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Speaker 1: Hello, Welcome to the Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumby. I'm a senior editor at Bloomberg.

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Speaker 2: Hi, and I'm Spencer Cutter. I'm a senior credit analyst

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Speaker 2: covering the energy sector with Bloomberg Intelligence. This week, we're

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Speaker 2: very pleased to welcome John Kirshner, head of US securitized

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Speaker 2: Products and portfolio manager at Janis Henderson.

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Speaker 3: John, how are you great?

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Speaker 4: Thanks for having me pleasure to.

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Speaker 2: Be here, great, thanks for joining us. For those of

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Speaker 2: you who are listening are not familiar with John, he's

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Speaker 2: a portfolio manager for a number of fixed income and

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Speaker 2: securitized ETFs at Janis Henderson, including the troll A Clo ETF,

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Speaker 2: which is the largest collateralized loan obligation ETF at.

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Speaker 3: Over twenty billion in assets on our management.

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Speaker 2: He also runs a Janis Henderson Mortgage Backed Securities ETF,

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Speaker 2: which is the largest actively managed mortgage backed securities et

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Speaker 2: at over five billion.

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Speaker 1: Thank you, Spencer. Thank you for also spelling out collasteralized

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Speaker 1: loan obligations.

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Speaker 4: No acronyms. I've been told.

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Speaker 1: Keep it simple, so just to set the same before

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Speaker 1: we dig in. Global markets are getting whipswored by recession

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Speaker 1: fears and haphazard and erratic US policy making, particularly on trade.

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Speaker 1: Despite that credit spreads are quite tight across the board,

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Speaker 1: including structured finance, there's the hope that the longer term

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Speaker 1: trajectory of the US economy remains up despite some short

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Speaker 1: term pain and volatility. Market optimists believe the new administration

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Speaker 1: has their back and will do its best to defend

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Speaker 1: the economy, that everything will be okay in the end.

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Speaker 1: Bond and loan markets are pricing in very low odds

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Speaker 1: of a US recession, even as talk of economic downturn

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Speaker 1: even stagflation become more frequent, with consumers throwing in the

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Speaker 1: towel and business leaders putting investments on hold complaining that

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Speaker 1: they can't take long term decisions in this environment. Treasury

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Speaker 1: yields remain high, keeping buyers of fixed income happy, especially

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Speaker 1: those with floating rate assets. Above all, there's not enough

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Speaker 1: supply of corporate debt to satisfy the growing demand. But John,

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Speaker 1: what's your view, how does this all affect structured finance

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Speaker 1: markets and what's the drawer of things like clos in

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Speaker 1: these times of heightened volatility and stress?

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Speaker 5: Yeah, Well, this is the big discussion flash argument of

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Speaker 5: the last month. Right, the new administration has added some

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Speaker 5: uncertainty to the overall economy and economic outlook. But I

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Speaker 5: think what people have to keep in mind is since

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Speaker 5: COVID we've been running massive deficits, right over ten percent

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Speaker 5: during COVID and even this past year about seven percent,

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Speaker 5: and that's not sustainable. So it's somewhat painful to dial

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Speaker 5: that down to a more normal level of three percent.

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Speaker 5: But this administration seems very motivated to do that. So

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Speaker 5: I think when people are out there saying, oh, well,

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Speaker 5: Biden's economy was so strong and now Trump or you know,

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Speaker 5: the White House is mucking them up, I think you

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Speaker 5: have to consider that. You know, what was going on

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Speaker 5: under the Biden administration was again not sustainable. But you know,

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Speaker 5: to your point, there have been a lot of people

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Speaker 5: now calling for a recession, and I think people have

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Speaker 5: to parse out like are people really rooting for a

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Speaker 5: recession because they don't like the current president or do

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Speaker 5: they really think it's going to be a recession. And

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Speaker 5: quite frankly, we just don't see the recession in the cards. Yes,

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Speaker 5: the soft data has gotten worse, like things like consumer

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Speaker 5: confidence and business confidence, but the hard data is still

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Speaker 5: pointing to a fairly strong economy. Now Q one GDP

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Speaker 5: will be lower than what we've seen. GDP has been

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Speaker 5: quite strong over the last couple of years, close to

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Speaker 5: three percent since twenty twenty two. This quarter is going

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Speaker 5: to be lower, probably about one percent, but that does

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Speaker 5: not mean a recession. And we're really looking at three things.

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Speaker 5: Number One is over all hard data, so like initial

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Speaker 5: jobless claims that really hasn't moved for years. And yes,

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Speaker 5: there might be a little blip in the DC area

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Speaker 5: that's to be expected with what's going on, but that

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Speaker 5: is has been traditionally the best indicator of recession going forward,

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Speaker 5: and we just haven't seen that move. Two, we're looking

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Speaker 5: at spreads in our sectors. So JP Morgan had a

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Speaker 5: very good piece this past week talking about when stocks

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Speaker 5: go down ten percent, what would you expect in securitized

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Speaker 5: products and investment grade and high yield credit as well.

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Speaker 5: And for example, stocks go down ten percent, you expect

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Speaker 5: mortgages be out twenty five basis points.

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Speaker 4: They were out five basis points.

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Speaker 5: You expect triple B autos out one hundred and twenty

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Speaker 5: five batises points. They've been out fifteen basis points and

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Speaker 5: high beta sectors like use cor credit or triple Bcnah,

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Speaker 5: it should be out two hundred and fifty to three

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Speaker 5: hundred basis points and they've only been out like fifty

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Speaker 5: five to seventy basis points. And then finally we actually

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Speaker 5: look at the prediction markets like polymarket and polymarket beginning

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Speaker 5: of the year was like twenty twenty five percent recession

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Speaker 5: probability for twenty twenty five. That's a baseline level. Today

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Speaker 5: it's about thirty two percent, so slightly higher, but nowhere

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Speaker 5: near the fifty to sixty percent that other people are

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Speaker 5: talking about.

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Speaker 2: Quick question, sticking with the sort of high level economic

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Speaker 2: focus before digging into specific market trends. There's a reason

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Speaker 2: an article came out talking to a United States is

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Speaker 2: basically a consumer driven economy, right, And there was an

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Speaker 2: article that came out and study, I think there's Moodies

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Speaker 2: that ran it. Basically that the wealthiest ten percent of households,

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Speaker 2: which are households making more than two hundred and fifty

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Speaker 2: thousand dollars a year, is now driving fifty percent of

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Speaker 2: all consumer spending, which has grown pretty dramatically over the

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Speaker 2: last couple of years.

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Speaker 3: And then that just means that the spending from the

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Speaker 3: other ninety percent of the household is somewhat anemic.

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Speaker 2: Is that something that is on your radars in terms

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Speaker 2: of cause for concern for the overall economy or as

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Speaker 2: long as spending overall stays strong, and that's kind of

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Speaker 2: what matters.

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Speaker 4: Yeah, like two points there.

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Speaker 5: You hear the stat all the time that seventy percent

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Speaker 5: of the economy is driven by the consumer, and that

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Speaker 5: is true, but it also includes things like healthcare, right,

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Speaker 5: and no one is really spending discretionarily on healthcare. So

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Speaker 5: I just want to clear that up because I think

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Speaker 5: that's the most overuse statistic that I hear. But it

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Speaker 5: is true that consumer spending is very important to this economy,

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Speaker 5: and it is true that the wealthiest ten percent or

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Speaker 5: one third are however you want to split that demographic

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Speaker 5: is driving most of it. Now, I do not want

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Speaker 5: to minimize the pain that lower the lowering consumer is facing.

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Speaker 4: Right.

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Speaker 5: Inflation hurts the lower end consumer much much more than

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Speaker 5: the higher end consumer, just because they don't have as

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Speaker 5: much discretionary income. So things like food prices, obviously, egg prices,

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Speaker 5: gas prices, things like that that hurts, and so I

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Speaker 5: do not want to minimize that, but if you look

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Speaker 5: at the lowest one third of the economy, it's only

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Speaker 5: like fifteen percent of discretionary spending or consumer spending.

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Speaker 4: And so yeah, when you're really.

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Speaker 5: Thinking about what's going to move the overall economy, you

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Speaker 5: have to look at the you know, the top ten

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Speaker 5: or top third or however you want to divide it.

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Speaker 5: And those people are continuing to spend, their continuing to travel,

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Speaker 5: They're continuing to kind of run this economy, move this economy.

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Speaker 5: So that's really what's driving I think our outlook as

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Speaker 5: far as what's going to happen to gdb GDP growth

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Speaker 5: going forward.

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Speaker 1: But that scenario kind of just no Fed rate cuts

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Speaker 1: this year, is that what you're expecting.

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Speaker 5: So if there are going to be cuts, it's going

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Speaker 5: to be at the back end of the year, So,

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Speaker 5: you know, eight nine months, it's hard to say. I

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Speaker 5: think Chair Paul when he was had his press conference

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Speaker 5: last week pretty much said the same thing. Look, they

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Speaker 5: they can be patient. Right, Unemployment has moved up a

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Speaker 5: little bit from the lows, but still four point one percent,

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Speaker 5: still very low historically. And so if I'm Chair Paul,

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Speaker 5: he's done in a year. Basically, his legacy is that

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Speaker 5: he took inflation that was running depending on how you measure,

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Speaker 5: at seven to nine percent and brought it down to

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Speaker 5: you know, two and a half three percent. And now

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Speaker 5: with tariffs, maybe it notches up a little bit, but

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Speaker 5: he does not want to ruin that legacy. And if

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Speaker 5: there's no you know, the FED has a dual mandate, right,

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Speaker 5: stable prices and full employment, and we're kind of at

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Speaker 5: full employment and we're not quite at his target of

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Speaker 5: two percent inflation. So yeah, I think they will be patient,

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Speaker 5: and that speaks very well for you know, to kind

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Speaker 5: of move into the product pitch like floating rate securities

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Speaker 5: and clateralized loan obligation ETFs that we're obviously a big

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Speaker 5: fans of.

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Speaker 2: You mentioned Powell and his impact on rates and whether

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Speaker 2: he'll cut rates or not, and what's happened We now

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Speaker 2: have another voice in the market, Treasury Secretary talking about

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Speaker 2: his desire to bring down yield on the tenure.

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Speaker 3: Treasury specifically seems to be targeting that he.

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Speaker 2: Doesn't have the levers to pull that Powell does. But

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Speaker 2: does that influence your decision or what would you see there?

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Speaker 2: Is that something that you would see impact in the

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Speaker 2: market or your decisions or outlook and where rates would go.

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Speaker 5: Well, yeah, you ignore the Secretary of Treasury at your peril, right,

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Speaker 5: And people say, well, what can you really do? Like

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Speaker 5: he's not moving short term rates like the feed is,

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Speaker 5: but just him out there kind of talking about wanting

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Speaker 5: lower rates, I think is important and material. And look,

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Speaker 5: they can change the auction schedule and the size of

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Speaker 5: the auctions. They can move auctions more into the short

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Speaker 5: end of the curve. So there are some things they

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Speaker 5: can do on the margin, and I would expect the

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Speaker 5: market to take them at his word that they're focused

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Speaker 5: more on what's going on with the treasury market than

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Speaker 5: the equity market. So what this really if you have

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Speaker 5: the Treasury Secretary is saying we want the tenure treasury

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Speaker 5: lower because that affects a lot of borrowing, particularly mortgages

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Speaker 5: and commercial real estate. And you know, there really hasn't

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Speaker 5: been a lot of volatility in the tenures so far

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Speaker 5: this year, and you have the FED on hold. Basically

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Speaker 5: that argues for a flatter ye'll curve. And you know,

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Speaker 5: if you ask me what my projecting is a year forward,

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Speaker 5: I think maybe we do have one or two FED

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Speaker 5: cuts later on this year, maybe get to kind of

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Speaker 5: high three percent. But you know, the tenure Treasury right

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Speaker 5: now is looking pretty fair to us, so I think

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Speaker 5: the ye'll curve gets a little steeper, but not materially.

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Speaker 2: So yeah, one sort of reaction I've heard people talk about,

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Speaker 2: you can move around the Treasury can move around the auctions,

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Speaker 2: whether they're going to do five year versus ten year,

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Speaker 2: twelve over twenty and potentially bring down the ten yere

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Speaker 2: I guess bring down the ten year rate relatively speaking

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Speaker 2: due to some sort of scarcity there because you're pushing

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Speaker 2: the auctions into other maturities. But then I guess I

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Speaker 2: question whether that would really have an impact on mortgage

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Speaker 2: rates if you end up with sort of an S

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Speaker 2: curve where the Treasury issues more five and seven year

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Speaker 2: notes and more fifteen year notes, but not any ten

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Speaker 2: year notes, so you kind of had a dip in there.

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Speaker 2: Are lenders really going to look past that dip and

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Speaker 2: focus just on a tenure. Theyre going to look more

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Speaker 2: at the curve and say, Okay, well this is kind

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Speaker 2: of artificial, and I'm going to look more at what's

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Speaker 2: the average curve between the seven and twelve or seven

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Speaker 2: fifteen year versus just the potentially artificially low ten years.

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Speaker 2: I mean, I don't know, that's my first reaction when

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Speaker 2: I hear that scenario.

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Speaker 5: Yeah, it's an excellent question, and you get into the

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Speaker 5: nuances as like how do they actually set mortgage rates

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Speaker 5: and what's driving that? Right, And there's something called the

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Speaker 5: primary secondary spread between where actually mortage backed securities trade

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Speaker 5: and where mortgages are actually offered two borrowers out there.

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Speaker 5: But really what's driving it, yes, is the entire curve,

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Speaker 5: So you're right about that, But maybe more importantly is

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Speaker 5: volatility in the rates market. Right, like mortgages, we have

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Speaker 5: this kind of unique structure of our mortgage finance market,

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Speaker 5: which is a thirty year fixed rate, fully pre payable instrument.

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Speaker 5: Like no other country has this, and the only reason

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Speaker 5: we do have this is because of Fannie Mae and

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Speaker 5: Freddie mac Like. Banks don't really want to lend for

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Speaker 5: thirty years, particularly at a fixed rate, because on the

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Speaker 5: other side of their balance sheet or deposits, which you know,

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Speaker 5: based on Silicon Valley bank we know are not as

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Speaker 5: long to ration as a lot of people thought they were.

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Speaker 5: But banks can basically use Fanny and Freddie and get

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Speaker 5: mortgages off their balance sheet and sell them to investors

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Speaker 5: like Janis Henderson. So it's much more important that interest

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Speaker 5: rates are less volatile and stable. And what the Treasury

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Speaker 5: Secretary Scott Benson is doing is saying like we're going

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Speaker 5: to take out some of that volatility. And I don't

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Speaker 5: want to lead your listeners to believe like this is

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Speaker 5: a massive thing. It's definitely on the margin, but it

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Speaker 5: will help bring down those mortgage spreads over time because

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Speaker 5: the mortgage investors have to worry less about volatility, and

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Speaker 5: so that helps being able to project things like prepayments,

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Speaker 5: and that will cause mortgage spreads to be a little

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Speaker 5: bit tighter on the margin. So I have no doubt

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Speaker 5: if that happens that the Treasury Secretary in the White

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Speaker 5: House will take credit for it. But you know, it

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Speaker 5: affects a lot of people there. I mean, we've seen

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Speaker 5: overall supply of homes go up, and yet demand for

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Speaker 5: homes really hasn't gotten there because mortgage rates are still

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Speaker 5: kind of mid sixes. I think mortgage rates got down,

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Speaker 5: you know, for whatever reason, humans really love round numbers,

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Speaker 5: and if it gets down to a five handle you know,

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Speaker 5: upper five percent, You're going to see a lot of

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Speaker 5: buyers come in because it's just will be a regime change,

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Speaker 5: and that will even though housing's still doing pretty well.

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Speaker 5: We got some housing numbers this morning and home prices

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Speaker 5: have been up four percent. I think that will really

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Speaker 5: help affordability and continue to keep housing markets strong.

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Speaker 1: Let's talk about the CLOS John though, you know you

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Speaker 1: run the biggest ETF. You know, it's a retail vehicle.

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Speaker 1: Four collateralized loan obligations which we bundled up loans to

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Speaker 1: companies leverage loans mostly so you know, on the risky side.

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Speaker 1: You know, when I first talked to people about the

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Speaker 1: concept of an ETF for clos, this is this is

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Speaker 1: going back, you know, more than a decade. They told

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Speaker 1: me I was crazy for reading suggesting it. Somehow you've

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Speaker 1: made a success of it.

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Speaker 3: You know.

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Speaker 1: The main sort of worry was that there was no

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Speaker 1: liquidity and then you know there was a mismatch there

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Speaker 1: for the retail participant and it was still going to

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Speaker 1: end in tears. Talk us through how this works, why

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Speaker 1: it matts is now and you know why it's not

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Speaker 1: really that risky.

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Speaker 5: Yeah, well, you're not the only one that was told

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Speaker 5: that this is crazy. We got told that many times

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Speaker 5: from competitors and the press and even some of our investors.

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Speaker 5: But look, we are large investors in Colos before we

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Speaker 5: launched these products, and Jade Triple A was launched in

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Speaker 5: October of twenty twenty based on our experience through COVID

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Speaker 5: with Colos, So we have obviously many other portfolios. I

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Speaker 5: manage a multisector income portfolio, think of it as a

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Speaker 5: fixed income portfolio. That's best ideas. We held Triple A

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Speaker 5: Colos in that portfolio for liquidity purposes.

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Speaker 4: When COVID hit, we had.

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Speaker 5: To sell some Colos to raise some liquidity in the portfolio.

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Speaker 5: We sold three different batches end of February twenty twenty,

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Speaker 5: early March twenty twenty, and then on one of the

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Speaker 5: worst days during COVID, which was March twenty fourth of

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Speaker 5: twenty twenty, with you know, probably the worst day that

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Speaker 5: was a Tuesday. The worst day was Monday because that

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Speaker 5: Sunday there were actually a lot of hedge funds and

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Speaker 5: opportunity funds that got on wound. They tried to do

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Speaker 5: bid lists on a Sunday. I had never seen that

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Speaker 5: before in my thirty year plus career of trading bonds,

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Speaker 5: and so Monday come in really tough market, stocks downs,

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Speaker 5: bond spreads wider. So we didn't sell that day, but

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Speaker 5: we did sell on Tuesday, and we sold about fifty

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Speaker 5: million of triple A colos in eight different ln items.

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Speaker 5: We had many bids for each line item. We sold

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Speaker 5: the entire lot. There was probably two out of the

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Speaker 5: markets that you could have sold that much on that day,

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Speaker 5: and that's US treasuries and agency mortgages, IG corporate credit.

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Speaker 5: No high yield, definitely not Maybe if you had a

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Speaker 5: very short way to average life, like triple A credit

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Speaker 5: card or something, maybe, but it just showed to us

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Speaker 5: like the liquidities here, and why is that Because there's

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Speaker 5: never been a default in a triple A colo in

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Speaker 5: over thirty years, so it's not really a credit product.

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Speaker 5: And when they started trading mid nineties with a three

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Speaker 5: percent yield and a very short weighted average life, there

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Speaker 5: was all sorts, sorts of money, and you know funds

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Speaker 5: that had dry powder that said, wow, I can get

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Speaker 5: high single digits, maybe even double digits on a triple

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Speaker 5: A COLO. I don't know what's going to happen with COVID.

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Speaker 5: I don't know what's going to happen with equities, I

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Speaker 5: don't know what's going to happen to the economy, but

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Speaker 5: I'm very confident that these securities are actually going to

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Speaker 5: perform well. And if I can get those kind of returns,

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Speaker 5: I'm going to buy them and let the air clear,

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Speaker 5: let you know, figure out what's going on, and then

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Speaker 5: you know, I can sell them later. And so given

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Speaker 5: that experience and the fact that it's a one point

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Speaker 5: one trillion dollar market, a lot of people don't realize that,

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Speaker 5: by comparison, the high yield corporate bond market is only

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Speaker 5: about one point three to one point four trillion. It's

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Speaker 5: almost as big as the high yield corporate bond market

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Speaker 5: and growing while the high corporate bond market is shrinking.

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Speaker 5: Another two hundred and fifty billion of euro colos, some

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Speaker 5: of the best investment managers in the world are issuing colos.

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Speaker 5: There's over one hundred managers that issue every year. This

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Speaker 5: is a much bigger, much more liquid, much wider market

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Speaker 5: than people appreciate, and that's what gave us the confidence

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Speaker 5: that we could launch an ETF wrapper around it. And

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Speaker 5: nowadays we're we are seeing days where we'll have you know,

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Speaker 5: half a billion either trade on the buy side or

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Speaker 5: the cell side, and we won't even get a create

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Speaker 5: or redeem because of the underlying liquidity is so good.

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Speaker 4: So it's it's.

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Speaker 5: Worked out as we expected, but I think a lot

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Speaker 5: better than that a lot of people expected when we

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Speaker 5: launched J Triple A.

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Speaker 1: Okay, we've been following the fun flows a little bit

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Speaker 1: over the last few days. You know that there have

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Speaker 1: been some slowdown because of growth fiars, I think Bank

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Speaker 1: of America flegg that essentially the higher rats STUF seems

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Speaker 1: to be getting some mainflow while the risky of funds

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Speaker 1: that the Triple B's losing some is that a flight

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Speaker 1: to safety and also your fund The J Triple A

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Speaker 1: saw a big outflow, you know, half a billion very recently.

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Speaker 1: What's that all about?

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Speaker 5: Yeah, so two things. Let's address the first point. Yes,

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Speaker 5: J Triple B is probably down about that's our triple

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Speaker 5: B colo E TF got over two billion. It's down

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Speaker 5: a couple hundred million since then, down about you know,

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Speaker 5: ten twelve percent something like that. But we compare that

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Speaker 5: product to the leverage loan ETFs because that's what category

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Speaker 5: it's in. It's its main competitors. And if you look

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Speaker 5: at the big leverage loan ETFs, they're down in AU

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Speaker 5: on a BU twenty percent. So we're actually pretty happy

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Speaker 5: that we knew if there was a dislocation. Look, obviously

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Speaker 5: there are investors in there that are just you know,

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Speaker 5: riding the wave of risk on and as soon as

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Speaker 5: kind of things got a little shaky, they'd leave more

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Speaker 5: fast money. You know, it's not necessarily what we want

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Speaker 5: as far as investors, but you know, you take that

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Speaker 5: and realize that that is going to happen. And if

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Speaker 5: you had told me, like stocks are going to be

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Speaker 5: down ten percent, what's going to happen with J triple B?

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Speaker 5: I would have been perfectly happy with what we've seen.

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Speaker 5: And actually it's very interesting in Cololand. The mezzanine part

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Speaker 5: of the capital stack, so like let's just call triple

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Speaker 5: b's Single a's have held in better than the triple

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Speaker 5: A part of the capital stack. Obviously they've widened more,

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Speaker 5: but on a risk adjusted basis, they've held in better.

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Speaker 5: And that's really coming from the inflows that insurance companies

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Speaker 5: are getting. In insurance companies like investment grade, that mezzanine

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Speaker 5: part of the capital stack, and so they're continuing to

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Speaker 5: be buyers. And now as far as J triple A, look,

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Speaker 5: we still are plus five billion on the year, we're

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Speaker 5: up fourteen billion over one year. We're basically flat for

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Speaker 5: the month of March. We have learned that there were

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Speaker 5: some investors actually buying J triple A and putting some

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Speaker 5: leverage on it, which, you know, isn't that surprising because

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Speaker 5: when spreads are very very tight, a lot of these

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Speaker 5: you know, hedge funds are levered total return investors or

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Speaker 5: absolute return investors. That's what they'll do, right, because they

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Speaker 5: don't want to reach for yield by buying something that's

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Speaker 5: you know, the spreads are historically tight. They'd rather buy

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Speaker 5: something that's lower risk, put a couple turns of leverage

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Speaker 5: on it, figuring that if things do blow out, that

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Speaker 5: that actual that triple A type security with a little

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Speaker 5: leverage will actually perform better. So so that's just.

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Speaker 4: A little leverage coming out of it.

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Speaker 5: Again, like I said, we there were days where we

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Speaker 5: had some outflows but we didn't even see We saw

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Speaker 5: the trades as cells, but we didn't even see redeems.

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Speaker 5: And one other thing we should talk about is when

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Speaker 5: and investors sells. Basically, the the market maker can short

401
00:22:22,280 --> 00:22:25,080
Speaker 5: the shares to them or they can do a cash

402
00:22:25,119 --> 00:22:27,879
Speaker 5: redeem or an in kind redeem. So cash redem is

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Speaker 5: just as it sounds. We end up getting cash withdrawals

404
00:22:33,320 --> 00:22:35,520
Speaker 5: and then we have to sell colos to meet that.

405
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Speaker 5: But in kind means that we're just trading shares for clos.

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Speaker 5: So what a dealer will do they are you know,

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Speaker 5: our holdings are public. You can see them on Bloomberg

408
00:22:46,280 --> 00:22:48,600
Speaker 5: on a day by day basis. Dealer will go in

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Speaker 5: there and say we want these five clos and we

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Speaker 5: want to give you shares in returns. So that's an

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Speaker 5: in kind redeem. The nice thing about that because we

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Speaker 5: don't have to sell, there's really no bid ass there,

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00:23:03,440 --> 00:23:07,040
Speaker 5: and it's it's more frictionless, right, and that keeps the

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Speaker 5: n a V of the ETF from getting too far

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Speaker 5: out of line with the underlying value or where the

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00:23:14,280 --> 00:23:18,399
Speaker 5: portfolio is trading. So we've seen a lot more in

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Speaker 5: kind both creates and redeems, again just showing the liquidity

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Speaker 5: of these products. And again I think there's if you

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Speaker 5: look at you know, the price line or whatever, it's

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Speaker 5: not as volatile as a lot of people would think

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Speaker 5: because of this mechanism.

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Speaker 1: Yeah, well, Spencer and Night with credit guys, we weary

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Speaker 1: all the time. But everything so when we see the

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Speaker 1: biggest outflow ever from the biggest Triple A clof should

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Speaker 1: we not panic?

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Speaker 4: You should not panic.

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Speaker 5: Literally, the triple A CLO market trades billions of dollars

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Speaker 5: a week. I'm not saying a you know, a half

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00:23:54,400 --> 00:23:57,760
Speaker 5: a billion you know flow isn't big. But during the

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Speaker 5: UK l d I crisis, there was one line item

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00:24:01,720 --> 00:24:04,520
Speaker 5: of a two hundred and seventy five million dollars COLO

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00:24:05,160 --> 00:24:07,480
Speaker 5: that traded and the market didn't even blink.

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Speaker 3: You know.

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Speaker 5: It's like this market is so deep and there's such

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00:24:11,520 --> 00:24:15,359
Speaker 5: a bid from end investors that even size which is

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00:24:15,520 --> 00:24:19,000
Speaker 5: you know size open s eyes right, like even size

437
00:24:19,080 --> 00:24:23,399
Speaker 5: like that is is fairly easily digested by the market.

438
00:24:23,440 --> 00:24:25,639
Speaker 5: So we obviously get a lot of questions about this,

439
00:24:26,080 --> 00:24:31,360
Speaker 5: both internally and externally, and we have now we've had

440
00:24:31,560 --> 00:24:36,040
Speaker 5: several instances where we've gotten major inflows from you know,

441
00:24:36,240 --> 00:24:40,479
Speaker 5: end investors and now some outflows. And again, like the

442
00:24:40,520 --> 00:24:46,160
Speaker 5: market is functioning as advertised and it's really not pushing

443
00:24:46,200 --> 00:24:49,960
Speaker 5: around the price. And like I said, the the you know,

444
00:24:50,040 --> 00:24:53,639
Speaker 5: the richness or cheapness to nav you know, sometimes it

445
00:24:53,680 --> 00:24:56,040
Speaker 5: trades a little cheap or rich, but not like it's

446
00:24:56,119 --> 00:24:59,480
Speaker 5: like pennies or maybe you know, ten cents, fifteen cents.

447
00:24:59,520 --> 00:25:02,080
Speaker 5: It's not like points like we saw during COVID. So

448
00:25:03,040 --> 00:25:08,440
Speaker 5: I understand the concern or worry or or the you know, inspection,

449
00:25:08,680 --> 00:25:12,359
Speaker 5: but it is it is performing as advertised, and we

450
00:25:12,560 --> 00:25:16,000
Speaker 5: have many examples. If anybody wants to reach out to

451
00:25:16,119 --> 00:25:19,800
Speaker 5: Janis Henderson, our capital markets team is world class. We

452
00:25:19,880 --> 00:25:22,840
Speaker 5: can walk them through the actual numbers and put them

453
00:25:22,840 --> 00:25:23,160
Speaker 5: at ease.

454
00:25:23,880 --> 00:25:27,320
Speaker 2: I'm going to reveal my age here and say that

455
00:25:28,000 --> 00:25:30,399
Speaker 2: my prior life before Bloomberg, I was working in the

456
00:25:30,480 --> 00:25:33,320
Speaker 2: leverage finance group at Lehman Brothers in the early two

457
00:25:33,359 --> 00:25:36,320
Speaker 2: thousands or underwriting leverage loans, a lot of which were

458
00:25:36,359 --> 00:25:41,160
Speaker 2: being syndicated to the then growing CLO market. The big

459
00:25:41,200 --> 00:25:44,159
Speaker 2: controversy or issue at the time was Covenant Light that

460
00:25:44,280 --> 00:25:47,480
Speaker 2: was starting to sort of make its way into the market.

461
00:25:47,640 --> 00:25:49,359
Speaker 2: I'm not going to ask you about that now because

462
00:25:49,359 --> 00:25:51,720
Speaker 2: it seems like that Ship of Salem that's pretty much

463
00:25:51,760 --> 00:25:52,400
Speaker 2: a standard.

464
00:25:53,160 --> 00:25:53,920
Speaker 3: But something we.

465
00:25:53,880 --> 00:25:57,600
Speaker 2: Didn't have to deal with as much back then was

466
00:25:57,680 --> 00:26:01,040
Speaker 2: private credit. It seems like, you know, every week there's

467
00:26:01,040 --> 00:26:03,720
Speaker 2: a new headline on some new fund putting billions of

468
00:26:03,760 --> 00:26:05,200
Speaker 2: dollars into private loans.

469
00:26:07,160 --> 00:26:09,280
Speaker 3: Is that having an impact on the COLO market?

470
00:26:09,320 --> 00:26:12,399
Speaker 2: Does that take away the supply that you could otherwise

471
00:26:12,840 --> 00:26:16,720
Speaker 2: have and put into a clo. What's the outlook or

472
00:26:16,760 --> 00:26:19,600
Speaker 2: the impact from the private credit market and growth of

473
00:26:19,640 --> 00:26:21,879
Speaker 2: that side versus the COLO market?

474
00:26:22,119 --> 00:26:23,840
Speaker 3: What does that do to your product?

475
00:26:24,440 --> 00:26:28,119
Speaker 5: Yeah, so it's a very good question. I want to

476
00:26:28,160 --> 00:26:31,719
Speaker 5: be very clear that private credit has got an incredible

477
00:26:31,760 --> 00:26:34,720
Speaker 5: amount of attention and press over the last couple of years,

478
00:26:35,200 --> 00:26:38,040
Speaker 5: just because it used to be kind of this sideshow

479
00:26:38,080 --> 00:26:40,159
Speaker 5: of a sideshow, like colos were a little bit of

480
00:26:40,240 --> 00:26:43,600
Speaker 5: a sideshow and private credit colos were a sideshow. But

481
00:26:43,720 --> 00:26:46,920
Speaker 5: private credit is definitely here to stay, right, It's depending

482
00:26:46,960 --> 00:26:49,240
Speaker 5: on who you ask, somewhere around seven hundred and fifty

483
00:26:49,280 --> 00:26:54,120
Speaker 5: billion to a trillion dollar asset class. It's growing, It

484
00:26:54,200 --> 00:26:57,480
Speaker 5: is taking some share away from the public markets. It's

485
00:26:57,520 --> 00:27:00,240
Speaker 5: why one of the reasons, like I mentioned before, how

486
00:27:00,280 --> 00:27:04,080
Speaker 5: you'll corporate credit is shrinking. But last year we actually

487
00:27:04,200 --> 00:27:08,479
Speaker 5: saw some deals that or firms that had gone the

488
00:27:08,480 --> 00:27:11,320
Speaker 5: private route come back to the public route. So there's

489
00:27:11,359 --> 00:27:17,160
Speaker 5: pluses and minuses on both sides. Our view is when

490
00:27:17,200 --> 00:27:19,840
Speaker 5: you look at private cress, so there's private credit loans,

491
00:27:20,440 --> 00:27:24,720
Speaker 5: and then now we have private credit clos and now

492
00:27:24,760 --> 00:27:28,679
Speaker 5: we even have some private credit COLO ETF. So you

493
00:27:28,720 --> 00:27:32,639
Speaker 5: know the three or the three derivatives of that market,

494
00:27:32,720 --> 00:27:36,399
Speaker 5: and so private credit definitely here to stay. There's some

495
00:27:36,560 --> 00:27:39,399
Speaker 5: very good managers here that do that, that know what

496
00:27:39,400 --> 00:27:45,480
Speaker 5: they're doing, no worries or complaints. Besides that, investors, if

497
00:27:45,520 --> 00:27:48,840
Speaker 5: they're investing in that market, they have to understand it

498
00:27:48,880 --> 00:27:52,680
Speaker 5: comes with the lack of transparency and a lack of liquidity, right,

499
00:27:52,760 --> 00:27:53,840
Speaker 5: and there.

500
00:27:53,760 --> 00:27:54,840
Speaker 4: Are reasons for that.

501
00:27:55,000 --> 00:27:58,240
Speaker 5: I'm not saying that's necessarily bad, because it also comes

502
00:27:58,600 --> 00:28:03,639
Speaker 5: with wider spreads, more covenants. Your local private credit manager

503
00:28:03,640 --> 00:28:06,200
Speaker 5: will be able to sing the praises of that market,

504
00:28:06,400 --> 00:28:08,680
Speaker 5: but I think investors have to be aware of that.

505
00:28:09,040 --> 00:28:13,760
Speaker 5: Private credit colos were very, very small till twenty twenty four,

506
00:28:13,840 --> 00:28:17,520
Speaker 5: when I think they issued about forty billion, whereas the

507
00:28:17,800 --> 00:28:21,159
Speaker 5: what we call the BSL broadly syndicated loan COLO market

508
00:28:21,280 --> 00:28:23,439
Speaker 5: was about one hundred little over one hundred, maybe one

509
00:28:23,520 --> 00:28:27,600
Speaker 5: hundred twenty hundred and thirty billion, So it used to

510
00:28:27,640 --> 00:28:30,439
Speaker 5: be about five to ten percent of the BSL market,

511
00:28:30,480 --> 00:28:32,240
Speaker 5: and all of a sudden it was about twenty five,

512
00:28:32,359 --> 00:28:36,800
Speaker 5: maybe even thirty percent of the BSL market. So Wall

513
00:28:36,840 --> 00:28:40,280
Speaker 5: Street was talking about a lot and how this was

514
00:28:40,320 --> 00:28:44,240
Speaker 5: going to grow, and it will grow, but private credit

515
00:28:44,760 --> 00:28:50,680
Speaker 5: colos are still a much smaller, less liquid market. Like

516
00:28:50,760 --> 00:28:55,680
Speaker 5: I mentioned, in any given week, the broadly syndicated loan

517
00:28:55,800 --> 00:29:00,680
Speaker 5: COLO market will trade billions, and the private credits market

518
00:29:00,720 --> 00:29:03,080
Speaker 5: will trade two to five percent of that. It's really

519
00:29:03,120 --> 00:29:08,320
Speaker 5: like tens to twenty millions. So the liquidity isn't even close.

520
00:29:08,400 --> 00:29:12,920
Speaker 5: It's just a fraction. And so when these issuers came

521
00:29:12,920 --> 00:29:15,360
Speaker 5: out and obviously we're not doing this, but came out

522
00:29:15,400 --> 00:29:20,880
Speaker 5: with private credit colo ETFs, you know, I think this

523
00:29:21,000 --> 00:29:26,080
Speaker 5: skepticism there should be real because the underlying isn't nearly

524
00:29:26,680 --> 00:29:32,440
Speaker 5: as liquid and hasn't really been tested throughout a real

525
00:29:32,520 --> 00:29:36,240
Speaker 5: dislocation credit cycle, et cetera, et cetera. And one of

526
00:29:36,280 --> 00:29:39,760
Speaker 5: the problems with private credit as well. And again like

527
00:29:39,880 --> 00:29:43,200
Speaker 5: if you go out and talk to these managers, I'm

528
00:29:43,240 --> 00:29:47,920
Speaker 5: not trying to, you know, say that they're not doing

529
00:29:47,960 --> 00:29:51,080
Speaker 5: the right thing or they're not doing the appropriate thing,

530
00:29:51,160 --> 00:29:54,760
Speaker 5: but bank of America had a recent piece where they

531
00:29:54,800 --> 00:29:57,880
Speaker 5: showed one loan in particular and six different managers, and

532
00:29:58,000 --> 00:30:01,640
Speaker 5: as this loan went through it it's you know problem

533
00:30:01,720 --> 00:30:06,720
Speaker 5: cycle default cycle. Different managers had it marked very differently,

534
00:30:06,800 --> 00:30:09,160
Speaker 5: like one manager had it marked in the mid to

535
00:30:09,240 --> 00:30:12,720
Speaker 5: high nineties, one manager had it marked at seventy. Now again,

536
00:30:13,120 --> 00:30:14,959
Speaker 5: I'm sure if you go talk to those managers they

537
00:30:15,000 --> 00:30:18,560
Speaker 5: will have very cojent arguments about where they were marking it.

538
00:30:19,040 --> 00:30:22,160
Speaker 5: But it doesn't have the transparency that you see in

539
00:30:22,200 --> 00:30:26,240
Speaker 5: the broadly syndicated loan market, which means any kind of

540
00:30:26,320 --> 00:30:30,760
Speaker 5: derivative security, whether it's a COLO or COLO ETF is

541
00:30:30,760 --> 00:30:33,880
Speaker 5: not going to have the same liquidity. So that's what's

542
00:30:33,920 --> 00:30:37,160
Speaker 5: going on with private credit. We have decided not to

543
00:30:37,200 --> 00:30:39,920
Speaker 5: go into that market for the reasons I just talked about.

544
00:30:40,280 --> 00:30:43,560
Speaker 5: What we're most concerned with that Janis Henderson, is our

545
00:30:43,600 --> 00:30:47,360
Speaker 5: client experience and our client promise. Right, the only unhappy

546
00:30:47,400 --> 00:30:51,080
Speaker 5: client should be one where we break our client promise

547
00:30:51,160 --> 00:30:54,680
Speaker 5: or we don't explain it properly. And so what we

548
00:30:54,800 --> 00:30:57,880
Speaker 5: have said with Triple A's Colos j Triple A, Jerry

549
00:30:57,920 --> 00:31:02,160
Speaker 5: Triple B that the liquidity's actually there even in dislocated markets,

550
00:31:02,160 --> 00:31:04,720
Speaker 5: and so far that it's proven to be true.

551
00:31:04,960 --> 00:31:07,840
Speaker 2: I get as a quick follow up, as the private

552
00:31:07,880 --> 00:31:11,800
Speaker 2: credit market grows and becomes more mature and tested, is

553
00:31:11,800 --> 00:31:14,480
Speaker 2: it possible that that you guys would go into that

554
00:31:14,800 --> 00:31:17,800
Speaker 2: or even that the two markets kind of merge from

555
00:31:17,840 --> 00:31:22,120
Speaker 2: the clo standpoint and that now you have clos that

556
00:31:22,160 --> 00:31:25,880
Speaker 2: have both broadly syndicated loans and private loans in them

557
00:31:25,880 --> 00:31:28,360
Speaker 2: and you're not really bifurcating between the two. Or is

558
00:31:28,360 --> 00:31:29,440
Speaker 2: that just a bridge too far.

559
00:31:29,960 --> 00:31:34,560
Speaker 5: Yeah, I think the latter is a possibility, but it

560
00:31:34,760 --> 00:31:40,200
Speaker 5: also there's there's also always a danger to taking these

561
00:31:40,240 --> 00:31:44,520
Speaker 5: products and making them too complicated, right invest Most of

562
00:31:44,560 --> 00:31:49,320
Speaker 5: our investors that are you know, either you know, retail

563
00:31:49,560 --> 00:31:52,240
Speaker 5: s like financial advisors or even the bigger kind of

564
00:31:52,280 --> 00:31:56,000
Speaker 5: asset allocators, they love the fact that they know what

565
00:31:56,040 --> 00:31:58,200
Speaker 5: they're getting with J triple A and J triple B.

566
00:31:58,360 --> 00:32:01,560
Speaker 5: There it's a very simple. Yes, we have levers to

567
00:32:01,720 --> 00:32:05,280
Speaker 5: add alpha, but we're you know, we're in triple A

568
00:32:05,400 --> 00:32:08,040
Speaker 5: clos at least ninety percent for J triple A. We

569
00:32:08,080 --> 00:32:10,400
Speaker 5: can go down to single A for ten percent vote,

570
00:32:10,640 --> 00:32:13,320
Speaker 5: but that is not a given right now. I think

571
00:32:13,400 --> 00:32:16,240
Speaker 5: we're below triple A, we're less than one percent. J

572
00:32:16,400 --> 00:32:19,280
Speaker 5: triple B can go below triple B for fifteen percent,

573
00:32:19,400 --> 00:32:22,320
Speaker 5: but right now we're all triple B. So we keep

574
00:32:22,360 --> 00:32:26,320
Speaker 5: it very plain, vanilla and simple for a reason because

575
00:32:26,840 --> 00:32:29,560
Speaker 5: I think whenever you add that layer of complexity, you

576
00:32:29,640 --> 00:32:31,960
Speaker 5: always have to ask ask as an investor, well what

577
00:32:32,040 --> 00:32:35,240
Speaker 5: am I missing? Why am I why are they doing this?

578
00:32:35,560 --> 00:32:38,360
Speaker 5: You know, if I want private credit, I should be

579
00:32:38,400 --> 00:32:41,320
Speaker 5: able to get that in its own wrapper. Like when

580
00:32:41,320 --> 00:32:45,720
Speaker 5: you start getting this mixture, it's kind of like I

581
00:32:45,760 --> 00:32:49,360
Speaker 5: don't really know what I'm getting, and that's going to

582
00:32:49,400 --> 00:32:52,800
Speaker 5: scare off a lot of investors. Never say never. As

583
00:32:52,800 --> 00:32:57,000
Speaker 5: far as Janis Henderson doing a private credit COLO ETF,

584
00:32:57,040 --> 00:33:00,520
Speaker 5: we have no plans on doing it. We're more focused

585
00:33:00,520 --> 00:33:04,320
Speaker 5: on the global market. Currently. We have a European clo

586
00:33:04,520 --> 00:33:09,160
Speaker 5: ETF and and you know, there are certain investors that

587
00:33:09,440 --> 00:33:14,680
Speaker 5: either can't or won't buy the US clo ets because

588
00:33:14,720 --> 00:33:18,400
Speaker 5: withholding taxes, and we are working on products to kind

589
00:33:18,400 --> 00:33:22,480
Speaker 5: of satisfy those investors. So that's really taking what we're

590
00:33:22,480 --> 00:33:24,760
Speaker 5: doing in the US with J triple A and J

591
00:33:24,920 --> 00:33:26,560
Speaker 5: triple B and taking that to.

592
00:33:26,560 --> 00:33:29,560
Speaker 4: A more global audience. Is really where we're focused now.

593
00:33:30,080 --> 00:33:32,800
Speaker 1: Before we get to even the private credit clo ETF,

594
00:33:32,840 --> 00:33:34,520
Speaker 1: we have to do the private credit ETF. Does that

595
00:33:34,560 --> 00:33:35,760
Speaker 1: make sense as a concept.

596
00:33:35,440 --> 00:33:37,080
Speaker 4: Do you think I?

597
00:33:36,680 --> 00:33:39,959
Speaker 5: I'm somewhat skeptical of it for the reasons I just

598
00:33:40,080 --> 00:33:42,880
Speaker 5: mentioned again. You know, I don't want to be here

599
00:33:43,480 --> 00:33:46,600
Speaker 5: like I'm my high horse saying that private credit is bad.

600
00:33:46,680 --> 00:33:49,959
Speaker 5: I just worry about the liquidity in an ETF rapper

601
00:33:50,080 --> 00:33:53,280
Speaker 5: and how that's going to work. I really think if

602
00:33:53,320 --> 00:33:56,719
Speaker 5: you want private credit credit doing in a BBC business

603
00:33:56,720 --> 00:34:00,160
Speaker 5: development company, you know, like a different wrapper where the

604
00:34:00,160 --> 00:34:03,200
Speaker 5: investor really knows, you know, how they get in, how

605
00:34:03,240 --> 00:34:06,160
Speaker 5: they get out, fees they're paying, things like that, I

606
00:34:06,240 --> 00:34:10,600
Speaker 5: really think that is a better vehicle for that type

607
00:34:10,600 --> 00:34:11,120
Speaker 5: of product.

608
00:34:11,160 --> 00:34:14,759
Speaker 1: Okay, on this show, for many months now, we've been

609
00:34:14,800 --> 00:34:18,360
Speaker 1: talking about the potential for mispriced risk across the board.

610
00:34:18,440 --> 00:34:22,000
Speaker 1: Given the huge what seems to be a demand supply

611
00:34:22,120 --> 00:34:26,719
Speaker 1: in balance that's obviously happening in the loan market. There

612
00:34:26,719 --> 00:34:28,840
Speaker 1: isn't a lot of net supply, and there seems to

613
00:34:28,840 --> 00:34:31,200
Speaker 1: be not much prospect of M and A coming to

614
00:34:31,360 --> 00:34:34,480
Speaker 1: provide new net supply, so it gets tighter and tighter

615
00:34:34,520 --> 00:34:37,080
Speaker 1: the demands ramping up. People want these assets, they want

616
00:34:37,120 --> 00:34:39,160
Speaker 1: the yield. But you know, so what do you do

617
00:34:39,200 --> 00:34:40,960
Speaker 1: in that situation? I mean, is it do you just

618
00:34:41,000 --> 00:34:43,080
Speaker 1: buy anything because you have to, or do you have

619
00:34:43,120 --> 00:34:45,960
Speaker 1: to substitute in other things like high eeld bonds or

620
00:34:45,960 --> 00:34:47,440
Speaker 1: what's the solution to all this?

621
00:34:48,360 --> 00:34:48,600
Speaker 4: Well?

622
00:34:48,680 --> 00:34:51,279
Speaker 5: Right, and that has been the big issue over the

623
00:34:51,360 --> 00:34:53,239
Speaker 5: last couple of years. As you know, we came out

624
00:34:53,280 --> 00:34:56,920
Speaker 5: of COVID and spread Scott tighter and tighter, and a

625
00:34:56,960 --> 00:34:59,240
Speaker 5: lot of that is technicals. Right when you go back

626
00:34:59,680 --> 00:35:02,200
Speaker 5: and think about when's the last time when spreads were

627
00:35:02,239 --> 00:35:04,839
Speaker 5: just really attractive. That was kind of twenty I mean,

628
00:35:04,880 --> 00:35:07,560
Speaker 5: obviously COVID, but then we came out of COVID, But

629
00:35:07,640 --> 00:35:10,720
Speaker 5: it was really once we kind of had some idea

630
00:35:10,760 --> 00:35:12,799
Speaker 5: of what was going to happen with COVID and it

631
00:35:12,880 --> 00:35:16,360
Speaker 5: was going to eventually decrease and go away. It was

632
00:35:16,400 --> 00:35:19,440
Speaker 5: really twenty twenty two, right, and two things were happening. Obviously,

633
00:35:19,960 --> 00:35:25,280
Speaker 5: fed raising rates, bond markets sold off. Money managers normally

634
00:35:25,280 --> 00:35:29,359
Speaker 5: get about one hundred billion a quarter in inflows. They

635
00:35:29,360 --> 00:35:31,759
Speaker 5: were getting just the opposite in twenty twenty two. So

636
00:35:32,320 --> 00:35:35,640
Speaker 5: instead of net inflows, they were getting net outflows. That

637
00:35:35,760 --> 00:35:39,360
Speaker 5: meant there was for sellings. Because of that, the technicals

638
00:35:39,400 --> 00:35:43,839
Speaker 5: were pretty horrible. Money managers had to sell, you know,

639
00:35:43,840 --> 00:35:46,719
Speaker 5: you got to meet redemptions. And then at the same time,

640
00:35:46,760 --> 00:35:50,879
Speaker 5: there were calls for a recession, right, and we never

641
00:35:50,960 --> 00:35:54,680
Speaker 5: really necessarily believe those calls for a recession, but pretty

642
00:35:54,760 --> 00:35:58,680
Speaker 5: much everybody out there was saying, you know, fifty percent,

643
00:35:58,840 --> 00:36:03,040
Speaker 5: sixty percent chance of recession. And why is that? Because

644
00:36:03,680 --> 00:36:07,760
Speaker 5: usually recoveries and for one of two reasons, it's either

645
00:36:07,840 --> 00:36:10,919
Speaker 5: too much leverage in the system. Think about the dot

646
00:36:11,000 --> 00:36:13,120
Speaker 5: com burst or think about the GFC.

647
00:36:13,400 --> 00:36:13,640
Speaker 3: Right.

648
00:36:13,920 --> 00:36:18,600
Speaker 5: These are typical recessions where you just have a risk

649
00:36:18,680 --> 00:36:20,880
Speaker 5: on market and then people put leverage on that, and

650
00:36:20,920 --> 00:36:25,279
Speaker 5: then you have leverage on leverage and eventually that has

651
00:36:25,320 --> 00:36:28,000
Speaker 5: to end and kind of removing that leverage on winding

652
00:36:28,080 --> 00:36:32,560
Speaker 5: that leverage causes the recession or some exogenous shock like COVID.

653
00:36:32,719 --> 00:36:32,919
Speaker 4: Right.

654
00:36:34,320 --> 00:36:38,359
Speaker 5: But in the past, we've also seen the FED raise

655
00:36:38,480 --> 00:36:41,279
Speaker 5: rates and continue to raise rates and just keep them

656
00:36:41,480 --> 00:36:44,920
Speaker 5: too high for too long until it's too late. Because

657
00:36:45,440 --> 00:36:49,680
Speaker 5: we know that FED policy acts.

658
00:36:49,360 --> 00:36:50,840
Speaker 4: On long and variable legs.

659
00:36:50,920 --> 00:36:53,879
Speaker 5: Right, That's the phrase they always use. No one really

660
00:36:53,920 --> 00:36:56,759
Speaker 5: knows what that means or how long is long and

661
00:36:56,800 --> 00:36:58,200
Speaker 5: how variable is variable?

662
00:36:58,280 --> 00:36:59,600
Speaker 4: But we know that.

663
00:36:59,800 --> 00:37:03,480
Speaker 5: It's not, you know, a precise instrument, even though the

664
00:37:03,520 --> 00:37:06,040
Speaker 5: FED makes it seem like that with twenty five basis

665
00:37:06,040 --> 00:37:08,160
Speaker 5: points hikes or.

666
00:37:10,080 --> 00:37:10,719
Speaker 4: Reductions.

667
00:37:10,800 --> 00:37:13,879
Speaker 5: So so usually the FED just hikes too much, keeps

668
00:37:13,880 --> 00:37:16,400
Speaker 5: it too long, and then the economy starts slowing and

669
00:37:16,440 --> 00:37:20,080
Speaker 5: by the time they start cutting rates, the economy slows

670
00:37:20,120 --> 00:37:22,080
Speaker 5: down goes in a recession. And so that's what a

671
00:37:22,120 --> 00:37:24,480
Speaker 5: lot of people thought was going to happen, and it

672
00:37:24,560 --> 00:37:26,880
Speaker 5: turned out not to be the case.

673
00:37:26,960 --> 00:37:29,480
Speaker 4: So yeah, I just.

674
00:37:29,520 --> 00:37:34,440
Speaker 5: Think that overall that when you look at this market,

675
00:37:35,719 --> 00:37:39,480
Speaker 5: people were getting inflows they had to buy. And I

676
00:37:39,520 --> 00:37:42,880
Speaker 5: think the interesting thing is, you know, if you're a

677
00:37:42,960 --> 00:37:45,600
Speaker 5: high yield manager, right and highyield spreads are tight and

678
00:37:45,640 --> 00:37:47,880
Speaker 5: you're getting inflows, you still have to buy high yield,

679
00:37:48,000 --> 00:37:52,040
Speaker 5: right and there you know by you know the dictum

680
00:37:52,200 --> 00:37:56,839
Speaker 5: of your overall portfolio, and fun that's what you have

681
00:37:56,880 --> 00:37:59,239
Speaker 5: to do. The nice thing about what we do in

682
00:37:59,400 --> 00:38:03,440
Speaker 5: securitized products. Yes, we have Colo products that are like

683
00:38:03,480 --> 00:38:06,160
Speaker 5: I said, simple, and so we have to buy colos

684
00:38:06,280 --> 00:38:10,160
Speaker 5: in those, but we have Janis Henderson Securitized Incdom that

685
00:38:10,239 --> 00:38:13,600
Speaker 5: can buy kind of across securitized products. I run a

686
00:38:13,680 --> 00:38:15,920
Speaker 5: multi sector income fund. Like I said, it's kind of

687
00:38:15,920 --> 00:38:19,120
Speaker 5: the best ideas and the nice thing about securitized product

688
00:38:19,160 --> 00:38:24,080
Speaker 5: there's still some very interesting, relatively cheap sectors within there,

689
00:38:24,440 --> 00:38:28,640
Speaker 5: particularly within the commercial real estate sector, but also within

690
00:38:28,880 --> 00:38:34,640
Speaker 5: ABS and even non agency rbs like home equity type securities.

691
00:38:34,840 --> 00:38:39,960
Speaker 5: It's a relatively new market. They have been trading relatively

692
00:38:40,040 --> 00:38:42,080
Speaker 5: cheap to a lot of other products out there. And

693
00:38:42,160 --> 00:38:45,920
Speaker 5: so in these instances where you know, kind of the

694
00:38:46,120 --> 00:38:49,560
Speaker 5: headline products maybe if you look at like prime auto

695
00:38:49,640 --> 00:38:53,160
Speaker 5: ABS or you know, HYO corporate credit or IG corporate credit,

696
00:38:53,600 --> 00:38:57,600
Speaker 5: you have to have the you know, ability to price

697
00:38:57,680 --> 00:39:00,200
Speaker 5: risk in other markets and to go into those other

698
00:39:00,280 --> 00:39:01,920
Speaker 5: markets to find relative value.

699
00:39:02,440 --> 00:39:04,680
Speaker 1: You mentioned relative value, John, which caught my ear because

700
00:39:05,000 --> 00:39:07,200
Speaker 1: everyone's been telling us everything so expensive for so long.

701
00:39:07,239 --> 00:39:09,279
Speaker 1: So the old idea that something might be cheap will

702
00:39:09,280 --> 00:39:11,320
Speaker 1: come as a surprise to some of our previous guests.

703
00:39:11,320 --> 00:39:13,719
Speaker 1: But where is the best relative value right now? And

704
00:39:14,160 --> 00:39:15,719
Speaker 1: you know, what's what's the opportunity view?

705
00:39:16,040 --> 00:39:18,400
Speaker 5: I mean, I think with it if you look at

706
00:39:18,760 --> 00:39:21,000
Speaker 5: there's a couple of the different things, like if you

707
00:39:21,160 --> 00:39:23,920
Speaker 5: really think tariffs are going to bite that the Fed is,

708
00:39:24,320 --> 00:39:26,440
Speaker 5: you know, going to be on hold for longer, higher

709
00:39:26,440 --> 00:39:29,600
Speaker 5: for longer, and you know that that is not a

710
00:39:29,640 --> 00:39:33,600
Speaker 5: bad view. I would agree with that view in certain respects.

711
00:39:34,800 --> 00:39:37,880
Speaker 5: Then you know, we still like colos because if you

712
00:39:37,920 --> 00:39:41,320
Speaker 5: look at you know, triple A colos got as tight

713
00:39:41,360 --> 00:39:45,280
Speaker 5: as one ten one point fifteen, they wind out about

714
00:39:46,000 --> 00:39:49,439
Speaker 5: fifteen basis points, maybe twenty basis points depending.

715
00:39:49,160 --> 00:39:51,799
Speaker 4: On the manager. That's still pretty.

716
00:39:51,480 --> 00:39:55,040
Speaker 5: Good relative value, particularly when you look at investment grade

717
00:39:55,080 --> 00:40:00,640
Speaker 5: corporate credit and it's it's it's a hedge against high rates.

718
00:40:00,719 --> 00:40:02,960
Speaker 5: Right like when you look back at twenty twenty two,

719
00:40:03,239 --> 00:40:06,440
Speaker 5: like so many investors had such a bad experience because

720
00:40:06,800 --> 00:40:09,880
Speaker 5: for the twenty years before that, they used to negative

721
00:40:09,920 --> 00:40:14,120
Speaker 5: correlation between stocks and bonds. Right when stocks went up, bonds,

722
00:40:14,239 --> 00:40:16,480
Speaker 5: you know, rates went up, so bond prices went down

723
00:40:16,480 --> 00:40:19,200
Speaker 5: and vice versa. Like during COVID, stocks went down, but

724
00:40:19,360 --> 00:40:22,360
Speaker 5: yields went down, so bond prices at least for like

725
00:40:22,400 --> 00:40:25,959
Speaker 5: mortgages and treasuries went up. All said, in twenty twenty two,

726
00:40:26,600 --> 00:40:31,319
Speaker 5: because inflation was high, that negative correlation turned into positive correlations.

727
00:40:31,360 --> 00:40:33,960
Speaker 5: So stocks went down, rates went up as the FED

728
00:40:34,360 --> 00:40:37,440
Speaker 5: was raising rates and bond prices went down as well.

729
00:40:38,400 --> 00:40:41,879
Speaker 5: A lot of investors, you know, came to us and said,

730
00:40:41,960 --> 00:40:44,080
Speaker 5: thank goodness for J triple A was the one thing

731
00:40:44,080 --> 00:40:46,640
Speaker 5: in my portfolio that was actually positive.

732
00:40:46,239 --> 00:40:46,719
Speaker 4: On the year.

733
00:40:46,880 --> 00:40:52,040
Speaker 5: So if you have a concern that again the terarifts

734
00:40:52,040 --> 00:40:54,320
Speaker 5: are going to bite, that maybe maybe the Fed doesn't

735
00:40:54,320 --> 00:40:56,600
Speaker 5: cut rates, maybe they actually have to hike rates. Not

736
00:40:56,640 --> 00:41:01,680
Speaker 5: our baseline call, but possibility. At absolutely J triple A

737
00:41:02,000 --> 00:41:06,680
Speaker 5: still you're getting kind of mid five type yields triple

738
00:41:06,719 --> 00:41:09,719
Speaker 5: A credit quality floating rate. It's a good hedge to

739
00:41:09,880 --> 00:41:13,600
Speaker 5: any portfolio because the vast majority of fixed income in

740
00:41:13,640 --> 00:41:16,600
Speaker 5: the US is fixed, and it offsets that as very

741
00:41:16,640 --> 00:41:19,239
Speaker 5: low correlation. If you want to take a little more risk,

742
00:41:19,280 --> 00:41:21,759
Speaker 5: get a little more yield J triple B. But we

743
00:41:21,840 --> 00:41:25,719
Speaker 5: want to make sure investors realize that the volatility in

744
00:41:25,840 --> 00:41:28,920
Speaker 5: J triple B is probably four x J triple a.

745
00:41:29,200 --> 00:41:33,839
Speaker 5: It's not quite equity volatility, but it's definitely higher volatility.

746
00:41:34,960 --> 00:41:38,440
Speaker 5: So the second part, we still like agency mortgages. They

747
00:41:38,560 --> 00:41:40,680
Speaker 5: never got as tight as a lot of sectors. Some

748
00:41:40,719 --> 00:41:44,000
Speaker 5: of that is due with technicals, some of it has

749
00:41:44,080 --> 00:41:48,160
Speaker 5: to do with volatility and interest rates. Some of that

750
00:41:48,239 --> 00:41:50,839
Speaker 5: has to do with bank regulations and what we saw

751
00:41:50,920 --> 00:41:53,360
Speaker 5: even two years back with Silicon Valley Bank.

752
00:41:53,600 --> 00:41:55,200
Speaker 4: But still, you know.

753
00:41:55,880 --> 00:41:58,480
Speaker 5: Fanny and Freddie Awards of the State for all intents

754
00:41:58,520 --> 00:42:02,440
Speaker 5: and purposes, government gearing, you're still getting, you know, on

755
00:42:02,520 --> 00:42:06,480
Speaker 5: a vall, if you take out volatility vowel adjusted bases,

756
00:42:06,520 --> 00:42:08,560
Speaker 5: you're still getting one hundred and thirty one hundred and

757
00:42:08,600 --> 00:42:11,759
Speaker 5: thirty five bas points over treasuries. We think that looks good.

758
00:42:11,800 --> 00:42:18,520
Speaker 5: And then finally CNBS. This has been an unloved sector. Obviously,

759
00:42:18,560 --> 00:42:22,040
Speaker 5: the office sector has gone through all sorts of pain.

760
00:42:23,239 --> 00:42:27,560
Speaker 5: But what we see is because of that, there's there's

761
00:42:27,640 --> 00:42:31,520
Speaker 5: actually a lot of opportunity in this sector because they're

762
00:42:31,560 --> 00:42:34,960
Speaker 5: investors that just have stepped away from this market, and

763
00:42:35,000 --> 00:42:40,240
Speaker 5: you're seeing great buildings with great tenants, with great sponsors,

764
00:42:40,400 --> 00:42:44,360
Speaker 5: great locations that have put in the cap backs. Like

765
00:42:44,800 --> 00:42:49,880
Speaker 5: it's funny because I was talking to somebody at a

766
00:42:50,120 --> 00:42:53,520
Speaker 5: Midtown office and we're talking about different buildings and A

767
00:42:53,640 --> 00:42:55,480
Speaker 5: plus buildings, and they were like, is this.

768
00:42:55,440 --> 00:42:56,320
Speaker 4: An A PLUS building?

769
00:42:56,360 --> 00:42:59,239
Speaker 5: I'm like, you know, these buildings and you know Midtown

770
00:42:59,560 --> 00:43:02,120
Speaker 5: built in the nineteen seventies are no longer A plus

771
00:43:02,200 --> 00:43:05,560
Speaker 5: because what the new generation wants is what you can

772
00:43:05,600 --> 00:43:08,360
Speaker 5: go out and find in Hudson Yards, right, Like brand

773
00:43:08,360 --> 00:43:12,000
Speaker 5: new buildings, great sense of space, great views, and they

774
00:43:12,000 --> 00:43:12,680
Speaker 5: have amenities.

775
00:43:12,760 --> 00:43:12,880
Speaker 3: Right.

776
00:43:12,920 --> 00:43:14,839
Speaker 5: They have a gym, they have a restaurant, they have

777
00:43:15,200 --> 00:43:17,799
Speaker 5: you know, a coffee shop, they have a podcast room

778
00:43:17,840 --> 00:43:19,960
Speaker 5: for things like that. You know, like they have all

779
00:43:20,000 --> 00:43:24,440
Speaker 5: these things besides just offices. And that's what's bringing people back.

780
00:43:24,840 --> 00:43:27,560
Speaker 5: And the C suite is saying, look, we want people

781
00:43:27,560 --> 00:43:30,440
Speaker 5: to come back the office. Just having them come to

782
00:43:30,480 --> 00:43:34,120
Speaker 5: the office and you know, having no amenities, that's probably

783
00:43:34,160 --> 00:43:36,800
Speaker 5: not going to work. So we'll move into the latest

784
00:43:36,840 --> 00:43:39,879
Speaker 5: and greatest, you know, the shiny new toy buildings, and

785
00:43:40,160 --> 00:43:43,200
Speaker 5: we will you know, we'll bring people back, but they'll

786
00:43:43,200 --> 00:43:46,839
Speaker 5: be happy because we're in this incredible space. And now

787
00:43:46,840 --> 00:43:50,120
Speaker 5: we're saying that. I think the interesting thing is we're

788
00:43:50,160 --> 00:43:53,279
Speaker 5: seeing around Grand Central right Park Avenue. There was this

789
00:43:53,440 --> 00:43:57,160
Speaker 5: historian Bloomberg about you know, one seventy five Park and

790
00:43:57,239 --> 00:44:00,719
Speaker 5: three fifty Park and obviously JP Morgan's doing their headquarters,

791
00:44:00,719 --> 00:44:05,800
Speaker 5: so this kind of sleepy corridor. Obviously Park Avenue always

792
00:44:05,800 --> 00:44:08,600
Speaker 5: will have the cachet of the address. But now we're

793
00:44:08,640 --> 00:44:11,040
Speaker 5: seeing like some of the buildings there. It's not just

794
00:44:11,120 --> 00:44:13,719
Speaker 5: the Seagrum building, which has a great architect and like

795
00:44:14,080 --> 00:44:16,880
Speaker 5: this history behind it, but like these new buildings with

796
00:44:16,960 --> 00:44:19,560
Speaker 5: great amenities. They're going to be really tall, so great

797
00:44:19,640 --> 00:44:20,600
Speaker 5: views at least.

798
00:44:20,360 --> 00:44:20,879
Speaker 4: At the top.

799
00:44:21,200 --> 00:44:23,360
Speaker 5: They're going to get these two hundred dollars a square

800
00:44:23,360 --> 00:44:26,040
Speaker 5: foot rents, and they'll be able to bring people back

801
00:44:26,000 --> 00:44:27,959
Speaker 5: to the office because of that great stuff.

802
00:44:28,040 --> 00:44:30,680
Speaker 1: John Kirshner ahead of you as securitized Products and portfolio

803
00:44:30,719 --> 00:44:32,759
Speaker 1: manager Janis Henderson, has been a pleasure having you on

804
00:44:32,760 --> 00:44:33,560
Speaker 1: the Credit Edge Money.

805
00:44:33,560 --> 00:44:37,120
Speaker 5: Thanks yeah, thank you guys, great questions, great conversations. My

806
00:44:37,200 --> 00:44:38,160
Speaker 5: pleasure to be here, and.

807
00:44:38,120 --> 00:44:40,520
Speaker 1: Of course very grateful to Spencer Cutter from Bloomberg Intelligence.

808
00:44:40,520 --> 00:44:42,920
Speaker 1: Thanks for joining us today. Spencer, thank you very much.

809
00:44:43,000 --> 00:44:43,480
Speaker 3: Enjoyed it.

810
00:44:43,640 --> 00:44:46,840
Speaker 1: For more credit analysis, read all of Spencer's great work

811
00:44:46,880 --> 00:44:49,839
Speaker 1: on the Bloomberg terminal. Bloomberg Intelligence is part of our

812
00:44:49,880 --> 00:44:53,560
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813
00:44:53,600 --> 00:44:57,520
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814
00:44:57,560 --> 00:45:00,560
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815
00:45:00,719 --> 00:45:05,120
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816
00:45:05,120 --> 00:45:09,160
Speaker 1: Credit Edge. Wherever you get your podcasts, We're on Apple, Spotify,

817
00:45:09,239 --> 00:45:13,000
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819
00:45:16,280 --> 00:45:20,320
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820
00:45:20,520 --> 00:45:22,680
Speaker 1: I'm James Crombie. It's been a pleasure having you join

821
00:45:22,760 --> 00:45:25,840
Speaker 1: us again next week on the Credit Edge