July 10, 2025 • 48 mins
JPMorgan Asset Management is seeking hedges against credit market losses as risks rise and spreads tighten. “There’s value in shorts and credit protection,” Oksana Aronov, the firm’s head of market strategy for alternative fixed income, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Jody Lurie in the latest Credit Edge podcast. “It is very undervalued today because of the complacency in the market,” says Aronov, referring to the high-grade credit default swap index. Aronov and Lurie also discuss the increasing amount of bond and loan interest being repaid with additional debt, dwindling recovery rates, private debt convergence and high-grade opportunities.
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Episode Transcript
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Speaker 1 (00:17):
Hello, and welcome to The Credit Edge, a weekly Marcus podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Jody Lurry, senior credit analyst at Bloomberg Intelligence,
covering leisure, lodging, gaming, restaurants, and mental car companies. Today,
I'm delighted to introduce our fabulous guests Asana Aronov Asana
Head's Market Strategy for Alternative fixed Income for JP Morgan
Asset Management. Prior roles include Global Head of Fixed Income
Management Research at JP Morgan, Private bank risk manager at
(00:44):
Goldman Sachs Asset Management, and asset allocator positions at Blackrock
and JP Morgan. She has a long list of incredible
accomplishments that I could probably spend a whole podcast talking about,
but the one I want to bring attention to which
I find the most important, is that she was one
of our deemed panelists for our twenty twenty four Fixed
Income Halftime Report event that we held at our one
(01:05):
twenty Park office last year. That annual event that we
hold obviously holds halfway through the year, and we talk
about everything and anything related to credit economics, rates, you
name it, and Oxana can cover it all, so.
Speaker 1 (01:19):
We'd obviously you'd delight to have you on the show, Oxanna.
Before we get to the questions, credit markets are looking
ever more complacent, with junk bonds trading tight as demand
for yield rises and net new supply of corporate debt
remains thin. Under the surface, there are signs of stress, though,
with investors moving to higher quality debt, structured finance and
sectors that would appear to be less exposed to the
chaos cause by trade wars and volatile US policymaking. Valuations
(01:42):
are getting pretty stretched, and it's unclear how safe higher
rated debt will actually do When markets take another big
hit and liquidity each rise up, the US economy risks
slipping into stagflation, which would be potentially catastrophic for borrowers
with a lot of debt. So, Oxanna, we've been talking
for years, you and I about the disc connect between
rising fundamental risk and bullish credit market pricing. You've talked
(02:04):
about a reckoning to come, but what would the trigger
be for such a correction?
Speaker 3 (02:08):
Thanks so much for having me always fun chatting with you.
What would the trigger be for that reckoning? So we
saw a little bit of it in April, and that
really came from nothing much at all except a picture
that the President held held up on Liberation Day, and
(02:29):
that just tells you how incredibly thin that trigger really is,
or how incredibly fragile the market is. And I'm not
saying that from the standpoint of you know, oh, fundamentals
are terrible. Certainly in investment greade credit they're quite constructive.
There are plenty of the low investment grade names where
they're also constructive. The issue is, of course, the very
(02:51):
very tight spreads. And I always say in fixed income
it is very easy to identify a top. In equities,
the markets have repeatedly defied tops and record highs and
we just don't know. But in fixed income, when spreads
are at historic tights, the closer they get to zero
(03:11):
the spreads that the more certainty there is a this
is a top, you know, in rates, a tenure at
one percent or fifty base points, that's the top. So
I think investors would do well to be at least
aware of that fact because part of the reason why
we've seen valuations remain resilient has been exactly James, what
(03:32):
you mentioned, lack of issuance and investors are continuing to
kind of chase a little bit of you'll, just to
give you an idea, double B rate of debt, which
is the highest tranch of junk rate of debt, is
sitting within about a percent of three month tea builds,
maybe a little bit more. I mean, it's hit levels,
you know, over the last few months that are that
(03:53):
have been tighter than before the Great Financial Crisis. So
there is a tremendous and lack of compensation for the risk.
And really it's the demand that's keeping this party going.
And should that demand go the other way because investors
feel nervous or something is changing in the geopolitical space
or physical policy, whatever it is, it doesn't take much
(04:16):
when things are priced for perfection. And one of the
things that you know, feel free to stop me with
a question, but one of the things that we're seeing
as signs that borrowers are perhaps struggling to make payments
is the amount of pick, the amount of picks that
have been used to you know, quote unquote pay interest.
That number is reaching towards nine percent. Probably is going
(04:40):
to finish above that this year. We don't know yet,
of course, but it was as low as you know
in the force just five years ago. So call about
you know, talk call it kind of a doubling, I
guess you could say. So we are seeing that phenomenon
that companies are finding it hard to get the cash
and they're resorting to more inventive of paying their interest.
Speaker 2 (05:02):
And I think, Oksanna, what fascinates me is I actually
rewatched our replay from last year's event, and what you
said last year still holds. What you just said about
double B still very much holds. And I think the
only difference between last year and this year is that
we're seeing an enhanced version of what we saw last year.
The conversation is the same, but I think, you know,
(05:22):
the maybe the volume was tuned up a bit more,
and maybe that's a reflection of the fact that the
election has gone and went. We now had a Liberation Day,
We've now had a lot of things happen over time.
But I think what struck me is not only the
conversation about double B and about risk taking or lack
of reward that you get, but the conversation around inflation.
(05:45):
So what are you thinking, I mean, where are you
seeing the most concern when you think about you know,
high yield taking on more pick related debt, right, so
they can't actually pay in cash, and then you have,
you know, inflation issues use on top of that, bubbling
around the surface. What are you thinking, what are you
advising people?
Speaker 3 (06:05):
So inflation is a really interesting foe in that it
impacts a lot of different companies in a variety of
different ways. When we talk about inflation, the first thing
that comes to mind is higher rates, which of course
is problematic for lower rateed credit because these companies tend
to not have very significant cash streams, right or very
healthy cash streams, or they rely on financing and that's difficult,
(06:28):
and that's why we've seen dramatic reduction and issuance. But
inflation also impacts in a different way, dramatically large investment
grade companies because their business models are so tied to
the global economy, and inflation of course, completely reorders that
global world order, and that has very significant ramifications for
(06:49):
those companies because a ton of their revenue comes from
overseas and that is all being totally kind of thrown
up in the air. So I think when we talk
about credit investing today, it makes me a little bit
concerned that there is sort of a stampede in or
a stamped out mentality when we really should be very
(07:09):
discerning with respect to all of these different layers. You know,
the fundamentals, the business model of a company. You know,
where are the revenues coming from, how much cash do
they have, what sector are they in? Because some sectors
are going you know this Jody better than anyone, and
some types of sectors are going to be significantly more
impacted than others, like retail, like manufacturing and others, and
(07:33):
some are going to be perhaps less less because they're
less dependent on things coming from overseas that are impacted
by tariffs, et cetera. So there are so many different
layers to look through, and yet we have kind of
this over arching phenomenon in the investment industry and the
investment management industry right now where we're just trying to
(07:53):
democratize access to all forms of credit, which in itself
is a good thing. We want to give people the
opportunity to access different streams of returns and differentiated streams
of returns. But when I see things like ETFs tied
to private credit, you know, I was kind of scratching
my head at the round etf tide to leverage loans,
and leverage loans have been in the ecosystem much longer,
(08:15):
and we know what they act like when they're stressed.
Private credit is not a tested st class. I'm not
saying it's a bad asset class. They are absolutely constructive
things and great things to do there. I just wonder
how much investment tourism exists there, how rigorous is the
due diligence around all of this stuff, and how much
(08:36):
do does every investor understand in terms of, you know,
the price stability they were promised, is it really going
to hold in a volatile episode?
Speaker 2 (08:45):
And that that market liquidity piece is sort of a
question that I've been pondering. And you know, even in
my prior life, you know, something that we looked at was,
you know, you think about bond ETFs. They're really not
that old, right, just corporate bond ETFs. So never mindverage loans,
never mind all these other products that are much less
liquid underlying, What are you thinking in terms of when
(09:07):
you're looking at opportunity, when you're looking at diversification, how
are you thinking about these Because if you just read
on the sidelines, you know, you could potentially lose out right,
you could be laiting. We be waiting years before the
shoe drops. So you know, if I just say I'm
not going to touch any retail company or if I'm
not going to touch any manufacturing company, there's definitely you
don't want to throw the baby out with bath leader.
(09:29):
So how are you thinking about opportunities?
Speaker 3 (09:32):
So credit investors are if we zoom out, fixed income
investors really have three issues. Today. You have a market
that is much more volatile, just broadly the bond market
than it's been between the Great Financial Crisis and called
it three years ago. Volatility has gone back to where
it used to live before central banks have gotten massively involved.
(09:54):
And this is actually one of the first things we
show investors when we start talking about the macro backdrop,
is that volatility back to where it used to live
before central banks became the kind of institute of the
central bank. Put if you will. The second issue investors
have is that everything within fixed income is highly correlated,
precisely because spreads are so tight. So if you look
(10:15):
at the correlation between investment grade, high yield, emerging market debt,
mortgage is kind of everything in fixed income versus treasuries.
That correlation used to be around zero point five just
five years ago. It ended twenty twenty four at north
of point nine, and this year, you know, April was
a poster child. And this continues to be the case
that bonds just haven't been offsetting the risk of equities.
(10:37):
This is a phenomenon that exists when inflation is alive
and well. And the fact that we've gotten so used
to sixty forty working so well for over twenty years.
Few people realize that the sixty forty ecosystem did not
exist really in any meaningful way prior to the late nineties,
which is when that stock bond correlation was negative and
(11:01):
you benefited anytime stocks won down, your bonds went up.
Prior to that, for decades, stock bond correlation was positive
and sixty forty was not a thing, or at least
it was a very kind of limited thing. So that's
the second big issue that investors have is that lack
of correlation, so portfolio construction or not lack but high
correlation between aset classes, So portfolio construction needs to be resought.
(11:25):
And the third issue is the one you just hit
on with fixing comingtfs. But just generally, this hits at
the bigger pitch picture of liquidity liquidity in this market
from the standpoint of who is going to take this
position off your hands when you want to sell it.
This used to be the cell side, and that the
appetite for risk there has been dramatically reduced post GFC,
(11:48):
both regulatory means but also just the bank risk appetite.
And so as a result, the top five corporate bond ETFs,
for example, you know, you're we all know who they are.
You know, I'm not going to name names, but we
know who they are. Their total assets under management are
several times what the street is inventorying for corporates. So
(12:10):
what does that mean in practice is that when someone
wants to sell these ETFs, which are meant to be
instantaneously liquid, the dealer that you call to unload that
position is not going to be able to take anything
off your hands. They're just going to try to find
the other side for that trade, which creates a bottleneck,
which creates a very violent price discovery process, and prices
(12:32):
kind of drop precipitously. So we have a market where
the fat is papered over this lack of liquidity for
a long time, but to the extent that they're not now,
and I seriously doubt that they're going to be the
buyer less resort for these speculative names like hy udtf's
the way they were during COVID or high you issuers. Altogether.
(12:54):
They may support and probably will blue chip employers because
that affects the overall American economy, But I really doubt
that Congress will have any appetite for bailing out you know, speculators,
which is really an investor who is just in the
markets for the sake of growing their capital. So I
think investors have to be cognizant of this, And you're right,
(13:15):
it has been kind of a consistent theme for years,
similar to how interest rates and the tremendously low yields
were a consistent theme for many years, and then we
had twenty twenty two and people still haven't been able
to dig themselves out of that hole. The aggregate now,
the Bloomberg aggregate is still down almost you know, four
(13:37):
to five percent depending in the year over the five
year period, and so these are real losses in portfolios.
So far, at least the portfolio haven't been able to
dig themselves out of that hole. So these things may
take a while to unravel, but I do think they're
important to be cognizant enough because they have lasting, long
(13:57):
term consequences.
Speaker 1 (14:00):
About something you said earlier, I said about the pick,
which I find interesting payment in kind. The company cannot
afford to pay back the debt, so they just give
you more debt. Obviously that's problematic. But you mentioned a
number nine percent versus four percent? Can you unpack that
a bit? I mean nine percent of what of what period?
And when was it four percent? And what's going on there?
Speaker 2 (14:19):
Yeah?
Speaker 3 (14:19):
So look, a pick can be a constructive thing. Sometimes
a pick is meant to finance a research effort that
a company is undertaking, right, and so they don't want
to pay cash. They want to take the cash and
use it for something that actually invests back into their
business and allows them to create a new revenue stream. Perhaps,
(14:40):
but more often than not we see picks too, exactly
as you said, because the company does not have a
cash stream, and so they just increase their debt load.
And when we say eight to nine percent picks, that's
a percentage out of the overall interest payable in the
below investment grade space currently so it's not insignificant.
Speaker 1 (15:02):
It's nine percent. Now, when was it four percent?
Speaker 3 (15:05):
And so about twenty twenty we had it somewhere between
four and five percent, And so you know, nine percent
is like every tenth eleventh company. So it's not insignificant.
Speaker 1 (15:15):
Is it across the board? Is it isolated in certain sectors?
Speaker 3 (15:18):
It is more prevalent in sectors that have had a
harder time, you know, like retail, like you know, but
it's it's definitely not limited. I can't say that it
is specific to only these three. It's definitely used pretty
pretty widely.
Speaker 2 (15:35):
But would you say that that is a tell for
a possible uptick in restructurings and bankruptcies, because oftentimes you
see picks as a precursor or a sort of restructuring component, right,
And what we've seen in recent years is because private
credit has gotten big, as you talked about earlier, is
(15:56):
that companies now have these alternative streams to get cash, right,
And so if you're thinking about it from that context,
I mean, is this either sort of a back door
restructuring situation in which we're already watching happen, or do
you think it's more of a precursor.
Speaker 3 (16:12):
So it's probably both because exactly as you said, we
are seeing so in terms of like just outright defaults,
right defaults have remained subdued, and you know, in loans
they're probably going to end up somewhere between four and
a half and six percent. That seems to be kind
of the consensus on the street. In bonds, they're actually
slightly lower, believe it or not, because loans have been
(16:35):
not to go off on a tangent, but there's been
really a deterioration in the quality of loans, and we
can talk about that separately. But what we see and
kind of in terms of what picks, in the use
of picks, what does it mean when we look at
the number of restructurings, there is a significant uptake in those.
And so if there weren't these alternative ways to refinance,
(16:59):
so like private credit that absolutely does come in and
take public companies out and allows them in a different
way to refine us, we would see higher default rates
for sure. So I think the use of pigs is
both a symptom of an evolving credit space and also
a precursor that, look, there are going to be companies
(17:21):
whose business models are just not interesting necessarily for private
credit by some estimates. You know, we had a number
of companies who shouldn't have made it through COVID who
are still around. Last year we had a reprieve and
in the interest rate environment, they were able to refinance
yet again and kind of push things down the road.
But to your earlier question, what is going to be
the catalyst, I think the catalyst is just the passing
(17:44):
of time. As the settles in that look rates are
higher for longer, the r star for this economy, that
sort of neutral rate is higher. It's trending, you know,
probably three percent, even the fedal and estimate of it
has been climbing up. This continues to be a reality
month after month and maybe even year after year. Quarter
(18:06):
after a quarter. It's the passage of time that's going
to keep driving that default rate up. And you're right
now you're still seeing more rising stars than falling angels,
meaning more upgrades than downgrades. But that changes very quickly
the moment kind of the mood in the market changes,
the ratings and agencies follow, and so I wouldn't really
(18:26):
use that as a barometer. But the catalyst is always
when the catalyst is something when we look back. It's
always like, well, of course you know this happened, but
it's never easy to forecast it. And I always say,
the only thing we can know is where we are
now and assess it very clearly. And where we are
now is a very very tight spread environment where you're
(18:50):
not compensated for the risk that is under the hood
of a lot of these companies. You have to be very,
very selective in terms of price.
Speaker 1 (18:57):
A lot of these companies had been kind of holding
that breath, wasting for rates to come down significantly. I mean,
we started this year expecting, you know, over one hundred
bases points in.
Speaker 3 (19:04):
Costs, then every year for a number of years.
Speaker 1 (19:06):
That's maybe there'll be no cuts this year. But then
you know, we have this conversation often with this sort
of segment of the market that we kind of know
is going to blow up. It's triple c's. Everyone knows
where it is, where the danger lies. They stay away
from it, and there's assumption that there will be no contagion,
that there'll be no ripple effect across credit. Is that
is that safe to say that you know you can
just get rid of you know, I think some people
(19:27):
have talked about hundreds of billions of dollars worth of
debt blowing up, but everything else will be fine. What
do you what do you make of that?
Speaker 3 (19:33):
You see me shaking my head right now. So high
yield is not the sort of ass of class where
you can have a part of the market experience that
kind of seismic shift or dislocation and the rest of
the market kind of yawning through. And I always bring
up twenty fifteen energy crisis as an example, because you
(19:56):
had legitimate fundamental issues in that space, but you didn't
have fundamental issues in leisure, in gaming and lodging, in
healthcare and technology and all these other sectors. But everything
went to nearly one thousand over nine hundred over because
you had stress in this one place. And again, you know,
talking about the fact that so much of this industry
has been etfized if that's wormed, and so much of
(20:19):
it has been investors just chasing yield. When something goes wrong,
there is a big kind of percentage that's like, all right,
I'm out. I don't really know what's going on here,
but I don't feel good about this, and I'm out.
And that, you know, selling begets selling to my earlier
point about lack of market makers with balance sheet capability
to be a stabilizing mechanism in the market. So liquidity
(20:43):
has completely shifted to the buy side, to the prior
credit to teams like my team, to the buyside. But
the buy side has investment committees, it has to sell
something to buy something. It's just not as efficient a
mechanism at you know, being a cushioning mechanism for a
market that's in stress. So I think, you know, it's
a long winded way to address the question, but I
(21:04):
think there's just a lot of factors at play that
are being discounted now that can make for volatility that
engulfs the entire sector, even if the issue only really
sits within one portion of it.
Speaker 2 (21:18):
So then if you're saying that there's potential for some
sort of high contagion even if it's not necessarily warranted. Right, So,
say we have a massive self and retail and all
the retail companies go billy up because of tariffs and
manufacturing and supply chain breakdown, and you know, people not
wanting to buy anything because it's too expensive, but everywhere
(21:38):
else is fine. Is it safe to say then that
investment grade looks good because the problem with investment grade
is it's just so tight right now right where is
it safe? Where's it both safe to go but also
somewhere that's actually going to give you some kind of value.
Speaker 3 (21:52):
So you're really hitting on a point that that deals
with portfolio construction, because you can't really Given my comment
around high correlation across sectors and lack of liquidity providers,
right and the fact that contagion tends to spread, it's
really hard to say that, you know, if I buy
these names, I'm going to be okay, Yes, you might
(22:12):
be okay in the long run. Like one of them,
I'm going to often go off on a tangent a
little bit here, like Colo. Triple A colos have been
all the rage. I'm not even sure that we have
from a market value standpoint, the amount of triple A
colos that are like supposedly in all the funds right
now out there. But and the pitch is often you know,
triple A colos were great in two thousand and eight.
(22:34):
They were whole. They did not you know default, this
is true, but they weren't down twenty to twenty five percent.
Do you have the appetite or the risk ability to
take that. So similar here you cannot kind of isolate
yourself from the experience of the volatility. But it really
speaks to the portfolio construction a bigger conversation about and
(22:56):
this is kind of how we think about risk. Is
okay if I and I don't mean to point to
paint the sort of doom and gloom picture. Right, we
are taking risk, but we're doing it in a way
where we're saying, okay, if I'm taking credit risk. Over here,
credit protection is incredibly cheap today, because, as you said,
investment grade is so tight. Credit protection is incredibly inexpensive.
(23:21):
And it is a fixed cost. Unlike with stocks, where
if you go short of stock you have to be right,
you have to be right quickly. With bonds, it's kind
of a fixed cost because you are receiving floating paying
fixed right, So if the credit market does dislocate, you
benefit from that. If it doesn't, you just have a
fixed cost. And so and that fixed cost is very
(23:41):
low today. So compliment your credit exposure. Yes, you're giving
up a little bit, you're not giving up a lot.
And what it does is, should there be volatility, it
allows you to not lose your head, but be very
methodical about what am I going to do now? Where
is the pricing more interesting, Where am I going to
start putting my money to work, et cetera. So I
(24:02):
think it speaks to a broader portfolio construction process. When
we talk about, you know, alternatives, I don't think it's
a conversation just about you know, exotic instruments and shortening
and all these things. Like, yes, that has a room
and a role to play, but it's also a conversation
about portfolio construction. And in fixed income, I think the
portfolio construction conversation has been entirely focused on a market
(24:26):
risk driven benchmark like the aggregate and replicating it and
you know, maybe sprinkling in a little bit more risk
to have some additional yield. But really, if you are
a fixed income investor, now, if you are a private
credit investor or high yield investor, that comes with specific
risk return profiles, and that's a different thing. But if
we're talking about a core type allocation, right the anchor
(24:49):
of your portfolio, the ballast in your portfolio, that has
to really be all about capital preservation first and foremost,
and capital preservation today the only part of the market
that offers that is liquidity, but none of the investment
process on the processes on the street. And I say
this as a former due diligence analyst, none of them
(25:11):
or very few of them start with liquidity and then
helicoptering out of there into pairs of the market where
there is opportunity. That's how my team thinks about risk
in fix income. It's the risk of losing a single dollar.
It's not the risk of you know, I'm going to
be down ten percent. My benchmarker's down thirteen percent. I'm
a top quartel manager. You know in twenty twenty two
(25:32):
that would have been a top quartal manager. That's a
hollow victory for investors. So I think the entire conversation
around portfolio construction in fix income has to really evolve
to include differentiated sources of return like what we're talking
about here, but also to think differently about what is
the neutral point for risk. And for us, the neutral
(25:52):
point for risk is liquidity, because that is the only
part of the market today, the only part of the
curve today where you truly have capital preservation, because even
treasuries have become so much more volatile and will continue
to be that. You can't really rely on that as
a constant sort of source of liquidity for whenever the
market moves in a direction that you want to take
(26:14):
advantage of.
Speaker 2 (26:14):
So then how much in cash should we hold?
Speaker 3 (26:16):
So that is a very personal question for every investor.
It depends on keep it all under the mattress. No,
definitely not. It depends and cash. Remember, there are different flavors.
There are ultra short strategies, right, There are different ways
to play that you know. For example, we really like
(26:37):
the investment grade corporate floater space. It gives you a
better yield than cash. It gives you better yield than
fixed corporate floaters sorry fix corporates, and better quality double
A plus. So you are in a fairly safe part
of the market. You're clipping a pretty attractive coupon. Yes,
you have the risk of that floating feature, but if
(26:59):
your view, as ours is that we are in a
higher for a longer environment, then that's a great place
to be. So it's not a cash equivalent, I would
never say that it is, but it is definitely a
pretty safe place to be. And so and it still
allows you that optionality to helicopter into other parts of
the market.
Speaker 1 (27:18):
The flip side of this kind of bearish view that
you might take on the market is that every dip
has been bought very very quickly, and it never lasts.
And you know, you get rewarded extremely well for just
buying that dip and piling in and naps back and
you're a winner. So what do you do with that?
I mean, way, buy the dip. There's no kind of
(27:38):
short view that there would work in credit despite the fundamentals.
It just seems that the market just keeps going up.
And there's another assumption. You mentioned the FED, you know,
not coming in and buying, but there is an assumption
that the government will bail you out in the end,
you know, the Vessent or Luttnek or Trump, someone will
be there to hold your hand if it all goes
rotten in the bond market. How much stock should we
(28:02):
hold that in that views, you think?
Speaker 3 (28:04):
So to address the first part of that, that's why
I say, you know, we are active and we are
taking risks precisely for the reason that you say, you
can't just kind of sit around a way forever. There
are things to do. There are interesting things in different
parts of the market. April was a very volatile period
and we absolutely bought the dip across a number of
different parts of the market, including around the edges of
(28:26):
fixed income with things like converts and closed end funds. Right,
So it's a very vibrant marketplace in terms of you know,
it's evolved into a lot of different interesting kind of pockets.
So that is definitely there is an agility. I guess
it is what I should say that you should bring
as a as a manager to operating in this market
in a way that perhaps was less relevant in prior decades. Right,
(28:50):
So you used to be able to take weeks and
months to kind of allocate and that, and these things
have been a lot more fast and furious. Not to
say that this is a new kind of paradigm, because
then that speaks to the second part of your question.
Does the government have the ability to rescue every investor? Yes,
absolutely they do. For now, we're still if you had
(29:12):
currency of the world, and we can still continue to print,
and that seems to be not working you know as well,
maybe but still working to some extent. I doubt there's
going to be a lot of appetite on the Hill
to really bail out investors in some of these more
speculative parts of the market, like private credit is associated
(29:32):
with you know, wealthy qualified purchasers, et cetera. And I
just don't think that anyone is coming for that part
of the market. And think about what happens, right, So
if these people can't get their money out, then they're
trying to liquidate the things they can liquidate, which are
the public markets, and then that stress always spills out
into other parts of the market. So again I'm not
(29:54):
trying to paint a gloom and doom picture. I'm just
sort of illuminating the way that markets function beyond just oh,
fundamentals are good, therefore everything is great. But if the
fundamentals are fully priced in, then you'll be able to
get your coupon. Maybe if anything goes wrong, then you know,
the entire investment cases come apart. So you always have
(30:16):
to think about what if I am wrong? And there
are many things that can go wrong today if you
kind of soberly assess the situation. This administration tends to
pick its winners and losers, and I think it's really
hard to predict who the winners and losers will be.
I think at the beginning of this year, when the
administration came in, we would have had a conversation about
(30:39):
who those winners and losers are going to be. Today.
It hasn't necessarily worked out that way, right, So I
think it's really foolish to rely on the government as
your investment strategy. I mean, call me an old timer,
but I think that's just that. Hope is not a strategy.
At the end of the day. You have to get
(31:01):
your hands around the fundamentals for sure, and marry it
with the price and know that you are compensated when
all is said and done. What is your recovery rate
going to be? Are you still comfortable with that? You know,
these things have never ceased to be the right way
to invest.
Speaker 2 (31:18):
So then should we be looking outside the US at corporation?
So you know, you talk lowderation, we talk higher grade,
and so it sounds like the US is headed for
some pain. So then where where in the world should
we be looking?
Speaker 3 (31:34):
Europe? If we look to Europe has some growth issues,
you know, investment grade is probably okay. Again, it is
a at best coupon game. But to the extend that you
want some diversification perhaps that's not a bad way to go.
But again, you know, spreads are tight everywhere when we
(31:57):
talk about below investment grade in Europe. It's interesting because
unlike the US, Europe doesn't really have a path to restructuring,
so companies that go bankrupt are kind of just done
and dead, Whereas in the US we can model for
recovery rates, we kind of know what they historically are,
so it's an easier path through stress that you can model,
(32:21):
whereas in Europe it's sort of a done deal. So
not generally, unless spreads are very wide and attractive, not
generally a fan of European high yield when it's comparable
in a compensation to US high yield, because US highld
is just kind of a better known foe.
Speaker 1 (32:37):
If you will, I'm glad you mentioned recovery rates, because
we've discussed those a lot on this show that they
are not good in the US. You know, so you've
got a pretty low default rate relatively, but your recovery
is much much lower. So and the loans, you know,
the loan only structures are putting people in trouble. And
then there's all the lemes, the liability management exercises, the
(33:00):
preference for certain types of investor. You know, the lawyers
get paid, but everyone else gets in trouble. So where
where do we go with recoveries? And how can you
really project them given the you know, more aggressive nature
of these workouts.
Speaker 3 (33:15):
Yes, recoveries have been coming down in the US. You know, typically,
you know this, historically, high heeled bonds have had recoveries
around forty cents on the dollar, loans seventy cents on
the dollar. Right now, we you know, more recently, we're
seeing bonds closer to twenty cents on the dollar and
loans closer to forty cents on the dollar. Loans have
been really fascinating to me because that's been a darling
of investors for many, many years in spite of the
(33:39):
fact and again, you know, someone who's been kind of
around for a while, I remember all the handwringing around
you know, twenty percent of loans being second lean or
cove light or whatever it was during the GFC. Well
in the you know, in the years since, you know,
over eighty percent of loans or cove light loans. That's
just the reality of the market today, and most of
(34:01):
them have no subordination below them. There's nothing below the loan,
even yes it is a senior structure in the in
the capital structure, but there's nothing below it. So it
takes a hit directly. And that's why we've seen the
lower recoveries in loans, and that's why the projected default
rate in loans is expected to be higher than in bonds,
because there's just been such proliferation. They've been obviously gobbled
(34:23):
out by clos by the way to our point and
conversation on triple c's, you know, clos can only hold
up to something like seven percent triple c's, so if
we do have a downgrade wave that you know, they
start to kind of puke these things out and the
price discovery gets worse. But I feel like again I'm
kind of just slipping back into that doom and gloom.
(34:45):
You know, where do we go and how do how
do we model? Yes, the recovery rates have been lower,
and I always make this point as well that even
though defaults have been subdued, your recovery rates are actually lower,
so it's not typical for a non recession market. I
think another important point is that in number of companies defaulting,
(35:07):
there have just been mostly smaller companies, but the number
of companies defaulting is not all that typical for a
non recession market. And so again I bring all these
things out because I feel like there's so much complacency
out there. And I remember the complacency that led into
two thousand and eight. And I'm not saying we're headed
for anything like that, but it's just, you know, investors
(35:29):
do get very complacent, even you know, if you think
about the ultra low rates of the you know, twenty tens,
and you know, up until COVID, and so everyone was
on board with by negative yielding debt in Europe for example,
I remember going to s a European clients and they'd say,
you know, we want five percent and their yields are negative,
and I would like get palpitations, like how how can
(35:50):
you get five percent? Like in a world where and
so the but the mantra was it's okay to buy
negatively yielding debt because you can sell it to you know,
the next fool or the government. It was the greater
fool theory almost. So I think these things take time
to develop, but we cannot get complacent because this is
(36:11):
someone's retirement money. This is someone's college money. James, you
and I have talked about this as someone who is,
you know, a frust generation immigrant. I am very closely,
intimately familiar with what it's like to kind of lose
your livelihood, and so we take this very seriously. Fixed
income is not a speculator or shouldn't be a get
(36:32):
rich asset class or a speculative acid class. In some
parts it is. There are places to be aggressive, but
really it's about maintaining wealth, preserving wealth, maintaining a ballast
in your portfolio. And I think looking at investments through
that prism has been somewhat diluted by this kind of
just mainlining liquidity from central banks. I think it will
(36:55):
be a lot more difficult against the backdrop of all
this spending in DC.
Speaker 1 (37:01):
So does the default rate get worse from here? Do
the does the amount of pick rise from here? Do
you do you see any signs that it is getting worse?
Or are we you know, because because you know, the
government's basically telling us to be patient and everything's going
to be fine, and we're going to be making it
all great again and we'll be absolutely fine. Don't worry
about it.
Speaker 3 (37:18):
But sure, it's paying for long term gain.
Speaker 1 (37:20):
Is this something you know fundamentally under the surface, are
there more defaults coming out?
Speaker 3 (37:24):
There? Is there more stress so fundamentally under the surface
in lower rated grade that we are seeing ib Ibita
coming off, you know, pretty aggressively off of its height.
And when we talk about EBITDA, there are all kinds
of creative ways of reporting it and creating it and
there's really no standard per se. Jordy, I'm sure you're
(37:46):
familiar with this phenomenon just a little too much. And
so when I look at those numbers, I wonder, even
you know, how much more of you know, creativity is
there under the hood that if we were to standard
dies it across the board, what would we So we
are seeing those fundamentals coming off. We are seeing interest
coverage ratios coming becoming lower. They're not kind of screamingly alarming,
(38:10):
but they're definitely the trajectory is not upwards. The trajectory
is slightly deteriorating. So yes, I think default rates will
continue to creep up. But the mitigating mechanism there is
the private credit space. For sure, it will continue to
take more companies out. There is even maybe a scenario
(38:32):
where it's like only the least interesting or where the
operators that are left, or I don't know. There's a
tremendous amount of also conversion between public and private operators
right where teams that have public capabilities are developing private capabilities,
and teams that have private capabilities are also kind of
dabbling in the public market. So I think the lines
(38:53):
between these will be increasingly more blurry. We are just
for being opportunities, being agile and not just sleepwalking into
investments because they seem hot and because everybody's doing it,
but really buying them when they are attractive, when the
price is when the price makes sense.
Speaker 1 (39:13):
So how do you position right now? I mean we've
talked about doubleb's, for example, being overpriced, We've talked about
TRIPLEZ risk you like I G floaters. What's what's the
sort of broad positioning and are you just massively long
cash waiting for the next dip.
Speaker 3 (39:28):
We always have liquidity in this portfolio, and that's just
due to the mandate that we have, so we're not
a high eield operator. We can't have a lot of
high yield at different points in time, and that's why
you know, investors often come to us for a very
unbiased point of view, because we're not structured or you know,
don't have a biased towards or away from any part
of the market. And so what you know, what do
we like? We like volatility, We like value. Where is
(39:52):
there volatility and where is their value? There's volatility in
the curve, and so we are trading the curve and
are being very tactical there. So you know, two year
agoes above fed funds, but that's a great entry point.
Rallies below four that's an exit point most likely, So
being tactical there. So where else is there volatility? It
(40:14):
periodically rears its head in credit like it did in April.
There were like three volatile days, and so we did
a lot of different things in those days, including monetizing
some of our shorts, which brings me to another point,
where is their value? There's value in shorts and credit protection.
I mean shorts kind of has a very aggressive connotation
to it, but really it's credit protection. It is very cheap.
(40:35):
It is very undervalued today because of the complacency in
the market, and we do like it just to buy
DX investment grade. Yeah, so because they are you know,
the correlation is there, but the cost is lower in
investment grade protection, So we definitely like that part of
the market. And yes, having liquidity in your portfolio essentially
(40:58):
makes you a coal option and I think today optionality
and portfolios is vastly underrated. And instead of being fully
invested across the cycle, We've always said this, and over
the years, James, you and I have talked at different
points in time, we've always said, instead of being fully
invested across the cycle, which basically ties you to the
(41:18):
back of a truck and just kind of like drags
you across the experience of that cycle. You know, be
the master of your fate. As I said, tops and
fixed income are very easily identifiable, don't participate in them,
take some chips off the table and use your liquidity
for that optionality. We're big believers in that, and that
(41:42):
has allowed us to create that twenty percent advantage over
your kind of traditional AG type product with having less vowve.
I mean that's really the key too, is what this
approach this. You know, having cash is your neutral point
for risk, which doesn't mean you sit in cash. We
don't like sitting in cash. We like taking risks. We're
(42:02):
investors But what this does is it essentially smooths your
paths to returns because you are not you know, moving
with that truck and just being dragged behind us. You
are choosing your entry point very widely and in an
informed manner, and that means you have less vall. And
when you have less vall, investors stick around to benefit
(42:24):
from the fact that these things are money good. Right.
So if we are going to talk about clos let's say,
then you know, we will buy them when the price
is right and not have to Investors won't have to
live through that twenty and twenty four twenty five percent
drow down.
Speaker 1 (42:37):
But if you had to pick one thing, you know
where there is value, where there's you know, relative value
that is exciting right now that you think others may
be missing, that's giving you an edge, what would that be.
Speaker 3 (42:47):
I think definitely the credit protection is vastly underrated. I
think every portfolio could could use it. It will make for
a much smoother experience for your investors. I think the
investment great floaters is probably our you know, it's definitely
the most dominant trade in our portfolio today and it's
a great way to clip some coupon while still staying
(43:09):
fairly agile, I would say those things are probably most
attractive from a price standpoint.
Speaker 1 (43:15):
And that's going to be banks most.
Speaker 3 (43:16):
Is it so about forty yes, roughly, you know, less
than half, but about forty five percent of it our
money center or at least we focus on money center banks,
not the regionals. And then there's you know, some kind
of very household names across different sectors. Yeah, very plain
vanilla stuff.
Speaker 1 (43:31):
That's assuming that the FED doesn't cut.
Speaker 3 (43:33):
Yes, absolutely so it assumes that we are in a
higher for longer environment. But even if we are not right,
even if the FED cuts, I think, and you know,
we didn't talk about this at length, but I think
it's clear for my comments, we are not believers that
the FED can really cut pretty aggressively here. Barring some
left tail scenario, they are going to either stay put,
maybe deliver one cut. I think they're concerned about exposing
(43:59):
a lack of influenced on the curve because they started cutting.
I think they were too early to cut in September,
and they did it very aggressively, and the long end
of the curve moved up. And if they were to
do that now, the long end of the curve could
do the same thing, because it's not really based on
what the FED is doing. And so I think they
have to kind of marry all of these things and
(44:21):
not really expose themselves as perhaps not having influenced the
kind of influence they want to have over the curve.
Speaker 1 (44:27):
And not to end on a down note, Alexander, but
you have been a great voice of reason in a
sea of irrational exuberance. What worries you most about the
outlook for credit markets specifically? Which is the one that
our audience most cares about. You know what really keeps
you up at night?
Speaker 3 (44:43):
Worry? Well, nothing keeps me up at night because we
have liquity to take.
Speaker 1 (44:47):
It's a little go What do you just shake your
head out and think, you know.
Speaker 3 (44:51):
That's just not you know, I've been around long enough
at this point, and I kind of hate saying this
because I still think of myself as a very young person,
but I've been around long enough to know that complacency
never ends well. And typically what gets investors into trouble
again and again is a combination of complacency and leverage,
(45:13):
and even the simplest things, when they are levered up,
they never work out well. And where is all the
leverage today? And I'm sorry you said not to end
on a set one, but I'm afraid that we will.
The leverage has shifted. Yes, there's still leverage on the
private side of the market, and I'm not just talking
about the private credit but I'm talking about you know,
corporates et cetera, hedge funds and all of that. But
(45:34):
where is the you know, two thousand and eight, the
GFC essentially transferred the leverage from the private side to
the government balance sheet and that's where it is today.
And that has very meaningful ramifications that the entire scope
of which we will only really be able to analyze
in retrospect, you know, looking back. And that does worry me.
(45:55):
What does that mean. I'm not in the camp of like, oh,
the dollar is going to go away and no one's
going to want it, because again, there's just not enough
stores of value in the world today. Yes, the Swiss
frank is very stable, there's not enough of it. Nearly gold,
you know, moving up is a symptom of the same thing.
But I do that really is something that wears me
because I don't think anyone fully understands what are really
(46:19):
the ramifications of that. How will it play out? What
does it mean for our economy and for for the
companies that you know, for for the corporate sector, for
the consumer sector, for for sovereigns. Frankly, what does it
mean for em if you can buy us mortgages at
you know, seven percent? Let's say, like, is anyone going
to want em at in that environment? Like? So, I
(46:39):
think that's if anything keeps me up at night, and
not because it will reflect negatively on the strategy that
we manage, but more so I think it's just the
ramifications of it are really really far reaching and serious.
Speaker 1 (46:52):
Great stuff, Folksanna Arnough with JP Morgan Asset Management, thank
you so much for joining us on the credit edge.
Speaker 3 (46:57):
Thank you so much. Always a pleasure and.
Speaker 1 (46:59):
Of course very grateful too. Jody Lurie from Bloomberg Intelligence,
thank you for joining us today.
Speaker 2 (47:02):
Always great to be here for.
Speaker 1 (47:04):
Even more credit market analysis and insight. Read all of
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(47:25):
We're on Apple, Spotify, and all other good podcast providers,
including the Bloomberg Terminal at b pod Goo. Give us
a review, tell your friends, or email me directly at
jcrombieight at Bloomberg dot net. I'm James Crombie. It's been
a pleasure having you join us again next week on
the Credit Edge.
Hello, and welcome to The Credit Edge, a weekly Marcus podcast.
My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I'm Jody Lurry, senior credit analyst at Bloomberg Intelligence,
covering leisure, lodging, gaming, restaurants, and mental car companies. Today,
I'm delighted to introduce our fabulous guests Asana Aronov Asana
Head's Market Strategy for Alternative fixed Income for JP Morgan
Asset Management. Prior roles include Global Head of Fixed Income
Management Research at JP Morgan, Private bank risk manager at
(00:44):
Goldman Sachs Asset Management, and asset allocator positions at Blackrock
and JP Morgan. She has a long list of incredible
accomplishments that I could probably spend a whole podcast talking about,
but the one I want to bring attention to which
I find the most important, is that she was one
of our deemed panelists for our twenty twenty four Fixed
Income Halftime Report event that we held at our one
(01:05):
twenty Park office last year. That annual event that we
hold obviously holds halfway through the year, and we talk
about everything and anything related to credit economics, rates, you
name it, and Oxana can cover it all, so.
Speaker 1 (01:19):
We'd obviously you'd delight to have you on the show, Oxanna.
Before we get to the questions, credit markets are looking
ever more complacent, with junk bonds trading tight as demand
for yield rises and net new supply of corporate debt
remains thin. Under the surface, there are signs of stress, though,
with investors moving to higher quality debt, structured finance and
sectors that would appear to be less exposed to the
chaos cause by trade wars and volatile US policymaking. Valuations
(01:42):
are getting pretty stretched, and it's unclear how safe higher
rated debt will actually do When markets take another big
hit and liquidity each rise up, the US economy risks
slipping into stagflation, which would be potentially catastrophic for borrowers
with a lot of debt. So, Oxanna, we've been talking
for years, you and I about the disc connect between
rising fundamental risk and bullish credit market pricing. You've talked
(02:04):
about a reckoning to come, but what would the trigger
be for such a correction?
Speaker 3 (02:08):
Thanks so much for having me always fun chatting with you.
What would the trigger be for that reckoning? So we
saw a little bit of it in April, and that
really came from nothing much at all except a picture
that the President held held up on Liberation Day, and
(02:29):
that just tells you how incredibly thin that trigger really is,
or how incredibly fragile the market is. And I'm not
saying that from the standpoint of you know, oh, fundamentals
are terrible. Certainly in investment greade credit they're quite constructive.
There are plenty of the low investment grade names where
they're also constructive. The issue is, of course, the very
(02:51):
very tight spreads. And I always say in fixed income
it is very easy to identify a top. In equities,
the markets have repeatedly defied tops and record highs and
we just don't know. But in fixed income, when spreads
are at historic tights, the closer they get to zero
(03:11):
the spreads that the more certainty there is a this
is a top, you know, in rates, a tenure at
one percent or fifty base points, that's the top. So
I think investors would do well to be at least
aware of that fact because part of the reason why
we've seen valuations remain resilient has been exactly James, what
(03:32):
you mentioned, lack of issuance and investors are continuing to
kind of chase a little bit of you'll, just to
give you an idea, double B rate of debt, which
is the highest tranch of junk rate of debt, is
sitting within about a percent of three month tea builds,
maybe a little bit more. I mean, it's hit levels,
you know, over the last few months that are that
(03:53):
have been tighter than before the Great Financial Crisis. So
there is a tremendous and lack of compensation for the risk.
And really it's the demand that's keeping this party going.
And should that demand go the other way because investors
feel nervous or something is changing in the geopolitical space
or physical policy, whatever it is, it doesn't take much
(04:16):
when things are priced for perfection. And one of the
things that you know, feel free to stop me with
a question, but one of the things that we're seeing
as signs that borrowers are perhaps struggling to make payments
is the amount of pick, the amount of picks that
have been used to you know, quote unquote pay interest.
That number is reaching towards nine percent. Probably is going
(04:40):
to finish above that this year. We don't know yet,
of course, but it was as low as you know
in the force just five years ago. So call about
you know, talk call it kind of a doubling, I
guess you could say. So we are seeing that phenomenon
that companies are finding it hard to get the cash
and they're resorting to more inventive of paying their interest.
Speaker 2 (05:02):
And I think, Oksanna, what fascinates me is I actually
rewatched our replay from last year's event, and what you
said last year still holds. What you just said about
double B still very much holds. And I think the
only difference between last year and this year is that
we're seeing an enhanced version of what we saw last year.
The conversation is the same, but I think, you know,
(05:22):
the maybe the volume was tuned up a bit more,
and maybe that's a reflection of the fact that the
election has gone and went. We now had a Liberation Day,
We've now had a lot of things happen over time.
But I think what struck me is not only the
conversation about double B and about risk taking or lack
of reward that you get, but the conversation around inflation.
(05:45):
So what are you thinking, I mean, where are you
seeing the most concern when you think about you know,
high yield taking on more pick related debt, right, so
they can't actually pay in cash, and then you have,
you know, inflation issues use on top of that, bubbling
around the surface. What are you thinking, what are you
advising people?
Speaker 3 (06:05):
So inflation is a really interesting foe in that it
impacts a lot of different companies in a variety of
different ways. When we talk about inflation, the first thing
that comes to mind is higher rates, which of course
is problematic for lower rateed credit because these companies tend
to not have very significant cash streams, right or very
healthy cash streams, or they rely on financing and that's difficult,
(06:28):
and that's why we've seen dramatic reduction and issuance. But
inflation also impacts in a different way, dramatically large investment
grade companies because their business models are so tied to
the global economy, and inflation of course, completely reorders that
global world order, and that has very significant ramifications for
(06:49):
those companies because a ton of their revenue comes from
overseas and that is all being totally kind of thrown
up in the air. So I think when we talk
about credit investing today, it makes me a little bit
concerned that there is sort of a stampede in or
a stamped out mentality when we really should be very
(07:09):
discerning with respect to all of these different layers. You know,
the fundamentals, the business model of a company. You know,
where are the revenues coming from, how much cash do
they have, what sector are they in? Because some sectors
are going you know this Jody better than anyone, and
some types of sectors are going to be significantly more
impacted than others, like retail, like manufacturing and others, and
(07:33):
some are going to be perhaps less less because they're
less dependent on things coming from overseas that are impacted
by tariffs, et cetera. So there are so many different
layers to look through, and yet we have kind of
this over arching phenomenon in the investment industry and the
investment management industry right now where we're just trying to
(07:53):
democratize access to all forms of credit, which in itself
is a good thing. We want to give people the
opportunity to access different streams of returns and differentiated streams
of returns. But when I see things like ETFs tied
to private credit, you know, I was kind of scratching
my head at the round etf tide to leverage loans,
and leverage loans have been in the ecosystem much longer,
(08:15):
and we know what they act like when they're stressed.
Private credit is not a tested st class. I'm not
saying it's a bad asset class. They are absolutely constructive
things and great things to do there. I just wonder
how much investment tourism exists there, how rigorous is the
due diligence around all of this stuff, and how much
(08:36):
do does every investor understand in terms of, you know,
the price stability they were promised, is it really going
to hold in a volatile episode?
Speaker 2 (08:45):
And that that market liquidity piece is sort of a
question that I've been pondering. And you know, even in
my prior life, you know, something that we looked at was,
you know, you think about bond ETFs. They're really not
that old, right, just corporate bond ETFs. So never mindverage loans,
never mind all these other products that are much less
liquid underlying, What are you thinking in terms of when
(09:07):
you're looking at opportunity, when you're looking at diversification, how
are you thinking about these Because if you just read
on the sidelines, you know, you could potentially lose out right,
you could be laiting. We be waiting years before the
shoe drops. So you know, if I just say I'm
not going to touch any retail company or if I'm
not going to touch any manufacturing company, there's definitely you
don't want to throw the baby out with bath leader.
(09:29):
So how are you thinking about opportunities?
Speaker 3 (09:32):
So credit investors are if we zoom out, fixed income
investors really have three issues. Today. You have a market
that is much more volatile, just broadly the bond market
than it's been between the Great Financial Crisis and called
it three years ago. Volatility has gone back to where
it used to live before central banks have gotten massively involved.
(09:54):
And this is actually one of the first things we
show investors when we start talking about the macro backdrop,
is that volatility back to where it used to live
before central banks became the kind of institute of the
central bank. Put if you will. The second issue investors
have is that everything within fixed income is highly correlated,
precisely because spreads are so tight. So if you look
(10:15):
at the correlation between investment grade, high yield, emerging market debt,
mortgage is kind of everything in fixed income versus treasuries.
That correlation used to be around zero point five just
five years ago. It ended twenty twenty four at north
of point nine, and this year, you know, April was
a poster child. And this continues to be the case
that bonds just haven't been offsetting the risk of equities.
(10:37):
This is a phenomenon that exists when inflation is alive
and well. And the fact that we've gotten so used
to sixty forty working so well for over twenty years.
Few people realize that the sixty forty ecosystem did not
exist really in any meaningful way prior to the late nineties,
which is when that stock bond correlation was negative and
(11:01):
you benefited anytime stocks won down, your bonds went up.
Prior to that, for decades, stock bond correlation was positive
and sixty forty was not a thing, or at least
it was a very kind of limited thing. So that's
the second big issue that investors have is that lack
of correlation, so portfolio construction or not lack but high
correlation between aset classes, So portfolio construction needs to be resought.
(11:25):
And the third issue is the one you just hit
on with fixing comingtfs. But just generally, this hits at
the bigger pitch picture of liquidity liquidity in this market
from the standpoint of who is going to take this
position off your hands when you want to sell it.
This used to be the cell side, and that the
appetite for risk there has been dramatically reduced post GFC,
(11:48):
both regulatory means but also just the bank risk appetite.
And so as a result, the top five corporate bond ETFs,
for example, you know, you're we all know who they are.
You know, I'm not going to name names, but we
know who they are. Their total assets under management are
several times what the street is inventorying for corporates. So
(12:10):
what does that mean in practice is that when someone
wants to sell these ETFs, which are meant to be
instantaneously liquid, the dealer that you call to unload that
position is not going to be able to take anything
off your hands. They're just going to try to find
the other side for that trade, which creates a bottleneck,
which creates a very violent price discovery process, and prices
(12:32):
kind of drop precipitously. So we have a market where
the fat is papered over this lack of liquidity for
a long time, but to the extent that they're not now,
and I seriously doubt that they're going to be the
buyer less resort for these speculative names like hy udtf's
the way they were during COVID or high you issuers. Altogether.
(12:54):
They may support and probably will blue chip employers because
that affects the overall American economy, But I really doubt
that Congress will have any appetite for bailing out you know, speculators,
which is really an investor who is just in the
markets for the sake of growing their capital. So I
think investors have to be cognizant of this, And you're right,
(13:15):
it has been kind of a consistent theme for years,
similar to how interest rates and the tremendously low yields
were a consistent theme for many years, and then we
had twenty twenty two and people still haven't been able
to dig themselves out of that hole. The aggregate now,
the Bloomberg aggregate is still down almost you know, four
(13:37):
to five percent depending in the year over the five
year period, and so these are real losses in portfolios.
So far, at least the portfolio haven't been able to
dig themselves out of that hole. So these things may
take a while to unravel, but I do think they're
important to be cognizant enough because they have lasting, long
(13:57):
term consequences.
Speaker 1 (14:00):
About something you said earlier, I said about the pick,
which I find interesting payment in kind. The company cannot
afford to pay back the debt, so they just give
you more debt. Obviously that's problematic. But you mentioned a
number nine percent versus four percent? Can you unpack that
a bit? I mean nine percent of what of what period?
And when was it four percent? And what's going on there?
Speaker 2 (14:19):
Yeah?
Speaker 3 (14:19):
So look, a pick can be a constructive thing. Sometimes
a pick is meant to finance a research effort that
a company is undertaking, right, and so they don't want
to pay cash. They want to take the cash and
use it for something that actually invests back into their
business and allows them to create a new revenue stream. Perhaps,
(14:40):
but more often than not we see picks too, exactly
as you said, because the company does not have a
cash stream, and so they just increase their debt load.
And when we say eight to nine percent picks, that's
a percentage out of the overall interest payable in the
below investment grade space currently so it's not insignificant.
Speaker 1 (15:02):
It's nine percent. Now, when was it four percent?
Speaker 3 (15:05):
And so about twenty twenty we had it somewhere between
four and five percent, And so you know, nine percent
is like every tenth eleventh company. So it's not insignificant.
Speaker 1 (15:15):
Is it across the board? Is it isolated in certain sectors?
Speaker 3 (15:18):
It is more prevalent in sectors that have had a
harder time, you know, like retail, like you know, but
it's it's definitely not limited. I can't say that it
is specific to only these three. It's definitely used pretty
pretty widely.
Speaker 2 (15:35):
But would you say that that is a tell for
a possible uptick in restructurings and bankruptcies, because oftentimes you
see picks as a precursor or a sort of restructuring component, right,
And what we've seen in recent years is because private
credit has gotten big, as you talked about earlier, is
(15:56):
that companies now have these alternative streams to get cash, right,
And so if you're thinking about it from that context,
I mean, is this either sort of a back door
restructuring situation in which we're already watching happen, or do
you think it's more of a precursor.
Speaker 3 (16:12):
So it's probably both because exactly as you said, we
are seeing so in terms of like just outright defaults,
right defaults have remained subdued, and you know, in loans
they're probably going to end up somewhere between four and
a half and six percent. That seems to be kind
of the consensus on the street. In bonds, they're actually
slightly lower, believe it or not, because loans have been
(16:35):
not to go off on a tangent, but there's been
really a deterioration in the quality of loans, and we
can talk about that separately. But what we see and
kind of in terms of what picks, in the use
of picks, what does it mean when we look at
the number of restructurings, there is a significant uptake in those.
And so if there weren't these alternative ways to refinance,
(16:59):
so like private credit that absolutely does come in and
take public companies out and allows them in a different
way to refine us, we would see higher default rates
for sure. So I think the use of pigs is
both a symptom of an evolving credit space and also
a precursor that, look, there are going to be companies
(17:21):
whose business models are just not interesting necessarily for private
credit by some estimates. You know, we had a number
of companies who shouldn't have made it through COVID who
are still around. Last year we had a reprieve and
in the interest rate environment, they were able to refinance
yet again and kind of push things down the road.
But to your earlier question, what is going to be
the catalyst, I think the catalyst is just the passing
(17:44):
of time. As the settles in that look rates are
higher for longer, the r star for this economy, that
sort of neutral rate is higher. It's trending, you know,
probably three percent, even the fedal and estimate of it
has been climbing up. This continues to be a reality
month after month and maybe even year after year. Quarter
(18:06):
after a quarter. It's the passage of time that's going
to keep driving that default rate up. And you're right
now you're still seeing more rising stars than falling angels,
meaning more upgrades than downgrades. But that changes very quickly
the moment kind of the mood in the market changes,
the ratings and agencies follow, and so I wouldn't really
(18:26):
use that as a barometer. But the catalyst is always
when the catalyst is something when we look back. It's
always like, well, of course you know this happened, but
it's never easy to forecast it. And I always say,
the only thing we can know is where we are
now and assess it very clearly. And where we are
now is a very very tight spread environment where you're
(18:50):
not compensated for the risk that is under the hood
of a lot of these companies. You have to be very,
very selective in terms of price.
Speaker 1 (18:57):
A lot of these companies had been kind of holding
that breath, wasting for rates to come down significantly. I mean,
we started this year expecting, you know, over one hundred
bases points in.
Speaker 3 (19:04):
Costs, then every year for a number of years.
Speaker 1 (19:06):
That's maybe there'll be no cuts this year. But then
you know, we have this conversation often with this sort
of segment of the market that we kind of know
is going to blow up. It's triple c's. Everyone knows
where it is, where the danger lies. They stay away
from it, and there's assumption that there will be no contagion,
that there'll be no ripple effect across credit. Is that
is that safe to say that you know you can
just get rid of you know, I think some people
(19:27):
have talked about hundreds of billions of dollars worth of
debt blowing up, but everything else will be fine. What
do you what do you make of that?
Speaker 3 (19:33):
You see me shaking my head right now. So high
yield is not the sort of ass of class where
you can have a part of the market experience that
kind of seismic shift or dislocation and the rest of
the market kind of yawning through. And I always bring
up twenty fifteen energy crisis as an example, because you
(19:56):
had legitimate fundamental issues in that space, but you didn't
have fundamental issues in leisure, in gaming and lodging, in
healthcare and technology and all these other sectors. But everything
went to nearly one thousand over nine hundred over because
you had stress in this one place. And again, you know,
talking about the fact that so much of this industry
has been etfized if that's wormed, and so much of
(20:19):
it has been investors just chasing yield. When something goes wrong,
there is a big kind of percentage that's like, all right,
I'm out. I don't really know what's going on here,
but I don't feel good about this, and I'm out.
And that, you know, selling begets selling to my earlier
point about lack of market makers with balance sheet capability
to be a stabilizing mechanism in the market. So liquidity
(20:43):
has completely shifted to the buy side, to the prior
credit to teams like my team, to the buyside. But
the buy side has investment committees, it has to sell
something to buy something. It's just not as efficient a
mechanism at you know, being a cushioning mechanism for a
market that's in stress. So I think, you know, it's
a long winded way to address the question, but I
(21:04):
think there's just a lot of factors at play that
are being discounted now that can make for volatility that
engulfs the entire sector, even if the issue only really
sits within one portion of it.
Speaker 2 (21:18):
So then if you're saying that there's potential for some
sort of high contagion even if it's not necessarily warranted. Right, So,
say we have a massive self and retail and all
the retail companies go billy up because of tariffs and
manufacturing and supply chain breakdown, and you know, people not
wanting to buy anything because it's too expensive, but everywhere
(21:38):
else is fine. Is it safe to say then that
investment grade looks good because the problem with investment grade
is it's just so tight right now right where is
it safe? Where's it both safe to go but also
somewhere that's actually going to give you some kind of value.
Speaker 3 (21:52):
So you're really hitting on a point that that deals
with portfolio construction, because you can't really Given my comment
around high correlation across sectors and lack of liquidity providers,
right and the fact that contagion tends to spread, it's
really hard to say that, you know, if I buy
these names, I'm going to be okay, Yes, you might
(22:12):
be okay in the long run. Like one of them,
I'm going to often go off on a tangent a
little bit here, like Colo. Triple A colos have been
all the rage. I'm not even sure that we have
from a market value standpoint, the amount of triple A
colos that are like supposedly in all the funds right
now out there. But and the pitch is often you know,
triple A colos were great in two thousand and eight.
(22:34):
They were whole. They did not you know default, this
is true, but they weren't down twenty to twenty five percent.
Do you have the appetite or the risk ability to
take that. So similar here you cannot kind of isolate
yourself from the experience of the volatility. But it really
speaks to the portfolio construction a bigger conversation about and
(22:56):
this is kind of how we think about risk. Is
okay if I and I don't mean to point to
paint the sort of doom and gloom picture. Right, we
are taking risk, but we're doing it in a way
where we're saying, okay, if I'm taking credit risk. Over here,
credit protection is incredibly cheap today, because, as you said,
investment grade is so tight. Credit protection is incredibly inexpensive.
(23:21):
And it is a fixed cost. Unlike with stocks, where
if you go short of stock you have to be right,
you have to be right quickly. With bonds, it's kind
of a fixed cost because you are receiving floating paying
fixed right, So if the credit market does dislocate, you
benefit from that. If it doesn't, you just have a
fixed cost. And so and that fixed cost is very
(23:41):
low today. So compliment your credit exposure. Yes, you're giving
up a little bit, you're not giving up a lot.
And what it does is, should there be volatility, it
allows you to not lose your head, but be very
methodical about what am I going to do now? Where
is the pricing more interesting, Where am I going to
start putting my money to work, et cetera. So I
(24:02):
think it speaks to a broader portfolio construction process. When
we talk about, you know, alternatives, I don't think it's
a conversation just about you know, exotic instruments and shortening
and all these things. Like, yes, that has a room
and a role to play, but it's also a conversation
about portfolio construction. And in fixed income, I think the
portfolio construction conversation has been entirely focused on a market
(24:26):
risk driven benchmark like the aggregate and replicating it and
you know, maybe sprinkling in a little bit more risk
to have some additional yield. But really, if you are
a fixed income investor, now, if you are a private
credit investor or high yield investor, that comes with specific
risk return profiles, and that's a different thing. But if
we're talking about a core type allocation, right the anchor
(24:49):
of your portfolio, the ballast in your portfolio, that has
to really be all about capital preservation first and foremost,
and capital preservation today the only part of the market
that offers that is liquidity, but none of the investment
process on the processes on the street. And I say
this as a former due diligence analyst, none of them
(25:11):
or very few of them start with liquidity and then
helicoptering out of there into pairs of the market where
there is opportunity. That's how my team thinks about risk
in fix income. It's the risk of losing a single dollar.
It's not the risk of you know, I'm going to
be down ten percent. My benchmarker's down thirteen percent. I'm
a top quartel manager. You know in twenty twenty two
(25:32):
that would have been a top quartal manager. That's a
hollow victory for investors. So I think the entire conversation
around portfolio construction in fix income has to really evolve
to include differentiated sources of return like what we're talking
about here, but also to think differently about what is
the neutral point for risk. And for us, the neutral
(25:52):
point for risk is liquidity, because that is the only
part of the market today, the only part of the
curve today where you truly have capital preservation, because even
treasuries have become so much more volatile and will continue
to be that. You can't really rely on that as
a constant sort of source of liquidity for whenever the
market moves in a direction that you want to take
(26:14):
advantage of.
Speaker 2 (26:14):
So then how much in cash should we hold?
Speaker 3 (26:16):
So that is a very personal question for every investor.
It depends on keep it all under the mattress. No,
definitely not. It depends and cash. Remember, there are different flavors.
There are ultra short strategies, right, There are different ways
to play that you know. For example, we really like
(26:37):
the investment grade corporate floater space. It gives you a
better yield than cash. It gives you better yield than
fixed corporate floaters sorry fix corporates, and better quality double
A plus. So you are in a fairly safe part
of the market. You're clipping a pretty attractive coupon. Yes,
you have the risk of that floating feature, but if
(26:59):
your view, as ours is that we are in a
higher for a longer environment, then that's a great place
to be. So it's not a cash equivalent, I would
never say that it is, but it is definitely a
pretty safe place to be. And so and it still
allows you that optionality to helicopter into other parts of
the market.
Speaker 1 (27:18):
The flip side of this kind of bearish view that
you might take on the market is that every dip
has been bought very very quickly, and it never lasts.
And you know, you get rewarded extremely well for just
buying that dip and piling in and naps back and
you're a winner. So what do you do with that?
I mean, way, buy the dip. There's no kind of
(27:38):
short view that there would work in credit despite the fundamentals.
It just seems that the market just keeps going up.
And there's another assumption. You mentioned the FED, you know,
not coming in and buying, but there is an assumption
that the government will bail you out in the end,
you know, the Vessent or Luttnek or Trump, someone will
be there to hold your hand if it all goes
rotten in the bond market. How much stock should we
(28:02):
hold that in that views, you think?
Speaker 3 (28:04):
So to address the first part of that, that's why
I say, you know, we are active and we are
taking risks precisely for the reason that you say, you
can't just kind of sit around a way forever. There
are things to do. There are interesting things in different
parts of the market. April was a very volatile period
and we absolutely bought the dip across a number of
different parts of the market, including around the edges of
(28:26):
fixed income with things like converts and closed end funds. Right,
So it's a very vibrant marketplace in terms of you know,
it's evolved into a lot of different interesting kind of pockets.
So that is definitely there is an agility. I guess
it is what I should say that you should bring
as a as a manager to operating in this market
in a way that perhaps was less relevant in prior decades. Right,
(28:50):
So you used to be able to take weeks and
months to kind of allocate and that, and these things
have been a lot more fast and furious. Not to
say that this is a new kind of paradigm, because
then that speaks to the second part of your question.
Does the government have the ability to rescue every investor? Yes,
absolutely they do. For now, we're still if you had
(29:12):
currency of the world, and we can still continue to print,
and that seems to be not working you know as well,
maybe but still working to some extent. I doubt there's
going to be a lot of appetite on the Hill
to really bail out investors in some of these more
speculative parts of the market, like private credit is associated
(29:32):
with you know, wealthy qualified purchasers, et cetera. And I
just don't think that anyone is coming for that part
of the market. And think about what happens, right, So
if these people can't get their money out, then they're
trying to liquidate the things they can liquidate, which are
the public markets, and then that stress always spills out
into other parts of the market. So again I'm not
(29:54):
trying to paint a gloom and doom picture. I'm just
sort of illuminating the way that markets function beyond just oh,
fundamentals are good, therefore everything is great. But if the
fundamentals are fully priced in, then you'll be able to
get your coupon. Maybe if anything goes wrong, then you know,
the entire investment cases come apart. So you always have
(30:16):
to think about what if I am wrong? And there
are many things that can go wrong today if you
kind of soberly assess the situation. This administration tends to
pick its winners and losers, and I think it's really
hard to predict who the winners and losers will be.
I think at the beginning of this year, when the
administration came in, we would have had a conversation about
(30:39):
who those winners and losers are going to be. Today.
It hasn't necessarily worked out that way, right, So I
think it's really foolish to rely on the government as
your investment strategy. I mean, call me an old timer,
but I think that's just that. Hope is not a strategy.
At the end of the day. You have to get
(31:01):
your hands around the fundamentals for sure, and marry it
with the price and know that you are compensated when
all is said and done. What is your recovery rate
going to be? Are you still comfortable with that? You know,
these things have never ceased to be the right way
to invest.
Speaker 2 (31:18):
So then should we be looking outside the US at corporation?
So you know, you talk lowderation, we talk higher grade,
and so it sounds like the US is headed for
some pain. So then where where in the world should
we be looking?
Speaker 3 (31:34):
Europe? If we look to Europe has some growth issues,
you know, investment grade is probably okay. Again, it is
a at best coupon game. But to the extend that you
want some diversification perhaps that's not a bad way to go.
But again, you know, spreads are tight everywhere when we
(31:57):
talk about below investment grade in Europe. It's interesting because
unlike the US, Europe doesn't really have a path to restructuring,
so companies that go bankrupt are kind of just done
and dead, Whereas in the US we can model for
recovery rates, we kind of know what they historically are,
so it's an easier path through stress that you can model,
(32:21):
whereas in Europe it's sort of a done deal. So
not generally, unless spreads are very wide and attractive, not
generally a fan of European high yield when it's comparable
in a compensation to US high yield, because US highld
is just kind of a better known foe.
Speaker 1 (32:37):
If you will, I'm glad you mentioned recovery rates, because
we've discussed those a lot on this show that they
are not good in the US. You know, so you've
got a pretty low default rate relatively, but your recovery
is much much lower. So and the loans, you know,
the loan only structures are putting people in trouble. And
then there's all the lemes, the liability management exercises, the
(33:00):
preference for certain types of investor. You know, the lawyers
get paid, but everyone else gets in trouble. So where
where do we go with recoveries? And how can you
really project them given the you know, more aggressive nature
of these workouts.
Speaker 3 (33:15):
Yes, recoveries have been coming down in the US. You know, typically,
you know this, historically, high heeled bonds have had recoveries
around forty cents on the dollar, loans seventy cents on
the dollar. Right now, we you know, more recently, we're
seeing bonds closer to twenty cents on the dollar and
loans closer to forty cents on the dollar. Loans have
been really fascinating to me because that's been a darling
of investors for many, many years in spite of the
(33:39):
fact and again, you know, someone who's been kind of
around for a while, I remember all the handwringing around
you know, twenty percent of loans being second lean or
cove light or whatever it was during the GFC. Well
in the you know, in the years since, you know,
over eighty percent of loans or cove light loans. That's
just the reality of the market today, and most of
(34:01):
them have no subordination below them. There's nothing below the loan,
even yes it is a senior structure in the in
the capital structure, but there's nothing below it. So it
takes a hit directly. And that's why we've seen the
lower recoveries in loans, and that's why the projected default
rate in loans is expected to be higher than in bonds,
because there's just been such proliferation. They've been obviously gobbled
(34:23):
out by clos by the way to our point and
conversation on triple c's, you know, clos can only hold
up to something like seven percent triple c's, so if
we do have a downgrade wave that you know, they
start to kind of puke these things out and the
price discovery gets worse. But I feel like again I'm
kind of just slipping back into that doom and gloom.
(34:45):
You know, where do we go and how do how
do we model? Yes, the recovery rates have been lower,
and I always make this point as well that even
though defaults have been subdued, your recovery rates are actually lower,
so it's not typical for a non recession market. I
think another important point is that in number of companies defaulting,
(35:07):
there have just been mostly smaller companies, but the number
of companies defaulting is not all that typical for a
non recession market. And so again I bring all these
things out because I feel like there's so much complacency
out there. And I remember the complacency that led into
two thousand and eight. And I'm not saying we're headed
for anything like that, but it's just, you know, investors
(35:29):
do get very complacent, even you know, if you think
about the ultra low rates of the you know, twenty tens,
and you know, up until COVID, and so everyone was
on board with by negative yielding debt in Europe for example,
I remember going to s a European clients and they'd say,
you know, we want five percent and their yields are negative,
and I would like get palpitations, like how how can
(35:50):
you get five percent? Like in a world where and
so the but the mantra was it's okay to buy
negatively yielding debt because you can sell it to you know,
the next fool or the government. It was the greater
fool theory almost. So I think these things take time
to develop, but we cannot get complacent because this is
(36:11):
someone's retirement money. This is someone's college money. James, you
and I have talked about this as someone who is,
you know, a frust generation immigrant. I am very closely,
intimately familiar with what it's like to kind of lose
your livelihood, and so we take this very seriously. Fixed
income is not a speculator or shouldn't be a get
(36:32):
rich asset class or a speculative acid class. In some
parts it is. There are places to be aggressive, but
really it's about maintaining wealth, preserving wealth, maintaining a ballast
in your portfolio. And I think looking at investments through
that prism has been somewhat diluted by this kind of
just mainlining liquidity from central banks. I think it will
(36:55):
be a lot more difficult against the backdrop of all
this spending in DC.
Speaker 1 (37:01):
So does the default rate get worse from here? Do
the does the amount of pick rise from here? Do
you do you see any signs that it is getting worse?
Or are we you know, because because you know, the
government's basically telling us to be patient and everything's going
to be fine, and we're going to be making it
all great again and we'll be absolutely fine. Don't worry
about it.
Speaker 3 (37:18):
But sure, it's paying for long term gain.
Speaker 1 (37:20):
Is this something you know fundamentally under the surface, are
there more defaults coming out?
Speaker 3 (37:24):
There? Is there more stress so fundamentally under the surface
in lower rated grade that we are seeing ib Ibita
coming off, you know, pretty aggressively off of its height.
And when we talk about EBITDA, there are all kinds
of creative ways of reporting it and creating it and
there's really no standard per se. Jordy, I'm sure you're
(37:46):
familiar with this phenomenon just a little too much. And
so when I look at those numbers, I wonder, even
you know, how much more of you know, creativity is
there under the hood that if we were to standard
dies it across the board, what would we So we
are seeing those fundamentals coming off. We are seeing interest
coverage ratios coming becoming lower. They're not kind of screamingly alarming,
(38:10):
but they're definitely the trajectory is not upwards. The trajectory
is slightly deteriorating. So yes, I think default rates will
continue to creep up. But the mitigating mechanism there is
the private credit space. For sure, it will continue to
take more companies out. There is even maybe a scenario
(38:32):
where it's like only the least interesting or where the
operators that are left, or I don't know. There's a
tremendous amount of also conversion between public and private operators
right where teams that have public capabilities are developing private capabilities,
and teams that have private capabilities are also kind of
dabbling in the public market. So I think the lines
(38:53):
between these will be increasingly more blurry. We are just
for being opportunities, being agile and not just sleepwalking into
investments because they seem hot and because everybody's doing it,
but really buying them when they are attractive, when the
price is when the price makes sense.
Speaker 1 (39:13):
So how do you position right now? I mean we've
talked about doubleb's, for example, being overpriced, We've talked about
TRIPLEZ risk you like I G floaters. What's what's the
sort of broad positioning and are you just massively long
cash waiting for the next dip.
Speaker 3 (39:28):
We always have liquidity in this portfolio, and that's just
due to the mandate that we have, so we're not
a high eield operator. We can't have a lot of
high yield at different points in time, and that's why
you know, investors often come to us for a very
unbiased point of view, because we're not structured or you know,
don't have a biased towards or away from any part
of the market. And so what you know, what do
we like? We like volatility, We like value. Where is
(39:52):
there volatility and where is their value? There's volatility in
the curve, and so we are trading the curve and
are being very tactical there. So you know, two year
agoes above fed funds, but that's a great entry point.
Rallies below four that's an exit point most likely, So
being tactical there. So where else is there volatility? It
(40:14):
periodically rears its head in credit like it did in April.
There were like three volatile days, and so we did
a lot of different things in those days, including monetizing
some of our shorts, which brings me to another point,
where is their value? There's value in shorts and credit protection.
I mean shorts kind of has a very aggressive connotation
to it, but really it's credit protection. It is very cheap.
(40:35):
It is very undervalued today because of the complacency in
the market, and we do like it just to buy
DX investment grade. Yeah, so because they are you know,
the correlation is there, but the cost is lower in
investment grade protection, So we definitely like that part of
the market. And yes, having liquidity in your portfolio essentially
(40:58):
makes you a coal option and I think today optionality
and portfolios is vastly underrated. And instead of being fully
invested across the cycle, We've always said this, and over
the years, James, you and I have talked at different
points in time, we've always said, instead of being fully
invested across the cycle, which basically ties you to the
(41:18):
back of a truck and just kind of like drags
you across the experience of that cycle. You know, be
the master of your fate. As I said, tops and
fixed income are very easily identifiable, don't participate in them,
take some chips off the table and use your liquidity
for that optionality. We're big believers in that, and that
(41:42):
has allowed us to create that twenty percent advantage over
your kind of traditional AG type product with having less vowve.
I mean that's really the key too, is what this
approach this. You know, having cash is your neutral point
for risk, which doesn't mean you sit in cash. We
don't like sitting in cash. We like taking risks. We're
(42:02):
investors But what this does is it essentially smooths your
paths to returns because you are not you know, moving
with that truck and just being dragged behind us. You
are choosing your entry point very widely and in an
informed manner, and that means you have less vall. And
when you have less vall, investors stick around to benefit
(42:24):
from the fact that these things are money good. Right.
So if we are going to talk about clos let's say,
then you know, we will buy them when the price
is right and not have to Investors won't have to
live through that twenty and twenty four twenty five percent
drow down.
Speaker 1 (42:37):
But if you had to pick one thing, you know
where there is value, where there's you know, relative value
that is exciting right now that you think others may
be missing, that's giving you an edge, what would that be.
Speaker 3 (42:47):
I think definitely the credit protection is vastly underrated. I
think every portfolio could could use it. It will make for
a much smoother experience for your investors. I think the
investment great floaters is probably our you know, it's definitely
the most dominant trade in our portfolio today and it's
a great way to clip some coupon while still staying
(43:09):
fairly agile, I would say those things are probably most
attractive from a price standpoint.
Speaker 1 (43:15):
And that's going to be banks most.
Speaker 3 (43:16):
Is it so about forty yes, roughly, you know, less
than half, but about forty five percent of it our
money center or at least we focus on money center banks,
not the regionals. And then there's you know, some kind
of very household names across different sectors. Yeah, very plain
vanilla stuff.
Speaker 1 (43:31):
That's assuming that the FED doesn't cut.
Speaker 3 (43:33):
Yes, absolutely so it assumes that we are in a
higher for longer environment. But even if we are not right,
even if the FED cuts, I think, and you know,
we didn't talk about this at length, but I think
it's clear for my comments, we are not believers that
the FED can really cut pretty aggressively here. Barring some
left tail scenario, they are going to either stay put,
maybe deliver one cut. I think they're concerned about exposing
(43:59):
a lack of influenced on the curve because they started cutting.
I think they were too early to cut in September,
and they did it very aggressively, and the long end
of the curve moved up. And if they were to
do that now, the long end of the curve could
do the same thing, because it's not really based on
what the FED is doing. And so I think they
have to kind of marry all of these things and
(44:21):
not really expose themselves as perhaps not having influenced the
kind of influence they want to have over the curve.
Speaker 1 (44:27):
And not to end on a down note, Alexander, but
you have been a great voice of reason in a
sea of irrational exuberance. What worries you most about the
outlook for credit markets specifically? Which is the one that
our audience most cares about. You know what really keeps
you up at night?
Speaker 3 (44:43):
Worry? Well, nothing keeps me up at night because we
have liquity to take.
Speaker 1 (44:47):
It's a little go What do you just shake your
head out and think, you know.
Speaker 3 (44:51):
That's just not you know, I've been around long enough
at this point, and I kind of hate saying this
because I still think of myself as a very young person,
but I've been around long enough to know that complacency
never ends well. And typically what gets investors into trouble
again and again is a combination of complacency and leverage,
(45:13):
and even the simplest things, when they are levered up,
they never work out well. And where is all the
leverage today? And I'm sorry you said not to end
on a set one, but I'm afraid that we will.
The leverage has shifted. Yes, there's still leverage on the
private side of the market, and I'm not just talking
about the private credit but I'm talking about you know,
corporates et cetera, hedge funds and all of that. But
(45:34):
where is the you know, two thousand and eight, the
GFC essentially transferred the leverage from the private side to
the government balance sheet and that's where it is today.
And that has very meaningful ramifications that the entire scope
of which we will only really be able to analyze
in retrospect, you know, looking back. And that does worry me.
(45:55):
What does that mean. I'm not in the camp of like, oh,
the dollar is going to go away and no one's
going to want it, because again, there's just not enough
stores of value in the world today. Yes, the Swiss
frank is very stable, there's not enough of it. Nearly gold,
you know, moving up is a symptom of the same thing.
But I do that really is something that wears me
because I don't think anyone fully understands what are really
(46:19):
the ramifications of that. How will it play out? What
does it mean for our economy and for for the
companies that you know, for for the corporate sector, for
the consumer sector, for for sovereigns. Frankly, what does it
mean for em if you can buy us mortgages at
you know, seven percent? Let's say, like, is anyone going
to want em at in that environment? Like? So, I
(46:39):
think that's if anything keeps me up at night, and
not because it will reflect negatively on the strategy that
we manage, but more so I think it's just the
ramifications of it are really really far reaching and serious.
Speaker 1 (46:52):
Great stuff, Folksanna Arnough with JP Morgan Asset Management, thank
you so much for joining us on the credit edge.
Speaker 3 (46:57):
Thank you so much. Always a pleasure and.
Speaker 1 (46:59):
Of course very grateful too. Jody Lurie from Bloomberg Intelligence,
thank you for joining us today.
Speaker 2 (47:02):
Always great to be here for.
Speaker 1 (47:04):
Even more credit market analysis and insight. Read all of
JODI's great work on the Bloomberg terminal. Bloomberg Intelligence is
part of our research department, with five hundred analysts and
strategists working across all markets. Coverage includes over two thousand
equities and credits plus outlooks on more than ninety industries
and one hundred market industries, currencies and commodities. Please do
subscribe to The Credit Edge wherever you get your podcasts.
(47:25):
We're on Apple, Spotify, and all other good podcast providers,
including the Bloomberg Terminal at b pod Goo. Give us
a review, tell your friends, or email me directly at
jcrombieight at Bloomberg dot net. I'm James Crombie. It's been
a pleasure having you join us again next week on
the Credit Edge.
Host
James Crombie
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