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Speaker 1: Hello, and welcome to the Credit Edge, a weekly Marcus podcast.

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

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Speaker 2: And I'm Noel Hebert, Global head of Fixed Income at

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Speaker 2: Bloomberg Intelligence, that's the research arm of Bloomberg LP. This week,

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Speaker 2: James and I were very pleased to welcome Christian Strack.

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Speaker 2: He's president for the two point twenty six trillion, that's

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Speaker 2: trillion with a tea asset manager Pimco. You might have

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Speaker 2: heard of them before. Christian, welcome aboard.

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Speaker 3: Thanks very much, Noel and James.

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Speaker 2: So before we turn things back to James to kick

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Speaker 2: things off, maybe just the level set for listeners given

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Speaker 2: the scale and the expanse of PIMCO. Christian overseas international

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Speaker 2: operations where he wears quite a few hats, and maybe

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Speaker 2: we'll get into some of that. Is also a senior

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Speaker 2: PM and highly engaged within pimco's alternative credit products, including

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Speaker 2: private credit. He's done turns in the past and credit strategy,

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Speaker 2: including covering glad Am. So with all that's going on

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Speaker 2: in the world today and there's just a little bit

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Speaker 2: of that, there's definitely some fertile ground to explore. So

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Speaker 2: let me start by turning things back to jameschair.

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Speaker 1: Thanks Nol, great to have you on the show. Christian,

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Speaker 1: we go way back, Yeah, we do, James, And so

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Speaker 1: to kick it off, markets are clearly on edge, as

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Speaker 1: Noel said, as trade wars escalate, geopolitical risk spikes, and

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Speaker 1: the future of the US Federal Reserve hangs in the balance,

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Speaker 1: and yet corporate debt spreads show a level of bullishness

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Speaker 1: not seen in decades. Buyers a clearly chasing yields, particularly

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Speaker 1: at the risky end of the market, and most of

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Speaker 1: the new issuance has been for refinancing, leading investors short. So, Christian,

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Speaker 1: is credit actually becoming a safe haven for global investors?

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Speaker 1: Or are we heading for some kind of disaster when

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Speaker 1: the fundamental impact of all this turmoil becomes clear?

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Speaker 4: Well, I think, James, you and I have been through

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Speaker 4: a lot of disasters over the years. James and I

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Speaker 4: first started talking way back maybe twenty five twenty six

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Speaker 4: years ago. So we've seen a lot of disasters and

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Speaker 4: a lot of ups and downs, and there will be

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Speaker 4: downs in the.

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Speaker 3: Credit market over time.

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Speaker 4: But you know, not everything that is going on in

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Speaker 4: terms of these low credit spreads is an expression of

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Speaker 4: excess the way that we have seen in the past

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Speaker 4: and our careers. And you know, there are surprisingly some

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Speaker 4: you know, real fundamental reasons for credit spreads to be

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Speaker 4: as tight as they are. We can go into into

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Speaker 4: real detail there, but the health of the corporate sector

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Speaker 4: is is quite strong. And I think you know, what's

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Speaker 4: what really surprises a lot of people is that in

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Speaker 4: both the US and in Europe we've seen a really

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Speaker 4: healthy de leveraging of the overall corporate sector. And there's

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Speaker 4: been a lot of headlines and rightly so, around all

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Speaker 4: the leveraging and direct lending and high yield bank loans,

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Speaker 4: those types of things. But if you just look at

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Speaker 4: the overall corporate sector in the US and in Europe,

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Speaker 4: there's actually been a healthy d leveraging steadily ever since COVID,

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Speaker 4: and we're at levels of debt to GDP now that

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Speaker 4: are well below where they were in say twenty nineteen,

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Speaker 4: and certainly at the peaks of indebtedness around COVID, and

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Speaker 4: that does help to explain some of these very low

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Speaker 4: credit spreads. And then of course also equities are very strong,

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Speaker 4: and just almost mathematically, if equities are very strong and

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Speaker 4: you haven't changed anything in terms of the amount of debt,

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Speaker 4: then the credit spread is going to be a little

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Speaker 4: bit lower, because the riskiness of that debt is all

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Speaker 4: LSEQL going to be a little bit lower. So, you know,

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Speaker 4: which is not to say that we are banging the

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Speaker 4: table saying there's a lot of value in credit.

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Speaker 3: We're not, certainly not.

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Speaker 4: But I do think it's important to sort of step

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Speaker 4: back and look at the context of these tight spreads

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Speaker 4: and realize that there are some fundamental explanations that said.

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Speaker 4: Of course, you know, it's very difficult to see spreads

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Speaker 4: being this slow for a lot longer, and we need

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Speaker 4: to be ready for when there is a hiccup in

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Speaker 4: risk markets in general, and as asset markets in general,

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Speaker 4: when we would see higher spreads.

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Speaker 2: So I guess maybe a two parter is sort of

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Speaker 2: a follow on there, because one of the things that

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Speaker 2: I hear about in terms of the current compressed levels

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Speaker 2: of spread, whether you're talking investment great or high yield,

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Speaker 2: is sort of this technical bit, particularly on the IG

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Speaker 2: side from the annuity space, given just where nominal yields

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Speaker 2: are in the environment. So I guess one from that

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Speaker 2: technical dynamic, how much of a fact do you think

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Speaker 2: that plays. And then I guess, how do you think about,

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Speaker 2: as maybe a little bit of a left hand turn,

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Speaker 2: how do you think about sort of the recomposition of

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Speaker 2: the market as we've seen certain sectors and I'm thinking

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Speaker 2: specifically technology here have become so much more pronounced in

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Speaker 2: terms of their activity in the primary marketplace.

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Speaker 4: Yeah, those are both really good questions. And the first one,

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Speaker 4: I think you could step even further out from just

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Speaker 4: the annuities buyers, and that's an important buyer in the

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Speaker 4: market certainly, But if you step way out, and what

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Speaker 4: we see at PIMCO is that.

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Speaker 3: The world, across all sorts of different types of investors

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Speaker 3: is underinvested in fixed income. You've got lots of portfolios

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Speaker 3: that really ran down their fixed income exposure in the

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Speaker 3: twenty tens when rates were so low, and then you know,

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Speaker 3: rates of course went negative around COVID, and so there

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Speaker 3: was just wasn't a lot of rationale for holding fixed

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Speaker 3: income in those years. But now that you've got much

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Speaker 3: higher rates, yes, rates have come down a little bit,

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Speaker 3: but still have rates well well above where they were

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Speaker 3: in the twenty tens and then around COVID, and you

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Speaker 3: have very strong equity markets, and so you know, not

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Speaker 3: only is it that that people haven't bought a lot

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Speaker 3: of fixed income, but their equities have appreciated significantly, So

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Speaker 3: the percentage of portfolios and fixed income has really gone

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Speaker 3: down across and this we see this that then go

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Speaker 3: across institutional clients, across retail clients, US clients, non US clients.

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Speaker 4: I mean, it is a very common theme. And so

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Speaker 4: the world is sort of coming back into fixed income.

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Speaker 4: And then when you come back into bonds, but what

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Speaker 4: do you buy? I mean, you can buy treasuries, but

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Speaker 4: ig is still you know, yeah, spreads are quite tight,

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Speaker 4: but still you're picking up an extra call at seventy

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Speaker 4: five eighty basis points of spread for something that's going

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Speaker 4: to have a very low default rate, very low downgrade

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Speaker 4: rate over time barring some very extreme economic shock, in

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Speaker 4: which case, of course, equities would be would be severely impacted.

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Speaker 4: And so investment grade into a much lesser extent hig

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Speaker 4: yield is a natural destination for those flows as they

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Speaker 4: come in, and that's what we're seeing, and that is

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Speaker 4: what's partly explaining some of these very tight spreads. And

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Speaker 4: then you know, you mentioned technology, that's one that we

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Speaker 4: talk about for quite some tigets is actually really important

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Speaker 4: mega trends in the credit markets right now, particularly in

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Speaker 4: investment grade, where you have very high quality tech names

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Speaker 4: ramping up their indebtedness both on and off balance sheet,

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Speaker 4: which is an important distinction, but across the board they

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Speaker 4: are ramping up their indebtedness not to dangerous levels, not

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Speaker 4: to alarming levels in almost all cases. But there is

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Speaker 4: a real demand for funds from from investors to finance

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Speaker 4: the build out of digital infrastructure, and that creates an

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Speaker 4: our view, an interesting opportunity. Not everything in that space

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Speaker 4: is something that we want to buy. There is already

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Speaker 4: some deterioration in underwriting quality and standards in the data

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Speaker 4: infrastructure debt space, but it does explain some of the

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Speaker 4: tight spreads because you've got very very high quality borrowers

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Speaker 4: coming out and tapping the market.

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Speaker 1: On that though, Christian, I mean the idea of a

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Speaker 1: forty year bond from a company that know their business

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Speaker 1: may not really survive the next five years. Does that

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Speaker 1: really make sense from a fixed income point of view?

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Speaker 4: Well, you know, most people who buy the forty year

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Speaker 4: bond today are not going to hold it for forty years.

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Speaker 4: You know that that's a combination of wanting to hold

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Speaker 4: it for a duration matching purpose. But yeah, I think

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Speaker 4: that's I think it's a really important point and it's

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Speaker 4: one that we focus on every day. And I would say, actually,

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Speaker 4: we're pretty paranoid about at PIMCO not to say that

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Speaker 4: we would never buy a forty year tech bond. In

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Speaker 4: some cases we will in some cases that makes sense,

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Speaker 4: But the reality stepping back is that there is phenomenal

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Speaker 4: dislocation risk out there in the economy. And it's not

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Speaker 4: just in tech, it's across everything. I mean, the advent

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Speaker 4: of AI is going to do all sorts of things

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Speaker 4: to every sector, and in many cases that's going to

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Speaker 4: create new winners, and it's also going to create a

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Speaker 4: lot of losers, a lot of stranded assets, a lot

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Speaker 4: of business models that are displaced, and we need to

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Speaker 4: be ready for that. We need to be flexible on

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Speaker 4: the way there. And that's you know, part of why

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Speaker 4: you're not going to want to load up on forty

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Speaker 4: year bonds in anything really, because there is going to

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Speaker 4: be so much disruption across so many different sectors. There

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Speaker 4: is real danger that's going to come from that. It's

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Speaker 4: difficult to predict you know, by the way, about who

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Speaker 4: exactly is going to be the loser in the space.

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Speaker 4: There's you know a lot of kind of easy answers,

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Speaker 4: but the deeper answers are going to emerge over time.

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Speaker 4: And that just speaks to making sure you've got diversified portfolios,

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Speaker 4: making sure you're nimble, making sure you've got liquidity and

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Speaker 4: portfolio all of those sort of best practice ways of

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Speaker 4: managing portfolios. Given that we really are in the early

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Speaker 4: innings of something that could be quite dramatic in terms

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Speaker 4: of dislocation and disruption across many different sectors, not technology, and.

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Speaker 1: The size of the funding these you know, we're talking

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Speaker 1: multiple trillions of dollars over many years for all sorts

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Speaker 1: of things and in many different markets. Obviously they'll want

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Speaker 1: to come to Pincos as one of the big investors

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Speaker 1: we hope the space. I mean, so how do you prioritize,

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Speaker 1: how do you look through all these opportunities? What is

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Speaker 1: you know on your radar in terms of relative value

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Speaker 1: in that space right now?

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Speaker 3: Yeah?

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Speaker 4: Sure, well, I mean there aren't You probably saw last

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Speaker 4: year we did a couple of significant deals. The deal

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Speaker 4: around Meta was a was an important one. Where that

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Speaker 4: was grabbed a lot of headlines because it was so large,

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Speaker 4: twenty five billion dollar deal total. So you know, what

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Speaker 4: we're looking for is where we can deploy client capital

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Speaker 4: into opportunities where you're capturing really a pure ill liquidity

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Speaker 4: premium for some of these situations as opposed to taking

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Speaker 4: sneak key credit risk. And that's an important distinction because

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Speaker 4: there are some of these structures in data center development

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Speaker 4: which give First of all, it may not be as

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Speaker 4: strong of a tenant as somebody like Meta. Second of all,

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Speaker 4: the lease itself may not be structured the way that

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Speaker 4: it needs to be where it's as strong and gives

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Speaker 4: the gives the creditor the protections that they need. So

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Speaker 4: there's a lot of the sort of you know, it's

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Speaker 4: called it slipperiness out there in some of the data

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Speaker 4: center development space. Some of it may make some sense,

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Speaker 4: but in our view, you know, that gets you that's

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Speaker 4: a much different profile. You're starting to take bets on

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Speaker 4: the technology, the stability of the technology. You're taking bets

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Speaker 4: on whether the space is going to get overbuilt or not,

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Speaker 4: and that there's a lot of uncertainty, and we don't

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Speaker 4: think you're getting paid for that uncertainty, so rather you know,

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Speaker 4: finding solutions for borrowers, and it won't just be Meta.

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Speaker 4: There will be others where, for a variety of reasons,

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Speaker 4: they're looking for a custom borrowing solution that's not straight

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Speaker 4: down the fairway unsecured bond and the IG market. And

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Speaker 4: that's where PIMCO can really step in and provide that

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Speaker 4: solution with flexible capital. And so that's really a theme

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Speaker 4: that we have so really distinguishing between you know, where

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Speaker 4: are you getting paid for being nimble, flexible and having

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Speaker 4: a custom solution versus where you're just getting paid for

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Speaker 4: taking additional credit risk that you may not even know

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Speaker 4: or want to be taken.

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Speaker 2: So I guess I get another two parter because I

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Speaker 2: like to ask my questions in multiples here. But you know,

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Speaker 2: you mentioned sort of the signs of the meta deal,

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Speaker 2: and I guess that does kind of get a question

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Speaker 2: for me in terms of when you're looking at that

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Speaker 2: type of dynamic, is there a certain scale to a

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Speaker 2: deal that you're looking to just you know, referencing back

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Speaker 2: to the two point two plus trillion dollars in assets there,

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Speaker 2: you know, because I presume you're not looking to write

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Speaker 2: fives and tens. And then I guess secondarily, when we

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Speaker 2: think about, you know, some of the broader themes and

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Speaker 2: obviously your own push into privates and we think about

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Speaker 2: sort of the privatization that we're in the IG space,

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Speaker 2: I guess, how does that sort of interact and how

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Speaker 2: do you think how that interplays with sort of your strategy,

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Speaker 2: you know, moving forward?

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Speaker 4: Yeah, so you know, actually we're you know, PIMCO does

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Speaker 4: a lot of deals that are much much smaller than

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Speaker 4: that twenty five billion, and you know, one hundred million

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Speaker 4: dollar deal can be quite interesting. We have all sorts

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Speaker 4: of different portfolios and investors who are looking for different profiles.

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Speaker 3: I mean, one thing that.

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Speaker 4: We've learned over years, and certainly I've seen in my

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Speaker 4: career over over decades in credit is that all l SQL,

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Speaker 4: a bigger borrower is better than a smaller borrower. When

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Speaker 4: you're bigger, you are more important to your customers, to

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Speaker 4: your vendors, to your banks, to your regulators, you know

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Speaker 4: all these things, and it just gives you flexibility when

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Speaker 4: you get into trouble, when you go through a cycle

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Speaker 4: that a smaller borrower doesn't have. So all LSEQL we

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Speaker 4: do have a have a pretty strong bias to up

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Speaker 4: inside is up in scale types of borrowers, but there

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Speaker 4: are a lot of interesting opportunities that are much smaller

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Speaker 4: than that. So you know, you just need to be

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Speaker 4: staffed accordingly. You need to have the platform to be

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Speaker 4: able to take down something very large and complex like

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Speaker 4: we've talked about, or also, you know something some of

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Speaker 4: the smaller deals that we see. PIMKA doesn't get too

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Speaker 4: far down into the lower middle market things like that.

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Speaker 4: There's some interesting opportunities in that space, but it's just

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Speaker 4: not something that we've tended to favor. But yeah, you

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Speaker 4: mentioned our reach out into private markets. I mean this

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Speaker 4: is part of the part of the strength of a

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Speaker 4: broad platform across public and private strategies that PIMCO has

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Speaker 4: and what the way that we approach it is not

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Speaker 4: you know, we have one business over here which is

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Speaker 4: private strategies and another over here which is public strategies.

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Speaker 4: We have one pim Go platform that can provide flexible solutions,

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Speaker 4: whether it's a smaller company that wants a private loan

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Speaker 4: now which with an eye to growing over time and

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Speaker 4: partnering with them go over time and maybe over time

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Speaker 4: you know, they're refinanced into the public market and could

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Speaker 4: be there with them for that as well. So there's

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Speaker 4: you know, there's a lot of different ways that this

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Speaker 4: platform's co platform, structured in one team across public and private,

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Speaker 4: can can operate large and small deals.

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Speaker 1: On private markets in general. Though Christina, you haven't been

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Speaker 1: a big fan. Put it that way. What what do

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Speaker 1: you find troubling about private credit? You know, you have

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Speaker 1: been quite a vocal critic, and obviously there are lots

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Speaker 1: of other people saying that there are problems there, you know,

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Speaker 1: not just you, but you know, the the IMF and

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Speaker 1: the regulators and a lot of other people. But but

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Speaker 1: when we talk to private credit practitioners, they're saying, you know,

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Speaker 1: we're doing great. We're making two hundred basis points over

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Speaker 1: public markets and our losses are very low.

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Speaker 4: So, you know, James, if we had all day, we

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Speaker 4: could go over everything that I find troubling. And look,

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Speaker 4: there's nothing definitionally wrong about private credit at all. But

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Speaker 4: the reality is that mark to market can keep you

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Speaker 4: honest and it can flag issues early in a way

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Speaker 4: that is difficult when you don't have marked to market.

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Speaker 4: I think that when times are good, both investors and

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Speaker 4: lenders can say, oh, yeah, you know, marked market is silly.

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Speaker 4: It creates you know, unnecessary noise and distraction. But the

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Speaker 4: reality is that there's real information almost always in mark

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Speaker 4: to market, and if you are managing a team of

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Speaker 4: credit analysts, managing a team of credit portfolio managers, the

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Speaker 4: signal that comes from the mark to market is really

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Speaker 4: important and it's a way to focus the mind and say, hey,

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Speaker 4: you know, we've got an overweight recommendation on this credit,

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Speaker 4: and yet the market is saying that no, actually, something's

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Speaker 4: really wrong there. Are we wrong or have we missed something?

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Speaker 4: What you know, let's go back and sharp on our

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Speaker 4: pencils and dig down a little bit more. Let's call

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Speaker 4: the company, let's and that maybe we need to you know,

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Speaker 4: get out and tell the company to do something and

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Speaker 4: advocate for change at the company. You know, there's all

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Speaker 4: sorts of things, positive benefits that come out of mark

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Speaker 4: to market, and so this, you know, this narrative that, oh,

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Speaker 4: mark to market is just you know, a distraction and

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Speaker 4: and you know, why don't you just leave that aside

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Speaker 4: and then pick up this additional premium now. And then

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Speaker 4: the other thing is that you know, yeah, it would

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Speaker 4: be nice to get two hundred basis points of pure

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Speaker 4: liquidity premium if that were the case, and sometimes you

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Speaker 4: can find that here and there, But the reality is,

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Speaker 4: there's again a lot of additional credit risk that people

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Speaker 4: are are often taking in some of these private situations

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Speaker 4: that you kind of turn a blind eye to. And

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Speaker 4: and yes, I mean covenants are often a lot stronger,

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Speaker 4: but as I mentioned, you're lending to much smaller companies

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Speaker 4: that again have all much less financial flexibility. In some cases,

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Speaker 4: you don't have the diversification that you have in public markets.

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Speaker 4: We've seen that very famously in the last couple of days,

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Speaker 4: where there's a lot of concentration to you know, these

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Speaker 4: very asset light Amazon aggregator type names. There's a lot

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Speaker 4: of a lot of concentration sector concentration in private markets

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Speaker 4: that you see less of in public markets. So there's

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Speaker 4: a lot of reasons why there's that additional two hundred

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Speaker 4: basis points to spread. Some of it is is a

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Speaker 4: liquidity and what you need to do is have a

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Speaker 4: platform and tools and analytics tools in particular that can

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Speaker 4: disaggregate all right, well, how much of this is credit

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Speaker 4: risk and how much of this is pure liquidity? And

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Speaker 4: what's the relative value of the opportunity relative to other

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Speaker 4: private opportunities and other relative to public opportunities. So yeah,

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Speaker 4: you know, this isn't to say categorically that private markets

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Speaker 4: that there's something categorically wrong with private markets. That's not

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Speaker 4: true at all, and effect because investing a lot in

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Speaker 4: particularly the asset based finance, we've got a very market

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Speaker 4: leading platform in that space and we see a lot

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Speaker 4: of growth there, and there's a lot of iniquity there,

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Speaker 4: there's a lot of credit risk there, but we see

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Speaker 4: a lot of relative value there. So it's not at

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Speaker 4: all that there's something wrong about ill liquidity. But you

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Speaker 4: need to understand the strength of marked to market and

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Speaker 4: what's missing when you don't have it, and that I

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Speaker 4: think is a fundamental concern that many in the market

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Speaker 4: have been missing.

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Speaker 1: But on the marked to market specifically where we taught

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Speaker 1: to private credit direct lenders I'm talking about about this,

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Speaker 1: they say, well, we've got you know, independent valuation providers

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Speaker 1: who give us very good information. They will also tell

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Speaker 1: you that you know, they have much more direct contact

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Speaker 1: with the management, They get a lot more data from

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Speaker 1: the borrower, they see a lot more across the board

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Speaker 1: about the industry that the public markets just don't see.

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Speaker 1: This is their defense, not mine. I'm wondering. You know,

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Speaker 1: when you have those sorts of discussions with those sorts

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Speaker 1: of people.

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Speaker 3: Well, look it's it's mixed.

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Speaker 4: And that may have been you know, in the in

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Speaker 4: the wonderful glory years of direct lending ten years ago,

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Speaker 4: that was more the case. But now you know, management

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Speaker 4: teams do not want to have to spend a ton

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Speaker 4: of time with their direct lenders. Part of the whole

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Speaker 4: business is it's a relationship business and they don't want to,

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Speaker 4: you know, have to have all of this burden of

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Speaker 4: having to talk talk to lenders at great length. And yeah,

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Speaker 4: I mean there is a you do have more direct

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Speaker 4: access to management teams. But you know, look, when you

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Speaker 4: when you're at a large manager like Pimpco, you have

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Speaker 4: fantastic access to management teams, you know, so it's not

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Speaker 4: as if, you know, you're sacrificing something in terms of

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Speaker 4: being able to engage with the company when when you're

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Speaker 4: at PIMCO, you're the more often than not the largest

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Speaker 4: lender to you know, to many many companies, even if

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Speaker 4: you're not particularly overweight the name, it's just a large platform,

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Speaker 4: and so that gives you access and information. So it's

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Speaker 4: not as if you have to be in private to

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Speaker 4: be able to access and information. And then the other

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Speaker 4: thing is, let's remember that disclosures in private markets are

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Speaker 4: are not phenomenal or they're mixed. Let's say, you know,

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Speaker 4: a lot of times you get a pretty stripped down

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Speaker 4: quarterly statement from the borrower. There's not you know, all

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Speaker 4: of this reams of data that that you might want

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Speaker 4: to have. There's a lot less regulation in terms of disclosures,

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Speaker 4: and and then who is the auditor on the annual report.

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Speaker 4: It's not always going to be the strongest auditor that

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Speaker 4: you want. You know, there's a lot of there's a

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Speaker 4: lot of things when you sort of start looking under

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Speaker 4: the hood in terms of disclosure, transparency, et cetera. Again,

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Speaker 4: you know, look, there's you can do this right and

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Speaker 4: and you have to do this right, by the way.

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Speaker 4: But I do think that to state sort of these

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Speaker 4: blanket statements that you have more access and more information

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Speaker 4: and more all of these things, it's just it's not true.

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Speaker 4: That might be the case for some managers relative to

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Speaker 4: other managers, but the reality is that when you work

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Speaker 4: at a fully staffed active fixed income manager like a PIMCO. Yeah,

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Speaker 4: lots of access, lots of data, and lots of resources.

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Speaker 1: Some of the big firms in that space private markets,

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Speaker 1: private credit, private debt that they say it's going to

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Speaker 1: be a forty trillion dollar market, which presumed I think

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Speaker 1: that a lot of the public debt will be taken

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Speaker 1: into that market. A lot of the borrows you traditionally

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Speaker 1: deal with in public markets will be only in private market.

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Speaker 1: So does that mean you potentially lose access to some

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Speaker 1: of your borrowers because they're essentially the whole market is

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Speaker 1: being privatized.

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Speaker 3: This notion that somehow, the.

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Speaker 4: Highly sophisticated financial teams at investment grade companies are going

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Speaker 4: to abandon the ten trillion dollar liquid investment grade credit

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Speaker 4: market to go wholesale into the ill liquid credit market

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Speaker 4: and pay a significant premium to do so, seems highly improbable.

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Speaker 4: Will there be trillions of dollars of opportunities and asset

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Speaker 4: based finance in general as banks step back or more importantly,

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Speaker 4: step into a more hybrid way of working where they

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Speaker 4: make some loans and keep some loans, and they sell

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Speaker 4: some loans and some loans they don't make and some

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Speaker 4: sectors they leave to specialty lenders. And here I'm not

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Speaker 4: talking about corporate lending. I'm talking about consumer lending, student lending,

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Speaker 4: aviation finance, equipment leasing, that type of thing, residential mortgagees,

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Speaker 4: that type of thing. Yes, there, there's going to be trillions,

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Speaker 4: and you see that growing already. But specific to the

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Speaker 4: corporate market, the ten trillion dollar IG market is not

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Speaker 4: going away, you know, it only continues to grow. It's

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Speaker 4: been quite stable around thirty percent of GDP for several years,

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Speaker 4: and we expect that to continue. Will there be you know,

433
00:24:02,720 --> 00:24:06,480
Speaker 4: some need for custom solutions in the private markets, even

434
00:24:06,520 --> 00:24:09,280
Speaker 4: for large i G borrowers, of course, and we've already

435
00:24:09,320 --> 00:24:11,359
Speaker 4: started to see that, and PIMCO will be there for those.

436
00:24:11,400 --> 00:24:16,439
Speaker 4: But the realities that the growth in private space is

437
00:24:16,480 --> 00:24:20,679
Speaker 4: going to come from asset based finance, not from IG credit.

438
00:24:21,040 --> 00:24:22,439
Speaker 1: How big is that opportunity for you?

439
00:24:22,640 --> 00:24:24,800
Speaker 4: Well, you know, I do think that that it is

440
00:24:24,880 --> 00:24:27,240
Speaker 4: going to be in the trillions. I mean, forty trillion

441
00:24:27,280 --> 00:24:32,200
Speaker 4: dollars is aspirational, let's call it, but certainly it'll be

442
00:24:32,359 --> 00:24:35,560
Speaker 4: in the trillions of dollars. It's difficult to measure exactly,

443
00:24:35,640 --> 00:24:39,040
Speaker 4: you know what the addressable market is right now, but

444
00:24:39,320 --> 00:24:42,240
Speaker 4: it will be there, and PIMCO is growing rapidly in

445
00:24:42,280 --> 00:24:45,800
Speaker 4: that space and interesting there it's there's going to be

446
00:24:45,880 --> 00:24:49,600
Speaker 4: a very there's already a pretty blurred line between public

447
00:24:49,640 --> 00:24:52,280
Speaker 4: and private because if you are PIMCO, what do you do?

448
00:24:52,359 --> 00:24:56,560
Speaker 4: Will you buy the private whole loans, whether there's let's

449
00:24:56,560 --> 00:25:02,119
Speaker 4: say there consumer loans or residential mortgages. But then as PIMPKO,

450
00:25:02,359 --> 00:25:05,800
Speaker 4: you can securitize those loans out into the market and

451
00:25:05,840 --> 00:25:10,119
Speaker 4: sell public securities, public debt securities. Retain the equity or

452
00:25:10,160 --> 00:25:14,440
Speaker 4: the junior tranches of that securitization have liabilities that are

453
00:25:14,480 --> 00:25:18,360
Speaker 4: matched into the assets, so you don't have asset liability

454
00:25:18,400 --> 00:25:21,840
Speaker 4: mismatch the way that you would in a bank, and

455
00:25:21,880 --> 00:25:24,359
Speaker 4: so a really interesting liability profile. And so what is

456
00:25:24,400 --> 00:25:27,280
Speaker 4: that is that private markets? Is that public markets. It's

457
00:25:27,400 --> 00:25:28,920
Speaker 4: kind of a hybrid of the two. So I think

458
00:25:28,960 --> 00:25:30,520
Speaker 4: that's going to be some of One of the interesting

459
00:25:30,560 --> 00:25:33,520
Speaker 4: things is this convergence of public private is going to

460
00:25:33,520 --> 00:25:37,320
Speaker 4: be very much apparent. It already is in asset based finance,

461
00:25:37,320 --> 00:25:40,280
Speaker 4: and we think that'll continue. But yes, that's that's certainly

462
00:25:40,320 --> 00:25:45,200
Speaker 4: a multi trillion dollar opportunity out over the next several years,

463
00:25:45,240 --> 00:25:47,760
Speaker 4: and PIMK looks to be there and that you know

464
00:25:47,840 --> 00:25:52,880
Speaker 4: over time. This is we've stated in Alliance's Capital Markets

465
00:25:52,960 --> 00:25:55,359
Speaker 4: Day more than a year ago that our target is

466
00:25:55,800 --> 00:25:59,639
Speaker 4: revenues of about thirty percent in alternatives and most of

467
00:25:59,640 --> 00:26:03,359
Speaker 4: that is going to be private strategies, and most of

468
00:26:03,359 --> 00:26:05,679
Speaker 4: that is going to be aset based. To announce that

469
00:26:05,880 --> 00:26:08,719
Speaker 4: be up from about twenty three percent of revenues when

470
00:26:08,800 --> 00:26:11,440
Speaker 4: we when we made that statement. So that's our that's

471
00:26:11,440 --> 00:26:13,160
Speaker 4: our goal. And you know how much is that that's

472
00:26:14,040 --> 00:26:16,720
Speaker 4: that's a lot of in terms of AUM. We'll see

473
00:26:16,760 --> 00:26:19,920
Speaker 4: exactly what that will be, but it's tens of billions

474
00:26:19,960 --> 00:26:21,760
Speaker 4: and probably a fair amount more than that.

475
00:26:23,880 --> 00:26:27,520
Speaker 1: One other impact of private on public markets that our

476
00:26:27,560 --> 00:26:31,040
Speaker 1: previous guests mentioned is that, you know, in crude terms,

477
00:26:31,080 --> 00:26:33,639
Speaker 1: there's a kind of cleansing effect in that deals that

478
00:26:34,160 --> 00:26:36,760
Speaker 1: previously would have been done in high yield markets are

479
00:26:36,800 --> 00:26:40,600
Speaker 1: being rejected and pushed into private and those guys are

480
00:26:40,720 --> 00:26:43,120
Speaker 1: you know, they're they're so liquid, they've got they need

481
00:26:43,160 --> 00:26:46,600
Speaker 1: to deploy, so they're lapping these deals up. It doesn't

482
00:26:46,640 --> 00:26:50,560
Speaker 1: sound like that's going to end. Well, do you do

483
00:26:50,560 --> 00:26:52,920
Speaker 1: you see that? Do you are you benefiting in your

484
00:26:52,920 --> 00:26:55,080
Speaker 1: portfolios in highield and do you and do you worry

485
00:26:55,119 --> 00:26:56,760
Speaker 1: that there is this kind of build up of so

486
00:26:56,920 --> 00:26:59,640
Speaker 1: called bad deals out there somewhere that we cannot see.

487
00:27:00,119 --> 00:27:02,879
Speaker 4: Yeah, I mean cleansing is cleansing for whom right the

488
00:27:02,920 --> 00:27:05,480
Speaker 4: dirt has to go somewhere. But yes, I mean we're

489
00:27:05,480 --> 00:27:10,080
Speaker 4: seeing that very much in high yield has been has

490
00:27:10,320 --> 00:27:14,280
Speaker 4: been dramatically changed by the rise of direct lending and

491
00:27:14,320 --> 00:27:16,959
Speaker 4: also of the rise of bank loans. Bank loans took

492
00:27:17,000 --> 00:27:19,160
Speaker 4: a lot of market share from high yield over time,

493
00:27:19,200 --> 00:27:22,800
Speaker 4: and so high yield has migrated to be a much

494
00:27:22,960 --> 00:27:27,800
Speaker 4: larger a universe of much larger borrowers, large cap borrowers. Again,

495
00:27:27,920 --> 00:27:29,920
Speaker 4: that's a higher we're going back to what we talked

496
00:27:29,920 --> 00:27:34,400
Speaker 4: about earlier. That's generally a higher quality profile of borrower.

497
00:27:35,200 --> 00:27:37,800
Speaker 4: There's also a lot less of the deep cyclical stuff

498
00:27:37,840 --> 00:27:40,800
Speaker 4: that used to be pretty common in high yield, and

499
00:27:40,840 --> 00:27:43,480
Speaker 4: so that's another advantage for highilding and it's starting to show.

500
00:27:43,720 --> 00:27:46,480
Speaker 4: So if you look at high yield default rates, they're

501
00:27:46,680 --> 00:27:49,320
Speaker 4: very low, single digit over the last few years at

502
00:27:49,320 --> 00:27:51,800
Speaker 4: a time when direct lending default rates if you include

503
00:27:52,680 --> 00:27:58,200
Speaker 4: both hard defaults and the emergency move into payment and

504
00:27:58,280 --> 00:28:02,280
Speaker 4: kind pick or what's called the ad PIC toggles. In

505
00:28:03,560 --> 00:28:07,399
Speaker 4: some of these loans, you're in mid single digit types

506
00:28:07,480 --> 00:28:11,640
Speaker 4: of default restructuring rates, and so you're seeing a very

507
00:28:11,720 --> 00:28:16,840
Speaker 4: dramatic divergence and performance in high yield default and restructuring

508
00:28:16,920 --> 00:28:20,440
Speaker 4: versus direct lending default and restructuring with bank loans somewhere

509
00:28:20,440 --> 00:28:23,520
Speaker 4: in between. And so yeah, I mean there were years there,

510
00:28:24,960 --> 00:28:28,440
Speaker 4: certainly late twenty twenty, twenty one, twenty two, when high

511
00:28:28,480 --> 00:28:31,360
Speaker 4: yield did not get deals because hig yield, remember.

512
00:28:31,119 --> 00:28:32,480
Speaker 3: Is a it's a.

513
00:28:32,400 --> 00:28:36,359
Speaker 4: Fixed rate, fixed coupon market. At a time when interest

514
00:28:36,400 --> 00:28:40,320
Speaker 4: rates were ultra low, you liked the floating rate nature

515
00:28:40,960 --> 00:28:44,880
Speaker 4: of accessing direct lending or the bank loan market, and

516
00:28:44,960 --> 00:28:48,000
Speaker 4: so all of the bad underwriting went into those spaces.

517
00:28:48,040 --> 00:28:51,360
Speaker 4: And we're starting to see those chickens come home to

518
00:28:51,480 --> 00:28:53,280
Speaker 4: roost right now, clean or not?

519
00:28:55,600 --> 00:28:57,360
Speaker 1: Is there a bigger problem developing though? Or is it

520
00:28:57,400 --> 00:28:59,320
Speaker 1: really contained? I mean, we talk a lot about in

521
00:28:59,320 --> 00:29:02,760
Speaker 1: the public marks triple cs and problems there and stresses there,

522
00:29:02,760 --> 00:29:04,680
Speaker 1: But then when you kind of look as it, it's

523
00:29:04,760 --> 00:29:07,120
Speaker 1: quite a small piece of the whole higheld market. Is

524
00:29:07,120 --> 00:29:09,320
Speaker 1: it the same in direct lending thing that there are

525
00:29:09,360 --> 00:29:11,800
Speaker 1: these problem deals, but there are you know, a few

526
00:29:11,840 --> 00:29:15,000
Speaker 1: of them, and they won't ultimately be a bigger problem

527
00:29:15,080 --> 00:29:16,120
Speaker 1: or any contation from them.

528
00:29:16,160 --> 00:29:18,840
Speaker 4: Yeah, I mean, what we're seeing is that there is

529
00:29:18,920 --> 00:29:22,600
Speaker 4: a you know, there's a fairly large overhang of problem

530
00:29:22,680 --> 00:29:26,920
Speaker 4: loans that were made in years earlier, this decade that

531
00:29:27,000 --> 00:29:30,800
Speaker 4: will take years to burn through because there is this

532
00:29:30,920 --> 00:29:35,560
Speaker 4: slow mechanism in direct lending to kick the can as

533
00:29:35,640 --> 00:29:37,880
Speaker 4: the kind of pejorative term, or but you know, or

534
00:29:37,920 --> 00:29:40,200
Speaker 4: work with your borrower and try to find solutions and

535
00:29:40,200 --> 00:29:42,360
Speaker 4: if you can't find a solution, you know, down the road,

536
00:29:42,400 --> 00:29:44,080
Speaker 4: then finally you would.

537
00:29:44,480 --> 00:29:48,200
Speaker 3: Move to restructure. So it'll take some number of years.

538
00:29:48,240 --> 00:29:49,840
Speaker 4: And so what that means is you're going to have

539
00:29:50,680 --> 00:29:52,479
Speaker 4: you had it in twenty four, you had it in

540
00:29:52,480 --> 00:29:54,600
Speaker 4: twenty five, you'll have it again this year a kind

541
00:29:54,640 --> 00:29:58,240
Speaker 4: of a mid single digit default and restructuring and bad

542
00:29:58,280 --> 00:30:00,920
Speaker 4: pick type of rate. You may even see that out

543
00:30:00,960 --> 00:30:04,600
Speaker 4: into twenty twenty seven. What that means is that returns

544
00:30:04,640 --> 00:30:06,560
Speaker 4: will be lower. It's not going to be you know,

545
00:30:06,640 --> 00:30:08,520
Speaker 4: it's not going to be a bust. And that's what

546
00:30:08,560 --> 00:30:13,680
Speaker 4: we saw in twenty twenty five when the average returns

547
00:30:13,720 --> 00:30:17,160
Speaker 4: on You know, we do a screen of these interval funds,

548
00:30:17,160 --> 00:30:19,480
Speaker 4: which are the semi liquid funds that focus a lot

549
00:30:19,520 --> 00:30:25,200
Speaker 4: on private credit. PIMCO runs diversified version of that across

550
00:30:25,480 --> 00:30:28,520
Speaker 4: across all kinds of asset based finance and other private opportunities,

551
00:30:28,840 --> 00:30:32,880
Speaker 4: but most of them are indirect landing. And the returns

552
00:30:32,920 --> 00:30:35,520
Speaker 4: there went from in twenty two to twenty three you

553
00:30:35,520 --> 00:30:37,760
Speaker 4: would have seen eleven twelve percent returns, in twenty four

554
00:30:37,800 --> 00:30:41,040
Speaker 4: you would have seen nine ten percent returns, and in

555
00:30:41,080 --> 00:30:44,360
Speaker 4: twenty five the average was down to around seven percent,

556
00:30:44,400 --> 00:30:47,320
Speaker 4: but wide dispersion around that, some down at three or

557
00:30:47,360 --> 00:30:50,400
Speaker 4: four percent, some still up at ten to eleven percent,

558
00:30:50,480 --> 00:30:54,480
Speaker 4: and we'll probably see that again this year. You've already

559
00:30:54,520 --> 00:30:57,160
Speaker 4: had this year some headlines around BBCs that are getting

560
00:30:57,160 --> 00:31:01,600
Speaker 4: into trouble with some of those those legacy bad loans.

561
00:31:01,640 --> 00:31:03,600
Speaker 4: There's going to be more of that to come. So

562
00:31:03,800 --> 00:31:05,480
Speaker 4: you know what this means is that returns are going

563
00:31:05,520 --> 00:31:08,520
Speaker 4: to be underwhelming, and that will you raise some questions

564
00:31:08,520 --> 00:31:11,800
Speaker 4: about just how much exposure do you want to this space,

565
00:31:11,880 --> 00:31:14,600
Speaker 4: But it's not going to be dropping off a cliff.

566
00:31:14,640 --> 00:31:16,200
Speaker 4: I think the only thing to say, though, is that

567
00:31:16,400 --> 00:31:18,240
Speaker 4: all of This is happening in the context of a

568
00:31:18,360 --> 00:31:22,680
Speaker 4: very strong economy with rates that are coming down, and

569
00:31:22,720 --> 00:31:26,360
Speaker 4: with relatively stable fixed income markets, and so you're seeing

570
00:31:26,400 --> 00:31:31,040
Speaker 4: a problematic burned through these bad loans, even with that

571
00:31:31,240 --> 00:31:35,680
Speaker 4: very robust economic backdrop. What if you did have a recession,

572
00:31:35,720 --> 00:31:38,120
Speaker 4: what if you did have a material economic weakness, what

573
00:31:38,160 --> 00:31:40,760
Speaker 4: if you did have a significant draw down in equity

574
00:31:40,800 --> 00:31:43,840
Speaker 4: markets and a turn away from risk markets, then I

575
00:31:43,840 --> 00:31:46,920
Speaker 4: think you'd be left with a much more serious outlook

576
00:31:47,000 --> 00:31:48,440
Speaker 4: for that market.

577
00:31:48,520 --> 00:31:50,160
Speaker 3: It wouldn't just be directly any By the way.

578
00:31:50,000 --> 00:31:53,560
Speaker 4: Bank loans had a lot of pretty problematic underwriting as well,

579
00:31:53,600 --> 00:31:56,600
Speaker 4: and you'd see problems there and which would then spill

580
00:31:56,600 --> 00:32:00,400
Speaker 4: into problems and some of the more mes tron of

581
00:32:00,440 --> 00:32:04,400
Speaker 4: clos et, cetera. So definitely something to keep a close

582
00:32:04,440 --> 00:32:07,080
Speaker 4: eye on. It is not a good sign that you

583
00:32:07,120 --> 00:32:10,840
Speaker 4: have all of these problems emerging in terms of loan

584
00:32:11,360 --> 00:32:14,720
Speaker 4: loan performance at a time when the economy is about

585
00:32:14,720 --> 00:32:15,600
Speaker 4: as good as it gets.

586
00:32:18,120 --> 00:32:20,240
Speaker 2: Yeah, I feel like I mean, certainly to a lesser degree,

587
00:32:20,280 --> 00:32:22,120
Speaker 2: but we see that in the high yield market as well.

588
00:32:22,120 --> 00:32:24,520
Speaker 2: But you do bring in a couple of points that

589
00:32:24,560 --> 00:32:26,960
Speaker 2: I'm kind of curious to piggyback on. You mentioned liquidity

590
00:32:27,000 --> 00:32:29,720
Speaker 2: premium a few times, both in talking about investment create

591
00:32:29,840 --> 00:32:31,560
Speaker 2: and high yield, and I am kind of curious in

592
00:32:31,640 --> 00:32:34,520
Speaker 2: terms of, you know, what are your thoughts there, just

593
00:32:34,560 --> 00:32:37,320
Speaker 2: because it appears to me that we've definitely seen some

594
00:32:37,400 --> 00:32:39,960
Speaker 2: compression in whatever that liquidity premium is call it ot

595
00:32:40,000 --> 00:32:42,080
Speaker 2: the last decade, whether you're talking with the advent of

596
00:32:42,120 --> 00:32:46,040
Speaker 2: portfolio trading as well as some of this substitution dynamic

597
00:32:46,040 --> 00:32:48,160
Speaker 2: that we saw in the twenty two to twenty three dynamic,

598
00:32:48,200 --> 00:32:50,840
Speaker 2: where you know, your direct lenders were able to pick

599
00:32:50,880 --> 00:32:53,880
Speaker 2: up the slack when the funding markets froze for loans

600
00:32:53,920 --> 00:32:57,680
Speaker 2: and corporates. It seems to me as if maybe what

601
00:32:57,960 --> 00:33:00,160
Speaker 2: used to be call it a two seventy five maybe

602
00:33:00,160 --> 00:33:02,720
Speaker 2: three hundred basis point liquidity premium in high yield is

603
00:33:02,720 --> 00:33:06,800
Speaker 2: maybe substantially less today in similarly, but on a smaller

604
00:33:06,800 --> 00:33:09,960
Speaker 2: scale for ig is that's something that you think about

605
00:33:10,000 --> 00:33:11,680
Speaker 2: where that number should be these dands.

606
00:33:11,760 --> 00:33:14,240
Speaker 4: Yeah, I mean, I think the first thing that we

607
00:33:14,320 --> 00:33:16,200
Speaker 4: think about, and we talk a lot about with our

608
00:33:16,240 --> 00:33:20,840
Speaker 4: clients is think about the value of liquidity and what

609
00:33:20,880 --> 00:33:24,800
Speaker 4: it does for portfolios and what it does for the

610
00:33:24,800 --> 00:33:29,400
Speaker 4: options that you have. Mo Matal, who's our CIO for

611
00:33:29,600 --> 00:33:33,680
Speaker 4: Traditional Strategies, has spoken about this really eloquently. That you know,

612
00:33:34,200 --> 00:33:38,640
Speaker 4: first of all, liquid markets are very liquid. Investment grade

613
00:33:38,680 --> 00:33:41,160
Speaker 4: corporate markets are as liquid as we've ever seen them

614
00:33:41,160 --> 00:33:44,120
Speaker 4: in our careers. And yes, it is true that banks

615
00:33:44,160 --> 00:33:48,400
Speaker 4: are less active in providing backstop liquidity in the market.

616
00:33:48,440 --> 00:33:52,760
Speaker 4: But the platform trading that you mentioned all has been

617
00:33:53,240 --> 00:33:58,240
Speaker 4: a revolution in the liquidity of fixed income markets, including

618
00:33:58,240 --> 00:34:02,080
Speaker 4: in the IG credit market. It is far easier to

619
00:34:02,120 --> 00:34:05,920
Speaker 4: trade large blocks of i G today than it's ever

620
00:34:06,000 --> 00:34:11,040
Speaker 4: been in our careers. And you know, and so the

621
00:34:11,120 --> 00:34:14,040
Speaker 4: liquidity is real, So that let's start with that. And

622
00:34:14,120 --> 00:34:17,359
Speaker 4: these questions around are these claims that there isn't really

623
00:34:17,400 --> 00:34:20,800
Speaker 4: any liquidity that you know, that's that's simply patently false.

624
00:34:21,239 --> 00:34:26,160
Speaker 4: Liquidity is real and quite dramatic in fact. Now the

625
00:34:26,600 --> 00:34:29,480
Speaker 4: second thing is what is the value of liquidity? Well,

626
00:34:29,480 --> 00:34:31,359
Speaker 4: the value of liquidity and we're kind of seeing in

627
00:34:31,440 --> 00:34:35,279
Speaker 4: some of these endowment portfolios that are so heavily exposed

628
00:34:35,320 --> 00:34:40,600
Speaker 4: to illiquid assets. The value of liquidity is your ability

629
00:34:40,640 --> 00:34:43,600
Speaker 4: to rebalance, you know, equities go sky high.

630
00:34:43,600 --> 00:34:44,759
Speaker 3: Well, maybe you don't want all that.

631
00:34:44,760 --> 00:34:47,759
Speaker 4: Concentration to equities, equities or whether it's private. If you're

632
00:34:47,760 --> 00:34:51,160
Speaker 4: in private, equity goes sky high. Good for you, that

633
00:34:51,280 --> 00:34:54,200
Speaker 4: was a good trade, you know, good, But maybe you

634
00:34:54,280 --> 00:34:57,839
Speaker 4: want to rebalance into something that has better relative value,

635
00:34:57,920 --> 00:35:01,400
Speaker 4: like for instance, fixed income. Right now, so you know,

636
00:35:01,440 --> 00:35:06,719
Speaker 4: the optionality that you give up when you move your

637
00:35:06,719 --> 00:35:10,879
Speaker 4: portfolio largely into I liquids is a real cost. It's

638
00:35:10,880 --> 00:35:15,680
Speaker 4: a real opportunity cost. So liquidity is real. The cost

639
00:35:15,800 --> 00:35:18,239
Speaker 4: of illiquidity is also real, so you need to be

640
00:35:18,280 --> 00:35:18,799
Speaker 4: paid for it.

641
00:35:19,920 --> 00:35:20,280
Speaker 3: Now.

642
00:35:20,719 --> 00:35:22,720
Speaker 4: Know, you ask sort of what is the right number?

643
00:35:22,760 --> 00:35:26,520
Speaker 4: And you know, fortunately that's the alchemist's dream to figure

644
00:35:26,560 --> 00:35:30,680
Speaker 4: out exactly what is the right number for what inquity spreads.

645
00:35:30,719 --> 00:35:32,520
Speaker 4: I mean, it's kind of a function of risk markets.

646
00:35:32,560 --> 00:35:37,120
Speaker 4: When when risk markets are strong, the necessary iliquity premium

647
00:35:37,160 --> 00:35:38,759
Speaker 4: is going to be lower. When risk markets are weak,

648
00:35:38,800 --> 00:35:42,680
Speaker 4: it's going to be higher. I think James mentioned a

649
00:35:42,680 --> 00:35:46,000
Speaker 4: two hundred basis point illiquidity premium in indirect lending. That's

650
00:35:46,040 --> 00:35:48,680
Speaker 4: probably about right. Maybe you could take a little bit

651
00:35:48,760 --> 00:35:53,520
Speaker 4: less for a larger, better, more stable profile. Maybe you

652
00:35:53,600 --> 00:35:56,000
Speaker 4: need a little bit more for you know, a triple

653
00:35:56,040 --> 00:35:58,400
Speaker 4: c ish type of profiles.

654
00:35:58,440 --> 00:36:00,879
Speaker 3: So that's probably about right in this market right now.

655
00:36:01,120 --> 00:36:03,440
Speaker 4: And then I also Nola mentioned that in IG space

656
00:36:03,440 --> 00:36:04,840
Speaker 4: it's going to be less, and yeah, it's going to

657
00:36:04,880 --> 00:36:06,640
Speaker 4: be it's gonna be less. It's gonna be material less

658
00:36:06,640 --> 00:36:10,080
Speaker 4: because you're also taking a lot less risk in your

659
00:36:10,120 --> 00:36:12,960
Speaker 4: IG profile. So it's really dependent on the context. And

660
00:36:13,280 --> 00:36:15,960
Speaker 4: you know, it's kind of part of the everyday discussion

661
00:36:15,960 --> 00:36:18,319
Speaker 4: that we have at PIMCO, which is, all right, what

662
00:36:18,440 --> 00:36:22,960
Speaker 4: analytical tools quantitative tools can we use to value the

663
00:36:23,719 --> 00:36:27,520
Speaker 4: price of illiquidity given all of the other risk factors

664
00:36:27,560 --> 00:36:30,120
Speaker 4: that you could take. It's a big part of the

665
00:36:30,160 --> 00:36:35,000
Speaker 4: process here at PIMCO. And the answer though is just

666
00:36:35,040 --> 00:36:36,000
Speaker 4: it's sort of dynamic.

667
00:36:36,040 --> 00:36:38,840
Speaker 3: It gives depends on the context and the rest of

668
00:36:38,840 --> 00:36:39,280
Speaker 3: the market.

669
00:36:39,960 --> 00:36:42,480
Speaker 2: So sticking maybe with the illiquidity theme, but maybe thinking

670
00:36:42,480 --> 00:36:44,719
Speaker 2: about it a slightly different way, And I guess I'm

671
00:36:44,800 --> 00:36:47,279
Speaker 2: very curious in terms of getting your thoughts in terms

672
00:36:47,280 --> 00:36:48,839
Speaker 2: of the shape of the curve, in terms of how

673
00:36:48,880 --> 00:36:52,400
Speaker 2: you think about the curve from here and however you

674
00:36:52,400 --> 00:36:54,359
Speaker 2: want to think about it, whether that's the spread curve

675
00:36:54,440 --> 00:36:57,400
Speaker 2: or the risk pre curve, and do you think about

676
00:36:57,560 --> 00:37:00,000
Speaker 2: everything that's happening in the world today. What we're talking

677
00:37:00,040 --> 00:37:01,759
Speaker 2: talking about may or may not be happening with the

678
00:37:01,760 --> 00:37:04,480
Speaker 2: Federal Reserve, et cetera. In terms of where you want

679
00:37:04,520 --> 00:37:07,520
Speaker 2: to be in the curve, how you think about roll

680
00:37:07,600 --> 00:37:10,279
Speaker 2: downs and all that sort of stuff and sort of

681
00:37:10,400 --> 00:37:13,800
Speaker 2: again sort of term structure as opposed to maybe liquidity premium.

682
00:37:13,800 --> 00:37:16,640
Speaker 2: But how do you think about that when you're assembling

683
00:37:16,680 --> 00:37:18,160
Speaker 2: a portfolio in today's climate.

684
00:37:18,239 --> 00:37:20,319
Speaker 4: Yeah, well, I think Dan i'ves in our group CEO

685
00:37:20,440 --> 00:37:24,640
Speaker 4: has talked a lot about about the back ends of

686
00:37:24,680 --> 00:37:27,160
Speaker 4: the curves and risks that are in back into the curves.

687
00:37:27,160 --> 00:37:30,279
Speaker 4: And you know, yeah, there are select opportunities here and

688
00:37:30,320 --> 00:37:35,680
Speaker 4: there out the curve, but generally speaking, you know, that's

689
00:37:35,719 --> 00:37:38,480
Speaker 4: a it's an unstable profile out there, and you know,

690
00:37:38,520 --> 00:37:41,799
Speaker 4: who is the natural buyer of thirty year treasury risk?

691
00:37:42,600 --> 00:37:45,919
Speaker 4: There are some but are they enough to really stabilize

692
00:37:45,960 --> 00:37:49,760
Speaker 4: that part of the curve? And and you know, generally speaking,

693
00:37:49,760 --> 00:37:51,319
Speaker 4: over the last year or so, it's been our view

694
00:37:51,320 --> 00:37:54,640
Speaker 4: that you don't really get paid enough in terms of

695
00:37:55,440 --> 00:37:58,840
Speaker 4: it spread, in terms of risk free curve premium to

696
00:37:58,840 --> 00:38:00,560
Speaker 4: go out in the back end of the curve. All

697
00:38:00,600 --> 00:38:04,319
Speaker 4: of that that I just mentioned is true. Even more

698
00:38:04,360 --> 00:38:08,640
Speaker 4: so in spread curves, where you know, there's just isn't

699
00:38:08,760 --> 00:38:12,200
Speaker 4: much pickup going out beyond ten year into twenty year

700
00:38:12,320 --> 00:38:16,680
Speaker 4: and thirty year in spread curves. So not only is

701
00:38:16,719 --> 00:38:18,920
Speaker 4: there not the sponsorship out there in the curve in

702
00:38:19,000 --> 00:38:21,400
Speaker 4: terms of who is the natural buyer, there are some

703
00:38:21,520 --> 00:38:24,200
Speaker 4: natural buyers of thirty year, you know, some some pension

704
00:38:24,400 --> 00:38:27,600
Speaker 4: on some insurance companies, but you know, it's it's they're

705
00:38:27,640 --> 00:38:31,360
Speaker 4: not necessarily large enough to really support back into the curve.

706
00:38:32,200 --> 00:38:35,480
Speaker 4: And then the other important thing is the lack of rolldown.

707
00:38:35,560 --> 00:38:38,319
Speaker 4: So the concept of rolldown is that you know, you

708
00:38:38,400 --> 00:38:42,120
Speaker 4: buy a seven year corporate bond right now at a

709
00:38:42,200 --> 00:38:44,480
Speaker 4: spread of you know, let's call it one hundred base

710
00:38:44,480 --> 00:38:46,479
Speaker 4: of points, just to be simple, and then you hold

711
00:38:46,480 --> 00:38:49,880
Speaker 4: it for two years and you're rolling down that spread

712
00:38:49,920 --> 00:38:53,680
Speaker 4: curve to a five year bond let's say, where where

713
00:38:53,719 --> 00:38:56,040
Speaker 4: if the spread curve hasn't changed, it is now sort

714
00:38:56,040 --> 00:38:59,480
Speaker 4: of a seventy seventy five basis points spread, and you

715
00:38:59,520 --> 00:39:00,319
Speaker 4: can sell that one.

716
00:39:00,440 --> 00:39:02,440
Speaker 3: Again. It's an important.

717
00:39:02,040 --> 00:39:04,360
Speaker 4: Example of needing to be liquid to be able to

718
00:39:04,400 --> 00:39:08,200
Speaker 4: realize and capture that roll down the spread curve. You

719
00:39:08,239 --> 00:39:10,359
Speaker 4: don't get any of that out in twenty and thirty years.

720
00:39:10,360 --> 00:39:14,400
Speaker 4: It's very flat curves, so you're not able to monetize

721
00:39:14,440 --> 00:39:17,319
Speaker 4: that roll down the way that you are in the

722
00:39:17,360 --> 00:39:21,200
Speaker 4: intermediate part of the curves. So yeah, I mean it's

723
00:39:21,200 --> 00:39:22,920
Speaker 4: not to say that there aren't opportunities out there, and

724
00:39:22,960 --> 00:39:26,320
Speaker 4: there are and we'll see them. But generally speaking, our

725
00:39:26,400 --> 00:39:28,920
Speaker 4: preferences in that kind of five to ten year part

726
00:39:28,960 --> 00:39:30,680
Speaker 4: of spread curves.

727
00:39:32,040 --> 00:39:35,280
Speaker 1: All you're saying, Christina, it sounds very bullish for investment

728
00:39:35,320 --> 00:39:39,120
Speaker 1: grade public credit. You know, from fundamentals, the economy being great,

729
00:39:39,360 --> 00:39:40,920
Speaker 1: technicals look great, and then you throw on top of

730
00:39:40,960 --> 00:39:44,319
Speaker 1: that liquidity, the ease of trading. I mean, you know,

731
00:39:44,520 --> 00:39:46,719
Speaker 1: why shouldn't spreads go even tighter? Why shouldn't they go

732
00:39:47,160 --> 00:39:49,360
Speaker 1: One of our guests, I think last year predicted this

733
00:39:49,480 --> 00:39:52,160
Speaker 1: was obviously didn't happen, but he said the ig US

734
00:39:52,200 --> 00:39:54,279
Speaker 1: spread would go to fifty five basis points. Based on

735
00:39:54,320 --> 00:39:56,280
Speaker 1: all of these points you're making, you know, why shouldn't

736
00:39:56,280 --> 00:39:57,040
Speaker 1: it go a lot tighter?

737
00:39:59,400 --> 00:40:02,440
Speaker 4: Well, I mean I think there's a few, you know,

738
00:40:02,800 --> 00:40:05,719
Speaker 4: major issues. I mean, one is certainly all of the

739
00:40:07,040 --> 00:40:11,600
Speaker 4: geopolitical and political risk that we see out there, monetary

740
00:40:11,600 --> 00:40:14,719
Speaker 4: policy risks that we see out there. That requires a

741
00:40:14,840 --> 00:40:19,919
Speaker 4: premium for the volatility that will that will come from

742
00:40:20,000 --> 00:40:24,120
Speaker 4: those things. That's kind of in the short term concerns.

743
00:40:24,440 --> 00:40:26,879
Speaker 4: But the other is the longer term concerns. I mean,

744
00:40:26,880 --> 00:40:30,239
Speaker 4: the reality is that equities are extremely strong. Spreads are

745
00:40:30,239 --> 00:40:33,560
Speaker 4: low because in part and large part, because equities are

746
00:40:33,600 --> 00:40:37,040
Speaker 4: as strong as they are now. You know, there are

747
00:40:37,280 --> 00:40:41,480
Speaker 4: real differences between equities today and the health of the

748
00:40:41,480 --> 00:40:45,040
Speaker 4: corporate sector and the health of profitability and the outlet

749
00:40:45,080 --> 00:40:48,680
Speaker 4: for profitability today relative to say, nineteen ninety nine when

750
00:40:48,719 --> 00:40:51,480
Speaker 4: you and I James were first getting started in this business.

751
00:40:53,040 --> 00:40:55,520
Speaker 4: There are real differences. And so it's not to say

752
00:40:55,560 --> 00:40:58,120
Speaker 4: that this is all just a repeat of nineteen ninety

753
00:40:58,200 --> 00:41:02,040
Speaker 4: nine of the crash that needs to come. But let's

754
00:41:02,040 --> 00:41:06,040
Speaker 4: be honest with ourselves. Equities are very stretched in terms

755
00:41:06,040 --> 00:41:12,279
Speaker 4: of valuations, and certainly if there were to come a

756
00:41:12,280 --> 00:41:17,560
Speaker 4: material downgrade in economic expectations, or even some material downgrade

757
00:41:17,600 --> 00:41:21,600
Speaker 4: in just the way that the technology sector develops, there

758
00:41:21,640 --> 00:41:24,279
Speaker 4: may be new competitors that emerge. There may be new

759
00:41:24,280 --> 00:41:26,560
Speaker 4: technologies that are there, may be you know, all sorts

760
00:41:26,600 --> 00:41:29,560
Speaker 4: of things that pop up that challenge the valuations in

761
00:41:30,360 --> 00:41:34,759
Speaker 4: equity markets. Right now, particularly the tech stocks, and if

762
00:41:34,760 --> 00:41:38,279
Speaker 4: that were to happen, then that would undermine IG as well.

763
00:41:38,360 --> 00:41:42,640
Speaker 4: So look, I mean, I'm trying to cast a balanced

764
00:41:42,760 --> 00:41:46,640
Speaker 4: view on public credit in particular here and even in

765
00:41:46,680 --> 00:41:52,640
Speaker 4: private credit there are some interesting opportunities for sure, but also,

766
00:41:52,880 --> 00:41:57,080
Speaker 4: you know, let's be honest that ultimately the IG spreads

767
00:41:57,080 --> 00:42:00,640
Speaker 4: are going to be very correlated with equity Marketsquity markets

768
00:42:00,680 --> 00:42:06,920
Speaker 4: are very frothy right now and do present you know,

769
00:42:06,960 --> 00:42:08,920
Speaker 4: a fair amount of downside risk. And so with that

770
00:42:08,960 --> 00:42:12,080
Speaker 4: in mind, you know, we would say, look, IG is okay.

771
00:42:13,360 --> 00:42:17,000
Speaker 4: Not you know, we're not calling for any sort of

772
00:42:17,000 --> 00:42:20,640
Speaker 4: material spread winding anytime soon, but probably best to look

773
00:42:21,080 --> 00:42:25,120
Speaker 4: in other areas for interesting relative value in spread products.

774
00:42:25,120 --> 00:42:28,479
Speaker 4: And so agency mortgages had until very recently, because they've

775
00:42:28,480 --> 00:42:30,560
Speaker 4: done so well recently, been you know, a good option

776
00:42:30,719 --> 00:42:36,000
Speaker 4: to find diversification. Securitized credit remains a very interesting opportunity

777
00:42:36,040 --> 00:42:39,600
Speaker 4: to where we do see better relative value there than

778
00:42:39,719 --> 00:42:44,240
Speaker 4: in IG space. Emerging markets another great area to find diversification.

779
00:42:44,360 --> 00:42:45,879
Speaker 4: All of these have tight spread, So I mean, I'm

780
00:42:45,880 --> 00:42:48,760
Speaker 4: not saying that there's you know, that there's a fire

781
00:42:48,800 --> 00:42:50,640
Speaker 4: sale code on in any of these things right now,

782
00:42:51,680 --> 00:42:56,240
Speaker 4: but our message has been IG's okay, but certainly exposed

783
00:42:56,280 --> 00:43:00,440
Speaker 4: to equity markets and more so than say, securitized credit,

784
00:43:00,960 --> 00:43:04,920
Speaker 4: emerging markets and others. So that the power of diversification

785
00:43:05,000 --> 00:43:07,680
Speaker 4: is really the message that we're getting out there in

786
00:43:07,719 --> 00:43:09,839
Speaker 4: the context of you know, not a lot of great

787
00:43:09,840 --> 00:43:12,160
Speaker 4: options in terms of cheap spreads.

788
00:43:13,960 --> 00:43:17,400
Speaker 1: Is that potentially an impact on the demand side, particularly

789
00:43:17,440 --> 00:43:20,080
Speaker 1: from foreign bias. I mean, I'm asking an American sitting

790
00:43:20,080 --> 00:43:23,520
Speaker 1: in London about the whole Cell America trade right now.

791
00:43:23,719 --> 00:43:26,120
Speaker 1: I mean, it came and went during tarriffs last year,

792
00:43:26,160 --> 00:43:29,680
Speaker 1: but how how real could it be now that we

793
00:43:29,719 --> 00:43:34,520
Speaker 1: are seeing this real you know, geopolitical fragmentation and disruption.

794
00:43:35,280 --> 00:43:38,520
Speaker 4: Yeah, yeah, you know, there have been the headlines recently

795
00:43:38,560 --> 00:43:44,759
Speaker 4: about about some Danish in particular investors selling down their treasuries.

796
00:43:45,880 --> 00:43:49,440
Speaker 4: We haven't seen in our client base a wholesale or

797
00:43:49,480 --> 00:43:53,839
Speaker 4: even any meaningful move away broadly from US assets. It's

798
00:43:53,880 --> 00:43:59,560
Speaker 4: more about specific investors moving away from treasuries in particular,

799
00:44:01,440 --> 00:44:03,640
Speaker 4: and that kind of shows and say the dollar, which

800
00:44:03,680 --> 00:44:06,000
Speaker 4: has been a little bit weaker this year, but not

801
00:44:06,360 --> 00:44:11,120
Speaker 4: you know, not in any way alarmingly so. But look

802
00:44:11,840 --> 00:44:15,120
Speaker 4: it just the what I said about equities and over

803
00:44:15,160 --> 00:44:16,480
Speaker 4: concentration to the equity market.

804
00:44:16,520 --> 00:44:18,200
Speaker 3: Exposure to the equen market.

805
00:44:18,680 --> 00:44:22,720
Speaker 4: Is very much paralleled by overexposure to the US, and

806
00:44:22,800 --> 00:44:24,799
Speaker 4: you know, in some ways are the same thing. The

807
00:44:24,840 --> 00:44:30,440
Speaker 4: world is highly exposed to the US and US assets.

808
00:44:30,160 --> 00:44:32,920
Speaker 3: And a lot of that is driven by.

809
00:44:33,080 --> 00:44:35,920
Speaker 4: The equity market, much less so by the IG corporate

810
00:44:35,920 --> 00:44:37,080
Speaker 4: credit market or by US.

811
00:44:37,040 --> 00:44:41,360
Speaker 3: Treasuries as well. It's really by the equity market.

812
00:44:41,600 --> 00:44:44,560
Speaker 4: And so if there were problems in the equity market,

813
00:44:44,600 --> 00:44:49,160
Speaker 4: then that would probably drive a sell America trade in

814
00:44:49,160 --> 00:44:51,600
Speaker 4: a more difficult way. And so that's something to be

815
00:44:51,960 --> 00:44:54,520
Speaker 4: very cognizant of. And it's it's another reason why we

816
00:44:54,560 --> 00:44:58,480
Speaker 4: have this more balanced view in i G. Credit because

817
00:44:58,920 --> 00:45:00,800
Speaker 4: you know, you're exposed to we need markets in a

818
00:45:00,880 --> 00:45:04,239
Speaker 4: number of way, not just directly because equities go down

819
00:45:04,280 --> 00:45:08,839
Speaker 4: and your debt to enterprise value goes up, but also

820
00:45:08,880 --> 00:45:13,520
Speaker 4: indirectly because the world's concentration in US assets, particularly the

821
00:45:13,640 --> 00:45:19,040
Speaker 4: US equities, could drive flows out of the US. Now, look,

822
00:45:19,080 --> 00:45:22,480
Speaker 4: I mean, you know this is that's all possible. You

823
00:45:22,520 --> 00:45:24,719
Speaker 4: know that's far from a base case. But again it's

824
00:45:24,760 --> 00:45:29,960
Speaker 4: just another reason to be diversified, both in terms of

825
00:45:31,200 --> 00:45:35,279
Speaker 4: what what credit assets you're looking for, but also regions, geographies,

826
00:45:35,320 --> 00:45:35,719
Speaker 4: et cetera.

827
00:45:37,800 --> 00:45:40,800
Speaker 1: How possible, though, is it in a massive global popular

828
00:45:40,920 --> 00:45:43,480
Speaker 1: to be underweight the US given the you know, in

829
00:45:43,560 --> 00:45:46,000
Speaker 1: terms of assets outstanding, it's like eighteen ninety percent of

830
00:45:46,000 --> 00:45:47,840
Speaker 1: the whole public market.

831
00:45:47,880 --> 00:45:51,760
Speaker 3: Right, Well, it's very possible.

832
00:45:51,800 --> 00:45:54,640
Speaker 4: I mean, you know, it's it's a big world out there,

833
00:45:54,920 --> 00:45:59,560
Speaker 4: and there's there's a lot of ways to express that view.

834
00:45:59,600 --> 00:45:59,680
Speaker 3: Now.

835
00:46:00,200 --> 00:46:02,400
Speaker 4: Look, you know, we're not saying that the underweight the

836
00:46:02,480 --> 00:46:04,839
Speaker 4: US is the call right now, but if you needed

837
00:46:04,840 --> 00:46:07,279
Speaker 4: to be, you know, there there could be a lot

838
00:46:07,280 --> 00:46:11,440
Speaker 4: of ways to move that way. The there are a

839
00:46:11,440 --> 00:46:13,719
Speaker 4: lot of governments all over the world that aren't the

840
00:46:13,800 --> 00:46:15,440
Speaker 4: US that would be happy to take your money if

841
00:46:15,480 --> 00:46:20,000
Speaker 4: you wanted to, if you wanted to buy gouveies outside

842
00:46:20,040 --> 00:46:23,320
Speaker 4: of the US, and there's and euroig is a big market,

843
00:46:23,480 --> 00:46:27,200
Speaker 4: et cetera, et cetera. So it is, it is quite possible.

844
00:46:27,280 --> 00:46:30,040
Speaker 4: And again in the context of you know, pretty decent

845
00:46:30,080 --> 00:46:33,799
Speaker 4: liquidity and fixing cup markets, you can't express that that

846
00:46:33,920 --> 00:46:35,440
Speaker 4: view and you need to. And in fact, if you

847
00:46:35,440 --> 00:46:39,320
Speaker 4: look at a lot of our diversified strategies that we

848
00:46:39,480 --> 00:46:43,000
Speaker 4: run in public fixed income, there are some pretty important

849
00:46:43,160 --> 00:46:47,600
Speaker 4: non US holdings that are diversifiers and in some ways

850
00:46:48,160 --> 00:46:49,400
Speaker 4: sources of additional return.

851
00:46:51,280 --> 00:46:52,640
Speaker 2: So it may not be here, but I do want

852
00:46:52,680 --> 00:46:55,720
Speaker 2: to tie in because you mentioned non US and obviously

853
00:46:55,800 --> 00:46:58,400
Speaker 2: you've spent some time in the past covering Latin America.

854
00:46:59,000 --> 00:47:01,359
Speaker 2: We've got some exciting stuff going on down there, not

855
00:47:01,400 --> 00:47:03,560
Speaker 2: only sort of the last couple of years with Argentina,

856
00:47:03,600 --> 00:47:06,920
Speaker 2: but more recently with Venezuela. How do you think about

857
00:47:07,400 --> 00:47:10,920
Speaker 2: you know, that market these days and sort of the

858
00:47:10,960 --> 00:47:15,000
Speaker 2: evolution there are these events sort of good things, bad things,

859
00:47:15,040 --> 00:47:18,640
Speaker 2: and different things. Does it really even change the investibility?

860
00:47:19,760 --> 00:47:25,640
Speaker 4: Yeah? You know this is a subject of ferocious debate

861
00:47:25,680 --> 00:47:28,160
Speaker 4: inside PIMCO, which you know, we have all sorts of

862
00:47:28,200 --> 00:47:30,399
Speaker 4: ferocious debates, and that's part of why we love working

863
00:47:30,480 --> 00:47:35,480
Speaker 4: here and part of why we stay. But this debate

864
00:47:35,600 --> 00:47:40,000
Speaker 4: around the convergence of EM and DM, so it's not

865
00:47:40,120 --> 00:47:43,080
Speaker 4: just about Venezuela or Latin America, but about the whole

866
00:47:43,239 --> 00:47:47,319
Speaker 4: asseclus convergence of EM and DM and and what would

867
00:47:47,440 --> 00:47:52,160
Speaker 4: drive convergence. I think we all pretty much agree, and

868
00:47:52,200 --> 00:47:54,480
Speaker 4: this is what I would stick to, is that some

869
00:47:54,560 --> 00:47:58,680
Speaker 4: of this convergence is coming from improvements in the investibility,

870
00:47:58,680 --> 00:48:02,799
Speaker 4: as you called it, all of of emerging markets, the

871
00:48:02,840 --> 00:48:09,600
Speaker 4: improvement in the in the sovereign credit fundamentals. When James

872
00:48:09,600 --> 00:48:11,920
Speaker 4: and I were in short pants in Latin America, you know,

873
00:48:12,239 --> 00:48:17,000
Speaker 4: you had you had Brazil devaluation and near default, and

874
00:48:17,000 --> 00:48:18,719
Speaker 4: you had the Argentina default.

875
00:48:18,760 --> 00:48:20,359
Speaker 3: And you know, it hadn't been that long since.

876
00:48:20,400 --> 00:48:24,840
Speaker 4: There was the all of the tech crises, including Mexico,

877
00:48:25,040 --> 00:48:29,640
Speaker 4: the Tequila crisis, et cetera, et cetera. That's the thing

878
00:48:29,640 --> 00:48:32,680
Speaker 4: in the past, and that's just over. You know, Mexico

879
00:48:32,840 --> 00:48:35,640
Speaker 4: is a is a radically different and better solvereign credit

880
00:48:35,719 --> 00:48:37,920
Speaker 4: today than it used to be. Brazil as a radically

881
00:48:39,160 --> 00:48:43,040
Speaker 4: better solveign credit. Argentina has gone through this incredible transformation

882
00:48:43,080 --> 00:48:45,440
Speaker 4: as well. And you can say that it's about about

883
00:48:45,440 --> 00:48:48,000
Speaker 4: other em I'm not I'm not picking on anybody, but

884
00:48:48,080 --> 00:48:49,719
Speaker 4: I'm mentioning them. But you know, this is it's a

885
00:48:49,760 --> 00:48:52,480
Speaker 4: it's a trend across Latin America and across most of

886
00:48:53,280 --> 00:48:55,759
Speaker 4: most of the emerging markets. And so you know that

887
00:48:56,320 --> 00:49:01,280
Speaker 4: secular improvement still has some runway as well. Now it'll

888
00:49:01,280 --> 00:49:04,600
Speaker 4: be bumpy and there's you know, some real questions around

889
00:49:05,280 --> 00:49:09,120
Speaker 4: on some of the emerging markets. But there's still transformation

890
00:49:09,239 --> 00:49:12,400
Speaker 4: to come in terms of the sovereign credit quality of

891
00:49:12,440 --> 00:49:15,280
Speaker 4: emerging markets. And now I'm just talking about external dollar

892
00:49:16,080 --> 00:49:18,640
Speaker 4: denominated debt, but also local markets. I mean, look at

893
00:49:18,640 --> 00:49:23,120
Speaker 4: local markets where you know, the only really good actors.

894
00:49:23,160 --> 00:49:27,000
Speaker 4: Now that's an exaggeration, but I was gonna say the

895
00:49:27,320 --> 00:49:32,560
Speaker 4: best actors in monetary policy around the inflation shock after

896
00:49:32,600 --> 00:49:35,560
Speaker 4: COVID were emerging markets where they were the most proactive,

897
00:49:35,640 --> 00:49:38,960
Speaker 4: and they took it that inflation shock the most seriously,

898
00:49:40,440 --> 00:49:43,560
Speaker 4: and they tightened in many cases the most and more

899
00:49:43,640 --> 00:49:47,880
Speaker 4: than the d M central banks. And that just shows

900
00:49:47,960 --> 00:49:51,360
Speaker 4: this transformation and the credibility of monetary policy across so

901
00:49:51,480 --> 00:49:54,440
Speaker 4: much of emerging markets. And so it's a great opportunity set.

902
00:49:54,800 --> 00:49:56,840
Speaker 4: There's a lot to be done there. There's also a

903
00:49:56,880 --> 00:49:58,719
Speaker 4: lot of risks, and you know, this is not just

904
00:49:58,960 --> 00:50:01,319
Speaker 4: willing nearly go into it EM by any means, but

905
00:50:01,800 --> 00:50:06,360
Speaker 4: that convergence at least coming from the improvement in terms

906
00:50:06,360 --> 00:50:10,080
Speaker 4: of EM is an important theme that's going to play

907
00:50:10,120 --> 00:50:12,759
Speaker 4: out over the next few years and gives us a

908
00:50:12,760 --> 00:50:15,560
Speaker 4: place to diversify portfolios when you know, we're not in

909
00:50:15,600 --> 00:50:19,320
Speaker 4: love with spreads in the rest of credit markets.

910
00:50:20,719 --> 00:50:24,239
Speaker 1: Closer to home, I mean your home. The European theme

911
00:50:24,320 --> 00:50:28,240
Speaker 1: of the moment is defense and re arming, and I'm wondering,

912
00:50:28,560 --> 00:50:30,400
Speaker 1: you know how much of that is an opportunity for

913
00:50:30,480 --> 00:50:32,040
Speaker 1: PIMCO in tons.

914
00:50:31,760 --> 00:50:36,880
Speaker 4: Of we Actually it's really it's funny that you mentioned that, James,

915
00:50:36,880 --> 00:50:41,439
Speaker 4: because we are actively looking at how can we get

916
00:50:41,440 --> 00:50:45,920
Speaker 4: involved in the space and help the public sector crowded

917
00:50:46,040 --> 00:50:51,480
Speaker 4: private sector finances to be an accelerator to some of

918
00:50:51,480 --> 00:50:54,080
Speaker 4: the public spending that's going to happen in the defense space.

919
00:50:54,520 --> 00:50:59,400
Speaker 4: There's a lot that the private sector can do, particularly

920
00:50:59,800 --> 00:51:02,759
Speaker 4: because you know, you don't have the Army Corps of

921
00:51:02,760 --> 00:51:06,359
Speaker 4: Engineers in most European countries, where the other big corep

922
00:51:06,400 --> 00:51:11,759
Speaker 4: of engineers is this very well developed body inside the

923
00:51:11,760 --> 00:51:14,400
Speaker 4: military in the US that can develop infrastructure, that can

924
00:51:14,440 --> 00:51:20,279
Speaker 4: develop you know, all of the herd assets that that

925
00:51:20,320 --> 00:51:24,200
Speaker 4: the US military needs that's much less developed as a

926
00:51:24,239 --> 00:51:29,960
Speaker 4: function inside of defense departments in Europe, and so bringing

927
00:51:30,000 --> 00:51:34,200
Speaker 4: in private sector expertise for things like building out military barracks,

928
00:51:34,200 --> 00:51:39,040
Speaker 4: building out warehouses and logistics facilities, building out training facilities,

929
00:51:39,120 --> 00:51:45,000
Speaker 4: building out data centers for the military, hardening electrical grids,

930
00:51:45,080 --> 00:51:47,919
Speaker 4: particularly around military installations, that.

931
00:51:47,840 --> 00:51:48,399
Speaker 3: Type of thing.

932
00:51:48,640 --> 00:51:50,279
Speaker 4: You know, those are the things where there's a lot

933
00:51:50,320 --> 00:51:53,840
Speaker 4: of private sector expertise in Europe that could be brought

934
00:51:53,880 --> 00:51:57,880
Speaker 4: in too much more quickly build out the type of

935
00:51:57,880 --> 00:52:03,440
Speaker 4: infrastructure that that defense departments need. Armaments is a different story,

936
00:52:03,520 --> 00:52:06,759
Speaker 4: and that's really going to you know, be it's there,

937
00:52:06,800 --> 00:52:08,680
Speaker 4: there is, it's a different private sector. There's more going

938
00:52:08,680 --> 00:52:10,360
Speaker 4: to be an equity play than it is going to

939
00:52:10,360 --> 00:52:12,560
Speaker 4: be a debt play. PIMPIC is much more focused on,

940
00:52:13,040 --> 00:52:16,400
Speaker 4: you know, where where is there an infrastructure need that

941
00:52:16,400 --> 00:52:18,919
Speaker 4: that Pimco can help. We've seen a lot of interest

942
00:52:18,960 --> 00:52:21,080
Speaker 4: from our clients in the space because it's an interesting

943
00:52:21,080 --> 00:52:23,880
Speaker 4: opportunity set. You know, if your if your tenant is

944
00:52:23,880 --> 00:52:26,000
Speaker 4: the government, then that you know is a is an

945
00:52:26,000 --> 00:52:29,360
Speaker 4: interesting risk profile. There's a bit of a chicken in

946
00:52:29,400 --> 00:52:32,920
Speaker 4: an egg right now where governments are a little cautious

947
00:52:32,960 --> 00:52:35,719
Speaker 4: because you know, they don't necessarily see that there is

948
00:52:35,880 --> 00:52:39,080
Speaker 4: capital raised in the private sector to deploy into infrastructure,

949
00:52:39,480 --> 00:52:41,839
Speaker 4: and there's not capital raised in the private sector because

950
00:52:41,880 --> 00:52:46,920
Speaker 4: there's not you know, tenders and active live opportunities from governments.

951
00:52:47,160 --> 00:52:49,080
Speaker 4: But that'll come, that will that will come, and I

952
00:52:49,120 --> 00:52:52,320
Speaker 4: think you know, you need some leaders like pimp coders

953
00:52:52,440 --> 00:52:54,399
Speaker 4: get out there and be that bridge. So so it's

954
00:52:54,400 --> 00:52:57,439
Speaker 4: an area we're very focused on, very interested in. We'll see,

955
00:52:57,480 --> 00:53:00,840
Speaker 4: it's probably going to be several years to come around,

956
00:53:02,040 --> 00:53:04,080
Speaker 4: but it's one that we think it's going to be

957
00:53:04,160 --> 00:53:07,799
Speaker 4: a pretty interesting opportunity over the next several years.

958
00:53:09,120 --> 00:53:11,600
Speaker 1: Any idea how big the investiable opportunity on the credit

959
00:53:11,600 --> 00:53:12,120
Speaker 1: side might.

960
00:53:12,040 --> 00:53:14,600
Speaker 4: Be, Oh, well, there's there's going to be public and

961
00:53:14,640 --> 00:53:15,760
Speaker 4: there's going to be private.

962
00:53:16,760 --> 00:53:17,000
Speaker 3: You know.

963
00:53:17,120 --> 00:53:22,279
Speaker 4: You hear estimates of low trillions of euros needed of

964
00:53:22,360 --> 00:53:29,359
Speaker 4: investment to build out to rearm Europe, let's let's call it.

965
00:53:30,600 --> 00:53:32,920
Speaker 4: Much of that will come from equity. Much of that

966
00:53:32,960 --> 00:53:37,560
Speaker 4: will come from public indebtedness. The private second, the private

967
00:53:37,640 --> 00:53:39,920
Speaker 4: debt element is going to be in the hundreds of

968
00:53:39,920 --> 00:53:41,880
Speaker 4: billions of euro's. Very difficult to know whether it's going

969
00:53:41,920 --> 00:53:43,920
Speaker 4: to be two hundred or five hundred, but probably that's

970
00:53:43,920 --> 00:53:46,240
Speaker 4: about the scape of that scope of it. And most

971
00:53:46,239 --> 00:53:48,000
Speaker 4: of that will be in the public markets, but some

972
00:53:48,080 --> 00:53:51,080
Speaker 4: of it is going to be an interesting private opportunity

973
00:53:51,080 --> 00:53:51,439
Speaker 4: as well.

974
00:53:53,080 --> 00:53:57,280
Speaker 1: Would you anticipate any pushback center from ESG focused investors

975
00:53:57,280 --> 00:53:57,480
Speaker 1: on that.

976
00:53:58,800 --> 00:54:00,879
Speaker 4: We have a number of client it's in Europe who

977
00:54:00,920 --> 00:54:05,520
Speaker 4: have added defense to their ESG mandates, so they're you know,

978
00:54:05,560 --> 00:54:09,840
Speaker 4: they're focusing on environmental outcomes, on social outcomes, on governance outcomes,

979
00:54:09,840 --> 00:54:14,719
Speaker 4: and on defense out meaning you know, helping to to

980
00:54:14,840 --> 00:54:18,200
Speaker 4: build out the defense transition in Europe. I think there's

981
00:54:18,719 --> 00:54:23,120
Speaker 4: a very healthy and pragmatic realization that this is something

982
00:54:23,200 --> 00:54:27,280
Speaker 4: that is needed in Europe that's been underinvested for too long.

983
00:54:27,480 --> 00:54:30,799
Speaker 4: And the ESG community is actually, you know, I think,

984
00:54:30,880 --> 00:54:32,280
Speaker 4: being really really.

985
00:54:32,040 --> 00:54:35,640
Speaker 3: Excited to be part of the solution here. Uh.

986
00:54:35,840 --> 00:54:37,640
Speaker 4: You know, there will still be and there should be,

987
00:54:38,680 --> 00:54:42,239
Speaker 4: you know, a questions around things like controversial weapons and

988
00:54:43,200 --> 00:54:46,040
Speaker 4: that type of thing, and that remains very much in

989
00:54:46,120 --> 00:54:51,600
Speaker 4: the scope, but broadly speaking, there's an understanding that does

990
00:54:51,719 --> 00:54:53,320
Speaker 4: need to happen and the private sector is going to

991
00:54:53,360 --> 00:54:54,239
Speaker 4: be an important part of it.

992
00:54:56,120 --> 00:54:58,080
Speaker 1: So when you think about positioning globally when it comes

993
00:54:58,080 --> 00:55:01,800
Speaker 1: to credit, given realdi value and from Marcus we've discussed today,

994
00:55:01,960 --> 00:55:04,799
Speaker 1: what's your view of the rest of the year. Are

995
00:55:04,840 --> 00:55:07,440
Speaker 1: you overweit one region versus the other, over wait one

996
00:55:07,520 --> 00:55:09,839
Speaker 1: kind of credit versus the other? I mean, is there

997
00:55:09,920 --> 00:55:12,560
Speaker 1: is there any kind of strategy from very macro level

998
00:55:12,600 --> 00:55:13,560
Speaker 1: that you would be able to.

999
00:55:14,320 --> 00:55:17,480
Speaker 4: So, as I mentioned, the big macro calls right now

1000
00:55:18,000 --> 00:55:22,320
Speaker 4: in pimcore portfolios are less focus on the corporate sector

1001
00:55:23,040 --> 00:55:29,640
Speaker 4: and more on diversifiers securitized credit, emerging markets, mortgage credit,

1002
00:55:30,760 --> 00:55:35,320
Speaker 4: a few other areas as well. That's the big diversifier

1003
00:55:36,600 --> 00:55:41,480
Speaker 4: positioning that we have on right now within credit itself.

1004
00:55:41,640 --> 00:55:45,560
Speaker 4: You know, we still see some opportunities in financials, you

1005
00:55:45,600 --> 00:55:49,120
Speaker 4: know where there's been there's been a very very significant

1006
00:55:49,120 --> 00:55:54,600
Speaker 4: tightening in financials over the last few years, but there's

1007
00:55:54,600 --> 00:55:57,760
Speaker 4: also been a very significant improvement in the fundamentals of financials.

1008
00:55:57,880 --> 00:56:00,360
Speaker 4: I alluded to this earlier in the conversation, where you

1009
00:56:00,440 --> 00:56:04,240
Speaker 4: have banks that are pivoting to be much more focused

1010
00:56:04,239 --> 00:56:08,560
Speaker 4: on this hybrid, more asset light, balance sheet light type

1011
00:56:08,600 --> 00:56:13,840
Speaker 4: of model, more focused on revenue on a fee revenues

1012
00:56:13,880 --> 00:56:19,040
Speaker 4: as opposed to net interest margin revenues. And that shows

1013
00:56:19,160 --> 00:56:21,319
Speaker 4: in the equity multiples, and the equities are doing really

1014
00:56:21,360 --> 00:56:26,000
Speaker 4: well because the equity analysts love this more hybrid less

1015
00:56:26,360 --> 00:56:30,040
Speaker 4: less exposure to an asset liability mismatch model. And that's

1016
00:56:29,800 --> 00:56:32,680
Speaker 4: the fundamental change that happened. That is the reason that

1017
00:56:32,719 --> 00:56:36,160
Speaker 4: the asset based finance opportunity is out there, but it

1018
00:56:36,280 --> 00:56:39,160
Speaker 4: is also the reason that you have these higher equity

1019
00:56:39,200 --> 00:56:42,520
Speaker 4: multiples because there's less of an asset liability mismatch than

1020
00:56:42,560 --> 00:56:44,959
Speaker 4: you had in that what brought down, for instance, first

1021
00:56:44,960 --> 00:56:48,640
Speaker 4: Republic Bank and Silicon Valley Bank, so financial is that

1022
00:56:48,760 --> 00:56:51,160
Speaker 4: now there's still some room to run in terms of that,

1023
00:56:51,600 --> 00:56:54,040
Speaker 4: in terms of that transformation, in terms of that improvement,

1024
00:56:54,080 --> 00:56:56,080
Speaker 4: and so that's going to be one area that we

1025
00:56:56,400 --> 00:56:57,200
Speaker 4: continue to like.

1026
00:56:57,480 --> 00:57:00,319
Speaker 1: Great stuff. Christians Struck, a president at PIMCO. It's been

1027
00:57:00,320 --> 00:57:02,800
Speaker 1: a great pleasure having you on the Credit Edge. Many thanks,

1028
00:57:03,280 --> 00:57:05,120
Speaker 1: great thanks James, thanks all, and of course I'm very

1029
00:57:05,120 --> 00:57:07,200
Speaker 1: grateful to know Hebert with Bloomberg Intelligence, thank you so

1030
00:57:07,280 --> 00:57:09,720
Speaker 1: much for joining us today for even more credit market

1031
00:57:09,719 --> 00:57:12,279
Speaker 1: analysis and insight, read all of Noel's great work on

1032
00:57:12,280 --> 00:57:15,840
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1033
00:57:15,920 --> 00:57:19,080
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1034
00:57:19,240 --> 00:57:22,760
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1035
00:57:22,760 --> 00:57:26,120
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1036
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1037
00:57:29,800 --> 00:57:33,000
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1038
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1039
00:57:37,760 --> 00:57:39,960
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1040
00:57:40,080 --> 00:57:45,560
Speaker 1: directly at jcromb eight at bloomberg dot net. I'm James Cromby.

1041
00:57:45,640 --> 00:57:47,959
Speaker 1: It's been a pleasure having you join us again. Next

1042
00:57:47,960 --> 00:58:06,160
Speaker 1: week on the Credit Edge.