March 20, 2025 • 43 mins
Global portfolio managers are seeking debt investment alternatives in China and Europe amid mounting volatility in America, according to CreditSights. “The US seems to be sneezing an awful lot lately and the rest of the world is saying, ‘Well how do we mask up and try to defend ourselves against this?” said Winnie Cisar, the firm’s global head of strategy. “If US exceptionalism is not on the table, then we’re going to have to go other places to look for opportunity,” Cisar tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Matthew Geudtner in the latest Credit Edge podcast. Cisar and Geudtner also discuss the impact on US borrowers of trade wars, the growing risk of stagflation and opportunities in the industrial sector, including Boeing bonds.
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Episode Transcript
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Speaker 1 (00:18):
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:24):
And I'm Mat Whitner, a member of our Global Credit
team within Bloomberg Intelligence, which is Bloomberg's research arm, and
I am covering the industrial space this week. I'm very
pleased to welcome Winnie Caesar, who is the global head
of strategy at Credit Sites.
Speaker 3 (00:36):
How are you doing, Winny, I'm great, Thanks for having
me for.
Speaker 4 (00:39):
All our listeners.
Speaker 2 (00:40):
Winnie is a very widely published and leading voice within
the corporate credit strategy world. She's also a frequent guest
across all of our Bloomberg media and appeared on our
High Yield panel with Mike McKee for bi's twenty twenty
five credit Outlook a few months ago. A lot's happened
since then, so I'm excited to hear your thoughts on
everything corporate credit.
Speaker 4 (00:58):
So what do you said? Do you want to kick
this off? James?
Speaker 1 (01:01):
Just to set the scene before we chat, global markets
are getting whipsawed by recession fears and alarming developments on
the geopolitical front. Invests are spoops by increasingly haphazard and
erratic US policymaking, particularly on trade. Despite that credit spreads
remain quite tight, there's a hope that the longer term
trajectory of the US economy remains up, that the new
administration will do its best to defend that, and that
(01:22):
everything will be okay. High yields are alluring buyers, Plus
there's not enough supply of corporate debt to satisfy all
the demand. Bond and loan markets are pricing in very
low odds of a US recession, even as talk of
economic downturn becomes more frequent, with consumers weakening and business
leaders complaining that they can't take long term decisions in
this environment. We at Bloomberg News are using the word
(01:44):
uncertainty at the fastest pace since COVID shut down the
economy in twenty twenty. But what's your view that, Winnie,
how much do we really need to worry about recession
or even worse stagflation?
Speaker 3 (01:55):
So we are definitely a little bit worried about a
stagflation light scenario. We're less worried about an outright recession,
especially a corporate balance seat recession. The starting point for
credit fundamentals feels like it's better than it has been
in prior periods where you've started to see the onset
of consumer recession like behavior. The problem is that the
(02:19):
pricing side of things is still not great. Now we
have seen companies manage through elevated prices pretty well. Margins
have been expanding for the past few quarters, really since
the height of inflation back in twenty twenty two, but
the ability to pass through those prices definitely slowing down.
(02:40):
So a lot of mixed signals when it comes to
what the trajectory of margins actually is. Probably not as
great as it has been, but also not recessionary overall.
We've been dubbing twenty twenty five the year of status woe.
Last year was the year of status quo, and markets
love status quo. And now we don't know if it's
(03:01):
woe in a good way, woa in a bad way,
or oh woe was me? Corporate credit spread should be
way wider.
Speaker 2 (03:08):
Yeah, I think at our year in conference last year
you had said that the outlook for this year you
had named it It's complicated. So now that we've got
concerns about tariffs, potential for persistent inflation, and expectations for
higher prices, and I think we just saw a prelim
consumer confidence tank last week. Are you reassessing that to
title something like it's getting super really complicated?
Speaker 4 (03:30):
Now? How is that? How do you see that UNFAI
length through the rest of the year.
Speaker 3 (03:33):
It is extra complicated Facebook status apparently. I mean a
lot of the things that we were anticipating have played out.
I think that what surprised us the most is the
markets weren't expecting it to be complicated, and that was
a major head scratcher for us. And so now that
the market is kind of standing up and paying a
little bit closer attention, that feels better to us that
(03:55):
at least the market is unnoticed that maybe it's not
just going to be this straight line to soft landing,
immaculate disinflation, fiscal policy certainty, M and A and animal spirits,
all of these things that people were anticipating. Instead, it's
probably going to be a little bit bumpier road. And
that's one of the reasons you're seeing places like Europe
outperformed so significantly. There seems to be a lot more
(04:19):
fiscal policy certainty in terms of what Germany plans to do,
what the ECB plans to do versus the US where
it's really still all up in the air.
Speaker 1 (04:30):
But going back to spreads, I mean, spreads did move
a little bit over the last week or so, but
they're still very tight. And you know, we looked at
the last piece of volatility in last August, they were
closer to four hundred basis points on the high yield.
Now it's still very close to three hundred. You know,
I get what you're saying. People have kind of taken
a second look, but they don't see that worried. So
what's going on.
Speaker 3 (04:49):
What's I think going on is the broader yield environment
has not changed that much. Back in August or March
of twenty twenty three, tenure treasure yield moved meaningfully lower,
you know, a three handle. We're still treading in that
four and a quarter to four point four percent range
on the ten year treasure yield right now, which does
(05:09):
make it a little bit harder for spreads to gap
out significantly wider. Now, that tells me two things. Either
in recession fears are really not being priced into the market.
One would think that if people were truly concerned about
an increasing likelihood of US recession, treasure yields would be
moving significantly lower, and instead inflation concerns are much more
(05:33):
being priced into the market right now because you're seeing
sticky yields really across the curve, some minor fluctuations and
FED pricing expectations, but really nothing all that significant. And
this is not a terrible operating environment for corporate credit
because there is kind of that head point you get
to on spread widening. But if you see this shift,
(05:56):
that's where things start to unwind.
Speaker 1 (05:59):
What is the I you're looking for? How do you
read that? And what are the signs?
Speaker 3 (06:02):
I mean, the signs are really tricky because consumer sentiment
has been really bumpy for the past three four or
five years at this point, and what consumers have been
saying has not actually manifested in the data really kind
of until now. There are a lot of questions about
recent retail sales data and personal spending data, how much
(06:23):
of this is real, how much of it is just
kind of a hangover effect from the holidays or seasonal
adjustments not being particularly accurate. I think us, like the FED,
are just a little bit on hold for the near
term to see how everything ends up working its way through.
And also inflation is still kind of the big bad
boogeyman in the room.
Speaker 1 (06:44):
And if there is stagflation, which you know, to me
sounds quite scary, and that you've got potentially much less
capacity to repay the debt and the debt's going to
cost you more for a company, why does that not
suddenly make for much more corporate credit risk, which really
is in the spread.
Speaker 3 (07:00):
Yeah, so stagflation is one of those really bad things
from an economic fundamental standpoint. We're also not calling for
a true nineteen seventies stagflation shock. There are a lot
of just structural differences in the domestic economy and the
markets that make it very difficult to get into that
kind of hot water. But an uptick in inflation does
(07:22):
feel like a reasonable expectation over the near term. The
good thing for corporate credit fundamentals is if borrowing costs
remain relatively elevated, that maintains management discipline as it relates
to balance sheets. They're not going to be saying, oh,
we're going to go out and do this LBO deal
or this super leveraging deal and just add all this
(07:43):
debt to our balance sheets because it's really expensive. Your
return on investment there has to make mathematical sense, and
with that, bondholders can feel some reassurance that perhaps these
companies are not going to be intentionally doing something that's
going to add xcution risk and perhaps get themselves into
trouble over the next twelve, twenty four or forty months,
(08:05):
because most bond investors have a longer term high horizon.
Speaker 2 (08:10):
So how do you see that sort of playing out
in terms of the supply side for like new issue
and so if you have stagflation, you have higher prices
and at the same time you have unemployment going up.
I think, like you had mentioned, you know, we had
fairly benign spread volatility last year, so you know, at
least I'm looking at the league screen right now and
we were up thirty percent on ig issuance. I think
(08:31):
it's like one and a half trillion. It's pretty impressive.
But given all these concerns, you know, what are your
thoughts and how issuance could trend through the rain of
the year, given the backdrop and some of the angst
that we've kind of highlighted here. I think high yield
in the last month at least is out forty fifty
base points on the high corporate and it's probably in
the twenty twenty five base point range for IG.
Speaker 4 (08:50):
So how do you see that going.
Speaker 3 (08:52):
Sure, So we always say that supply follows demand. Companies
are not going to be bringing deals to market if
they don't feel that they can price them at attractive
levels and if they don't feel like there is some
certainty around those new issue conditions. No company wants to
come to the primary market and launch a deal and
have not good receptivity or even just need to get
(09:15):
pulled because there's not enough investor demand. At the same time,
we've been expecting that overall new issue volumes were probably
not going to meet what they were last year. Last
year was very much an exceptional year because you had
the fear that rates were going meaningfully lower. Perhaps this
is the last hurrah that I can buy IG at
(09:35):
five percent. If only we had known that actually you
could buy IG at five and a quarter now. But
there was this massive surgeon issuance because there were a
lot of fears around am I going to be able
to buy this again? Am I going to be able
to get this back? And there was such strong demand.
They're still demand, but the flows have been a little
bit shoppier this year. And I think that the combination
(09:58):
of M and a not matiter realizing to the extent
that a lot of people were expecting. I mean, every
cell side forecast for twenty twenty five. Animal spirits was
in the title somehow, yes, And it's really hard for
animal spirits to be the driving factor when you don't
know how to do projections, because what do tariffs look like,
(10:19):
what does ultimate demand look like? All of these different things,
what's your cost of capital? You know, where are we
underrating these deals? And so we thought there would just
be kind of a natural deceleration in issuance overall on
that combined factor of uncertainty from the future. You know, what,
what are these companies going to be looking like, what's
(10:40):
the operating environment? And also where is the demand actually
going to be? And instead we've seen a lot of
issuance in Europe because the demand's there. The ECB seems
to be still kind of an easing mode, maybe less
so than they were. And also we know that there's
going to be some fiscal stimulus at long last, so
(11:00):
hopefully kind of rekickstart the economy over there.
Speaker 1 (11:04):
Talking of projections, so do you have a projection for
issuance that you can put a number on, or would
you have to keep changing every day.
Speaker 3 (11:10):
No, we tried not to change it every day. That
makes for kind of a flaty strategy team, and usually
our clients don't appreciate that. For US investment grade, our
gross issuance forecast is one point three trillion, so still
not a bad year by any stretch, but also not
you know, kind of the peak volume years. And we
also did expect that the net supply number would be
(11:33):
kind of flat to last year, so a little bit
of an uptick on a percentage basis overall compared to
what we saw in twenty twenty four. In the leverage
finance markets, we thought that leverage loan volume would be
a little bit softer than it was last year. We
look at net of repricings and extensions, which was just
a bonanza last year. It was almost on par with
(11:54):
the US investment grade market, and we think about the
relative sizes of those two markets. That's absolute lunacy. And
then the high yield bond market, we have a forecast
of call it, three hundred to three hundred and twenty
five billion, so that might be a little high at
this point. It seems like there's been both kind of
an issuer strike and a buyer strike going on in
(12:15):
the high yield market to start the year. A lot
of the refine needs that needed to get done. We're
done in twenty twenty four, and so now there's a
lot of people just kind of looking at capital structures
and thinking what are we going to do next? But
there have been some kind of big LBO deals announced,
so there should be some new issue supply coming to
the market.
Speaker 1 (12:35):
And a net increase, you think on the high yield
bond side.
Speaker 3 (12:37):
Yeah, but very modest, very modest net increase, because that.
Speaker 1 (12:40):
All just must keep spreads very tight. That's been my
central thesis for you know, as long as I can
remember that. People constantly asking me why spreads not moving,
why they're so tight, And I keep looking at net
supply and it's very low, and I keep looking at
rising demand. That just that tension just seems to be
persisting despite what's going on in the geopolitics.
Speaker 3 (12:58):
Yeah, it's been interesting. We have done to the high
yield market the incredible shrinking asset class because it just
can't grow. There's no new issuance. We had in call
it twenty twelve to twenty fourteen, all of the energy
paper that was done in new deals, and then in
twenty sixteen, really through present, a lot of deals have
(13:18):
just gone to the loan market that have been for
private equity and LBOs, and so high yield is almost
entirely a refy trade save for some kind of interesting
secured deals for companies that just needed some additional liquidity
and took it to the high yield bond market. But
the technical power there has been immensely strong. The change
(13:39):
in technicals comes when people actually fear a default cycle
and a downgrade cycle, right, because if you're staring at
one hundred billion of triple B debt that's coming your
way as a high yield investor, you are definitely going
to be shedding some of that single BE risk and
probably even some double B risk so that you could
buy whatever that fallen angel is because that history is
(14:00):
just a home run trade.
Speaker 4 (14:01):
Right.
Speaker 1 (14:02):
But you know, you say incredibly shrinking, but at the
same time private debt is just blowing up. Is that
where it's all going? And is that is that the
sort of technical strength that you know we're getting all
everything's being privatized in terms of debt.
Speaker 3 (14:15):
Yes, I don't think that the private credit managers would
like you to say that it's.
Speaker 1 (14:19):
Been blowing up in a good way, you know, in
a good.
Speaker 3 (14:23):
Way for sure. There has been so much growth within
private credit, which is, you know, a natural extension of
regulation of banks. Right, middle market lending has always existed,
it's just historically been banks that have been doing it.
And now we've had some interesting factors where private credit
has had a really good track record during some of
(14:44):
the biggest economic shocks that we've ever seen. You know,
everybody looks at private credit portfolio returns in twenty twenty
and twenty twenty one, and man, those were really great years,
despite the fact that we had an actual default cycle
in the high bond market. It tracks capital, you know,
becomes this virtuous cycle. I do think at this point
(15:04):
there's a lot more scrutiny on the world of private credits.
It's still very much kind of the key source of
liquidity for companies that can't necessarily get deals done within
the highield bond or the broadly syndicated loan market. If
that were to shut, then that would be a problem. Right,
If private credit says no, Mas, we do not want
(15:26):
any more of these big deals that would be definitely
in an issue. And then there is the problem of
just the opaque nature of the asset class. You read
six different default reports on the world of private credit,
and you're going to have six different numbers ranging from
zero percent to ten percent, and so it's really difficult
to get a handle on what exactly is in this market.
Speaker 1 (15:47):
Right right, Yeah, I know Matt want's to talk about sexes,
but before that, I just wanted to get you pinned
down on your forecast for spreads, because that's going to
be really hard to do. But you did say when
we last talked in December that you thought three point
fifty on high yield. Is that something you stick?
Speaker 3 (16:00):
Yeah, we still like three fifty on high yield. You know,
we've gotten kind of closer to that level. We were
also in the camp of higher treasury rates as well
and some more treasury market volatility, so it'll be interesting
to see if that plays out. So we've been underweight
high yield, just kind of waiting to get closer to
that three fifty level. Seeing a little bit more decompression
(16:22):
across ratings.
Speaker 1 (16:23):
Does that mean no, FED rate cuts.
Speaker 3 (16:25):
We have the FED on hold this year.
Speaker 1 (16:27):
Okay, interesting, so what does that mean for IG?
Speaker 3 (16:29):
So for IG, we have our spread forecast at one
hundred and ten basis points, which is still objectively a
very tight level. But when I was out pitching that
to clients, everybody looked at me like I had grown
an extra head. Because of the yield environment, people say,
you know, if IG's north of five percent, then we're
going to be buying it. And that's true until you
start to say, well, maybe the Fed's actually going to
(16:50):
be hiking rates, and maybe cash looks a little bit
more attractive, and I should stick with short duration because
the yield care is still super flat.
Speaker 2 (16:58):
So no, no big high yield default cycle going on.
Speaker 3 (17:01):
It's not right now, not today. No, And you know,
we actually have, I would say, a more aggressive default
forecast than what the market is currently pricing in. The
distress ratio in the market is a great forward indicator
for what defaults are going to look like over the
next twelve months or so, and that's consistently been pretty low,
call it six to seven percent for the past twelve
(17:23):
months or so, and that would imply maybe a one
to one and a half percent default rate and ours
is closer to two and a half to three percent.
So that does assume that some of these capital structures
that have just been circling the drain and just waiting
and waiting and waiting, are finally going to do whatever
distressed exchange that actually triggers a default.
Speaker 2 (17:45):
Is President Trump's I guess geopolitical, you know, true social tweets.
Is that more a negotiating tactic or do you think
that there's the Trump put is is a real thing.
I looking at WI and you know, looks like at
least today retirement for James and I as another year
or so out, just based on the market's behaving. So
(18:07):
how much worse does it have to get in the
equity market before we start seeing credit market take notice?
Speaker 3 (18:13):
Yeah, this is a great question. I think that right now,
when you look at yield in the credit market, still
seven and a half percent for high yield, call it
five and a quarter for investment grade, and then forward
earnings yield for the S and P five hundred, credit
still looks pretty attractive. So you would need to see
another call it eight to ten percent down on the
(18:37):
S and P five hundred before you're at kind of
like for like yield implications. Now that assumes that you're
also not seeing massive reductions to forward earnings, which I
think is not necessarily the safest assumption, but that's kind
of the back of the envelope way to do it.
I think. In general, credit is still viewed as a
(18:57):
pretty safe trade, and when people think about valuations went sure,
spreads got really tight back to all time historic levels,
kind of depending on how you're measuring your historic timeframe,
but equity has really felt very frothy. You know, two
back to back years of twenty percent plus returns on
the s and P five hundred. It's unusual.
Speaker 4 (19:19):
I enjoyed it. Yeah, I thought it was great. Keep
it coming.
Speaker 3 (19:21):
I love it.
Speaker 2 (19:23):
So if we get some volatility, where are some of
the sectors that you like and maybe some what are
some of the names that you think can perform really well?
And then conversely, you know, what are some of the
sectors you think might be doing really poorly? And there's
some candidates that could be for some spread widening candidates.
Speaker 3 (19:39):
Yeah, I mean, so this is a tricky one because
there's less to like nowadays and credit, even with the
spread widening that we've gotten. It's kind of hard to
you know, pound the table and say, wow, this seems
like a really great trade within the investment grade. We've
still been constructive on financials. The thesis on that has
been of all thing. Our team had been very positive
(20:02):
on the regionals and some of the consumer finance, and
as valuations really compressed, they said, okay, maybe now it's
time to go a little bit up in quality. You know,
look at the jesibs. Just where are the really strong
balance sheets where you're going to have some defensive carry
and kind of sleep well at night. And even if
there is a credit cycle, we're probably not going to
(20:24):
be all that impacted by it. But then also there
are some credits within the industrial space where our analysts
feel pretty good. You know, we're still pretty constructive on Boeing,
which seems contrarian when you think about everything that's going
on in terms of government cost cutting and man Boeing
has had just the bumpiest of bumpy rides, but you know,
(20:46):
you're getting paid some decent spread there to actually go
into that capital structure, and on a long term basis,
we feel like it's probably not going to be a
fallen angel candidate, at least for now, which which makes
us feel a little bit better about things. We also
just re upgraded Pharma back to a neutral. We had
been underperformed there because of the whole animal spirits thing.
(21:06):
Farmah loves to do M and A. They love to
do big leveraging M and A, but it seems like
that is maybe not going to be as big of
a risk, and instead you want to be in some
of these higher quality, more defensive balance sheets where you know,
spreads worth sticking out a little bit wide just because
of oh my gosh, what's going to happen here on
the M and A space, and really with tariffs as well,
(21:28):
you know, Pharma is kind of front and center on
the healthcare side of things as well.
Speaker 4 (21:33):
Well.
Speaker 1 (21:33):
Building definitely a bumpy ride and will waghs than one,
But Matt, you cover that. So are you in agreement?
Speaker 4 (21:39):
Do you think? Oh? Yeah, I actually I do. I
do agree.
Speaker 2 (21:42):
I think that Actually they've outperformed since I guess December
or not December. But October first, when news broke they
were going to do a ten billion dollar equity Ways
and Rays, and that quickly turned into a twenty four
billion with nineteen billion being equity and a mandatory convert
so after they exercise the green shoes, twenty four billion
on in so and I would actually Anglis Kelly, who
(22:05):
is the air Cap CEO, which is basically the biggest
fire of aviation assets in the world, has highlighted that
the manufacturing quality has gotten really really good with Bowing
over the last couple of years. So I think that
they're taking the steps they need to to Boosto's deliveries
and production and basically unlock the eighty plus billion of
inventory that they have on their balance sheet, which they desperately,
(22:27):
desperately need. So maybe this year we see spreads sort of.
Speaker 4 (22:29):
Behave in an inverse relationship.
Speaker 2 (22:31):
As production and deliveries go up, spreads come down closer
to she will be to your careers.
Speaker 1 (22:36):
So we go into a downtown, people stop buying flights.
What's going to happen to these companies? Is that not
a big risk? If you know?
Speaker 2 (22:43):
I think it's definitely a big risk, But I don't
think it's a demand issue. I think when you have
a half a trillion dollar black backlog and at these rates,
you're looking at production well into the twenty thirties.
Speaker 1 (22:52):
I think many people think of it as a defensive name,
But is it one of the more obvious relative value
plays now for both of you think.
Speaker 3 (22:59):
I think so. I mean, I wouldn't necessarily say it's defensive.
Speaker 2 (23:02):
There's yeah bullet the vulture will be negative outlooks and
a review for downgraded s and P. I wouldn't say
that it's defensive, but I think they're moving the needle
in the correct direction at this point. And you know
when he said, a fallen angel is typically a home run,
so we actually did some work in the fall and
if they were to fall, which is not our base case,
(23:24):
access returns are pretty well of the Ford twelve months
and usually have that one month adjustment period, And any
high yield manager, I'm sure it would be salivating at
a business risk profile like that. And the seventy percent
of the capitol structure has coupon steps, which is also interesting,
a nice little kicker on the way.
Speaker 3 (23:42):
Down, big feature. I would say that every high yield
cell side trading desk would just be ecstatic going we're
actually downgraded. They get that much in new paper to
trade around when they just haven't had much.
Speaker 1 (23:57):
Yeah, exactly, And the other set t flag when he
was metals in mining, is that just because the oil price, sorry,
the gold price is through the roof, not just gold.
Speaker 3 (24:06):
But you know, as much as we kind of bemoan
tariff and trade policy as being this net negative and
creating uncertainty, there's some certainty in terms of actually the
US companies benefiting from some of these things. And so
when we look at the domestic metals and mining sector,
feels like it's one place to try to kind of
(24:27):
align yourself. You know. Also, we still have a lot
of capex going into infrastructure. You know, to build a
data center, you need steel and aluminum and copper and
all of these things that you know, these producers are making.
Speaker 1 (24:42):
And on the flip side, as Matt said, you know
what's most impacted by tires? What are you staying away from?
Speaker 3 (24:47):
Yeah, so I think the autos is kind of the
layup one. Right. We've had a little bit of a
reprieve for the big US auto makers, But who knows
what's going to happen on April second, which is quote
the big one according to Trump. I mean, I feel
like every Monday has been a big one in twenty
twenty five, it feels a little bit like Groundhog Day overall,
(25:08):
but autos has been kind of a bumpy ride. We
recently saw a Fallen Angel downgrade in the world of autos,
so that's something to kind of pay attention to. I
think if Ford came back down, which is not our
base case, but you know, definitely on people's minds given
everything that's going on. While long term, that would probably
be good, it's usually not great if you're a boomerang,
(25:28):
you know, Fallen Angel, Rising Star, Fallen Angel, Rising Star.
That starts kind of put people on notice, yes, for sure,
and then it's it's really interesting. Retail one of the
tightest trading, most defensive sectors within the US market, very
vulnerable to tariffs. You know how much of these consumer
products are we importing from China and other places. It's
(25:51):
a pretty significant chunk. And we're already seeing retailers and
consumer goods in the crosshairs of consumer sentiment and shifting.
Try and we're spending on services and now we're spending
on goods. So wait, groceries are too expensive. There's just
a lot to get right in that sector that even
if it's high quality, you're probably not going to be
(26:12):
massively outperforming there.
Speaker 1 (26:14):
And by rating Terry. You mentioned it earlier that people
would probably want to move up to the double b's,
but that is a very crowded trade. People have been
trying to do that for a long time, and you
mentioned earlier that you know there's less to like generally.
I mean, I'm seeing that's because of valuation, But so
where do you go?
Speaker 3 (26:32):
Yeah, so we like a barbell right now in high yield.
And I'm probably going to sound crazy that I have
a wider spread forecast, but telling people to buy some
triple c's, I think that when you are anticipating spread widening,
you want to be aligned with issuers that have a
high conviction view on maintaining and defending ratings. And the
(26:53):
triple C universe and the double B universe, I think
that those are the core places within high yield that
companies are going to be saying, we don't want a downgrade.
You know. In triple C that's kind of endgame right there.
And the move in cost of capital from double B
to single B that's also pretty significant. If anything, Double
B assures are continuing to try to migrate up to
(27:14):
investment grade single B world that's where we've seen a
lot more challenge in kind of maintaining ratings, and that's
been an anomaly versus the rest of the corporate credit market,
where this kind of rating upgrade momentum has still been intact.
And so we kind of like that Barbell strategy of
(27:34):
we can construct that seven to eight percent yield in
the portfolio by kind of a core holding in double b's,
including extending out duration a little bit there, and also
adding some alpha within triple c's.
Speaker 1 (27:45):
But the triple cs, by the rating agency definition, is
very high risk of loss. How do you headge that?
Speaker 3 (27:52):
I mean, you have to hedge that by picking the
right triple c's and your liquidity.
Speaker 1 (27:57):
Yeah, yes, And.
Speaker 3 (27:58):
You know, sometimes in the kind of liquidity shocks, actually
being in triple c's is not the worst place to
be because things just don't turn over that much. Like
if you can kind of ride it through and listening
are anticipating you know, two, three, four, five years of
you know, twenty percent triple C yields, then you're kind
of kind of be okay as long as you've aligned
(28:20):
with not those capital structures that are going to be
doing distressed exchanges and.
Speaker 1 (28:24):
Things like that, Are there any sectors or names that
stick out in there we're going in triple c's.
Speaker 3 (28:29):
Yeah, so, I mean teleco and media have been front
and center for problems, and it does seem like we're
kind of getting to the other side of that in
some ways. Uh So, definitely kind of looking at those
spaces as areas of opportunity. Healthcare is another one, you know,
that's been the big, you know, kind of bad sector
(28:52):
for quite some time in the high healed space as well,
But then there's like not a lot of triple c's
left in other sectors.
Speaker 4 (28:59):
Right.
Speaker 3 (28:59):
Energy has gone through this massive ratings upgrade cycle. It
used to be the core tripleC market and now it's
really not anymore.
Speaker 1 (29:07):
Right, and it also seems to be somewhat less volatile.
I mean, I look at the big market swings that
go on act. Previously, we'd looked at it and the
triple cs would just blow out immediately and everyone would
just dump those. But now there's less of that going on.
Is that because there's just less supply and more demand
for that.
Speaker 3 (29:21):
I think that that has a lot to do with it.
I think that positioning within the high old market has
been really tricky for the past three years. At this point,
at the beginning of twenty twenty three, every high yield
fund manager was worried about recession risk, was worried about
a default cycle, and because of that, stayed really up
in quality, stayed overweight cash. I had conversations with some
(29:44):
clients that were telling me that they were twenty to
thirty percent cash in their portfolios. And this was still
midway through twenty twenty three, when there had already been
a pretty significant recovery and spreads from recession fears from
the regional banks crisis. And that goes to the fact
that there was no supply. There was nothing to buy.
So if you're trying to add risk and there's no
(30:05):
supply and you're just sitting in cash, your portfolio drag
is going to be massive. Now Psychologically, I think a
lot of people have recalibrated risk. If anything, over the
course of twenty twenty four, every client from investment grade
at high yield was telling me they were adding risk,
they were a long credit risk. If they weren't, it
was because they were perma bears and they just were
(30:26):
waiting for the big one that did not ultimately manifest.
Who knows. Maybe this year not our base case, but
it's something to think about. So I think that the
technicals and the positioning side of things has really kind
of supported triple c's, and triple c's have also been
super bifurcated. You have that cohort of distressed issuers that's
ranged from call it five to ten percent of the
(30:47):
market for the past eighteen months or so, they've been
the really tricky ones, and everything else in the world
of triple C has tightened up quite significantly.
Speaker 2 (30:56):
Just going back to the sectors, I don't know if
you omit. It's because there's so many you could or
could not like. But I don't think you spoke on
tech given China's supply chain position as tech exposed, how
exposed or how do you see that?
Speaker 3 (31:12):
Yeah, so we actually think that tech proper is maybe
less exposed than everything else that is exposed to tech
when you think about the AI value chain. Sure, you
have these hyperscalers spending immense dollars on cappax, right, data
center investment, all of these things, but it doesn't really
(31:33):
move the needle for a lot of those issuers from
a ratings perspective, From a real cash flow perspective, they're
just so big and generate so much cash and are
so highly rated. What it does move the needle on
is everything else. Utilities that have been massively upgrading their
infrastructure so that they can supply electricity to these data centers,
(31:56):
natural gas, which is one of the big inputs for
the power generation, building materials, and construction. You know, when
you kind of give the mouse a cookie and then
the mouse has all of these other things. You know,
if you give some chips to China, they're going to
do it better and cheaper, and it's just going to
set off this domino effect within really the US market,
(32:18):
which has been very interesting, and so we see the
exposure there maybe less centered on tech, which has been
kind of the opinion of the equity market. And perhaps
that's the difference between the equity market and the credit
market is inequities. If you don't get that return on investment,
if you're not actually able to monetize the AI, that
is going to be a big problem for your multiples
(32:39):
going forward. Whereas for credit market, if you have been
building all this infrastructure and then you actually don't need
to power all these data centers and you don't get
to push through that rate to your local utility regulator.
That's going to be problematic.
Speaker 1 (32:57):
There's been a sort of recent sea change in terms
of the globe investment thesis, sort of slightly away from
the US, this idea that US exceptionalism is maybe being
tested in lots of different ways, you know, politically, culture
and others. But are you seeing much of that in
terms of the day to day meetings you have with
(33:17):
people that are outside the US In terms of credit.
Speaker 3 (33:19):
Absolutely. We have a wonderful strategist on our team based
in Singapore. She's been making the rounds in Korea, talking
to investors, you know, all over the Asia Pacific region,
and there's been a lot more focus on China again
and maybe getting back into some China trades, which is
very counter to what we've heard for the past couple
(33:39):
of years because US policy big question market, while Chinese policy,
you know, at least there's something being done to kind
of restimulate demand, or at least the government is saying
that they want to restimulate consumer demand. At the same
time the European markets. You know, there's that old saying,
if you know, the US sneezes everyone else catches the cold.
(34:03):
It doesn't feel like people are thinking about that right now.
In fact, the US seems to be sneezing an awful
lot lately, and the rest of the world is saying, well,
how do we mask up and try to defend ourselves
against this? And we're seeing that within German fiscal policy
and a massive sea change there right Like if we
had anticipated that there would be this willingness to add
(34:27):
debt to spend to avoid the debt break, that would
have been shocking to me at the beginning of the year.
But people are seeing that and looking at Europe as
maybe actually a more defensive place to be. And also
when you add in the nuance that Europe has not
been investing in the tech AI trade nearly to the
(34:48):
same magnitude of the US. I think there are these
kind of lookbacks to the energy blow up in the
US in twenty fourteen and twenty sixteen and twenty twenty.
It happened a lot over the past decade or so,
and thinking well, if European spreads remain tight to the
US in that period and we have the similar dynamic
(35:09):
of this kind of US centric bubble, maybe we actually
are more defensive, and also we know what the fiscal
plan is. We have better certainty there.
Speaker 1 (35:19):
Going back to China, only a year ago, people were
telling me that was uninvestable. How do you invest now?
And what's the what's the play? Is it by cheap
real estate bonds or something that have blown up and
now you think they might recover and the government's going
to help you out. I mean, what's the what is
how do you approach China is as a global credit manager?
Speaker 3 (35:35):
It is interesting that the memories seem very short term,
but you know, credit cycles, they can be boom bust,
they can be relatively short term. I do think that,
you know, looking at some of Chinese tech is a
place that people are aligning. I think that some of
the real estate people are looking at. I don't know
that necessarily all of it. There is kind of this
(35:58):
widespread accepted that the Chinese property market is a problem
with no clear indirect solution, and we would probably need
to see consumer momentum build a little bit more before
people were more confident around it. And also, you know,
if US exceptionalism is not on the table, then we're
going to have to go other places to look for opportunity.
Speaker 1 (36:21):
But the problem is always that there's no scale they elsewhere,
you know, the US is you know, what is it
ninety percent of the of the assets, So you're going
to hit the wall eventually. That's just physics.
Speaker 3 (36:33):
That is just hys X, that is for sure, and
that is you know, not just the scale, but the liquidity,
the regulations, kind of the transparency of the market. I
don't think that anyone is saying we need to abandon
the US entirely, but it's that incremental hero that they
have to add, and they're probably looking at this point
(36:54):
away from the US and towards a domestic market or
something else. Because also the reality is a lot of
non US investors are very overweight US credit and had
been getting overweight US credit risk. We're also hearing more
interest in US non credit asset classes like muni's, so
you know, away from corporates and into the muni market
(37:16):
or agency R and bs is another place that people
are saying, I can get kind of a similar yield
and shorter duration and no credit risk. Actually that feels
like an okay place to be right now.
Speaker 1 (37:27):
So it does that ultimate to sort of bring it
full circles where we started does that ultimately effect demand
for corporate credit and then push spreads even wide.
Speaker 3 (37:34):
Yeah, so demand is definitely slowing for corporate credit. When
we look at the pace of inflows this year compared
to the pace of inflows last year, it's definitely slower
than it was. I would not say that we've never
necessarily seen the big reversal, and so I would say
that from a spread perspective, we're more kind of this
equilibrium state and people are really confused as to which
(37:58):
way is it going to break? Actually going to gap
twenty basis points tighter again because Trump and Bessent are
going to say, oh, actually, haha, just kidding, tariffs was
an April School's joke. Maybe that's why April second is
the big dace Or are they going to double down
and there is no Trump put and there is no
power put and there's no puts at all, and people
(38:19):
are really going to have to recalibrate risk in portfolios.
It's been a very tricky question.
Speaker 1 (38:25):
Which would presume be pushed a lot more cash into
China and.
Speaker 3 (38:27):
Europe, presumably, but there is only so far that the
US can go without the rest of the world starting
to really come unraveled. Our EM sovereign strategist has just
been scratching his head because EM has performed really, really well,
and he thinks back to every other period in which
the US has had some volatility, and that EM has volatility,
(38:50):
and he's like, sure, the US fiscal picture looks much
more EM than a lot of the countries that I'm
now looking at, But is that really enough to to
totally change the dynamic where things should be trading.
Speaker 1 (39:03):
And the political picture too. Perhaps so to continue on
that point, when you look globally, when you know everything,
you see what sort of sticks out for you in
terms of relative value? Right now, where are the sort
of points of interest?
Speaker 3 (39:18):
Yeah, so relative value. We don't have a lot that
we are loving. We've remained neutral on the US broadly
syndicated loan space versus underwaight, US investment grade and high yield.
That was very much contingent on our FEDS holden rate steady.
You still have some spread there. That means that you're
probably going to have good supply and demand. You know,
clos have been front and center with the amount of
(39:39):
inflows this year, which is a very supportive technical to
broadly syndicated loans. We've also liked Euro high yield, which feels,
you know, a little shaky just given a view of
wider spreads in the US market. But Euro high yield
is also very different than the US high yield. It's
it is a much more up in quality asset class,
more like sixty five to seven twenty percent double B
(40:02):
versus the US I call it fifty five ish percent
double B. A lot of kind of subordinated notes from
investment grade issuers within the EUROHIIALD market, some domestic alignment,
you know, some places that you can be a little
bit insulated from some of the trade wars in tariffs,
and so we've seen that as a pretty good opportunity
(40:22):
that has really gotten some incremental momentum on the different
fiscal announcements that we've seen. And then outside of that,
there's not a lot of places to go within the
world of corporate credit. You know, we've been telling people
agency MBS looks pretty good. That's not actually my core market,
but when I just kind of look at the relval
and historically when USIG posts negative excess returns, which we're doing,
(40:47):
MBS outperforms. So that's definitely a place to consider and.
Speaker 1 (40:52):
When you look at the economy, your view of the
economy seems to be more bearish than a lot of others.
But do you think there's anywhere else you'll particularly contrarian
right now in tons of old views?
Speaker 3 (41:01):
Yeah, it's interesting. I feel like we came into the
year with a more bearish economic view, and now everybody
else has gotten more bearish, and we're like, wait, should
we be even more bearish now or should we get
positive again? Because you know, wherever the chorus is going,
we try to go the other way for sure. I
(41:22):
think that the core view of you can't have wider
spreads if yields are high, that has been something that
we get a lot of you know, conversation around, and
we think that you can have wider spreads if you
have higher yields, especially if people think that yields are
going to continue to move higher. I know that treasure
yields have come down a lot this year, especially from
(41:44):
that kind of early intra year peak that we hit.
But we still haven't figured out the fiscal side of things.
I don't know what a tax bill's going to look like.
Are we really not taxing tips and social Security? And
also lowering the corporate tax rate seems like a lot
going on there, and so we haven't capitulated on that
trade as well, and we feel a little bit better
(42:06):
about that because the market has not gone back to
the recent tenure.
Speaker 1 (42:10):
Treasury lows great stuff when he sees our global head
of strategy at Credit Sites. It's been a pleasure of
having you on the Credit Edge Money.
Speaker 3 (42:17):
Thanks, thank you for having me, and of.
Speaker 1 (42:19):
Course we're very grateful to Matt Gogner from Bloomberg Intelligence.
Thank you for joining us today.
Speaker 4 (42:22):
Matt, thanks for having me.
Speaker 1 (42:24):
For more credit analysis. Read all of Matt Goyner's work
on the Bloomberg Terminal. Bloomberg Intelligence is part of our
research department, with five hundred analysts and strategists working across
all markets. Coverage includes over two thousand equities and credits
and outlooks on more than ninety industries and one hundred
market industries, currencies and commodities. Please do subscribe to the
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(42:46):
Spotify and all other good podcast providers, including the Bloomberg
Terminal at bpod Go. Give us a review, tell your friends,
or email me directly. At Jcrombie eight at Bloomberg dot Net.
I'm James Cromby. It's been a pleasure having you join
US US again next week on the credit Edge
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:24):
And I'm Mat Whitner, a member of our Global Credit
team within Bloomberg Intelligence, which is Bloomberg's research arm, and
I am covering the industrial space this week. I'm very
pleased to welcome Winnie Caesar, who is the global head
of strategy at Credit Sites.
Speaker 3 (00:36):
How are you doing, Winny, I'm great, Thanks for having
me for.
Speaker 4 (00:39):
All our listeners.
Speaker 2 (00:40):
Winnie is a very widely published and leading voice within
the corporate credit strategy world. She's also a frequent guest
across all of our Bloomberg media and appeared on our
High Yield panel with Mike McKee for bi's twenty twenty
five credit Outlook a few months ago. A lot's happened
since then, so I'm excited to hear your thoughts on
everything corporate credit.
Speaker 4 (00:58):
So what do you said? Do you want to kick
this off? James?
Speaker 1 (01:01):
Just to set the scene before we chat, global markets
are getting whipsawed by recession fears and alarming developments on
the geopolitical front. Invests are spoops by increasingly haphazard and
erratic US policymaking, particularly on trade. Despite that credit spreads
remain quite tight, there's a hope that the longer term
trajectory of the US economy remains up, that the new
administration will do its best to defend that, and that
(01:22):
everything will be okay. High yields are alluring buyers, Plus
there's not enough supply of corporate debt to satisfy all
the demand. Bond and loan markets are pricing in very
low odds of a US recession, even as talk of
economic downturn becomes more frequent, with consumers weakening and business
leaders complaining that they can't take long term decisions in
this environment. We at Bloomberg News are using the word
(01:44):
uncertainty at the fastest pace since COVID shut down the
economy in twenty twenty. But what's your view that, Winnie,
how much do we really need to worry about recession
or even worse stagflation?
Speaker 3 (01:55):
So we are definitely a little bit worried about a
stagflation light scenario. We're less worried about an outright recession,
especially a corporate balance seat recession. The starting point for
credit fundamentals feels like it's better than it has been
in prior periods where you've started to see the onset
of consumer recession like behavior. The problem is that the
(02:19):
pricing side of things is still not great. Now we
have seen companies manage through elevated prices pretty well. Margins
have been expanding for the past few quarters, really since
the height of inflation back in twenty twenty two, but
the ability to pass through those prices definitely slowing down.
(02:40):
So a lot of mixed signals when it comes to
what the trajectory of margins actually is. Probably not as
great as it has been, but also not recessionary overall.
We've been dubbing twenty twenty five the year of status woe.
Last year was the year of status quo, and markets
love status quo. And now we don't know if it's
(03:01):
woe in a good way, woa in a bad way,
or oh woe was me? Corporate credit spread should be
way wider.
Speaker 2 (03:08):
Yeah, I think at our year in conference last year
you had said that the outlook for this year you
had named it It's complicated. So now that we've got
concerns about tariffs, potential for persistent inflation, and expectations for
higher prices, and I think we just saw a prelim
consumer confidence tank last week. Are you reassessing that to
title something like it's getting super really complicated?
Speaker 4 (03:30):
Now? How is that? How do you see that UNFAI
length through the rest of the year.
Speaker 3 (03:33):
It is extra complicated Facebook status apparently. I mean a
lot of the things that we were anticipating have played out.
I think that what surprised us the most is the
markets weren't expecting it to be complicated, and that was
a major head scratcher for us. And so now that
the market is kind of standing up and paying a
little bit closer attention, that feels better to us that
(03:55):
at least the market is unnoticed that maybe it's not
just going to be this straight line to soft landing,
immaculate disinflation, fiscal policy certainty, M and A and animal spirits,
all of these things that people were anticipating. Instead, it's
probably going to be a little bit bumpier road. And
that's one of the reasons you're seeing places like Europe
outperformed so significantly. There seems to be a lot more
(04:19):
fiscal policy certainty in terms of what Germany plans to do,
what the ECB plans to do versus the US where
it's really still all up in the air.
Speaker 1 (04:30):
But going back to spreads, I mean, spreads did move
a little bit over the last week or so, but
they're still very tight. And you know, we looked at
the last piece of volatility in last August, they were
closer to four hundred basis points on the high yield.
Now it's still very close to three hundred. You know,
I get what you're saying. People have kind of taken
a second look, but they don't see that worried. So
what's going on.
Speaker 3 (04:49):
What's I think going on is the broader yield environment
has not changed that much. Back in August or March
of twenty twenty three, tenure treasure yield moved meaningfully lower,
you know, a three handle. We're still treading in that
four and a quarter to four point four percent range
on the ten year treasure yield right now, which does
(05:09):
make it a little bit harder for spreads to gap
out significantly wider. Now, that tells me two things. Either
in recession fears are really not being priced into the market.
One would think that if people were truly concerned about
an increasing likelihood of US recession, treasure yields would be
moving significantly lower, and instead inflation concerns are much more
(05:33):
being priced into the market right now because you're seeing
sticky yields really across the curve, some minor fluctuations and
FED pricing expectations, but really nothing all that significant. And
this is not a terrible operating environment for corporate credit
because there is kind of that head point you get
to on spread widening. But if you see this shift,
(05:56):
that's where things start to unwind.
Speaker 1 (05:59):
What is the I you're looking for? How do you
read that? And what are the signs?
Speaker 3 (06:02):
I mean, the signs are really tricky because consumer sentiment
has been really bumpy for the past three four or
five years at this point, and what consumers have been
saying has not actually manifested in the data really kind
of until now. There are a lot of questions about
recent retail sales data and personal spending data, how much
(06:23):
of this is real, how much of it is just
kind of a hangover effect from the holidays or seasonal
adjustments not being particularly accurate. I think us, like the FED,
are just a little bit on hold for the near
term to see how everything ends up working its way through.
And also inflation is still kind of the big bad
boogeyman in the room.
Speaker 1 (06:44):
And if there is stagflation, which you know, to me
sounds quite scary, and that you've got potentially much less
capacity to repay the debt and the debt's going to
cost you more for a company, why does that not
suddenly make for much more corporate credit risk, which really
is in the spread.
Speaker 3 (07:00):
Yeah, so stagflation is one of those really bad things
from an economic fundamental standpoint. We're also not calling for
a true nineteen seventies stagflation shock. There are a lot
of just structural differences in the domestic economy and the
markets that make it very difficult to get into that
kind of hot water. But an uptick in inflation does
(07:22):
feel like a reasonable expectation over the near term. The
good thing for corporate credit fundamentals is if borrowing costs
remain relatively elevated, that maintains management discipline as it relates
to balance sheets. They're not going to be saying, oh,
we're going to go out and do this LBO deal
or this super leveraging deal and just add all this
(07:43):
debt to our balance sheets because it's really expensive. Your
return on investment there has to make mathematical sense, and
with that, bondholders can feel some reassurance that perhaps these
companies are not going to be intentionally doing something that's
going to add xcution risk and perhaps get themselves into
trouble over the next twelve, twenty four or forty months,
(08:05):
because most bond investors have a longer term high horizon.
Speaker 2 (08:10):
So how do you see that sort of playing out
in terms of the supply side for like new issue
and so if you have stagflation, you have higher prices
and at the same time you have unemployment going up.
I think, like you had mentioned, you know, we had
fairly benign spread volatility last year, so you know, at
least I'm looking at the league screen right now and
we were up thirty percent on ig issuance. I think
(08:31):
it's like one and a half trillion. It's pretty impressive.
But given all these concerns, you know, what are your
thoughts and how issuance could trend through the rain of
the year, given the backdrop and some of the angst
that we've kind of highlighted here. I think high yield
in the last month at least is out forty fifty
base points on the high corporate and it's probably in
the twenty twenty five base point range for IG.
Speaker 4 (08:50):
So how do you see that going.
Speaker 3 (08:52):
Sure, So we always say that supply follows demand. Companies
are not going to be bringing deals to market if
they don't feel that they can price them at attractive
levels and if they don't feel like there is some
certainty around those new issue conditions. No company wants to
come to the primary market and launch a deal and
have not good receptivity or even just need to get
(09:15):
pulled because there's not enough investor demand. At the same time,
we've been expecting that overall new issue volumes were probably
not going to meet what they were last year. Last
year was very much an exceptional year because you had
the fear that rates were going meaningfully lower. Perhaps this
is the last hurrah that I can buy IG at
(09:35):
five percent. If only we had known that actually you
could buy IG at five and a quarter now. But
there was this massive surgeon issuance because there were a
lot of fears around am I going to be able
to buy this again? Am I going to be able
to get this back? And there was such strong demand.
They're still demand, but the flows have been a little
bit shoppier this year. And I think that the combination
(09:58):
of M and a not matiter realizing to the extent
that a lot of people were expecting. I mean, every
cell side forecast for twenty twenty five. Animal spirits was
in the title somehow, yes, And it's really hard for
animal spirits to be the driving factor when you don't
know how to do projections, because what do tariffs look like,
(10:19):
what does ultimate demand look like? All of these different things,
what's your cost of capital? You know, where are we
underrating these deals? And so we thought there would just
be kind of a natural deceleration in issuance overall on
that combined factor of uncertainty from the future. You know, what,
what are these companies going to be looking like, what's
(10:40):
the operating environment? And also where is the demand actually
going to be? And instead we've seen a lot of
issuance in Europe because the demand's there. The ECB seems
to be still kind of an easing mode, maybe less
so than they were. And also we know that there's
going to be some fiscal stimulus at long last, so
(11:00):
hopefully kind of rekickstart the economy over there.
Speaker 1 (11:04):
Talking of projections, so do you have a projection for
issuance that you can put a number on, or would
you have to keep changing every day.
Speaker 3 (11:10):
No, we tried not to change it every day. That
makes for kind of a flaty strategy team, and usually
our clients don't appreciate that. For US investment grade, our
gross issuance forecast is one point three trillion, so still
not a bad year by any stretch, but also not
you know, kind of the peak volume years. And we
also did expect that the net supply number would be
(11:33):
kind of flat to last year, so a little bit
of an uptick on a percentage basis overall compared to
what we saw in twenty twenty four. In the leverage
finance markets, we thought that leverage loan volume would be
a little bit softer than it was last year. We
look at net of repricings and extensions, which was just
a bonanza last year. It was almost on par with
(11:54):
the US investment grade market, and we think about the
relative sizes of those two markets. That's absolute lunacy. And
then the high yield bond market, we have a forecast
of call it, three hundred to three hundred and twenty
five billion, so that might be a little high at
this point. It seems like there's been both kind of
an issuer strike and a buyer strike going on in
(12:15):
the high yield market to start the year. A lot
of the refine needs that needed to get done. We're
done in twenty twenty four, and so now there's a
lot of people just kind of looking at capital structures
and thinking what are we going to do next? But
there have been some kind of big LBO deals announced,
so there should be some new issue supply coming to
the market.
Speaker 1 (12:35):
And a net increase, you think on the high yield
bond side.
Speaker 3 (12:37):
Yeah, but very modest, very modest net increase, because that.
Speaker 1 (12:40):
All just must keep spreads very tight. That's been my
central thesis for you know, as long as I can
remember that. People constantly asking me why spreads not moving,
why they're so tight, And I keep looking at net
supply and it's very low, and I keep looking at
rising demand. That just that tension just seems to be
persisting despite what's going on in the geopolitics.
Speaker 3 (12:58):
Yeah, it's been interesting. We have done to the high
yield market the incredible shrinking asset class because it just
can't grow. There's no new issuance. We had in call
it twenty twelve to twenty fourteen, all of the energy
paper that was done in new deals, and then in
twenty sixteen, really through present, a lot of deals have
(13:18):
just gone to the loan market that have been for
private equity and LBOs, and so high yield is almost
entirely a refy trade save for some kind of interesting
secured deals for companies that just needed some additional liquidity
and took it to the high yield bond market. But
the technical power there has been immensely strong. The change
(13:39):
in technicals comes when people actually fear a default cycle
and a downgrade cycle, right, because if you're staring at
one hundred billion of triple B debt that's coming your
way as a high yield investor, you are definitely going
to be shedding some of that single BE risk and
probably even some double B risk so that you could
buy whatever that fallen angel is because that history is
(14:00):
just a home run trade.
Speaker 4 (14:01):
Right.
Speaker 1 (14:02):
But you know, you say incredibly shrinking, but at the
same time private debt is just blowing up. Is that
where it's all going? And is that is that the
sort of technical strength that you know we're getting all
everything's being privatized in terms of debt.
Speaker 3 (14:15):
Yes, I don't think that the private credit managers would
like you to say that it's.
Speaker 1 (14:19):
Been blowing up in a good way, you know, in
a good.
Speaker 3 (14:23):
Way for sure. There has been so much growth within
private credit, which is, you know, a natural extension of
regulation of banks. Right, middle market lending has always existed,
it's just historically been banks that have been doing it.
And now we've had some interesting factors where private credit
has had a really good track record during some of
(14:44):
the biggest economic shocks that we've ever seen. You know,
everybody looks at private credit portfolio returns in twenty twenty
and twenty twenty one, and man, those were really great years,
despite the fact that we had an actual default cycle
in the high bond market. It tracks capital, you know,
becomes this virtuous cycle. I do think at this point
(15:04):
there's a lot more scrutiny on the world of private credits.
It's still very much kind of the key source of
liquidity for companies that can't necessarily get deals done within
the highield bond or the broadly syndicated loan market. If
that were to shut, then that would be a problem. Right,
If private credit says no, Mas, we do not want
(15:26):
any more of these big deals that would be definitely
in an issue. And then there is the problem of
just the opaque nature of the asset class. You read
six different default reports on the world of private credit,
and you're going to have six different numbers ranging from
zero percent to ten percent, and so it's really difficult
to get a handle on what exactly is in this market.
Speaker 1 (15:47):
Right right, Yeah, I know Matt want's to talk about sexes,
but before that, I just wanted to get you pinned
down on your forecast for spreads, because that's going to
be really hard to do. But you did say when
we last talked in December that you thought three point
fifty on high yield. Is that something you stick?
Speaker 3 (16:00):
Yeah, we still like three fifty on high yield. You know,
we've gotten kind of closer to that level. We were
also in the camp of higher treasury rates as well
and some more treasury market volatility, so it'll be interesting
to see if that plays out. So we've been underweight
high yield, just kind of waiting to get closer to
that three fifty level. Seeing a little bit more decompression
(16:22):
across ratings.
Speaker 1 (16:23):
Does that mean no, FED rate cuts.
Speaker 3 (16:25):
We have the FED on hold this year.
Speaker 1 (16:27):
Okay, interesting, so what does that mean for IG?
Speaker 3 (16:29):
So for IG, we have our spread forecast at one
hundred and ten basis points, which is still objectively a
very tight level. But when I was out pitching that
to clients, everybody looked at me like I had grown
an extra head. Because of the yield environment, people say,
you know, if IG's north of five percent, then we're
going to be buying it. And that's true until you
start to say, well, maybe the Fed's actually going to
(16:50):
be hiking rates, and maybe cash looks a little bit
more attractive, and I should stick with short duration because
the yield care is still super flat.
Speaker 2 (16:58):
So no, no big high yield default cycle going on.
Speaker 3 (17:01):
It's not right now, not today. No, And you know,
we actually have, I would say, a more aggressive default
forecast than what the market is currently pricing in. The
distress ratio in the market is a great forward indicator
for what defaults are going to look like over the
next twelve months or so, and that's consistently been pretty low,
call it six to seven percent for the past twelve
(17:23):
months or so, and that would imply maybe a one
to one and a half percent default rate and ours
is closer to two and a half to three percent.
So that does assume that some of these capital structures
that have just been circling the drain and just waiting
and waiting and waiting, are finally going to do whatever
distressed exchange that actually triggers a default.
Speaker 2 (17:45):
Is President Trump's I guess geopolitical, you know, true social tweets.
Is that more a negotiating tactic or do you think
that there's the Trump put is is a real thing.
I looking at WI and you know, looks like at
least today retirement for James and I as another year
or so out, just based on the market's behaving. So
(18:07):
how much worse does it have to get in the
equity market before we start seeing credit market take notice?
Speaker 3 (18:13):
Yeah, this is a great question. I think that right now,
when you look at yield in the credit market, still
seven and a half percent for high yield, call it
five and a quarter for investment grade, and then forward
earnings yield for the S and P five hundred, credit
still looks pretty attractive. So you would need to see
another call it eight to ten percent down on the
(18:37):
S and P five hundred before you're at kind of
like for like yield implications. Now that assumes that you're
also not seeing massive reductions to forward earnings, which I
think is not necessarily the safest assumption, but that's kind
of the back of the envelope way to do it.
I think. In general, credit is still viewed as a
(18:57):
pretty safe trade, and when people think about valuations went sure,
spreads got really tight back to all time historic levels,
kind of depending on how you're measuring your historic timeframe,
but equity has really felt very frothy. You know, two
back to back years of twenty percent plus returns on
the s and P five hundred. It's unusual.
Speaker 4 (19:19):
I enjoyed it. Yeah, I thought it was great. Keep
it coming.
Speaker 3 (19:21):
I love it.
Speaker 2 (19:23):
So if we get some volatility, where are some of
the sectors that you like and maybe some what are
some of the names that you think can perform really well?
And then conversely, you know, what are some of the
sectors you think might be doing really poorly? And there's
some candidates that could be for some spread widening candidates.
Speaker 3 (19:39):
Yeah, I mean, so this is a tricky one because
there's less to like nowadays and credit, even with the
spread widening that we've gotten. It's kind of hard to
you know, pound the table and say, wow, this seems
like a really great trade within the investment grade. We've
still been constructive on financials. The thesis on that has
been of all thing. Our team had been very positive
(20:02):
on the regionals and some of the consumer finance, and
as valuations really compressed, they said, okay, maybe now it's
time to go a little bit up in quality. You know,
look at the jesibs. Just where are the really strong
balance sheets where you're going to have some defensive carry
and kind of sleep well at night. And even if
there is a credit cycle, we're probably not going to
(20:24):
be all that impacted by it. But then also there
are some credits within the industrial space where our analysts
feel pretty good. You know, we're still pretty constructive on Boeing,
which seems contrarian when you think about everything that's going
on in terms of government cost cutting and man Boeing
has had just the bumpiest of bumpy rides, but you know,
(20:46):
you're getting paid some decent spread there to actually go
into that capital structure, and on a long term basis,
we feel like it's probably not going to be a
fallen angel candidate, at least for now, which which makes
us feel a little bit better about things. We also
just re upgraded Pharma back to a neutral. We had
been underperformed there because of the whole animal spirits thing.
(21:06):
Farmah loves to do M and A. They love to
do big leveraging M and A, but it seems like
that is maybe not going to be as big of
a risk, and instead you want to be in some
of these higher quality, more defensive balance sheets where you know,
spreads worth sticking out a little bit wide just because
of oh my gosh, what's going to happen here on
the M and A space, and really with tariffs as well,
(21:28):
you know, Pharma is kind of front and center on
the healthcare side of things as well.
Speaker 4 (21:33):
Well.
Speaker 1 (21:33):
Building definitely a bumpy ride and will waghs than one,
But Matt, you cover that. So are you in agreement?
Speaker 4 (21:39):
Do you think? Oh? Yeah, I actually I do. I
do agree.
Speaker 2 (21:42):
I think that Actually they've outperformed since I guess December
or not December. But October first, when news broke they
were going to do a ten billion dollar equity Ways
and Rays, and that quickly turned into a twenty four
billion with nineteen billion being equity and a mandatory convert
so after they exercise the green shoes, twenty four billion
on in so and I would actually Anglis Kelly, who
(22:05):
is the air Cap CEO, which is basically the biggest
fire of aviation assets in the world, has highlighted that
the manufacturing quality has gotten really really good with Bowing
over the last couple of years. So I think that
they're taking the steps they need to to Boosto's deliveries
and production and basically unlock the eighty plus billion of
inventory that they have on their balance sheet, which they desperately,
(22:27):
desperately need. So maybe this year we see spreads sort of.
Speaker 4 (22:29):
Behave in an inverse relationship.
Speaker 2 (22:31):
As production and deliveries go up, spreads come down closer
to she will be to your careers.
Speaker 1 (22:36):
So we go into a downtown, people stop buying flights.
What's going to happen to these companies? Is that not
a big risk? If you know?
Speaker 2 (22:43):
I think it's definitely a big risk, But I don't
think it's a demand issue. I think when you have
a half a trillion dollar black backlog and at these rates,
you're looking at production well into the twenty thirties.
Speaker 1 (22:52):
I think many people think of it as a defensive name,
But is it one of the more obvious relative value
plays now for both of you think.
Speaker 3 (22:59):
I think so. I mean, I wouldn't necessarily say it's defensive.
Speaker 2 (23:02):
There's yeah bullet the vulture will be negative outlooks and
a review for downgraded s and P. I wouldn't say
that it's defensive, but I think they're moving the needle
in the correct direction at this point. And you know
when he said, a fallen angel is typically a home run,
so we actually did some work in the fall and
if they were to fall, which is not our base case,
(23:24):
access returns are pretty well of the Ford twelve months
and usually have that one month adjustment period, And any
high yield manager, I'm sure it would be salivating at
a business risk profile like that. And the seventy percent
of the capitol structure has coupon steps, which is also interesting,
a nice little kicker on the way.
Speaker 3 (23:42):
Down, big feature. I would say that every high yield
cell side trading desk would just be ecstatic going we're
actually downgraded. They get that much in new paper to
trade around when they just haven't had much.
Speaker 1 (23:57):
Yeah, exactly, And the other set t flag when he
was metals in mining, is that just because the oil price, sorry,
the gold price is through the roof, not just gold.
Speaker 3 (24:06):
But you know, as much as we kind of bemoan
tariff and trade policy as being this net negative and
creating uncertainty, there's some certainty in terms of actually the
US companies benefiting from some of these things. And so
when we look at the domestic metals and mining sector,
feels like it's one place to try to kind of
(24:27):
align yourself. You know. Also, we still have a lot
of capex going into infrastructure. You know, to build a
data center, you need steel and aluminum and copper and
all of these things that you know, these producers are making.
Speaker 1 (24:42):
And on the flip side, as Matt said, you know
what's most impacted by tires? What are you staying away from?
Speaker 3 (24:47):
Yeah, so I think the autos is kind of the
layup one. Right. We've had a little bit of a
reprieve for the big US auto makers, But who knows
what's going to happen on April second, which is quote
the big one according to Trump. I mean, I feel
like every Monday has been a big one in twenty
twenty five, it feels a little bit like Groundhog Day overall,
(25:08):
but autos has been kind of a bumpy ride. We
recently saw a Fallen Angel downgrade in the world of autos,
so that's something to kind of pay attention to. I
think if Ford came back down, which is not our
base case, but you know, definitely on people's minds given
everything that's going on. While long term, that would probably
be good, it's usually not great if you're a boomerang,
(25:28):
you know, Fallen Angel, Rising Star, Fallen Angel, Rising Star.
That starts kind of put people on notice, yes, for sure,
and then it's it's really interesting. Retail one of the
tightest trading, most defensive sectors within the US market, very
vulnerable to tariffs. You know how much of these consumer
products are we importing from China and other places. It's
(25:51):
a pretty significant chunk. And we're already seeing retailers and
consumer goods in the crosshairs of consumer sentiment and shifting.
Try and we're spending on services and now we're spending
on goods. So wait, groceries are too expensive. There's just
a lot to get right in that sector that even
if it's high quality, you're probably not going to be
(26:12):
massively outperforming there.
Speaker 1 (26:14):
And by rating Terry. You mentioned it earlier that people
would probably want to move up to the double b's,
but that is a very crowded trade. People have been
trying to do that for a long time, and you
mentioned earlier that you know there's less to like generally.
I mean, I'm seeing that's because of valuation, But so
where do you go?
Speaker 3 (26:32):
Yeah, so we like a barbell right now in high yield.
And I'm probably going to sound crazy that I have
a wider spread forecast, but telling people to buy some
triple c's, I think that when you are anticipating spread widening,
you want to be aligned with issuers that have a
high conviction view on maintaining and defending ratings. And the
(26:53):
triple C universe and the double B universe, I think
that those are the core places within high yield that
companies are going to be saying, we don't want a downgrade.
You know. In triple C that's kind of endgame right there.
And the move in cost of capital from double B
to single B that's also pretty significant. If anything, Double
B assures are continuing to try to migrate up to
(27:14):
investment grade single B world that's where we've seen a
lot more challenge in kind of maintaining ratings, and that's
been an anomaly versus the rest of the corporate credit market,
where this kind of rating upgrade momentum has still been intact.
And so we kind of like that Barbell strategy of
(27:34):
we can construct that seven to eight percent yield in
the portfolio by kind of a core holding in double b's,
including extending out duration a little bit there, and also
adding some alpha within triple c's.
Speaker 1 (27:45):
But the triple cs, by the rating agency definition, is
very high risk of loss. How do you headge that?
Speaker 3 (27:52):
I mean, you have to hedge that by picking the
right triple c's and your liquidity.
Speaker 1 (27:57):
Yeah, yes, And.
Speaker 3 (27:58):
You know, sometimes in the kind of liquidity shocks, actually
being in triple c's is not the worst place to
be because things just don't turn over that much. Like
if you can kind of ride it through and listening
are anticipating you know, two, three, four, five years of
you know, twenty percent triple C yields, then you're kind
of kind of be okay as long as you've aligned
(28:20):
with not those capital structures that are going to be
doing distressed exchanges and.
Speaker 1 (28:24):
Things like that, Are there any sectors or names that
stick out in there we're going in triple c's.
Speaker 3 (28:29):
Yeah, so, I mean teleco and media have been front
and center for problems, and it does seem like we're
kind of getting to the other side of that in
some ways. Uh So, definitely kind of looking at those
spaces as areas of opportunity. Healthcare is another one, you know,
that's been the big, you know, kind of bad sector
(28:52):
for quite some time in the high healed space as well,
But then there's like not a lot of triple c's
left in other sectors.
Speaker 4 (28:59):
Right.
Speaker 3 (28:59):
Energy has gone through this massive ratings upgrade cycle. It
used to be the core tripleC market and now it's
really not anymore.
Speaker 1 (29:07):
Right, and it also seems to be somewhat less volatile.
I mean, I look at the big market swings that
go on act. Previously, we'd looked at it and the
triple cs would just blow out immediately and everyone would
just dump those. But now there's less of that going on.
Is that because there's just less supply and more demand
for that.
Speaker 3 (29:21):
I think that that has a lot to do with it.
I think that positioning within the high old market has
been really tricky for the past three years. At this point,
at the beginning of twenty twenty three, every high yield
fund manager was worried about recession risk, was worried about
a default cycle, and because of that, stayed really up
in quality, stayed overweight cash. I had conversations with some
(29:44):
clients that were telling me that they were twenty to
thirty percent cash in their portfolios. And this was still
midway through twenty twenty three, when there had already been
a pretty significant recovery and spreads from recession fears from
the regional banks crisis. And that goes to the fact
that there was no supply. There was nothing to buy.
So if you're trying to add risk and there's no
(30:05):
supply and you're just sitting in cash, your portfolio drag
is going to be massive. Now Psychologically, I think a
lot of people have recalibrated risk. If anything, over the
course of twenty twenty four, every client from investment grade
at high yield was telling me they were adding risk,
they were a long credit risk. If they weren't, it
was because they were perma bears and they just were
(30:26):
waiting for the big one that did not ultimately manifest.
Who knows. Maybe this year not our base case, but
it's something to think about. So I think that the
technicals and the positioning side of things has really kind
of supported triple c's, and triple c's have also been
super bifurcated. You have that cohort of distressed issuers that's
ranged from call it five to ten percent of the
(30:47):
market for the past eighteen months or so, they've been
the really tricky ones, and everything else in the world
of triple C has tightened up quite significantly.
Speaker 2 (30:56):
Just going back to the sectors, I don't know if
you omit. It's because there's so many you could or
could not like. But I don't think you spoke on
tech given China's supply chain position as tech exposed, how
exposed or how do you see that?
Speaker 3 (31:12):
Yeah, so we actually think that tech proper is maybe
less exposed than everything else that is exposed to tech
when you think about the AI value chain. Sure, you
have these hyperscalers spending immense dollars on cappax, right, data
center investment, all of these things, but it doesn't really
(31:33):
move the needle for a lot of those issuers from
a ratings perspective, From a real cash flow perspective, they're
just so big and generate so much cash and are
so highly rated. What it does move the needle on
is everything else. Utilities that have been massively upgrading their
infrastructure so that they can supply electricity to these data centers,
(31:56):
natural gas, which is one of the big inputs for
the power generation, building materials, and construction. You know, when
you kind of give the mouse a cookie and then
the mouse has all of these other things. You know,
if you give some chips to China, they're going to
do it better and cheaper, and it's just going to
set off this domino effect within really the US market,
(32:18):
which has been very interesting, and so we see the
exposure there maybe less centered on tech, which has been
kind of the opinion of the equity market. And perhaps
that's the difference between the equity market and the credit
market is inequities. If you don't get that return on investment,
if you're not actually able to monetize the AI, that
is going to be a big problem for your multiples
(32:39):
going forward. Whereas for credit market, if you have been
building all this infrastructure and then you actually don't need
to power all these data centers and you don't get
to push through that rate to your local utility regulator.
That's going to be problematic.
Speaker 1 (32:57):
There's been a sort of recent sea change in terms
of the globe investment thesis, sort of slightly away from
the US, this idea that US exceptionalism is maybe being
tested in lots of different ways, you know, politically, culture
and others. But are you seeing much of that in
terms of the day to day meetings you have with
(33:17):
people that are outside the US In terms of credit.
Speaker 3 (33:19):
Absolutely. We have a wonderful strategist on our team based
in Singapore. She's been making the rounds in Korea, talking
to investors, you know, all over the Asia Pacific region,
and there's been a lot more focus on China again
and maybe getting back into some China trades, which is
very counter to what we've heard for the past couple
(33:39):
of years because US policy big question market, while Chinese policy,
you know, at least there's something being done to kind
of restimulate demand, or at least the government is saying
that they want to restimulate consumer demand. At the same
time the European markets. You know, there's that old saying,
if you know, the US sneezes everyone else catches the cold.
(34:03):
It doesn't feel like people are thinking about that right now.
In fact, the US seems to be sneezing an awful
lot lately, and the rest of the world is saying, well,
how do we mask up and try to defend ourselves
against this? And we're seeing that within German fiscal policy
and a massive sea change there right Like if we
had anticipated that there would be this willingness to add
(34:27):
debt to spend to avoid the debt break, that would
have been shocking to me at the beginning of the year.
But people are seeing that and looking at Europe as
maybe actually a more defensive place to be. And also
when you add in the nuance that Europe has not
been investing in the tech AI trade nearly to the
(34:48):
same magnitude of the US. I think there are these
kind of lookbacks to the energy blow up in the
US in twenty fourteen and twenty sixteen and twenty twenty.
It happened a lot over the past decade or so,
and thinking well, if European spreads remain tight to the
US in that period and we have the similar dynamic
(35:09):
of this kind of US centric bubble, maybe we actually
are more defensive, and also we know what the fiscal
plan is. We have better certainty there.
Speaker 1 (35:19):
Going back to China, only a year ago, people were
telling me that was uninvestable. How do you invest now?
And what's the what's the play? Is it by cheap
real estate bonds or something that have blown up and
now you think they might recover and the government's going
to help you out. I mean, what's the what is
how do you approach China is as a global credit manager?
Speaker 3 (35:35):
It is interesting that the memories seem very short term,
but you know, credit cycles, they can be boom bust,
they can be relatively short term. I do think that,
you know, looking at some of Chinese tech is a
place that people are aligning. I think that some of
the real estate people are looking at. I don't know
that necessarily all of it. There is kind of this
(35:58):
widespread accepted that the Chinese property market is a problem
with no clear indirect solution, and we would probably need
to see consumer momentum build a little bit more before
people were more confident around it. And also, you know,
if US exceptionalism is not on the table, then we're
going to have to go other places to look for opportunity.
Speaker 1 (36:21):
But the problem is always that there's no scale they elsewhere,
you know, the US is you know, what is it
ninety percent of the of the assets, So you're going
to hit the wall eventually. That's just physics.
Speaker 3 (36:33):
That is just hys X, that is for sure, and
that is you know, not just the scale, but the liquidity,
the regulations, kind of the transparency of the market. I
don't think that anyone is saying we need to abandon
the US entirely, but it's that incremental hero that they
have to add, and they're probably looking at this point
(36:54):
away from the US and towards a domestic market or
something else. Because also the reality is a lot of
non US investors are very overweight US credit and had
been getting overweight US credit risk. We're also hearing more
interest in US non credit asset classes like muni's, so
you know, away from corporates and into the muni market
(37:16):
or agency R and bs is another place that people
are saying, I can get kind of a similar yield
and shorter duration and no credit risk. Actually that feels
like an okay place to be right now.
Speaker 1 (37:27):
So it does that ultimate to sort of bring it
full circles where we started does that ultimately effect demand
for corporate credit and then push spreads even wide.
Speaker 3 (37:34):
Yeah, so demand is definitely slowing for corporate credit. When
we look at the pace of inflows this year compared
to the pace of inflows last year, it's definitely slower
than it was. I would not say that we've never
necessarily seen the big reversal, and so I would say
that from a spread perspective, we're more kind of this
equilibrium state and people are really confused as to which
(37:58):
way is it going to break? Actually going to gap
twenty basis points tighter again because Trump and Bessent are
going to say, oh, actually, haha, just kidding, tariffs was
an April School's joke. Maybe that's why April second is
the big dace Or are they going to double down
and there is no Trump put and there is no
power put and there's no puts at all, and people
(38:19):
are really going to have to recalibrate risk in portfolios.
It's been a very tricky question.
Speaker 1 (38:25):
Which would presume be pushed a lot more cash into
China and.
Speaker 3 (38:27):
Europe, presumably, but there is only so far that the
US can go without the rest of the world starting
to really come unraveled. Our EM sovereign strategist has just
been scratching his head because EM has performed really, really well,
and he thinks back to every other period in which
the US has had some volatility, and that EM has volatility,
(38:50):
and he's like, sure, the US fiscal picture looks much
more EM than a lot of the countries that I'm
now looking at, But is that really enough to to
totally change the dynamic where things should be trading.
Speaker 1 (39:03):
And the political picture too. Perhaps so to continue on
that point, when you look globally, when you know everything,
you see what sort of sticks out for you in
terms of relative value? Right now, where are the sort
of points of interest?
Speaker 3 (39:18):
Yeah, so relative value. We don't have a lot that
we are loving. We've remained neutral on the US broadly
syndicated loan space versus underwaight, US investment grade and high yield.
That was very much contingent on our FEDS holden rate steady.
You still have some spread there. That means that you're
probably going to have good supply and demand. You know,
clos have been front and center with the amount of
(39:39):
inflows this year, which is a very supportive technical to
broadly syndicated loans. We've also liked Euro high yield, which feels,
you know, a little shaky just given a view of
wider spreads in the US market. But Euro high yield
is also very different than the US high yield. It's
it is a much more up in quality asset class,
more like sixty five to seven twenty percent double B
(40:02):
versus the US I call it fifty five ish percent
double B. A lot of kind of subordinated notes from
investment grade issuers within the EUROHIIALD market, some domestic alignment,
you know, some places that you can be a little
bit insulated from some of the trade wars in tariffs,
and so we've seen that as a pretty good opportunity
(40:22):
that has really gotten some incremental momentum on the different
fiscal announcements that we've seen. And then outside of that,
there's not a lot of places to go within the
world of corporate credit. You know, we've been telling people
agency MBS looks pretty good. That's not actually my core market,
but when I just kind of look at the relval
and historically when USIG posts negative excess returns, which we're doing,
(40:47):
MBS outperforms. So that's definitely a place to consider and.
Speaker 1 (40:52):
When you look at the economy, your view of the
economy seems to be more bearish than a lot of others.
But do you think there's anywhere else you'll particularly contrarian
right now in tons of old views?
Speaker 3 (41:01):
Yeah, it's interesting. I feel like we came into the
year with a more bearish economic view, and now everybody
else has gotten more bearish, and we're like, wait, should
we be even more bearish now or should we get
positive again? Because you know, wherever the chorus is going,
we try to go the other way for sure. I
(41:22):
think that the core view of you can't have wider
spreads if yields are high, that has been something that
we get a lot of you know, conversation around, and
we think that you can have wider spreads if you
have higher yields, especially if people think that yields are
going to continue to move higher. I know that treasure
yields have come down a lot this year, especially from
(41:44):
that kind of early intra year peak that we hit.
But we still haven't figured out the fiscal side of things.
I don't know what a tax bill's going to look like.
Are we really not taxing tips and social Security? And
also lowering the corporate tax rate seems like a lot
going on there, and so we haven't capitulated on that
trade as well, and we feel a little bit better
(42:06):
about that because the market has not gone back to
the recent tenure.
Speaker 1 (42:10):
Treasury lows great stuff when he sees our global head
of strategy at Credit Sites. It's been a pleasure of
having you on the Credit Edge Money.
Speaker 3 (42:17):
Thanks, thank you for having me, and of.
Speaker 1 (42:19):
Course we're very grateful to Matt Gogner from Bloomberg Intelligence.
Thank you for joining us today.
Speaker 4 (42:22):
Matt, thanks for having me.
Speaker 1 (42:24):
For more credit analysis. Read all of Matt Goyner's work
on the Bloomberg Terminal. Bloomberg Intelligence is part of our
research department, with five hundred analysts and strategists working across
all markets. Coverage includes over two thousand equities and credits
and outlooks on more than ninety industries and one hundred
market industries, currencies and commodities. Please do subscribe to the
Credit Edge wherever you got your podcasts. We're on Apples,
(42:46):
Spotify and all other good podcast providers, including the Bloomberg
Terminal at bpod Go. Give us a review, tell your friends,
or email me directly. At Jcrombie eight at Bloomberg dot Net.
I'm James Cromby. It's been a pleasure having you join
US US again next week on the credit Edge
Host
James Crombie
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