December 18, 2025 • 41 mins
Long-term debt bets on technology companies that are borrowing heavily for AI may end in tears, according to Newfleet Asset Management. “It’s one of the biggest risks out there,” said Dave Albrycht, the multi-sector fixed income manager’s president and chief investment officer. “There’s no free lunch in the bond market,” he tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Arnold Kakuda in this episode of the Credit Edge podcast. Besides investment-grade companies borrowing to fund equity-like risk, they discuss the risk of Oracle falling to junk, why asset-backed securities are a hedge and how leveraged loans will be worth buying when the Federal Reserve stops cutting rates.
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Episode Transcript
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Speaker 1 (00:18):
Hello, Welcome to the Credit Edge Weekly Muket's podcasts. My
name is James Crumby. I'm as senior editor at Bloomberg.
Speaker 2 (00:23):
Hello, my name is Arnold Kakuda, senior analyst at Bloomberg Intelligence.
This week, we're very pleased to welcome Dave Albricht, President
and CIO of new Fleet Asset Management.
Speaker 3 (00:34):
How are you, Dave, I'm doing welve today. Thank you, guys.
Speaker 2 (00:36):
Okay, great, great, so fun. Fact So, Dave is a
market veteran and he started his career before Gordon Gecko
was a household name. In addition to his executive responsibilities
at Newfleet, which has about seventeen billion of assets on
her management, he's a senior portfolio manager of several multisector
fixing some strategies and then in his role as CIO,
(00:57):
mister Albrich drives top down strategy for new Fleet's investment platform.
So basically, James, he knows everything. His knowledge is limitless,
and I think we've saved the best for last in
terms of podcasts for this year. So let me turn
it back back to you for the first Q.
Speaker 1 (01:11):
Thanks great to have you on the show, Dave. So
your credit had has has had an extraordinary year, from
the April tariffs shop to the recent cut croaches outbreak,
But bond spreads are finishing up pretty much where they started.
Everyone sounds so upbeat about next year. The low level
of defaults is being taken as a sign of health.
But is it really, Dave? Are we fooling ourselves that
(01:32):
the trouble's gone away?
Speaker 3 (01:33):
Well? I think that, you know, if you look at
the investment great space, you look at the high yield space,
you look at leverage finance, I think a lot of
debt maturities have been pushed out, which is good. The
faults are down due to the abundance of liquidity in
the market, and I think private credit helped on that front.
So defaults are something that you know, are much lower
than the historical average. You've looked at high yield, the
(01:54):
faults right now are running much below the historic average.
I think we're at one point eight two in the
historic averages, somewhere in the mid rees. If you look
at bank loans, we're probably right around the historic average.
And then we really don't have a faults in investment grade.
I think, you know, the last time we actually had
a default in investment grade, not a downgrade, but a
default was back with Orange County, which was quite some
(02:14):
time ago. But faults typically don't happen in the investment
grade space. I think that we've only seen one default
in the last seven years, and that was fraud. And
if you went back, you know, years and years ago,
and you looked at Enron World Commadelphia, those are all fraud.
So I think we're in a good, good place right now.
I think, you know, if I look at three the
barometers I look at all in yields are still very attractive.
(02:35):
Where you get insurance companies, pension funds and institutional investors
excited about fixed income. When you get corporate bonds yielding
in the high fours, you get securitized yielding in the
five to six percent range, and then you still have
discount dollar prices, which if you do a good job
in credit selection, you're going to get a nice total
return in addition to that yield. Now you're exactly right.
(02:56):
Credit spreads are on the tight side without question. You know,
if you look at investment grade corporates are at seventy nine,
and you know seventy three was a twenty seven year low,
so we're not far from that high yield is you know,
approaching tights, even though we do have the highest credit
quality ever with the abundance of fallen angels that we've
seen there. But we're at somewhere around the two seventy level,
(03:17):
and then loans are again on the tighter side, so's
there's not a lot left. However, they could still grind tighter.
One of the areas that actually, you know, fixed income
in general had positive excess returns for last year, which
was good. If you look at you know, one of
the sectors that is outside of domestic credit, you look
at emerging markets. You did see significant spread tightening in
(03:40):
emerging markets fifty to sixty basis points, with the high
yield market tightening by over one hundred and thirty five
basis points. So you did see some meaningful spread tightening
to put to bring us to these levels, which are
I think pretty fully valued from a spread perspective.
Speaker 2 (03:56):
So are we looking to buy right now? Are you
looking at tread credit less less versus cash or what
are your thoughts there?
Speaker 3 (04:02):
Yeah, I mean, you know, I'm a bond guy, so
I'm always going to be fully invested in fixed income.
The nice thing about multisector is I have fourteen levers
to pull, so there's always something that seems exciting out there.
Speaker 1 (04:11):
You know.
Speaker 3 (04:12):
Some of the moves that we made this year, we're
selling bank loans. Obviously, as the FED was you know,
cutting rates in a you know, a rate cutting mode,
bought agency mortgage backs, which for the first time in years,
we saw the yield of corporate bonds and the yield
of agency mortgage backs on top of each other. They
were right around four eighty six four eighty seven. Typically
(04:33):
you're getting fifty three additional basis points when you're in
an investment grade corporate, but they were on top of
each other. So we felt it a good entry point
to start buying agency mortgage backs. And they've had a
great return. Agency mortgage backs are up right around eight
percent this year, so a nice total return, but a
lot of the dislocation in the market, and that's when
we get excited. When you start to see the market
(04:55):
dislocate and something that's cheap, the dislocations are much narrower
and much quicker to rebound. You know. We we went
back we had the Enkerry trade, where the dislocation and
the leverage finance markets were about five weeks, so it
was very short lived. We had some of the elections
in Europe and then the stamp election in France, which
(05:17):
was another five week dislocation, and then you know, as
you guys had just mentioned earlier in the call, we
had Liberation Day where we saw a dislocation for about
eight weeks. But they're nowhere near what they used to be.
I would just say, we get excited about high yield
when you know spreads get to six fifty seven hundred.
We didn't see that. We had spreads get to four fifty,
and then a bunch of money came in and spreads
(05:37):
tightened back up inside of three hundred. So you have
to be much more quick, you have to be much
more tactical, and you got to do it quickly. I
think derivatives market has allowed us to execute efficiently and
then fill out those trades in the cash markets. So
it's much more efficient that we can get exposure immediately.
And again when they're short lived, when there's so much
(05:58):
cash on the sidelines, when you have seven trillion in
money market waiting for that opportunity to get involved in
the markets, you got to be quick, and you got
to be tactical.
Speaker 2 (06:06):
Maybe some of the banks might be stepping in a
little bit bit more with the rate cuts. And then
also I think we saw an article in terms of
Fanny Freddy they're kind of bulking up their portfolios but
perhaps kind of limiting the supply of agency mbs. So
is that a sector that you're kind of really more favoring,
continuing to favor more into twenty twenty six.
Speaker 3 (06:24):
I would say that it was a great opportunity. Last
year they had a great return. You had that anomaly
where they traded on top of corporate bonds. Now they're
back to pretty much fair value. So I mean we
like the non agency space a little better. We think
that has underperformed versus agencies. You know, if you look
at the metrics, you know, if I look at you know, both,
I think we like the housing market in general. I
(06:45):
think good underwriting, very strong, credit supply is down dramatically,
good structures, low inventory. You know, if you go back
to two thousand and seven, they were building about a
million houses per year. Two thousand and nine and after
was about two hundred and fifty thousands. So the shortage
of housing has been about seven hundred thousand per year
going all the way back to nine. So there's insational
(07:08):
demand that it really provides a nice floor for the market.
One of the other reasons I think I talk about
this that I think we could we avoided a recession
in the US. If you went to Europe, about eighty
plus percent of their mortgages are floating rate, So when
rates got the seven percent, you know, your mortgage payment
went up threefold. That's very, very painful. In the US,
(07:30):
sixty four percent of mortgages are at three and a
half percent or lower. So mortgage rates go to seven percent,
your life doesn't change. You're probably not selling your home.
You've locked in a nice equity build up. But I
think that avoided, you know, helped us avoid a recession.
So I think there's a lot of metrics that are
working for us. We do like the mortgage market. Think
going forward from a value perspective right now, I think
(07:52):
non agencies percent a better opportunity.
Speaker 1 (07:55):
Going back to the credit cycle, Dave and the default
cycle in particular, I mean, people are telling us across
the board that we're late cycle, you know, with seventh
eighth innings in terms of you know, what's going to happen.
And you know, there are a lot of companies that
did borrow way too much when rates were near zero
and they just keep you know, kicking the can. There's
been a lot of liability management exercises, has been a
(08:15):
lot of you know, private credit has helped some. But
are we just delaying the inevitable here or has all
the problems? Have all the problems gone away?
Speaker 3 (08:24):
Well, ill on me. It is definitely a problem in
the bank on the market. We're watching that very very closely.
Those that you know, it's guys like us that lose
rights to you know, go after the collateral and it
becomes a problem. So that's something you have to be
very cognizant of. So our bias has been up in
quality in the loan market, but we've been better sellers
due to the fact that the Fed's been cutting rates
and liboard has been going down, and obviously the yield
(08:46):
that you get has been much less. Going forward, if
you believe that we're at the end of the rate
cut cycle, which possibly there's possibly one or two more
cuts to come, I think the loan market becomes a
good avenue of for investment. You know, if you look
at a lot of the finance in the area has
been refinancing and repayments. It's been almost three quarters of
what's been going on, which provides a nice fundamental backdrop.
(09:08):
If you went back to the last time the loan
market imploded, it was back in the global financial crisis,
when probably about thirty to forty percent was retail. Now
only seven percent of that market is retail. The big
portion of that market is clos which you know probably
are about seventy percent of that market, which is really
much a buy and hold as opposed to the emotional
(09:31):
investor in the retail space. So we're looking at loans
once the FED stops cutting rates as an opportunity to
get back in. You have a very high current yield
right around eight percent, you know, very good technicals. You've
had seventeen billion of flows into that market. We think
that makes sense a little less concerning when I look
at the high yield market. You know, the high market
is the highest credit quality ever. You had about two
(09:53):
hundred and eighty four billion of downgrades. Some of the
fallen angels, occidental craft times for Twitter, NORDG froms cement
in a few which has actually improved the overall credit
quality of that market. So at two seventy, with the
faults at one eighty two, I feel a little more comfortable.
We're more market like and exposure there, and again I
think we're defensively postured. You would ask this question before
(10:15):
it defensively postured and a dip buyer. But as I
had mentioned, the dips are shorter and you have to
be much quicker and much more tactical. So you know,
as we see opportunity, we will buy in both those markets,
both in the loan market and the high yield market.
You have to be very, very cautious of being in
late innings. I've heard that for the last three or
four years, and it keeps on getting extended out, so
(10:36):
we'll watch it closely. We're cognizant of l me risk,
We're cognizant of being higher quality in the high yield market,
and you know, something that will take into consideration when
we look to add exposure in the future.
Speaker 1 (10:49):
But do the problems then ultimately end up in twenty
twenty seven, twenty twenty eight. I mean, we're going to
have a good year next year, but but then we'll
hit the wall after that well.
Speaker 3 (10:58):
We're starting to see some of the cracks, you know,
and you talk about, you know, some of the things
that we've seen. We've seen, you know, fraud with Tricolor
and First Brands. We saw some of the bankruptcies in
private credit, Zip, car Wash and Renova Home Partners. You know,
do you know do the fact that they're only priced
on either a monthly or quarterly basis and prices dropped
pretty quickly. That's something we have to watch very very closely.
(11:19):
When I look at the private capital markets, private credit,
that market has grown to one point seventy five trillion.
It's a it's a good sized market. About one and
a quarter trillion are invested. Five hundred plus billion is
waiting to be invested. Provided great liquidity and alternative financing
in the markets. It started out coming to weak single
bees that we're going to default. And you know, some
(11:40):
of the best news that we would hear as my
loan manager would walk in my office and you say, hey,
that deal that was trading an eight cents to the dollar,
we thought was going to default. You know, one of
the BDCs took us out at one hundred cents on
the dollar. We're like we'd love you guys. In private credit.
That's changed. It's now there's such an abundance of money.
It's providing liquidity at every tier. You know, a lot
of companies that we thought, you know, that needed to
(12:01):
finance in the private credit markets were able to get financing,
they got their financial house in order. Then they were
able to go back and refinance into the public market
set you know, a much lower rate. So it provided
a nice source of capital. And there's still plenty of liquidity.
There's still five hundred billion looking to be invested in
that market. So I think that's helped pushed out the
default cycle. That's helped with liquidity in the overall market,
(12:23):
and it's something we're watching very very closely. It starts
to be a little concerning when a lot of the
companies are doing pay in kind. They're not actually generating
cash flow, they're actually accumulating more debt. That starts to
get me worried. And a lot of dollars are invested,
you know, And it's it's when a lot of people
are telling me how great of a market it is.
I mean, the spread between public and private has compressed.
(12:45):
It used to be about three to four hundred basis
points now it's inside of one hundred. So and then
two other things that I when I look at private credit,
you have a concentration in commercial service and software. It's
about forty percent. You compare that to the public leverage
loan market, they're only about twenty percent. So they're overexposed
to AI disruptions and we have to watch that closely.
(13:06):
And also i'd say they're heavily skewed to lower credit
ratings B three in triple c's versus the public loan market.
So again, I think it's provided great liquidity, it's done
its job. You have to be very very cautious and
could there be hiccups in the future. Let's see what
four negative quarters of GDP due to these markets. You know,
we haven't seen that. We've seen a pretty much a
(13:28):
bull market, right private credit, the bulk of it has
come out in the last five years. It's been a
bull market. We've had pretty positive fundamental backdrop. We'll have
to wait and see if we do start to see
a dislocation or slow down the economy, you know, we'll
take that the consideration. We'll go up in quality, we'll
hold you know, higher quality assets looking for an entry point.
Speaker 1 (13:47):
Dave, on the point you made about the difference in
pricing between public and private, you're saying that it was
three to four hundred basis points over let's say, for
a private loan over the public equivalent, and now it's
gone below one hundred.
Speaker 3 (13:59):
It's gotten much more competitive due to the fact that
you've had so much cash come into the market and
you still have about four hundred I'm sorry, five hundred
and fifty fourteen billion waiting to be invested.
Speaker 1 (14:07):
Yes, at one hundred, though, does it even make sense?
Is that compensate you for the lack of liquidity.
Speaker 3 (14:12):
Again, that's you know, that's sort of your choice. There's
there is positive to it where you only you know,
you know, I have to disclose your financials to more
than one or two brokers. There's things that are positive
for me. You know, I invest in the public markets.
I don't. We don't invest in private credit. I do
have private credit exposure through the BBC's that's how we
sort of get our private exposure. You know, business development
(14:33):
companies are larger liquid companies, so you know, we we
sort of lack the transparency there. However, I feel very
well about the large, well capitalized issuers like a Blackstone,
Apollo and areas. That's why I can get exposure to
private credit. I'm not actually buying the individual transactions, but yes,
that that premium has narrowed pretty dramatically. And you've gotten
(14:53):
great performance. You know, you've defaults have been limited. Performance
has been good, but you've also been in a bull market.
Speaker 2 (14:59):
You talk about, you know, the liquidity that all the
private credit, you know, alternative asset managers have provided. What
do you think will make this kind of music stop?
Speaker 3 (15:08):
Well, I think you know, when you start to see,
you know, some of the problem problems with credits, you
start to see some defaults, you start to see when
you start to see the market have cracks, that that
would be my thing. When you start to see the
market have cracks is sort of the top of the market.
You've you've had a nice run. You know, I own
it personally. I think it's made sense me personally. I'm
taking some profits. I think it makes sense to take
(15:30):
profits now. You've had a great run. You pretty much
have haven't had many credit impairments. You know, you've got
a very strong backdrop. You look at, uh, you know
the economy has been chugging along in the two to
three percent range. Defaults even you know, are much more
manageable right now. Leverage is lower than historical averages. You know,
earnings have been relatively strong. Those are all those are
(15:51):
all very good backdrops to have, you know, right now.
So we're taking a hard look at that. If that
starts to change, then I'd be a little more cautious.
Speaker 2 (15:59):
Got it. And so I guess some of these recent
things that have popped up in I guess the past
few weeks months, little cockroaches. I guess that that Jamie
Diamond has said, those you've view as kind of more
as one offs versus like canaries in the coal mine.
Speaker 3 (16:12):
In terms of ask a question again, No, that's a
that's a really good question. I mean, I think Tricolor
and first brands, when you have fraud, I mean those
are few and far between us something that you can't
really detect. You know, fraud is fraud. When you have bankruptcies,
that's something that you can detect. And you know, obviously
you have to do credit work, and credit work is
part of the exercise. You know, it's I don't want
(16:33):
to buy an indexed etf. You know, without knowing what
the underlying credits are, especially if we're that late in
the cycle. The point you made, I want to make
sure I'm doing independent credit research. I feel very good
about the underlying credits, and I want to know what
I own. So I would say that fundamental credit work
is of utmost importance, especially as we get towards the
end of the cycle.
Speaker 1 (16:53):
Other than private credit, which is what everyone wants to
talk about, AI has taken over the discussion and the
amount of money that is being borrowed to fund the
build out, not just on the AI specific but also
the associated infrastructure, the power, the utilities, everything else around it.
It's going to be you know, three trillion dollars of funding.
A lot of that that's going to hit the public markets.
But what does that say to you, Dave? I mean,
(17:14):
you know, you've been around quite a long time. We've
seen these euphoria moments about certain you know, new things
that come along and everyone's borrowing furiously to get in there.
But is that really a great opportunity to think for
credit investors?
Speaker 3 (17:30):
So, you know, I call it one of the one
of the headwinds is the leverage in the tech space.
You know, if you look at on an issuance basis,
it was about two percent about six months ago. That's
grown to ten percent. You've seen the issuance of companies
like Amazon, Medica, I'm sorry, Meta, Oracle, Google, Netflix, and
then you've seen the poster child I'd call it, you know, Oracle,
(17:53):
you know, have negative ratings impact. I think now they're
a mid triple B. We do not believe that it's
realistic to believe in the near term they're going to
go to junk. But they're issuing a lot of debt.
You know, they currently have I think about one hundred
billion of index eligible bonds. We expect this to grow
to somewhere in one hundred and fifty billion dollar range
over the next two to three years. You know, if
(18:13):
it was to fall into the high yield market at
one point five trillion, to be ten percent of the
high yield index, which would be scary. So you know,
we don't think that's going to happen. We're not. We
think would be reckless if they did that. I'm just
making the point that it's massive issuance. I think the
best way to categorize it is is that you have
investment grade companies taking on debt to finance equity like risks.
(18:37):
And I stole that from Howard Marks. That's not my
two cents, but Hard Marks said that, and I think
that's spot on. You want to be cognizant of what
they're doing, what the investment is, and what risk that
it entails. And it is these big, well capitalized companies,
unlike the dot com bubble, which were over levered, you know,
weak companies that were issuing debt before they even put
(19:00):
fiber optic cable in the ground. It came with three
deals and then defaulted. These are much better capitalized companies,
but it is equity like risk that you're financing.
Speaker 1 (19:07):
With that say, Oracle doesn't really want to be junk,
and they have said that they want to defend their
investment grade ratings, but they may not have a choice.
And they are trading. Some of their bonds are trading,
you know, with double b yields at this point, and
the CDs is blown out, so the market is sort
of telling us something else. I'm curious, you know, as
someone who could look at either you know, if that
big capital structure of one hundred billion dollars of debt,
(19:30):
you know, jumps into the high yield market. Is that
posentially more of an opportunity for you.
Speaker 3 (19:35):
So I'd say that during the pandemic, when we saw
two hundred andy four billion of fallen angels, that was
right in our wheelhouse. When you have pension funds that
are insurance companies that are forced to sell because a
company goes from investment grade to blow investment grade and
then it falls into the high yield category. He had
forward with thirty year bonds. I mean, typically you're seeing
(19:56):
five and seven year issues in the high yield market.
Now you have thirty year bullet paper available, they become
some of the best performers occidental craft times as I
had mentioned, you know for Twitter, nor Trum's just mentioned
a few those were great opportunities. Now, Oracle, I never
said they're going to junk. They're a solid, solid, you know,
(20:17):
mid triple B. But you know it's an investment that
we're looking at. You know, we're not going to position
too aggressively. But I just say the current sell off
has this feeling like the risks are starting to be
priced in, so it may be starting to look a
lot more attractive to us. So something that we're falling
very very closely in our investment grades with our investment
grade team.
Speaker 2 (20:36):
Let's go move on to other kind of AI uh,
the more single A double A you know, ones that
are kind of right raising a lot of debt but
also in in in special kind of SPV type form.
So what are some of your thoughts, like, what's the
best way to kind of play that space, right is it?
Is it through the public markets or like you know,
at the company level or at these special entities or
(20:57):
you know, what do you think the best bank for
the buck is?
Speaker 3 (21:01):
I mean, you know, for us, it would be playing
it at the company level. That's just that's just our
our forte. So I would say that looking at the
companies evaluating what they're doing, we haven't jumped in with
both feet. We've sort of been a little hesitant and
wait and see, sort of a wait and see mode.
But we have been reviewing it and we actually just
did an industry review today. So something we're talking about
(21:21):
and we're falling very closely, but haven't jumped in with
both feet as of yet.
Speaker 1 (21:25):
Do you wonder about the rationale for long dated debt?
I mean you talked about equity like dreams for you know,
credit risk. You know, you're funding something for forty years
that could be obsolete in you know, much much less time.
Given the change in technologies and the way you know,
things are rapidly evolving. Would it make Does it make
sense for a credit invested by forty year bonds from
(21:45):
a tech company?
Speaker 3 (21:46):
Absolutely not. I mean unless you're so comfortable that it's
going to be the right investment. Now, I think it's
it's a it's a big risk. That's that's that's that's
probably the biggest risk out there is you know, investing
you know, in debt for something that may go away
in three to four years with forty year maturity. So no,
that's something we're definitely considering, and it's it's one of
(22:07):
the biggest risks out there. So something you have to
evaluate when something seems too good to be true. There's
no free lunch in the bond market. That's why, that's
the why I was that's why I was brought up
in investing. Anything looks too good to be true, it
probably is to be careful. And you know, obviously, you know,
we want to have we want to have diversification, we
want to be safe. If we did it, it would
be you know, smaller investment sizes, we'd be extremely well diversified.
(22:30):
So it's something we're evaluating.
Speaker 1 (22:31):
Does it remind you of anything else you've seen? Was
it like the dot com bubble or the mid mid
two thousand's housing expansion or anything else like that?
Speaker 3 (22:39):
Those were you know, those were definitely things that were
a little crazy. I mean I started in nineteen ninety
for managing money. That was the year of seven rating pieces,
the Mexican pace of evaluation, and the end of the
high yield, the bacle. I remember, I remember getting a
call from Lipper and they told me that you were
ranked number one. I said, but I'm a short term
(23:00):
bond fund that's down one point eight percent, Like you
were number one out of one hundred. You won the
lip Award. I'm like, I'm not sure that's the objective.
It was short term bond fund to be down one
point eight percent. So we've I've lived through a lot
of that. We had nineteen ninety eight, which was the
we had the long term capital. Two thousand and two
was the telecom bubble of the faults. Two thousand and
(23:23):
eight was the long term capital crisis we had, you know,
obviously the downgrade of the US. We had some other
oil concerns China. I've been through a lot. This is
a little different because you have well capitalized, large companies,
but you have a lot of people jumping on the bandwagon.
So I want to just be cautious as we approach it.
And again we're taking everything to do with consideration and
(23:44):
we'll make a decision whether we want to allocate there
or not.
Speaker 2 (23:47):
So if you had to put you know, obviously we're
not in you know, your forecast for twenty twenty six,
would you say it's it's the continuation of the AI
bubble or will it pop or we are not in
a bubble? Do you have any thoughts on that or.
Speaker 3 (24:00):
You know, I just if I look at twenty twenty six,
I think the current backdrop will persist. I mean sort
of the tailwinds we had last year was an accommodative
FED there were cutting rates. We had a good economy,
decent consumer unemployment was low, earnings were good, leverage was
you know, below long term averages. As we had mentioned,
we had positive flows and you know, really strong returns
(24:22):
and fixed income. We talked about some of the headwinds
which tariff's uncertainty, tight spreads, as you guys had mentioned,
some geopolitical uncertainty, and then elevated inflation. We haven't got
to the Fed's target in four years of two percent,
and then some policy uncertainty. If I look at you know,
twenty twenty six, I think that current backdrop persists. You know,
(24:44):
the Fed's easy monetary policy and you know, yeah, they're
going to the rates by cuts will come to an end.
I don't see a recession, still see moderate growth, and
as I had mentioned before, I see you know, sort
of coupon plus type returns as a possibility. You know,
AI is only one of the areas that we're we're
considering for investment and could it, could it correct, absolutely,
(25:07):
Could it go on and run for a few years. Absolutely,
So we'll watch it very very closely. You know, if
I had to look at some of the other headwinds
going forward, we have midterm elections coming up, we still
have geopolitical risks, We still have the Middle East, we
still have Rushia, Ukraine which is now going on to
its fourth year, China, which is the second largest economy
(25:28):
in the world. You have to look at what are
the growth projections for China and you will continue to
grow it five percent. We talked about the leverage in
the tech space, which is definitely a concern. I'm not
saying it's going to blow up next year and not
saying you can't run for a little longer. And then
Fed policy, you know, we have to talk about FED policy.
Not only you know, you know what will they do?
(25:49):
Will they continue to cut rates? But what's the composition
that FED going to look like when Paul's term is
up in May? And you know, and how will the
how will the FED look and you know what will
the what will they do going forward? And then as
you guys well mentioned, we continue to be in a
tight spread environment and are we at the end of
the credit cycle is a big concern. So again, diversification
(26:10):
is very very important defensive posturing being up in quality,
having the ability to buy on dips when you know
the opportunity presents themselves and people start getting emotional about investments,
that's when we typically make our most money.
Speaker 1 (26:23):
One of the defensive trades for this year that everyone
seems to love is banks, certainly the big banks, but
you also, Dave, you mentioned the like regional banks. Since
we have Vinyld here who also covers the banks, I'm
keen to get both your thoughts on those because there
still seems to be too many of them, and they
still seem to have a lot of real estate trouble
and they're exposed to the consumer which isn't doing great.
So why do we like banks?
Speaker 3 (26:45):
Yeah, I would say that, you know, in investment grade,
you know, I think the areas of focus US are
Triple D is number one at seventy five percent of
the investment grade marketplace is triple b's second. Financials is
another area that we focus on, and it would be
the regional banks. The better capitalized regional banks like a
(27:06):
fifth third of citizens a Huntington Bank Corp. Those that
are better capitalized, the g said banks. They all trade cheap,
they all have abundance of issuance. You know, we started
buying those when we had the Silicon Valley debacle and
you got, you know, some very cheap valuations. They're still cheap.
We still like, you know, capital goods. But you talked
about the banking segment. One of the things we're very
(27:28):
cognizant of is is the commercial real estate exposure, especially
hotel and office. A lot of those guys have you know,
twenty to forty percent of their balance sheet and commercial
real estate, as you had mentioned, consumer lower and consumers
starting to feel the bite of you know, higher defaults
and delinquencies, and that's something we have to be very
very cautious on. But for us it's been up, you know,
(27:49):
the higher quality bias, better capitalized. You know, we haven't
really dug down into the some of the questionable regionals,
So I think our bias has been the better well
capitalis regional.
Speaker 2 (28:00):
Banks maybe I G and high yield are tight, but
you know, preferreds could be just right. So that's that's
you know, kind of going down the capital structure of
the banks. Uh and in the US, kind of going
down to the preferred level actually you know, might not
be a bad area kind of given you know, like
you said, the economy looks, you know, decent, right, and
then you know, with deregulation. You know, the thing that
(28:22):
I look at is, you know, with deregulation, yeah, you're
you might lose some of the a little bit of
the equity buffer that you have, but you know, the
debt requirements that that all these big banks have to
do that's actually going down as well. So again, big
banks are big issuers, but you know, hey, there their
issuance needs are going down, so you might see that
(28:43):
pair back a little bit, right, and you know, the
fundamentals look solid, and then potentially the technicals, right, might
be a little bit better next year. And then on
top of that, you contrast that with you know this
all the tech guys, you know, these hyperscalers issuing a
lot of extra debt. And then also you know with
M and A right, I don't think we've touched on
that too much today, but with M and A looking
(29:04):
to pick up right, and that's more of a you know,
non financial thing where where the risk might be, you know,
you might have some spread widening potentially with more M
and A back debt. So you know, we see the
financial space, which I think trades about flat overall to
the Corper Bond Index, but it used to trade about
ten tighter, right and back in twenty twenty one, so hey,
(29:24):
maybe that's that's something. You know, maybe spreads might widen
this year, right, But but on a relative basis, we
view financials as perhaps a little bit.
Speaker 1 (29:34):
Cheap if we're worried about AI and the banks of
funding it, and you know, they're also at the same
time quietly trying to get this risk off their books
and the forms of SRTs and they're doing you know,
CDs and a bunch of other stuff. So they clearly,
you know, they see the risk. How much does that
filter through to the actual bank risk itself.
Speaker 3 (29:52):
I mean, it's something that we're that we're definitely watching
very very closely. And you know, you obviously made some
great points on finance and the banks. You're exactly right.
I mean, the banks used to trade at you know,
at a much tighter spread than the overall index, and
Silicon Valley caused that to revert the other way, especially
the GISIB banks, and that's when we started getting involved,
(30:12):
and we did not only play in the debt, but
we also played in some of the preferreds and the
hybrid preferreds. We subsequently have taken profits there. We also
did that in some of the utility hybrids, which got
very very cheap at the end of last year. But
that's that's what some of the errors that we focus on.
But you're you're exactly right, they're offloading risks they're trying
to get diversified. You know, they they want to be
(30:32):
in the AI game, but they also don't want to
have all that risk on their balance sheets. So again
it's a case by case basis. We'll look at the
underlying bank, we'll look at the fundamentals, and it comes
back to you know, independent credit research.
Speaker 2 (30:43):
James so on the AI kind of risk hedging. Right,
I think you know the bank to look at there
is Morgan Stanley and what they're doing kind of given
right at some articles out on saying that they've taken
the lead on you know, tech AI related issue ince
So if they're looking to you know, kind of offload
risk and you know, I think the thing that helps them.
(31:05):
You know, in the US we have a great capital
market system. It's great that all these guys looking at
issue at are you know, really high grade companies and
then the investors will handle it. But right I think
there's still going to be a portion that you know,
the banks might need to you know, it can come
in loan format, right, so that the banks might have
some risks. So if they're looking to do hearties on
this stuff, yeah, it's saying something right where you know,
(31:26):
again we might have a lot of record issues potentially,
and I corporate bond land, you know how much will
come there versus you know, special vehicles, right, but still
you know some of that might end up on bank
bound sheets. And for them to be looking at hedge,
I think it tells you something that, yeah, you know
we're hearing what multiple trillions right of potentral issuesrillion views.
Speaker 1 (31:46):
But on issuance generally, I mean I have looked at
net issuance being very very low over the last few years,
and that is part of the reason I think why
spreads have been so tight, because there aren't enough bonds
to supply all the demand for that yield bid that
you talked about earlier on. I'm wondering when we go
into next year, when there is expected to be a
significant increase in net supply of issuance, you know, Morgan
(32:07):
Sandy not to keep naming them, but they did say
that there'd be a trillion dollars in net new supply
of IG debt, which we've never seen before. I think
maybe had a big year in twenty twenty, but not
a big year you know, like that for a long time.
So how does the market absorble that debt DAVE without
spreads blowing.
Speaker 3 (32:24):
Out, well, I think number one, it could be painful,
and I think you could see spreads widen. But when
I start looking at us versus some of our you know,
some of the other areas. You know, right now we're
yielding for eighty seven, Europe is yielding three twenty one,
and ages yielding three seventy five. We're still the best
game in town. So I think we'll still be attractive.
If you see spreads widen for us, that's when we
(32:45):
get interested. You know, if we start to get back
to the right now we're at seventy nine, if we
start to get back to the eighties nineties up to
one hundred off, for me, that's a you know, something
I'd look at very very, you know, closely to reallocate
to that sector. So I don't have a problem with
spreads widen. If we see an abundance of issuance, fields
go higher and there's opportunities, and again it will be
(33:07):
obviously a case by case basis.
Speaker 1 (33:10):
And you don't think that's going to be a problem
with demand. Do you think they'll be an ample bid
for all that extra new supply?
Speaker 3 (33:18):
I think you know, this year, I think you had
net supply was actually down from last year because a
lot of it was refinancing of existing debt. I think
if net new supply comes out, we'll have to wait
and see and see if they're still demand for it.
But as it cheapens up, you know, and you get
some decent valuations again, you know, you get five plus
(33:39):
percent on corporate debt. That's when you know pension funds
and insurance companies can meet their liability payments and they
get excited about it. So I think it you know, again,
it depends on the context of the rest of the
market and what happens. But if you start to see
spreads widen here and it becomes a better investment opportunity
and you get overall yields in excess of five percent,
I think that could be very interesting.
Speaker 2 (34:00):
Do you prefer IG or high yield? And then within that,
you know, what are some of your picks and pans
within both of those segments.
Speaker 3 (34:08):
Yeah, I would say that, you know, IG were probably
underweight to what we've been historically, just due to the
fact that securitized has really good value in the IG space.
If I look at you know, some of the other
things we invest in I throughout you know, we talked
about the mortgage market. That's one we had been doing agencies,
and we still like the non agency market. But asset
(34:30):
backed securities you look at tap of the top of
the capital stack from part of the curve, very solid underwriting.
You know, we do stuff there like franchise, franchise least receivables.
If you own a Jersey Mics, a Dunkin Donuts, a Domino's,
you know, Domino's Pizza, Carl Juniors, you make a payment
to the parent for using their name. They turn around
(34:51):
and securitize that and sell it to a guy like me.
Very short paper that deliverges very quickly, and they take
the proceeds and build more properties. Those have been an
absolute home run. Right now, you're getting somewhere in the
upper fours for two year paper double A three type ratings.
We think that that's much more attractive than corporate bonds
in the front end. And another one that's been good.
(35:12):
I told you were a little cautious on hotel and
office building single atset single bar ordeals in the commercial
mortgage market, rule office data centers, industrial warehouses, some trophy
properties like the Bellagio, Willis Toller, some of the sixth
Avenue properties in New York City that are fully occupied.
It's giving you a great return this year, seven point
four percent on you know, things that are very very attractive.
(35:35):
You know, we talked about that maturity wall of one
hundred and ten billion coming due. I used to call
it survive till twenty five. Now it's survived till twenty six,
especially in the office market and the data center market,
where you know the recoveries on some of these properties.
I'm looking at the United Healthcare building out my window.
They had a one hundred and twenty million dollar mortgage
on that building. United Healthcare left and it's sold for
(35:58):
in the twenties. You've got to be very very cautious
of write downs. But being selected with single acid, single barrower,
it's been very very rewarding, especially getting into some of
the office properties that are in high demand. So that's
been supplementing us, and we've been taking some of our
assets out of IG and putting them there. If we
do see that dynamic where IG starts getting a lot
(36:20):
wider and yields get a lot higher, we'll reallocate back
into the IG market high yield. I would just say that,
you know, spreads have moved pretty dramatically. You're up a
little over eight percent. You're up about eight point one
percent this year. You've got a big move. Our bias
there has been you know, number one, you've had very
good flows, supportive technicals, very good fundamentals. Maturity wall has
(36:43):
been pushed out. Earnings are good. As we had talked
about before, leverage is low when you look at long
term historical averages, and we mentioned defaults being below the
historical average. We have a market like exposure here, and
we're a better buyer on depths. Like I said, if
we see a sell off and it's not going to
get to say fifty or eight fifty off, it may
be a sell off that gets you to four hundred.
(37:03):
Right now, we're at two seventy. That's where we start
adding exposure, and it's pretty much diversified. You know, our
focus there is pretty much market like type exposure. So
no one sector we're jumping up and down about just
you know, getting a market like exposure.
Speaker 1 (37:20):
On the asset back security today. I mean, I know
this is nearly a holiday shown and I shouldn't be
so down, but I'm worried about the just massive increase
in supply we're seeing across the board in asset backs,
and then you know the signs of stress we're seeing
in some of the markets xclos some of the equity
checks aren't being paid, for example, do you think that
there's any sign of froth at all in ABS right now?
Speaker 3 (37:43):
When we think whereas froth, we're defensively postured and we're
up in the capital stack, We're not taking a lot
of risk. We're staying in double A, triple A single,
a type paper friend of the curve where there's underwriting
that it's very very solid, and we do our own
analysis and we're comfortable with it. If we start to
think that the market is, you know, there's not as
(38:03):
much paper, not as much issuance, you know, then we'll
express our views by moving down in the capitol structure.
But right now, i'd say up in the capital stack,
not taking a lot of risk, getting you know, quality
exposure of deals that deliver very very quickly, and I
think we're comfortable with our exposure there, so not taking
a lot of risk in that market. I'd say up
in the capital stack and still looks more attractive than
(38:24):
short corporate bonds.
Speaker 1 (38:25):
So if you look around everything, you get to see, Dave,
where's the best relative value right now, let's say for
the next twelve months.
Speaker 3 (38:31):
That's a tough call. I think, you know, we're divers
pretty well diversified, defensively postured. We do have exposure to
leverage finance. But I'd say probably a little blower long
term averages, a little more insecuritized due to the fact
that asset backs through the fact that you mentioned a
lot of issuance have gotten cheap. CMBs have moved quite
(38:53):
a bit this year. They're probably pretty fully valued. One
that we didn't talk about, which I think everybody loves
to talk about and I will buy, is the uni market.
You know, Muni's started the year with heavy, heavy supply.
You had supply overwhelmed demand, so you know, pretty poor performance,
but you had taxable equivalent yields that we haven't seen
(39:15):
going back to the global financial crisis. An investment grade
you're getting six percent on high yield, you're getting nine
and a half percent. That's insane.
Speaker 1 (39:24):
But if you just start to corporates, Dave, is there
anything that think sticks out as a screaming buy right now.
Speaker 3 (39:29):
I'd say in the corporate market, you know, spreads are tight,
you know, nothing there screaming as a buy for us.
I would say that one that we didn't mention is
midstream energy, those with contracted cash flows like gas, gas processing,
and pipelines look somewhat attractive. You know, we talked about
(39:49):
the banks. I would just say that some of the
capital good companies also look attractive, but nothing screaming there
for a buy. Not when spreads are at seventy nine
and the twenty seven year OD heights in seventy three.
Speaker 1 (40:01):
And if you are long credit and you're going into
next year thinking, you know, you're a bit worried, what's
the best hedge for credit exposure.
Speaker 3 (40:08):
I'd say securitized. I mean, that's how we're sort of
hedging our book, going into short, high quality paper that's very,
very liquid, and if we see this location in the
corporate bond market, we can quickly turn that into liquidity
and quickly moving back into the investment grade market.
Speaker 1 (40:24):
Great stuff, Dave Albright, President and CIO at new Fleet
Asset Management, It's been a great pleasure having you on
the credit edge.
Speaker 3 (40:29):
Many thanks, Thank you, guys, thanks for having me.
Speaker 1 (40:32):
And to Arnold Kakuda with Bloomberg Intelligence, thank you very
much for joining us today. Thanks for having me freedom
more analysis. Read all of Ronold's great work on the
Bloomberg Terminal. Bloomberg Intelligence is part of our research department,
with five hundred analysts and strategists working across all markets.
Coverage includes over two thousand equities and credits and outlooks
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(40:55):
you get your podcasts. We're on Apple, Spotify, and all
other good podcast providers, including the Bloomberg Terminal at bpod Go.
Give us a review, tell your friends, or email me
directly at jcrombeight at Bloomberg dot net. I'm James Crombie.
It's been a pleasure having you join us again next
year on the Credit Edge
Hello, Welcome to the Credit Edge Weekly Muket's podcasts. My
name is James Crumby. I'm as senior editor at Bloomberg.
Speaker 2 (00:23):
Hello, my name is Arnold Kakuda, senior analyst at Bloomberg Intelligence.
This week, we're very pleased to welcome Dave Albricht, President
and CIO of new Fleet Asset Management.
Speaker 3 (00:34):
How are you, Dave, I'm doing welve today. Thank you, guys.
Speaker 2 (00:36):
Okay, great, great, so fun. Fact So, Dave is a
market veteran and he started his career before Gordon Gecko
was a household name. In addition to his executive responsibilities
at Newfleet, which has about seventeen billion of assets on
her management, he's a senior portfolio manager of several multisector
fixing some strategies and then in his role as CIO,
(00:57):
mister Albrich drives top down strategy for new Fleet's investment platform.
So basically, James, he knows everything. His knowledge is limitless,
and I think we've saved the best for last in
terms of podcasts for this year. So let me turn
it back back to you for the first Q.
Speaker 1 (01:11):
Thanks great to have you on the show, Dave. So
your credit had has has had an extraordinary year, from
the April tariffs shop to the recent cut croaches outbreak,
But bond spreads are finishing up pretty much where they started.
Everyone sounds so upbeat about next year. The low level
of defaults is being taken as a sign of health.
But is it really, Dave? Are we fooling ourselves that
(01:32):
the trouble's gone away?
Speaker 3 (01:33):
Well? I think that, you know, if you look at
the investment great space, you look at the high yield space,
you look at leverage finance, I think a lot of
debt maturities have been pushed out, which is good. The
faults are down due to the abundance of liquidity in
the market, and I think private credit helped on that front.
So defaults are something that you know, are much lower
than the historical average. You've looked at high yield, the
(01:54):
faults right now are running much below the historic average.
I think we're at one point eight two in the
historic averages, somewhere in the mid rees. If you look
at bank loans, we're probably right around the historic average.
And then we really don't have a faults in investment grade.
I think, you know, the last time we actually had
a default in investment grade, not a downgrade, but a
default was back with Orange County, which was quite some
(02:14):
time ago. But faults typically don't happen in the investment
grade space. I think that we've only seen one default
in the last seven years, and that was fraud. And
if you went back, you know, years and years ago,
and you looked at Enron World Commadelphia, those are all fraud.
So I think we're in a good, good place right now.
I think, you know, if I look at three the
barometers I look at all in yields are still very attractive.
(02:35):
Where you get insurance companies, pension funds and institutional investors
excited about fixed income. When you get corporate bonds yielding
in the high fours, you get securitized yielding in the
five to six percent range, and then you still have
discount dollar prices, which if you do a good job
in credit selection, you're going to get a nice total
return in addition to that yield. Now you're exactly right.
(02:56):
Credit spreads are on the tight side without question. You know,
if you look at investment grade corporates are at seventy nine,
and you know seventy three was a twenty seven year low,
so we're not far from that high yield is you know,
approaching tights, even though we do have the highest credit
quality ever with the abundance of fallen angels that we've
seen there. But we're at somewhere around the two seventy level,
(03:17):
and then loans are again on the tighter side, so's
there's not a lot left. However, they could still grind tighter.
One of the areas that actually, you know, fixed income
in general had positive excess returns for last year, which
was good. If you look at you know, one of
the sectors that is outside of domestic credit, you look
at emerging markets. You did see significant spread tightening in
(03:40):
emerging markets fifty to sixty basis points, with the high
yield market tightening by over one hundred and thirty five
basis points. So you did see some meaningful spread tightening
to put to bring us to these levels, which are
I think pretty fully valued from a spread perspective.
Speaker 2 (03:56):
So are we looking to buy right now? Are you
looking at tread credit less less versus cash or what
are your thoughts there?
Speaker 3 (04:02):
Yeah, I mean, you know, I'm a bond guy, so
I'm always going to be fully invested in fixed income.
The nice thing about multisector is I have fourteen levers
to pull, so there's always something that seems exciting out there.
Speaker 1 (04:11):
You know.
Speaker 3 (04:12):
Some of the moves that we made this year, we're
selling bank loans. Obviously, as the FED was you know,
cutting rates in a you know, a rate cutting mode,
bought agency mortgage backs, which for the first time in years,
we saw the yield of corporate bonds and the yield
of agency mortgage backs on top of each other. They
were right around four eighty six four eighty seven. Typically
(04:33):
you're getting fifty three additional basis points when you're in
an investment grade corporate, but they were on top of
each other. So we felt it a good entry point
to start buying agency mortgage backs. And they've had a
great return. Agency mortgage backs are up right around eight
percent this year, so a nice total return, but a
lot of the dislocation in the market, and that's when
we get excited. When you start to see the market
(04:55):
dislocate and something that's cheap, the dislocations are much narrower
and much quicker to rebound. You know. We we went
back we had the Enkerry trade, where the dislocation and
the leverage finance markets were about five weeks, so it
was very short lived. We had some of the elections
in Europe and then the stamp election in France, which
(05:17):
was another five week dislocation, and then you know, as
you guys had just mentioned earlier in the call, we
had Liberation Day where we saw a dislocation for about
eight weeks. But they're nowhere near what they used to be.
I would just say, we get excited about high yield
when you know spreads get to six fifty seven hundred.
We didn't see that. We had spreads get to four fifty,
and then a bunch of money came in and spreads
(05:37):
tightened back up inside of three hundred. So you have
to be much more quick, you have to be much
more tactical, and you got to do it quickly. I
think derivatives market has allowed us to execute efficiently and
then fill out those trades in the cash markets. So
it's much more efficient that we can get exposure immediately.
And again when they're short lived, when there's so much
(05:58):
cash on the sidelines, when you have seven trillion in
money market waiting for that opportunity to get involved in
the markets, you got to be quick, and you got
to be tactical.
Speaker 2 (06:06):
Maybe some of the banks might be stepping in a
little bit bit more with the rate cuts. And then
also I think we saw an article in terms of
Fanny Freddy they're kind of bulking up their portfolios but
perhaps kind of limiting the supply of agency mbs. So
is that a sector that you're kind of really more favoring,
continuing to favor more into twenty twenty six.
Speaker 3 (06:24):
I would say that it was a great opportunity. Last
year they had a great return. You had that anomaly
where they traded on top of corporate bonds. Now they're
back to pretty much fair value. So I mean we
like the non agency space a little better. We think
that has underperformed versus agencies. You know, if you look
at the metrics, you know, if I look at you know, both,
I think we like the housing market in general. I
(06:45):
think good underwriting, very strong, credit supply is down dramatically,
good structures, low inventory. You know, if you go back
to two thousand and seven, they were building about a
million houses per year. Two thousand and nine and after
was about two hundred and fifty thousands. So the shortage
of housing has been about seven hundred thousand per year
going all the way back to nine. So there's insational
(07:08):
demand that it really provides a nice floor for the market.
One of the other reasons I think I talk about
this that I think we could we avoided a recession
in the US. If you went to Europe, about eighty
plus percent of their mortgages are floating rate, So when
rates got the seven percent, you know, your mortgage payment
went up threefold. That's very, very painful. In the US,
(07:30):
sixty four percent of mortgages are at three and a
half percent or lower. So mortgage rates go to seven percent,
your life doesn't change. You're probably not selling your home.
You've locked in a nice equity build up. But I
think that avoided, you know, helped us avoid a recession.
So I think there's a lot of metrics that are
working for us. We do like the mortgage market. Think
going forward from a value perspective right now, I think
(07:52):
non agencies percent a better opportunity.
Speaker 1 (07:55):
Going back to the credit cycle, Dave and the default
cycle in particular, I mean, people are telling us across
the board that we're late cycle, you know, with seventh
eighth innings in terms of you know, what's going to happen.
And you know, there are a lot of companies that
did borrow way too much when rates were near zero
and they just keep you know, kicking the can. There's
been a lot of liability management exercises, has been a
(08:15):
lot of you know, private credit has helped some. But
are we just delaying the inevitable here or has all
the problems? Have all the problems gone away?
Speaker 3 (08:24):
Well, ill on me. It is definitely a problem in
the bank on the market. We're watching that very very closely.
Those that you know, it's guys like us that lose
rights to you know, go after the collateral and it
becomes a problem. So that's something you have to be
very cognizant of. So our bias has been up in
quality in the loan market, but we've been better sellers
due to the fact that the Fed's been cutting rates
and liboard has been going down, and obviously the yield
(08:46):
that you get has been much less. Going forward, if
you believe that we're at the end of the rate
cut cycle, which possibly there's possibly one or two more
cuts to come, I think the loan market becomes a
good avenue of for investment. You know, if you look
at a lot of the finance in the area has
been refinancing and repayments. It's been almost three quarters of
what's been going on, which provides a nice fundamental backdrop.
(09:08):
If you went back to the last time the loan
market imploded, it was back in the global financial crisis,
when probably about thirty to forty percent was retail. Now
only seven percent of that market is retail. The big
portion of that market is clos which you know probably
are about seventy percent of that market, which is really
much a buy and hold as opposed to the emotional
(09:31):
investor in the retail space. So we're looking at loans
once the FED stops cutting rates as an opportunity to
get back in. You have a very high current yield
right around eight percent, you know, very good technicals. You've
had seventeen billion of flows into that market. We think
that makes sense a little less concerning when I look
at the high yield market. You know, the high market
is the highest credit quality ever. You had about two
(09:53):
hundred and eighty four billion of downgrades. Some of the
fallen angels, occidental craft times for Twitter, NORDG froms cement
in a few which has actually improved the overall credit
quality of that market. So at two seventy, with the
faults at one eighty two, I feel a little more comfortable.
We're more market like and exposure there, and again I
think we're defensively postured. You would ask this question before
(10:15):
it defensively postured and a dip buyer. But as I
had mentioned, the dips are shorter and you have to
be much quicker and much more tactical. So you know,
as we see opportunity, we will buy in both those markets,
both in the loan market and the high yield market.
You have to be very, very cautious of being in
late innings. I've heard that for the last three or
four years, and it keeps on getting extended out, so
(10:36):
we'll watch it closely. We're cognizant of l me risk,
We're cognizant of being higher quality in the high yield market,
and you know, something that will take into consideration when
we look to add exposure in the future.
Speaker 1 (10:49):
But do the problems then ultimately end up in twenty
twenty seven, twenty twenty eight. I mean, we're going to
have a good year next year, but but then we'll
hit the wall after that well.
Speaker 3 (10:58):
We're starting to see some of the cracks, you know,
and you talk about, you know, some of the things
that we've seen. We've seen, you know, fraud with Tricolor
and First Brands. We saw some of the bankruptcies in
private credit, Zip, car Wash and Renova Home Partners. You know,
do you know do the fact that they're only priced
on either a monthly or quarterly basis and prices dropped
pretty quickly. That's something we have to watch very very closely.
(11:19):
When I look at the private capital markets, private credit,
that market has grown to one point seventy five trillion.
It's a it's a good sized market. About one and
a quarter trillion are invested. Five hundred plus billion is
waiting to be invested. Provided great liquidity and alternative financing
in the markets. It started out coming to weak single
bees that we're going to default. And you know, some
(11:40):
of the best news that we would hear as my
loan manager would walk in my office and you say, hey,
that deal that was trading an eight cents to the dollar,
we thought was going to default. You know, one of
the BDCs took us out at one hundred cents on
the dollar. We're like we'd love you guys. In private credit.
That's changed. It's now there's such an abundance of money.
It's providing liquidity at every tier. You know, a lot
of companies that we thought, you know, that needed to
(12:01):
finance in the private credit markets were able to get financing,
they got their financial house in order. Then they were
able to go back and refinance into the public market
set you know, a much lower rate. So it provided
a nice source of capital. And there's still plenty of liquidity.
There's still five hundred billion looking to be invested in
that market. So I think that's helped pushed out the
default cycle. That's helped with liquidity in the overall market,
(12:23):
and it's something we're watching very very closely. It starts
to be a little concerning when a lot of the
companies are doing pay in kind. They're not actually generating
cash flow, they're actually accumulating more debt. That starts to
get me worried. And a lot of dollars are invested,
you know, And it's it's when a lot of people
are telling me how great of a market it is.
I mean, the spread between public and private has compressed.
(12:45):
It used to be about three to four hundred basis
points now it's inside of one hundred. So and then
two other things that I when I look at private credit,
you have a concentration in commercial service and software. It's
about forty percent. You compare that to the public leverage
loan market, they're only about twenty percent. So they're overexposed
to AI disruptions and we have to watch that closely.
(13:06):
And also i'd say they're heavily skewed to lower credit
ratings B three in triple c's versus the public loan market.
So again, I think it's provided great liquidity, it's done
its job. You have to be very very cautious and
could there be hiccups in the future. Let's see what
four negative quarters of GDP due to these markets. You know,
we haven't seen that. We've seen a pretty much a
(13:28):
bull market, right private credit, the bulk of it has
come out in the last five years. It's been a
bull market. We've had pretty positive fundamental backdrop. We'll have
to wait and see if we do start to see
a dislocation or slow down the economy, you know, we'll
take that the consideration. We'll go up in quality, we'll
hold you know, higher quality assets looking for an entry point.
Speaker 1 (13:47):
Dave, on the point you made about the difference in
pricing between public and private, you're saying that it was
three to four hundred basis points over let's say, for
a private loan over the public equivalent, and now it's
gone below one hundred.
Speaker 3 (13:59):
It's gotten much more competitive due to the fact that
you've had so much cash come into the market and
you still have about four hundred I'm sorry, five hundred
and fifty fourteen billion waiting to be invested.
Speaker 1 (14:07):
Yes, at one hundred, though, does it even make sense?
Is that compensate you for the lack of liquidity.
Speaker 3 (14:12):
Again, that's you know, that's sort of your choice. There's
there is positive to it where you only you know,
you know, I have to disclose your financials to more
than one or two brokers. There's things that are positive
for me. You know, I invest in the public markets.
I don't. We don't invest in private credit. I do
have private credit exposure through the BBC's that's how we
sort of get our private exposure. You know, business development
(14:33):
companies are larger liquid companies, so you know, we we
sort of lack the transparency there. However, I feel very
well about the large, well capitalized issuers like a Blackstone,
Apollo and areas. That's why I can get exposure to
private credit. I'm not actually buying the individual transactions, but yes,
that that premium has narrowed pretty dramatically. And you've gotten
(14:53):
great performance. You know, you've defaults have been limited. Performance
has been good, but you've also been in a bull market.
Speaker 2 (14:59):
You talk about, you know, the liquidity that all the
private credit, you know, alternative asset managers have provided. What
do you think will make this kind of music stop?
Speaker 3 (15:08):
Well, I think you know, when you start to see,
you know, some of the problem problems with credits, you
start to see some defaults, you start to see when
you start to see the market have cracks, that that
would be my thing. When you start to see the
market have cracks is sort of the top of the market.
You've you've had a nice run. You know, I own
it personally. I think it's made sense me personally. I'm
taking some profits. I think it makes sense to take
(15:30):
profits now. You've had a great run. You pretty much
have haven't had many credit impairments. You know, you've got
a very strong backdrop. You look at, uh, you know
the economy has been chugging along in the two to
three percent range. Defaults even you know, are much more
manageable right now. Leverage is lower than historical averages. You know,
earnings have been relatively strong. Those are all those are
(15:51):
all very good backdrops to have, you know, right now.
So we're taking a hard look at that. If that
starts to change, then I'd be a little more cautious.
Speaker 2 (15:59):
Got it. And so I guess some of these recent
things that have popped up in I guess the past
few weeks months, little cockroaches. I guess that that Jamie
Diamond has said, those you've view as kind of more
as one offs versus like canaries in the coal mine.
Speaker 3 (16:12):
In terms of ask a question again, No, that's a
that's a really good question. I mean, I think Tricolor
and first brands, when you have fraud, I mean those
are few and far between us something that you can't
really detect. You know, fraud is fraud. When you have bankruptcies,
that's something that you can detect. And you know, obviously
you have to do credit work, and credit work is
part of the exercise. You know, it's I don't want
(16:33):
to buy an indexed etf. You know, without knowing what
the underlying credits are, especially if we're that late in
the cycle. The point you made, I want to make
sure I'm doing independent credit research. I feel very good
about the underlying credits, and I want to know what
I own. So I would say that fundamental credit work
is of utmost importance, especially as we get towards the
end of the cycle.
Speaker 1 (16:53):
Other than private credit, which is what everyone wants to
talk about, AI has taken over the discussion and the
amount of money that is being borrowed to fund the
build out, not just on the AI specific but also
the associated infrastructure, the power, the utilities, everything else around it.
It's going to be you know, three trillion dollars of funding.
A lot of that that's going to hit the public markets.
But what does that say to you, Dave? I mean,
(17:14):
you know, you've been around quite a long time. We've
seen these euphoria moments about certain you know, new things
that come along and everyone's borrowing furiously to get in there.
But is that really a great opportunity to think for
credit investors?
Speaker 3 (17:30):
So, you know, I call it one of the one
of the headwinds is the leverage in the tech space.
You know, if you look at on an issuance basis,
it was about two percent about six months ago. That's
grown to ten percent. You've seen the issuance of companies
like Amazon, Medica, I'm sorry, Meta, Oracle, Google, Netflix, and
then you've seen the poster child I'd call it, you know, Oracle,
(17:53):
you know, have negative ratings impact. I think now they're
a mid triple B. We do not believe that it's
realistic to believe in the near term they're going to
go to junk. But they're issuing a lot of debt.
You know, they currently have I think about one hundred
billion of index eligible bonds. We expect this to grow
to somewhere in one hundred and fifty billion dollar range
over the next two to three years. You know, if
(18:13):
it was to fall into the high yield market at
one point five trillion, to be ten percent of the
high yield index, which would be scary. So you know,
we don't think that's going to happen. We're not. We
think would be reckless if they did that. I'm just
making the point that it's massive issuance. I think the
best way to categorize it is is that you have
investment grade companies taking on debt to finance equity like risks.
(18:37):
And I stole that from Howard Marks. That's not my
two cents, but Hard Marks said that, and I think
that's spot on. You want to be cognizant of what
they're doing, what the investment is, and what risk that
it entails. And it is these big, well capitalized companies,
unlike the dot com bubble, which were over levered, you know,
weak companies that were issuing debt before they even put
(19:00):
fiber optic cable in the ground. It came with three
deals and then defaulted. These are much better capitalized companies,
but it is equity like risk that you're financing.
Speaker 1 (19:07):
With that say, Oracle doesn't really want to be junk,
and they have said that they want to defend their
investment grade ratings, but they may not have a choice.
And they are trading. Some of their bonds are trading,
you know, with double b yields at this point, and
the CDs is blown out, so the market is sort
of telling us something else. I'm curious, you know, as
someone who could look at either you know, if that
big capital structure of one hundred billion dollars of debt,
(19:30):
you know, jumps into the high yield market. Is that
posentially more of an opportunity for you.
Speaker 3 (19:35):
So I'd say that during the pandemic, when we saw
two hundred andy four billion of fallen angels, that was
right in our wheelhouse. When you have pension funds that
are insurance companies that are forced to sell because a
company goes from investment grade to blow investment grade and
then it falls into the high yield category. He had
forward with thirty year bonds. I mean, typically you're seeing
(19:56):
five and seven year issues in the high yield market.
Now you have thirty year bullet paper available, they become
some of the best performers occidental craft times as I
had mentioned, you know for Twitter, nor Trum's just mentioned
a few those were great opportunities. Now, Oracle, I never
said they're going to junk. They're a solid, solid, you know,
(20:17):
mid triple B. But you know it's an investment that
we're looking at. You know, we're not going to position
too aggressively. But I just say the current sell off
has this feeling like the risks are starting to be
priced in, so it may be starting to look a
lot more attractive to us. So something that we're falling
very very closely in our investment grades with our investment
grade team.
Speaker 2 (20:36):
Let's go move on to other kind of AI uh,
the more single A double A you know, ones that
are kind of right raising a lot of debt but
also in in in special kind of SPV type form.
So what are some of your thoughts, like, what's the
best way to kind of play that space, right is it?
Is it through the public markets or like you know,
at the company level or at these special entities or
(20:57):
you know, what do you think the best bank for
the buck is?
Speaker 3 (21:01):
I mean, you know, for us, it would be playing
it at the company level. That's just that's just our
our forte. So I would say that looking at the
companies evaluating what they're doing, we haven't jumped in with
both feet. We've sort of been a little hesitant and
wait and see, sort of a wait and see mode.
But we have been reviewing it and we actually just
did an industry review today. So something we're talking about
(21:21):
and we're falling very closely, but haven't jumped in with
both feet as of yet.
Speaker 1 (21:25):
Do you wonder about the rationale for long dated debt?
I mean you talked about equity like dreams for you know,
credit risk. You know, you're funding something for forty years
that could be obsolete in you know, much much less time.
Given the change in technologies and the way you know,
things are rapidly evolving. Would it make Does it make
sense for a credit invested by forty year bonds from
(21:45):
a tech company?
Speaker 3 (21:46):
Absolutely not. I mean unless you're so comfortable that it's
going to be the right investment. Now, I think it's
it's a it's a big risk. That's that's that's that's
probably the biggest risk out there is you know, investing
you know, in debt for something that may go away
in three to four years with forty year maturity. So no,
that's something we're definitely considering, and it's it's one of
(22:07):
the biggest risks out there. So something you have to
evaluate when something seems too good to be true. There's
no free lunch in the bond market. That's why, that's
the why I was that's why I was brought up
in investing. Anything looks too good to be true, it
probably is to be careful. And you know, obviously, you know,
we want to have we want to have diversification, we
want to be safe. If we did it, it would
be you know, smaller investment sizes, we'd be extremely well diversified.
(22:30):
So it's something we're evaluating.
Speaker 1 (22:31):
Does it remind you of anything else you've seen? Was
it like the dot com bubble or the mid mid
two thousand's housing expansion or anything else like that?
Speaker 3 (22:39):
Those were you know, those were definitely things that were
a little crazy. I mean I started in nineteen ninety
for managing money. That was the year of seven rating pieces,
the Mexican pace of evaluation, and the end of the
high yield, the bacle. I remember, I remember getting a
call from Lipper and they told me that you were
ranked number one. I said, but I'm a short term
(23:00):
bond fund that's down one point eight percent, Like you
were number one out of one hundred. You won the
lip Award. I'm like, I'm not sure that's the objective.
It was short term bond fund to be down one
point eight percent. So we've I've lived through a lot
of that. We had nineteen ninety eight, which was the
we had the long term capital. Two thousand and two
was the telecom bubble of the faults. Two thousand and
(23:23):
eight was the long term capital crisis we had, you know,
obviously the downgrade of the US. We had some other
oil concerns China. I've been through a lot. This is
a little different because you have well capitalized, large companies,
but you have a lot of people jumping on the bandwagon.
So I want to just be cautious as we approach it.
And again we're taking everything to do with consideration and
(23:44):
we'll make a decision whether we want to allocate there
or not.
Speaker 2 (23:47):
So if you had to put you know, obviously we're
not in you know, your forecast for twenty twenty six,
would you say it's it's the continuation of the AI
bubble or will it pop or we are not in
a bubble? Do you have any thoughts on that or.
Speaker 3 (24:00):
You know, I just if I look at twenty twenty six,
I think the current backdrop will persist. I mean sort
of the tailwinds we had last year was an accommodative
FED there were cutting rates. We had a good economy,
decent consumer unemployment was low, earnings were good, leverage was
you know, below long term averages. As we had mentioned,
we had positive flows and you know, really strong returns
(24:22):
and fixed income. We talked about some of the headwinds
which tariff's uncertainty, tight spreads, as you guys had mentioned,
some geopolitical uncertainty, and then elevated inflation. We haven't got
to the Fed's target in four years of two percent,
and then some policy uncertainty. If I look at you know,
twenty twenty six, I think that current backdrop persists. You know,
(24:44):
the Fed's easy monetary policy and you know, yeah, they're
going to the rates by cuts will come to an end.
I don't see a recession, still see moderate growth, and
as I had mentioned before, I see you know, sort
of coupon plus type returns as a possibility. You know,
AI is only one of the areas that we're we're
considering for investment and could it, could it correct, absolutely,
(25:07):
Could it go on and run for a few years. Absolutely,
So we'll watch it very very closely. You know, if
I had to look at some of the other headwinds
going forward, we have midterm elections coming up, we still
have geopolitical risks, We still have the Middle East, we
still have Rushia, Ukraine which is now going on to
its fourth year, China, which is the second largest economy
(25:28):
in the world. You have to look at what are
the growth projections for China and you will continue to
grow it five percent. We talked about the leverage in
the tech space, which is definitely a concern. I'm not
saying it's going to blow up next year and not
saying you can't run for a little longer. And then
Fed policy, you know, we have to talk about FED policy.
Not only you know, you know what will they do?
(25:49):
Will they continue to cut rates? But what's the composition
that FED going to look like when Paul's term is
up in May? And you know, and how will the
how will the FED look and you know what will
the what will they do going forward? And then as
you guys well mentioned, we continue to be in a
tight spread environment and are we at the end of
the credit cycle is a big concern. So again, diversification
(26:10):
is very very important defensive posturing being up in quality,
having the ability to buy on dips when you know
the opportunity presents themselves and people start getting emotional about investments,
that's when we typically make our most money.
Speaker 1 (26:23):
One of the defensive trades for this year that everyone
seems to love is banks, certainly the big banks, but
you also, Dave, you mentioned the like regional banks. Since
we have Vinyld here who also covers the banks, I'm
keen to get both your thoughts on those because there
still seems to be too many of them, and they
still seem to have a lot of real estate trouble
and they're exposed to the consumer which isn't doing great.
So why do we like banks?
Speaker 3 (26:45):
Yeah, I would say that, you know, in investment grade,
you know, I think the areas of focus US are
Triple D is number one at seventy five percent of
the investment grade marketplace is triple b's second. Financials is
another area that we focus on, and it would be
the regional banks. The better capitalized regional banks like a
(27:06):
fifth third of citizens a Huntington Bank Corp. Those that
are better capitalized, the g said banks. They all trade cheap,
they all have abundance of issuance. You know, we started
buying those when we had the Silicon Valley debacle and
you got, you know, some very cheap valuations. They're still cheap.
We still like, you know, capital goods. But you talked
about the banking segment. One of the things we're very
(27:28):
cognizant of is is the commercial real estate exposure, especially
hotel and office. A lot of those guys have you know,
twenty to forty percent of their balance sheet and commercial
real estate, as you had mentioned, consumer lower and consumers
starting to feel the bite of you know, higher defaults
and delinquencies, and that's something we have to be very
very cautious on. But for us it's been up, you know,
(27:49):
the higher quality bias, better capitalized. You know, we haven't
really dug down into the some of the questionable regionals,
So I think our bias has been the better well
capitalis regional.
Speaker 2 (28:00):
Banks maybe I G and high yield are tight, but
you know, preferreds could be just right. So that's that's
you know, kind of going down the capital structure of
the banks. Uh and in the US, kind of going
down to the preferred level actually you know, might not
be a bad area kind of given you know, like
you said, the economy looks, you know, decent, right, and
then you know, with deregulation. You know, the thing that
(28:22):
I look at is, you know, with deregulation, yeah, you're
you might lose some of the a little bit of
the equity buffer that you have, but you know, the
debt requirements that that all these big banks have to
do that's actually going down as well. So again, big
banks are big issuers, but you know, hey, there their
issuance needs are going down, so you might see that
(28:43):
pair back a little bit, right, and you know, the
fundamentals look solid, and then potentially the technicals, right, might
be a little bit better next year. And then on
top of that, you contrast that with you know this
all the tech guys, you know, these hyperscalers issuing a
lot of extra debt. And then also you know with
M and A right, I don't think we've touched on
that too much today, but with M and A looking
(29:04):
to pick up right, and that's more of a you know,
non financial thing where where the risk might be, you know,
you might have some spread widening potentially with more M
and A back debt. So you know, we see the
financial space, which I think trades about flat overall to
the Corper Bond Index, but it used to trade about
ten tighter, right and back in twenty twenty one, so hey,
(29:24):
maybe that's that's something. You know, maybe spreads might widen
this year, right, But but on a relative basis, we
view financials as perhaps a little bit.
Speaker 1 (29:34):
Cheap if we're worried about AI and the banks of
funding it, and you know, they're also at the same
time quietly trying to get this risk off their books
and the forms of SRTs and they're doing you know,
CDs and a bunch of other stuff. So they clearly,
you know, they see the risk. How much does that
filter through to the actual bank risk itself.
Speaker 3 (29:52):
I mean, it's something that we're that we're definitely watching
very very closely. And you know, you obviously made some
great points on finance and the banks. You're exactly right.
I mean, the banks used to trade at you know,
at a much tighter spread than the overall index, and
Silicon Valley caused that to revert the other way, especially
the GISIB banks, and that's when we started getting involved,
(30:12):
and we did not only play in the debt, but
we also played in some of the preferreds and the
hybrid preferreds. We subsequently have taken profits there. We also
did that in some of the utility hybrids, which got
very very cheap at the end of last year. But
that's that's what some of the errors that we focus on.
But you're you're exactly right, they're offloading risks they're trying
to get diversified. You know, they they want to be
(30:32):
in the AI game, but they also don't want to
have all that risk on their balance sheets. So again
it's a case by case basis. We'll look at the
underlying bank, we'll look at the fundamentals, and it comes
back to you know, independent credit research.
Speaker 2 (30:43):
James so on the AI kind of risk hedging. Right,
I think you know the bank to look at there
is Morgan Stanley and what they're doing kind of given
right at some articles out on saying that they've taken
the lead on you know, tech AI related issue ince
So if they're looking to you know, kind of offload
risk and you know, I think the thing that helps them.
(31:05):
You know, in the US we have a great capital
market system. It's great that all these guys looking at
issue at are you know, really high grade companies and
then the investors will handle it. But right I think
there's still going to be a portion that you know,
the banks might need to you know, it can come
in loan format, right, so that the banks might have
some risks. So if they're looking to do hearties on
this stuff, yeah, it's saying something right where you know,
(31:26):
again we might have a lot of record issues potentially,
and I corporate bond land, you know how much will
come there versus you know, special vehicles, right, but still
you know some of that might end up on bank
bound sheets. And for them to be looking at hedge,
I think it tells you something that, yeah, you know
we're hearing what multiple trillions right of potentral issuesrillion views.
Speaker 1 (31:46):
But on issuance generally, I mean I have looked at
net issuance being very very low over the last few years,
and that is part of the reason I think why
spreads have been so tight, because there aren't enough bonds
to supply all the demand for that yield bid that
you talked about earlier on. I'm wondering when we go
into next year, when there is expected to be a
significant increase in net supply of issuance, you know, Morgan
(32:07):
Sandy not to keep naming them, but they did say
that there'd be a trillion dollars in net new supply
of IG debt, which we've never seen before. I think
maybe had a big year in twenty twenty, but not
a big year you know, like that for a long time.
So how does the market absorble that debt DAVE without
spreads blowing.
Speaker 3 (32:24):
Out, well, I think number one, it could be painful,
and I think you could see spreads widen. But when
I start looking at us versus some of our you know,
some of the other areas. You know, right now we're
yielding for eighty seven, Europe is yielding three twenty one,
and ages yielding three seventy five. We're still the best
game in town. So I think we'll still be attractive.
If you see spreads widen for us, that's when we
(32:45):
get interested. You know, if we start to get back
to the right now we're at seventy nine, if we
start to get back to the eighties nineties up to
one hundred off, for me, that's a you know, something
I'd look at very very, you know, closely to reallocate
to that sector. So I don't have a problem with
spreads widen. If we see an abundance of issuance, fields
go higher and there's opportunities, and again it will be
(33:07):
obviously a case by case basis.
Speaker 1 (33:10):
And you don't think that's going to be a problem
with demand. Do you think they'll be an ample bid
for all that extra new supply?
Speaker 3 (33:18):
I think you know, this year, I think you had
net supply was actually down from last year because a
lot of it was refinancing of existing debt. I think
if net new supply comes out, we'll have to wait
and see and see if they're still demand for it.
But as it cheapens up, you know, and you get
some decent valuations again, you know, you get five plus
(33:39):
percent on corporate debt. That's when you know pension funds
and insurance companies can meet their liability payments and they
get excited about it. So I think it you know, again,
it depends on the context of the rest of the
market and what happens. But if you start to see
spreads widen here and it becomes a better investment opportunity
and you get overall yields in excess of five percent,
I think that could be very interesting.
Speaker 2 (34:00):
Do you prefer IG or high yield? And then within that,
you know, what are some of your picks and pans
within both of those segments.
Speaker 3 (34:08):
Yeah, I would say that, you know, IG were probably
underweight to what we've been historically, just due to the
fact that securitized has really good value in the IG space.
If I look at you know, some of the other
things we invest in I throughout you know, we talked
about the mortgage market. That's one we had been doing agencies,
and we still like the non agency market. But asset
(34:30):
backed securities you look at tap of the top of
the capital stack from part of the curve, very solid underwriting.
You know, we do stuff there like franchise, franchise least receivables.
If you own a Jersey Mics, a Dunkin Donuts, a Domino's,
you know, Domino's Pizza, Carl Juniors, you make a payment
to the parent for using their name. They turn around
(34:51):
and securitize that and sell it to a guy like me.
Very short paper that deliverges very quickly, and they take
the proceeds and build more properties. Those have been an
absolute home run. Right now, you're getting somewhere in the
upper fours for two year paper double A three type ratings.
We think that that's much more attractive than corporate bonds
in the front end. And another one that's been good.
(35:12):
I told you were a little cautious on hotel and
office building single atset single bar ordeals in the commercial
mortgage market, rule office data centers, industrial warehouses, some trophy
properties like the Bellagio, Willis Toller, some of the sixth
Avenue properties in New York City that are fully occupied.
It's giving you a great return this year, seven point
four percent on you know, things that are very very attractive.
(35:35):
You know, we talked about that maturity wall of one
hundred and ten billion coming due. I used to call
it survive till twenty five. Now it's survived till twenty six,
especially in the office market and the data center market,
where you know the recoveries on some of these properties.
I'm looking at the United Healthcare building out my window.
They had a one hundred and twenty million dollar mortgage
on that building. United Healthcare left and it's sold for
(35:58):
in the twenties. You've got to be very very cautious
of write downs. But being selected with single acid, single barrower,
it's been very very rewarding, especially getting into some of
the office properties that are in high demand. So that's
been supplementing us, and we've been taking some of our
assets out of IG and putting them there. If we
do see that dynamic where IG starts getting a lot
(36:20):
wider and yields get a lot higher, we'll reallocate back
into the IG market high yield. I would just say that,
you know, spreads have moved pretty dramatically. You're up a
little over eight percent. You're up about eight point one
percent this year. You've got a big move. Our bias
there has been you know, number one, you've had very
good flows, supportive technicals, very good fundamentals. Maturity wall has
(36:43):
been pushed out. Earnings are good. As we had talked
about before, leverage is low when you look at long
term historical averages, and we mentioned defaults being below the
historical average. We have a market like exposure here, and
we're a better buyer on depths. Like I said, if
we see a sell off and it's not going to
get to say fifty or eight fifty off, it may
be a sell off that gets you to four hundred.
(37:03):
Right now, we're at two seventy. That's where we start
adding exposure, and it's pretty much diversified. You know, our
focus there is pretty much market like type exposure. So
no one sector we're jumping up and down about just
you know, getting a market like exposure.
Speaker 1 (37:20):
On the asset back security today. I mean, I know
this is nearly a holiday shown and I shouldn't be
so down, but I'm worried about the just massive increase
in supply we're seeing across the board in asset backs,
and then you know the signs of stress we're seeing
in some of the markets xclos some of the equity
checks aren't being paid, for example, do you think that
there's any sign of froth at all in ABS right now?
Speaker 3 (37:43):
When we think whereas froth, we're defensively postured and we're
up in the capital stack, We're not taking a lot
of risk. We're staying in double A, triple A single,
a type paper friend of the curve where there's underwriting
that it's very very solid, and we do our own
analysis and we're comfortable with it. If we start to
think that the market is, you know, there's not as
(38:03):
much paper, not as much issuance, you know, then we'll
express our views by moving down in the capitol structure.
But right now, i'd say up in the capital stack,
not taking a lot of risk, getting you know, quality
exposure of deals that deliver very very quickly, and I
think we're comfortable with our exposure there, so not taking
a lot of risk in that market. I'd say up
in the capital stack and still looks more attractive than
(38:24):
short corporate bonds.
Speaker 1 (38:25):
So if you look around everything, you get to see, Dave,
where's the best relative value right now, let's say for
the next twelve months.
Speaker 3 (38:31):
That's a tough call. I think, you know, we're divers
pretty well diversified, defensively postured. We do have exposure to
leverage finance. But I'd say probably a little blower long
term averages, a little more insecuritized due to the fact
that asset backs through the fact that you mentioned a
lot of issuance have gotten cheap. CMBs have moved quite
(38:53):
a bit this year. They're probably pretty fully valued. One
that we didn't talk about, which I think everybody loves
to talk about and I will buy, is the uni market.
You know, Muni's started the year with heavy, heavy supply.
You had supply overwhelmed demand, so you know, pretty poor performance,
but you had taxable equivalent yields that we haven't seen
(39:15):
going back to the global financial crisis. An investment grade
you're getting six percent on high yield, you're getting nine
and a half percent. That's insane.
Speaker 1 (39:24):
But if you just start to corporates, Dave, is there
anything that think sticks out as a screaming buy right now.
Speaker 3 (39:29):
I'd say in the corporate market, you know, spreads are tight,
you know, nothing there screaming as a buy for us.
I would say that one that we didn't mention is
midstream energy, those with contracted cash flows like gas, gas processing,
and pipelines look somewhat attractive. You know, we talked about
(39:49):
the banks. I would just say that some of the
capital good companies also look attractive, but nothing screaming there
for a buy. Not when spreads are at seventy nine
and the twenty seven year OD heights in seventy three.
Speaker 1 (40:01):
And if you are long credit and you're going into
next year thinking, you know, you're a bit worried, what's
the best hedge for credit exposure.
Speaker 3 (40:08):
I'd say securitized. I mean, that's how we're sort of
hedging our book, going into short, high quality paper that's very,
very liquid, and if we see this location in the
corporate bond market, we can quickly turn that into liquidity
and quickly moving back into the investment grade market.
Speaker 1 (40:24):
Great stuff, Dave Albright, President and CIO at new Fleet
Asset Management, It's been a great pleasure having you on
the credit edge.
Speaker 3 (40:29):
Many thanks, Thank you, guys, thanks for having me.
Speaker 1 (40:32):
And to Arnold Kakuda with Bloomberg Intelligence, thank you very
much for joining us today. Thanks for having me freedom
more analysis. Read all of Ronold's great work on the
Bloomberg Terminal. Bloomberg Intelligence is part of our research department,
with five hundred analysts and strategists working across all markets.
Coverage includes over two thousand equities and credits and outlooks
on more than ninety industries and one hundred market industries, currencies,
and commodities. Please do subscribe to the Credit Edge wherever
(40:55):
you get your podcasts. We're on Apple, Spotify, and all
other good podcast providers, including the Bloomberg Terminal at bpod Go.
Give us a review, tell your friends, or email me
directly at jcrombeight at Bloomberg dot net. I'm James Crombie.
It's been a pleasure having you join us again next
year on the Credit Edge
Host
James Crombie
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