May 15, 2025 • 46 mins
Yield-hungry credit investors are increasingly seeking longer-dated corporate debt, just as supply is evaporating, according to Barclays. “It’s problematic,” Meghan Graper, the firm’s global head of debt capital markets, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Arnold Kakuda in the latest Credit Edge podcast. “I worry — can we source enough assets to appeal to where the bid is gravitating, and that’s out the curve.” Graper and Kakuda also discuss the growth of private credit, value in financial sector debt, hybrid issuance, the Trump put and league table rankings for global bond underwriters.
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Episode Transcript
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Speaker 1 (00:18):
Hello, Welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumby. I'm a senior ed his
her at Bloomberg and I'm Arnold.
Speaker 2 (00:24):
Kakuta, senior credit analyst covering US banks at Bloomberg Intelligence.
So this week we're very pleased to welcome Meghan Raper,
global head of Debt capital Markets at Barkley's.
Speaker 3 (00:34):
How you doing, Meghan, I'm great, good to be here,
Lots to talk.
Speaker 2 (00:37):
About, absolutely so. Barkley's right, as you know, is a
bolt racket bank, and in its investment banking review last year,
Meghan's debt honorary business it was highlighted as the firm's
relative strength, and this strong business performance was a part
of why Meghan was named as one of the American
bankers most Powerful Women in Finance in twenty twenty three.
(00:59):
So I'm very excited to hear her. Abews.
Speaker 3 (01:02):
Oh, thanks on the shoulders of giants. I think you know,
representing a team effort for sure, but thank you for
that a humbling introduction, and you.
Speaker 1 (01:12):
Said debt capital markets. And also just to set the
scene on that, we are seeing a lot of global
market volatility that's made things very challenging for companies that
want to raise debt this week, the window is wide open.
After a seeming thought in the trade war, the US
and China made some progress by agreeing to slash tariffs
on both sides, but next week it may well slam shut.
There's a huge amount of volatility and uncertainty, making it
(01:34):
very difficult for business leaders to make long term decisions
about anything, let alone funding and refinancing plans. Meanwhile, there
are cracks appearing on the demand side as investors look
to diversify away from the US and private lenders are
looking to steal some of the business from public bond
and loan markets. So, Megan, where does that leave us?
What's the outlook for the rest of the year. E bullish?
Speaker 3 (01:55):
I am. I think you know, we've sort of been
unwavering in the investment grade market, and so if you're
looking for flight to quality trades, investment grade has really
been affording that. And so even as we've watched volatility
play out across other asset classes, we've remained fairly functional
and orderly, and there's been no shortage of appetite for
credit even through a pretty unprecedented number of weeks.
Speaker 2 (02:18):
And you know, You've been a star both on TV
and also at our credit conferences, So thank you very
much there. But if I recall, I think at the
year end conference in December, and I know the world
has changed, you know, for the worst, and maybe maybe
we're back on pace. But I believe you mentioned the
forecast for this year USIG credit about one point sixty
five trillion, maybe a little bit, you know, ahead of
(02:39):
last year's pace. So can we still get there?
Speaker 3 (02:42):
Is?
Speaker 2 (02:42):
Do we need an m and a pickup for that
to happen? What are your views now?
Speaker 3 (02:46):
I think it's possible, you know, I think that you know,
the the there's not a credit issue as we look
at the dynamics that are playing out in the backdrop.
So you know, the announcements over the course of this
past weekend I think have given new life. And so
while we were unshaken, it is fair to say we
saw fits and starts of activity in the primary market.
So April was very very touch and go, not because
(03:08):
of demand dynamics, but rather issuers who were defensive heading
into the year, picking and choosing their windows, and so
you're seeing very hefty concentrations of supply. So any given
month we're actually threading the needle effectively well, meaning two
thirds of supply are coming in five business days. We
saw that in January, it was a record January start
(03:29):
to the year. We saw that in February, in March,
and again in April, and so these sort of searching
for optimal windows of execution is the more challenging piece
of the equation. And I also think we're going to
see a front loading of activity. There's been a healthy
amount of supply acceleration and so the top line numbers
you're seeing in terms of investment grade supply have been
driven not by a nominal uptick and funding needs, but
(03:52):
actually pulling forward of those needs with a view that
things could get choppier into the second half.
Speaker 1 (03:57):
I do want to dig into the pipeline, but first
I wanted to usk about the net issuance number because
we've been saying on this show for a long time
that spreads are very tight. But part of that is
really the supply demand technicals. In fact, the fact that
there isn't enough supply and there's a lot of demand
for yield and that just keeps things tight. Where are
we on a net basis and where do we go, yeah.
Speaker 3 (04:16):
I mean, so you look at the headline numbers, we're
actually running a couple of percentage points above where we
were this time last year. Some of that driven by
a week that, as we kicked off May, has supported
seventy five billion of supply, But on a gross basis,
that feels like pretty measured on a net supply basis,
as we account for that record wall of COVID death
that's maturing this year, paired with coupon income that's upwards
(04:40):
a four hundred billion, and the dollar market, so cash
naturally rotating back to be invested, means that net net
were down sixteen percent. And so as you say this,
the technicals have become an incredibly powerful force to underpinning
the functionality of investment grade in particular, and that's a
theme we see exacerbated. There was some signs of concern.
We were seeing some signaling the lip or data is
(05:03):
probably a healthy gauge of sort of investor sentiment, and
we did see eight consecutive weeks of outflows, which there
was some fear was that being driven by international money
leaving investment markets. IG markets actually see twenty two percent
of demand coming from offshore investors, and so it's something
we've been closely scrutinizing, and I think fair to say
(05:25):
it is a bit difficult given how entangled and globalized
the investment grade markets have become. To see investors without
sort of shooting themselves in their own foot, thinking about
exiting one currency versus the other. And so the order
books we've seen in recent weeks, there's no signs of
that demand abating that international bid. We're actually seeing the
(05:47):
Middle East, Asia, Europe really consistently playing and if anything,
there's more breadth than depth to that bid. Then we've
seen now that yields, as you suggest, to become as
palatable as they are.
Speaker 2 (05:59):
And so you talked about the international demand, but then
on the backdrop of that, we also hear about the
testing of US exceptionalism, Right, So do you think that's
more of a kind of longer end treasury yield type
concern or is that gonna Do you feel like some
of that concern might filter into the corporate bond markets
here in the US?
Speaker 3 (06:16):
Yeah, that Sell America narrative was really tied to watching
flows in the equity market. I think there certainly we've
seen some pairing back of exposure that started well before
the last couple of months. On the treasury side as well, credit,
as I say, is a bit more enmeshed between those two.
So if you think about issuers that have debt outstanding
in the euro market, two thirds of those borrowers that
(06:38):
are European appealing to the dollar market actually have dollar
dead outstanding, and fifty percent of those with dollar dead
outstanding have deat outstanding in the European markets as well.
So there's a lot of cross pollination there that makes
the idea of expressing a sell America view much more
humbersome in my world than what maybe others are saying
away from us. So we think it's unlikely that that
(06:59):
theme continues.
Speaker 1 (07:00):
But where does that leave spreads? They seem very tight,
you know, if you consider that, you know, there's kind
of a round trip after so called Liberation Day they
blew out. Now they're back down below one hundred on
the IG index. But there does seem to have been
some fundamental damage to the economy. There's you know, still inflation,
there's there's a lot of questions about recession. Is the
(07:21):
risk of all that stuff properly reflected right now in
the IG spread.
Speaker 3 (07:24):
Well, it's a great point, James. I actually don't think
that we feel like risk is being properly evaluated. The
technicals are overwhelming where fair value should be, and I
think unfortunately the pain trade if you're an investor, is
probably tighter, even though I've yet to find an investor
who would say they're bullish here. The good news is
there are some silver linings. If you look at what's
transpired in the last forty eight hours, every economist across
(07:47):
the street, including Barkley's economists, are revising sort of worst
case scenarios out of the equation. So if anything, we've
hit a reset button and we're seeing sort of the
upside of less bad, if you will. And so as
a result of that, we do think that tariffs in
and of itself will be inflationary. We're still settling in
it all in you know, weighted tariff and average weighted
(08:08):
tariff percentage of around seventeen percent, you know, So it's
worse than we thought two months ago on that count.
What does that mean? It does mean inflation takes higher,
but off of the worst level. So we think core
PCE actually is around three three as we look at
Q four Q four numbers. It does mean growth is
(08:30):
going to contract, but I think we've now eliminated the
prospect of a recession as the baseline outcome. As we
look at at the end of the year, we're probably up.
You're going to be a growth slow down, but maybe
that's five tenths of growth, so not nearly as pronounced
as some had feared. And then the unemployment piece is
the other part of this, which is rarely where the
Fed's hands are tied, and we think that is off
(08:52):
of worst case outcomes. Probably closer to four point three
percent is where we top out at the end of
the year.
Speaker 1 (08:58):
So FED hands tied. Does that mean no cut this year?
Speaker 3 (09:01):
I don't think it means no cuts this year. But
I do think this wait and see strategy is going
to prove to have been the right call. I think
you're going to see very consistent. There's an avalanche of
FED speak this week, and I think you're going to
see that the FED governors are aligned in their view,
which is that yes, tariffs by their very nature are inflationary.
There are risks to that being more long standing rather
(09:23):
than just one off. And at the same time, the
economy now is likely to be in a better spot,
so the urgency to cut will be less than people
had expected. The market's still pricing in two cuts before
the end of the year. Our evolving view is now
that we'll see one cut, and that's likely to come
in December. And I think there's real risk that if
the economy holds up as well as it appears to
(09:46):
be looking at some of the hard data that we are,
you know, at risk of seeing all of that push
back into twenty twenty six.
Speaker 2 (09:54):
And then in terms of sectors, who do who do
you think might perform underperform, you know, space, I guess
that the you call them the self funders, right, the
biggest banks at least in the US, you know, record
issues in January, and they've still been very active. I
guess part of that to fun you know, very active
trading desks, which I guess that's the one you know
good that you know, all this volatively has been good
(10:15):
so far, so you know, and but their spreads have
kind of wind out a little bit more than others.
So you know, if we get some of these more
kind of trade flightworks or whatever, and you know, maybe
less issuance, do you think maybe financials can can have
a little bit more room to outperform corporates or what
are your views and what sectors might perform, underperform, or outperform.
Speaker 3 (10:33):
It's a great point, I think as we look at
the evolving landscape here, one thing that stands out to
me is that the laggards are those that are benefiting
from an uptick and demand. We saw that yesterday in
secondary trading volumes, so cyclicals had underformed, Triple b's had underperformed.
And even as you say, with the material correction that
we've seen in financials off the wides of twenty twenty
(10:54):
three post the banking crisis, they still are trading on
average about nine basis points back at the last twelve
month median. And so it does feel like there's incremental
room for compression in financials who are less exposed to tariffs,
benefiting from an expectation of deregulation, and have net funding
needs that are actually lower on the year. So there's
(11:15):
value to be had in financials. I hear that consistently
when I'm out talking to the biggest investors in the market.
I think we're going to see support and we already
did today. There's an uptick in eighty one issuance, which
here again, if you're yield focused, buying down the capital
stack in financials is another place we see real opportunity.
The self funders is an interesting one. I think there
(11:35):
again it's front loading. So if you needed supply acceleration,
there's no better place to look at that than in
self funders, who are up twenty one percent in a
market that's barely up year over year. All of that
is putting their money where their mouth is, advising clients
to say, look, there's a real risk on the horizon. Yes,
things are better than they were, but the baseline is still,
(11:56):
you know, worse than what we had envisioned, and you
need to be prepared for it and take advantage of
windows as they present themselves. And the self funders in
the Big six in particular, I've really monetized on that perspective.
Speaker 2 (12:09):
Then, I think, even even throughout this April volatility, I
think even kind of you know, harping on the strength
of the ig USLL market, but what will kind of
dethrone kind of that view, Like what would make you
kind of concerned you're still sticking with the one point
six five trillion potential for this year. So what will
kind of shake your condiction in that view.
Speaker 3 (12:30):
Well, I think if we were to see a reinstatement,
if we if you know, we've seen some handshakes around
some of these trade deals, they aren't actually granular in
the detail. And you know, we've got a ninety day
pause here, it could be extended. Europe is sort of
the next major gating item as it relates to that front.
We are being underpinned in investment grid credit by yields.
That's true when you talk to hedge funds, that's true
(12:52):
when you talk to asset managers. The spreads, as we say,
aren't necessarily pricing and enough risk, but it's being compensated
because of what's happening underlying treasuries. So I think you've
got to wonder what happens to the Trump put if
we look at the underlying treasury yields. So every asset
class on the heels of the weekend news retraced across
(13:12):
the board, with the exception of rates. So you have
VIX well below twenty, You've got S and P rallying.
You've got the US dollar in the greatest move we've
seen since the election, you got credit spreads back to
ninety four rates are till still trending higher. That is
fundamental to what's underpinning the demand for credit, and I
(13:33):
think there's a question of what can Trump do to
affect a FED put that would bring those levels down,
because what we've seen is the guardrails are the US
dollar and long term yields, in part because he's got
to think about the deficit. That's chapter two, and it's
maybe a whole other segment, But at at the end
of the day, I worry that if we were to
(13:53):
see a FED or a Trump put as it relates
to long dated treasuries and those yield start to come
back down, that that erodes some of the bid that's
there to benefit from the income that that's currently affording them.
Speaker 1 (14:07):
On the Trump put. Megan competitor Bank of America recently
wrote that there is a Trump put in credit and
that will keep IG spreads below one thirty. Is that
your assumption?
Speaker 3 (14:18):
I don't agree with that. I'm not sure he's looking
at functionality of credit markets, and I don't think he
really cares about normal spreads in the same way. I
think he's backed away from the equity markets as a gauge,
it really is about the US dollar and ultimately about
long dated treasuries. I do think he's got a tax
plan he needs to get through. That's that's the second
half of the year and the debate. He doesn't hold
(14:38):
the purse strings around that Congress does. But the cost
of that is incriminally more expensive is yields move higher.
So that's hard to envision what he could actually affect.
I mean, maybe that's doubling down to the Mari Lago accord.
Maybe that's trying to convince Asia to step back in
and be an outsized supporter. I'm sure you'll put pressure
pressure on the Fed to re institute sort of deregulation
(15:02):
to afford the banks to step in as in an
intermediary there. But that remains to be seen. We're in
early days, and that could evolve by the minute, if
not the hour.
Speaker 1 (15:11):
Yeah, yeah, I mean, I certainly don't want to go
too far down the Trump rabbit hole, but the investors
we talked to definitely think that if things, you know,
get really shaken up in credit, then there will be
some kind of dialing back of the rhetoric or some
kind of support from the current administration to prevent too
much spread widening. I mean that's at least what we're
hearing from the buyside at the moment. I mean there's
the belief, so who knows wishable thinking it could be.
Speaker 2 (15:34):
But but then again, like you know, as I think
to like this this Trump put or or you know
what you know, I think the ten year treasure yield mean,
like you said, that's the only thing that's kind of underperformed. Yeah,
this is kind of a key metric, right that that
the president as well as you know, the treasure sector
are looking at. So like, yeah, what are the mechanisms right,
(15:54):
like is there does there need to be like a
like management or the curve type thing or does that
mean like a weekly time to me or something? Right?
And so are aren't those things I guess more important
to I guess that the people who are kind of
running the country now versus you know what we think
of in the bond market. So do we need like
a worse economic outlook right for that to happen? Like
how do you think about those things? Or how do
(16:14):
you what do you talk to issuers and investors about.
Speaker 3 (16:17):
He's in a difficult spot as he thinks about how
he can affect change in bond markets. I think the
hope was, the aspiration was you put some of these
you unwind some of these tariff plans, and you'd see
a course correction across asset classes. He's getting it with
the exception of the rate rate market. There's not been
any waning of demand from the international subset of investors.
(16:39):
Looking at the April treasure auction data, you know, I
don't know what you know, political tools he has in
hand to sort of encourage incremental participation from that buyer
base that has paired down their exposure to treasuries for
certain even though they remain you know, sort of a
trillion plus spires of credit and you know investment grade
(17:02):
and rates, and you know fifty percent of the exposure
they have in our market is through treasury yields. So
it's you know, I leave my head. I'm scratching my
head a bit in terms of how he's going to
affect that outcome, because I don't think he wants to
see a recession in the cards. As he thinks about
the path ahead, think he's willing to take some pain.
But I would say the markets are here again creating
(17:23):
some guardrails for him when he.
Speaker 1 (17:25):
Talks to peign investor. When you're on the road in
your global role. Is there any kind of like questioning
around the whole concept of risk free rate when it
comes to treasuries?
Speaker 3 (17:32):
Now, I've not experienced any of that. I do think
there's a willingness and a tolerance to think about credit
as sort of a pickup to those risk free rates
and finding credits that you think whether the storm irrespective
of terra if outcomes, irrespective of growth slowdown, and so
it is I think finding yield opportunities that are compelling
(17:55):
in that context. So hybrids is a good example of that.
You think about you know at one, but you also
think about corporate hybrids. There's been a rebirth of that issuance.
Why because the relative spread relationships are yield relationships to
what you can see in other asset classes that are
deemed to be slightly more risky. So let's look at
double b's that index is trading around six and a
(18:16):
half percent. You can buy six ninety coupons and ig
names if you're willing to buy them down the capital
stack on average feels like a healthy trade off and
you're seeing outside sponsorship for those order books. As a result,
we'd let a deal for an auto company, a German
auto in the hybrid markets, the largest order book of
the year in that asset class in Europe yesterday. I
(18:39):
think that theme will continue, and I think you're also
seeing it in the secondary market, where you're seeing investors
picking and choosing their spots, looking for down in capital trades,
but also looking for down and credit quality trades. Assuming
you're staying in that ig echelon which you think outperforms
in any of the scenarios, we can envision as we
move ahead.
Speaker 2 (18:59):
And then in terms of you talked about the hybrid issuance,
I recall it the conference the utility hybrids right much
talked about, but I guess we had the news in
China in terms of their AI efficiency being being a
lot more efficient. So do you feel like that's kind
of slowed down a bit, you know, our companies, kind
of the tech companies kind of recessing kind of that
(19:21):
investment in that capex as well as kind of the
utilities companies being like, okay, maybe you know the demand
for extra server are necessary or what are some of
your thoughts there?
Speaker 3 (19:31):
I think it's picking and choosing spots, and so yeah,
April felt like a bit of a retracement in terms
of signs of life in that asset class in particular,
but that was not necessarily I think a backing away
of a view that there were capex needs that need
to be funded, there are leverage concerns and some sectors
that need to be addressed, and that the hybrid market
presents historically compelling opportunity to access that. In the same
(19:56):
way we saw thirty three straight days of no long
duration supply in April, that was more about heightened uncertainty,
and so it was a willingness to be patient and
then evaluate other entry points. So our hybrid backlog is
growing as we speak, both in banks as we look
at at ones, but also on the corporate side, and
I think you'll see a broader swath of issuers and
sectors participating in that given the senior sub relationships that
(20:20):
have compressed to such a large degree. So yes, I
think there'll be the signs of life there. But it's
picking and choosing windows, as we say, and April just
wasn't that window.
Speaker 2 (20:32):
And then should should we have to lead tables James
or not that the easy segment that the layups are done.
All right, let's go to league tables. So you know,
looking at that, it seems like Barclays is the top
you know, non US bank and the US stella market
and obviously kind of tough to crack that. But is
that kind of the goal like to to to be
(20:52):
that or you know, is there you know, you know,
are you looking forward to kind of cracking you know,
the even more of that top five space in the
US or are you kind of happy being with the
top non US choice here?
Speaker 3 (21:05):
To me, it's about wallet share and consistent wallet share,
and it's about how do you advise clients. And Vincett
set out a new plan for us. It's a three
year plan and it's simpler, better, more balanced, and how
are we delivering solutions to clients that really hit on
those three points? So we don't we are not all
things to all clients, but where we have the right
(21:25):
to win, we want to be outside the box and
the way we deliver solutions and in many cases where
we're outperforming and taking wallet share in this volatility is
looking at cross currency in an agnostic way. So we
are doing trades. We did a deal for Alphabet, We
did an inaugural euro for them and came with a
US dollar exercise. Some of that is about optimizing execution outcomes.
(21:48):
Some of that's evaluating FX moves and where there are
opportunities for clients on both sides of the pond. Some
of its maturity tower management, some of its investor divers
creation and an uncertain market backdrop up. So increasingly I
think we are involved in this uptick in reverse Yankee activity,
so bringing US borrowers to the European market. It's now
(22:09):
twenty five percent of the corporate market in Europe is
driven by non European domicile companies. We are a leader
in that in part because we're back to brass tacks here.
This is not a bowl market where anyone can just
watch the screens and guide issuers effectively. It's really digging
in and getting back to relative value conversations, understanding the
(22:31):
evolution of the buyer base. Where on the curve do
they want to buy? That's changing by the hour, by
the day, by the week. We have a secondary market
platform that is second to none, that provides real time
insights in a way that the screens, I think belie.
I mean days that look like down equity days aren't
necessarily inactive on the new issue front. And yet you'd
(22:53):
be surprised how many go no go conversations we have
where that's hotly debated, even though investors continue to be
starved for assets, and so it's having a pulse of
the market looking for creative solutions and currency agnostic and
or hybrid opportunities are places we've really led the charge.
Speaker 1 (23:10):
On creative solutions. A lot of investors, particularly but also
issues increasingly want private markets. How do you respond to that.
Speaker 3 (23:17):
Yeah, we've viewed private markets as sort of complementary to
what we do on the public side. So we are
aligned here again trying to leverage relationships for investors that
are involved on the secondary side and the primary side.
What you're finding is that the definition of private credit
is really evolving. So it started out as sort of
a lef and concept. Increasingly, I think securitization has played
(23:39):
a healthy role and we'll continue to in terms of
the growth of that market. They tend to be very
bespoke transactions that are more m and a like in
the way that they're structured. There are many months, and
for us that means really operating and delivering one firm
so that our coverage partners, our M and A partners
are in the weeds alongside of debt capital markets where
(24:01):
we've got treasury level CFO level conversations and then sort
of trying to appeal to where that bid is emerging.
And frankly, there's not a day or week that goes
by that there are not new players stepping into the fold,
I think with a bit of fear of missing out
as the mentality. And yet these trades are bespoke, They're very,
very nuanced. It's really peeling back the layers and oftentimes
(24:22):
looking at subsidiary level opportunities. And so yes, we continue
to see more of that. We are invested and heavily
involved in that dialogue. But there's a reason you aren't
seeing deals hit the screens every other day. The path
and the horizon around the structuring of these trades takes
much longer than a pure play, regular public deal would.
(24:44):
They're also not always as cost efficient, so while liquidity
as intact as they are in the public markets, oftentimes
the better and more straightforward path is through the public channel.
Those same private ig investors are showing up in new
issues on the public side too. In many cases that's
at you know, levels that are a point or better
than they might see in the private market. So there's
(25:06):
room for both. It'll be a balancing act and it's
about tailoring solutions, I think, very very specific instances to
build that asset class on the side.
Speaker 1 (25:16):
Do you think that will get to the point that
some time in the future, in the future that the
deal like a frequent issuer will take a private loan
instead of a public bond. Is there going to be
a time when that becomes more cost effective? And there's
so much competition, there's so much cash out there to
lend these companies, why wouldn't it become much cheaper and
ultimately replace the bonds.
Speaker 3 (25:37):
Yeah, I mean, because there is such breadth and depth
to you know, an eight and a half trillion dollar
IG market and dollars. You know, if you look at
order books we saw on we brought deals yesterday for
cat in Deier, both of them saw outside sponsorship some
of the larger largest order books they've ever ever garnered
at levels that are at negative new issue concessions relative
(25:58):
to their secondaries, and so public markets are leading the
charge in terms of repricing. We're moving so quickly with
the headline flow that we're dealing with that you know,
new issue markets on the public side set transparency, legitimize
fair value, and create anchor points for those private conversations
to follow. So here again, I think it is a
(26:19):
complimentary dynamic. But the breadth and depth, you know, is
just speaking to that Kat. Yesterday, if you look at
captive finance deals, they typically have somewhere between seventy and
one hundred and thirty accounts in the book. Yesterday, we
had upwards of two hundred investors distinct orders in that.
So there's more cash piling into public markets that is
(26:40):
competing with and providing price tension in a way that
the private markets with a more concentrated subset of investors
doesn't always afford.
Speaker 2 (26:48):
Got okay, you brought up an interesting point on the
increased demand I guess for corporate bonds. So you know,
when I talk to clients and then I mentioned now
I'm going to talk to somebody in DCM on a podcast.
You know, within the first like minute or so, I
get the joke, Oh yeah, how do I get better allocations? Right?
And so you know what is kind of that that
that you know? I guess you know the bigger players,
(27:08):
you always deal with them, they know what's going on
and stuff. But maybe to some of these, like new
accounts or some of these, you know, smaller sized firms,
what would you say to them, you know, in terms
of like when they when when? I guess nobody's people
are going to be afraid to ask you, but I'll
ask it. Now, how do they get better allocation?
Speaker 3 (27:23):
Well, they ask all the time. You don't always make friends.
Having led the global syndicate business for a while, you're
striking the balance between the issuers and investors and trying
to walk a fine line in terms of the end outcome.
And if you get it right, it's very transparent in
the secondary market as well, so you know, if you
if you priced it and placed it efficiently. I think
what is important and what we're increasingly seeing is going
(27:46):
back to thought leadership, and so Barkleay's is I think
uniquely positioned here. We've invested in our research franchise in
a way that others over the past few years have
really backed away from. But we think actually fundamental relative
value conversations digging into the credit story and affording an
ability to differentiate. There's been no dispersion investment Greek credit
(28:08):
now for the better part of the last two years.
That dispersion is starting to pick up. It's picking winners
and losers. If you're going to generate alpha in this
market as an investor, you need to pick and choose
your spots. It's not broad based buying of any given sector.
It's not broad based buying of any given part of
the curve. It's really picking and choosing your spots. So
how do you do that effectively? We are holding sector
(28:29):
specific conferences and asset specific conferences to help generate dialogue
and bring issuers and investors together in a room to
have those conversations as a precursor. There's real value add
to investors in providing feedback on the heels of those discussions,
and we're finding it playing out in the room. Some
of the private ig ideas are coming out of those
(28:50):
one on one discussions. We've got a healthcare conference coming
up in May. We've got a TMT conference coming up
in May. We just held a hybrid corporate in the US.
We have one in Europe. Also, there's an Investment Grade
Conference in June. I mean, it is fundamental to how
we try to approach differentiating thought content, but also affording
(29:11):
investors and opportunity to stand out, to provide unique ideas,
and to be price leaders as they think about the
relative value build. And so the investors that do that
tend to be treated more favorably, if only because issuers
then really value the thought leadership that that im vibes
and I think helpful in terms of broadening their footprint.
(29:33):
You're seeing US issuers go to the European market in
part to expand their footprint and to diversify that investor base.
It's become much less concentrated, so it's incredibly well valued.
And if you're new to a name and you've really
dug in and they're going to follow it, that tends
to benefit those investors in that way. So I'm not
sure that fully answers your question, but I think it's
(29:53):
a path to better outcomes for some clients.
Speaker 2 (29:56):
Yeah, I think that's fair. And then it's always hard
to write, and then and then sometimes you get the weight.
I got this much allocation, what's wrong on my hat?
You know, everybody's always unhappy and I guess it's trying
to manage that that It makes.
Speaker 1 (30:08):
You wonder about the order book. Is it all padding?
Speaker 3 (30:09):
Is it?
Speaker 1 (30:10):
Is it real orders when it's you know, eight and
a half billion dollars for five hundred million dollar day.
Speaker 3 (30:14):
And it's a combination of the two, right, I mean,
but we know, we know the players, we know how
they operate. It is a bull market, so there's always
some posturing around them. It's the syndicates job to decode that.
What do people really want? What are they going to
do with those bonds on the follow are they at
on buyers on the break? Are they long term holders?
It's not one size fits all, and so it's why
(30:34):
I think we also spend a lot of time even
though we're advising issuers to the market and talking to
CFOs and they're trying to convince their boards when to
go and why really, I think you know, understanding that
investor piece is critical to getting it right. So, yes,
it speaks to the scarcity of assets, relatively amount of
cash that continues to flood in.
Speaker 2 (30:56):
And then in terms of this new issuance process, I mean,
I guess maybe around COVID where we got to this
guidance plus or minus five or whatnot. So but then
you know, I have complaints that I hear from investors
is if we already know on a us IG deal
everything's going to tighten twenty five thirty BIPs, why don't
we just get there? You know, like, well, why can't
we cut the time? And you know kind of do
(31:18):
like a guidance maybe two to five wider than you
know existing. So can you talk to that? You know,
why do we need to go through this song and dance?
Speaker 3 (31:27):
I love I love that question. Some of this is
that the sheer growth of the investment grade market and
the amount of supply that's coming in any given day.
So if two thirds of supply are coming in five
days in a month, it's a lot of supply. When
you're seeing one hundred billion plus months, is the norm
coming through the pipes? We have electronified our book building
(31:47):
platforms to sort of provide efficiency of execution, getting in
and out of the market as quickly as possible. It's
come a long way. Sure, there's more more room to
run there now more important than ever to try to
minimize your exposure to markets. It's why you're seeing activity
on CPI days or seven deals in the market today.
(32:08):
I mean historically CPI days if you're concerned about inflation
was a non starter. Pencils down, wait out until the
next window. Last week as a FED week was the
most active FED week I think going back to twenty twenty.
Those are known quantums at the moment, or at least
so the unknown knowns. You think you know what outcomes
are around the data as we move ahead. What you
don't know is where the Twitter feed or the x
(32:30):
feed might derail things as you move throughout the day.
So getting in and out as quickly as possible, I
think is proving to be the new norm and moving
straight to launch if there's conviction around the clearing levels
has been the faster path to think taking an hour
out of that new issue exercise. So where we used
to price after four, now we're pricing many times before
(32:51):
two or two thirty in the afternoon. So we're continuing
to get better. We're out of the dark ages now
with some of the technology that exists. But I think
that extra step when you've got confidence around clearing level
felt unnecessary in COVID and here again in today's more
volatile backdrop.
Speaker 1 (33:08):
It's not not a science. But can you talk a
bit about the pipeline megan in terms of, you know,
what's the opportunity for new deals. I've heard about the
commercial paper trade turning out there's definitely a bit of duration.
What's that all about, Yeah, that's right.
Speaker 3 (33:23):
I think there was a bridge. So this volatility all
picked up right into corporate earnings blackouts, which are self
imposed windows where these barrowers actually can't come to market.
So as the market started to rebound, they were actually
precluded from moving forward. And the CP market provided a
very functional you know, the pipes all work, you're able
to source liquidity, and it was a bridge to when
(33:45):
is the next viable window, which was an uncertain I mean,
no one expected the announcements over the weekend, no one
was positioned for it. We are seeing it had seen
sort of one hundred billion increase in terms of CP
outstandings as a response to that. Now that they're at
it that yeah, that's since Liberation days and an increase
(34:07):
for a month. It is, and it's and it was
digested incredibly efficiently. I think the whams on those extended.
What we're seeing now is that we're twenty to thirty
billion off the peak of those numbers. Why new issue
markets are functional. New issue concessions have dropped back down
to zero to negative. We had peaked at seventeen basis
points over. Subscription levels are increasing, So the access to
(34:29):
that market in an efficient way means barers are turning
out that CP and you're seeing that in a lot
of the stated use of proceeds that we've seen.
Speaker 1 (34:36):
Okay, and that market is liquid, the exen it can
flip on and off like that at that size very quickly.
Speaker 3 (34:41):
Very easily. It's a money market investor base. A lot
of it is short data debt, so it's overnights, one week,
one month maturities, and so the balances can be lofty.
I mean we've seen some some issuers increase to seven
to ten billion dollars outstanding. You can easily turn that
out of the market today in an efficient way because.
Speaker 1 (35:00):
We've got a whole load of you know, potential more
volatility coming through tax reform, immigration reform, all the other
things that the current administration wants to do. So CP
is kind of a backstop. It's a kind of it
is a safety valve, safety valvey.
Speaker 3 (35:12):
Yeah, and really there are some borrowers who've turned out
and are willing to wait until Q three. They want
to see a longer string of stability. So there's some
jumping right into this window. We've seen seventy five billion
in the first week in May. There are others that
are going to be tempered in terms of how they evaluate.
They want more certainty around TARORF outcomes, particularly if they're
directly impacted before they before they move.
Speaker 1 (35:34):
What's an average CP deal that like, just for our
listeners who don't really know that market, is it a
like a billion dollar one month transaction? What's the size
and scope?
Speaker 3 (35:43):
It is a broad and deep market, but it is
it tends to be a laddered maturity profile, so you'll
get overnights rolling every single day. It's why we call
them CP traders. They actually are actively trading a lot
of size, but very short dated. So I would say
whams you know, tend to be sort of one week,
one month. You have seen some extension of that out
to three months. In very volatile periods, you see some
(36:07):
turning out to one year. I think everyone feels like
some of this volatility is short lived, and so we're
seeing some extension, but not in a market way. So
you know, yes, there are high quality borrowers Tier one
borrowers with CP balances now that are running at seven
to ten billion as a regular course and doing that efficiently.
Speaker 1 (36:29):
And when did you last see that kind of situation
in this market?
Speaker 3 (36:32):
Well, there were concerns when volatility got very bad, was
that liquid going to dry up? They are the most
conservative investors on the market, so there was an up
in quality bid There was no challenge to sort of
double a single A issuers accessing that market. But you
did see some caution around tier two borrowers. It was
a blip on the radar. It lasted a day I
lived through. I was trading CP during the financial crisis,
(36:55):
the Lehman bankruptcy. You know, the cracks start to emerge
there first, because they are the most conservative investors in
our market, and so as long as they are orderly
and functional. The increase of CP in and of itself
is an anomaly.
Speaker 1 (37:10):
But the CPECE spike we've seen was it as big
as the one we saw in COVID or is it.
Speaker 3 (37:14):
Oh to a far lesser degree? I mean enough to
take note. It is the first place we look to
say what's the health of the market and is there
an opportunity for investors if they needed it to hide
out there, And the answer was definitively yes.
Speaker 2 (37:27):
And then in terms of I think you mentioned a
lot of the self funders or whatnot kind of pulling
forward kind of the issuance. But I mean with with
I think the treating being a lot more active than expected,
do you feel like it's not just a pull forward,
but maybe do you think the expectations for annual issues
do you think that might also go up as well?
Speaker 3 (37:47):
I think with deregulation, we actually think bank funding needs
have lowered, and so most banks I'm talking to are
forty fifty sixty percent of the way through their funding
needs for the year. Some of the US regionals are
almost close to a hundred percent done for the year,
all sort of taking a bird in hand with spreads
at all time tights or close to all time tights.
As spread focused borrowers, the banks have been first to
(38:09):
sort of step in. We're advising our own treasury team
to continue to stay the course and follow in a
similar pattern. So we are well through our funding needs.
I think more than halfway through our funding needs for
the year as well. That feels prudent because none of
us have a crystal ball. The second half is now
going to be around tax policy and the deficit, so
there's more volatility to come. I think we've walked back
(38:30):
from the cliff's edge, but we're not in the clear
just yet.
Speaker 1 (38:33):
Are you seeing any evidence I know we've talked about
this earlier in the call, that any evidence at all
that there is this kind of rotation out of US
into Europe.
Speaker 3 (38:41):
I have not seen that. I think over time that's
a multi year trend. As you look at hedging costs.
Maybe Asia is underweight to Europe at the moment. So
as I think about Japanese investment or Taiwanese investment, I
do think over a multi year period you could see
them leaning more into the Euro market just for diversification.
They are overweight US, and so volatility proves anything is
(39:03):
people want to be diversified, and so that's true for
issuers as we've seen on the new issue side of things,
but that will be true for the buyside as well.
But it doesn't at the moment feel like that's a
removal of assets in the US to redeploy it just
means on a go four basis inflows might be deployed
there in a more balanced way.
Speaker 2 (39:21):
Is that. I don't know if we allowed to talk
about yes anymore.
Speaker 3 (39:24):
But like we do it Barkleys, we double down on
it as others have backed away.
Speaker 2 (39:28):
The widening of that umbrella, and yeah, maybe you can
talk a little bit about that. You know, the isguy
space I mean.
Speaker 3 (39:34):
It for you know, without question, I think has become
less of a relevant focus for US borrowers in part
because it's speed to market. I mean setting up ESG,
documentation and third party opinions takes time, so if you
have fleeting windows that come and go. A lot of
US borrowers have said just from you know, speed to market,
it's been a challenging decision to make to go down
(39:55):
the green path, but we just did this Volkswagen Green
Hybrid deal yesterday. The utility space in the US continues
to be looking at this as an opportunity and an
investment they want to make. But it's fundamental to our commitments.
We didn't have any clauses to back out of it.
We remain committed to it as something we think is
important and fundamental to how we are going to serve clients,
(40:17):
and in Europe it's fairly prescriptive. There isn't anybody who's
really backing away. ESG is topical, it's cross sectors, it's
across regions, and investors really think about it as an
investment strategy too. So some of bringing us borrowers to
the European market, why we're well suited to that is
that ESG, even if it's not an ESG labeled or
stated use to proceeds transaction is still part of the
(40:39):
diligence and the relative value conversation for many of the
investors that think about where are they going to deploy
their cash.
Speaker 1 (40:45):
So, going back to where we started making, spreads are
too tight compared to the risk out there. Although you
don't expect recession and you don't see much of a
trump put where should spreads end up this year?
Speaker 3 (40:58):
Our strategists have been calling for one twenty one twenty five,
which we be pricing in about a twenty percent chance
of recession. I would be surprised if we weren't reevaluating
that in the context of the developments in the last
forty eight hours. I also think that there will be
mitigans to that. So if we are undersupplied, if we
are still seeing cash rotation into investment grade, both that
(41:20):
coupon income, the record COVID maturities, all of that sort
of needing to get reinvested back in investment grade credit
at a time when inflows have now rebounded. The confluence
of those events sort of creates, you know, the stars
aligning in a way that I think will curtail that
spread widening. Even if our strategy's current view is sort
(41:41):
of won twenty twenty five as a potential outcome over
the next six months, much of this is tied to
the economy. If we don't see an economic slowdown, if
that's much more measured, then that six months might get
you know, turned out in terms of how long it
takes for widening to materialize.
Speaker 1 (41:57):
Okay, Well, if a credit guys like us to watching
bad news all day and always thinking about the worst
case outcomes, what worries you about the setup at the moment?
I mean, it just seems like there is a lot
to worry about. But the last few days, I mean,
I'm going to date this for our listeners. May thirteenth
is where we're speaking and we don't know what's going
happened tomorrow, but what worries you about, you know, the
(42:17):
outlook for the rest of the year.
Speaker 3 (42:19):
Well for yield centric, I mean that is the underpinning
of the bid for credit and makes sort of IG
credit for a while the only game in town. I
think that's evolving. Ah, we saw some money leave equities
and come into investment grade credit during peak uncertainty. If
underlying yields come down in a material way, some of
that bid is going to erode. And so you know,
(42:42):
you think about five point thirty on the index, it's
ninety fourth percentile going back to the global financial crisis.
I mean that is a huge reason why the draw
and dry powder is as robust as it is, and
so I really am keeping an eye on volatility in
treasury markets. Is sort of fundamental to the health that
they must grade new issue market and secondary market as well.
Speaker 1 (43:03):
But we've talked about yields having to go down to
what near four percent on IG for people to back off.
That seems like a long way away.
Speaker 3 (43:11):
It feels like a long way away, and you know,
the question, the question also becomes it do yields become
so high that they're punitive. If we've got all in
yield focused borrowers and we've just seen a material move
higher and all in yields, we have seen some issuers
say I'm going to wait this out and hope that
yields come back down before I move forward. So it
(43:31):
is the spread focused borrowers electing to hop in here
all in yields. If you've got spreads, spread moves mitigating
the move higher and treasuries, which is where we stand today,
there are opportunities, I think to be had. But this
is very sort of day by day evaluating what the
right trade is for the right client and based on
you know, what lens are they looking at the world through.
(43:52):
Is it yield? Is it spread? Is it They've got
so much cash that they're going to just sit be
patient here till the world becomes a bit more settled.
It's it's very case specific.
Speaker 1 (44:03):
I guess to flip the question, though, you were in
the middle of all these investors and issuers and you
see a lot of stuff, what's the question they ask
you most what are they most worried about?
Speaker 3 (44:13):
They're most worried about, how and when are they going
to see more? Thirty year issuance, and so if everyone's
searching duration, it's the reason even a lot of international
investors gravitate to our market the absence of long dated supply.
We're down nine percent year over year. We had that
string you know of over a month of no thirty
year bullet issuance. It's problematic. It is allowing for curves
(44:36):
to compress. So it's great for issuers. Cat printed the
flattest ten thirties curve since twenty twenty yesterday, so we're
proud of that outcome. They're flat in the secondary market today.
You know, I worry can we source enough assets to
appeal to where the bid is gravitating and that's out
the curve.
Speaker 1 (44:53):
So the investor aren't running for the exits. They're actually
rushing to buy more.
Speaker 3 (44:56):
They're rushing to buy more, and they're rushing to buy
more in the long end, having a hard time producing
it at the moment.
Speaker 1 (45:02):
Great stuff. Megan Graper, Global head of Debt Capital Markets
at Barclays. It's been a pleasure having you on the
credit Edge money. Thanks.
Speaker 3 (45:07):
Thanks you all so much, And to.
Speaker 1 (45:08):
Annol Kakuda with Bloomberg Intelligence, thank you very much for
joining us today.
Speaker 2 (45:11):
Thanks for having me again.
Speaker 1 (45:12):
For even more analysis, read all of Ronold's great work
on the Bloomberg Terminal. Bloomberg Intelligence is part of our
research department, with five hundred analysts and strategists working across
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(45:33):
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 Crombie. It's been a pleasure having you join
us again next week on the Credit Edge
Hello, Welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumby. I'm a senior ed his
her at Bloomberg and I'm Arnold.
Speaker 2 (00:24):
Kakuta, senior credit analyst covering US banks at Bloomberg Intelligence.
So this week we're very pleased to welcome Meghan Raper,
global head of Debt capital Markets at Barkley's.
Speaker 3 (00:34):
How you doing, Meghan, I'm great, good to be here,
Lots to talk.
Speaker 2 (00:37):
About, absolutely so. Barkley's right, as you know, is a
bolt racket bank, and in its investment banking review last year,
Meghan's debt honorary business it was highlighted as the firm's
relative strength, and this strong business performance was a part
of why Meghan was named as one of the American
bankers most Powerful Women in Finance in twenty twenty three.
(00:59):
So I'm very excited to hear her. Abews.
Speaker 3 (01:02):
Oh, thanks on the shoulders of giants. I think you know,
representing a team effort for sure, but thank you for
that a humbling introduction, and you.
Speaker 1 (01:12):
Said debt capital markets. And also just to set the
scene on that, we are seeing a lot of global
market volatility that's made things very challenging for companies that
want to raise debt this week, the window is wide open.
After a seeming thought in the trade war, the US
and China made some progress by agreeing to slash tariffs
on both sides, but next week it may well slam shut.
There's a huge amount of volatility and uncertainty, making it
(01:34):
very difficult for business leaders to make long term decisions
about anything, let alone funding and refinancing plans. Meanwhile, there
are cracks appearing on the demand side as investors look
to diversify away from the US and private lenders are
looking to steal some of the business from public bond
and loan markets. So, Megan, where does that leave us?
What's the outlook for the rest of the year. E bullish?
Speaker 3 (01:55):
I am. I think you know, we've sort of been
unwavering in the investment grade market, and so if you're
looking for flight to quality trades, investment grade has really
been affording that. And so even as we've watched volatility
play out across other asset classes, we've remained fairly functional
and orderly, and there's been no shortage of appetite for
credit even through a pretty unprecedented number of weeks.
Speaker 2 (02:18):
And you know, You've been a star both on TV
and also at our credit conferences, So thank you very
much there. But if I recall, I think at the
year end conference in December, and I know the world
has changed, you know, for the worst, and maybe maybe
we're back on pace. But I believe you mentioned the
forecast for this year USIG credit about one point sixty
five trillion, maybe a little bit, you know, ahead of
(02:39):
last year's pace. So can we still get there?
Speaker 3 (02:42):
Is?
Speaker 2 (02:42):
Do we need an m and a pickup for that
to happen? What are your views now?
Speaker 3 (02:46):
I think it's possible, you know, I think that you know,
the the there's not a credit issue as we look
at the dynamics that are playing out in the backdrop.
So you know, the announcements over the course of this
past weekend I think have given new life. And so
while we were unshaken, it is fair to say we
saw fits and starts of activity in the primary market.
So April was very very touch and go, not because
(03:08):
of demand dynamics, but rather issuers who were defensive heading
into the year, picking and choosing their windows, and so
you're seeing very hefty concentrations of supply. So any given
month we're actually threading the needle effectively well, meaning two
thirds of supply are coming in five business days. We
saw that in January, it was a record January start
(03:29):
to the year. We saw that in February, in March,
and again in April, and so these sort of searching
for optimal windows of execution is the more challenging piece
of the equation. And I also think we're going to
see a front loading of activity. There's been a healthy
amount of supply acceleration and so the top line numbers
you're seeing in terms of investment grade supply have been
driven not by a nominal uptick and funding needs, but
(03:52):
actually pulling forward of those needs with a view that
things could get choppier into the second half.
Speaker 1 (03:57):
I do want to dig into the pipeline, but first
I wanted to usk about the net issuance number because
we've been saying on this show for a long time
that spreads are very tight. But part of that is
really the supply demand technicals. In fact, the fact that
there isn't enough supply and there's a lot of demand
for yield and that just keeps things tight. Where are
we on a net basis and where do we go, yeah.
Speaker 3 (04:16):
I mean, so you look at the headline numbers, we're
actually running a couple of percentage points above where we
were this time last year. Some of that driven by
a week that, as we kicked off May, has supported
seventy five billion of supply, But on a gross basis,
that feels like pretty measured on a net supply basis,
as we account for that record wall of COVID death
that's maturing this year, paired with coupon income that's upwards
(04:40):
a four hundred billion, and the dollar market, so cash
naturally rotating back to be invested, means that net net
were down sixteen percent. And so as you say this,
the technicals have become an incredibly powerful force to underpinning
the functionality of investment grade in particular, and that's a
theme we see exacerbated. There was some signs of concern.
We were seeing some signaling the lip or data is
(05:03):
probably a healthy gauge of sort of investor sentiment, and
we did see eight consecutive weeks of outflows, which there
was some fear was that being driven by international money
leaving investment markets. IG markets actually see twenty two percent
of demand coming from offshore investors, and so it's something
we've been closely scrutinizing, and I think fair to say
(05:25):
it is a bit difficult given how entangled and globalized
the investment grade markets have become. To see investors without
sort of shooting themselves in their own foot, thinking about
exiting one currency versus the other. And so the order
books we've seen in recent weeks, there's no signs of
that demand abating that international bid. We're actually seeing the
(05:47):
Middle East, Asia, Europe really consistently playing and if anything,
there's more breadth than depth to that bid. Then we've
seen now that yields, as you suggest, to become as
palatable as they are.
Speaker 2 (05:59):
And so you talked about the international demand, but then
on the backdrop of that, we also hear about the
testing of US exceptionalism, Right, So do you think that's
more of a kind of longer end treasury yield type
concern or is that gonna Do you feel like some
of that concern might filter into the corporate bond markets
here in the US?
Speaker 3 (06:16):
Yeah, that Sell America narrative was really tied to watching
flows in the equity market. I think there certainly we've
seen some pairing back of exposure that started well before
the last couple of months. On the treasury side as well, credit,
as I say, is a bit more enmeshed between those two.
So if you think about issuers that have debt outstanding
in the euro market, two thirds of those borrowers that
(06:38):
are European appealing to the dollar market actually have dollar
dead outstanding, and fifty percent of those with dollar dead
outstanding have deat outstanding in the European markets as well.
So there's a lot of cross pollination there that makes
the idea of expressing a sell America view much more
humbersome in my world than what maybe others are saying
away from us. So we think it's unlikely that that
(06:59):
theme continues.
Speaker 1 (07:00):
But where does that leave spreads? They seem very tight,
you know, if you consider that, you know, there's kind
of a round trip after so called Liberation Day they
blew out. Now they're back down below one hundred on
the IG index. But there does seem to have been
some fundamental damage to the economy. There's you know, still inflation,
there's there's a lot of questions about recession. Is the
(07:21):
risk of all that stuff properly reflected right now in
the IG spread.
Speaker 3 (07:24):
Well, it's a great point, James. I actually don't think
that we feel like risk is being properly evaluated. The
technicals are overwhelming where fair value should be, and I
think unfortunately the pain trade if you're an investor, is
probably tighter, even though I've yet to find an investor
who would say they're bullish here. The good news is
there are some silver linings. If you look at what's
transpired in the last forty eight hours, every economist across
(07:47):
the street, including Barkley's economists, are revising sort of worst
case scenarios out of the equation. So if anything, we've
hit a reset button and we're seeing sort of the
upside of less bad, if you will. And so as
a result of that, we do think that tariffs in
and of itself will be inflationary. We're still settling in
it all in you know, weighted tariff and average weighted
(08:08):
tariff percentage of around seventeen percent, you know, So it's
worse than we thought two months ago on that count.
What does that mean? It does mean inflation takes higher,
but off of the worst level. So we think core
PCE actually is around three three as we look at
Q four Q four numbers. It does mean growth is
(08:30):
going to contract, but I think we've now eliminated the
prospect of a recession as the baseline outcome. As we
look at at the end of the year, we're probably up.
You're going to be a growth slow down, but maybe
that's five tenths of growth, so not nearly as pronounced
as some had feared. And then the unemployment piece is
the other part of this, which is rarely where the
Fed's hands are tied, and we think that is off
(08:52):
of worst case outcomes. Probably closer to four point three
percent is where we top out at the end of
the year.
Speaker 1 (08:58):
So FED hands tied. Does that mean no cut this year?
Speaker 3 (09:01):
I don't think it means no cuts this year. But
I do think this wait and see strategy is going
to prove to have been the right call. I think
you're going to see very consistent. There's an avalanche of
FED speak this week, and I think you're going to
see that the FED governors are aligned in their view,
which is that yes, tariffs by their very nature are inflationary.
There are risks to that being more long standing rather
(09:23):
than just one off. And at the same time, the
economy now is likely to be in a better spot,
so the urgency to cut will be less than people
had expected. The market's still pricing in two cuts before
the end of the year. Our evolving view is now
that we'll see one cut, and that's likely to come
in December. And I think there's real risk that if
the economy holds up as well as it appears to
(09:46):
be looking at some of the hard data that we are,
you know, at risk of seeing all of that push
back into twenty twenty six.
Speaker 2 (09:54):
And then in terms of sectors, who do who do
you think might perform underperform, you know, space, I guess
that the you call them the self funders, right, the
biggest banks at least in the US, you know, record
issues in January, and they've still been very active. I
guess part of that to fun you know, very active
trading desks, which I guess that's the one you know
good that you know, all this volatively has been good
(10:15):
so far, so you know, and but their spreads have
kind of wind out a little bit more than others.
So you know, if we get some of these more
kind of trade flightworks or whatever, and you know, maybe
less issuance, do you think maybe financials can can have
a little bit more room to outperform corporates or what
are your views and what sectors might perform, underperform, or outperform.
Speaker 3 (10:33):
It's a great point, I think as we look at
the evolving landscape here, one thing that stands out to
me is that the laggards are those that are benefiting
from an uptick and demand. We saw that yesterday in
secondary trading volumes, so cyclicals had underformed, Triple b's had underperformed.
And even as you say, with the material correction that
we've seen in financials off the wides of twenty twenty
(10:54):
three post the banking crisis, they still are trading on
average about nine basis points back at the last twelve
month median. And so it does feel like there's incremental
room for compression in financials who are less exposed to tariffs,
benefiting from an expectation of deregulation, and have net funding
needs that are actually lower on the year. So there's
(11:15):
value to be had in financials. I hear that consistently
when I'm out talking to the biggest investors in the market.
I think we're going to see support and we already
did today. There's an uptick in eighty one issuance, which
here again, if you're yield focused, buying down the capital
stack in financials is another place we see real opportunity.
The self funders is an interesting one. I think there
(11:35):
again it's front loading. So if you needed supply acceleration,
there's no better place to look at that than in
self funders, who are up twenty one percent in a
market that's barely up year over year. All of that
is putting their money where their mouth is, advising clients
to say, look, there's a real risk on the horizon. Yes,
things are better than they were, but the baseline is still,
(11:56):
you know, worse than what we had envisioned, and you
need to be prepared for it and take advantage of
windows as they present themselves. And the self funders in
the Big six in particular, I've really monetized on that perspective.
Speaker 2 (12:09):
Then, I think, even even throughout this April volatility, I
think even kind of you know, harping on the strength
of the ig USLL market, but what will kind of
dethrone kind of that view, Like what would make you
kind of concerned you're still sticking with the one point
six five trillion potential for this year. So what will
kind of shake your condiction in that view.
Speaker 3 (12:30):
Well, I think if we were to see a reinstatement,
if we if you know, we've seen some handshakes around
some of these trade deals, they aren't actually granular in
the detail. And you know, we've got a ninety day
pause here, it could be extended. Europe is sort of
the next major gating item as it relates to that front.
We are being underpinned in investment grid credit by yields.
That's true when you talk to hedge funds, that's true
(12:52):
when you talk to asset managers. The spreads, as we say,
aren't necessarily pricing and enough risk, but it's being compensated
because of what's happening underlying treasuries. So I think you've
got to wonder what happens to the Trump put if
we look at the underlying treasury yields. So every asset
class on the heels of the weekend news retraced across
(13:12):
the board, with the exception of rates. So you have
VIX well below twenty, You've got S and P rallying.
You've got the US dollar in the greatest move we've
seen since the election, you got credit spreads back to
ninety four rates are till still trending higher. That is
fundamental to what's underpinning the demand for credit, and I
(13:33):
think there's a question of what can Trump do to
affect a FED put that would bring those levels down,
because what we've seen is the guardrails are the US
dollar and long term yields, in part because he's got
to think about the deficit. That's chapter two, and it's
maybe a whole other segment, But at at the end
of the day, I worry that if we were to
(13:53):
see a FED or a Trump put as it relates
to long dated treasuries and those yield start to come
back down, that that erodes some of the bid that's
there to benefit from the income that that's currently affording them.
Speaker 1 (14:07):
On the Trump put. Megan competitor Bank of America recently
wrote that there is a Trump put in credit and
that will keep IG spreads below one thirty. Is that
your assumption?
Speaker 3 (14:18):
I don't agree with that. I'm not sure he's looking
at functionality of credit markets, and I don't think he
really cares about normal spreads in the same way. I
think he's backed away from the equity markets as a gauge,
it really is about the US dollar and ultimately about
long dated treasuries. I do think he's got a tax
plan he needs to get through. That's that's the second
half of the year and the debate. He doesn't hold
(14:38):
the purse strings around that Congress does. But the cost
of that is incriminally more expensive is yields move higher.
So that's hard to envision what he could actually affect.
I mean, maybe that's doubling down to the Mari Lago accord.
Maybe that's trying to convince Asia to step back in
and be an outsized supporter. I'm sure you'll put pressure
pressure on the Fed to re institute sort of deregulation
(15:02):
to afford the banks to step in as in an
intermediary there. But that remains to be seen. We're in
early days, and that could evolve by the minute, if
not the hour.
Speaker 1 (15:11):
Yeah, yeah, I mean, I certainly don't want to go
too far down the Trump rabbit hole, but the investors
we talked to definitely think that if things, you know,
get really shaken up in credit, then there will be
some kind of dialing back of the rhetoric or some
kind of support from the current administration to prevent too
much spread widening. I mean that's at least what we're
hearing from the buyside at the moment. I mean there's
the belief, so who knows wishable thinking it could be.
Speaker 2 (15:34):
But but then again, like you know, as I think
to like this this Trump put or or you know
what you know, I think the ten year treasure yield mean,
like you said, that's the only thing that's kind of underperformed. Yeah,
this is kind of a key metric, right that that
the president as well as you know, the treasure sector
are looking at. So like, yeah, what are the mechanisms right,
(15:54):
like is there does there need to be like a
like management or the curve type thing or does that
mean like a weekly time to me or something? Right?
And so are aren't those things I guess more important
to I guess that the people who are kind of
running the country now versus you know what we think
of in the bond market. So do we need like
a worse economic outlook right for that to happen? Like
how do you think about those things? Or how do
(16:14):
you what do you talk to issuers and investors about.
Speaker 3 (16:17):
He's in a difficult spot as he thinks about how
he can affect change in bond markets. I think the
hope was, the aspiration was you put some of these
you unwind some of these tariff plans, and you'd see
a course correction across asset classes. He's getting it with
the exception of the rate rate market. There's not been
any waning of demand from the international subset of investors.
(16:39):
Looking at the April treasure auction data, you know, I
don't know what you know, political tools he has in
hand to sort of encourage incremental participation from that buyer
base that has paired down their exposure to treasuries for
certain even though they remain you know, sort of a
trillion plus spires of credit and you know investment grade
(17:02):
and rates, and you know fifty percent of the exposure
they have in our market is through treasury yields. So
it's you know, I leave my head. I'm scratching my
head a bit in terms of how he's going to
affect that outcome, because I don't think he wants to
see a recession in the cards. As he thinks about
the path ahead, think he's willing to take some pain.
But I would say the markets are here again creating
(17:23):
some guardrails for him when he.
Speaker 1 (17:25):
Talks to peign investor. When you're on the road in
your global role. Is there any kind of like questioning
around the whole concept of risk free rate when it
comes to treasuries?
Speaker 3 (17:32):
Now, I've not experienced any of that. I do think
there's a willingness and a tolerance to think about credit
as sort of a pickup to those risk free rates
and finding credits that you think whether the storm irrespective
of terra if outcomes, irrespective of growth slowdown, and so
it is I think finding yield opportunities that are compelling
(17:55):
in that context. So hybrids is a good example of that.
You think about you know at one, but you also
think about corporate hybrids. There's been a rebirth of that issuance.
Why because the relative spread relationships are yield relationships to
what you can see in other asset classes that are
deemed to be slightly more risky. So let's look at
double b's that index is trading around six and a
(18:16):
half percent. You can buy six ninety coupons and ig
names if you're willing to buy them down the capital
stack on average feels like a healthy trade off and
you're seeing outside sponsorship for those order books. As a result,
we'd let a deal for an auto company, a German
auto in the hybrid markets, the largest order book of
the year in that asset class in Europe yesterday. I
(18:39):
think that theme will continue, and I think you're also
seeing it in the secondary market, where you're seeing investors
picking and choosing their spots, looking for down in capital trades,
but also looking for down and credit quality trades. Assuming
you're staying in that ig echelon which you think outperforms
in any of the scenarios, we can envision as we
move ahead.
Speaker 2 (18:59):
And then in terms of you talked about the hybrid issuance,
I recall it the conference the utility hybrids right much
talked about, but I guess we had the news in
China in terms of their AI efficiency being being a
lot more efficient. So do you feel like that's kind
of slowed down a bit, you know, our companies, kind
of the tech companies kind of recessing kind of that
(19:21):
investment in that capex as well as kind of the
utilities companies being like, okay, maybe you know the demand
for extra server are necessary or what are some of
your thoughts there?
Speaker 3 (19:31):
I think it's picking and choosing spots, and so yeah,
April felt like a bit of a retracement in terms
of signs of life in that asset class in particular,
but that was not necessarily I think a backing away
of a view that there were capex needs that need
to be funded, there are leverage concerns and some sectors
that need to be addressed, and that the hybrid market
presents historically compelling opportunity to access that. In the same
(19:56):
way we saw thirty three straight days of no long
duration supply in April, that was more about heightened uncertainty,
and so it was a willingness to be patient and
then evaluate other entry points. So our hybrid backlog is
growing as we speak, both in banks as we look
at at ones, but also on the corporate side, and
I think you'll see a broader swath of issuers and
sectors participating in that given the senior sub relationships that
(20:20):
have compressed to such a large degree. So yes, I
think there'll be the signs of life there. But it's
picking and choosing windows, as we say, and April just
wasn't that window.
Speaker 2 (20:32):
And then should should we have to lead tables James
or not that the easy segment that the layups are done.
All right, let's go to league tables. So you know,
looking at that, it seems like Barclays is the top
you know, non US bank and the US stella market
and obviously kind of tough to crack that. But is
that kind of the goal like to to to be
(20:52):
that or you know, is there you know, you know,
are you looking forward to kind of cracking you know,
the even more of that top five space in the
US or are you kind of happy being with the
top non US choice here?
Speaker 3 (21:05):
To me, it's about wallet share and consistent wallet share,
and it's about how do you advise clients. And Vincett
set out a new plan for us. It's a three
year plan and it's simpler, better, more balanced, and how
are we delivering solutions to clients that really hit on
those three points? So we don't we are not all
things to all clients, but where we have the right
(21:25):
to win, we want to be outside the box and
the way we deliver solutions and in many cases where
we're outperforming and taking wallet share in this volatility is
looking at cross currency in an agnostic way. So we
are doing trades. We did a deal for Alphabet, We
did an inaugural euro for them and came with a
US dollar exercise. Some of that is about optimizing execution outcomes.
(21:48):
Some of that's evaluating FX moves and where there are
opportunities for clients on both sides of the pond. Some
of its maturity tower management, some of its investor divers
creation and an uncertain market backdrop up. So increasingly I
think we are involved in this uptick in reverse Yankee activity,
so bringing US borrowers to the European market. It's now
(22:09):
twenty five percent of the corporate market in Europe is
driven by non European domicile companies. We are a leader
in that in part because we're back to brass tacks here.
This is not a bowl market where anyone can just
watch the screens and guide issuers effectively. It's really digging
in and getting back to relative value conversations, understanding the
(22:31):
evolution of the buyer base. Where on the curve do
they want to buy? That's changing by the hour, by
the day, by the week. We have a secondary market
platform that is second to none, that provides real time
insights in a way that the screens, I think belie.
I mean days that look like down equity days aren't
necessarily inactive on the new issue front. And yet you'd
(22:53):
be surprised how many go no go conversations we have
where that's hotly debated, even though investors continue to be
starved for assets, and so it's having a pulse of
the market looking for creative solutions and currency agnostic and
or hybrid opportunities are places we've really led the charge.
Speaker 1 (23:10):
On creative solutions. A lot of investors, particularly but also
issues increasingly want private markets. How do you respond to that.
Speaker 3 (23:17):
Yeah, we've viewed private markets as sort of complementary to
what we do on the public side. So we are
aligned here again trying to leverage relationships for investors that
are involved on the secondary side and the primary side.
What you're finding is that the definition of private credit
is really evolving. So it started out as sort of
a lef and concept. Increasingly, I think securitization has played
(23:39):
a healthy role and we'll continue to in terms of
the growth of that market. They tend to be very
bespoke transactions that are more m and a like in
the way that they're structured. There are many months, and
for us that means really operating and delivering one firm
so that our coverage partners, our M and A partners
are in the weeds alongside of debt capital markets where
(24:01):
we've got treasury level CFO level conversations and then sort
of trying to appeal to where that bid is emerging.
And frankly, there's not a day or week that goes
by that there are not new players stepping into the fold,
I think with a bit of fear of missing out
as the mentality. And yet these trades are bespoke, They're very,
very nuanced. It's really peeling back the layers and oftentimes
(24:22):
looking at subsidiary level opportunities. And so yes, we continue
to see more of that. We are invested and heavily
involved in that dialogue. But there's a reason you aren't
seeing deals hit the screens every other day. The path
and the horizon around the structuring of these trades takes
much longer than a pure play, regular public deal would.
(24:44):
They're also not always as cost efficient, so while liquidity
as intact as they are in the public markets, oftentimes
the better and more straightforward path is through the public channel.
Those same private ig investors are showing up in new
issues on the public side too. In many cases that's
at you know, levels that are a point or better
than they might see in the private market. So there's
(25:06):
room for both. It'll be a balancing act and it's
about tailoring solutions, I think, very very specific instances to
build that asset class on the side.
Speaker 1 (25:16):
Do you think that will get to the point that
some time in the future, in the future that the
deal like a frequent issuer will take a private loan
instead of a public bond. Is there going to be
a time when that becomes more cost effective? And there's
so much competition, there's so much cash out there to
lend these companies, why wouldn't it become much cheaper and
ultimately replace the bonds.
Speaker 3 (25:37):
Yeah, I mean, because there is such breadth and depth
to you know, an eight and a half trillion dollar
IG market and dollars. You know, if you look at
order books we saw on we brought deals yesterday for
cat in Deier, both of them saw outside sponsorship some
of the larger largest order books they've ever ever garnered
at levels that are at negative new issue concessions relative
(25:58):
to their secondaries, and so public markets are leading the
charge in terms of repricing. We're moving so quickly with
the headline flow that we're dealing with that you know,
new issue markets on the public side set transparency, legitimize
fair value, and create anchor points for those private conversations
to follow. So here again, I think it is a
(26:19):
complimentary dynamic. But the breadth and depth, you know, is
just speaking to that Kat. Yesterday, if you look at
captive finance deals, they typically have somewhere between seventy and
one hundred and thirty accounts in the book. Yesterday, we
had upwards of two hundred investors distinct orders in that.
So there's more cash piling into public markets that is
(26:40):
competing with and providing price tension in a way that
the private markets with a more concentrated subset of investors
doesn't always afford.
Speaker 2 (26:48):
Got okay, you brought up an interesting point on the
increased demand I guess for corporate bonds. So you know,
when I talk to clients and then I mentioned now
I'm going to talk to somebody in DCM on a podcast.
You know, within the first like minute or so, I
get the joke, Oh yeah, how do I get better allocations? Right?
And so you know what is kind of that that
that you know? I guess you know the bigger players,
(27:08):
you always deal with them, they know what's going on
and stuff. But maybe to some of these, like new
accounts or some of these, you know, smaller sized firms,
what would you say to them, you know, in terms
of like when they when when? I guess nobody's people
are going to be afraid to ask you, but I'll
ask it. Now, how do they get better allocation?
Speaker 3 (27:23):
Well, they ask all the time. You don't always make friends.
Having led the global syndicate business for a while, you're
striking the balance between the issuers and investors and trying
to walk a fine line in terms of the end outcome.
And if you get it right, it's very transparent in
the secondary market as well, so you know, if you
if you priced it and placed it efficiently. I think
what is important and what we're increasingly seeing is going
(27:46):
back to thought leadership, and so Barkleay's is I think
uniquely positioned here. We've invested in our research franchise in
a way that others over the past few years have
really backed away from. But we think actually fundamental relative
value conversations digging into the credit story and affording an
ability to differentiate. There's been no dispersion investment Greek credit
(28:08):
now for the better part of the last two years.
That dispersion is starting to pick up. It's picking winners
and losers. If you're going to generate alpha in this
market as an investor, you need to pick and choose
your spots. It's not broad based buying of any given sector.
It's not broad based buying of any given part of
the curve. It's really picking and choosing your spots. So
how do you do that effectively? We are holding sector
(28:29):
specific conferences and asset specific conferences to help generate dialogue
and bring issuers and investors together in a room to
have those conversations as a precursor. There's real value add
to investors in providing feedback on the heels of those discussions,
and we're finding it playing out in the room. Some
of the private ig ideas are coming out of those
(28:50):
one on one discussions. We've got a healthcare conference coming
up in May. We've got a TMT conference coming up
in May. We just held a hybrid corporate in the US.
We have one in Europe. Also, there's an Investment Grade
Conference in June. I mean, it is fundamental to how
we try to approach differentiating thought content, but also affording
(29:11):
investors and opportunity to stand out, to provide unique ideas,
and to be price leaders as they think about the
relative value build. And so the investors that do that
tend to be treated more favorably, if only because issuers
then really value the thought leadership that that im vibes
and I think helpful in terms of broadening their footprint.
(29:33):
You're seeing US issuers go to the European market in
part to expand their footprint and to diversify that investor base.
It's become much less concentrated, so it's incredibly well valued.
And if you're new to a name and you've really
dug in and they're going to follow it, that tends
to benefit those investors in that way. So I'm not
sure that fully answers your question, but I think it's
(29:53):
a path to better outcomes for some clients.
Speaker 2 (29:56):
Yeah, I think that's fair. And then it's always hard
to write, and then and then sometimes you get the weight.
I got this much allocation, what's wrong on my hat?
You know, everybody's always unhappy and I guess it's trying
to manage that that It makes.
Speaker 1 (30:08):
You wonder about the order book. Is it all padding?
Speaker 3 (30:09):
Is it?
Speaker 1 (30:10):
Is it real orders when it's you know, eight and
a half billion dollars for five hundred million dollar day.
Speaker 3 (30:14):
And it's a combination of the two, right, I mean,
but we know, we know the players, we know how
they operate. It is a bull market, so there's always
some posturing around them. It's the syndicates job to decode that.
What do people really want? What are they going to
do with those bonds on the follow are they at
on buyers on the break? Are they long term holders?
It's not one size fits all, and so it's why
(30:34):
I think we also spend a lot of time even
though we're advising issuers to the market and talking to
CFOs and they're trying to convince their boards when to
go and why really, I think you know, understanding that
investor piece is critical to getting it right. So, yes,
it speaks to the scarcity of assets, relatively amount of
cash that continues to flood in.
Speaker 2 (30:56):
And then in terms of this new issuance process, I mean,
I guess maybe around COVID where we got to this
guidance plus or minus five or whatnot. So but then
you know, I have complaints that I hear from investors
is if we already know on a us IG deal
everything's going to tighten twenty five thirty BIPs, why don't
we just get there? You know, like, well, why can't
we cut the time? And you know kind of do
(31:18):
like a guidance maybe two to five wider than you
know existing. So can you talk to that? You know,
why do we need to go through this song and dance?
Speaker 3 (31:27):
I love I love that question. Some of this is
that the sheer growth of the investment grade market and
the amount of supply that's coming in any given day.
So if two thirds of supply are coming in five
days in a month, it's a lot of supply. When
you're seeing one hundred billion plus months, is the norm
coming through the pipes? We have electronified our book building
(31:47):
platforms to sort of provide efficiency of execution, getting in
and out of the market as quickly as possible. It's
come a long way. Sure, there's more more room to
run there now more important than ever to try to
minimize your exposure to markets. It's why you're seeing activity
on CPI days or seven deals in the market today.
(32:08):
I mean historically CPI days if you're concerned about inflation
was a non starter. Pencils down, wait out until the
next window. Last week as a FED week was the
most active FED week I think going back to twenty twenty.
Those are known quantums at the moment, or at least
so the unknown knowns. You think you know what outcomes
are around the data as we move ahead. What you
don't know is where the Twitter feed or the x
(32:30):
feed might derail things as you move throughout the day.
So getting in and out as quickly as possible, I
think is proving to be the new norm and moving
straight to launch if there's conviction around the clearing levels
has been the faster path to think taking an hour
out of that new issue exercise. So where we used
to price after four, now we're pricing many times before
(32:51):
two or two thirty in the afternoon. So we're continuing
to get better. We're out of the dark ages now
with some of the technology that exists. But I think
that extra step when you've got confidence around clearing level
felt unnecessary in COVID and here again in today's more
volatile backdrop.
Speaker 1 (33:08):
It's not not a science. But can you talk a
bit about the pipeline megan in terms of, you know,
what's the opportunity for new deals. I've heard about the
commercial paper trade turning out there's definitely a bit of duration.
What's that all about, Yeah, that's right.
Speaker 3 (33:23):
I think there was a bridge. So this volatility all
picked up right into corporate earnings blackouts, which are self
imposed windows where these barrowers actually can't come to market.
So as the market started to rebound, they were actually
precluded from moving forward. And the CP market provided a
very functional you know, the pipes all work, you're able
to source liquidity, and it was a bridge to when
(33:45):
is the next viable window, which was an uncertain I mean,
no one expected the announcements over the weekend, no one
was positioned for it. We are seeing it had seen
sort of one hundred billion increase in terms of CP
outstandings as a response to that. Now that they're at
it that yeah, that's since Liberation days and an increase
(34:07):
for a month. It is, and it's and it was
digested incredibly efficiently. I think the whams on those extended.
What we're seeing now is that we're twenty to thirty
billion off the peak of those numbers. Why new issue
markets are functional. New issue concessions have dropped back down
to zero to negative. We had peaked at seventeen basis
points over. Subscription levels are increasing, So the access to
(34:29):
that market in an efficient way means barers are turning
out that CP and you're seeing that in a lot
of the stated use of proceeds that we've seen.
Speaker 1 (34:36):
Okay, and that market is liquid, the exen it can
flip on and off like that at that size very quickly.
Speaker 3 (34:41):
Very easily. It's a money market investor base. A lot
of it is short data debt, so it's overnights, one week,
one month maturities, and so the balances can be lofty.
I mean we've seen some some issuers increase to seven
to ten billion dollars outstanding. You can easily turn that
out of the market today in an efficient way because.
Speaker 1 (35:00):
We've got a whole load of you know, potential more
volatility coming through tax reform, immigration reform, all the other
things that the current administration wants to do. So CP
is kind of a backstop. It's a kind of it
is a safety valve, safety valvey.
Speaker 3 (35:12):
Yeah, and really there are some borrowers who've turned out
and are willing to wait until Q three. They want
to see a longer string of stability. So there's some
jumping right into this window. We've seen seventy five billion
in the first week in May. There are others that
are going to be tempered in terms of how they evaluate.
They want more certainty around TARORF outcomes, particularly if they're
directly impacted before they before they move.
Speaker 1 (35:34):
What's an average CP deal that like, just for our
listeners who don't really know that market, is it a
like a billion dollar one month transaction? What's the size
and scope?
Speaker 3 (35:43):
It is a broad and deep market, but it is
it tends to be a laddered maturity profile, so you'll
get overnights rolling every single day. It's why we call
them CP traders. They actually are actively trading a lot
of size, but very short dated. So I would say
whams you know, tend to be sort of one week,
one month. You have seen some extension of that out
to three months. In very volatile periods, you see some
(36:07):
turning out to one year. I think everyone feels like
some of this volatility is short lived, and so we're
seeing some extension, but not in a market way. So
you know, yes, there are high quality borrowers Tier one
borrowers with CP balances now that are running at seven
to ten billion as a regular course and doing that efficiently.
Speaker 1 (36:29):
And when did you last see that kind of situation
in this market?
Speaker 3 (36:32):
Well, there were concerns when volatility got very bad, was
that liquid going to dry up? They are the most
conservative investors on the market, so there was an up
in quality bid There was no challenge to sort of
double a single A issuers accessing that market. But you
did see some caution around tier two borrowers. It was
a blip on the radar. It lasted a day I
lived through. I was trading CP during the financial crisis,
(36:55):
the Lehman bankruptcy. You know, the cracks start to emerge
there first, because they are the most conservative investors in
our market, and so as long as they are orderly
and functional. The increase of CP in and of itself
is an anomaly.
Speaker 1 (37:10):
But the CPECE spike we've seen was it as big
as the one we saw in COVID or is it.
Speaker 3 (37:14):
Oh to a far lesser degree? I mean enough to
take note. It is the first place we look to
say what's the health of the market and is there
an opportunity for investors if they needed it to hide
out there, And the answer was definitively yes.
Speaker 2 (37:27):
And then in terms of I think you mentioned a
lot of the self funders or whatnot kind of pulling
forward kind of the issuance. But I mean with with
I think the treating being a lot more active than expected,
do you feel like it's not just a pull forward,
but maybe do you think the expectations for annual issues
do you think that might also go up as well?
Speaker 3 (37:47):
I think with deregulation, we actually think bank funding needs
have lowered, and so most banks I'm talking to are
forty fifty sixty percent of the way through their funding
needs for the year. Some of the US regionals are
almost close to a hundred percent done for the year,
all sort of taking a bird in hand with spreads
at all time tights or close to all time tights.
As spread focused borrowers, the banks have been first to
(38:09):
sort of step in. We're advising our own treasury team
to continue to stay the course and follow in a
similar pattern. So we are well through our funding needs.
I think more than halfway through our funding needs for
the year as well. That feels prudent because none of
us have a crystal ball. The second half is now
going to be around tax policy and the deficit, so
there's more volatility to come. I think we've walked back
(38:30):
from the cliff's edge, but we're not in the clear
just yet.
Speaker 1 (38:33):
Are you seeing any evidence I know we've talked about
this earlier in the call, that any evidence at all
that there is this kind of rotation out of US
into Europe.
Speaker 3 (38:41):
I have not seen that. I think over time that's
a multi year trend. As you look at hedging costs.
Maybe Asia is underweight to Europe at the moment. So
as I think about Japanese investment or Taiwanese investment, I
do think over a multi year period you could see
them leaning more into the Euro market just for diversification.
They are overweight US, and so volatility proves anything is
(39:03):
people want to be diversified, and so that's true for
issuers as we've seen on the new issue side of things,
but that will be true for the buyside as well.
But it doesn't at the moment feel like that's a
removal of assets in the US to redeploy it just
means on a go four basis inflows might be deployed
there in a more balanced way.
Speaker 2 (39:21):
Is that. I don't know if we allowed to talk
about yes anymore.
Speaker 3 (39:24):
But like we do it Barkleys, we double down on
it as others have backed away.
Speaker 2 (39:28):
The widening of that umbrella, and yeah, maybe you can
talk a little bit about that. You know, the isguy
space I mean.
Speaker 3 (39:34):
It for you know, without question, I think has become
less of a relevant focus for US borrowers in part
because it's speed to market. I mean setting up ESG,
documentation and third party opinions takes time, so if you
have fleeting windows that come and go. A lot of
US borrowers have said just from you know, speed to market,
it's been a challenging decision to make to go down
(39:55):
the green path, but we just did this Volkswagen Green
Hybrid deal yesterday. The utility space in the US continues
to be looking at this as an opportunity and an
investment they want to make. But it's fundamental to our commitments.
We didn't have any clauses to back out of it.
We remain committed to it as something we think is
important and fundamental to how we are going to serve clients,
(40:17):
and in Europe it's fairly prescriptive. There isn't anybody who's
really backing away. ESG is topical, it's cross sectors, it's
across regions, and investors really think about it as an
investment strategy too. So some of bringing us borrowers to
the European market, why we're well suited to that is
that ESG, even if it's not an ESG labeled or
stated use to proceeds transaction is still part of the
(40:39):
diligence and the relative value conversation for many of the
investors that think about where are they going to deploy
their cash.
Speaker 1 (40:45):
So, going back to where we started making, spreads are
too tight compared to the risk out there. Although you
don't expect recession and you don't see much of a
trump put where should spreads end up this year?
Speaker 3 (40:58):
Our strategists have been calling for one twenty one twenty five,
which we be pricing in about a twenty percent chance
of recession. I would be surprised if we weren't reevaluating
that in the context of the developments in the last
forty eight hours. I also think that there will be
mitigans to that. So if we are undersupplied, if we
are still seeing cash rotation into investment grade, both that
(41:20):
coupon income, the record COVID maturities, all of that sort
of needing to get reinvested back in investment grade credit
at a time when inflows have now rebounded. The confluence
of those events sort of creates, you know, the stars
aligning in a way that I think will curtail that
spread widening. Even if our strategy's current view is sort
(41:41):
of won twenty twenty five as a potential outcome over
the next six months, much of this is tied to
the economy. If we don't see an economic slowdown, if
that's much more measured, then that six months might get
you know, turned out in terms of how long it
takes for widening to materialize.
Speaker 1 (41:57):
Okay, Well, if a credit guys like us to watching
bad news all day and always thinking about the worst
case outcomes, what worries you about the setup at the moment?
I mean, it just seems like there is a lot
to worry about. But the last few days, I mean,
I'm going to date this for our listeners. May thirteenth
is where we're speaking and we don't know what's going
happened tomorrow, but what worries you about, you know, the
(42:17):
outlook for the rest of the year.
Speaker 3 (42:19):
Well for yield centric, I mean that is the underpinning
of the bid for credit and makes sort of IG
credit for a while the only game in town. I
think that's evolving. Ah, we saw some money leave equities
and come into investment grade credit during peak uncertainty. If
underlying yields come down in a material way, some of
that bid is going to erode. And so you know,
(42:42):
you think about five point thirty on the index, it's
ninety fourth percentile going back to the global financial crisis.
I mean that is a huge reason why the draw
and dry powder is as robust as it is, and
so I really am keeping an eye on volatility in
treasury markets. Is sort of fundamental to the health that
they must grade new issue market and secondary market as well.
Speaker 1 (43:03):
But we've talked about yields having to go down to
what near four percent on IG for people to back off.
That seems like a long way away.
Speaker 3 (43:11):
It feels like a long way away, and you know,
the question, the question also becomes it do yields become
so high that they're punitive. If we've got all in
yield focused borrowers and we've just seen a material move
higher and all in yields, we have seen some issuers
say I'm going to wait this out and hope that
yields come back down before I move forward. So it
(43:31):
is the spread focused borrowers electing to hop in here
all in yields. If you've got spreads, spread moves mitigating
the move higher and treasuries, which is where we stand today,
there are opportunities, I think to be had. But this
is very sort of day by day evaluating what the
right trade is for the right client and based on
you know, what lens are they looking at the world through.
(43:52):
Is it yield? Is it spread? Is it They've got
so much cash that they're going to just sit be
patient here till the world becomes a bit more settled.
It's it's very case specific.
Speaker 1 (44:03):
I guess to flip the question, though, you were in
the middle of all these investors and issuers and you
see a lot of stuff, what's the question they ask
you most what are they most worried about?
Speaker 3 (44:13):
They're most worried about, how and when are they going
to see more? Thirty year issuance, and so if everyone's
searching duration, it's the reason even a lot of international
investors gravitate to our market the absence of long dated supply.
We're down nine percent year over year. We had that
string you know of over a month of no thirty
year bullet issuance. It's problematic. It is allowing for curves
(44:36):
to compress. So it's great for issuers. Cat printed the
flattest ten thirties curve since twenty twenty yesterday, so we're
proud of that outcome. They're flat in the secondary market today.
You know, I worry can we source enough assets to
appeal to where the bid is gravitating and that's out
the curve.
Speaker 1 (44:53):
So the investor aren't running for the exits. They're actually
rushing to buy more.
Speaker 3 (44:56):
They're rushing to buy more, and they're rushing to buy
more in the long end, having a hard time producing
it at the moment.
Speaker 1 (45:02):
Great stuff. Megan Graper, Global head of Debt Capital Markets
at Barclays. It's been a pleasure having you on the
credit Edge money. Thanks.
Speaker 3 (45:07):
Thanks you all so much, And to.
Speaker 1 (45:08):
Annol Kakuda with Bloomberg Intelligence, thank you very much for
joining us today.
Speaker 2 (45:11):
Thanks for having me again.
Speaker 1 (45:12):
For even more analysis, read all of Ronold's great 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 indices, currencies and commodities. Please do subscribe to the
Credit Edge wherever you get your podcasts. We're on Apple,
(45:33):
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 Crombie. It's been a pleasure having you join
us again next week on the Credit Edge
Host
James Crombie
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