June 5, 2025 • 46 mins
Credit markets are rallying but there’s elevated risk of some companies not repaying debt, according to the Schwab Center for Financial Research. “There’s a sense of complacency,” Collin Martin, the firm’s fixed income strategist, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Himanshu Bakshi in the latest episode of the Credit Edge podcast. “Defaults are probably going to stay high,” says Martin, noting low interest coverage ratios among the weakest borrowers. Martin and Bakshi also discuss private credit risk, floating-rate and preferred debt opportunities, and the impact of trade wars on consumer confidence.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:17):
Hello, and welcome to the Credit Edge Weekly Markets Podcast.
My name is James Grumby. I'm a senior at Bloomberg.
Speaker 2 (00:23):
And I'm Himanshu Bakshi, a senior credit analyst at Bloomberg Intelligence,
covering banks and non bank financials. This week, we are
very pleased to welcome Colin Martin, director and fixed income
strategist at show Op Center for Financial Research. How are you, Colin,
I'm doing great. Thank you so much for having me.
Thank you for joining us today. At SHOOP, Colin provides
in depth analysis and investor education on fixed income markets,
(00:44):
with a particular focus on taxable credit markets, and with
over a decade at Shop, Colin has established himself as
a leading voice in fixed income strategy with thrilled to
have you on the show.
Speaker 1 (00:55):
Thank you so much, so we have loads of questions
for you. Before we ask the question, I'm just going
to set the scene a bit. Markets have rallied on
hopes of a broad ceasefire in the trade war, but
there's still a huge amount of uncertainty out there, plus
more volatility to come as the US moves on from
tariffs to tax and immigration reform. Headline risk is high,
yet credit markets project an air of complacency, with debt
(01:16):
spreads back below where they were before so called Liberation
Day at the start of April, and junk bonds just
had their best month in almost a year. Keeping corporate
debt risk premium very tight is the fact that there's
way too much demand for a limited amount of net
new supply of corporate bonds, and unless the M and
A machine cranks back up, the supply demand in balance
will continue. On top of that, the US has lost
(01:38):
its triple A credit rating, calling into question the idea
of risk free rate. Perhaps that makes corporate debt look
more attractive in relative terms. Investors are also looking more
at Europe and Asia as alternatives, but there are clear
limitations when it comes to scale and liquidity in those markets.
So Colin, what's your take. Is credit fairly valued at
these levels?
Speaker 3 (01:57):
I'd say it is fairly valued.
Speaker 4 (01:59):
To maybe a little bit overvalued. You know, we saw
that big blowout in spreads in early April because of
all the anxiety around the tariffs, but then they've since
come down. They're still a little bit elevated compared to
where they were earlier in the year. I think it's
important to point out that even though there's a lot
of uncertainty out there, you said that when.
Speaker 3 (02:17):
You kicked us off.
Speaker 4 (02:19):
I'll probably repeat it a lot in this conversation. I mean,
that's the number one thing we're looking at. But despite
all that uncertainty, we came into the year on relatively
solid footing and the data we're seeing right now, despite
the disappointing soft data, the hard data is okay. So
I think still think they're a little overvalued, But I
think it makes sense that spreads are where they are
(02:39):
because if tariffs.
Speaker 3 (02:41):
Are you can't say they're off the table. Right now.
There's on again, off again.
Speaker 4 (02:45):
We still have a relatively high tariff rate, even with
those big reciprocal tariffs kind of brought back to that
ten percent level. That is an overhang. But if you
look at fundamentals, revenues are still strong. Corporate profits are
still high. We got corporate profits last week GDP release
and they did decline in the first quarter by I
think three percent or so, but we're still at a
(03:05):
really high level. If you look at where we were
back in you know, the early stages of COVID late
twenty nineteen. Corporate profits on an aggregate are up fifty
or sixty percent, so that's a really strong starting point
in aggregate. Again, balance sheets are relatively strong, a lot
of cash on their balance sheets, and even though borrowing
costs financing costs are elevated compared to where we've seen
(03:28):
for the past fifteen years and right before the pandemic,
corporations have proven that they can mostly handle it. I
say mostly because lower rated companies I think will continue
to struggle, but they've shown us that that they can
handle it. So I think spreads will probably stay supported
for a while unless there's another, you know, big tariff
(03:48):
headline that I think would spook the markets.
Speaker 3 (03:50):
But I think we'll probably trade low for a little bit.
Speaker 2 (03:53):
So Coney, you talked about it, and then James mentioned
it in his own remarks. Despite tight spreads, he's remain
attractive due to high base rates. Our investors adequately compensated
for the risk, do you think or is there a
sense of complacency in the market.
Speaker 4 (04:07):
I do think there's a sense of complacency of the market.
I'd say they're adequately compensated, but not compensated too well.
Pretty much our mantra when we talk about investing in
credit and regardless of you know what the spectrum of that,
that risk is to make sure you're being compensated.
Speaker 3 (04:22):
Well for it.
Speaker 4 (04:23):
So if we look at high yield, I think that
it's always more fun to talk about high yield than
ig just because you see, you know, much more volatility, spread, fluctuations,
kind of funkier issuance trends, things like that. At close
to three percent, that's well below the long term average.
So that leads us to be a little bit more
cautious here. But you mentioned yields. You know, what's the
(04:45):
yield that an investor earns. You can make the case
that the yields are relatively attractive. Again, if we go
back to the last fifteen years or so. On that point,
I'll pivot to investment create that that's an area that
we've liked for a while because despite the potential complacency,
despite the concerns about maybe slower growth down the road,
I think they're starting at a really really strong starting point,
(05:08):
like I mentioned before, And if we're looking at yields
of five, five and a half six percent depending on
the actual credit rating, depending on the maturity, we think
that's attractive for a lot of investors. Even if spreads
rise or fall a little bit and we see some fluctuations.
If you're looking for yield, and we know a lot
of investors are, we think that's a pretty good place
to start.
Speaker 1 (05:28):
But the high yield market, you know, those are the
weaker borrowers. They are the ones, you know, most exposed
to a lot of this volatility, and potentially they can't
pay the money back. You know, it's a Fixingcome investor.
You want to get your coupon and the money back.
So what are the risks of more defaults? You know,
with this kind of turbulence in the economy.
Speaker 4 (05:49):
I think the risk of defaults is still high. We
don't really talk about or hear about defaults, but the
rate's still pretty high right now.
Speaker 2 (05:55):
You know.
Speaker 4 (05:55):
We look at data from both Moodies and Standard and
Poors and the trail twelve months specorate default rate is
around four percent or so. It's nothing to sneeze at.
That is closer to the long term average. Using averages
is always difficult. It's usually above or below, just like
with spreads. But that kind of plays into our idea
of are you being compensated well appropriately? And if spreads
(06:20):
are well below average, but we think the risks are
pretty high and default rates are closer to their long
term averages. That's why we think spreads might need to
adjust a little bit. But defaults, like I said, that
they are elevated. We see a big risk with the
lowest rated parts of the market, the Triple C's. That's
pretty much always the case. I don't think that's anything
crazy to say. But you mentioned James the idea of
(06:40):
getting your money back, and we've seen, you know, fundamentals
deteriorate depending on credit rating. And just this morning I
was looking at.
Speaker 3 (06:47):
All, right, what's the what's leverage look like, what's.
Speaker 4 (06:50):
Interest coverage look like for the broad high yield universe,
And if you look specifically at Triple C's, interest coverage
is less than one. So, you know, bringing it back
to your point, if you're not making enough to pay
out that interest payment, I think that's a really big risk.
So defaults are probably gonna stay high. And but it's
I don't know if it's gonna surge higher, but at
(07:11):
four percent, it's enough for us to be a little
bit more cautious, and you know, suggest investors kind of
dive in headfirst.
Speaker 1 (07:19):
And could it be higher if we didn't factor in
all of the liabilty management that's going on and all
of the you know, private credit amendments and pick and
all that stuff. I mean, could it could the actual
rate behive for all this other stuff wasn't going on?
Speaker 4 (07:31):
It most likely is they treat defaults differently, and I
think each credit rating does. And forgive me, I forget
which one treats distressed exchanges differently.
Speaker 3 (07:41):
But if you look at the highyal.
Speaker 4 (07:43):
Bond default rate versus a loan default rate, loans are
still very low, I'd say artificially low. They're not lying,
it's just different methodology. But we see more and more
distressed exchanges. I mean, the default environment is not what
it used to be.
Speaker 3 (07:58):
It used to be.
Speaker 4 (07:59):
You know, you you lend to an issuer, you hope
to get your money back. If not, we're going to
go into chapter seven, chapter eleven, we'll figure it out.
That's not the case anymore. And we've seen all these
this pickup into stressed exchanges. And I think, going back
to the point back complacency, I think markets don't really
worry about that. But at the end of the day,
it's generally speaking, you're getting something that you weren't promised.
(08:21):
You're probably taking a haircut, you're probably pushing out the maturity.
And at its core, you know, lending is expecting to
get your money back. And the world has changed. The
investing world has changed, especially with you know, spec rated
investors or borrowers, rather so.
Speaker 2 (08:40):
Calling all these specific sectors within the investment grade or
HI space that you believe a more vulnerable or resilient
in the content environment.
Speaker 4 (08:49):
So we when we look at the credit markets, you know,
we look at it from a high level, so we
don't look at specific sectors, say communications versus energy utilities.
That's kind of out of our wheelhouse. So we tend
to look at whether we like IG or high yield.
We'll look at things like fixed first floating rate, and
(09:09):
then maybe specific credit ratings. If we look at investment grade,
I think ninety two percent of the market single A
or triple B. It's tough to avoid triple b's these days,
but that's not something I'm too worried about. When I
think when I talk about investment grade, I think fundamentals
are pretty strong across the board. Yeah, there'll be some
weak issues here, and there. So if you are an
(09:29):
investor looking at individual single names, you know, maybe the
lowest of the triple B might be a little bit concerning,
but generally speaking, we're not too worried. There is some
good news though we've seen the share of triple b's
coming down. We saw it surging for almost a decade.
I think at its peak at the Bloomberg US Corporate
Index it got to about fifty two percent. It's down
to about forty six percent, where we've seen single a's
(09:51):
actually decline a little bit. So I think that's that's
pretty good. And then just bringing it back to where
and how we look at at junk, double bees are
probably going to be okay. I mean defaults, which we
were just talking about, they usually come from the lowest rated,
so you're looking at the low bs and the triple C.
So if you have a strategy that's focusing on double
(10:13):
b's or high single bees, yeah, they'll probably be volatility.
There could be spread widening as we expect as the
year progresses, but we wouldn't expect a blowout in those
parts of the junk market.
Speaker 2 (10:26):
So that brings me to something that you mentioned tariffs
in your comments. So a recent US Straight Code ruling
blocked most of President Trump's drives. However, an appease scote
temporarily reinstated those statves spending for the review. How might
this legal uncertainty surrounding type of impact investor confidence and
product credit markets?
Speaker 3 (10:45):
You know it should.
Speaker 4 (10:47):
I think all the uncertainty should negatively influence consumer confidence.
We've seen that, whether it's at the business level or
the consumer level, the number we've seen have been really bad.
I mean, I can't stress that enough. Although we did
get an bounce back with the University of Michigan numbers.
Speaker 3 (11:02):
Because of the quasi tariff rollback.
Speaker 4 (11:05):
I think the on again, off again nature is just
going to leave this cloud of uncertainty around investors, around consumers,
I think specifically around businesses. We haven't seen consumers crack much.
Consumers continue to spend. It's been the case for years
where consumer driven economy. I think on the business level,
I think there is a risk that the sentiment we're
(11:27):
seeing translates to them actually changing how they run their business.
Are they going to hire a lot more people if
there's all this uncertainty out there, I don't think they will.
Maybe they start to reduce their headcount. That's the risk.
Obviously haven't seen it yet. The labor markets held up well.
Do they not expand capacity? Do they not buy a
(11:50):
company as you talked about, James, in terms of M
and A. So I think that should weigh on business
actual activity as the year progresses, and that translates to
a growth slow down. I think that's what would likely
bring spreads a little bit higher.
Speaker 1 (12:05):
If growth slows down, could it not ultimately lead to recession?
And we were at this long end of a really
long cycle that seems to go on, but you know,
rates of high consumers are suffering, there's all these cracks appearing.
You know, there's a lot of volatility coming from the
policy side. What are the risks of a US recession
and something that might affect credit?
Speaker 4 (12:25):
I think the risks are certainly up relative to the
past few months. It's pretty funny. Over twenty twenty three
and twenty twenty four, recession was all that a lot
of people talked about.
Speaker 3 (12:35):
I mean, we talked about it a lot, but but
we were.
Speaker 4 (12:37):
Warning about the risks, but not you know, flashing alarm
signs or alarm signals just yet. We were thinking that
it could happen. It was the recession that never came, though,
and then if we fast forwarded to early twenty twenty five,
I remember having a conversation with some colleagues where we
just stopped talking about it. The idea of a recession
in January and February of this year was just not
(12:59):
something that we were talking talking about. And I'd say
risk was very, very low because the economy was still
growing above trent. We were looking at economic growth in
the two and a half to three percent level. The
risks to the labor market we got a little spook
in twenty twenty four. We saw the sam rule triggered
for I think a month, maybe two, and then it
just leveled off.
Speaker 3 (13:18):
So all those, you know, the.
Speaker 4 (13:20):
Concerns we had didn't arrive, and they never arrived. With
slower economic data, I'd say the risk is on again
just due to uncertainty. I keep using that word a lot,
but I think there's a real risk to slower activity.
Also on the consumer side, we're seeing mortgage rates still
high again, I think around seven percent. For years, people
(13:42):
have been talking about the risks to the housing market
that again never really came. We're starting to see some
headlines there about you know, people looking to sell and
are there enough buyers out there with mortgage rates so high?
I think that's a risk. I think if there's a
just an unser environment, if.
Speaker 3 (14:01):
You're worried about your job prospects.
Speaker 4 (14:02):
Are you going to go you know, put on that addition,
build the deck, take that big vacation. I think there
is a risk that that slows down. But right now,
in the here and now, in early June, that seems
like it might be a few more months away because
right now things still appear to be generally okay.
Speaker 1 (14:20):
Also, the rates side, I mean, is not supposed to
you know this inflation, sale prices stills seem to be
very sticky on the upside. What does the Fed do
in this situation?
Speaker 3 (14:30):
Right now?
Speaker 4 (14:30):
The Fed doesn't need to do anything that there's all
this talk about what happens when the Fed's mandates get
in conflict.
Speaker 3 (14:38):
That is a risk. What are they going to do?
Speaker 4 (14:40):
That's not a conversation that we need to have right now,
because the data says they're not in conflict. Inflation is
still above target, but we've gotten some good inflation readings
over the past month or two. I mean that PCEE
report was really nice in an environment where tariffs were
generally in place. So inflation, though is it's still about
target and the labor market's doing okay. So if you
(15:03):
look at that just those two indicators, the Fed doesn't
need to do anything. It supports the case for them
to hold rates where they are unless we start to
see that recent trend and inflation continue. If we see
inflation on a year over your basis getting really close
to two percent, and I think that would support.
Speaker 3 (15:22):
The case for a cut.
Speaker 4 (15:23):
We'd also need to see the labor market weaken a
little bit, but right now they don't need to if
we look ahead and those mandates are in conflict. You know,
Powell mentioned that that he will still look at inflation.
He mentioned that they're going to see how far away
they are from each of their mandates. I think if
push comes to shove that they'd probably focus on the
(15:44):
labor market more. But as Powell mentioned it, that did
give them a little wheel room. But right now they
don't need to do anything. You know, we keep seeing
changing expectations from the Fed Fund's futures market. Right now,
markets are pricing in two cuts by the end of
the year with a risk cut not coming into like
I believe October we are in the one to two
(16:04):
cut camp. September would probably be the earliest. But the
more this data that we receive that continues to kind
of be in line or suggest that things are holding
up well, that probably pushes the timeline back a little bit.
Speaker 2 (16:19):
So, given your outlook for rates and the risk that
you talked about, what strategies would you recommend for investors
or what securities, whether it's preferred or corpid bonds, would
you like what you don't like as of today?
Speaker 4 (16:32):
So our big picture guidance is intermediate term maturities and
on that. It's mainly because we kind of see two
sided risks here, given all the deficit concerns that it's
historically we've not really bought into that. We haven't found
a relationship between debt deficits and the level of treasure yields.
Speaker 3 (16:50):
But the deficits.
Speaker 4 (16:51):
Continue to grow, our debt continues to grow, so there's
a strong possibility that that zero relationship becomes somewhat of
a relationship. So we are worried that yields can rise
at the long end. So we're worried about taking a
little bit too much interest rate risk. If you're too short,
you're opening yourself up to reinvestment rate risk if the
FED were to cut more than expected. So we just
(17:13):
want to protect investors from both sides. Focus on intermediate
term maturities. We think that's pretty good. On the credit
quality side, we favor an up in credit quality stance
right now. For the points I made before, we think
it makes sense to take risks if you're being well
compensated for them. That's not the case. We really like
investment grade corporates. Intermediate term, you can get yields of
(17:34):
five five and a half percent or so for high
yield bonds. We're not saying investors need to get out
of high yield bonds. Even though spreads are tight, those
absolute yields are relatively attractive around seven and a half percent.
And what we've seen over the past few years the
spread fluctuations, they've been fast. They go up and then
they come down. So if you're holding for twelve months,
(17:57):
twenty four months, thirty six months, you can still generate
relatively attractive return. So that's how we frame a high
yield allocation right now. If seven and a half percent
looks attractive now. I frame that a little bit that
if you hold it for a long period of time,
your returns will probably be a little bit less than
seven and a half percent because of potential credit loss.
(18:18):
But we think that's relatively attractive if you're looking to
be tactical. We don't think it's a great time to
dive in right now. We think there could be a
better opportunity down the road. You mentioned preferreds. I like preferreds.
It's an area that doesn't make as many headlines. I mean,
it's a really small market, but I think it makes
a lot of sense for individual investors.
Speaker 3 (18:39):
I mean a lot of the parts of the.
Speaker 4 (18:40):
Preferred market are really geared towards individual investors with those
twenty five dollars par values. What I really like about them,
and it's not the whole market, but a good chunk
of the market, are the tax advantages that they offer.
Because a lot of preferred securities, if they're considered equity,
they can pay qualified dividends. So if you're investing in
a taxable a count you can get yields after tax
(19:03):
yields that are higher than the high yield bond market.
It's not in apples to apples comparison, but if you
look at just credit ratings, you know, most preferreds. If
we're looking at those issued by the large US banks,
kind of the investment crede market, you're looking at low
triple b's, maybe some high double bees. It's a more
highly rated index than junk bonds. Obviously you're taking some
(19:26):
capital structure risk, but you can get after tax yields
in the four and a half to five percent if
you're in the high tax brackets. So I think that's
a pretty attractive opportunity. And but it goes into you know,
asset sorting, making sure which accounts you're placing investments in.
But we think that they can make a lot of sense.
Speaker 1 (19:45):
Colleague Arnold Kakuta refer to them as thenay danger field
of the credit markets. Yeah, he agrees with you.
Speaker 2 (19:51):
Yeah, so Arnold, actually my colleague he published research today
and he said that banks flutas actually healing more than
some of the investment copied bonds. Because we know, given
that the front end of the treasure cover is in whatted,
which generally signals impending rate cuts, and you yourself mentioned
that you're expecting one to two rate cuts. Do you
find floating rate notes appealing?
Speaker 4 (20:12):
I do, and that's and that's great timing with with
Arnold's fort.
Speaker 2 (20:17):
Is it relative valuation, credits spreads, defensive qualities, or something else.
Speaker 3 (20:21):
It's not necessarily credit spreads. I'd say it's.
Speaker 4 (20:23):
The defensive qualities. I think floaters can be a great
way to invest in the market and stay invested in
the market when there's a lot, a lot of potential
for volatility. Now, floaters there there tend to be higher
rated than the broad ig market. If you look at
the broad investment grade market, you're looking at mostly triple
b's and single a's. For floaters, it's a lot of
(20:45):
single a's and double a's, a lot of allocation, a
lot of exposure to banks, so you have some sector
risk there, but again, if you're investing in highly rated banks,
we think that's acceptable.
Speaker 3 (20:57):
What we like is is the the lack of volatility.
Speaker 4 (21:02):
They have very low interest rate risk, so when we
do see fluctuations and volatility like we saw through the
first five months of the year, their prices do change
a little bit, but the magnitude is much much smaller,
and I think the yields are attractive. Now, if you
look at the average yield of the Bloomberg Floater index,
(21:22):
it's close to five percent, And if you look at
the average yield of an intermediate term corporate index, it's
less than that. It's closer to four point six or
four point seven. So on a maturity to maturity basis,
you get higher yields because of the inverted nature of
the yield curve that you just alluded to, and you
don't have to worry as much about the price fluctuations.
(21:44):
I think it's again a good way to earn yields
near five percent, and you take away a lot, a
lot of the potential movements.
Speaker 2 (21:54):
So I just want to die everything to together that
you mentioned. So how my recent tie of discussions that
we talked about beeflee and potential trade restrictions impact inflation,
economic growth, and consequently the risk of recession. Would such
an environment also your view on attractiveness of floating rate notes.
Speaker 4 (22:14):
It would if we were to get let's look at
a situation where tariffs were in place at a high
level that they did impact growth and then therefore the
labor market, because that's a situation if they were high enough,
we'd probably see inflation stay sticky, even though the recent
trends have kind of bucked that thinking. I would expect
(22:34):
inflation to pick up in a situation like that, and
I would expect growth to slow. If we're seeing that scenario,
the Fed probably cuts more than expected, and that's a
risk to floaters. That is a risk in general to
floaters if you hold them right now. Yes, they offer
very attractive yields, especially compared to fixed rate bonds, but
(22:55):
they're not fixed, so if the Fed cuts rates, your
income would likely come down. If if we continue to
get kind of this i'd say stable decent data and
that continues to push back the timing of rate cuts.
Speaker 3 (23:08):
That's great for floaters.
Speaker 4 (23:09):
It means you don't have to worry about it as much.
If growth just slows a little bit. From here, I
think you have to accept the idea that your income
will come down a little bit. But that's the trade off.
It's a trade off of floaters. You know, you're sacrificing yield,
potential yield to get more price stability. So that's something
to consider. If we were to get a recession that
(23:30):
we talked about, or significantly slower growth and the Fed
cuts more than expected, floaters wouldn't be the best place
to be in.
Speaker 1 (23:38):
So price stability, floating rates sounds like you're the ideal
customer full private credit? Why not private credit called it?
Why not go straight down into the everyone's talking about it.
Speaker 4 (23:49):
Yeah, I'd be silly to think we would talk about
private credit here. Well, why isn't everybody? And it's a
tough market to get into. I'll frame it that way.
Speaker 1 (23:56):
How do you see the relative value though? In that market?
Speaker 4 (23:58):
You know, I think the relative values fine, just like
my view on general leveraged investing. That's always how I
like to frame this discussion. Because we hear about private
credit so much these days, I don't think a day
goes by. We're one of the top stories on the
Bloomberg Terminal has to do with private credit, so we
(24:18):
keep hearing about it. And there are a lot of positives.
You look at historical returns, they are attractive if you
have a long term investing horizon, they can make a
lot of sense. But if you consider what you're investing in,
it's generally junk rated issues, and sometimes you know, some
would argue maybe it's a little bit better than junk.
We don't really know, right, because sometimes they're not necessarily rated.
(24:40):
We're not seeing what's in there. But for the most part,
it's leveraged lending direct lending that you don't really see
what's going on behind the surface. And just like I'm
a little bit worried and cautious about the public junk markets,
I just I share that with private credit, and that
it's not some magical elis. You know there's risks there,
(25:01):
and you don't hear about the risks too often. I
like to frame it this way. It's not it's probably
not the best analogy, but James, I could open up
an account at Schwab for you. I can buy a
high yield ETF. I'm never going to tell you what
your account password is, and in five or six years
will take a look and see how it is. It's okay,
(25:22):
it's not the best analogy, but it's kind of how
it is. You don't see what's going on, and you're
gonna see how it grows over time because you don't
have the ability to see it in real time or
to take your money out.
Speaker 3 (25:31):
So it's not a bad thing. I'm neutral on it.
I just I always like.
Speaker 4 (25:36):
To tell our clients at Schwab who are interested in it,
that it's it's risky investing, just like investing in junk bonds.
Speaker 1 (25:43):
But for much higher yields. So you're going to get
that return? Is it not worth sticking your neck out?
Speaker 4 (25:48):
Potentially the returns are higher, I think because of those risks.
There's no free lunch. If they're offering those high returns,
it's because there's a lot of risk there. Otherwise, I
don't think they'd be going to those markets. If they
could issue publicly at a six or seven percent yield,
(26:08):
why would you issue at ten or eleven or twelve
percent privately? There are benefits to private right it's a
smaller investor base. You can negotiate directly with lenders. That
is a good thing. So I want to make sure
I'm balanced here and not making it seem like I'm
all negative. That can be a good thing. But again,
there's no free lunch, and those yields, those yields do.
Speaker 3 (26:27):
Come with risk.
Speaker 4 (26:28):
And then actually I'll build on something we talked about before.
It's a different type of lending. This is my view.
When I think of traditional bonds, you lend to an
issue you hope to get your money back. I think
direct lending and private credit is very different than that
because I think there's an acknowledgment that it won't be
that straightforward, that there might be some sort of asset
(26:51):
liability management exercise. Maybe there's going to be exchange. Where
am I in the capital stack? What's my recovery value?
Bankers are thinking about that when they come to the
market with debt traditional debt, but I think with private
it's a much different thought process about how might my
position look in three or four years versus traditional borrowing
(27:15):
or lending. Am I getting my money back in four
or five years?
Speaker 3 (27:18):
Right?
Speaker 1 (27:18):
So some guests are talking about investment grade private credit,
and they're talking about asset based finance, and they're talking
about a growth in the market to forty trillion dollars,
which is, you know, presuming you just can't ignore it
at that point, what do you think of investment grade
private sure?
Speaker 4 (27:31):
I mean I'd be more interested in that if it
is true investment grade. You know, I think generally speaking,
fundamentals are pretty strong. Again, I don't want to be
too much of a curmudgeon here. I just want to
highlight that there are risks on investment grade. If that
were the case, and it's truly investment grade, then I
think that can make sense. And if you are an
investor and you're looking for a diversified portfolio, and you
(27:53):
have a large enough asset base to kind of handle
the long lock up periods, then these invests are generally okay.
You just want to make sure that you have that
time horizon and that an allocation there is appropriate given
your risk tolerance.
Speaker 2 (28:09):
Colin, you said you like preferred securities, you like floating
rate notes, which I mostly should buy financial institutions, and
we talked about private credit. Are there other particular segments
of fixed income you believe either overvalued or undervalued at
this point?
Speaker 4 (28:23):
An area we've been looking at a lot, but it's
changed so much lately, and I say lately just over
the past few weeks is the municipal bond market. I
don't know if that's maybe out of the realm here,
but you know, we look at all asset classes, of course,
and if we go back to the early stages of
the tariff announcements in early April, it presented a really,
(28:44):
really attractive opportunity in the municipal bond market. I think
there were a lot of dynamics at play, and our
team has looked into that a lot where I think
people got spooked they left the market where we've seen
this big and we've seen funds become more and more
prominent with MUNI bonds, and so if people kind of
pulled their money out in a relatively ill liquid market,
(29:05):
I think we saw a lot of price discrepancies there,
and we saw relative yields with Muni's go to levels
that we that we thought were really really attractive. That
has since reversed itself a little bit, so Munis can
still make sense a lot. We're not worried about the
credit quality. We think those price movements again were due
to liquidity as opposed to credit quality. But I think
(29:25):
these fast movements are appropriate to discuss in kind of
all of the asset classes, and I'll tie it back
to whether it's IG or high yield or preferreds that
investors might need to be a little bit more nimble
in this environment, because if you're a high yield investor
and you're waiting for say five percent credit spreads before
(29:46):
you want to dive in, we didn't get there. And
even if you were looking at four and a half
percent in April. They were there for a day or
two and then right back down. So we kind of
give that guidance right now where we prefer quality. We
think valuations are are rich for a lot of the
riskier investments. But if we were to see that reverse,
even in the short run, that can present an opportunity.
Speaker 1 (30:08):
Why are these dips not lusts? What are they snap
back so quickly? Let's feel rationale for.
Speaker 4 (30:13):
That, you know, I think, well, I think they snapped
back quickly because of kind of the rollback with the tariffs.
Even though the tariffs were still there, they were they
were less extreme than initially mentioned. But also there's a
lot of demand and you mentioned this earlier, James, there's
a lot of money out there looking for a home.
And and I think this is how private credit can
(30:34):
help the markets.
Speaker 3 (30:35):
Because, like I said, every day goes by where I see.
Speaker 4 (30:38):
A new headline on Bloomberg about private credit, a lot
of it is a lot of new private credits, private
credit funds, you know, raising money. That means there's a
lot of money looking for a home. Now there's pros
and cons to that. If there's too much money chasing
too few investments, we don't get real price discovery, and
maybe maybe.
Speaker 3 (30:55):
We get low spreads. That's probably why we get low spreads.
Speaker 4 (30:58):
But I think it can help on the down side,
where those funds might be looking for an attractive home,
and when we do get these quick selloffs, there can
be investors willing to go inside. So I think even
though we're nervous about the risk of rising spreads as
the year progresses, they're probably not going to go as
high as you'd think based on previous recessions or previous
(31:22):
kind of risk off environments. You know, if you look
at say a fifteen year high yield spread chart, you
can point to, you know, ten plus percent for recessions,
seven and a half eight percent for kind of a
pretty bad risk off environment. Maybe we don't get that
high this time around. They didn't get that high back
in twenty twenty two. They only got to four and
(31:43):
a half percent in early April, so maybe they're only
that four and a half five percent level is what
becomes attractive because there might be more demand coming in
to prevent a further blowout.
Speaker 1 (31:53):
But it seems that the demand holds, and I'm wondering
what the risks to that appetite, you know, us credit
from let's say someone in Japan who's getting very high
local yields from the government. What's the risk that demand
goes away.
Speaker 4 (32:06):
Yeah, well, if the demand goes away, it makes it
harder for companies to refinance. I mean, we have the
so called zombie companies that are staying alive because they
can refinance now. They're refinancing now at very high higher rates,
but they're still doing it even though there's a lot
of demand there. Yes, that might keep support in the
secondary market or even the primary market, but that doesn't
(32:29):
mean there aren't problems under the surface. You know, strong
demand for high yield debt doesn't mean that a troubled
issuer doesn't have the troubles that it already had. That's
not going to fix their earnings outlook, their revenue outlook.
It might help their borrowing costs a little bit, but
if there are issues that are tied to economic growth,
(32:49):
twerf uncertainty, things like that, strong demand and lower borrowing
costs can only do so much.
Speaker 1 (32:55):
So in terms of the global picture we have and
we keep saying this idea of sell America and that
comes and goes. What impact is that having on global credit.
Are you seeing any evidence of that?
Speaker 4 (33:07):
Well, we have seen it pick up lately in US
companies issuing Euro denominated debt. I think because we have
investors looking for it for non US dollar assets.
Speaker 3 (33:19):
I don't know if that's.
Speaker 4 (33:20):
Going to become the norm or a sustained trend. Despite
all the concerns about the end of US exceptionalism, it
always comes down to the question of.
Speaker 3 (33:30):
What's the alternative.
Speaker 4 (33:32):
And I'm sure you've had numerous guests on this podcast
who've said the same thing.
Speaker 3 (33:37):
For better or for worse.
Speaker 4 (33:38):
We have a lot of treasury debt outstanding. That in
itself is a problem, but it means there's a lot
of high quality treasury debt that investors can own if
they're looking for high quality investments. The dollar, we don't
expect it to lose its reserve currency status anytime soon soon,
and probably even longer than that. Most trade is still
done in US dollars, Foreign central banks hold a lot
(34:00):
of US dollars, and there just isn't an alternative, whether
in currency terms or or highly rated debt terms. So
maybe we see the dollar decline a little bit from here,
but that doesn't mean it's the end of the dollar.
Speaker 2 (34:14):
And Colin, I think you mentioned this in the beginning
of the podcast, But given the recent warnings from figures
like Jamie Diamond about potential cracks in the bond market
due to rising national debt, do you see any imagy
at risk that could disrupt the kind of stability in
the credit spreads.
Speaker 4 (34:32):
I do think that if rates were to move higher,
that would have an impact, and it would trickle away
from right now, you know. I'd say that the junkiest
of the junkies most at risk. If rates on the
intermediate term and long part of the curves move up
a little bit higher and stay there, then you get
more and more companies that become more at risk. I
(34:52):
think the risk is that yields stay at these current levels,
and the longer they stay there, which we're at a
handful of years now, but the longer they stay there,
the more that these you know, highly indebted companies needed
to need to manage that. And if we go back
to triple c's again, you know, interest coverage of less
than one, if we see those borrowing costs rise even more,
(35:14):
we'd probably see those ratios come down, So that would
be more of a risk in our view, but again
it's more of a I think it's more of a
junk issue than an investment great issue.
Speaker 1 (35:23):
And if we see that spike in defaults at that
really low end of credit, you know, triple c's how
much of an impact does it have on broader credit?
Speaker 4 (35:31):
Yeah, it has, it has an impact. It's a ripple effect.
It's not a one for one. But if we were
to see the default rate pick up from the current
levels and pick up enough that it was making headlines
because again, like it's been high, but people aren't really
talking about it too much, then yeah, you'd see single
be spreads continue.
Speaker 3 (35:49):
To rise or rise.
Speaker 4 (35:50):
Rather you'd see double be spreads rise. The magnitude would
be less, but in general, it would be a you know,
repricing of risk. And if the outlook is a little
bit gloomier, and if corporate profits are expected to be
challenged in an environment where rates were high, I think
investors are going to start repricing those issues a little bit.
We'd see spreads move up, but again we'd see single
bees move up a lot more than double bees.
Speaker 1 (36:11):
Yeah, I mean, certainly all seeing the gap between spreads
on triple seas and single Bees is quite wide and
has stayed wide throughout all of this snapback and spreads
over the last few weeks, which kind of suggests that
credit investors are kind of, you know, differentiating a little bit,
and so they're not so complacent about that part of
the market, which it seems like it will conveniently blow
(36:32):
up and go away and not rip through the entire market.
I mean, do you think that's the complacency that people
just underestimate the contagion risk from the low end of junk.
Speaker 3 (36:42):
I think so.
Speaker 4 (36:43):
But but what you alluded to that we're seeing right now,
I think that's a good thing. If we're looking across
the curve or across the credit spectrum and all spreads
were low, that would be concerning. But like you said,
triple c's are still elevated.
Speaker 3 (36:57):
So if we look at.
Speaker 4 (36:58):
Where all the various credit ratings are relative to the
past ten years or so, I look at kind of
what's their you know, percentile, and I think most you know,
from double A down to single Bee are in like
the ten to twenty percent range, but triple c's are
in the closer to forty percent range. So that shows
(37:19):
that the markets are focusing more of their attention there
and I think acknowledging that there are risks there. The
question is from a fundamental standpoint, will it trickle in
to these single bees that markets are not pricing in
that risk and are too complacent. I guess it remains
to be seen, but the fact that the triple c's
(37:40):
haven't come down as much shows that, yes, the markets
are differentiating to a degree.
Speaker 1 (37:45):
And you know, we're always looking for the next problem,
the next blow up. You know, since two thousand and
eight when most people missed it. What do you think
could really take us down at this point? I mean,
is there anything that you worry about in terms of
credit markets at the moment.
Speaker 4 (37:57):
In terms of well, one thing, we worried about a
lot that would have ripple effects everywhere, but luckily it
seems to have passed. We worry about FED independence because
that can have a huge impact on everything on all investments,
stock bonds, governments, things like that. On the bright side,
(38:17):
that appears to have passed. We got some good news
that the President and fedcher Powell actually had lunch together
for I think the first time.
Speaker 3 (38:25):
That's good.
Speaker 4 (38:26):
Didn't seem like it went too well, but they met,
and I feel like that's a step in the right direction.
That's one thing that was making us a bit concerned,
but it seems like that's died down for now. Aside
from that, I don't want to keep talking about uncertainty
or complacency too much, but I just wonder if the
(38:47):
general level of complacency because again, if you look at
the ability of issuers to continue to exist in this environment,
not just for the next three months or six months,
but for you twelve eighteen month on twenty four months,
is there too much complacency there? And do we see
you know, some sort of mass selling that that spooks
(39:08):
the markets. But aside from that, it's uncertainty with tariffs,
it's the FED independence, but that doesn't seem to be
an issue right now. And you know how the tariffs
and trade policy kind of translates to the overall economy.
If the tariff news continues to make headlines but we
(39:30):
continue to see the data come in, okay, I think
the markets will keep drugging along. If we start to
see it have a real impact on business activity and
we start to see cracks in the labor market, I
think that's when you start to see a real repricing
of risk.
Speaker 1 (39:44):
And is the general assumption now around the policy that
the trub administration will be more pragmatic than confrontational. Is
that having seen the sort of flip flop over tariffs
over the last few weeks, do you expect more just
accommodation and more of a rational policy.
Speaker 4 (40:02):
Making Maybe all of the above. It's so tough to
tell right now. I'd say that we hear something new
every single day. I think what has changed is we've
gotten it seems like President Trump prefers treasury sectory, dosn't
to be kind of the mouthpiece of what's going on,
(40:22):
and the markets seem to react.
Speaker 3 (40:24):
Better to that.
Speaker 4 (40:26):
Policy itself, though you know, it's still all over the place.
I think that there's just so much uncertainty out there
that even with you know, the court pause and then
the appeal that allows them to stay on, and then
the potential that, let's say that doesn't work, do they
go down other paths with some of these other sections
(40:46):
of the law that allows them to explore other avenues.
I just think this overhang of the tariffs is problematic.
Speaker 3 (40:55):
I do.
Speaker 4 (40:55):
I mean, it's the same thing we've talked about this
whole discussion, the uncertainty that's out there, and if I
don't know what I'm going to be paying for goods
that I'm importing, how do I set a plan for
the next twelve months. And I think that's I think
that's a big problem. So until we get clarity, you know,
I think uncertainty is going to be very much present.
Speaker 1 (41:15):
And Besten did say over the weekend that he was
never going to default on the debt, which kind of
reminded me of what the Argentines used to say, you know,
just before they defaulted on that debt. So we'll have
to see. But in terms of, you know, the relative
value of fixed income in this in this market, the
President also seems to like stocks a lot and talks about,
you know, great chance to buy, but it's a very
(41:36):
volatile stock market. Does that make the relative appeal of
fixed income, you know, credit, Does that make it more
appealing to most people or not?
Speaker 2 (41:44):
Really?
Speaker 4 (41:45):
Well, I think it can support the market. So all
the risks I've talked about, which again I want to
highlight that yields are relatively attractive, and with high yield,
if you're a long term investor, you know, we're not
expecting that the market to tank anytime soon. We just
want to make sure that investors are aware of the risks.
If President Trump begins focusing more on the stock market,
I'd argue that, aside from the a few tweets or
(42:06):
truths that he said now is the time to buy,
he hasn't focused on it as much as he had
in the previous administration. But if he does start to
focus on it more, I think implicitly that's good for
the credit markets. It's good for risk assets in general.
If it seems that I don't know how much he'll
change his policies, but if he, you know, changes the
(42:27):
way he communicates things, I think that that results in
a general support for pretty much all risk assets.
Speaker 1 (42:34):
Yeah, one strategies I was talking about one thirty on
the IG spread is the kind of Trump put level
which they back off. But do you have a I
mean that we talk about the taco trade as well,
But is there any level at which you think, you know,
we are supported in terms of spreads by by the
Trump put?
Speaker 4 (42:52):
One thirty sounds pretty good if I look at though,
if I look at spreads, you know how high have
junk spread or high yield or investment grades. Spread's gone
in non recessionary environments, you know, they've gone to like
two percent or so they're probably not getting that high.
I think that you're right, maybe in the one to three,
maybe one and a half percent range for high yield,
maybe in the four and a half to five percent range,
(43:14):
because even though again he hasn't been as vocal this
time around, we know that he has a preference for
the stock market and the risk asset's doing well, so
I would expect some sort of support and part of
the reason why we're nervous that spreads will increase, but
again not to levels that we've seen in previous risk
(43:35):
off environments.
Speaker 1 (43:36):
Is there one area of relative value that you highlight
right now? Where do you think the best investment opportunity
is for the next let's say, twelve months.
Speaker 4 (43:43):
I still really like it Intermedia term investment, Crede corporates.
It's probably a boring, boring recommendation or outlook, but I
just know that there's a lot of investors out there
looking for yield, and I know that there were a
lot of investors, and we talk we talked to a
lot of individual investors at Schwab that when money market
fund yields got to over five percent, that was, you know,
(44:06):
a great opportunity. We agreed it was an objectively attractive yield,
but those are short term yields, and anyone who held
a money market fund a year, year and a half
ago is now seeing yields probably in the four to
four and a quarter percent range. If you're looking for
five percent, you can get it now. I'm not comparing
an intermediate term corporate bond or bond fund or strategy
(44:27):
with a money market fund, but if you have a
longer term investing horizon five years or more and five
percent is going to help you reach your goals, I
think it's it's a really, really attractive opportunity because I
just think fundamentals are strong and a five percent plus
yield just seems attractive relative to where we've been over
the past fifteen years.
Speaker 1 (44:47):
Great stuff. Colin Martin, Director and Fixed Income Stresses at
the Schweb Center for Financial Research. It's been a pleasure
having you on the Credit Edge Money.
Speaker 3 (44:55):
Thanks thank you so much for having.
Speaker 1 (44:56):
Me, and of course we're very grateful to him and
Shoot Bakshi from Bloomberg Intelligence. Thanks for joining us today.
Speaker 2 (45:01):
Thank you for having me James.
Speaker 1 (45:02):
For more credit market analysis and insight, read all of
Himanchu's great work on the Bloomberg Terminal. Bloomberg Intelligence is
part of our research department, with five hundred analysts and
strategists working across all markets. Coverage includes over two thousand
equities and credits and outlooks on more than ninety industries
and one hundred market industries, currencies and commodities. Please do
subscribe to the Credit Edge wherever you get your podcasts.
(45:23):
We're on Apple, Spotify, and all other good podcast providers,
including the Bloomberg Terminal at b pod Go. Give us
a review, tell your friends, or email me directly at
jcrombieight at Bloomberg dot net.
Speaker 3 (45:35):
I'm James Crombie.
Speaker 1 (45:36):
It's been a pleasure having you join us again next
week on the Credit Edge
Hello, and welcome to the Credit Edge Weekly Markets Podcast.
My name is James Grumby. I'm a senior at Bloomberg.
Speaker 2 (00:23):
And I'm Himanshu Bakshi, a senior credit analyst at Bloomberg Intelligence,
covering banks and non bank financials. This week, we are
very pleased to welcome Colin Martin, director and fixed income
strategist at show Op Center for Financial Research. How are you, Colin,
I'm doing great. Thank you so much for having me.
Thank you for joining us today. At SHOOP, Colin provides
in depth analysis and investor education on fixed income markets,
(00:44):
with a particular focus on taxable credit markets, and with
over a decade at Shop, Colin has established himself as
a leading voice in fixed income strategy with thrilled to
have you on the show.
Speaker 1 (00:55):
Thank you so much, so we have loads of questions
for you. Before we ask the question, I'm just going
to set the scene a bit. Markets have rallied on
hopes of a broad ceasefire in the trade war, but
there's still a huge amount of uncertainty out there, plus
more volatility to come as the US moves on from
tariffs to tax and immigration reform. Headline risk is high,
yet credit markets project an air of complacency, with debt
(01:16):
spreads back below where they were before so called Liberation
Day at the start of April, and junk bonds just
had their best month in almost a year. Keeping corporate
debt risk premium very tight is the fact that there's
way too much demand for a limited amount of net
new supply of corporate bonds, and unless the M and
A machine cranks back up, the supply demand in balance
will continue. On top of that, the US has lost
(01:38):
its triple A credit rating, calling into question the idea
of risk free rate. Perhaps that makes corporate debt look
more attractive in relative terms. Investors are also looking more
at Europe and Asia as alternatives, but there are clear
limitations when it comes to scale and liquidity in those markets.
So Colin, what's your take. Is credit fairly valued at
these levels?
Speaker 3 (01:57):
I'd say it is fairly valued.
Speaker 4 (01:59):
To maybe a little bit overvalued. You know, we saw
that big blowout in spreads in early April because of
all the anxiety around the tariffs, but then they've since
come down. They're still a little bit elevated compared to
where they were earlier in the year. I think it's
important to point out that even though there's a lot
of uncertainty out there, you said that when.
Speaker 3 (02:17):
You kicked us off.
Speaker 4 (02:19):
I'll probably repeat it a lot in this conversation. I mean,
that's the number one thing we're looking at. But despite
all that uncertainty, we came into the year on relatively
solid footing and the data we're seeing right now, despite
the disappointing soft data, the hard data is okay. So
I think still think they're a little overvalued, But I
think it makes sense that spreads are where they are
(02:39):
because if tariffs.
Speaker 3 (02:41):
Are you can't say they're off the table. Right now.
There's on again, off again.
Speaker 4 (02:45):
We still have a relatively high tariff rate, even with
those big reciprocal tariffs kind of brought back to that
ten percent level. That is an overhang. But if you
look at fundamentals, revenues are still strong. Corporate profits are
still high. We got corporate profits last week GDP release
and they did decline in the first quarter by I
think three percent or so, but we're still at a
(03:05):
really high level. If you look at where we were
back in you know, the early stages of COVID late
twenty nineteen. Corporate profits on an aggregate are up fifty
or sixty percent, so that's a really strong starting point
in aggregate. Again, balance sheets are relatively strong, a lot
of cash on their balance sheets, and even though borrowing
costs financing costs are elevated compared to where we've seen
(03:28):
for the past fifteen years and right before the pandemic,
corporations have proven that they can mostly handle it. I
say mostly because lower rated companies I think will continue
to struggle, but they've shown us that that they can
handle it. So I think spreads will probably stay supported
for a while unless there's another, you know, big tariff
(03:48):
headline that I think would spook the markets.
Speaker 3 (03:50):
But I think we'll probably trade low for a little bit.
Speaker 2 (03:53):
So Coney, you talked about it, and then James mentioned
it in his own remarks. Despite tight spreads, he's remain
attractive due to high base rates. Our investors adequately compensated
for the risk, do you think or is there a
sense of complacency in the market.
Speaker 4 (04:07):
I do think there's a sense of complacency of the market.
I'd say they're adequately compensated, but not compensated too well.
Pretty much our mantra when we talk about investing in
credit and regardless of you know what the spectrum of that,
that risk is to make sure you're being compensated.
Speaker 3 (04:22):
Well for it.
Speaker 4 (04:23):
So if we look at high yield, I think that
it's always more fun to talk about high yield than
ig just because you see, you know, much more volatility, spread, fluctuations,
kind of funkier issuance trends, things like that. At close
to three percent, that's well below the long term average.
So that leads us to be a little bit more
cautious here. But you mentioned yields. You know, what's the
(04:45):
yield that an investor earns. You can make the case
that the yields are relatively attractive. Again, if we go
back to the last fifteen years or so. On that point,
I'll pivot to investment create that that's an area that
we've liked for a while because despite the potential complacency,
despite the concerns about maybe slower growth down the road,
I think they're starting at a really really strong starting point,
(05:08):
like I mentioned before, And if we're looking at yields
of five, five and a half six percent depending on
the actual credit rating, depending on the maturity, we think
that's attractive for a lot of investors. Even if spreads
rise or fall a little bit and we see some fluctuations.
If you're looking for yield, and we know a lot
of investors are, we think that's a pretty good place
to start.
Speaker 1 (05:28):
But the high yield market, you know, those are the
weaker borrowers. They are the ones, you know, most exposed
to a lot of this volatility, and potentially they can't
pay the money back. You know, it's a Fixingcome investor.
You want to get your coupon and the money back.
So what are the risks of more defaults? You know,
with this kind of turbulence in the economy.
Speaker 4 (05:49):
I think the risk of defaults is still high. We
don't really talk about or hear about defaults, but the
rate's still pretty high right now.
Speaker 2 (05:55):
You know.
Speaker 4 (05:55):
We look at data from both Moodies and Standard and
Poors and the trail twelve months specorate default rate is
around four percent or so. It's nothing to sneeze at.
That is closer to the long term average. Using averages
is always difficult. It's usually above or below, just like
with spreads. But that kind of plays into our idea
of are you being compensated well appropriately? And if spreads
(06:20):
are well below average, but we think the risks are
pretty high and default rates are closer to their long
term averages. That's why we think spreads might need to
adjust a little bit. But defaults, like I said, that
they are elevated. We see a big risk with the
lowest rated parts of the market, the Triple C's. That's
pretty much always the case. I don't think that's anything
crazy to say. But you mentioned James the idea of
(06:40):
getting your money back, and we've seen, you know, fundamentals
deteriorate depending on credit rating. And just this morning I
was looking at.
Speaker 3 (06:47):
All, right, what's the what's leverage look like, what's.
Speaker 4 (06:50):
Interest coverage look like for the broad high yield universe,
And if you look specifically at Triple C's, interest coverage
is less than one. So, you know, bringing it back
to your point, if you're not making enough to pay
out that interest payment, I think that's a really big risk.
So defaults are probably gonna stay high. And but it's
I don't know if it's gonna surge higher, but at
(07:11):
four percent, it's enough for us to be a little
bit more cautious, and you know, suggest investors kind of
dive in headfirst.
Speaker 1 (07:19):
And could it be higher if we didn't factor in
all of the liabilty management that's going on and all
of the you know, private credit amendments and pick and
all that stuff. I mean, could it could the actual
rate behive for all this other stuff wasn't going on?
Speaker 4 (07:31):
It most likely is they treat defaults differently, and I
think each credit rating does. And forgive me, I forget
which one treats distressed exchanges differently.
Speaker 3 (07:41):
But if you look at the highyal.
Speaker 4 (07:43):
Bond default rate versus a loan default rate, loans are
still very low, I'd say artificially low. They're not lying,
it's just different methodology. But we see more and more
distressed exchanges. I mean, the default environment is not what
it used to be.
Speaker 3 (07:58):
It used to be.
Speaker 4 (07:59):
You know, you you lend to an issuer, you hope
to get your money back. If not, we're going to
go into chapter seven, chapter eleven, we'll figure it out.
That's not the case anymore. And we've seen all these
this pickup into stressed exchanges. And I think, going back
to the point back complacency, I think markets don't really
worry about that. But at the end of the day,
it's generally speaking, you're getting something that you weren't promised.
(08:21):
You're probably taking a haircut, you're probably pushing out the maturity.
And at its core, you know, lending is expecting to
get your money back. And the world has changed. The
investing world has changed, especially with you know, spec rated
investors or borrowers, rather so.
Speaker 2 (08:40):
Calling all these specific sectors within the investment grade or
HI space that you believe a more vulnerable or resilient
in the content environment.
Speaker 4 (08:49):
So we when we look at the credit markets, you know,
we look at it from a high level, so we
don't look at specific sectors, say communications versus energy utilities.
That's kind of out of our wheelhouse. So we tend
to look at whether we like IG or high yield.
We'll look at things like fixed first floating rate, and
(09:09):
then maybe specific credit ratings. If we look at investment grade,
I think ninety two percent of the market single A
or triple B. It's tough to avoid triple b's these days,
but that's not something I'm too worried about. When I
think when I talk about investment grade, I think fundamentals
are pretty strong across the board. Yeah, there'll be some
weak issues here, and there. So if you are an
(09:29):
investor looking at individual single names, you know, maybe the
lowest of the triple B might be a little bit concerning,
but generally speaking, we're not too worried. There is some
good news though we've seen the share of triple b's
coming down. We saw it surging for almost a decade.
I think at its peak at the Bloomberg US Corporate
Index it got to about fifty two percent. It's down
to about forty six percent, where we've seen single a's
(09:51):
actually decline a little bit. So I think that's that's
pretty good. And then just bringing it back to where
and how we look at at junk, double bees are
probably going to be okay. I mean defaults, which we
were just talking about, they usually come from the lowest rated,
so you're looking at the low bs and the triple C.
So if you have a strategy that's focusing on double
(10:13):
b's or high single bees, yeah, they'll probably be volatility.
There could be spread widening as we expect as the
year progresses, but we wouldn't expect a blowout in those
parts of the junk market.
Speaker 2 (10:26):
So that brings me to something that you mentioned tariffs
in your comments. So a recent US Straight Code ruling
blocked most of President Trump's drives. However, an appease scote
temporarily reinstated those statves spending for the review. How might
this legal uncertainty surrounding type of impact investor confidence and
product credit markets?
Speaker 3 (10:45):
You know it should.
Speaker 4 (10:47):
I think all the uncertainty should negatively influence consumer confidence.
We've seen that, whether it's at the business level or
the consumer level, the number we've seen have been really bad.
I mean, I can't stress that enough. Although we did
get an bounce back with the University of Michigan numbers.
Speaker 3 (11:02):
Because of the quasi tariff rollback.
Speaker 4 (11:05):
I think the on again, off again nature is just
going to leave this cloud of uncertainty around investors, around consumers,
I think specifically around businesses. We haven't seen consumers crack much.
Consumers continue to spend. It's been the case for years
where consumer driven economy. I think on the business level,
I think there is a risk that the sentiment we're
(11:27):
seeing translates to them actually changing how they run their business.
Are they going to hire a lot more people if
there's all this uncertainty out there, I don't think they will.
Maybe they start to reduce their headcount. That's the risk.
Obviously haven't seen it yet. The labor markets held up well.
Do they not expand capacity? Do they not buy a
(11:50):
company as you talked about, James, in terms of M
and A. So I think that should weigh on business
actual activity as the year progresses, and that translates to
a growth slow down. I think that's what would likely
bring spreads a little bit higher.
Speaker 1 (12:05):
If growth slows down, could it not ultimately lead to recession?
And we were at this long end of a really
long cycle that seems to go on, but you know,
rates of high consumers are suffering, there's all these cracks appearing.
You know, there's a lot of volatility coming from the
policy side. What are the risks of a US recession
and something that might affect credit?
Speaker 4 (12:25):
I think the risks are certainly up relative to the
past few months. It's pretty funny. Over twenty twenty three
and twenty twenty four, recession was all that a lot
of people talked about.
Speaker 3 (12:35):
I mean, we talked about it a lot, but but
we were.
Speaker 4 (12:37):
Warning about the risks, but not you know, flashing alarm
signs or alarm signals just yet. We were thinking that
it could happen. It was the recession that never came, though,
and then if we fast forwarded to early twenty twenty five,
I remember having a conversation with some colleagues where we
just stopped talking about it. The idea of a recession
in January and February of this year was just not
(12:59):
something that we were talking talking about. And I'd say
risk was very, very low because the economy was still
growing above trent. We were looking at economic growth in
the two and a half to three percent level. The
risks to the labor market we got a little spook
in twenty twenty four. We saw the sam rule triggered
for I think a month, maybe two, and then it
just leveled off.
Speaker 3 (13:18):
So all those, you know, the.
Speaker 4 (13:20):
Concerns we had didn't arrive, and they never arrived. With
slower economic data, I'd say the risk is on again
just due to uncertainty. I keep using that word a lot,
but I think there's a real risk to slower activity.
Also on the consumer side, we're seeing mortgage rates still
high again, I think around seven percent. For years, people
(13:42):
have been talking about the risks to the housing market
that again never really came. We're starting to see some
headlines there about you know, people looking to sell and
are there enough buyers out there with mortgage rates so high?
I think that's a risk. I think if there's a
just an unser environment, if.
Speaker 3 (14:01):
You're worried about your job prospects.
Speaker 4 (14:02):
Are you going to go you know, put on that addition,
build the deck, take that big vacation. I think there
is a risk that that slows down. But right now,
in the here and now, in early June, that seems
like it might be a few more months away because
right now things still appear to be generally okay.
Speaker 1 (14:20):
Also, the rates side, I mean, is not supposed to
you know this inflation, sale prices stills seem to be
very sticky on the upside. What does the Fed do
in this situation?
Speaker 3 (14:30):
Right now?
Speaker 4 (14:30):
The Fed doesn't need to do anything that there's all
this talk about what happens when the Fed's mandates get
in conflict.
Speaker 3 (14:38):
That is a risk. What are they going to do?
Speaker 4 (14:40):
That's not a conversation that we need to have right now,
because the data says they're not in conflict. Inflation is
still above target, but we've gotten some good inflation readings
over the past month or two. I mean that PCEE
report was really nice in an environment where tariffs were
generally in place. So inflation, though is it's still about
target and the labor market's doing okay. So if you
(15:03):
look at that just those two indicators, the Fed doesn't
need to do anything. It supports the case for them
to hold rates where they are unless we start to
see that recent trend and inflation continue. If we see
inflation on a year over your basis getting really close
to two percent, and I think that would support.
Speaker 3 (15:22):
The case for a cut.
Speaker 4 (15:23):
We'd also need to see the labor market weaken a
little bit, but right now they don't need to if
we look ahead and those mandates are in conflict. You know,
Powell mentioned that that he will still look at inflation.
He mentioned that they're going to see how far away
they are from each of their mandates. I think if
push comes to shove that they'd probably focus on the
(15:44):
labor market more. But as Powell mentioned it, that did
give them a little wheel room. But right now they
don't need to do anything. You know, we keep seeing
changing expectations from the Fed Fund's futures market. Right now,
markets are pricing in two cuts by the end of
the year with a risk cut not coming into like
I believe October we are in the one to two
(16:04):
cut camp. September would probably be the earliest. But the
more this data that we receive that continues to kind
of be in line or suggest that things are holding
up well, that probably pushes the timeline back a little bit.
Speaker 2 (16:19):
So, given your outlook for rates and the risk that
you talked about, what strategies would you recommend for investors
or what securities, whether it's preferred or corpid bonds, would
you like what you don't like as of today?
Speaker 4 (16:32):
So our big picture guidance is intermediate term maturities and
on that. It's mainly because we kind of see two
sided risks here, given all the deficit concerns that it's
historically we've not really bought into that. We haven't found
a relationship between debt deficits and the level of treasure yields.
Speaker 3 (16:50):
But the deficits.
Speaker 4 (16:51):
Continue to grow, our debt continues to grow, so there's
a strong possibility that that zero relationship becomes somewhat of
a relationship. So we are worried that yields can rise
at the long end. So we're worried about taking a
little bit too much interest rate risk. If you're too short,
you're opening yourself up to reinvestment rate risk if the
FED were to cut more than expected. So we just
(17:13):
want to protect investors from both sides. Focus on intermediate
term maturities. We think that's pretty good. On the credit
quality side, we favor an up in credit quality stance
right now. For the points I made before, we think
it makes sense to take risks if you're being well
compensated for them. That's not the case. We really like
investment grade corporates. Intermediate term, you can get yields of
(17:34):
five five and a half percent or so for high
yield bonds. We're not saying investors need to get out
of high yield bonds. Even though spreads are tight, those
absolute yields are relatively attractive around seven and a half percent.
And what we've seen over the past few years the
spread fluctuations, they've been fast. They go up and then
they come down. So if you're holding for twelve months,
(17:57):
twenty four months, thirty six months, you can still generate
relatively attractive return. So that's how we frame a high
yield allocation right now. If seven and a half percent
looks attractive now. I frame that a little bit that
if you hold it for a long period of time,
your returns will probably be a little bit less than
seven and a half percent because of potential credit loss.
(18:18):
But we think that's relatively attractive if you're looking to
be tactical. We don't think it's a great time to
dive in right now. We think there could be a
better opportunity down the road. You mentioned preferreds. I like preferreds.
It's an area that doesn't make as many headlines. I mean,
it's a really small market, but I think it makes
a lot of sense for individual investors.
Speaker 3 (18:39):
I mean a lot of the parts of the.
Speaker 4 (18:40):
Preferred market are really geared towards individual investors with those
twenty five dollars par values. What I really like about them,
and it's not the whole market, but a good chunk
of the market, are the tax advantages that they offer.
Because a lot of preferred securities, if they're considered equity,
they can pay qualified dividends. So if you're investing in
a taxable a count you can get yields after tax
(19:03):
yields that are higher than the high yield bond market.
It's not in apples to apples comparison, but if you
look at just credit ratings, you know, most preferreds. If
we're looking at those issued by the large US banks,
kind of the investment crede market, you're looking at low
triple b's, maybe some high double bees. It's a more
highly rated index than junk bonds. Obviously you're taking some
(19:26):
capital structure risk, but you can get after tax yields
in the four and a half to five percent if
you're in the high tax brackets. So I think that's
a pretty attractive opportunity. And but it goes into you know,
asset sorting, making sure which accounts you're placing investments in.
But we think that they can make a lot of sense.
Speaker 1 (19:45):
Colleague Arnold Kakuta refer to them as thenay danger field
of the credit markets. Yeah, he agrees with you.
Speaker 2 (19:51):
Yeah, so Arnold, actually my colleague he published research today
and he said that banks flutas actually healing more than
some of the investment copied bonds. Because we know, given
that the front end of the treasure cover is in whatted,
which generally signals impending rate cuts, and you yourself mentioned
that you're expecting one to two rate cuts. Do you
find floating rate notes appealing?
Speaker 4 (20:12):
I do, and that's and that's great timing with with
Arnold's fort.
Speaker 2 (20:17):
Is it relative valuation, credits spreads, defensive qualities, or something else.
Speaker 3 (20:21):
It's not necessarily credit spreads. I'd say it's.
Speaker 4 (20:23):
The defensive qualities. I think floaters can be a great
way to invest in the market and stay invested in
the market when there's a lot, a lot of potential
for volatility. Now, floaters there there tend to be higher
rated than the broad ig market. If you look at
the broad investment grade market, you're looking at mostly triple
b's and single a's. For floaters, it's a lot of
(20:45):
single a's and double a's, a lot of allocation, a
lot of exposure to banks, so you have some sector
risk there, but again, if you're investing in highly rated banks,
we think that's acceptable.
Speaker 3 (20:57):
What we like is is the the lack of volatility.
Speaker 4 (21:02):
They have very low interest rate risk, so when we
do see fluctuations and volatility like we saw through the
first five months of the year, their prices do change
a little bit, but the magnitude is much much smaller,
and I think the yields are attractive. Now, if you
look at the average yield of the Bloomberg Floater index,
(21:22):
it's close to five percent, And if you look at
the average yield of an intermediate term corporate index, it's
less than that. It's closer to four point six or
four point seven. So on a maturity to maturity basis,
you get higher yields because of the inverted nature of
the yield curve that you just alluded to, and you
don't have to worry as much about the price fluctuations.
(21:44):
I think it's again a good way to earn yields
near five percent, and you take away a lot, a
lot of the potential movements.
Speaker 2 (21:54):
So I just want to die everything to together that
you mentioned. So how my recent tie of discussions that
we talked about beeflee and potential trade restrictions impact inflation,
economic growth, and consequently the risk of recession. Would such
an environment also your view on attractiveness of floating rate notes.
Speaker 4 (22:14):
It would if we were to get let's look at
a situation where tariffs were in place at a high
level that they did impact growth and then therefore the
labor market, because that's a situation if they were high enough,
we'd probably see inflation stay sticky, even though the recent
trends have kind of bucked that thinking. I would expect
(22:34):
inflation to pick up in a situation like that, and
I would expect growth to slow. If we're seeing that scenario,
the Fed probably cuts more than expected, and that's a
risk to floaters. That is a risk in general to
floaters if you hold them right now. Yes, they offer
very attractive yields, especially compared to fixed rate bonds, but
(22:55):
they're not fixed, so if the Fed cuts rates, your
income would likely come down. If if we continue to
get kind of this i'd say stable decent data and
that continues to push back the timing of rate cuts.
Speaker 3 (23:08):
That's great for floaters.
Speaker 4 (23:09):
It means you don't have to worry about it as much.
If growth just slows a little bit. From here, I
think you have to accept the idea that your income
will come down a little bit. But that's the trade off.
It's a trade off of floaters. You know, you're sacrificing yield,
potential yield to get more price stability. So that's something
to consider. If we were to get a recession that
(23:30):
we talked about, or significantly slower growth and the Fed
cuts more than expected, floaters wouldn't be the best place
to be in.
Speaker 1 (23:38):
So price stability, floating rates sounds like you're the ideal
customer full private credit? Why not private credit called it?
Why not go straight down into the everyone's talking about it.
Speaker 4 (23:49):
Yeah, I'd be silly to think we would talk about
private credit here. Well, why isn't everybody? And it's a
tough market to get into. I'll frame it that way.
Speaker 1 (23:56):
How do you see the relative value though? In that market?
Speaker 4 (23:58):
You know, I think the relative values fine, just like
my view on general leveraged investing. That's always how I
like to frame this discussion. Because we hear about private
credit so much these days, I don't think a day
goes by. We're one of the top stories on the
Bloomberg Terminal has to do with private credit, so we
(24:18):
keep hearing about it. And there are a lot of positives.
You look at historical returns, they are attractive if you
have a long term investing horizon, they can make a
lot of sense. But if you consider what you're investing in,
it's generally junk rated issues, and sometimes you know, some
would argue maybe it's a little bit better than junk.
We don't really know, right, because sometimes they're not necessarily rated.
(24:40):
We're not seeing what's in there. But for the most part,
it's leveraged lending direct lending that you don't really see
what's going on behind the surface. And just like I'm
a little bit worried and cautious about the public junk markets,
I just I share that with private credit, and that
it's not some magical elis. You know there's risks there,
(25:01):
and you don't hear about the risks too often. I
like to frame it this way. It's not it's probably
not the best analogy, but James, I could open up
an account at Schwab for you. I can buy a
high yield ETF. I'm never going to tell you what
your account password is, and in five or six years
will take a look and see how it is. It's okay,
(25:22):
it's not the best analogy, but it's kind of how
it is. You don't see what's going on, and you're
gonna see how it grows over time because you don't
have the ability to see it in real time or
to take your money out.
Speaker 3 (25:31):
So it's not a bad thing. I'm neutral on it.
I just I always like.
Speaker 4 (25:36):
To tell our clients at Schwab who are interested in it,
that it's it's risky investing, just like investing in junk bonds.
Speaker 1 (25:43):
But for much higher yields. So you're going to get
that return? Is it not worth sticking your neck out?
Speaker 4 (25:48):
Potentially the returns are higher, I think because of those risks.
There's no free lunch. If they're offering those high returns,
it's because there's a lot of risk there. Otherwise, I
don't think they'd be going to those markets. If they
could issue publicly at a six or seven percent yield,
(26:08):
why would you issue at ten or eleven or twelve
percent privately? There are benefits to private right it's a
smaller investor base. You can negotiate directly with lenders. That
is a good thing. So I want to make sure
I'm balanced here and not making it seem like I'm
all negative. That can be a good thing. But again,
there's no free lunch, and those yields, those yields do.
Speaker 3 (26:27):
Come with risk.
Speaker 4 (26:28):
And then actually I'll build on something we talked about before.
It's a different type of lending. This is my view.
When I think of traditional bonds, you lend to an
issue you hope to get your money back. I think
direct lending and private credit is very different than that
because I think there's an acknowledgment that it won't be
that straightforward, that there might be some sort of asset
(26:51):
liability management exercise. Maybe there's going to be exchange. Where
am I in the capital stack? What's my recovery value?
Bankers are thinking about that when they come to the
market with debt traditional debt, but I think with private
it's a much different thought process about how might my
position look in three or four years versus traditional borrowing
(27:15):
or lending. Am I getting my money back in four
or five years?
Speaker 3 (27:18):
Right?
Speaker 1 (27:18):
So some guests are talking about investment grade private credit,
and they're talking about asset based finance, and they're talking
about a growth in the market to forty trillion dollars,
which is, you know, presuming you just can't ignore it
at that point, what do you think of investment grade
private sure?
Speaker 4 (27:31):
I mean I'd be more interested in that if it
is true investment grade. You know, I think generally speaking,
fundamentals are pretty strong. Again, I don't want to be
too much of a curmudgeon here. I just want to
highlight that there are risks on investment grade. If that
were the case, and it's truly investment grade, then I
think that can make sense. And if you are an
investor and you're looking for a diversified portfolio, and you
(27:53):
have a large enough asset base to kind of handle
the long lock up periods, then these invests are generally okay.
You just want to make sure that you have that
time horizon and that an allocation there is appropriate given
your risk tolerance.
Speaker 2 (28:09):
Colin, you said you like preferred securities, you like floating
rate notes, which I mostly should buy financial institutions, and
we talked about private credit. Are there other particular segments
of fixed income you believe either overvalued or undervalued at
this point?
Speaker 4 (28:23):
An area we've been looking at a lot, but it's
changed so much lately, and I say lately just over
the past few weeks is the municipal bond market. I
don't know if that's maybe out of the realm here,
but you know, we look at all asset classes, of course,
and if we go back to the early stages of
the tariff announcements in early April, it presented a really,
(28:44):
really attractive opportunity in the municipal bond market. I think
there were a lot of dynamics at play, and our
team has looked into that a lot where I think
people got spooked they left the market where we've seen
this big and we've seen funds become more and more
prominent with MUNI bonds, and so if people kind of
pulled their money out in a relatively ill liquid market,
(29:05):
I think we saw a lot of price discrepancies there,
and we saw relative yields with Muni's go to levels
that we that we thought were really really attractive. That
has since reversed itself a little bit, so Munis can
still make sense a lot. We're not worried about the
credit quality. We think those price movements again were due
to liquidity as opposed to credit quality. But I think
(29:25):
these fast movements are appropriate to discuss in kind of
all of the asset classes, and I'll tie it back
to whether it's IG or high yield or preferreds that
investors might need to be a little bit more nimble
in this environment, because if you're a high yield investor
and you're waiting for say five percent credit spreads before
(29:46):
you want to dive in, we didn't get there. And
even if you were looking at four and a half
percent in April. They were there for a day or
two and then right back down. So we kind of
give that guidance right now where we prefer quality. We
think valuations are are rich for a lot of the
riskier investments. But if we were to see that reverse,
even in the short run, that can present an opportunity.
Speaker 1 (30:08):
Why are these dips not lusts? What are they snap
back so quickly? Let's feel rationale for.
Speaker 4 (30:13):
That, you know, I think, well, I think they snapped
back quickly because of kind of the rollback with the tariffs.
Even though the tariffs were still there, they were they
were less extreme than initially mentioned. But also there's a
lot of demand and you mentioned this earlier, James, there's
a lot of money out there looking for a home.
And and I think this is how private credit can
(30:34):
help the markets.
Speaker 3 (30:35):
Because, like I said, every day goes by where I see.
Speaker 4 (30:38):
A new headline on Bloomberg about private credit, a lot
of it is a lot of new private credits, private
credit funds, you know, raising money. That means there's a
lot of money looking for a home. Now there's pros
and cons to that. If there's too much money chasing
too few investments, we don't get real price discovery, and
maybe maybe.
Speaker 3 (30:55):
We get low spreads. That's probably why we get low spreads.
Speaker 4 (30:58):
But I think it can help on the down side,
where those funds might be looking for an attractive home,
and when we do get these quick selloffs, there can
be investors willing to go inside. So I think even
though we're nervous about the risk of rising spreads as
the year progresses, they're probably not going to go as
high as you'd think based on previous recessions or previous
(31:22):
kind of risk off environments. You know, if you look
at say a fifteen year high yield spread chart, you
can point to, you know, ten plus percent for recessions,
seven and a half eight percent for kind of a
pretty bad risk off environment. Maybe we don't get that
high this time around. They didn't get that high back
in twenty twenty two. They only got to four and
(31:43):
a half percent in early April, so maybe they're only
that four and a half five percent level is what
becomes attractive because there might be more demand coming in
to prevent a further blowout.
Speaker 1 (31:53):
But it seems that the demand holds, and I'm wondering
what the risks to that appetite, you know, us credit
from let's say someone in Japan who's getting very high
local yields from the government. What's the risk that demand
goes away.
Speaker 4 (32:06):
Yeah, well, if the demand goes away, it makes it
harder for companies to refinance. I mean, we have the
so called zombie companies that are staying alive because they
can refinance now. They're refinancing now at very high higher rates,
but they're still doing it even though there's a lot
of demand there. Yes, that might keep support in the
secondary market or even the primary market, but that doesn't
(32:29):
mean there aren't problems under the surface. You know, strong
demand for high yield debt doesn't mean that a troubled
issuer doesn't have the troubles that it already had. That's
not going to fix their earnings outlook, their revenue outlook.
It might help their borrowing costs a little bit, but
if there are issues that are tied to economic growth,
(32:49):
twerf uncertainty, things like that, strong demand and lower borrowing
costs can only do so much.
Speaker 1 (32:55):
So in terms of the global picture we have and
we keep saying this idea of sell America and that
comes and goes. What impact is that having on global credit.
Are you seeing any evidence of that?
Speaker 4 (33:07):
Well, we have seen it pick up lately in US
companies issuing Euro denominated debt. I think because we have
investors looking for it for non US dollar assets.
Speaker 3 (33:19):
I don't know if that's.
Speaker 4 (33:20):
Going to become the norm or a sustained trend. Despite
all the concerns about the end of US exceptionalism, it
always comes down to the question of.
Speaker 3 (33:30):
What's the alternative.
Speaker 4 (33:32):
And I'm sure you've had numerous guests on this podcast
who've said the same thing.
Speaker 3 (33:37):
For better or for worse.
Speaker 4 (33:38):
We have a lot of treasury debt outstanding. That in
itself is a problem, but it means there's a lot
of high quality treasury debt that investors can own if
they're looking for high quality investments. The dollar, we don't
expect it to lose its reserve currency status anytime soon soon,
and probably even longer than that. Most trade is still
done in US dollars, Foreign central banks hold a lot
(34:00):
of US dollars, and there just isn't an alternative, whether
in currency terms or or highly rated debt terms. So
maybe we see the dollar decline a little bit from here,
but that doesn't mean it's the end of the dollar.
Speaker 2 (34:14):
And Colin, I think you mentioned this in the beginning
of the podcast, But given the recent warnings from figures
like Jamie Diamond about potential cracks in the bond market
due to rising national debt, do you see any imagy
at risk that could disrupt the kind of stability in
the credit spreads.
Speaker 4 (34:32):
I do think that if rates were to move higher,
that would have an impact, and it would trickle away
from right now, you know. I'd say that the junkiest
of the junkies most at risk. If rates on the
intermediate term and long part of the curves move up
a little bit higher and stay there, then you get
more and more companies that become more at risk. I
(34:52):
think the risk is that yields stay at these current levels,
and the longer they stay there, which we're at a
handful of years now, but the longer they stay there,
the more that these you know, highly indebted companies needed
to need to manage that. And if we go back
to triple c's again, you know, interest coverage of less
than one, if we see those borrowing costs rise even more,
(35:14):
we'd probably see those ratios come down, So that would
be more of a risk in our view, but again
it's more of a I think it's more of a
junk issue than an investment great issue.
Speaker 1 (35:23):
And if we see that spike in defaults at that
really low end of credit, you know, triple c's how
much of an impact does it have on broader credit?
Speaker 4 (35:31):
Yeah, it has, it has an impact. It's a ripple effect.
It's not a one for one. But if we were
to see the default rate pick up from the current
levels and pick up enough that it was making headlines
because again, like it's been high, but people aren't really
talking about it too much, then yeah, you'd see single
be spreads continue.
Speaker 3 (35:49):
To rise or rise.
Speaker 4 (35:50):
Rather you'd see double be spreads rise. The magnitude would
be less, but in general, it would be a you know,
repricing of risk. And if the outlook is a little
bit gloomier, and if corporate profits are expected to be
challenged in an environment where rates were high, I think
investors are going to start repricing those issues a little bit.
We'd see spreads move up, but again we'd see single
bees move up a lot more than double bees.
Speaker 1 (36:11):
Yeah, I mean, certainly all seeing the gap between spreads
on triple seas and single Bees is quite wide and
has stayed wide throughout all of this snapback and spreads
over the last few weeks, which kind of suggests that
credit investors are kind of, you know, differentiating a little bit,
and so they're not so complacent about that part of
the market, which it seems like it will conveniently blow
(36:32):
up and go away and not rip through the entire market.
I mean, do you think that's the complacency that people
just underestimate the contagion risk from the low end of junk.
Speaker 3 (36:42):
I think so.
Speaker 4 (36:43):
But but what you alluded to that we're seeing right now,
I think that's a good thing. If we're looking across
the curve or across the credit spectrum and all spreads
were low, that would be concerning. But like you said,
triple c's are still elevated.
Speaker 3 (36:57):
So if we look at.
Speaker 4 (36:58):
Where all the various credit ratings are relative to the
past ten years or so, I look at kind of
what's their you know, percentile, and I think most you know,
from double A down to single Bee are in like
the ten to twenty percent range, but triple c's are
in the closer to forty percent range. So that shows
(37:19):
that the markets are focusing more of their attention there
and I think acknowledging that there are risks there. The
question is from a fundamental standpoint, will it trickle in
to these single bees that markets are not pricing in
that risk and are too complacent. I guess it remains
to be seen, but the fact that the triple c's
(37:40):
haven't come down as much shows that, yes, the markets
are differentiating to a degree.
Speaker 1 (37:45):
And you know, we're always looking for the next problem,
the next blow up. You know, since two thousand and
eight when most people missed it. What do you think
could really take us down at this point? I mean,
is there anything that you worry about in terms of
credit markets at the moment.
Speaker 4 (37:57):
In terms of well, one thing, we worried about a
lot that would have ripple effects everywhere, but luckily it
seems to have passed. We worry about FED independence because
that can have a huge impact on everything on all investments,
stock bonds, governments, things like that. On the bright side,
(38:17):
that appears to have passed. We got some good news
that the President and fedcher Powell actually had lunch together
for I think the first time.
Speaker 3 (38:25):
That's good.
Speaker 4 (38:26):
Didn't seem like it went too well, but they met,
and I feel like that's a step in the right direction.
That's one thing that was making us a bit concerned,
but it seems like that's died down for now. Aside
from that, I don't want to keep talking about uncertainty
or complacency too much, but I just wonder if the
(38:47):
general level of complacency because again, if you look at
the ability of issuers to continue to exist in this environment,
not just for the next three months or six months,
but for you twelve eighteen month on twenty four months,
is there too much complacency there? And do we see
you know, some sort of mass selling that that spooks
(39:08):
the markets. But aside from that, it's uncertainty with tariffs,
it's the FED independence, but that doesn't seem to be
an issue right now. And you know how the tariffs
and trade policy kind of translates to the overall economy.
If the tariff news continues to make headlines but we
(39:30):
continue to see the data come in, okay, I think
the markets will keep drugging along. If we start to
see it have a real impact on business activity and
we start to see cracks in the labor market, I
think that's when you start to see a real repricing
of risk.
Speaker 1 (39:44):
And is the general assumption now around the policy that
the trub administration will be more pragmatic than confrontational. Is
that having seen the sort of flip flop over tariffs
over the last few weeks, do you expect more just
accommodation and more of a rational policy.
Speaker 4 (40:02):
Making Maybe all of the above. It's so tough to
tell right now. I'd say that we hear something new
every single day. I think what has changed is we've
gotten it seems like President Trump prefers treasury sectory, dosn't
to be kind of the mouthpiece of what's going on,
(40:22):
and the markets seem to react.
Speaker 3 (40:24):
Better to that.
Speaker 4 (40:26):
Policy itself, though you know, it's still all over the place.
I think that there's just so much uncertainty out there
that even with you know, the court pause and then
the appeal that allows them to stay on, and then
the potential that, let's say that doesn't work, do they
go down other paths with some of these other sections
(40:46):
of the law that allows them to explore other avenues.
I just think this overhang of the tariffs is problematic.
Speaker 3 (40:55):
I do.
Speaker 4 (40:55):
I mean, it's the same thing we've talked about this
whole discussion, the uncertainty that's out there, and if I
don't know what I'm going to be paying for goods
that I'm importing, how do I set a plan for
the next twelve months. And I think that's I think
that's a big problem. So until we get clarity, you know,
I think uncertainty is going to be very much present.
Speaker 1 (41:15):
And Besten did say over the weekend that he was
never going to default on the debt, which kind of
reminded me of what the Argentines used to say, you know,
just before they defaulted on that debt. So we'll have
to see. But in terms of, you know, the relative
value of fixed income in this in this market, the
President also seems to like stocks a lot and talks about,
you know, great chance to buy, but it's a very
(41:36):
volatile stock market. Does that make the relative appeal of
fixed income, you know, credit, Does that make it more
appealing to most people or not?
Speaker 2 (41:44):
Really?
Speaker 4 (41:45):
Well, I think it can support the market. So all
the risks I've talked about, which again I want to
highlight that yields are relatively attractive, and with high yield,
if you're a long term investor, you know, we're not
expecting that the market to tank anytime soon. We just
want to make sure that investors are aware of the risks.
If President Trump begins focusing more on the stock market,
I'd argue that, aside from the a few tweets or
(42:06):
truths that he said now is the time to buy,
he hasn't focused on it as much as he had
in the previous administration. But if he does start to
focus on it more, I think implicitly that's good for
the credit markets. It's good for risk assets in general.
If it seems that I don't know how much he'll
change his policies, but if he, you know, changes the
(42:27):
way he communicates things, I think that that results in
a general support for pretty much all risk assets.
Speaker 1 (42:34):
Yeah, one strategies I was talking about one thirty on
the IG spread is the kind of Trump put level
which they back off. But do you have a I
mean that we talk about the taco trade as well,
But is there any level at which you think, you know,
we are supported in terms of spreads by by the
Trump put?
Speaker 4 (42:52):
One thirty sounds pretty good if I look at though,
if I look at spreads, you know how high have
junk spread or high yield or investment grades. Spread's gone
in non recessionary environments, you know, they've gone to like
two percent or so they're probably not getting that high.
I think that you're right, maybe in the one to three,
maybe one and a half percent range for high yield,
maybe in the four and a half to five percent range,
(43:14):
because even though again he hasn't been as vocal this
time around, we know that he has a preference for
the stock market and the risk asset's doing well, so
I would expect some sort of support and part of
the reason why we're nervous that spreads will increase, but
again not to levels that we've seen in previous risk
(43:35):
off environments.
Speaker 1 (43:36):
Is there one area of relative value that you highlight
right now? Where do you think the best investment opportunity
is for the next let's say, twelve months.
Speaker 4 (43:43):
I still really like it Intermedia term investment, Crede corporates.
It's probably a boring, boring recommendation or outlook, but I
just know that there's a lot of investors out there
looking for yield, and I know that there were a
lot of investors, and we talk we talked to a
lot of individual investors at Schwab that when money market
fund yields got to over five percent, that was, you know,
(44:06):
a great opportunity. We agreed it was an objectively attractive yield,
but those are short term yields, and anyone who held
a money market fund a year, year and a half
ago is now seeing yields probably in the four to
four and a quarter percent range. If you're looking for
five percent, you can get it now. I'm not comparing
an intermediate term corporate bond or bond fund or strategy
(44:27):
with a money market fund, but if you have a
longer term investing horizon five years or more and five
percent is going to help you reach your goals, I
think it's it's a really, really attractive opportunity because I
just think fundamentals are strong and a five percent plus
yield just seems attractive relative to where we've been over
the past fifteen years.
Speaker 1 (44:47):
Great stuff. Colin Martin, Director and Fixed Income Stresses at
the Schweb Center for Financial Research. It's been a pleasure
having you on the Credit Edge Money.
Speaker 3 (44:55):
Thanks thank you so much for having.
Speaker 1 (44:56):
Me, and of course we're very grateful to him and
Shoot Bakshi from Bloomberg Intelligence. Thanks for joining us today.
Speaker 2 (45:01):
Thank you for having me James.
Speaker 1 (45:02):
For more credit market analysis and insight, read all of
Himanchu's great work on the Bloomberg Terminal. Bloomberg Intelligence is
part of our research department, with five hundred analysts and
strategists working across all markets. Coverage includes over two thousand
equities and credits and outlooks on more than ninety industries
and one hundred market industries, currencies and commodities. Please do
subscribe to the Credit Edge wherever you get your podcasts.
(45:23):
We're on Apple, Spotify, and all other good podcast providers,
including the Bloomberg Terminal at b pod Go. Give us
a review, tell your friends, or email me directly at
jcrombieight at Bloomberg dot net.
Speaker 3 (45:35):
I'm James Crombie.
Speaker 1 (45:36):
It's been a pleasure having you join us again next
week on the Credit Edge
Host
James Crombie
Popular Podcasts
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.