00:23:39,560 --> 00:23:41,320 Speaker 2: And I think that's a large part of why we've 400 00:23:41,320 --> 00:23:46,960 Speaker 2: seen long corporate spreads perform so well kind of at 401 00:23:47,000 --> 00:23:49,879 Speaker 2: their tights over the last twenty years. We think some 402 00:23:49,920 --> 00:23:53,800 Speaker 2: of that performance is really probably run its course, and 403 00:23:53,840 --> 00:23:57,520 Speaker 2: we're expecting a little bit more steeping from the corporate curve. 404 00:23:57,640 --> 00:24:01,200 Speaker 2: So in kind of account where we're trading across the 405 00:24:01,240 --> 00:24:04,080 Speaker 2: full maturity, we're allocating a little bit more into five 406 00:24:04,119 --> 00:24:07,200 Speaker 2: to ten year corporates than long corporates. But for the 407 00:24:07,240 --> 00:24:12,280 Speaker 2: accounts that we manage against the long corporate benchmark or 408 00:24:12,320 --> 00:24:15,679 Speaker 2: the long of credit, we're still making sure that we 409 00:24:15,760 --> 00:24:20,200 Speaker 2: have that overweight income profile because I think that that's 410 00:24:20,280 --> 00:24:24,439 Speaker 2: still a positive technical that's really impacting that market. And 411 00:24:24,480 --> 00:24:27,960 Speaker 2: you're also seeing less supply, especially on the corporate side, 412 00:24:27,960 --> 00:24:33,040 Speaker 2: coming through because of higher rates. So you've got, you know, 413 00:24:33,160 --> 00:24:36,359 Speaker 2: kind of a good demand story and a beneficial supply 414 00:24:36,480 --> 00:24:39,560 Speaker 2: story for the long end, and then you had mentioned 415 00:24:39,560 --> 00:24:43,480 Speaker 2: before the pension de risking, So just to be clear 416 00:24:43,520 --> 00:24:46,520 Speaker 2: on that, is that where you for I guess, more 417 00:24:46,520 --> 00:24:50,560 Speaker 2: of the layman, you know, where pensions had previously or 418 00:24:50,560 --> 00:24:53,399 Speaker 2: are currently you know, allocated to some let's say equities, 419 00:24:53,680 --> 00:24:55,840 Speaker 2: they have a chance now now that yields are high, 420 00:24:55,960 --> 00:24:58,440 Speaker 2: you can take some of that risk off and reinvest 421 00:24:58,800 --> 00:25:01,720 Speaker 2: in higher really tries or long daty corporate bonds. Is 422 00:25:01,960 --> 00:25:04,879 Speaker 2: that kind of what you're talking about exactly? And for 423 00:25:04,960 --> 00:25:09,440 Speaker 2: those plans that actually reduces the risk for them. So 424 00:25:09,480 --> 00:25:13,280 Speaker 2: that's getting closer to an immunized position they would call it. 425 00:25:13,800 --> 00:25:16,359 Speaker 1: Are there any other sectors you particularly like at the 426 00:25:16,359 --> 00:25:18,440 Speaker 1: moment that you are are buying into. 427 00:25:18,920 --> 00:25:21,160 Speaker 2: I guess one of the areas that we've been adding 428 00:25:21,240 --> 00:25:25,359 Speaker 2: some risk long corporate side is in some of the 429 00:25:25,440 --> 00:25:30,520 Speaker 2: electric utilities. They're being forced to issue or are less 430 00:25:30,640 --> 00:25:33,400 Speaker 2: rate interest rate sensitive than some of the other sectors, 431 00:25:33,480 --> 00:25:37,320 Speaker 2: so are increasing their issuance in thirty year bonds. So 432 00:25:37,359 --> 00:25:38,959 Speaker 2: that's kind of a sector where we like to make 433 00:25:39,000 --> 00:25:45,280 Speaker 2: sure we're continuing to allocate capital too. And then consumer finance, 434 00:25:45,359 --> 00:25:47,200 Speaker 2: I guess is one of the other areas where we're 435 00:25:47,240 --> 00:25:50,639 Speaker 2: seeing some opportunities. We do still think that the US 436 00:25:50,680 --> 00:25:55,320 Speaker 2: consumer is in really good shape. When we're dissecting the 437 00:25:55,440 --> 00:25:59,680 Speaker 2: US kind of population in general, we are seeing some 438 00:25:59,680 --> 00:26:04,320 Speaker 2: stress come forward at the lower income cohorts, middle income cohorts, 439 00:26:04,359 --> 00:26:08,399 Speaker 2: and upper earners are still looking very very strong, healthy 440 00:26:08,440 --> 00:26:11,640 Speaker 2: balance sheets, a lot of equity that's been built up 441 00:26:12,000 --> 00:26:15,320 Speaker 2: in their homes. And when we're looking at some of 442 00:26:15,320 --> 00:26:19,880 Speaker 2: the recent proposals like from Freddie Mack, looking at creating 443 00:26:19,960 --> 00:26:24,280 Speaker 2: ways for more homeowners to tap into home equity, we 444 00:26:24,320 --> 00:26:27,520 Speaker 2: think that could be the next leg of consumption. As 445 00:26:27,520 --> 00:26:31,320 Speaker 2: we look out over the next couple of years, in general, 446 00:26:31,480 --> 00:26:36,120 Speaker 2: we're seeing excess savings be pulled down, so the consumer 447 00:26:36,240 --> 00:26:39,840 Speaker 2: is probably running out of space there and it's going 448 00:26:39,920 --> 00:26:43,160 Speaker 2: to have to start relying more on actual spending or 449 00:26:43,200 --> 00:26:45,159 Speaker 2: actual income to drive their spending. 450 00:26:46,320 --> 00:26:48,960 Speaker 1: That's interesting. So our last guest from TCW was very 451 00:26:49,040 --> 00:26:51,000 Speaker 1: worried about the US consumer and thought that was the 452 00:26:51,000 --> 00:26:55,080 Speaker 1: big vulnerability that you know, the actual levels of unemployment 453 00:26:55,119 --> 00:26:58,200 Speaker 1: aren't visible, that all of this buy now, pay later 454 00:26:59,160 --> 00:27:01,600 Speaker 1: stuff and all of this debtedness on the consumer balance 455 00:27:01,640 --> 00:27:03,400 Speaker 1: sheet was it was then it was going to end up, 456 00:27:03,440 --> 00:27:08,760 Speaker 1: you know, potentially bringing markets down. Ultimately, you seem to 457 00:27:08,760 --> 00:27:11,520 Speaker 1: have a different view, which is which is also interesting. 458 00:27:11,560 --> 00:27:13,600 Speaker 1: So the data must be telling us two different things. 459 00:27:15,200 --> 00:27:17,520 Speaker 2: I think the way we square that circle is that 460 00:27:17,800 --> 00:27:21,760 Speaker 2: the buy now, pay later data is not showing up 461 00:27:21,800 --> 00:27:23,600 Speaker 2: on credit reports and things like that. So there is 462 00:27:23,680 --> 00:27:27,480 Speaker 2: an kind of an area where credit has been lent 463 00:27:28,800 --> 00:27:31,800 Speaker 2: and it's new and when that happens. Usually we have 464 00:27:32,000 --> 00:27:35,520 Speaker 2: some areas where you know, the credit box was open 465 00:27:35,600 --> 00:27:39,040 Speaker 2: too much and maybe some imprudent lending happened. I think 466 00:27:39,119 --> 00:27:41,800 Speaker 2: for the large part that again comes back to the 467 00:27:41,840 --> 00:27:45,480 Speaker 2: lower income cohorts where we are seeing some signs of stress, 468 00:27:46,040 --> 00:27:48,240 Speaker 2: I would say when we're thinking about the labor market 469 00:27:48,359 --> 00:27:51,440 Speaker 2: in general. So one of the things that really led 470 00:27:51,480 --> 00:27:55,520 Speaker 2: to dramatic outperformance of the economy. We think last year 471 00:27:55,920 --> 00:27:59,440 Speaker 2: one government spending, but two were also seeing a lot 472 00:27:59,520 --> 00:28:04,800 Speaker 2: more and immigration. So the CBO or the Congressional Budget 473 00:28:04,800 --> 00:28:07,960 Speaker 2: Office just updated their statistics on what they think twenty 474 00:28:08,040 --> 00:28:11,000 Speaker 2: twenty three immigration was. They think it was roughly three 475 00:28:11,000 --> 00:28:14,880 Speaker 2: point three million new immigrants and are expecting another two 476 00:28:14,920 --> 00:28:19,000 Speaker 2: point six million this year. When you have that surge 477 00:28:19,040 --> 00:28:22,439 Speaker 2: of population coming into the labor market, what we're seeing 478 00:28:22,520 --> 00:28:27,680 Speaker 2: is the unemployment rate. If they just entered the labor marketing, 479 00:28:27,680 --> 00:28:30,200 Speaker 2: didn't have a job, and not all of those immigrants 480 00:28:30,240 --> 00:28:34,000 Speaker 2: are going to have work permits and things like that, obviously, 481 00:28:34,040 --> 00:28:37,000 Speaker 2: but they are a pool of potential workers. You could 482 00:28:37,000 --> 00:28:40,400 Speaker 2: see the unemployment rate moving much higher. Instead, we're seeing 483 00:28:40,760 --> 00:28:43,440 Speaker 2: more employment coming through and this showed up as an 484 00:28:43,480 --> 00:28:46,520 Speaker 2: improvement in the supply side of the economy, so we 485 00:28:46,640 --> 00:28:51,240 Speaker 2: ended up with more growth in twenty twenty three. The 486 00:28:51,400 --> 00:28:55,239 Speaker 2: unemployment rate stayed similar to levels that we saw in 487 00:28:55,280 --> 00:28:59,120 Speaker 2: the middle of the year post the regional banking crisis, 488 00:28:59,440 --> 00:29:05,280 Speaker 2: and yet inflation was able to decelerate by essentially a 489 00:29:05,320 --> 00:29:08,760 Speaker 2: full percentage point in core pce terms, more than the 490 00:29:08,760 --> 00:29:11,720 Speaker 2: FED had been anticipated in June. So we ended the 491 00:29:11,800 --> 00:29:14,440 Speaker 2: year closer to two point nine percent for core PCEE 492 00:29:14,520 --> 00:29:20,000 Speaker 2: after them anticipating three point nine percent with better growth. 493 00:29:20,240 --> 00:29:22,680 Speaker 2: And how does that make sense, Well, it means that 494 00:29:22,720 --> 00:29:25,360 Speaker 2: you had an improvement in the supply side of the economy. 495 00:29:25,360 --> 00:29:26,880 Speaker 2: I think a large part of that had to do 496 00:29:27,000 --> 00:29:30,360 Speaker 2: with the influx of labor, and that's meant that you 497 00:29:30,520 --> 00:29:35,240 Speaker 2: do continue to have more people working, you have more 498 00:29:35,360 --> 00:29:39,920 Speaker 2: productive labor, and I think from the US consumer perspective, 499 00:29:40,240 --> 00:29:45,160 Speaker 2: that's why we're still seeing overall payroll income running between 500 00:29:45,160 --> 00:29:47,760 Speaker 2: five and six percent. Historically that would have been a 501 00:29:47,920 --> 00:29:52,400 Speaker 2: very strong labor market. So I do think the unemployment 502 00:29:52,440 --> 00:29:54,440 Speaker 2: rate might move a little bit higher as we look 503 00:29:54,560 --> 00:29:56,800 Speaker 2: through this year. And that's part of the reason that 504 00:29:56,840 --> 00:30:01,160 Speaker 2: the Fed's task is becoming more difficult because they're going 505 00:30:01,240 --> 00:30:03,800 Speaker 2: to have to balance more the labor market trade off 506 00:30:03,920 --> 00:30:07,480 Speaker 2: with kind of that last mile of getting inflation down. 507 00:30:08,200 --> 00:30:11,640 Speaker 3: And so it sounds like you're in the camp of 508 00:30:11,680 --> 00:30:15,200 Speaker 3: you know, the FED can manufacture the soft landing. But 509 00:30:15,560 --> 00:30:17,880 Speaker 3: if I can ask, like, what do you think are 510 00:30:17,920 --> 00:30:20,680 Speaker 3: the biggest risks out there? I mean, if maybe you 511 00:30:20,680 --> 00:30:22,560 Speaker 3: know what keeps you up at night, is it is 512 00:30:22,560 --> 00:30:26,640 Speaker 3: it a stagflation you know, potential environment where inflation remains 513 00:30:26,720 --> 00:30:29,680 Speaker 3: high but then growth slows or what what are some 514 00:30:29,680 --> 00:30:31,840 Speaker 3: of these things that that might you know, that that 515 00:30:31,920 --> 00:30:32,400 Speaker 3: concern you. 516 00:30:33,440 --> 00:30:36,640 Speaker 2: Yeah, I liked the way Powell answered this in his 517 00:30:36,720 --> 00:30:39,040 Speaker 2: press conference. I don't see the stag or the flation. 518 00:30:40,240 --> 00:30:43,880 Speaker 2: I think that's generally right. It's it's a risk that 519 00:30:43,920 --> 00:30:46,520 Speaker 2: we're worried about, like should we go into an environment 520 00:30:46,640 --> 00:30:51,080 Speaker 2: where we are seeing much weaker growth and much higher inflation? 521 00:30:51,880 --> 00:30:55,880 Speaker 2: But right now inflation is relatively contained compared to what 522 00:30:55,920 --> 00:30:59,240 Speaker 2: we saw in the seventies and early eighties, and the 523 00:30:59,320 --> 00:31:03,480 Speaker 2: unemployment rate is still very very low by almost all 524 00:31:03,600 --> 00:31:08,760 Speaker 2: historical standards. So against that backdrop, it doesn't seem like 525 00:31:08,800 --> 00:31:13,160 Speaker 2: a stagflationary environment. That is a toxic mix for policy 526 00:31:13,160 --> 00:31:16,480 Speaker 2: makers though, So when we're thinking about tail risks, yeah, 527 00:31:16,520 --> 00:31:22,040 Speaker 2: that if we have an exogenous shock that really impacts inflation. Again, 528 00:31:22,160 --> 00:31:25,320 Speaker 2: like when Russia invaded Ukraine and we saw energy prices spike, 529 00:31:25,360 --> 00:31:29,480 Speaker 2: we saw food prices spike, all of those feed into 530 00:31:29,760 --> 00:31:34,320 Speaker 2: a de anchoring of inflation expectations by consumers and by 531 00:31:34,360 --> 00:31:38,520 Speaker 2: the general population. I think that's one of those big worries. 532 00:31:38,880 --> 00:31:43,320 Speaker 2: I also worry about anything that disrupts the US dollars 533 00:31:43,600 --> 00:31:49,360 Speaker 2: safe haven status. That could be something that's geopolitical in nature, 534 00:31:51,400 --> 00:31:55,000 Speaker 2: or it could be something that is natural disaster related 535 00:31:55,080 --> 00:31:59,160 Speaker 2: outside of the US that causes safe haven flows or 536 00:32:00,520 --> 00:32:04,040 Speaker 2: kind of individuals to repatriate to home country biases. Given 537 00:32:04,080 --> 00:32:07,800 Speaker 2: we have been the recipient of so much kind of 538 00:32:08,000 --> 00:32:10,440 Speaker 2: foreign money over the years. 539 00:32:11,000 --> 00:32:12,920 Speaker 1: And when you look at credits spelifically, I mean all 540 00:32:12,960 --> 00:32:16,320 Speaker 1: of the money that's flowing in and it just seems 541 00:32:16,360 --> 00:32:19,200 Speaker 1: to be, you know, relentless, and then you know, in 542 00:32:19,280 --> 00:32:21,440 Speaker 1: terms of the net supply, it's not that big. It 543 00:32:21,440 --> 00:32:23,360 Speaker 1: seems on a growth space there is a lot of supply, 544 00:32:23,440 --> 00:32:26,440 Speaker 1: but you drill down it's mostly REFI. So there is 545 00:32:26,480 --> 00:32:30,720 Speaker 1: this huge demand supply imbalance which is just growing. When 546 00:32:30,720 --> 00:32:34,960 Speaker 1: you ask most investors about it, they cically about spreads. 547 00:32:35,000 --> 00:32:36,920 Speaker 1: They say, well, the yields are just so high we 548 00:32:37,000 --> 00:32:40,600 Speaker 1: can't resist. You know, you've been in the market for 549 00:32:40,680 --> 00:32:44,560 Speaker 1: quite some time. You've seen situations where there is a 550 00:32:44,920 --> 00:32:47,720 Speaker 1: more demand than supply. And I'm thinking also about private 551 00:32:47,760 --> 00:32:50,880 Speaker 1: credit here. It doesn't always end well. Are you worried 552 00:32:50,880 --> 00:32:54,600 Speaker 1: about froth and potential accidents in the market. 553 00:32:55,600 --> 00:32:59,680 Speaker 2: I think that's something that is an ever present danger always. 554 00:33:00,280 --> 00:33:03,320 Speaker 2: I would say right now, I think we had a 555 00:33:03,360 --> 00:33:06,520 Speaker 2: shock in twenty twenty two, in early twenty twenty three. 556 00:33:06,640 --> 00:33:12,080 Speaker 2: I think that reset expectations. So if we think about 557 00:33:12,120 --> 00:33:15,760 Speaker 2: twenty twenty two, with how much global central banks increased 558 00:33:15,800 --> 00:33:19,160 Speaker 2: policy rates, you know, we reset the IPO machine, We 559 00:33:19,280 --> 00:33:25,080 Speaker 2: broke spacks crypto, you uncovered several frauds like things that 560 00:33:25,080 --> 00:33:27,880 Speaker 2: would typically happen in a recession. We just didn't have 561 00:33:27,920 --> 00:33:31,920 Speaker 2: a labor market recession, and so as we're looking forward, 562 00:33:32,080 --> 00:33:35,640 Speaker 2: I'm anticipating more of a range trading environment for corporate 563 00:33:35,800 --> 00:33:39,200 Speaker 2: spreads and for risk gussets in general. And I think 564 00:33:39,320 --> 00:33:44,160 Speaker 2: that's an outcome that is more consistent with probably the 565 00:33:44,360 --> 00:33:46,840 Speaker 2: two thousand and four to two thousand and six period 566 00:33:47,840 --> 00:33:51,120 Speaker 2: where you get to, you know, the FED being on hold. 567 00:33:52,000 --> 00:33:57,080 Speaker 2: It's not clear where big excesses are. Of course that 568 00:33:57,200 --> 00:34:00,880 Speaker 2: cyclo is in housing, and then also in what was 569 00:34:00,880 --> 00:34:05,120 Speaker 2: happening in shadow banking this time around. Could it be 570 00:34:06,040 --> 00:34:08,480 Speaker 2: on the lower end consumer side, if there was a 571 00:34:08,520 --> 00:34:13,719 Speaker 2: lot more by now pay later lending, Could it be 572 00:34:13,760 --> 00:34:17,000 Speaker 2: in private credit markets? You know, there's a lot of 573 00:34:17,000 --> 00:34:20,200 Speaker 2: areas where we don't have a ton of transparency and 574 00:34:20,320 --> 00:34:24,160 Speaker 2: leverage has probably increased. But right now I'm not seeing 575 00:34:24,280 --> 00:34:28,120 Speaker 2: signs that, you know, a stop is imminent. 576 00:34:28,800 --> 00:34:31,960 Speaker 3: And so what are some of these things that you're 577 00:34:32,120 --> 00:34:34,279 Speaker 3: kind of tracking in the background that that kind of 578 00:34:34,280 --> 00:34:37,160 Speaker 3: gives you confidence that, hey, you know, maybe there is 579 00:34:37,200 --> 00:34:39,480 Speaker 3: still potential for a rate cut at the end of 580 00:34:39,520 --> 00:34:41,280 Speaker 3: this year or kind of going forward. 581 00:34:42,760 --> 00:34:45,720 Speaker 2: Well, a lot of it has to do with where 582 00:34:45,840 --> 00:34:50,560 Speaker 2: real policy rates are. So over time, the FED tends 583 00:34:50,600 --> 00:34:53,960 Speaker 2: to be thinking about setting policy based on real policy 584 00:34:54,040 --> 00:34:57,640 Speaker 2: rates or the phenomenal policy rate deflated by the either 585 00:34:57,760 --> 00:35:00,359 Speaker 2: inflation we're expecting to get over the near term or 586 00:35:00,400 --> 00:35:04,520 Speaker 2: the most recent inflation that's been delivered, and as inflation 587 00:35:04,800 --> 00:35:09,680 Speaker 2: has decelerated, that's actually making policy rates a little bit 588 00:35:09,719 --> 00:35:13,160 Speaker 2: more restrictive. So if they keep policy rates in the 589 00:35:13,200 --> 00:35:15,439 Speaker 2: five and qure to five and a half range as 590 00:35:15,480 --> 00:35:20,920 Speaker 2: we go through the year, and inflation does decelerate down 591 00:35:21,040 --> 00:35:23,640 Speaker 2: in core PC terms closer to something like two and 592 00:35:23,640 --> 00:35:25,960 Speaker 2: a half, all of a sudden, you're going to have 593 00:35:26,000 --> 00:35:29,080 Speaker 2: a real policy rate that's closer to three percent, which 594 00:35:29,280 --> 00:35:32,880 Speaker 2: historically would be very restrictive for the US and would 595 00:35:32,960 --> 00:35:37,560 Speaker 2: likely lead to a more pronounced slowing in the labor market. 596 00:35:37,880 --> 00:35:41,240 Speaker 2: We're already seeing that slowing come through in the labor market. 597 00:35:42,000 --> 00:35:44,520 Speaker 2: We can look at the most recent view payroll prints, 598 00:35:45,040 --> 00:35:46,560 Speaker 2: but we can also look at some of the labor 599 00:35:46,560 --> 00:35:51,120 Speaker 2: market reads, whether it's from the NFIV Small business surveys 600 00:35:51,280 --> 00:35:55,439 Speaker 2: or from like the isms, you'll see the employment expectations 601 00:35:55,640 --> 00:35:58,040 Speaker 2: are beginning to come down. We're even seeing that in 602 00:35:58,080 --> 00:36:02,040 Speaker 2: some of the consumer confidence surveys, where there's a little 603 00:36:02,040 --> 00:36:06,640 Speaker 2: bit more worry about personal finances and job prospects as 604 00:36:06,680 --> 00:36:10,080 Speaker 2: you look forward, So those can be good leads to 605 00:36:10,160 --> 00:36:13,279 Speaker 2: where we think inflation is also going to come out. 606 00:36:14,840 --> 00:36:17,759 Speaker 2: But when we're doing kind of the bottom up analysis 607 00:36:17,760 --> 00:36:21,600 Speaker 2: within CPI and things like that, I think shelter still 608 00:36:21,640 --> 00:36:24,920 Speaker 2: has room for deceleration. We can look at some of 609 00:36:24,960 --> 00:36:27,560 Speaker 2: the high frequency data that we get from things like Zillow, 610 00:36:28,440 --> 00:36:32,840 Speaker 2: which would suggest that we should be anticipating more downside surprise. 611 00:36:33,160 --> 00:36:35,840 Speaker 2: I think as we look at things like vacancy rates, 612 00:36:35,840 --> 00:36:41,720 Speaker 2: as we look at the potential for oncoming multifamily units, 613 00:36:41,960 --> 00:36:44,080 Speaker 2: as we look out over the next eighteen months, there's 614 00:36:44,120 --> 00:36:46,960 Speaker 2: a lot of supply that's going to come on that'll 615 00:36:47,040 --> 00:36:50,680 Speaker 2: likely also take some of the sting out of rents. 616 00:36:50,760 --> 00:36:53,800 Speaker 2: So I'm anticipating that that'll show up in owners equivalent 617 00:36:53,840 --> 00:36:58,799 Speaker 2: rent the large shelter component within CPI. But the area 618 00:36:58,880 --> 00:37:01,680 Speaker 2: that we are a little bit more concerned about is 619 00:37:01,760 --> 00:37:06,520 Speaker 2: the service sector outside of shelter, and that ends up 620 00:37:06,560 --> 00:37:10,319 Speaker 2: being driven more by wages, and wages have proved to 621 00:37:10,320 --> 00:37:13,800 Speaker 2: be a little bit stickier now. We're continuing to see 622 00:37:14,320 --> 00:37:17,920 Speaker 2: moderation in things like average hourly earnings. When we look 623 00:37:17,920 --> 00:37:21,839 Speaker 2: at the Atlanta Fed measure, and we can look at 624 00:37:21,840 --> 00:37:24,560 Speaker 2: indeed postings and things like that. They're all suggesting that 625 00:37:24,600 --> 00:37:26,759 Speaker 2: wages are probably going to come down into the three 626 00:37:26,800 --> 00:37:30,200 Speaker 2: to four percent range after being in the high single digits. 627 00:37:30,640 --> 00:37:34,200 Speaker 2: That's much closer to normal. But I think as we 628 00:37:34,239 --> 00:37:36,560 Speaker 2: go through we did have a change come out of 629 00:37:36,560 --> 00:37:42,719 Speaker 2: the pandemic. We adopted remote work policies in a much 630 00:37:42,760 --> 00:37:46,960 Speaker 2: more rapid fashion than we would have adopted them, and 631 00:37:47,000 --> 00:37:50,400 Speaker 2: that's causing a lot of sectors where you need to 632 00:37:50,480 --> 00:37:54,040 Speaker 2: have people be present on site five days a week 633 00:37:54,080 --> 00:37:56,320 Speaker 2: to have to pay more and more in wages. You 634 00:37:56,360 --> 00:38:00,560 Speaker 2: can think about education, you can think about healthcare fatality, 635 00:38:01,239 --> 00:38:04,319 Speaker 2: and over time we're seeing those wages pressures kind of 636 00:38:04,320 --> 00:38:07,359 Speaker 2: build in those sectors. And I think that's an area 637 00:38:07,440 --> 00:38:11,680 Speaker 2: where we're seeing more stickiness come through and kind of 638 00:38:11,680 --> 00:38:14,200 Speaker 2: that core service inflation. So that's what we're watching. But 639 00:38:14,640 --> 00:38:18,560 Speaker 2: as the labor market softens, I think some of that 640 00:38:18,600 --> 00:38:20,960 Speaker 2: wage pressure is going to come out as well. 641 00:38:22,000 --> 00:38:23,840 Speaker 1: So to wrap it up, Jeremy, in this year of 642 00:38:23,880 --> 00:38:26,839 Speaker 1: the bond, what's the best opportunity? Where is the best 643 00:38:26,840 --> 00:38:27,919 Speaker 1: relative value right now? 644 00:38:29,400 --> 00:38:31,800 Speaker 2: For us? We're really seeing it in some of the 645 00:38:31,840 --> 00:38:35,520 Speaker 2: structured markets that's where we've probably allocated more of our 646 00:38:35,560 --> 00:38:41,640 Speaker 2: capital decent bet in US consumer and US residential housing. 647 00:38:41,719 --> 00:38:46,239 Speaker 2: We still think there's a large kind of undersupply for 648 00:38:46,400 --> 00:38:50,120 Speaker 2: especially single family homes in the US, and so over 649 00:38:50,200 --> 00:38:53,319 Speaker 2: time we're anticipating that that's going to be one of 650 00:38:53,320 --> 00:38:54,719 Speaker 2: the better performing sectors. 651 00:38:55,320 --> 00:38:58,480 Speaker 1: So the specificity and stretched its non agency mortgages, is 652 00:38:58,480 --> 00:38:58,960 Speaker 1: that right. 653 00:38:59,280 --> 00:39:01,160 Speaker 2: That's where we have we have a large amount of 654 00:39:01,160 --> 00:39:02,160 Speaker 2: our position. 655 00:39:02,239 --> 00:39:07,560 Speaker 1: Yeah, yep, okay, brilliant, great stuff. Jeremy Forster with Wellington Management, 656 00:39:07,560 --> 00:39:09,160 Speaker 1: it's been a pleasure having you on the Credit Edge. 657 00:39:09,160 --> 00:39:11,720 Speaker 2: Many thanks, thank you, it's been a pleasure. 658 00:39:12,560 --> 00:39:15,000 Speaker 1: And to Arnold Kakuda with Bloomberg Intelligence, thank you so 659 00:39:15,080 --> 00:39:15,919 Speaker 1: much for being on the show. 660 00:39:16,080 --> 00:39:17,440 Speaker 3: Absolutely pleasure is mine. 661 00:39:17,920 --> 00:39:21,280 Speaker 1: Check out all of Arnold's excellent analysis on the Bloomberg Terminal. 662 00:39:21,320 --> 00:39:23,279 Speaker 1: It's really great and everyone should be paying attention to 663 00:39:23,280 --> 00:39:25,920 Speaker 1: the banks right now. And please do subscribe wherever you 664 00:39:25,920 --> 00:39:28,640 Speaker 1: get your podcasts. We're on Apple, Spotify and all other 665 00:39:28,680 --> 00:39:32,720 Speaker 1: good podcast providers, including the Bloomberg Terminal. Give me a review, 666 00:39:32,840 --> 00:39:35,640 Speaker 1: tell your friends, or email me directly at jcromb eight 667 00:39:35,920 --> 00:39:38,840 Speaker 1: at Bloomberg dot net. I'm James Cromby, it's been a 668 00:39:38,880 --> 00:39:41,160 Speaker 1: pleasure having you join us again next week on the 669 00:39:41,200 --> 00:39:42,040 Speaker 1: Credit edge.