December 4, 2025 • 46 mins
The technology-funding frenzy could become a bust for credit markets if AI falls short of lofty expectations, according to Barclays. “If we get to a point where we see a lot of this issuance coming to the market — and then there’s some changes, where maybe certain things are a little bit less viable or a little bit less attractive — that leads to some downside risks,” Brad Rogoff, the firm’s global head of research, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Mike Campellone in the latest Credit Edge podcast. They also discuss “late-cycle” behavior, private-debt risk, asset-based finance and portfolio trades, as well as Barclays’ 2026 forecasts for credit spreads, defaults and global issuance.
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Episode Transcript
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Speaker 1 (00:17):
Hello, Welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumby. I'm a senior at his
twit Bloomberg and.
Speaker 2 (00:23):
On Mike Camplone, a senior credit analyst covering high yield
and investment grade retailers at Bloomberg Intelligence. This week, we're
very pleased to welcome Brad Rogueff, Global head of Research
at Barclay's. How are you, Brad?
Speaker 3 (00:34):
I'm doing great. Thank you guys both for having me.
Hope you had a nice Thanksgiving.
Speaker 2 (00:37):
Absolutely likewise as well for those of you who don't
know Brad. Since joining Barclays in two thousand and eight,
he's held a number of leadership roles across research before
assuming his current position in twenty twenty four, including Head
of FIC Research, Head of Credit Research, and Head of
Credit Strategy. In addition to his leadership role, Brad focuses
his research on the US high yield leverd loans, COLO
and private credit markets. James, why don't I hand it
(00:59):
over to you? Kick us off?
Speaker 1 (01:00):
Yeah, So, credit markets have had a pretty good year,
although risk takers haven't really been rewarded. The twenty to
twenty five winners globally held investment grade bonds, and if
you stuck your neck out and bought the junkiest junk bonds,
the triple c's, you got slammed by tariffs and pulled
down by some high profile defaults and bankruptcies. Insatiable demand
for yield and limited net new supply of corporate debt
are keeping spreads very tight across the board. But there's
(01:23):
a ton of AI funding to be done and maybe
more M and A that could tip that balance. Looking ahead,
the macro outlook seems just as murky as it did
twelve months ago. We'll probably get more rate cuts, but
inflation is still a problem. US government policy is a
huge wildcard, particularly as we get closer to the midterm elections.
So we have trade wars, immigration reform, the Big Beautiful Bill,
(01:43):
unreliable macro data, political pressure on the Fed, and widespread
geo political risk, all making forecasting a very difficult business.
But Brad, you've crunched the numbers, as you always do
at this time of year. How are we set up
for twenty twenty six?
Speaker 3 (01:57):
A lot there, and what you just said, I surprise
when the whole podcast answering that question, I won't don't worry.
I know that wouldn't make for a good one. So
look as we look at twenty twenty six, we are
coming off a year that obviously had that Liberation Day volatility,
but then you look across the rest of the year
and the volatility and credit spreads really pretty modest relative
to points in time historically. If you look at the
(02:19):
investment grade market and go back over the course of
the last six months, so that doesn't include Liberation Day, clearly,
from today you're looking at max credit spreads that are
as low as any period in time really, and so
that folves super low. You know, you go back to
spreads a year ago, they were a couple basis points
away from where they are today, and so then really
(02:39):
the question is what causes it to change in terily way.
We saw Liberation Day as an example for that in
twenty twenty five. In twenty twenty six, we think generically,
you have to think of this as late cycle, but
still late cycle and part of the cycle, not the
end of the cycle, right, because if we were in
the end of the cycle, or the end of the
(03:00):
cycle was that imminent, then we would be talking about
recessions and we'd be talking about a lot wider spreads.
We don't think you're quite there, and we don't even
think that you'll be quite there in terms of recession,
just on the horizon by the end of the year.
But that would also lead to materially wider spreads. But
we think you know you mentioned the murky growth picture,
it's still positive, right and for credit and especially the
(03:22):
higher quality stuff that can turn out okay, and so
we do expect spreads to be wider. I would say
the investment grade side, you're looking at spreads in the
probably low nineties is where we think they'll be in
twenty twenty six. You look at high yield with the
leverage finance market, I think there you're pushing into the
three hundreds, maybe somewhere, you know, around the three twenty
five contexts. So certainly in the context of actually all
(03:46):
of credit market's history, nothing material in terms of wider,
but still wider from what we've been used to. Over
the last six.
Speaker 2 (03:54):
Months now, we've seen that certain technological investment cycles can
reshape funding dynamics across sectors. How do you think the
current AI and data center CAPEX wave is altering the
credit market playbook? Both in terms of issuer behavior and
how investors should think about sector level evaluation resets.
Speaker 3 (04:10):
Well, look, as a guy who started my career on
the turn of the century covering TMT stuff, I certainly
understand what you're asking me there, and I think we
really are in the early innings of this playing out
in the credit markets right and specifically in the public
credit markets. I mean, some of the stats from this
(04:32):
year are pretty remarkable because this news story has become
so relevant today that you know, it's what we're all
focusing on. But if we look at netsupply for the
investment grade market this year, we're down close to ten
percent in nets supply. Now, no one thinks that's going
to be the case next year, including us. We think
that number could be up on the order of forty
(04:53):
percent next year, led by tech and not just tech,
but and M and A supply hasn't been up this
year either, and flatish let's call it right and talking
about you know, big investment, greate M and A. So
you get those two things combined, you can get a
big increase in net supply, and you obviously need demand
to meet that. Now, specifically, the changes in credit markets
(05:16):
that you allude to, right, the changes in credit markets.
Let's look at everything, right, and you can't just look
at here public markets. You have to look at private
markets as well. One thing we've been saying for a
long period of time, there's a lot of concerns about
systemic risks, and you guys may ask me about this later,
so I'm happy to talk about it then too. In
private credit markets, what we've said for a while is
(05:39):
if there's risks that are going to come from private
credit markets, I actually think the greatest likelihood is it
comes from the enterprise value on tech companies just you know,
our enterprise value multiples excuse me, and tech companies coming down,
because if you look across these markets, traditionally in IG,
the big tech names, the hyperscalers have been the lowest
(06:00):
beta part of the investment grade market, and that's because
they barely had any net debt, right, And now we're
seeing certain names that do have a little bit more debt,
like Oracle, have higher beta. But and then you look
in high yield, and the names in high yield in
the tech world, they're not necessarily the AI ones are
also not necessarily the software ones that have come really
(06:23):
under the microscope recently, so it hasn't been a particularly
high beta and just becoming more of those part of
the high yield market. Then you move to leverage loans
and you move to private credit, and these are the
biggest sectors in that market. And you know, tech is
the biggest sector in both those markets. If you include
like business services names, you know, really the private credit market,
(06:44):
if you include tech, business services, financial services, and a
lot of those have a tech component to it, you're
talking about half of the private credit market, right and
so well, right now the focus is on AI, the hyperscalletors,
et cetera, and really what it's doing for the IG market,
where we can also get into what it's doing for
the private IG market. I was focusing more on the
private high yield leverage loan type market there. I mean,
(07:07):
it's it's it's becoming a big part of all of this.
Speaker 1 (07:10):
But if we back up a bit, I just a
lot of numbers in what you've just said, a lot
of detail, but in terms of the actual supply, I'm
interested in the net supply. You're saying it's down ten
percent this year and it's going to be up forty percent. Yes,
next year. Well, that'd be the biggest increase we've seen
and it must be a long time, right.
Speaker 3 (07:25):
Yes, yes, it is. It is certainly a very sizable number.
Now you're talking about obviously the net number winds up
being you know, well less than half, probably about forty
percent next year around there of the gross number. Right,
So you still you know, you're still not talking about
the one and a half one one point six trillion
(07:46):
we probably think you can see in terms of gross supply.
But yes, you need demand to feed that, right. And
if you think about the demand that's been feeding the
investment grade market over the last few years, it's come
from a bunch of different places. You've seen it from
the insurance side, annuities, right, Annuity growth has been a
big part of that, and you've seen very good inflows
(08:07):
if you look at the kind of retail space right
where you're looking at ETF's mutual funds. I mean, one
thing that's interesting in that is, okay, can this get
a bit cheaper and then can we see a bit
of a reallocation towards credit. So while often we might
look at investment grade corporate fund flows and just that
data that you can get every week. That's actually a
(08:30):
smaller fraction of what's investing in investment grade than the
contributions that can be made from the larger taxable bond
fund category. And AE might think of it as things
that follow the Bloomberg are good index, right, And so
if we look at that twenty twenty funds that follow
that index loaded up on credit. It got very cheap
(08:50):
during COVID. Obviously that wound up being a very good trade.
And since then there the shaff credit in those portfolios
has declined every year until this year it's up marginally.
It's not much, but it is up marginally. And so
I think a source like that that can be billions
and billions of dollars in demand if you take that up. Look,
(09:11):
are they probably only taking it up if it gets
a bit cheaper. Yes. Where that demand, where where where
those funds have gone is really towards the securitized products market.
This will be the first year, probably in a while,
that you have seen a little bit about performance from mortgages,
for example, relative to credit. So maybe that relationship is
starting to change. And if credit gets a little bit
(09:31):
cheaper because of new issue discounts can change even more but.
Speaker 1 (09:34):
You're saying a big increase in supply and net supply,
but then not really much increase in spread. So the
demand must be there to pick up all of this supply,
including the AI. Are there any potential kind of you know,
worries about that forecast in terms of the demand trailing off.
Speaker 3 (09:50):
Yeah, And look, I think that's one of the reasons
we think spreads wind up probably ten to fifteen basis
points wider. And if you told me, you know, is
there a reason, Look, is there a reason they go
twenty five wider from there? Then it's got to be
way more fundamental. Is there a reason they got another
five wider from there? Yeah, I think you've nailed it.
I think I think that that supply starts to overwhelm
(10:10):
the market. It'll be interesting to see. You know, some
of the supply may come longer dated, which we have
seen less of in recent years, right that you know,
thirty year type supply has declined just generically speaking over time,
but their demand from Asia, which tends to buy some
of that, has held up over the course of this year.
So yeah, it is a risk, if you know, if
(10:33):
I want to catch one of the downside risks, of
our forecast, it's definitely one of them.
Speaker 2 (10:37):
Yeah, so we're entering a year where spreads are tight
issue and expectations are rising and economic signals are somewhat
mixed in that kind of environment. What frameworks are indicators
do you think are most useful for evaluating sector rotation
opportunities and credit?
Speaker 3 (10:52):
Yeah, so what's really interesting on the sector side is
most normal feeling years and like I said, wasn't that
high this year? Kind of a normal feeling year, you
would say, Okay, you know, let's look at the starting spread,
let's look at the beta related to that, and see
how it plays out. You chart that this year, it's
just a bunch of dots on a graph. It's there.
(11:15):
It actually doesn't have very much value. So what was
interesting is, especially in the investment grade side, what we
found is if you actually looked at that supply, the
supplying numbers, and looked at them versus the moving spreads,
they did matter a lot. So I think the change
the last question you know that that that that is
going to continue to be part of the answer. Obviously,
(11:35):
fundamentals always are as well. We've certainly seen some out
of favor sector some sectors we expect to continue to
have pressure. You'd look at something like chemicals where it
doesn't feel like there's a turnaround that's in it, right,
and we'd remain cautious on areas like that. Uh, and
so you've got you've got to overlay the fundamentals. But
it was interesting this year how it was much less
(11:58):
of a beta play and much more of what's going
on technically, which is what I would call supply.
Speaker 2 (12:04):
And it feels like event driven factors, everything from asset
sales to regulatory shifts to M and A are playing
a bigger role in single name credit. How do you
see that trend evolving? And what makes a catalyst actionable
from a credit selection standpoint?
Speaker 3 (12:18):
Yeah, really really good point, right, And so I would
actually start with financials to answer that question. So if
we think about, as you know, what's going on in
terms of the ability to do M and A. Look
at you know, and this is mostly on the small side, right,
but look at small bank mergers. How quickly you can
get that through under the current administration relative to what's
(12:39):
occurred in the past, and the ability to do that,
it's it's changed significantly. The other thing is SLR rules
we're just finalized, and if you look at the SLR rules,
the opposite is probably going to be happening. Happening on
the financial side in terms of supply, right then, so
the need you know, if anything, a lot of the
larger banks have more debt than they made need under SLR,
(13:00):
so you can have less pressure. And that is a
big part of It's not the only part, but it's
a big part of why we continue to like financials
expect that they can get some outperformance relative to industrials.
Speaker 1 (13:14):
In twenty twenty six, going back to the private markets spread,
I mean, you must get asked about this a lot.
It's the other big theme other than AI as.
Speaker 3 (13:20):
All definitely those are the two every time, right, But
it was.
Speaker 1 (13:23):
The Golden Asian, then it became the age of cockroaches,
and then it became, as Mark Rowan said, we've all
lost our minds about you know, the risks that are there.
Speaker 3 (13:31):
I'm just wondering what minds up in between.
Speaker 1 (13:33):
Well, you get to look at this stuff all day long.
I wonder, like, you know, how you see private markets
in terms of the debt. Is it that inherently risky?
Is it really a big problem? And what impact does
it have ultimately on the public markets.
Speaker 3 (13:48):
Yeah, so, so, look, I do think the truth probably
lies in between. I was joking first, but I think
on this question that probably is the answer. So I
mentioned those net supply numbers down ten percent. If we
had some of these big mega deals in private IG,
which to be fair, in past years we really haven't had.
Maybe we've had one or two a year, and it's
(14:09):
been ramping up over time. But you go back, you
know pre COVID virtually none of them, and you would
have had nets supply up this year. Okay, So that
took real supply out of the market. I think that
will continue. There's been a lot of capital rays that
is going to go after that. Now, what I think
(14:29):
sometimes gets confused is when people talk about private IG
and look, if I wasn't spending my whole days on this,
I would get confused too. In your head, it's okay,
does XYZ Corporate are they deciding should they issue a
ten year bond in the private space or should they
issue a ten year bond in the public space. That
is not most of what we are talking about in
private IG saying it can't happen, but it is the
(14:51):
best minority. Instead, it's related to what really is you know,
net supply if we get back to that, a CAPEX
project act, maybe an M and a related thing, and
it's typically had an asset associated with right, and so
these are really you know, somewhat secured or asset backed
typed deals, right, and so now are you know in
(15:16):
the sense of, you know, a lot of them have
ironclad leases are very important to you know, singlely rated
parent companies, and you have to take all of that
into account. But they're often done potentially from a separate
you know SPV right, in other words, a separate box
that is not part of the main borrowing group of
a company, which has its benefits you know, as well
(15:37):
as potentially some downsides in terms of being behind some
other debt with with respect to certain assets. So they
are different, right, there are different risks that are inherent
in those. I think most of those large deals that
are still part of of some of these larger corporates,
you know, the risks seem to be priced somewhat appropriately.
(16:00):
Were my concern lives more generally, right. And then, as
you just mentioned before, I go there on the leverage
lending side of things, right, So kind of hig yield
rated if you will, even though a lot of this
stuff doesn't get rated private credit there, Do I think leverage,
You know, we have a bunch of different stats we
can look at, But do I think on average leverage
is higher than you would see in the leverage loan market. Yeah,
(16:23):
I think it probably is. But pricing a half a
turn or a turn more of leverage, we can do that,
and if we think that causes additional stress, we can
look back at histories of defaults and recoveries and all
of those things, and we can price that risk. What
concerns me a bit more is as we move more
and more into the asset backed world and we move
(16:44):
into pools of securities that are constantly changing potentially, because
that's what the asset back world can often be as
opposed to just what I referenced earlier in private credit,
which is, hey, we build this facility. It's CAPEX related
and this is exactly what you're referencing. There's a lot
been made about who does better due diligence, well, the
ability to do due diligence in the same level on
(17:07):
a changing pool of borrowers. It's just lower, No matter
who's doing the due diligence. And I think that's where
some of the risks. We're also securitizing potentially cash flows
that we don't have as much to fault history on
recovery history and all of those things as markets get creative,
which also fits with my hey, it's it's probably late
(17:27):
cycle type theme. I mean we've seen this before, definitely
in markets. I've certainly seen it before. So I think
that's where if we continue to move into some of
these assets in the asset backworld that are you know,
not what we've securitized before, I have some concerns.
Speaker 1 (17:45):
There, and more exposure to the consumer and more exposi subprime,
and more exposure to a lot of loans that may
just fall apart. Also at a time when there's just
way more demand, it seems than actual supply of these
assets to securitize. And then you know this is constant, Oh,
we need to get more yield, so let's move into
stretch of finance.
Speaker 3 (18:02):
Yeah, I mean the demand is clearly there. If you
look at insurers balance sheets, the abs portion of that
balance sheet is up materially, and it's really the growth
is almost all through private ABS, and the growth has
been very concentrated. If you look at private equity owned insures,
(18:23):
they tend to have you know, eight nine hundred basis
points more of ABS on their balance sheet than they
do corporates relative to more traditional insures.
Speaker 1 (18:32):
Right, But have we seen this movie before? I mean
we remember, we all remember two thousand and eight. I
mean that was you know, the lead up to that
was a lot of securitization of you know, products that
didn't turn out to be well, everyone told themselves it
was uncorrelated and there was a bundle of loans underlying,
so you were, you know, somewhat diversified. But you know,
give the amount of clos, given the amount of issuance
(18:54):
of new abs, do you worry at all that we
are creating another bubble in that market?
Speaker 3 (18:58):
I worry to some degree. I don't think we're there yet,
But I think if we do go back to that analogy,
and you use CLOS as an example, right, what was
the one thing that if you're buying up in the
capital structure, even though anything that started with C and
had three letters became essentially a four letter word as
part of the credit crisis, what was the one thing
(19:19):
that didn't blow up at all. Right, Yeah, triple a's
double as you've never had the fault. I think there's
one single A CLO default in history. I don't think
that's changed really materially for for that product, you know.
And I think a lot of what what we're lending
against is more corporate backed than if you look at
(19:41):
you know, the more mortgage back stuff that we did
in that crisis, and the course of the correlation I
think works out a little bit better. And honestly, I
used to joke at coming out of the credit crisis,
I said, Okay, well, if you survive this, what could happen,
for example, in clos that could actually cause them to
blow up? I mean, I guess you could shut down
(20:01):
the whole economy for three to six months, but that'll
never happen. And then we did that. Right now, you
can say the government came in and helped out. But
I think generically, I still feel like these assets are
a lot better than what we saw then, But they're
also a lot riskier than where we were five years ago,
I guess the fair comment.
Speaker 1 (20:18):
And we're getting more people on our show talking about
the equity and the double B and all of the
other stuff to get returns.
Speaker 2 (20:25):
And so you know, zooming out a little bit. Your
team often combines systematic signals with fundamental analyst views. How
do you see that relationship evolving as investors increasingly rely
on data driven insights and what does best practice look
like when those two perspectives diverge.
Speaker 3 (20:42):
Yeah, it's fascinating. And hey, we're tying in the AI
stuff again because it's constantly, constantly evolving and we're trying
to get smarter and faster and all of those things.
And look, this is something that's been happening in the
equity markets for a long time. As I spend more
time in the equity markets, certainly see more of it.
I think. Right now, what's more interesting is the credit markets,
(21:04):
because the credit markets are going through that evolution. I mean,
we have termed it the equidification of credit, not surprisingly
based on what I just said, but it's one of
the number one topics and it is fascinating, right and
that we've run study after study of trying to say, okay,
you know, we're unique amongst Wall Street banks, I think,
and that we've had this large credit research operation for
(21:26):
years and years. We can go back and mind all
the data of the teams and how they do, and
we look at that and we look at it versus
some of the best you know, systematic signals we can find,
and the answers are pretty similar that the analysts team
tends to do a little bit better, which you know,
always makes me happy. But they're similar enough. But then
when you take the signals right and overlay them on
(21:47):
top of the analysts recommendations, that performance is really good
and the alpha that generates it's like nothing else that
we really see. And you know, really what it does
is is when those signals, meaning the fundamental one and
the systematic one are not aligned and you kind of
kick out those examples, you're really doing a pretty darn
(22:07):
good job of getting rid of things that might not
work in terms of a trade and generating substantial alpha. Right,
And so we are seeing clients increasingly move that way.
Now do I think they could move that way if
we weren't seeing this equification of credit in terms of
the trading side of things, right, the ability to transact
very differently in terms of electronic but portfolio trading really,
(22:33):
you know, and then when you see a price in
a model knowing that, hey, there's a pretty good chance
that that's actually the price, which I mean, I would
say the I mean from the end of the credit
crisis really almost till the pandemic. The number one thing
I would hear when I walk into a meeting, since
we just talked about the two things I have to
talk about this time, was how bad liquidity was in
credit markets. I never hear that anymore. It's completely changed.
Speaker 1 (22:56):
How big are the trades right now? On the portfolio trades?
Speaker 3 (22:58):
Oh, well, you know, portfolio trades in you know, in
aggregate can be billions of dollars of portfolio trading. The
line items tend to be small. Now on some of
those bigger ones, of course, there are a few million
the line items. But your average portfolio trade has line
items of you know, half a million or lass because
it's dealing with those flows.
Speaker 1 (23:20):
And does it inherently mean that spreads in ig credit
should be tied to because it's easier to trade.
Speaker 3 (23:25):
I think that's a great question, and probably people don't
ask it enough. I think the answer to is yes so.
And I also think it explains part of the private
credit frenzy. So if you think about credit markets ig
or high yields. You had some form of liquidity premium
(23:46):
that should have been in those spreads historically because they
were not the most liquid things, and really the need
to have that premium in spreads today, I would argue
it doesn't exist. And so and you also would have said, hey,
some of that's in off the run, some of it's
down in quality, and now that everything has that kind
(24:06):
of liquidity, it doesn't exist. I think it would tell
you that, you know, on average spread should be a
bit tighter in public credit markets, So what do you do.
You wind up going into things like private credit that
certainly had a lot more of that illiquidity premium in it.
I think today we've seen a decent amount of that
evaporate in areas. Right so, you know, when there's a
(24:30):
potential large leverage loancoming and it could go to the
private credit markets, it could go to their probably syndicated
loan markets, a lot of that premium, if not all
of it has evaporated. Just it's obvious it's competition right now.
There are other unique deals where I think it certainly
still exists, even if not in the size it once did.
Speaker 2 (24:49):
And I guess getting a little bit more micro here
and maybe leveraging some of your analysts team views. You know,
every sector you know view naturally embeds a macro assumption.
So how is your team framing the twenty twenty six
economic backdrop from growth, inflation, consumer health, funding conditions, and
how do those assumptions shape your expectations for cyclicals versus
(25:11):
non cyclicals.
Speaker 3 (25:12):
Yeah, so we're thinking we will see another year that's
you know, growth doesn't look that dissimilar to this year,
although this year has been a bit lumpy, you know
when you kind of think of the official statistics, especially
because of the government shutdown that we just went through. Right,
But you know, if you're thinking about a year that
you could have like high one percent type growth, we
don't expect huge moves when it comes to treasure yields
(25:37):
as well, Right, So that's not going to have a
massive impact a little bit when it comes to two returns.
But you know, when you think about a baseline economic
scenario like that, right, as I said earlier, that's okay
for credit, or it tends to be okay for credit.
We talked about financial side, so I'll talk about the
non financial side as we think through what it means
(25:58):
for certain sectors. You also have to think through with
a lot of those sectors what it means based on
the makeup of it. Right, So you can look at
something like retail and high yield that you might say
still would be sensitive in a sort of low but
positive growth environment or menium growth environment, maybe we'd even
(26:21):
call it in these more leveraged companies. But over time
the composition of that index has changed a little bit,
and you know, I actually think it should perform okay
next year. Then you look at some areas where there's
potentially secular declining businesses and that and what that potentially
could mean. But if you look at the cyclical non
(26:42):
cyclical premium in general, cyclical premium, I guess this is
what we should call it. In general. You're not getting
a ton right now for that cyclical premium. I mentioned
sectors like chemicals that were a bit nervous on some
of the premiums come out of autos that was in
where we're not overly parish but also not not not
super bullsh and so you know, I think you probably
(27:03):
lean in a little bit to the non cyclicals at
levels here.
Speaker 1 (27:06):
And the one thing you just don't want to do
is lose any money. So that's what about defaults. There
aren't that many defaults in public markets. I'm wondering whether
you think that they've been kind of you know, pushed
into the private markets or whether sort of paper it
over by the lems, the liability management you know, what's
going on with defaults? What should we be looking for there?
Speaker 3 (27:26):
Yeah, well, look, the liability management stuff, you can you
can get that and you can include it in your
defaults if you so choose. And that's why the leverage
loan default rate has looked a decent amount higher than
the high yield market rate over the last few years.
We think the loan default rate will come down, maybe
not all the way to the high yield the fault rate,
which will probably be like a two to three percent
range for next year, but yeah, a lot closer to
(27:49):
it next year as we've worked through you know, actually
a lot of these uh, these l and mes and
I think to your point in private markets, yeah, there
was a time a few years ago where there are
some loans that were triple c and because of the
way the loan market works, and that two thirds of
the buyer base is colos who can't really be buying
new triple c's. You know, it is difficult to refinance
(28:12):
some of those names. You definitely saw a few of
these triple c's get refinanced into the private credit markets
where they might have been default otherwise. Now those haven't
necessarily gone on the private credit market and just defaulted.
It was probably just a better buyer and it made
more sense for those names to be in that market.
When you look at private credit, there's a lot of
people trying to figure out what default rates are, and
(28:33):
you can certainly look at NONIC rules. You can get
that information pretty easily. On things like BDC's, the non
AC rule rates are fairly modest and would be below
the numbers that you actually see for the public markets. Now,
if I'm saying, well, we can include L andmes in
public market default rates, it's a little bit disingenuous to
(28:54):
just look at non AC rules in the private markets.
There's some data that we see out there that shows,
for example, covenant defaults in private markets. If you added
that to non accrules, the numbers would look pretty darn similar,
if not a tiny bit higher than the public markets. Now,
that's probably being too harsh actually in private markets because
(29:17):
you know, not every covenant default rate, not every covenant
default would be enough to lead to an LME or
something like that. So I actually think the numbers point
to pretty similar levels between them. I've also seen some
studies on picks or paying payment in kind in the
private credit markets. You hear that coming up a lot.
(29:38):
I think you guys have discussed that in the past
on this show. And if you look at that, you know,
let's use around number, it's about ten percent of most
of the data you can find, you know, for BBC's
in other areas in private credit markets. You know, I've
seen some studies that show that okay, well you know
about you know, fifty five sixty percent of those picks
(30:00):
or what people have now been terming bad picks. I'm
sure you're getting familiar with, i e. What they're saying
there is picks that aren't given at the outset because
the company knows it just needs a couple of years
to grow into things. But they're picks that are part
of a renegotiation, which you know that feels like, you know,
potentially something that could have led to a public market
to fault, right, and so you can say, okay, that's
(30:21):
like a six percent rate. Once again, probably a little
bit too harsh to say it's a six percent of fault.
Wait for the private credit markets, it's just meant to
say that not a cruel rates. Probably not the rate
number either, And like I said, I think the numbers
are pretty similar.
Speaker 1 (30:34):
So absolute a recession then it just seems like pretty
easy to avoid trouble. You just done by any triple cs.
You kind of do a bit more credit work. You
you know, stay out of things that look a bit
stress in terms of sects. But if you if you
are worried, and if you do think that, you know,
the economies may be going into a downtown or there
are other things to look out for, how would you
hedge the risk and credit right now?
Speaker 3 (30:55):
Yeah, you know, if you think about it, these credit
One of the nice things about the public markets, and
maybe it's a comment about the fact that we have
public credit and private credit markets, is the quality of
those markets is the best it's been in a long time,
or amongst the best it's been in a long time. Right,
And so if you look at the investment grade market,
(31:17):
right within the investment grade market, we're seeing you know,
very high levels of upgrades from triple bs to single a's.
We're seeing triple b's be a much smaller portion of
the investment grade market than they've been in several years.
If you think about going into twenty twenty, let's go
back to you know, what was the most popular question
(31:37):
at the time. Going into twenty twenty, Everything started with
triple B bubble. Okay, that does not exist today. Now
we think there's some chunky names that can get downgrade
and we'll actually see a net fallen angel relative to
rising star year. It's a little bit more specific to
some single names.
Speaker 1 (31:55):
Is that on credit quality or is it own levering
up for M and as.
Speaker 3 (31:58):
It's more on credit quality and uh, some cyclical areas,
you know, and you know, some of it was past
M and A right, you know, how to WBD get
downgraded this year was past M and A right, and
so you know it's some isolatedt stuff, but you know,
within ig actually we've seen a huge net upgrade ratio
(32:21):
and I think with triple B is shrinking in general, right,
it's actually an interesting part of the credit markets to own.
Then you look at the high yield market and with
the exception of right after COVID when when a bunch
of stuff got downgraded, you really have one of the
highest double B portions of the market ever, so you
(32:41):
actually have places, you know, because we can use the
term hide out. But the ability to do that definitely
exists in today's markets. Now, you know, the double B
single bee ratio this point in time is a bit tight.
So you know, maybe say, okay, I don't want to
add too much to double b's today. And look, I
think to your point on avoiding triple c's. While we're
(33:03):
not going to sit here and pound the table on
triple c's, it is the only part of the credit
market that if you look at in a historical context,
you could argue that from a spread standpoint, it's cheap.
And so that tells me you can't ignore it either,
and you've got to pick and choose there Also.
Speaker 1 (33:20):
On spread, though, the gap between double be's and triple
be's is not very big, so you're not really getting
paid that much to take more junk risk. Therefore, is
it not you know, simple just to say triple b's
and you know, I.
Speaker 3 (33:31):
Think triple b's look good right now. Yes, to answer
your question, it looks like a sweet sports spot. Certainly
of markets today. You know, there's that double B tribleship
can tend to change very very rapidly. But I agree
if you look at it today, it does it does
look better.
Speaker 1 (33:50):
So in terms of the globe, I mean, I love
the fact you have a global responsibility. We don't get
to talk enough about the rest of the world here.
We we have had, you know, swings. It's maybe off
the Liberation day of you know, look at our portfolio
so long the US, We've got to start diversifying. Everyone
kind of had that reaction to the tariffs that kind
(34:11):
of faded a bit. But what are you thinking in
terms of opportunities in Europe? And you know, how does
it compared to the US.
Speaker 3 (34:17):
Yeah, so the Cell America narrative, right, which is probably
what you were referring to, it didn't really amount too
much in my opinion, you know, where their marginal flows
that didn't come to the US. I think that's true.
I think there was less selling. Look a year ago
we put on an outlook and we said Europe look
really cheap from a spread standpoint, and it has performed
(34:41):
quite well. If we look at it today, marginally cheap.
I would say, you know, if I had a pick,
you know, who would have perform next year, probably Europe.
But it's by a really slim margin at this point.
And look, some of that is while the growth picture
is you know, growth picture, it you know, from an
(35:02):
absolute standpoint should be a little better in the US,
that's been the case for a long time. The delta
should be a little bit lower. A lot of that
obviously is uh, you know, kind of boosting fiscal spending,
with Germany being the empicenter of that. We got through
the UK budget seemingly without the worst results in the
past week. There's still a lot of risks coming out
(35:25):
of France, you know, as they struggle to pass budgets
and and form governments and all those things. So there
are some risks like that. But at the same time,
with a little bit of that, more of the fiscal
stabilizer over in Europe than we've had in the past,
it probably gives you enough stability to get very marginal
out performance.
Speaker 1 (35:44):
Is there a risk the fysical spending, all this defense
spending particularly crowds out the corporates in the European market.
Speaker 3 (35:52):
It's a risk, you know, it's certainly a risk. And
and when you look at the defense spending, you know,
in general you can see, okay, Germany's the biggest chunk
of it as they kind of you know, loosened up
the debt break, but everyone is spending more right across Europe,
and you know, I think most of it will be
spent on European companies. Obviously not all of it will,
(36:15):
so there should be some boosts there. But look, there's
certainly a risk. However, you know, I think when you're
in a world that's unfortunately as viollatile as it is today,
I think we continue to see that spending and it
is incremental in some way, at least to what we
were seeing versus say, twelve months ago. Right.
Speaker 1 (36:38):
Asia's also another market we don't get enough to talk
about here. China was, you know, not that longer uninvestible
to most people, but now it has become you know,
it's back in the fold. It's the potential. We're still
going through the housing and you know, real estate crisis there,
but there seems to be appetite and certainly there's yield
and there's return if you go that way. Do you
(36:58):
see any opportunity and.
Speaker 3 (37:00):
We talk about credit markets, right, what happened for years
and years was that China and Asia were becoming a
much bigger portion of any EM portfolio, especially on the
high yield side with property right, and I mean, those
property bonds have shrunk massively the amount outstanding because of
defaults and structuring and all of those things. So I
(37:23):
think it's a bit tougher to focus on that just
just not a lot left. And we do think the
property sector still has issues moving forward, right, Instead, it
becomes a little bit more of the TMT space on
the IG side, really on the high yeld side, it's
more of like Macaw gaming and stuff like that, and
it's becoming a smaller part. And then instead, what you're
(37:45):
finding is that in the EM landscape overall, you're actually
seeing the rest of the world become a bigger portion
of it. And if you look at where that issuance
is occurring, and you know, if we think through next year,
especially in the higher quality stuff, it's really going to
be the GCC Middle East area that's adding a lot
to the net issuance. And you know, and and ironically
(38:08):
some of that gets bought as a replacement out in Asia, right,
but to replace some of the issuance that traditionally was
coming maybe from China, right, and so we think that'll
remain interesting. I mean, Latin America has certainly been interesting
on the corporate side. Brazilian corporates have been really validle
it feels like we're at a point right now, or
maybe moving towards the other side of that. But you know,
(38:28):
there's there's gonna be plenty of interesting things in the MS,
there always is.
Speaker 1 (38:32):
But you think the best relative value remains in the US.
Speaker 3 (38:36):
You know, look, I think the US is the market
that is large liquid, and you you know, you are
able to invest position and take different views. I would
say I could see, you know, Europe outperforming very marginally,
so so I guess a tiny bit of a relative
(38:56):
value lean to Europe, but not new as strong as
we felt last year when European spreads were clearly cheap
to US spreads.
Speaker 1 (39:04):
You do a lot of traveling, You talk to people
all around the world. What kind of questions are they
asking you right now about credit markets? How interested? Alicuely,
I'm interested in the the funds that could invest in anything,
And you know, what what do they what do they make?
Speaker 3 (39:19):
Of credit.
Speaker 1 (39:20):
Yeah, it seems to be more popular.
Speaker 3 (39:22):
It is, but not always for good reasons. I guess
that is what I would say.
Speaker 1 (39:25):
Okay, tell us about the bad reasons.
Speaker 3 (39:27):
Yeah, yeah, Well I think I think you sort of
hit on it a little bit earlier, right, And so
when you've got the comment like the cockroaches comment, people
want to know about that when they know your background
is certainly on the on the credit side. And then
when you think about the AI, when you think about
the cap X funding, you know, for a long time,
(39:49):
AI was just a story and inequity markets, and in
my opinion, it really wasn't that interesting for credit markets
because the low beta nature of a lot of those names,
and you know that being said, you know, some of
these private credit deals even strike the interests of people
who from outside the asset class when they see they
can potentially get those those kind of spreads on the
(40:11):
on the death side, right, it makes you know, could
potentially make sense for people. I think, to your point,
we are seeing people look at interesting ways, you know,
to securitize things we have seen. You know, you mentioned
you know, Colo Equity and double b's and those kind
of things, you know, in a world where yields are
a little bit lower, those are going to garner focus, right,
(40:33):
and so structure is going to continue to garner focus.
But look, a lot of it right now is the
question of is credit the canary in the coal mine
or what do you know that our market doesn't know?
And obviously equity markets have been a little bit more
volatile recently, but still trading it decently high multiples.
Speaker 1 (40:51):
When you're talking about AI to people that don't look
at credit all the time, and they're discussing it, let's
say an Oracle thirty year bond or another reason with
thirty year bond, you know you'll you'll aim in credit
is to get your money back. Yes, and this is
business where you've don't know what's going to happen tomorrow,
let alone thirty years later. How do you kind of
reconcile you know, the lung term debt investment for some
of these projects that you know appear entirely speculative to me.
Speaker 3 (41:15):
Yeah, and that's and that's why I think as we
move forward, if we continue to see issue in out
the curve, it'll be interesting to see the appetite for that,
especially in a market that hasn't seen as much thirty
year type investments. But look, I mean we could have
probably make the same argument for ten year type paper, right.
And what's been interesting though, is in a highal market,
(41:36):
which is more speculative, right, ten year bonds when I started,
every bomb was a ten year non call five right.
We don't see those anymore. Almost no one issues outside
of eight years in high yield. Now those bonds are callable,
and people are always thinking that they could potentially call
them and refinance them at a better rate. And you
can argue that's part of it, but I think part
(41:57):
of it is, you know, as more speculative companies, you
don't issue that for out the curve, right, And so
we could certainly see some transit issuance. But but look,
when you think about some of these data centers, they're
signing leases off in like twenty year type leases that
are quite binding, and so there is the ability to
definitely support the cash flows for a long period of time.
(42:19):
So maybe it doesn't go out with thirty years, maybe
it winds up being twenty year bonds. But I think
if you have those clear leases that no one can
get out of, and most of the hyperscales have been
clear about that, then your ability to issue debt with
some term will exist.
Speaker 1 (42:34):
Hoping though that you're in a company that whose technology
is not going to be absolete.
Speaker 3 (42:38):
Yes, the technology side of things is at some point mark, which.
Speaker 1 (42:42):
You know concerns me. But going back to forecasting, one
of our guest studies year described forecasting as a crime
on wool Street. It was actually a crime. You could
get fined or punished or something for it. You do
have to forecast. So you were very good this year
in terms of your IG spread forecast. You said it
would end in an eighty five to ninety basis points
ranged by the end of the year. Wait below that,
but we could will wide. Now ilet'll say, still a
(43:03):
good cool But what did you get wrong about this year?
And you know where did you get calls off God?
Speaker 3 (43:08):
And why do you think? Yeah? Look, so I think
understanding just how extreme the moves were going to be
in both directions around Liberation Day was not easy for most.
It certainly did feel like a buying opportunity at some point.
(43:30):
But I wouldn't say we perfectly called the tops and
bottoms around that. I think you know where we've had
a view that's been helpful is that as we work
through that and really start to do the math around
it and realize that the tariffs were going to add
up to a lot of revenue and that the deficit
(43:50):
side of things was not going to be as bad
probably in twenty twenty six as a result of the
tariff revenues. Now, let's obviously they've got some core cases
coming up too, I understand that, but based on the
current status quo, that that was going to lead to
a little bit better environment in terms of the risks
that people were seeing in a sell off and treasuries
(44:13):
which were going to be a general risk off event.
I think that's something we were able to focus on
and identify as part of that next move tighter. You know,
even if we didn't get the first one, and it.
Speaker 1 (44:23):
Terms of focusing out for next year, what are you
most worried about in terms of you know this, if
this thing happens, then all bets are off.
Speaker 3 (44:30):
Yeah. Look, I think you know to your point on
the technology change, right. So we had the deep seek
moment at the beginning of this year, which was a
real freak out for a lot of people. Turned out
at least in the short term that that shouldn't have
been that troubling for markets. But I think, you know,
(44:51):
as the technology changes, if we get to a point
where we see a lot of this issuance coming to
the market, and then there's some changes where maybe certain
things are a little bit less viable, a little bit
less attractive, and you've already stuck the market with off
that paper, I think that leads to some downside risks
that we're not fully putting in our forecast at least.
Speaker 1 (45:10):
And we started the call talking about the late cycle,
and you use the word innings, and we've got loads
of baseball fans, although I don't really understand the game myself,
but what inning are we actually in?
Speaker 3 (45:20):
You know, I think we're approaching the seventh inning stretch here.
Speaker 1 (45:23):
Probably we'll see, we'll see, all right. Brilliant, great stuff.
Brad Rogoff from Berkley's, thank you so much for joining
us on.
Speaker 3 (45:29):
The Credit Edge.
Speaker 1 (45:30):
Thank you guys both for having me, and of course
we're very grateful to Mike camp Alone from Bloomberg Intelligence. Cheers, Mike,
thank you very much for even more credit market analysis
and insight. Read all of Mike'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, plus outlooks
on more than ninety industries and one hundred market industries,
(45:52):
currencies and commodities. Please do subscribe to The Credit Edge
wherever you get your podcasts. We're on Apple, Spotify and
all other good podcasts it is, including the Bloomberg Terminal
at bpod Go. Give us a review, tell your friends,
or email me directly at jcrombieight 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 at his
twit Bloomberg and.
Speaker 2 (00:23):
On Mike Camplone, a senior credit analyst covering high yield
and investment grade retailers at Bloomberg Intelligence. This week, we're
very pleased to welcome Brad Rogueff, Global head of Research
at Barclay's. How are you, Brad?
Speaker 3 (00:34):
I'm doing great. Thank you guys both for having me.
Hope you had a nice Thanksgiving.
Speaker 2 (00:37):
Absolutely likewise as well for those of you who don't
know Brad. Since joining Barclays in two thousand and eight,
he's held a number of leadership roles across research before
assuming his current position in twenty twenty four, including Head
of FIC Research, Head of Credit Research, and Head of
Credit Strategy. In addition to his leadership role, Brad focuses
his research on the US high yield leverd loans, COLO
and private credit markets. James, why don't I hand it
(00:59):
over to you? Kick us off?
Speaker 1 (01:00):
Yeah, So, credit markets have had a pretty good year,
although risk takers haven't really been rewarded. The twenty to
twenty five winners globally held investment grade bonds, and if
you stuck your neck out and bought the junkiest junk bonds,
the triple c's, you got slammed by tariffs and pulled
down by some high profile defaults and bankruptcies. Insatiable demand
for yield and limited net new supply of corporate debt
are keeping spreads very tight across the board. But there's
(01:23):
a ton of AI funding to be done and maybe
more M and A that could tip that balance. Looking ahead,
the macro outlook seems just as murky as it did
twelve months ago. We'll probably get more rate cuts, but
inflation is still a problem. US government policy is a
huge wildcard, particularly as we get closer to the midterm elections.
So we have trade wars, immigration reform, the Big Beautiful Bill,
(01:43):
unreliable macro data, political pressure on the Fed, and widespread
geo political risk, all making forecasting a very difficult business.
But Brad, you've crunched the numbers, as you always do
at this time of year. How are we set up
for twenty twenty six?
Speaker 3 (01:57):
A lot there, and what you just said, I surprise
when the whole podcast answering that question, I won't don't worry.
I know that wouldn't make for a good one. So
look as we look at twenty twenty six, we are
coming off a year that obviously had that Liberation Day volatility,
but then you look across the rest of the year
and the volatility and credit spreads really pretty modest relative
to points in time historically. If you look at the
(02:19):
investment grade market and go back over the course of
the last six months, so that doesn't include Liberation Day, clearly,
from today you're looking at max credit spreads that are
as low as any period in time really, and so
that folves super low. You know, you go back to
spreads a year ago, they were a couple basis points
away from where they are today, and so then really
(02:39):
the question is what causes it to change in terily way.
We saw Liberation Day as an example for that in
twenty twenty five. In twenty twenty six, we think generically,
you have to think of this as late cycle, but
still late cycle and part of the cycle, not the
end of the cycle, right, because if we were in
the end of the cycle, or the end of the
(03:00):
cycle was that imminent, then we would be talking about
recessions and we'd be talking about a lot wider spreads.
We don't think you're quite there, and we don't even
think that you'll be quite there in terms of recession,
just on the horizon by the end of the year.
But that would also lead to materially wider spreads. But
we think you know you mentioned the murky growth picture,
it's still positive, right and for credit and especially the
(03:22):
higher quality stuff that can turn out okay, and so
we do expect spreads to be wider. I would say
the investment grade side, you're looking at spreads in the
probably low nineties is where we think they'll be in
twenty twenty six. You look at high yield with the
leverage finance market, I think there you're pushing into the
three hundreds, maybe somewhere, you know, around the three twenty
five contexts. So certainly in the context of actually all
(03:46):
of credit market's history, nothing material in terms of wider,
but still wider from what we've been used to. Over
the last six.
Speaker 2 (03:54):
Months now, we've seen that certain technological investment cycles can
reshape funding dynamics across sectors. How do you think the
current AI and data center CAPEX wave is altering the
credit market playbook? Both in terms of issuer behavior and
how investors should think about sector level evaluation resets.
Speaker 3 (04:10):
Well, look, as a guy who started my career on
the turn of the century covering TMT stuff, I certainly
understand what you're asking me there, and I think we
really are in the early innings of this playing out
in the credit markets right and specifically in the public
credit markets. I mean, some of the stats from this
(04:32):
year are pretty remarkable because this news story has become
so relevant today that you know, it's what we're all
focusing on. But if we look at netsupply for the
investment grade market this year, we're down close to ten
percent in nets supply. Now, no one thinks that's going
to be the case next year, including us. We think
that number could be up on the order of forty
(04:53):
percent next year, led by tech and not just tech,
but and M and A supply hasn't been up this
year either, and flatish let's call it right and talking
about you know, big investment, greate M and A. So
you get those two things combined, you can get a
big increase in net supply, and you obviously need demand
to meet that. Now, specifically, the changes in credit markets
(05:16):
that you allude to, right, the changes in credit markets.
Let's look at everything, right, and you can't just look
at here public markets. You have to look at private
markets as well. One thing we've been saying for a
long period of time, there's a lot of concerns about
systemic risks, and you guys may ask me about this later,
so I'm happy to talk about it then too. In
private credit markets, what we've said for a while is
(05:39):
if there's risks that are going to come from private
credit markets, I actually think the greatest likelihood is it
comes from the enterprise value on tech companies just you know,
our enterprise value multiples excuse me, and tech companies coming down,
because if you look across these markets, traditionally in IG,
the big tech names, the hyperscalers have been the lowest
(06:00):
beta part of the investment grade market, and that's because
they barely had any net debt, right, And now we're
seeing certain names that do have a little bit more debt,
like Oracle, have higher beta. But and then you look
in high yield, and the names in high yield in
the tech world, they're not necessarily the AI ones are
also not necessarily the software ones that have come really
(06:23):
under the microscope recently, so it hasn't been a particularly
high beta and just becoming more of those part of
the high yield market. Then you move to leverage loans
and you move to private credit, and these are the
biggest sectors in that market. And you know, tech is
the biggest sector in both those markets. If you include
like business services names, you know, really the private credit market,
(06:44):
if you include tech, business services, financial services, and a
lot of those have a tech component to it, you're
talking about half of the private credit market, right and
so well, right now the focus is on AI, the hyperscalletors,
et cetera, and really what it's doing for the IG market,
where we can also get into what it's doing for
the private IG market. I was focusing more on the
private high yield leverage loan type market there. I mean,
(07:07):
it's it's it's becoming a big part of all of this.
Speaker 1 (07:10):
But if we back up a bit, I just a
lot of numbers in what you've just said, a lot
of detail, but in terms of the actual supply, I'm
interested in the net supply. You're saying it's down ten
percent this year and it's going to be up forty percent. Yes,
next year. Well, that'd be the biggest increase we've seen
and it must be a long time, right.
Speaker 3 (07:25):
Yes, yes, it is. It is certainly a very sizable number.
Now you're talking about obviously the net number winds up
being you know, well less than half, probably about forty
percent next year around there of the gross number. Right,
So you still you know, you're still not talking about
the one and a half one one point six trillion
(07:46):
we probably think you can see in terms of gross supply.
But yes, you need demand to feed that, right. And
if you think about the demand that's been feeding the
investment grade market over the last few years, it's come
from a bunch of different places. You've seen it from
the insurance side, annuities, right, Annuity growth has been a
big part of that, and you've seen very good inflows
(08:07):
if you look at the kind of retail space right
where you're looking at ETF's mutual funds. I mean, one
thing that's interesting in that is, okay, can this get
a bit cheaper and then can we see a bit
of a reallocation towards credit. So while often we might
look at investment grade corporate fund flows and just that
data that you can get every week. That's actually a
(08:30):
smaller fraction of what's investing in investment grade than the
contributions that can be made from the larger taxable bond
fund category. And AE might think of it as things
that follow the Bloomberg are good index, right, And so
if we look at that twenty twenty funds that follow
that index loaded up on credit. It got very cheap
(08:50):
during COVID. Obviously that wound up being a very good trade.
And since then there the shaff credit in those portfolios
has declined every year until this year it's up marginally.
It's not much, but it is up marginally. And so
I think a source like that that can be billions
and billions of dollars in demand if you take that up. Look,
(09:11):
are they probably only taking it up if it gets
a bit cheaper. Yes. Where that demand, where where where
those funds have gone is really towards the securitized products market.
This will be the first year, probably in a while,
that you have seen a little bit about performance from mortgages,
for example, relative to credit. So maybe that relationship is
starting to change. And if credit gets a little bit
(09:31):
cheaper because of new issue discounts can change even more but.
Speaker 1 (09:34):
You're saying a big increase in supply and net supply,
but then not really much increase in spread. So the
demand must be there to pick up all of this supply,
including the AI. Are there any potential kind of you know,
worries about that forecast in terms of the demand trailing off.
Speaker 3 (09:50):
Yeah, And look, I think that's one of the reasons
we think spreads wind up probably ten to fifteen basis
points wider. And if you told me, you know, is
there a reason, Look, is there a reason they go
twenty five wider from there? Then it's got to be
way more fundamental. Is there a reason they got another
five wider from there? Yeah, I think you've nailed it.
I think I think that that supply starts to overwhelm
(10:10):
the market. It'll be interesting to see. You know, some
of the supply may come longer dated, which we have
seen less of in recent years, right that you know,
thirty year type supply has declined just generically speaking over time,
but their demand from Asia, which tends to buy some
of that, has held up over the course of this year.
So yeah, it is a risk, if you know, if
(10:33):
I want to catch one of the downside risks, of
our forecast, it's definitely one of them.
Speaker 2 (10:37):
Yeah, so we're entering a year where spreads are tight
issue and expectations are rising and economic signals are somewhat
mixed in that kind of environment. What frameworks are indicators
do you think are most useful for evaluating sector rotation
opportunities and credit?
Speaker 3 (10:52):
Yeah, so what's really interesting on the sector side is
most normal feeling years and like I said, wasn't that
high this year? Kind of a normal feeling year, you
would say, Okay, you know, let's look at the starting spread,
let's look at the beta related to that, and see
how it plays out. You chart that this year, it's
just a bunch of dots on a graph. It's there.
(11:15):
It actually doesn't have very much value. So what was
interesting is, especially in the investment grade side, what we
found is if you actually looked at that supply, the
supplying numbers, and looked at them versus the moving spreads,
they did matter a lot. So I think the change
the last question you know that that that that is
going to continue to be part of the answer. Obviously,
(11:35):
fundamentals always are as well. We've certainly seen some out
of favor sector some sectors we expect to continue to
have pressure. You'd look at something like chemicals where it
doesn't feel like there's a turnaround that's in it, right,
and we'd remain cautious on areas like that. Uh, and
so you've got you've got to overlay the fundamentals. But
it was interesting this year how it was much less
(11:58):
of a beta play and much more of what's going
on technically, which is what I would call supply.
Speaker 2 (12:04):
And it feels like event driven factors, everything from asset
sales to regulatory shifts to M and A are playing
a bigger role in single name credit. How do you
see that trend evolving? And what makes a catalyst actionable
from a credit selection standpoint?
Speaker 3 (12:18):
Yeah, really really good point, right, And so I would
actually start with financials to answer that question. So if
we think about, as you know, what's going on in
terms of the ability to do M and A. Look
at you know, and this is mostly on the small side, right,
but look at small bank mergers. How quickly you can
get that through under the current administration relative to what's
(12:39):
occurred in the past, and the ability to do that,
it's it's changed significantly. The other thing is SLR rules
we're just finalized, and if you look at the SLR rules,
the opposite is probably going to be happening. Happening on
the financial side in terms of supply, right then, so
the need you know, if anything, a lot of the
larger banks have more debt than they made need under SLR,
(13:00):
so you can have less pressure. And that is a
big part of It's not the only part, but it's
a big part of why we continue to like financials
expect that they can get some outperformance relative to industrials.
Speaker 1 (13:14):
In twenty twenty six, going back to the private markets spread,
I mean, you must get asked about this a lot.
It's the other big theme other than AI as.
Speaker 3 (13:20):
All definitely those are the two every time, right, But
it was.
Speaker 1 (13:23):
The Golden Asian, then it became the age of cockroaches,
and then it became, as Mark Rowan said, we've all
lost our minds about you know, the risks that are there.
Speaker 3 (13:31):
I'm just wondering what minds up in between.
Speaker 1 (13:33):
Well, you get to look at this stuff all day long.
I wonder, like, you know, how you see private markets
in terms of the debt. Is it that inherently risky?
Is it really a big problem? And what impact does
it have ultimately on the public markets.
Speaker 3 (13:48):
Yeah, so, so, look, I do think the truth probably
lies in between. I was joking first, but I think
on this question that probably is the answer. So I
mentioned those net supply numbers down ten percent. If we
had some of these big mega deals in private IG,
which to be fair, in past years we really haven't had.
Maybe we've had one or two a year, and it's
(14:09):
been ramping up over time. But you go back, you
know pre COVID virtually none of them, and you would
have had nets supply up this year. Okay, So that
took real supply out of the market. I think that
will continue. There's been a lot of capital rays that
is going to go after that. Now, what I think
(14:29):
sometimes gets confused is when people talk about private IG
and look, if I wasn't spending my whole days on this,
I would get confused too. In your head, it's okay,
does XYZ Corporate are they deciding should they issue a
ten year bond in the private space or should they
issue a ten year bond in the public space. That
is not most of what we are talking about in
private IG saying it can't happen, but it is the
(14:51):
best minority. Instead, it's related to what really is you know,
net supply if we get back to that, a CAPEX
project act, maybe an M and a related thing, and
it's typically had an asset associated with right, and so
these are really you know, somewhat secured or asset backed
typed deals, right, and so now are you know in
(15:16):
the sense of, you know, a lot of them have
ironclad leases are very important to you know, singlely rated
parent companies, and you have to take all of that
into account. But they're often done potentially from a separate
you know SPV right, in other words, a separate box
that is not part of the main borrowing group of
a company, which has its benefits you know, as well
(15:37):
as potentially some downsides in terms of being behind some
other debt with with respect to certain assets. So they
are different, right, there are different risks that are inherent
in those. I think most of those large deals that
are still part of of some of these larger corporates,
you know, the risks seem to be priced somewhat appropriately.
(16:00):
Were my concern lives more generally, right. And then, as
you just mentioned before, I go there on the leverage
lending side of things, right, So kind of hig yield
rated if you will, even though a lot of this
stuff doesn't get rated private credit there, Do I think leverage,
You know, we have a bunch of different stats we
can look at, But do I think on average leverage
is higher than you would see in the leverage loan market. Yeah,
(16:23):
I think it probably is. But pricing a half a
turn or a turn more of leverage, we can do that,
and if we think that causes additional stress, we can
look back at histories of defaults and recoveries and all
of those things, and we can price that risk. What
concerns me a bit more is as we move more
and more into the asset backed world and we move
(16:44):
into pools of securities that are constantly changing potentially, because
that's what the asset back world can often be as
opposed to just what I referenced earlier in private credit,
which is, hey, we build this facility. It's CAPEX related
and this is exactly what you're referencing. There's a lot
been made about who does better due diligence, well, the
ability to do due diligence in the same level on
(17:07):
a changing pool of borrowers. It's just lower, No matter
who's doing the due diligence. And I think that's where
some of the risks. We're also securitizing potentially cash flows
that we don't have as much to fault history on
recovery history and all of those things as markets get creative,
which also fits with my hey, it's it's probably late
(17:27):
cycle type theme. I mean we've seen this before, definitely
in markets. I've certainly seen it before. So I think
that's where if we continue to move into some of
these assets in the asset backworld that are you know,
not what we've securitized before, I have some concerns.
Speaker 1 (17:45):
There, and more exposure to the consumer and more exposi subprime,
and more exposure to a lot of loans that may
just fall apart. Also at a time when there's just
way more demand, it seems than actual supply of these
assets to securitize. And then you know this is constant, Oh,
we need to get more yield, so let's move into
stretch of finance.
Speaker 3 (18:02):
Yeah, I mean the demand is clearly there. If you
look at insurers balance sheets, the abs portion of that
balance sheet is up materially, and it's really the growth
is almost all through private ABS, and the growth has
been very concentrated. If you look at private equity owned insures,
(18:23):
they tend to have you know, eight nine hundred basis
points more of ABS on their balance sheet than they
do corporates relative to more traditional insures.
Speaker 1 (18:32):
Right, But have we seen this movie before? I mean
we remember, we all remember two thousand and eight. I
mean that was you know, the lead up to that
was a lot of securitization of you know, products that
didn't turn out to be well, everyone told themselves it
was uncorrelated and there was a bundle of loans underlying,
so you were, you know, somewhat diversified. But you know,
give the amount of clos, given the amount of issuance
(18:54):
of new abs, do you worry at all that we
are creating another bubble in that market?
Speaker 3 (18:58):
I worry to some degree. I don't think we're there yet,
But I think if we do go back to that analogy,
and you use CLOS as an example, right, what was
the one thing that if you're buying up in the
capital structure, even though anything that started with C and
had three letters became essentially a four letter word as
part of the credit crisis, what was the one thing
(19:19):
that didn't blow up at all. Right, Yeah, triple a's
double as you've never had the fault. I think there's
one single A CLO default in history. I don't think
that's changed really materially for for that product, you know.
And I think a lot of what what we're lending
against is more corporate backed than if you look at
(19:41):
you know, the more mortgage back stuff that we did
in that crisis, and the course of the correlation I
think works out a little bit better. And honestly, I
used to joke at coming out of the credit crisis,
I said, Okay, well, if you survive this, what could happen,
for example, in clos that could actually cause them to
blow up? I mean, I guess you could shut down
(20:01):
the whole economy for three to six months, but that'll
never happen. And then we did that. Right now, you
can say the government came in and helped out. But
I think generically, I still feel like these assets are
a lot better than what we saw then, But they're
also a lot riskier than where we were five years ago,
I guess the fair comment.
Speaker 1 (20:18):
And we're getting more people on our show talking about
the equity and the double B and all of the
other stuff to get returns.
Speaker 2 (20:25):
And so you know, zooming out a little bit. Your
team often combines systematic signals with fundamental analyst views. How
do you see that relationship evolving as investors increasingly rely
on data driven insights and what does best practice look
like when those two perspectives diverge.
Speaker 3 (20:42):
Yeah, it's fascinating. And hey, we're tying in the AI
stuff again because it's constantly, constantly evolving and we're trying
to get smarter and faster and all of those things.
And look, this is something that's been happening in the
equity markets for a long time. As I spend more
time in the equity markets, certainly see more of it.
I think. Right now, what's more interesting is the credit markets,
(21:04):
because the credit markets are going through that evolution. I mean,
we have termed it the equidification of credit, not surprisingly
based on what I just said, but it's one of
the number one topics and it is fascinating, right and
that we've run study after study of trying to say, okay,
you know, we're unique amongst Wall Street banks, I think,
and that we've had this large credit research operation for
(21:26):
years and years. We can go back and mind all
the data of the teams and how they do, and
we look at that and we look at it versus
some of the best you know, systematic signals we can find,
and the answers are pretty similar that the analysts team
tends to do a little bit better, which you know,
always makes me happy. But they're similar enough. But then
when you take the signals right and overlay them on
(21:47):
top of the analysts recommendations, that performance is really good
and the alpha that generates it's like nothing else that
we really see. And you know, really what it does
is is when those signals, meaning the fundamental one and
the systematic one are not aligned and you kind of
kick out those examples, you're really doing a pretty darn
(22:07):
good job of getting rid of things that might not
work in terms of a trade and generating substantial alpha. Right,
And so we are seeing clients increasingly move that way.
Now do I think they could move that way if
we weren't seeing this equification of credit in terms of
the trading side of things, right, the ability to transact
very differently in terms of electronic but portfolio trading really,
(22:33):
you know, and then when you see a price in
a model knowing that, hey, there's a pretty good chance
that that's actually the price, which I mean, I would
say the I mean from the end of the credit
crisis really almost till the pandemic. The number one thing
I would hear when I walk into a meeting, since
we just talked about the two things I have to
talk about this time, was how bad liquidity was in
credit markets. I never hear that anymore. It's completely changed.
Speaker 1 (22:56):
How big are the trades right now? On the portfolio trades?
Speaker 3 (22:58):
Oh, well, you know, portfolio trades in you know, in
aggregate can be billions of dollars of portfolio trading. The
line items tend to be small. Now on some of
those bigger ones, of course, there are a few million
the line items. But your average portfolio trade has line
items of you know, half a million or lass because
it's dealing with those flows.
Speaker 1 (23:20):
And does it inherently mean that spreads in ig credit
should be tied to because it's easier to trade.
Speaker 3 (23:25):
I think that's a great question, and probably people don't
ask it enough. I think the answer to is yes so.
And I also think it explains part of the private
credit frenzy. So if you think about credit markets ig
or high yields. You had some form of liquidity premium
(23:46):
that should have been in those spreads historically because they
were not the most liquid things, and really the need
to have that premium in spreads today, I would argue
it doesn't exist. And so and you also would have said, hey,
some of that's in off the run, some of it's
down in quality, and now that everything has that kind
(24:06):
of liquidity, it doesn't exist. I think it would tell
you that, you know, on average spread should be a
bit tighter in public credit markets, So what do you do.
You wind up going into things like private credit that
certainly had a lot more of that illiquidity premium in it.
I think today we've seen a decent amount of that
evaporate in areas. Right so, you know, when there's a
(24:30):
potential large leverage loancoming and it could go to the
private credit markets, it could go to their probably syndicated
loan markets, a lot of that premium, if not all
of it has evaporated. Just it's obvious it's competition right now.
There are other unique deals where I think it certainly
still exists, even if not in the size it once did.
Speaker 2 (24:49):
And I guess getting a little bit more micro here
and maybe leveraging some of your analysts team views. You know,
every sector you know view naturally embeds a macro assumption.
So how is your team framing the twenty twenty six
economic backdrop from growth, inflation, consumer health, funding conditions, and
how do those assumptions shape your expectations for cyclicals versus
(25:11):
non cyclicals.
Speaker 3 (25:12):
Yeah, so we're thinking we will see another year that's
you know, growth doesn't look that dissimilar to this year,
although this year has been a bit lumpy, you know
when you kind of think of the official statistics, especially
because of the government shutdown that we just went through. Right,
But you know, if you're thinking about a year that
you could have like high one percent type growth, we
don't expect huge moves when it comes to treasure yields
(25:37):
as well, Right, So that's not going to have a
massive impact a little bit when it comes to two returns.
But you know, when you think about a baseline economic
scenario like that, right, as I said earlier, that's okay
for credit, or it tends to be okay for credit.
We talked about financial side, so I'll talk about the
non financial side as we think through what it means
(25:58):
for certain sectors. You also have to think through with
a lot of those sectors what it means based on
the makeup of it. Right, So you can look at
something like retail and high yield that you might say
still would be sensitive in a sort of low but
positive growth environment or menium growth environment, maybe we'd even
(26:21):
call it in these more leveraged companies. But over time
the composition of that index has changed a little bit,
and you know, I actually think it should perform okay
next year. Then you look at some areas where there's
potentially secular declining businesses and that and what that potentially
could mean. But if you look at the cyclical non
(26:42):
cyclical premium in general, cyclical premium, I guess this is
what we should call it. In general. You're not getting
a ton right now for that cyclical premium. I mentioned
sectors like chemicals that were a bit nervous on some
of the premiums come out of autos that was in
where we're not overly parish but also not not not
super bullsh and so you know, I think you probably
(27:03):
lean in a little bit to the non cyclicals at
levels here.
Speaker 1 (27:06):
And the one thing you just don't want to do
is lose any money. So that's what about defaults. There
aren't that many defaults in public markets. I'm wondering whether
you think that they've been kind of you know, pushed
into the private markets or whether sort of paper it
over by the lems, the liability management you know, what's
going on with defaults? What should we be looking for there?
Speaker 3 (27:26):
Yeah, well, look, the liability management stuff, you can you
can get that and you can include it in your
defaults if you so choose. And that's why the leverage
loan default rate has looked a decent amount higher than
the high yield market rate over the last few years.
We think the loan default rate will come down, maybe
not all the way to the high yield the fault rate,
which will probably be like a two to three percent
range for next year, but yeah, a lot closer to
(27:49):
it next year as we've worked through you know, actually
a lot of these uh, these l and mes and
I think to your point in private markets, yeah, there
was a time a few years ago where there are
some loans that were triple c and because of the
way the loan market works, and that two thirds of
the buyer base is colos who can't really be buying
new triple c's. You know, it is difficult to refinance
(28:12):
some of those names. You definitely saw a few of
these triple c's get refinanced into the private credit markets
where they might have been default otherwise. Now those haven't
necessarily gone on the private credit market and just defaulted.
It was probably just a better buyer and it made
more sense for those names to be in that market.
When you look at private credit, there's a lot of
people trying to figure out what default rates are, and
(28:33):
you can certainly look at NONIC rules. You can get
that information pretty easily. On things like BDC's, the non
AC rule rates are fairly modest and would be below
the numbers that you actually see for the public markets. Now,
if I'm saying, well, we can include L andmes in
public market default rates, it's a little bit disingenuous to
(28:54):
just look at non AC rules in the private markets.
There's some data that we see out there that shows,
for example, covenant defaults in private markets. If you added
that to non accrules, the numbers would look pretty darn similar,
if not a tiny bit higher than the public markets. Now,
that's probably being too harsh actually in private markets because
(29:17):
you know, not every covenant default rate, not every covenant
default would be enough to lead to an LME or
something like that. So I actually think the numbers point
to pretty similar levels between them. I've also seen some
studies on picks or paying payment in kind in the
private credit markets. You hear that coming up a lot.
(29:38):
I think you guys have discussed that in the past
on this show. And if you look at that, you know,
let's use around number, it's about ten percent of most
of the data you can find, you know, for BBC's
in other areas in private credit markets. You know, I've
seen some studies that show that okay, well you know
about you know, fifty five sixty percent of those picks
(30:00):
or what people have now been terming bad picks. I'm
sure you're getting familiar with, i e. What they're saying
there is picks that aren't given at the outset because
the company knows it just needs a couple of years
to grow into things. But they're picks that are part
of a renegotiation, which you know that feels like, you know,
potentially something that could have led to a public market
to fault, right, and so you can say, okay, that's
(30:21):
like a six percent rate. Once again, probably a little
bit too harsh to say it's a six percent of fault.
Wait for the private credit markets, it's just meant to
say that not a cruel rates. Probably not the rate
number either, And like I said, I think the numbers
are pretty similar.
Speaker 1 (30:34):
So absolute a recession then it just seems like pretty
easy to avoid trouble. You just done by any triple cs.
You kind of do a bit more credit work. You
you know, stay out of things that look a bit
stress in terms of sects. But if you if you
are worried, and if you do think that, you know,
the economies may be going into a downtown or there
are other things to look out for, how would you
hedge the risk and credit right now?
Speaker 3 (30:55):
Yeah, you know, if you think about it, these credit
One of the nice things about the public markets, and
maybe it's a comment about the fact that we have
public credit and private credit markets, is the quality of
those markets is the best it's been in a long time,
or amongst the best it's been in a long time. Right,
And so if you look at the investment grade market,
(31:17):
right within the investment grade market, we're seeing you know,
very high levels of upgrades from triple bs to single a's.
We're seeing triple b's be a much smaller portion of
the investment grade market than they've been in several years.
If you think about going into twenty twenty, let's go
back to you know, what was the most popular question
(31:37):
at the time. Going into twenty twenty, Everything started with
triple B bubble. Okay, that does not exist today. Now
we think there's some chunky names that can get downgrade
and we'll actually see a net fallen angel relative to
rising star year. It's a little bit more specific to
some single names.
Speaker 1 (31:55):
Is that on credit quality or is it own levering
up for M and as.
Speaker 3 (31:58):
It's more on credit quality and uh, some cyclical areas,
you know, and you know, some of it was past
M and A right, you know, how to WBD get
downgraded this year was past M and A right, and
so you know it's some isolatedt stuff, but you know,
within ig actually we've seen a huge net upgrade ratio
(32:21):
and I think with triple B is shrinking in general, right,
it's actually an interesting part of the credit markets to own.
Then you look at the high yield market and with
the exception of right after COVID when when a bunch
of stuff got downgraded, you really have one of the
highest double B portions of the market ever, so you
(32:41):
actually have places, you know, because we can use the
term hide out. But the ability to do that definitely
exists in today's markets. Now, you know, the double B
single bee ratio this point in time is a bit tight.
So you know, maybe say, okay, I don't want to
add too much to double b's today. And look, I
think to your point on avoiding triple c's. While we're
(33:03):
not going to sit here and pound the table on
triple c's, it is the only part of the credit
market that if you look at in a historical context,
you could argue that from a spread standpoint, it's cheap.
And so that tells me you can't ignore it either,
and you've got to pick and choose there Also.
Speaker 1 (33:20):
On spread, though, the gap between double be's and triple
be's is not very big, so you're not really getting
paid that much to take more junk risk. Therefore, is
it not you know, simple just to say triple b's
and you know, I.
Speaker 3 (33:31):
Think triple b's look good right now. Yes, to answer
your question, it looks like a sweet sports spot. Certainly
of markets today. You know, there's that double B tribleship
can tend to change very very rapidly. But I agree
if you look at it today, it does it does
look better.
Speaker 1 (33:50):
So in terms of the globe, I mean, I love
the fact you have a global responsibility. We don't get
to talk enough about the rest of the world here.
We we have had, you know, swings. It's maybe off
the Liberation day of you know, look at our portfolio
so long the US, We've got to start diversifying. Everyone
kind of had that reaction to the tariffs that kind
(34:11):
of faded a bit. But what are you thinking in
terms of opportunities in Europe? And you know, how does
it compared to the US.
Speaker 3 (34:17):
Yeah, so the Cell America narrative, right, which is probably
what you were referring to, it didn't really amount too
much in my opinion, you know, where their marginal flows
that didn't come to the US. I think that's true.
I think there was less selling. Look a year ago
we put on an outlook and we said Europe look
really cheap from a spread standpoint, and it has performed
(34:41):
quite well. If we look at it today, marginally cheap.
I would say, you know, if I had a pick,
you know, who would have perform next year, probably Europe.
But it's by a really slim margin at this point.
And look, some of that is while the growth picture
is you know, growth picture, it you know, from an
(35:02):
absolute standpoint should be a little better in the US,
that's been the case for a long time. The delta
should be a little bit lower. A lot of that
obviously is uh, you know, kind of boosting fiscal spending,
with Germany being the empicenter of that. We got through
the UK budget seemingly without the worst results in the
past week. There's still a lot of risks coming out
(35:25):
of France, you know, as they struggle to pass budgets
and and form governments and all those things. So there
are some risks like that. But at the same time,
with a little bit of that, more of the fiscal
stabilizer over in Europe than we've had in the past,
it probably gives you enough stability to get very marginal
out performance.
Speaker 1 (35:44):
Is there a risk the fysical spending, all this defense
spending particularly crowds out the corporates in the European market.
Speaker 3 (35:52):
It's a risk, you know, it's certainly a risk. And
and when you look at the defense spending, you know,
in general you can see, okay, Germany's the biggest chunk
of it as they kind of you know, loosened up
the debt break, but everyone is spending more right across Europe,
and you know, I think most of it will be
spent on European companies. Obviously not all of it will,
(36:15):
so there should be some boosts there. But look, there's
certainly a risk. However, you know, I think when you're
in a world that's unfortunately as viollatile as it is today,
I think we continue to see that spending and it
is incremental in some way, at least to what we
were seeing versus say, twelve months ago. Right.
Speaker 1 (36:38):
Asia's also another market we don't get enough to talk
about here. China was, you know, not that longer uninvestible
to most people, but now it has become you know,
it's back in the fold. It's the potential. We're still
going through the housing and you know, real estate crisis there,
but there seems to be appetite and certainly there's yield
and there's return if you go that way. Do you
(36:58):
see any opportunity and.
Speaker 3 (37:00):
We talk about credit markets, right, what happened for years
and years was that China and Asia were becoming a
much bigger portion of any EM portfolio, especially on the
high yield side with property right, and I mean, those
property bonds have shrunk massively the amount outstanding because of
defaults and structuring and all of those things. So I
(37:23):
think it's a bit tougher to focus on that just
just not a lot left. And we do think the
property sector still has issues moving forward, right, Instead, it
becomes a little bit more of the TMT space on
the IG side, really on the high yeld side, it's
more of like Macaw gaming and stuff like that, and
it's becoming a smaller part. And then instead, what you're
(37:45):
finding is that in the EM landscape overall, you're actually
seeing the rest of the world become a bigger portion
of it. And if you look at where that issuance
is occurring, and you know, if we think through next year,
especially in the higher quality stuff, it's really going to
be the GCC Middle East area that's adding a lot
to the net issuance. And you know, and and ironically
(38:08):
some of that gets bought as a replacement out in Asia, right,
but to replace some of the issuance that traditionally was
coming maybe from China, right, and so we think that'll
remain interesting. I mean, Latin America has certainly been interesting
on the corporate side. Brazilian corporates have been really validle
it feels like we're at a point right now, or
maybe moving towards the other side of that. But you know,
(38:28):
there's there's gonna be plenty of interesting things in the MS,
there always is.
Speaker 1 (38:32):
But you think the best relative value remains in the US.
Speaker 3 (38:36):
You know, look, I think the US is the market
that is large liquid, and you you know, you are
able to invest position and take different views. I would
say I could see, you know, Europe outperforming very marginally,
so so I guess a tiny bit of a relative
(38:56):
value lean to Europe, but not new as strong as
we felt last year when European spreads were clearly cheap
to US spreads.
Speaker 1 (39:04):
You do a lot of traveling, You talk to people
all around the world. What kind of questions are they
asking you right now about credit markets? How interested? Alicuely,
I'm interested in the the funds that could invest in anything,
And you know, what what do they what do they make?
Speaker 3 (39:19):
Of credit.
Speaker 1 (39:20):
Yeah, it seems to be more popular.
Speaker 3 (39:22):
It is, but not always for good reasons. I guess
that is what I would say.
Speaker 1 (39:25):
Okay, tell us about the bad reasons.
Speaker 3 (39:27):
Yeah, yeah, Well I think I think you sort of
hit on it a little bit earlier, right, And so
when you've got the comment like the cockroaches comment, people
want to know about that when they know your background
is certainly on the on the credit side. And then
when you think about the AI, when you think about
the cap X funding, you know, for a long time,
(39:49):
AI was just a story and inequity markets, and in
my opinion, it really wasn't that interesting for credit markets
because the low beta nature of a lot of those names,
and you know that being said, you know, some of
these private credit deals even strike the interests of people
who from outside the asset class when they see they
can potentially get those those kind of spreads on the
(40:11):
on the death side, right, it makes you know, could
potentially make sense for people. I think, to your point,
we are seeing people look at interesting ways, you know,
to securitize things we have seen. You know, you mentioned
you know, Colo Equity and double b's and those kind
of things, you know, in a world where yields are
a little bit lower, those are going to garner focus, right,
(40:33):
and so structure is going to continue to garner focus.
But look, a lot of it right now is the
question of is credit the canary in the coal mine
or what do you know that our market doesn't know?
And obviously equity markets have been a little bit more
volatile recently, but still trading it decently high multiples.
Speaker 1 (40:51):
When you're talking about AI to people that don't look
at credit all the time, and they're discussing it, let's
say an Oracle thirty year bond or another reason with
thirty year bond, you know you'll you'll aim in credit
is to get your money back. Yes, and this is
business where you've don't know what's going to happen tomorrow,
let alone thirty years later. How do you kind of
reconcile you know, the lung term debt investment for some
of these projects that you know appear entirely speculative to me.
Speaker 3 (41:15):
Yeah, and that's and that's why I think as we
move forward, if we continue to see issue in out
the curve, it'll be interesting to see the appetite for that,
especially in a market that hasn't seen as much thirty
year type investments. But look, I mean we could have
probably make the same argument for ten year type paper, right.
And what's been interesting though, is in a highal market,
(41:36):
which is more speculative, right, ten year bonds when I started,
every bomb was a ten year non call five right.
We don't see those anymore. Almost no one issues outside
of eight years in high yield. Now those bonds are callable,
and people are always thinking that they could potentially call
them and refinance them at a better rate. And you
can argue that's part of it, but I think part
(41:57):
of it is, you know, as more speculative companies, you
don't issue that for out the curve, right, And so
we could certainly see some transit issuance. But but look,
when you think about some of these data centers, they're
signing leases off in like twenty year type leases that
are quite binding, and so there is the ability to
definitely support the cash flows for a long period of time.
(42:19):
So maybe it doesn't go out with thirty years, maybe
it winds up being twenty year bonds. But I think
if you have those clear leases that no one can
get out of, and most of the hyperscales have been
clear about that, then your ability to issue debt with
some term will exist.
Speaker 1 (42:34):
Hoping though that you're in a company that whose technology
is not going to be absolete.
Speaker 3 (42:38):
Yes, the technology side of things is at some point mark, which.
Speaker 1 (42:42):
You know concerns me. But going back to forecasting, one
of our guest studies year described forecasting as a crime
on wool Street. It was actually a crime. You could
get fined or punished or something for it. You do
have to forecast. So you were very good this year
in terms of your IG spread forecast. You said it
would end in an eighty five to ninety basis points
ranged by the end of the year. Wait below that,
but we could will wide. Now ilet'll say, still a
(43:03):
good cool But what did you get wrong about this year?
And you know where did you get calls off God?
Speaker 3 (43:08):
And why do you think? Yeah? Look, so I think
understanding just how extreme the moves were going to be
in both directions around Liberation Day was not easy for most.
It certainly did feel like a buying opportunity at some point.
(43:30):
But I wouldn't say we perfectly called the tops and
bottoms around that. I think you know where we've had
a view that's been helpful is that as we work
through that and really start to do the math around
it and realize that the tariffs were going to add
up to a lot of revenue and that the deficit
(43:50):
side of things was not going to be as bad
probably in twenty twenty six as a result of the
tariff revenues. Now, let's obviously they've got some core cases
coming up too, I understand that, but based on the
current status quo, that that was going to lead to
a little bit better environment in terms of the risks
that people were seeing in a sell off and treasuries
(44:13):
which were going to be a general risk off event.
I think that's something we were able to focus on
and identify as part of that next move tighter. You know,
even if we didn't get the first one, and it.
Speaker 1 (44:23):
Terms of focusing out for next year, what are you
most worried about in terms of you know this, if
this thing happens, then all bets are off.
Speaker 3 (44:30):
Yeah. Look, I think you know to your point on
the technology change, right. So we had the deep seek
moment at the beginning of this year, which was a
real freak out for a lot of people. Turned out
at least in the short term that that shouldn't have
been that troubling for markets. But I think, you know,
(44:51):
as the technology changes, if we get to a point
where we see a lot of this issuance coming to
the market, and then there's some changes where maybe certain
things are a little bit less viable, a little bit
less attractive, and you've already stuck the market with off
that paper, I think that leads to some downside risks
that we're not fully putting in our forecast at least.
Speaker 1 (45:10):
And we started the call talking about the late cycle,
and you use the word innings, and we've got loads
of baseball fans, although I don't really understand the game myself,
but what inning are we actually in?
Speaker 3 (45:20):
You know, I think we're approaching the seventh inning stretch here.
Speaker 1 (45:23):
Probably we'll see, we'll see, all right. Brilliant, great stuff.
Brad Rogoff from Berkley's, thank you so much for joining
us on.
Speaker 3 (45:29):
The Credit Edge.
Speaker 1 (45:30):
Thank you guys both for having me, and of course
we're very grateful to Mike camp Alone from Bloomberg Intelligence. Cheers, Mike,
thank you very much for even more credit market analysis
and insight. Read all of Mike'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, plus outlooks
on more than ninety industries and one hundred market industries,
(45:52):
currencies and commodities. Please do subscribe to The Credit Edge
wherever you get your podcasts. We're on Apple, Spotify and
all other good podcasts it is, including the Bloomberg Terminal
at bpod Go. Give us a review, tell your friends,
or email me directly at jcrombieight 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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