February 20, 2025 • 45 mins
As trade wars intensify, inflation persists and geopolitical risks spread, Pimco is finding value in the debt of large US banks and leisure-sector companies. “There are some really strong spots within lodging, cruise lines and the like,” said Sonali Pier, who focuses on multi-sector credit opportunities and is a senior member of the $2 trillion asset manager’s leveraged finance team. Pimco is meanwhile cautious on retail and autos, especially in Europe, Pier tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Jody Lurie, in the latest Credit Edge podcast. Pier and Lurie also discuss private debt relative value, asset-based finance opportunities and how to navigate creditor conflict when borrowers fall into distress.
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Episode Transcript
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Speaker 1 (00:17):
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumbie. I'm a senior editor at.
Speaker 2 (00:22):
Bloomberg, and I'm Jody Luriy, a senior credit analyst covering
the leisure sector at Bloomberg Intelligence. This week, we're very
pleased to welcome Sinali Pierre, a portfolio manager at PIMCO,
the two trillion dollar asset manager.
Speaker 3 (00:35):
How are you, Sonali doing great?
Speaker 4 (00:37):
Thanks for having me, Jody and James.
Speaker 2 (00:39):
Of course, of course, Sonali is focused on multi sector
credit opportunities. She's the lead portfolio manager for Diversified Income
and a senior member of the Leverage Finance team. Thank
you so much for joining us today, and we're very
excited to get your credit views.
Speaker 1 (00:55):
And Sonati was actually named one of the one hundred
most influential women in Finance by Barons last year and
so recently made some big calls on the finance sector
and bonds in the leisure sector. So we're going to
dig into that today, but before we do, I just
want to set this scene a little bit here. Markets
have been whipsored by trade wars that will probably fuel
inflation and could also dent US growth. Both would be
(01:16):
very bad for credit. Yet corporate bonds and loans remain
priced for perfection. Debt spreads, which we use as a
proxy for risk, are pretty close to where they were
in two thousand and seven, just before the global financial crisis.
If you only looked at metal sorry market pricing, you
would think the world was a very peaceful, calm place
right now, nothing to worry about at all. But the
(01:37):
news headlines would suggest the exact opposite, from radical policy
shifts by the US government to wars in Ukraine and
the Middle East. And I think there's a lot of
complacency out there in markets, but we continue to see
very robust investor demand for corporate bonds and loans and
not a lot of net new supply. This, more than anything,
I think, seems to be keeping valuations quite high. So
(01:58):
let's start there, Sinali, what's your Should we worry more
about all these headlines or do credit markets rightly show
us now that the fundamental risks are actually pretty low.
Speaker 4 (02:07):
You know, I echo some of the things you've said, certainly.
You know, we actually called our last cyclical piece uncertainty
is certain, And the reason we titled it that way
is because there are elevated geopolitical risks, growth is diverging
across markets, and you know what looks like we're a
little bit more in this higher for longer regime with
(02:30):
the FED being patient as they gather information and data
from whether it's the impact of deglobalization, deficit finance, tax cuts. Also,
you know, we're seeing the impact of the DOGE, the
Department of Government efficiency, deportations, deregulations. So there's a lot
out there that's uncertain even in today's policy outlook, and
(02:54):
you know, when you factor all that in, some of
it can lead to a little bit of inflation. Case
is that you know, we will get closer to FED target,
but not quite there. And so you know, when we
look across we do see a lot of uncertainty. But
we think fixed income is in a great position here
in large part because while spreads are tight, the yield
(03:16):
outlook is so strong in that you know, is it's
a good indicator for forward returns, and so even with
a FED that might be pausing in the near term,
the outlook for potential cuts in the back half of
the year could lead to additional capital appreciation for fixed income.
But also we're at a point where yields are higher
(03:37):
than cash, and cash is essentially renting the yield right
because it can change at any point. And when we
look at the equity market, it certainly has had a
very strong run. But at this point, with the starting
level of yield and fixed income, we think it looks
a lot more attractive to be in fixed income than
either the cash market or equities, although both have served
(04:01):
very well previously.
Speaker 2 (04:03):
So, Siddali, I want to touch on the point that
you made about how spreads are tight but yields are attractive,
and we've actually we've heard that comment quite a bit recently. Now,
are you suggesting that all parts of fixed income look
attractive in that sense?
Speaker 3 (04:20):
Are there certain areas in particular?
Speaker 2 (04:22):
Is it okay to reach for yield or is it
okay to sort of go for more modest yield because
the absolute yield is so attractive everywhere.
Speaker 4 (04:30):
That's a great question, you know. I mean, the income
that that starting yield can generate can cushion some spread widening,
and even in the event that we saw rates rise,
so you know, that's why we continue to see inflows
across asset classes. Ig H yield bank loans, et cetera.
But it doesn't mean that all these acid classes will
have similar return profiles, and of course we know their
(04:54):
risk profiles are quite different. From our perspective, we think
that high quality fixed income is attractive and at this point,
while there's opportunity selectively across each of these asset classes.
So in a multisector credit mandate here, you know, we
can look across and really dig into that relative value
not just by acid allocation, but also by regional selection,
(05:16):
industry selection, security selections. So there's a lot of ways
there we can extract those singles and doubles in alpha terms.
But you know, when we look across these acid classes,
you know, the ones that stand out tend to be
the ones that we think can you know, add diversification, resilience,
and yield to the portfolio across a wide number of
(05:37):
economic scenarios. We don't just build our portfolios for that
base case, right because obviously the base case many times
does not you know, transpire, because there's a lot going
on in the world, as we talked about earlier, right
with uncertainty being certain, you know, we need to make
sure that these portfolios can stand the test of time
and be robust.
Speaker 1 (05:55):
On that note, a lot going on in the world tariffs.
You know, that's a lot of uncertainty. There, a lot
of announcements, a lot of you know, lack of real
clarity on what will actually go through. How do you
trade that on fixed income in a fixed incomefolio.
Speaker 3 (06:12):
Yeah, certainly.
Speaker 4 (06:12):
So. You know, the the tariffs can be looked at twofold, right,
they're somewhat leverage to make deals with other countries, so
it could be short lived, but there's also a potential
for you know, bringing jobs back to the US, and
that can lead to more uncertainty because it can take
that's a longer term theme, and so you know, not
only is it the impact of tariffs today, but it's
(06:32):
also the near term impacts versus the medium and longer
term impacts.
Speaker 3 (06:37):
You know.
Speaker 4 (06:37):
The way we look at it is making sure that
the industries we're in are strong and robust such that
they have either of the margin to be able to
pass on those tariffs to the consumer, or you know,
they have some barriers to entry as well such that
that you know, that replacement component is something they can
(06:57):
manage as well. And so we're looking at industries to
invest in. You know, even outside of this tariff situation
we're in today, you know, we are looking for strong
credit fundamentals, so meaning companies that have barriers to entry
pricing power. You know, if you focus on the fundamentals
from the beginning, it actually helps take care of these
types of situations when it becomes more acute, right where,
(07:21):
whether it's inflation or tariffs. And you know, for example,
some of the industries we are concerned about are ones
that we were you know, for example, retail, we were
concerned about it pre tariff situation, given you know, the
impact of online you know, with Amazon going into more
and more products, the you know, the traffic in brick
(07:42):
and mortar stores being not quite at its pre COVID peak,
and there was a lot of reasons to be concerned
about retail to begin with. But then you have, you know,
the add on of tariffs, and that certainly will squeeze margins,
especially for the lower margin, lower quality portions of retail
(08:03):
that are also beholden to consumer tastes and trends. So
you know, the way to navigate it is really to
make sure we're in those stronger companies that have more
consistent free cash flow and that we're avoiding some of
these sectors where there's just not the ability to flex
when things change. So another area we would have some
(08:23):
concern around is autos and a little bit more specifically
even European autos as we look at tarffs certainly causing
some pain there from a trade and tariff perspective.
Speaker 2 (08:35):
And which industries are the ones that you find more
attractive given you know, the margin profile, the cash flow profile,
the sort of areas that aren't of concern for you.
Speaker 4 (08:47):
Yeah, so within investment grating and we do prefer financials,
especially the big six banks. They have gotten into a
position partly due to regulation, but where metrics are very strong.
You know, these are multi national in many cases, we're
looking at the global champions even across the globe, and
you know, because of the fact that they are serial
(09:10):
issuers at times they're trading wide and non financials, although
that spread difference has compressed more recently, but certainly that's
an area where we think is poised to benefit from
potentially being in higher for longer, from overall growth of
the market, so broader GDP growth as well, and potentially
(09:30):
even deregulation. As we look at this administration's policies other areas.
So within you know, high yield, i'd highlight, you know,
lodging and leisure demand has been pretty strong and the
consumer has been quite resilient. Now you know, it's not
the same across all the whole spectrum of consumers. Certainly
we've seen greater strength in the higher end consumer and
(09:55):
maybe even the medium areas, but where the low end
consumer does seem to be in a little bit of
a tighter spot. But that is certainly something that's helping.
You know, we're starting to see some you know, lodging
and leisure companies even or more recently have graduated from
high yield and gone into investment grade, and you know,
I would say there's some poise to continue to that
(10:17):
trend on rising stars, although I think we've seen the
bulk of it.
Speaker 2 (10:21):
And I would say, Sinali that that is music to
my ears when you talk about lodging in leisure within
high yield, because that's certainly something we've been talking about
as well at nauseum, especially given our results to our
US travel survey and a lot of other reports that
we've done of late. So I think I think probably
(10:43):
thinking within that you know, something that was interesting to
me at least, and I don't know if this is
getting a little bit too detailed for you, is theme parks.
You know, they do fit that profile of high barriers
to entry, consistent ish cash flows, but they've definitely struggled,
and they're within leisure. But I mean that's been an
(11:05):
area that I've sort of looked at within my space
and said, you know what, as much as things are
going well for lodging, as much as things are going
well for other parts of leisure such as cruise lines,
theme parks still seem not on great footing.
Speaker 3 (11:19):
What would you say to something like that.
Speaker 2 (11:20):
I don't know if that's getting a little too specific
for you or if it's something that you're thinking about.
Speaker 4 (11:26):
Absolutely, you know, normalization has been more variable with theme
parks and ski resorts and movie theaters too. Right relative
to the theme I'm talking about where we've seen more
robust demand, those are areas where it's been more variable,
and certainly in the movie theaters area lagging. So you know,
while we talk about lodging and leisure as an area
(11:47):
where overall we're constructive, there's always selection that's super important
here within the industry, than within the capital structure as well. Right,
So while we've seen the lodging industry actually evolve, right,
it's now characterized almost by act light fee based models,
where you know, we are seeing higher margins, less volatility,
(12:08):
and stronger free cash flow generation. As you highlight, that's
not what we're seeing everywhere. And so this is where
it becomes very important not just to be selective within
an industry by which company we're going to buy which
part of the capital structure, and then of course you
know what the covenants are as well, because what a
company looks like today it may very well not be
what it looks like when it's in a more difficult situation.
(12:32):
And so you know, we're looking with our analysts to
stress test many of these companies, look at the downside
protection but also the upside convexity, and when we build
a portfolio, we pull that all together to make sure
we're aware of, you know, what the correlations are, what
the downside risk is, and how we're going to actually
see catalyst to the upside and perform with spread tightening.
(12:53):
So I would agree with you that it's not uniform
across lodging and leisure but there are some really strong
spots within lodging, cruise lines and the like, but.
Speaker 1 (13:04):
The sector as a whole, it must be getting squeezed
at some point. I mean, you know, we've had years
of this sort of excess spending from the post COVID
bending accumulation. We've had, you know, now a lot more
pressure on earnings inflation. You know, my eggs are costing
me ten dollars a dozen. And the first thing I'm
going to cut when I'm under pressure is all of
this sort of discretionary I mean, I'm not going on
(13:25):
a cruise, I'm not going to go to the theme
park because I'm just getting crushed on all sides.
Speaker 3 (13:29):
So how come?
Speaker 1 (13:30):
And also I'd add that the leisure sector, retail, you know,
these sorts of companies have had such a great run
in credit over the last few years. How can that
rally be sustained?
Speaker 4 (13:40):
Yeah, I do think that. You know, as we said,
spreads have gotten tighter, so there's not a ton of
additional spread tightening. But there is also the potential to
either consolidate or to you know, we haven't talked about
the M and A theme yet, but there's also the
possibility of spread tightening by moving at a classes right
as we talked about earlier, with high high yield to
(14:02):
investment grade, and then of course creative financing as well,
which we haven't touched on just yet. But I think overall, yes,
you know, the consumer has performed better than expectations, and
that's been supported by low unemployment, positive real wage growth,
and in particular among middle income consumers. So yes, you know,
certainly the lower end consumer is more vulnerable, and these
(14:25):
are some discretionary areas where they can cut, but if
you look at forward bookings, it still looks strong. If
we look at you know, the delinquency rate, the rate
of delinquency increases, they have been accelerating, so you know,
this is certainly we're at a point where when spreads
are tight, where we really need to take out that
(14:45):
fine tooth comb and make sure that we're looking through
not just which companies will benefit if the trend continues,
but also you know, where is their resilience within their
profile to pivot if demand starts to come down, and
and also you know, so that pricing coming back, and
then also you know, being flexible and adjusting their their
(15:11):
capital structure, their pricing and the like.
Speaker 2 (15:14):
So Sanala, you you did leave a breadcrumb there for
M and A as a discussion. And I think we've
seen across the board that everyone's expecting a quote unquote
dynamite ear for M and A, just given the administration,
given everything. But at the same time, we started off
this podcast talking about uncertainty with all the different policies,
(15:36):
and so M and A hasn't really bubbled up at
least yet as as we've expected. What are you thinking
when you when you think about uncertainty and when you
think about M and A and marrying the two together.
We I mean, we did see Hyatt with the playa deal, right,
but we're not seeing that giant deluge that that we've expected.
(15:59):
So what point does it sort of shift from uncertainty
and each day's a different story to yes, M and
A is back.
Speaker 4 (16:08):
Yeah. I think part of the reason it's been a
little bit slower than initially maybe forecasted for twenty twenty
five is because we're in what looks like higher for
longer than initially forecasted going into twenty twenty five, right,
and certainly depth financing is not going to come down
maybe in the cost quite as quickly. But I still
(16:31):
think that there's room for more additional MNA here and
that has to do with whether it's you know, it's
supported by the needs in also some of these sectors.
So you know, the expectation of M and A being
high in consumer and TMT, you know, as we look
at the build out for you know, the technology AI,
(16:53):
if we think about the US exceptionalism point as well,
and then also of course with an administration where de
regulation seems to be a theme. So I think, you know,
also sponsors are at a point where they need to
increasingly look for ways to monetize their positions as well.
So whether that's you know, bolt on acquisitions perhaps you know,
(17:15):
in an early stage rather than a large scale M
and A. But I still think this theme is here
with US for twenty twenty five, and it's now going
to be maybe more of a question of you know,
the portion that maybe was considered for debt financing, maybe
there's a component that's also equity financed. But you know, overall,
I think credit markets are certainly looking for additional new
(17:37):
supply and with M and A to be one of
those drivers to bring that.
Speaker 1 (17:42):
So is that the opportunity then in terms of deal making,
is it more like it rebalances the market because it
seems very out of balance in terms of supply versus demand,
or is there an opportunity to play the you know
that the the acquisition targets and try and get the
change of control prem from that.
Speaker 4 (18:01):
I think that those are good. Those are two good points, right.
One is that the demand for credit generally is very strong,
and you know, in another area, you can see that
the demand is very strong, not just from the you know,
weekly inflows in public markets, but also there's you know,
in excess of four hundred billion of capital that's been
raised in private credit markets that has not yet been deployed,
(18:23):
and given its in locked up vehicles, you need to
earn the fee, you need to deploy the capital, right,
So that that's one thing that's definitely helping buoy markets
overall in terms of tight spreads. But in terms of
you know, the way we look at these things is
certainly we want to be able to identify the catalyst,
meaning the companies that are likely to be bought, you know,
and that's what you know, our investors are certainly counting
(18:47):
on us, not just from a you know, building portfolios
that are robust, as we mentioned that across a wide
number of scenarios, but also selecting those that companies that
will be beneficiaries of themes and and this cat list
so certainly in high yield. Given the average dollar price
and given the step rate increase that we saw over
(19:08):
twenty twenty two in parts of twenty twenty three, the
you know, one to one change of control can be
really meaningful today, and so we're certainly looking at, you know,
which are the acquisition targets potentially, you know, where what's
the dollar price that that curve trades and is there
a bond in particular that we think we can get
the biggest bang for our buck by being long and
(19:32):
then potential acquisition happens and you get that one on
one change of control.
Speaker 1 (19:36):
Which sector is you mostly looking at in that context?
Speaker 3 (19:40):
Yeah?
Speaker 4 (19:40):
I think in that context, you know, we will see
some M and A in consumer and TMT and building materials,
and so those are some areas in particular where we
think are poised for M and A.
Speaker 2 (19:51):
And then I think, you know, thinking along those lines,
and only when we think about something like retail, where
we did see quite a bit of M and A
that sort of fell flat, right, that was significant credit
risks and then ended.
Speaker 3 (20:04):
Up just dwindling.
Speaker 2 (20:07):
How are you managing through those risks and how are
you kind of thinking I mean, obviously, retail is one
of the ones you don't like. Financials obviously is one
that you do, and that could actually benefit a lot
of financial institutions, right in terms of fees and what
have you. But where are you sort of thinking that, Okay,
this is a good area to look at, or are
you just being very credit by credit specific and very
(20:29):
picking picky and choosy in terms of what you're thinking
about in the context of M A.
Speaker 4 (20:34):
Yeah, certainly all M and A is not good for
all credits, right, so you know we are being selective
by you know, by industry, by region, by the specific company,
et cetera. But you know, so we're still deploying. You know,
we're not going to deploy just because we think something
(20:54):
is an M and A target if it's not a
sound credit on its own as well, right, because there's
always a scenario to let a company go into bankruptcy
and then buy assets or buy the company then, right,
So you know, first and foremost credit selection is based
on you know the strength of credit and where it's going.
But you know, we also are looking at many times
(21:16):
the standalone first and then deciding, you know, what are
the possible outcomes. So that's just one probable outcome when
we look at it. You know, we're not banking on
and then announced Emina necessarily actually closing, right, So all
of this has to kind of be brought to bear
in a scenario analysis.
Speaker 2 (21:34):
So thinking more broadly, when when we're thinking globally, I
mean where geographically are you looking both for credit as
well as other asset classes and are there certain asset
classes that you find interesting? I know you said that
European autos are a no go for you guys at
the moment or not something that you like retail as well,
what are you what are you leaning towards, What regions
(21:56):
are you leaning towards? And what asset classes are you
leaning towards?
Speaker 4 (21:59):
Yes, so you know, we still do prefer developed markets
over emerging markets overall, you know, and even honing into
developed markets while most are heading towards you know, there
are central bank targets for inflation.
Speaker 3 (22:13):
Obviously we may.
Speaker 4 (22:14):
Still see a rate hike from the Bank of Japan.
So you know, within developed markets, we do think the
US exceptionalism still has some time and that theme meaning
we do prefer the US over Europe, not just due
to that, but also around the impact of tariffs. You know,
many of these tariffs, while we don't know how long
(22:34):
they will last, can certainly hinder growth in many of
these areas, including the US potentially but more likely to
be more painful for whether it's Canada, Mexico, Europe. And
so you know, we've been really looking at the credit,
its quality, the relative value. You know, when we look
at relative value, we get really granular, making sure we're
(22:55):
leaving no stone unturned.
Speaker 1 (22:57):
On the covenant side, there have been a lot more
aggressive credits are on credits to situations, perhaps arising from
people not looking at the covenants close enough. But how
much of that is becoming part of your investment decision?
I mean, do you have to get a lawyer into
every every time you make a decision nowadays?
Speaker 4 (23:14):
You know, I mean, covenants have been loose for quite
a long time. So you know, creditor is basically with
this amount of demand. You know, many bondholders have whether
they did it explicitly or implicitly have agreed to loose docs.
Speaker 3 (23:29):
You know.
Speaker 4 (23:30):
Certainly our analysts are looking through these docks with the
PM team as well and making sure we're aware of
where there's downside potential or where you know, you may
need to see amendment activity for example. You know, but
certainly this live mobility management exercise being called an exercise
is a euphemism of its own right. This is essentially
(23:51):
creditor on creditor of violence taking out like a knife fight,
you know. But it's really important to us and to
make sure that we are well resources to protect our
clients interests. So you know, we've added a lot of
resourcing in our alts areas, in our opportunistic credit areas,
in our distressed areas, really just to make sure that
we can advocate very effectively on behalf of our clients,
(24:14):
whether we're going into an lem's type situation, a co
op agreement, you know. And importantly, what might seem like
a short term solution is often still not a long
term solution. So meaning seventy five percent of the default
in the bank loan market in twenty twenty four were
from lems, and historically forty percent of them Lems end
up still defaulting within three years. Right, So while it's
(24:37):
important to advocate and ensure outcomes here, we're also looking
to ensure long term outcomes are robust as well.
Speaker 3 (24:45):
Right.
Speaker 4 (24:46):
You don't want to put good money after bad money
just to say, you know, you were in the in
group right on a co op, So you know, this
is certainly something we're looking at and have added a
lot of resources and have had a lot of resources too,
but it's certainly something where being at a larger, well
resourced firm is helpful, and you know, making sure that
(25:08):
we are reading the docks as we do in advance
of any of these situations. It really makes sure that
we are in a better situation before the rubber heads
the road.
Speaker 1 (25:18):
But surely it only gets worse from here. I mean,
we've had one guest described it as just capitalism at
work and it's a natural, you know, just what's going
to happen, and so I'm kind of you know what
stops it, and really it's just spreading and it seems
to be going into all markets at this point.
Speaker 4 (25:32):
Well, I think that's an important part, right to keep perspective,
which is, you know, less than five percent of the
high yield and banklal markets are quote unquote distressed, right
if you use the typical one thousand plus spread, and
with that, you know about if you look at that portion,
about a third tends to defall on a given year.
So we're talking about a very small portion of the market,
(25:55):
but certainly yes this you know, if we allowed loose docks,
you know, these are all possibilities. This is why it
becomes really important to pick. You know, when we're selecting companies,
we're not looking at you know, we're making sure we're
picking the right industry and the right company with its
flexibility meaning having that how it's so important to make
(26:18):
sure that the company is sound rather than you know,
the covenants are a sound you don't need to test
those covenants if you're in a strong company to begin with, right,
And so that's where it becomes the trade off of
really trying to forecast ahead what's likely to be the
possibilities when you look at that sensitivity analysis, because you
know today it's often when you get the new issue,
(26:40):
you know, you're not looking at a company that's going
to struggle, But when you start to map out possible outcomes,
that's when it gets difficult, and so it's important that
you know the company being in a better company with
tight covenants than being in a poor company with loose covenants.
That's where it's going to get difficult.
Speaker 2 (26:59):
Keeping along that line of distressed and defaults, default rates
are on historic level, relatively low at the moment, but
we are starting to see signs of some companies potentially
going into what you would call Chapter twenty two, meaning
their second round of Chapter eleven, or possibly some sort
(27:20):
of restructuring type situation.
Speaker 3 (27:22):
Given where we are.
Speaker 2 (27:24):
With the credit markets, with the credit cycle, I mean,
do you expect default rates still still stay low or
or is that sort of the other end of the
coin when you're talking about what's going on from an
uncertain global economic environment.
Speaker 4 (27:38):
Yeah, you know, when we look out, the default rate
is still forecasted to be relatively low. Right, if you
look at the twelve month trailing par weighted high yield
default rate has been just one point thirty nine percent,
so we're below even the long term average. So certainly
it can tick up from this low level. But when
you look out, one of the triggers often for default
(27:59):
is in near term maturity. These companies have been really
quick to refinance. In fact, eighty percent of the bank
loan market last year was eighty percent that supply was refinancings.
So you know, when you look out at the near
term twenty twenty five, twenty twenty six maturities, it's not
a wall, and certainly it's manageable, and you know, we
(28:19):
may even see more repricings this year for what's left
that you know, there's between that, and it comes back
to the actual credits and the quality of the credits
because the portion that's distressed, the fact that there's not
a lot of near term maturities, you know, that paints
a pretty strong outlook for credit from a fundamental perspective.
(28:40):
And then you know, when we look at without that
near term maturity and there's still a robust open capital
markets outlook, it certainly is something that can be managed.
Now that you know, if we're talking about triple cs
and sort of the wrong industries right where there's been
some pain, whether it's cable media, retail, you know, there
(29:01):
certainly will still be defaults. It's just that you know,
we're also seeing many companies go down the LME route,
which you know is effectively still taking a haircut on
your capital, but you know, not an official call it
Chapter eleven.
Speaker 2 (29:15):
Do you also think that perhaps given the robustness of
the private credit market, that that's providing an alternative avenue
for some of these companies to go in terms of financing,
but also just needing additional sources of capital or is
that just a separate, complete issue.
Speaker 4 (29:34):
Definitely, you know, the fact that there's capital that's eager
to be deployed certainly means that they're looking for deals
right and of the things that are not getting done
in the highal market. And part of the reason the
hile market is actually improved in quality over the last decade,
meaning there's more double B than there has been i
call it ten years ago in HYLD and that's even
(29:56):
after two hundred and fifty billion of rising stars across
twenty twenty in twenty twenty three. Has a lot to
do with It's not just organic growth that's improved these companies,
it's also that you know, essentially private credit has helped
do the laundry of high yield right where if we
look at the for example, even the bank loan market,
which has deteriorated in quality over the last decade, as
(30:17):
companies saw the flexibility to refinance at any time at
par is quite attractive right when when rates are high
and at the time earlier spreads were high, that ability
to just reprice is really helpful versus you know, in
the high yeal market having a non call three period
a par plus half the coupon as the first call price,
(30:38):
you know, where so it's time prohibitive and cost prohibitive
and high yield. So certainly, you know, having this dry
capital in private markets has helped. In fact, if you
look at the just you know, over twenty twenty four
of the deals that went from the broadly syndicated loan
market to private credit, you know, fifty six percent of
those were single B minus, twenty seven percent were triple
(31:00):
C plus. So yes, in twenty twenty three we did
see we are seeing this fungibility across high yield bank
loans and private credit where you know, essentially many times
we're providing dual track financing to an issuer where wherever
they want, you know, we'll show them terms of this
is the price and the covees and the structure. We
want to see if it's a public deal and this
(31:21):
is what it looks like if it's a private deal,
because we do have many strategies that can go across
these areas, and we want to make sure just we're
getting compensated for giving up that liquidity and we're getting
compensated for the different structure if we are. We're pretty
agnostic which way the company wants to go, but it's
really important that you know, we realize that what it
(31:43):
means when you have a lot of capital that's in
a locked up vehicle that can't go away tomorrow, right
like the technicals in the public markets, those could go
way tomorrow, that's not an investing strategy. Whereas here, you know,
that can certainly lead to sort of the stage we're
in right now, where spreads are tight and it can
last a bit longer than me be initially anticipated by
public markets private markets.
Speaker 1 (32:04):
There that's all people want to talk about right right now,
and about the massive growth and about the potential for
forty trillion dollars of investible assets out there. But when
you look at it across you know, public and private,
and I know it's hard to compare apples to apples
because they really, you know, they're very different. But what
kind of relative value, are you saying, and are you
able to sort of quantify it maybe by IG and
(32:25):
high yield.
Speaker 4 (32:26):
Yeah, certainly so, I mean in IG you know, maney
of these private credit deals, whether you want to call
them reverse inquiries in the old school way or private placements,
but you know, many of them are due to companies
looking for a more unique structure, having some complexity involved
as well. And you know there are certainly market participants
(32:46):
that can give afford to give up that liquidity and
look for that additional spread. You know, this isn't something
new to him. Go We've been doing reverse inquiry type deals,
working with issuers, with our eighty plus research analysts, really
looking to essentially craft the bonds we want to buy
on behalf of our clients. When we look at it
versus say the leve fin area, you know, here it's
(33:09):
a bit more nuanced, certainly because you are you know,
adding leverage in many of these cases, or you know,
have seeking control and the like. So it becomes even
less apples to apples, you know when we talk about it.
But nonetheless, you know, I think the important part is
that we're when we make that trade off between public
(33:30):
to private market that we're getting compensated for the liquidity,
the opportunity cost, the alpha that we can generate. You know,
seventy percent of fixing come managers can generate positive alpha,
and I'd hope to say that it's even better at PIMCO.
But also the credit quality difference. Right, So if we're
getting compensated for all of those things, we're pretty agnostic
(33:50):
between which market a issuer wants to come in, as
we do have strategies that can do either. But if
we're not getting compensated, then we say to right now.
In particular, public fixed income is attractive because it also
leads you the flexibility to later go into a more
leverage heavy whether that's you know, the lower quality parts
of bank loans, high yield or private credit when we
(34:13):
think the compensation is more considerable.
Speaker 1 (34:16):
But right now, how much more compensation are you getting
on a let's say an IG private versus a public,
say high yield And is it enough?
Speaker 3 (34:23):
Yeah?
Speaker 4 (34:24):
So for IG deals, you know, we're seeing anywhere between
thirty to fifty bases point pickup, and I would say
it's case by case the is ited enough? Right, because
it's a question of the complexity and structure as well,
and so similarly, you know, when we look even in
lower quality, you know, we that's why I say it's
like it becomes less of an apples to apples. You know,
certainly there are heuristics of how much may be more
(34:45):
spread you'd want to get, but it's really a question
of you know, also, is this in an industry that
you may want need to exit or want to exit
over a secular period, right because you know, again, if
you're underwriting in with strong standards, good docs, and in
industries where you know we would want to be in
for the long term, that's a very different story than
(35:07):
if you need to change your mind and you know
where where you kind of can't in those in that
asset class. You know, I would actually also turn us
to asset based finance, which you know we think is
quite attractive. You know, you're getting that investment grade type
credit quality and you're getting more compensation for you know,
the complexity and and it's an area where we think
(35:30):
a PIMPCO we've got some edge given our significant footprint
in securitized credit and you know also relationships as well.
Speaker 2 (35:41):
So you talked about acid beefs financing as an area
to go into. Are there certain sectors, Are there certain
areas that you find most attractive.
Speaker 4 (35:48):
Yeah, well, you know, we do find acid based lending
quite attractive, you know for us, I would say it's
also not something new given you know, over the last
fifteen years we've deployed close to two hundred billion in
private ass based credit. What we're looking to do here is,
you know, we're seeing quite attractive investment grade opportunities with
(36:10):
a bigger spread pickup than say direct lending in IG
so the four A two market and so you know,
with that you're getting the better documentation and you know,
essentially a bigger spread pickup, and it's an area where
we know quite well. So this is something we've found
quite attractive and have also deployed additional resourcing here as well.
(36:33):
In terms of, you know, what we're looking at, I
would say the opportunity set is pretty broad, but fun financings,
consumer and non consumer related credit.
Speaker 1 (36:43):
Given the tight spreads that we've talked about, I mean,
there's very little room for error. There's very little potential
compensation for credit risk as it is, and there are
so many things that could potentially go wrong. You know
that the trade wars we started talking about at the beginning,
and all the other stuff that's going on in the
policy side could end up hitting growth. It could hit earnings.
You know, we might get declining earnings and declining growth
(37:03):
and still very high inflation, you know, taculation potentially, which
would be pretty bad for credit. And yet none of
this seems to be priced in. So is there a
way to hedge any of those views if you take
a take a I mean other than the CDX, which
I guess everyone is saying is very very cheap at
the moment, Is there is there something you can do
to hedge?
Speaker 4 (37:20):
So actually, you know, this is where I think our
portfolio construction is so important, right, which is rather than
looking for those hedges and looking for ways to reduce risk,
you know, we'd rather reduce the risk that we're concerned about,
and so when in doing so, you know, many times
we're actually have sold protection to those who are looking
for the quick way out of the risk and looking
(37:42):
at the relative value between cash and derivative markets and
making that decision based on the relative value. But in
terms of you know, how do we shore up the portfolio?
You know, we're looking for ways to build resilience and
that downside protection. And so one thing, for example, is
adding some securitized credit to our multi sector mandates. It's
also looking at, you know, within high yield for example,
(38:03):
thirty five percent of that market is now secured, so
maybe looking up at a secured bond versus an unsecured holding,
depending on the relative value. It's also looking at, you know,
certainly the credit selection. But when we even go into
other ways of building that resilience, you know, is you know,
really being aware of correlated risks and the like. And
(38:24):
so while spreads are tight, it's super important to be
invested right now because of how high the yields are,
and in order to wait for that quote unquote backup
that may come in credit markets, the not being invested
at that time unless you can say precisely when that
backup will be, it's very difficult to forego the income
(38:46):
that that fixed income can produce. So I would say,
you know, instead, it's important to look at the portfolio
very granularly and maybe reduce some of the cyclicals versus
non cyclicals and kind of be invested and be ready
and poised with that flexibility and liquidity to go further
on offense. If we were to see a backup when you.
Speaker 1 (39:08):
Look around everything that you get to see, Sonali, what
would you put your finger on in terms of the
best relative value for let's say the next twelve to
eighteen months.
Speaker 4 (39:16):
Yeah, I think you know at this point, because there
isn't a singular beta that's miss priced or attractive within
corporate credit markets. It's really building that resilience in right.
So if I think about, you know, where the portfolio
has alpha potential over the next year, you know it's
in that. It's in the fact that, yes, the selection
(39:38):
is part of it, but the dispersion is also a
part of it. And then being in areas where we
can benefit from, you know, the flexibility. So for example,
having a derivative position for us means that we have
cash backing that. So when others say there's outflows broadly
in the market and people need to sell to be
able to return cash to their investors, that's a time
(40:02):
where we're sitting on cash, we can quickly unwind the
derivatives and actually step in and be a buyer of bonds,
essentially becoming the price maker, right. And so that's why
that portfolio construction becomes really important, and you know, it
is so important because we don't know when we may
see a backup in spreads. But what we do know
(40:23):
is that for now, it looks like the market's in
a pretty strong place from a broad macro picture growth picture,
and you know, there's always that potential for us to
see a hiccup given how tight spreads are. So if
we built that flexibility into the construction, we can kind
of perform across both scenarios.
Speaker 1 (40:44):
So there's nothing that really looks cheap right now, corporate bonds, loans,
structure of finance, mortgages, anything like that.
Speaker 4 (40:50):
Yeah, So I would say the things that we think
are attractive outright right now is certainly the asset based
lending looks attractive for the quality of the risk versus
the spreads we can get, so that looks attractive. Other
areas that look attractive agency mortgages. You know, if we
look at the spread there, it's almost similar to like
single a corporate and you're picking up an implicit government
(41:11):
guarantee as well as liquidity, So that looks attractive. Parts
of the non agency market certainly look attractive versus some
areas of corporate credit and then within corporate credit, I
think it's more nuanced at this point, given how much
spreads have compressed, and so there I would say it's
more about the right industry, the right covenant package, et cetera,
(41:35):
in terms of the selection, and so that that becomes
very human capital intensive.
Speaker 1 (41:39):
So you sound quite positive, You sound quite optimistic, although
whenever I look at the news, I struggle to feel
the same way. Why should I be optimistic?
Speaker 4 (41:47):
Why? Why?
Speaker 1 (41:48):
You know, what's the opportunity to the optimistic take? And
is there anything at all you worry about?
Speaker 4 (41:54):
So certainly we worry about a lot of things as
fixed income investors, whether it's geopolitics, whether it's you know,
the path for monetary policy, or the lot you know,
how difficult it maybe to get additional fiscal policy, that
change in administration's policies and their impacts. So there's a
lot to worry about. That said, today's outlook for fixed
income in particular is very strong.
Speaker 3 (42:17):
Right.
Speaker 4 (42:18):
We haven't seen this rate reset up to this type
of level in a long time, and so it's really
providing a real opportunity from a historical perspective as well.
And then while spreads are tight, admittedly you know, when
we look at the fundamentals of these companies, we look
at the macro outlook for growth. You know, there's a
scenario where we can stay in this type of environment
(42:39):
for longer than say, the historical spread would suggest. Right,
And so as a result, we need to be invested,
and we need to look for ways in which we
can make sure our portfolios are flexible and liquid and
able to move where when the time comes. But for now,
we want to make sure that we are outperforming by
(42:59):
ways of you know, with discipline such that you know,
when those days come that you're worried about, you know,
we can move on offense and really you know, move
into some of these more economically sensitive areas that will
have repriced.
Speaker 1 (43:13):
But you already do expect spreads to say this type
for let's say the rest of the year.
Speaker 4 (43:18):
We will certainly see volatility as headlines move, as rates move,
as you know, policy implication implications are digested. It's just that,
as I mentioned earlier, you know, at this level of yield,
if you get a twenty five bit spread widening, you
can absorb that and still see positive potential returns on
an absolute basis. Right, So it's much more a question
(43:39):
of timing magnitude, and from here the forecast doesn't appear
to be for a significant correction, although that's always possible,
and so we'll make sure that we can still weather
that as well.
Speaker 1 (43:51):
Do you see anything that might shake the demand for
credit though it it just seems relentless and constantly.
Speaker 3 (43:56):
Growing, you know.
Speaker 4 (43:58):
I I think if I guess areas where you know
we could come up short, would be whether it's geopolitical
risk out there, whether it's you know, M and A
not materializing and therefore it's you know, you're chasing into
newer tights you know, in the market, or just an
upset in the overall macro outlook. Certainly, if growth were
(44:20):
in question, that would certainly lead to some discomfort in
the economically sensitive areas that are very levered. So there's
certainly a scenario for spread widening and or a big
potential for spread widening. It's just a question of the
probabilities we assigned to each of these scenarios.
Speaker 1 (44:38):
Great stuff, Sinili Pierre, portfolio manager at PIMCO. It's been
a pleasure having you on the credit edge many thanks,
thanks so much, and of course we're very grateful to
Jody Lewi from Bloomberg Intelligence. Thanks for joining us today, Jody,
of course James.
Speaker 3 (44:48):
As always, for.
Speaker 1 (44:49):
More Credit Analysis, read all of Jody Lewie's great work
on the Bloomberg terminal. Bloomberg Intelligence is part of our
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(45:10):
Spotify and all other good podcast providers. Give us a review,
tell your friends, or email me directly at jcrombieight at
Bloomberg dot net. I'm James Crombie. It's been a pleasure
having you join us again next week on the Credit
Edge
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crumbie. I'm a senior editor at.
Speaker 2 (00:22):
Bloomberg, and I'm Jody Luriy, a senior credit analyst covering
the leisure sector at Bloomberg Intelligence. This week, we're very
pleased to welcome Sinali Pierre, a portfolio manager at PIMCO,
the two trillion dollar asset manager.
Speaker 3 (00:35):
How are you, Sonali doing great?
Speaker 4 (00:37):
Thanks for having me, Jody and James.
Speaker 2 (00:39):
Of course, of course, Sonali is focused on multi sector
credit opportunities. She's the lead portfolio manager for Diversified Income
and a senior member of the Leverage Finance team. Thank
you so much for joining us today, and we're very
excited to get your credit views.
Speaker 1 (00:55):
And Sonati was actually named one of the one hundred
most influential women in Finance by Barons last year and
so recently made some big calls on the finance sector
and bonds in the leisure sector. So we're going to
dig into that today, but before we do, I just
want to set this scene a little bit here. Markets
have been whipsored by trade wars that will probably fuel
inflation and could also dent US growth. Both would be
(01:16):
very bad for credit. Yet corporate bonds and loans remain
priced for perfection. Debt spreads, which we use as a
proxy for risk, are pretty close to where they were
in two thousand and seven, just before the global financial crisis.
If you only looked at metal sorry market pricing, you
would think the world was a very peaceful, calm place
right now, nothing to worry about at all. But the
(01:37):
news headlines would suggest the exact opposite, from radical policy
shifts by the US government to wars in Ukraine and
the Middle East. And I think there's a lot of
complacency out there in markets, but we continue to see
very robust investor demand for corporate bonds and loans and
not a lot of net new supply. This, more than anything,
I think, seems to be keeping valuations quite high. So
(01:58):
let's start there, Sinali, what's your Should we worry more
about all these headlines or do credit markets rightly show
us now that the fundamental risks are actually pretty low.
Speaker 4 (02:07):
You know, I echo some of the things you've said, certainly.
You know, we actually called our last cyclical piece uncertainty
is certain, And the reason we titled it that way
is because there are elevated geopolitical risks, growth is diverging
across markets, and you know what looks like we're a
little bit more in this higher for longer regime with
(02:30):
the FED being patient as they gather information and data
from whether it's the impact of deglobalization, deficit finance, tax cuts. Also,
you know, we're seeing the impact of the DOGE, the
Department of Government efficiency, deportations, deregulations. So there's a lot
out there that's uncertain even in today's policy outlook, and
(02:54):
you know, when you factor all that in, some of
it can lead to a little bit of inflation. Case
is that you know, we will get closer to FED target,
but not quite there. And so you know, when we
look across we do see a lot of uncertainty. But
we think fixed income is in a great position here
in large part because while spreads are tight, the yield
(03:16):
outlook is so strong in that you know, is it's
a good indicator for forward returns, and so even with
a FED that might be pausing in the near term,
the outlook for potential cuts in the back half of
the year could lead to additional capital appreciation for fixed income.
But also we're at a point where yields are higher
(03:37):
than cash, and cash is essentially renting the yield right
because it can change at any point. And when we
look at the equity market, it certainly has had a
very strong run. But at this point, with the starting
level of yield and fixed income, we think it looks
a lot more attractive to be in fixed income than
either the cash market or equities, although both have served
(04:01):
very well previously.
Speaker 2 (04:03):
So, Siddali, I want to touch on the point that
you made about how spreads are tight but yields are attractive,
and we've actually we've heard that comment quite a bit recently. Now,
are you suggesting that all parts of fixed income look
attractive in that sense?
Speaker 3 (04:20):
Are there certain areas in particular?
Speaker 2 (04:22):
Is it okay to reach for yield or is it
okay to sort of go for more modest yield because
the absolute yield is so attractive everywhere.
Speaker 4 (04:30):
That's a great question, you know. I mean, the income
that that starting yield can generate can cushion some spread widening,
and even in the event that we saw rates rise,
so you know, that's why we continue to see inflows
across asset classes. Ig H yield bank loans, et cetera.
But it doesn't mean that all these acid classes will
have similar return profiles, and of course we know their
(04:54):
risk profiles are quite different. From our perspective, we think
that high quality fixed income is attractive and at this point,
while there's opportunity selectively across each of these asset classes.
So in a multisector credit mandate here, you know, we
can look across and really dig into that relative value
not just by acid allocation, but also by regional selection,
(05:16):
industry selection, security selections. So there's a lot of ways
there we can extract those singles and doubles in alpha terms.
But you know, when we look across these acid classes,
you know, the ones that stand out tend to be
the ones that we think can you know, add diversification, resilience,
and yield to the portfolio across a wide number of
(05:37):
economic scenarios. We don't just build our portfolios for that
base case, right because obviously the base case many times
does not you know, transpire, because there's a lot going
on in the world, as we talked about earlier, right
with uncertainty being certain, you know, we need to make
sure that these portfolios can stand the test of time
and be robust.
Speaker 1 (05:55):
On that note, a lot going on in the world tariffs.
You know, that's a lot of uncertainty. There, a lot
of announcements, a lot of you know, lack of real
clarity on what will actually go through. How do you
trade that on fixed income in a fixed incomefolio.
Speaker 3 (06:12):
Yeah, certainly.
Speaker 4 (06:12):
So. You know, the the tariffs can be looked at twofold, right,
they're somewhat leverage to make deals with other countries, so
it could be short lived, but there's also a potential
for you know, bringing jobs back to the US, and
that can lead to more uncertainty because it can take
that's a longer term theme, and so you know, not
only is it the impact of tariffs today, but it's
(06:32):
also the near term impacts versus the medium and longer
term impacts.
Speaker 3 (06:37):
You know.
Speaker 4 (06:37):
The way we look at it is making sure that
the industries we're in are strong and robust such that
they have either of the margin to be able to
pass on those tariffs to the consumer, or you know,
they have some barriers to entry as well such that
that you know, that replacement component is something they can
(06:57):
manage as well. And so we're looking at industries to
invest in. You know, even outside of this tariff situation
we're in today, you know, we are looking for strong
credit fundamentals, so meaning companies that have barriers to entry
pricing power. You know, if you focus on the fundamentals
from the beginning, it actually helps take care of these
types of situations when it becomes more acute, right where,
(07:21):
whether it's inflation or tariffs. And you know, for example,
some of the industries we are concerned about are ones
that we were you know, for example, retail, we were
concerned about it pre tariff situation, given you know, the
impact of online you know, with Amazon going into more
and more products, the you know, the traffic in brick
(07:42):
and mortar stores being not quite at its pre COVID peak,
and there was a lot of reasons to be concerned
about retail to begin with. But then you have, you know,
the add on of tariffs, and that certainly will squeeze margins,
especially for the lower margin, lower quality portions of retail
(08:03):
that are also beholden to consumer tastes and trends. So
you know, the way to navigate it is really to
make sure we're in those stronger companies that have more
consistent free cash flow and that we're avoiding some of
these sectors where there's just not the ability to flex
when things change. So another area we would have some
(08:23):
concern around is autos and a little bit more specifically
even European autos as we look at tarffs certainly causing
some pain there from a trade and tariff perspective.
Speaker 2 (08:35):
And which industries are the ones that you find more
attractive given you know, the margin profile, the cash flow profile,
the sort of areas that aren't of concern for you.
Speaker 4 (08:47):
Yeah, so within investment grating and we do prefer financials,
especially the big six banks. They have gotten into a
position partly due to regulation, but where metrics are very strong.
You know, these are multi national in many cases, we're
looking at the global champions even across the globe, and
you know, because of the fact that they are serial
(09:10):
issuers at times they're trading wide and non financials, although
that spread difference has compressed more recently, but certainly that's
an area where we think is poised to benefit from
potentially being in higher for longer, from overall growth of
the market, so broader GDP growth as well, and potentially
(09:30):
even deregulation. As we look at this administration's policies other areas.
So within you know, high yield, i'd highlight, you know,
lodging and leisure demand has been pretty strong and the
consumer has been quite resilient. Now you know, it's not
the same across all the whole spectrum of consumers. Certainly
we've seen greater strength in the higher end consumer and
(09:55):
maybe even the medium areas, but where the low end
consumer does seem to be in a little bit of
a tighter spot. But that is certainly something that's helping.
You know, we're starting to see some you know, lodging
and leisure companies even or more recently have graduated from
high yield and gone into investment grade, and you know,
I would say there's some poise to continue to that
(10:17):
trend on rising stars, although I think we've seen the
bulk of it.
Speaker 2 (10:21):
And I would say, Sinali that that is music to
my ears when you talk about lodging in leisure within
high yield, because that's certainly something we've been talking about
as well at nauseum, especially given our results to our
US travel survey and a lot of other reports that
we've done of late. So I think I think probably
(10:43):
thinking within that you know, something that was interesting to
me at least, and I don't know if this is
getting a little bit too detailed for you, is theme parks.
You know, they do fit that profile of high barriers
to entry, consistent ish cash flows, but they've definitely struggled,
and they're within leisure. But I mean that's been an
(11:05):
area that I've sort of looked at within my space
and said, you know what, as much as things are
going well for lodging, as much as things are going
well for other parts of leisure such as cruise lines,
theme parks still seem not on great footing.
Speaker 3 (11:19):
What would you say to something like that.
Speaker 2 (11:20):
I don't know if that's getting a little too specific
for you or if it's something that you're thinking about.
Speaker 4 (11:26):
Absolutely, you know, normalization has been more variable with theme
parks and ski resorts and movie theaters too. Right relative
to the theme I'm talking about where we've seen more
robust demand, those are areas where it's been more variable,
and certainly in the movie theaters area lagging. So you know,
while we talk about lodging and leisure as an area
(11:47):
where overall we're constructive, there's always selection that's super important
here within the industry, than within the capital structure as well. Right,
So while we've seen the lodging industry actually evolve, right,
it's now characterized almost by act light fee based models,
where you know, we are seeing higher margins, less volatility,
(12:08):
and stronger free cash flow generation. As you highlight, that's
not what we're seeing everywhere. And so this is where
it becomes very important not just to be selective within
an industry by which company we're going to buy which
part of the capital structure, and then of course you
know what the covenants are as well, because what a
company looks like today it may very well not be
what it looks like when it's in a more difficult situation.
(12:32):
And so you know, we're looking with our analysts to
stress test many of these companies, look at the downside
protection but also the upside convexity, and when we build
a portfolio, we pull that all together to make sure
we're aware of, you know, what the correlations are, what
the downside risk is, and how we're going to actually
see catalyst to the upside and perform with spread tightening.
(12:53):
So I would agree with you that it's not uniform
across lodging and leisure but there are some really strong
spots within lodging, cruise lines and the like, but.
Speaker 1 (13:04):
The sector as a whole, it must be getting squeezed
at some point. I mean, you know, we've had years
of this sort of excess spending from the post COVID
bending accumulation. We've had, you know, now a lot more
pressure on earnings inflation. You know, my eggs are costing
me ten dollars a dozen. And the first thing I'm
going to cut when I'm under pressure is all of
this sort of discretionary I mean, I'm not going on
(13:25):
a cruise, I'm not going to go to the theme
park because I'm just getting crushed on all sides.
Speaker 3 (13:29):
So how come?
Speaker 1 (13:30):
And also I'd add that the leisure sector, retail, you know,
these sorts of companies have had such a great run
in credit over the last few years. How can that
rally be sustained?
Speaker 4 (13:40):
Yeah, I do think that. You know, as we said,
spreads have gotten tighter, so there's not a ton of
additional spread tightening. But there is also the potential to
either consolidate or to you know, we haven't talked about
the M and A theme yet, but there's also the
possibility of spread tightening by moving at a classes right
as we talked about earlier, with high high yield to
(14:02):
investment grade, and then of course creative financing as well,
which we haven't touched on just yet. But I think overall, yes,
you know, the consumer has performed better than expectations, and
that's been supported by low unemployment, positive real wage growth,
and in particular among middle income consumers. So yes, you know,
certainly the lower end consumer is more vulnerable, and these
(14:25):
are some discretionary areas where they can cut, but if
you look at forward bookings, it still looks strong. If
we look at you know, the delinquency rate, the rate
of delinquency increases, they have been accelerating, so you know,
this is certainly we're at a point where when spreads
are tight, where we really need to take out that
(14:45):
fine tooth comb and make sure that we're looking through
not just which companies will benefit if the trend continues,
but also you know, where is their resilience within their
profile to pivot if demand starts to come down, and
and also you know, so that pricing coming back, and
then also you know, being flexible and adjusting their their
(15:11):
capital structure, their pricing and the like.
Speaker 2 (15:14):
So Sanala, you you did leave a breadcrumb there for
M and A as a discussion. And I think we've
seen across the board that everyone's expecting a quote unquote
dynamite ear for M and A, just given the administration,
given everything. But at the same time, we started off
this podcast talking about uncertainty with all the different policies,
(15:36):
and so M and A hasn't really bubbled up at
least yet as as we've expected. What are you thinking
when you when you think about uncertainty and when you
think about M and A and marrying the two together.
We I mean, we did see Hyatt with the playa deal, right,
but we're not seeing that giant deluge that that we've expected.
(15:59):
So what point does it sort of shift from uncertainty
and each day's a different story to yes, M and
A is back.
Speaker 4 (16:08):
Yeah. I think part of the reason it's been a
little bit slower than initially maybe forecasted for twenty twenty
five is because we're in what looks like higher for
longer than initially forecasted going into twenty twenty five, right,
and certainly depth financing is not going to come down
maybe in the cost quite as quickly. But I still
(16:31):
think that there's room for more additional MNA here and
that has to do with whether it's you know, it's
supported by the needs in also some of these sectors.
So you know, the expectation of M and A being
high in consumer and TMT, you know, as we look
at the build out for you know, the technology AI,
(16:53):
if we think about the US exceptionalism point as well,
and then also of course with an administration where de
regulation seems to be a theme. So I think, you know,
also sponsors are at a point where they need to
increasingly look for ways to monetize their positions as well.
So whether that's you know, bolt on acquisitions perhaps you know,
(17:15):
in an early stage rather than a large scale M
and A. But I still think this theme is here
with US for twenty twenty five, and it's now going
to be maybe more of a question of you know,
the portion that maybe was considered for debt financing, maybe
there's a component that's also equity financed. But you know, overall,
I think credit markets are certainly looking for additional new
(17:37):
supply and with M and A to be one of
those drivers to bring that.
Speaker 1 (17:42):
So is that the opportunity then in terms of deal making,
is it more like it rebalances the market because it
seems very out of balance in terms of supply versus demand,
or is there an opportunity to play the you know
that the the acquisition targets and try and get the
change of control prem from that.
Speaker 4 (18:01):
I think that those are good. Those are two good points, right.
One is that the demand for credit generally is very strong,
and you know, in another area, you can see that
the demand is very strong, not just from the you know,
weekly inflows in public markets, but also there's you know,
in excess of four hundred billion of capital that's been
raised in private credit markets that has not yet been deployed,
(18:23):
and given its in locked up vehicles, you need to
earn the fee, you need to deploy the capital, right,
So that that's one thing that's definitely helping buoy markets
overall in terms of tight spreads. But in terms of
you know, the way we look at these things is
certainly we want to be able to identify the catalyst,
meaning the companies that are likely to be bought, you know,
and that's what you know, our investors are certainly counting
(18:47):
on us, not just from a you know, building portfolios
that are robust, as we mentioned that across a wide
number of scenarios, but also selecting those that companies that
will be beneficiaries of themes and and this cat list
so certainly in high yield. Given the average dollar price
and given the step rate increase that we saw over
(19:08):
twenty twenty two in parts of twenty twenty three, the
you know, one to one change of control can be
really meaningful today, and so we're certainly looking at, you know,
which are the acquisition targets potentially, you know, where what's
the dollar price that that curve trades and is there
a bond in particular that we think we can get
the biggest bang for our buck by being long and
(19:32):
then potential acquisition happens and you get that one on
one change of control.
Speaker 1 (19:36):
Which sector is you mostly looking at in that context?
Speaker 3 (19:40):
Yeah?
Speaker 4 (19:40):
I think in that context, you know, we will see
some M and A in consumer and TMT and building materials,
and so those are some areas in particular where we
think are poised for M and A.
Speaker 2 (19:51):
And then I think, you know, thinking along those lines,
and only when we think about something like retail, where
we did see quite a bit of M and A
that sort of fell flat, right, that was significant credit
risks and then ended.
Speaker 3 (20:04):
Up just dwindling.
Speaker 2 (20:07):
How are you managing through those risks and how are
you kind of thinking I mean, obviously, retail is one
of the ones you don't like. Financials obviously is one
that you do, and that could actually benefit a lot
of financial institutions, right in terms of fees and what
have you. But where are you sort of thinking that, Okay,
this is a good area to look at, or are
you just being very credit by credit specific and very
(20:29):
picking picky and choosy in terms of what you're thinking
about in the context of M A.
Speaker 4 (20:34):
Yeah, certainly all M and A is not good for
all credits, right, so you know we are being selective
by you know, by industry, by region, by the specific company,
et cetera. But you know, so we're still deploying. You know,
we're not going to deploy just because we think something
(20:54):
is an M and A target if it's not a
sound credit on its own as well, right, because there's
always a scenario to let a company go into bankruptcy
and then buy assets or buy the company then, right,
So you know, first and foremost credit selection is based
on you know the strength of credit and where it's going.
But you know, we also are looking at many times
(21:16):
the standalone first and then deciding, you know, what are
the possible outcomes. So that's just one probable outcome when
we look at it. You know, we're not banking on
and then announced Emina necessarily actually closing, right, So all
of this has to kind of be brought to bear
in a scenario analysis.
Speaker 2 (21:34):
So thinking more broadly, when when we're thinking globally, I
mean where geographically are you looking both for credit as
well as other asset classes and are there certain asset
classes that you find interesting? I know you said that
European autos are a no go for you guys at
the moment or not something that you like retail as well,
what are you what are you leaning towards, What regions
(21:56):
are you leaning towards? And what asset classes are you
leaning towards?
Speaker 4 (21:59):
Yes, so you know, we still do prefer developed markets
over emerging markets overall, you know, and even honing into
developed markets while most are heading towards you know, there
are central bank targets for inflation.
Speaker 3 (22:13):
Obviously we may.
Speaker 4 (22:14):
Still see a rate hike from the Bank of Japan.
So you know, within developed markets, we do think the
US exceptionalism still has some time and that theme meaning
we do prefer the US over Europe, not just due
to that, but also around the impact of tariffs. You know,
many of these tariffs, while we don't know how long
(22:34):
they will last, can certainly hinder growth in many of
these areas, including the US potentially but more likely to
be more painful for whether it's Canada, Mexico, Europe. And
so you know, we've been really looking at the credit,
its quality, the relative value. You know, when we look
at relative value, we get really granular, making sure we're
(22:55):
leaving no stone unturned.
Speaker 1 (22:57):
On the covenant side, there have been a lot more
aggressive credits are on credits to situations, perhaps arising from
people not looking at the covenants close enough. But how
much of that is becoming part of your investment decision?
I mean, do you have to get a lawyer into
every every time you make a decision nowadays?
Speaker 4 (23:14):
You know, I mean, covenants have been loose for quite
a long time. So you know, creditor is basically with
this amount of demand. You know, many bondholders have whether
they did it explicitly or implicitly have agreed to loose docs.
Speaker 3 (23:29):
You know.
Speaker 4 (23:30):
Certainly our analysts are looking through these docks with the
PM team as well and making sure we're aware of
where there's downside potential or where you know, you may
need to see amendment activity for example. You know, but
certainly this live mobility management exercise being called an exercise
is a euphemism of its own right. This is essentially
(23:51):
creditor on creditor of violence taking out like a knife fight,
you know. But it's really important to us and to
make sure that we are well resources to protect our
clients interests. So you know, we've added a lot of
resourcing in our alts areas, in our opportunistic credit areas,
in our distressed areas, really just to make sure that
we can advocate very effectively on behalf of our clients,
(24:14):
whether we're going into an lem's type situation, a co
op agreement, you know. And importantly, what might seem like
a short term solution is often still not a long
term solution. So meaning seventy five percent of the default
in the bank loan market in twenty twenty four were
from lems, and historically forty percent of them Lems end
up still defaulting within three years. Right, So while it's
(24:37):
important to advocate and ensure outcomes here, we're also looking
to ensure long term outcomes are robust as well.
Speaker 3 (24:45):
Right.
Speaker 4 (24:46):
You don't want to put good money after bad money
just to say, you know, you were in the in
group right on a co op, So you know, this
is certainly something we're looking at and have added a
lot of resources and have had a lot of resources too,
but it's certainly something where being at a larger, well
resourced firm is helpful, and you know, making sure that
(25:08):
we are reading the docks as we do in advance
of any of these situations. It really makes sure that
we are in a better situation before the rubber heads
the road.
Speaker 1 (25:18):
But surely it only gets worse from here. I mean,
we've had one guest described it as just capitalism at
work and it's a natural, you know, just what's going
to happen, and so I'm kind of you know what
stops it, and really it's just spreading and it seems
to be going into all markets at this point.
Speaker 4 (25:32):
Well, I think that's an important part, right to keep perspective,
which is, you know, less than five percent of the
high yield and banklal markets are quote unquote distressed, right
if you use the typical one thousand plus spread, and
with that, you know about if you look at that portion,
about a third tends to defall on a given year.
So we're talking about a very small portion of the market,
(25:55):
but certainly yes this you know, if we allowed loose docks,
you know, these are all possibilities. This is why it
becomes really important to pick. You know, when we're selecting companies,
we're not looking at you know, we're making sure we're
picking the right industry and the right company with its
flexibility meaning having that how it's so important to make
(26:18):
sure that the company is sound rather than you know,
the covenants are a sound you don't need to test
those covenants if you're in a strong company to begin with, right,
And so that's where it becomes the trade off of
really trying to forecast ahead what's likely to be the
possibilities when you look at that sensitivity analysis, because you
know today it's often when you get the new issue,
(26:40):
you know, you're not looking at a company that's going
to struggle, But when you start to map out possible outcomes,
that's when it gets difficult, and so it's important that
you know the company being in a better company with
tight covenants than being in a poor company with loose covenants.
That's where it's going to get difficult.
Speaker 2 (26:59):
Keeping along that line of distressed and defaults, default rates
are on historic level, relatively low at the moment, but
we are starting to see signs of some companies potentially
going into what you would call Chapter twenty two, meaning
their second round of Chapter eleven, or possibly some sort
(27:20):
of restructuring type situation.
Speaker 3 (27:22):
Given where we are.
Speaker 2 (27:24):
With the credit markets, with the credit cycle, I mean,
do you expect default rates still still stay low or
or is that sort of the other end of the
coin when you're talking about what's going on from an
uncertain global economic environment.
Speaker 4 (27:38):
Yeah, you know, when we look out, the default rate
is still forecasted to be relatively low. Right, if you
look at the twelve month trailing par weighted high yield
default rate has been just one point thirty nine percent,
so we're below even the long term average. So certainly
it can tick up from this low level. But when
you look out, one of the triggers often for default
(27:59):
is in near term maturity. These companies have been really
quick to refinance. In fact, eighty percent of the bank
loan market last year was eighty percent that supply was refinancings.
So you know, when you look out at the near
term twenty twenty five, twenty twenty six maturities, it's not
a wall, and certainly it's manageable, and you know, we
(28:19):
may even see more repricings this year for what's left
that you know, there's between that, and it comes back
to the actual credits and the quality of the credits
because the portion that's distressed, the fact that there's not
a lot of near term maturities, you know, that paints
a pretty strong outlook for credit from a fundamental perspective.
(28:40):
And then you know, when we look at without that
near term maturity and there's still a robust open capital
markets outlook, it certainly is something that can be managed.
Now that you know, if we're talking about triple cs
and sort of the wrong industries right where there's been
some pain, whether it's cable media, retail, you know, there
(29:01):
certainly will still be defaults. It's just that you know,
we're also seeing many companies go down the LME route,
which you know is effectively still taking a haircut on
your capital, but you know, not an official call it
Chapter eleven.
Speaker 2 (29:15):
Do you also think that perhaps given the robustness of
the private credit market, that that's providing an alternative avenue
for some of these companies to go in terms of financing,
but also just needing additional sources of capital or is
that just a separate, complete issue.
Speaker 4 (29:34):
Definitely, you know, the fact that there's capital that's eager
to be deployed certainly means that they're looking for deals
right and of the things that are not getting done
in the highal market. And part of the reason the
hile market is actually improved in quality over the last decade,
meaning there's more double B than there has been i
call it ten years ago in HYLD and that's even
(29:56):
after two hundred and fifty billion of rising stars across
twenty twenty in twenty twenty three. Has a lot to
do with It's not just organic growth that's improved these companies,
it's also that you know, essentially private credit has helped
do the laundry of high yield right where if we
look at the for example, even the bank loan market,
which has deteriorated in quality over the last decade, as
(30:17):
companies saw the flexibility to refinance at any time at
par is quite attractive right when when rates are high
and at the time earlier spreads were high, that ability
to just reprice is really helpful versus you know, in
the high yeal market having a non call three period
a par plus half the coupon as the first call price,
(30:38):
you know, where so it's time prohibitive and cost prohibitive
and high yield. So certainly, you know, having this dry
capital in private markets has helped. In fact, if you
look at the just you know, over twenty twenty four
of the deals that went from the broadly syndicated loan
market to private credit, you know, fifty six percent of
those were single B minus, twenty seven percent were triple
(31:00):
C plus. So yes, in twenty twenty three we did
see we are seeing this fungibility across high yield bank
loans and private credit where you know, essentially many times
we're providing dual track financing to an issuer where wherever
they want, you know, we'll show them terms of this
is the price and the covees and the structure. We
want to see if it's a public deal and this
(31:21):
is what it looks like if it's a private deal,
because we do have many strategies that can go across
these areas, and we want to make sure just we're
getting compensated for giving up that liquidity and we're getting
compensated for the different structure if we are. We're pretty
agnostic which way the company wants to go, but it's
really important that you know, we realize that what it
(31:43):
means when you have a lot of capital that's in
a locked up vehicle that can't go away tomorrow, right
like the technicals in the public markets, those could go
way tomorrow, that's not an investing strategy. Whereas here, you know,
that can certainly lead to sort of the stage we're
in right now, where spreads are tight and it can
last a bit longer than me be initially anticipated by
public markets private markets.
Speaker 1 (32:04):
There that's all people want to talk about right right now,
and about the massive growth and about the potential for
forty trillion dollars of investible assets out there. But when
you look at it across you know, public and private,
and I know it's hard to compare apples to apples
because they really, you know, they're very different. But what
kind of relative value, are you saying, and are you
able to sort of quantify it maybe by IG and
(32:25):
high yield.
Speaker 4 (32:26):
Yeah, certainly so, I mean in IG you know, maney
of these private credit deals, whether you want to call
them reverse inquiries in the old school way or private placements,
but you know, many of them are due to companies
looking for a more unique structure, having some complexity involved
as well. And you know there are certainly market participants
(32:46):
that can give afford to give up that liquidity and
look for that additional spread. You know, this isn't something
new to him. Go We've been doing reverse inquiry type deals,
working with issuers, with our eighty plus research analysts, really
looking to essentially craft the bonds we want to buy
on behalf of our clients. When we look at it
versus say the leve fin area, you know, here it's
(33:09):
a bit more nuanced, certainly because you are you know,
adding leverage in many of these cases, or you know,
have seeking control and the like. So it becomes even
less apples to apples, you know when we talk about it.
But nonetheless, you know, I think the important part is
that we're when we make that trade off between public
(33:30):
to private market that we're getting compensated for the liquidity,
the opportunity cost, the alpha that we can generate. You know,
seventy percent of fixing come managers can generate positive alpha,
and I'd hope to say that it's even better at PIMCO.
But also the credit quality difference. Right, So if we're
getting compensated for all of those things, we're pretty agnostic
(33:50):
between which market a issuer wants to come in, as
we do have strategies that can do either. But if
we're not getting compensated, then we say to right now.
In particular, public fixed income is attractive because it also
leads you the flexibility to later go into a more
leverage heavy whether that's you know, the lower quality parts
of bank loans, high yield or private credit when we
(34:13):
think the compensation is more considerable.
Speaker 1 (34:16):
But right now, how much more compensation are you getting
on a let's say an IG private versus a public,
say high yield And is it enough?
Speaker 3 (34:23):
Yeah?
Speaker 4 (34:24):
So for IG deals, you know, we're seeing anywhere between
thirty to fifty bases point pickup, and I would say
it's case by case the is ited enough? Right, because
it's a question of the complexity and structure as well,
and so similarly, you know, when we look even in
lower quality, you know, we that's why I say it's
like it becomes less of an apples to apples. You know,
certainly there are heuristics of how much may be more
(34:45):
spread you'd want to get, but it's really a question
of you know, also, is this in an industry that
you may want need to exit or want to exit
over a secular period, right because you know, again, if
you're underwriting in with strong standards, good docs, and in
industries where you know we would want to be in
for the long term, that's a very different story than
(35:07):
if you need to change your mind and you know
where where you kind of can't in those in that
asset class. You know, I would actually also turn us
to asset based finance, which you know we think is
quite attractive. You know, you're getting that investment grade type
credit quality and you're getting more compensation for you know,
the complexity and and it's an area where we think
(35:30):
a PIMPCO we've got some edge given our significant footprint
in securitized credit and you know also relationships as well.
Speaker 2 (35:41):
So you talked about acid beefs financing as an area
to go into. Are there certain sectors, Are there certain
areas that you find most attractive.
Speaker 4 (35:48):
Yeah, well, you know, we do find acid based lending
quite attractive, you know for us, I would say it's
also not something new given you know, over the last
fifteen years we've deployed close to two hundred billion in
private ass based credit. What we're looking to do here is,
you know, we're seeing quite attractive investment grade opportunities with
(36:10):
a bigger spread pickup than say direct lending in IG
so the four A two market and so you know,
with that you're getting the better documentation and you know,
essentially a bigger spread pickup, and it's an area where
we know quite well. So this is something we've found
quite attractive and have also deployed additional resourcing here as well.
(36:33):
In terms of, you know, what we're looking at, I
would say the opportunity set is pretty broad, but fun financings,
consumer and non consumer related credit.
Speaker 1 (36:43):
Given the tight spreads that we've talked about, I mean,
there's very little room for error. There's very little potential
compensation for credit risk as it is, and there are
so many things that could potentially go wrong. You know
that the trade wars we started talking about at the beginning,
and all the other stuff that's going on in the
policy side could end up hitting growth. It could hit earnings.
You know, we might get declining earnings and declining growth
(37:03):
and still very high inflation, you know, taculation potentially, which
would be pretty bad for credit. And yet none of
this seems to be priced in. So is there a
way to hedge any of those views if you take
a take a I mean other than the CDX, which
I guess everyone is saying is very very cheap at
the moment, Is there is there something you can do
to hedge?
Speaker 4 (37:20):
So actually, you know, this is where I think our
portfolio construction is so important, right, which is rather than
looking for those hedges and looking for ways to reduce risk,
you know, we'd rather reduce the risk that we're concerned about,
and so when in doing so, you know, many times
we're actually have sold protection to those who are looking
for the quick way out of the risk and looking
(37:42):
at the relative value between cash and derivative markets and
making that decision based on the relative value. But in
terms of you know, how do we shore up the portfolio?
You know, we're looking for ways to build resilience and
that downside protection. And so one thing, for example, is
adding some securitized credit to our multi sector mandates. It's
also looking at, you know, within high yield for example,
(38:03):
thirty five percent of that market is now secured, so
maybe looking up at a secured bond versus an unsecured holding,
depending on the relative value. It's also looking at, you know,
certainly the credit selection. But when we even go into
other ways of building that resilience, you know, is you know,
really being aware of correlated risks and the like. And
(38:24):
so while spreads are tight, it's super important to be
invested right now because of how high the yields are,
and in order to wait for that quote unquote backup
that may come in credit markets, the not being invested
at that time unless you can say precisely when that
backup will be, it's very difficult to forego the income
(38:46):
that that fixed income can produce. So I would say,
you know, instead, it's important to look at the portfolio
very granularly and maybe reduce some of the cyclicals versus
non cyclicals and kind of be invested and be ready
and poised with that flexibility and liquidity to go further
on offense. If we were to see a backup when you.
Speaker 1 (39:08):
Look around everything that you get to see, Sonali, what
would you put your finger on in terms of the
best relative value for let's say the next twelve to
eighteen months.
Speaker 4 (39:16):
Yeah, I think you know at this point, because there
isn't a singular beta that's miss priced or attractive within
corporate credit markets. It's really building that resilience in right.
So if I think about, you know, where the portfolio
has alpha potential over the next year, you know it's
in that. It's in the fact that, yes, the selection
(39:38):
is part of it, but the dispersion is also a
part of it. And then being in areas where we
can benefit from, you know, the flexibility. So for example,
having a derivative position for us means that we have
cash backing that. So when others say there's outflows broadly
in the market and people need to sell to be
able to return cash to their investors, that's a time
(40:02):
where we're sitting on cash, we can quickly unwind the
derivatives and actually step in and be a buyer of bonds,
essentially becoming the price maker, right. And so that's why
that portfolio construction becomes really important, and you know, it
is so important because we don't know when we may
see a backup in spreads. But what we do know
(40:23):
is that for now, it looks like the market's in
a pretty strong place from a broad macro picture growth picture,
and you know, there's always that potential for us to
see a hiccup given how tight spreads are. So if
we built that flexibility into the construction, we can kind
of perform across both scenarios.
Speaker 1 (40:44):
So there's nothing that really looks cheap right now, corporate bonds, loans,
structure of finance, mortgages, anything like that.
Speaker 4 (40:50):
Yeah, So I would say the things that we think
are attractive outright right now is certainly the asset based
lending looks attractive for the quality of the risk versus
the spreads we can get, so that looks attractive. Other
areas that look attractive agency mortgages. You know, if we
look at the spread there, it's almost similar to like
single a corporate and you're picking up an implicit government
(41:11):
guarantee as well as liquidity, So that looks attractive. Parts
of the non agency market certainly look attractive versus some
areas of corporate credit and then within corporate credit, I
think it's more nuanced at this point, given how much
spreads have compressed, and so there I would say it's
more about the right industry, the right covenant package, et cetera,
(41:35):
in terms of the selection, and so that that becomes
very human capital intensive.
Speaker 1 (41:39):
So you sound quite positive, You sound quite optimistic, although
whenever I look at the news, I struggle to feel
the same way. Why should I be optimistic?
Speaker 4 (41:47):
Why? Why?
Speaker 1 (41:48):
You know, what's the opportunity to the optimistic take? And
is there anything at all you worry about?
Speaker 4 (41:54):
So certainly we worry about a lot of things as
fixed income investors, whether it's geopolitics, whether it's you know,
the path for monetary policy, or the lot you know,
how difficult it maybe to get additional fiscal policy, that
change in administration's policies and their impacts. So there's a
lot to worry about. That said, today's outlook for fixed
income in particular is very strong.
Speaker 3 (42:17):
Right.
Speaker 4 (42:18):
We haven't seen this rate reset up to this type
of level in a long time, and so it's really
providing a real opportunity from a historical perspective as well.
And then while spreads are tight, admittedly you know, when
we look at the fundamentals of these companies, we look
at the macro outlook for growth. You know, there's a
scenario where we can stay in this type of environment
(42:39):
for longer than say, the historical spread would suggest. Right,
And so as a result, we need to be invested,
and we need to look for ways in which we
can make sure our portfolios are flexible and liquid and
able to move where when the time comes. But for now,
we want to make sure that we are outperforming by
(42:59):
ways of you know, with discipline such that you know,
when those days come that you're worried about, you know,
we can move on offense and really you know, move
into some of these more economically sensitive areas that will
have repriced.
Speaker 1 (43:13):
But you already do expect spreads to say this type
for let's say the rest of the year.
Speaker 4 (43:18):
We will certainly see volatility as headlines move, as rates move,
as you know, policy implication implications are digested. It's just that,
as I mentioned earlier, you know, at this level of yield,
if you get a twenty five bit spread widening, you
can absorb that and still see positive potential returns on
an absolute basis. Right, So it's much more a question
(43:39):
of timing magnitude, and from here the forecast doesn't appear
to be for a significant correction, although that's always possible,
and so we'll make sure that we can still weather
that as well.
Speaker 1 (43:51):
Do you see anything that might shake the demand for
credit though it it just seems relentless and constantly.
Speaker 3 (43:56):
Growing, you know.
Speaker 4 (43:58):
I I think if I guess areas where you know
we could come up short, would be whether it's geopolitical
risk out there, whether it's you know, M and A
not materializing and therefore it's you know, you're chasing into
newer tights you know, in the market, or just an
upset in the overall macro outlook. Certainly, if growth were
(44:20):
in question, that would certainly lead to some discomfort in
the economically sensitive areas that are very levered. So there's
certainly a scenario for spread widening and or a big
potential for spread widening. It's just a question of the
probabilities we assigned to each of these scenarios.
Speaker 1 (44:38):
Great stuff, Sinili Pierre, portfolio manager at PIMCO. It's been
a pleasure having you on the credit edge many thanks,
thanks so much, and of course we're very grateful to
Jody Lewi from Bloomberg Intelligence. Thanks for joining us today, Jody,
of course James.
Speaker 3 (44:48):
As always, for.
Speaker 1 (44:49):
More Credit Analysis, read all of Jody Lewie'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 to thousand equities and credits
and outlooks on more than ninety industries and one hundred
market industries, currencies and commodities. Please do subscribe to the
Credit Edge wherever you get your podcasts. We're on Apple,
(45:10):
Spotify and all other good podcast providers. Give us a review,
tell your friends, or email me directly at jcrombieight at
Bloomberg dot net. I'm James Crombie. It's been a pleasure
having you join us again next week on the Credit
Edge
Host
James Crombie
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