November 20, 2025 • 48 mins
Vanguard Group, the world’s second-largest money manager, is wary of junk bonds given how expensive they’ve become. “Where the market is today doesn’t leave a lot of room for negative surprises,” Michael Chang, head of high-yield corporate credit at the $11 trillion asset manager, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Matthew Geudtner in the latest Credit Edge podcast. “Spreads are pretty tight, yields are about average — it’s not the best time to be investing in high yield,” Chang says. They also discuss Vanguard’s preference for debt from utilities and consumer staples companies, how to get extra yield from leveraged loans and how to profit from liability-management exercises.
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Episode Transcript
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Speaker 1 (00:18):
Hello, Welcome to Credit Edge, a weekly markets podcast. My
name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I am at Wyner. I'm a credit analyst here
with Bloomberg Intelligence. This week, we're very pleased to welcome
Michael Chang, head of High Yield Corporate Credit at Vanguard,
the eleven trillion dollar money manager. Yes, I said, T
not b.
Speaker 3 (00:34):
How are you, Michael, I'm doing well good.
Speaker 2 (00:37):
Mike's been with Vanguard for close to a decade, with
stops at Goldman Winchester, Capitol, and Pimco along the way,
and he's the fund manager for Vanguard's bond funds, with
the largest fund with assets under manager being the High
Yield Corporate Fund, which you can actually find on terminal
under the ticker v w e h X. So with that,
do you want to kick us off here, James.
Speaker 1 (00:55):
Yeah, We've got loads of questions for you, Michael, but
first I just wanted to kind of set the scene
a bit. We are seeing a bit of a risk
off move in markets as investors fret over froth in
the AI boom and the risk that the Federal Reserve
does not cut rates at the December meeting. There's also
a fair amount of anxiety over the economy as inflation
stays high and consumers, especially at the low income end,
start to buckle. HI yield bond issuance is coming back,
(01:18):
but risky issuers are paying up for access. In some cases,
Applied Digital sold two point three five billion dollars of
bonds at one of the steepest discounts of the year
as the deals struggled to generate demand. And in the
leveraged loan market there's also issuance, including a notable pickup
in deals to pay dividends to private equity owners. Markets
still seem under supplied, though given a lack of m
(01:39):
and a So, Michael, what's your take. Is this a
time to lean into risk, take advantage of yields that
are still pretty high, grab some year end bargains.
Speaker 3 (01:46):
I think that what you just started with, James is
there's a lot of stuff going on in the world
right now, and a lot of the things that you
described I would characterize as kind of the macro environment.
When you think about certainly the AI boom, which has
some adjacencies to high yield, although a lot of that
is I would argue is stuff going on outside the
(02:08):
higher market. You did reference a deal that is and
I AI related deal that did come to market last week.
But the reality is there's a lot of uncertainty right
now in the markets. Certainly there's a lack of data
given the government shut down. There's a lot of uncertainty
around things like AI and what types of benefits and
(02:33):
you productivity and growth that could come out of that.
And the reality is that uncertainty is being met with
relatively tight valuations. And so when when I look at
the market today, and maybe this is specific to high yield,
spreads have certainly widened a little bit from the recent tights.
(02:55):
Yields I would say are generally okay, not great, But
the reality is where the market is today, it doesn't
weave a lot of room for negative surprises and or
room for elevated amounts of uncertainty. And so part of
what you've seen more recently, and maybe the specific to
the HYO market is a bit of widening just related
(03:18):
to more uncertainty, which has related which has translated maybe
less in terms of an increase in anticipated defaults, but
more just more premium that investors are asking for to
delve into some of the riskier parts of the credit markets.
Speaker 2 (03:38):
Yeah, Mike, I guess I'll jump in here maybe before
we get into the views on the outlook ahead. I'm
interested in hearing your thoughts on kind of how we
got to where we are today. Right, So you just
mentioned spread. So the IG index is at eighty two
over the hyolndus is about two hundred and ninety one
basis points, both levels that are effectively flat with where
we had started the year. But obviously the path has
been extremely volatile in twenty five, right, So in the
(04:01):
case of high yield, I think uncertainty certainly breeds opportunity,
particularly when events such as you know, Liberation Day takes
place where we saw all the pieces on the board
of the World Trade you know, game go sort of
flying in April, everything got turned on our heads as
President Trump wields tariffs to sort of reset the global
trade with the United States. So I'm kind of interested
(04:22):
in hearing your thoughts on, you know, what are some
of the opportunities that you saw come out of that.
You know, what did you overweight or underweight, whether it
be an entire sector or sectors, and sort of which
issuers were you guys able to identify some outside returns
or maybe even sidesteps some outsized losses.
Speaker 3 (04:38):
So there's a there's a bunch of stuff to unpack there, Matt.
So I'll try and take each one on their own.
You reference, current spreads ran around three hundred if you
exclude kind of that reached to the kind of very
brief peak of spreads that we saw post Liberation Day.
When you look on a twelve month basis, spreads have
(05:00):
been somewhat range bound, between two fifty to three point
fifty over and so all we're at right now is
somewhere in the middle of that range again if you
exclude kind of that April cell off where spreads went
out to four fifty for a second. And so you know,
when you look top down, things look pretty calm, kind
(05:21):
of in the middle of that kind of twelve month range.
I think, as you reference, when you get below the
surface is where things start to get a lot more interesting.
And so even in a market where spread has been
range bound, part of what we've seen over the past
six or twelve months is increasing amounts of dispersion, a
lot of disconnects within the market, a lot of differentiation
(05:47):
between kind of the haves and have nots. And so
when I look at the market today just at a
top level, while valuations aren't that attractive, there have been
and continue to be tremendous opportunities to add value. Actually
has an active manager really in terms of picking kind
of the right credits to invest in and and maybe
just if not more importantly, to avoid the wrong credits
(06:10):
to invest in. You asked about, you know, what are
the things that we've been doing over the course of
this year to take advantage of kind of the credit markets.
I would say it's definitely been a stock pickers market.
With this version comes opportunity if you are, you know,
if you've got the right team in place, if you
have the right process to really identify on a proactive
(06:32):
basis the right invest right issuers to invest in and
the right invest right issuers to avoid. And so that's
really what we've been focused on. Things like Liberation Day
can create some temporary dislocations. You know, part of the
benefit that we have here at Vanguard is just given
our structure, given our fee advantage, it does allow us
(06:54):
on balance to be a little bit more disciplined, to
be a little bit more patient around when and how
we take risk. And so when I think about the
beginning of this year, where spreads were tighter than they
were today, are about the same. Our feeling was we
weren't really being paid to take risk at a top level,
and so we were relatively defensive in our orientation, both
(07:14):
from a credit quality point of view as well as
staying a little bit closer to home in terms of
being a little bit more of a weight some of
the more defensive sectors that changed a little bit in April,
you know it with some of the kind of broad
market sell off, but also the disproportionate impact that we
saw on valuation repricing across different sectors. That kind of
(07:36):
brief period really gave us an opportunity to cover some
of the underweights in the some of the sectors that
we viewed as most sensitive in some cases to things
like tariffs, but where we thought valuations had repriced a
little bit too much. And so, you know, those types
of opportunities don't come around very often. You know, you
need to be willing and able to take advantage of
(07:58):
them when they do appear, and you know, in the
case of kind of Liberation Day that that sell off
was pretty brief.
Speaker 1 (08:05):
You sound a bit cautious, So Michael, and most people
that when we have them on the show on the
high yield specifically, they sound relatively optimistic, relatively bullish. You know,
balance sheets are in good shape, quality is high, earnings
have come in pretty strong, and you know, unless the
economy and we're also in you know, an easing cycle.
But unless the economy slips into a recession, and I
think no one thinks that the government will allow that
(08:27):
to happen, you know that everything will be fine in
high yield and you should just lean into risk.
Speaker 3 (08:34):
You should buy it.
Speaker 1 (08:34):
And you know, I mean it hasn't done particuarly well
on the fripple c side, but most of the rest
of the market is done. Okay, What is your caution
based on it? Is it around the economy? Is it
is there something else? Is it around the cockroach? Is
it something that's just bigger and bigger concern.
Speaker 3 (08:48):
I would say fundamentals don't concern us in terms of
the health of the high yeal market. Again, not not
to sound like a broken record, I'm sure many of
the guests that have come on your show have may
have referenced kind of the pretty strong balance sheets in
the higher market, the composition of the highal market today,
which is quite a bit different than than you know,
(09:10):
if you compare it to you know, fifteen years ago,
for example, it's it's a much higher quality market that
has and should translate into default rate activity that should
remain below historical averages. That's what we've seen over the
past couple of years. That's what we would anticipate, you know,
as we think about the next twelve months apps in
a recession. So fundamentals aren't really the issue, you know.
(09:34):
You know, if I think about reasons why we're somewhat
cautious on the hio market today, I would I would
highlight two things. One is, and I've already kind of
indirectly or directly, you know, talked about evaluations. Again, valuations are,
no matter how you look at it, pretty tight relative
(09:55):
to history. And so as I think about an economic
andvironment that is still pretty good, but it's probably on
balance getting a little bit weaker. As I think about
monetary policy that is still somewhat uncertain, and a lot
of the other kind of headwinds or potential issues that
are going on in the macro environment, it's really tough
(10:17):
to make a case from a valuation perspective that things
are great. So that's one thing, and then the second
thing is in you reference cochroactors, there's just a lot
of stuff going on, not necessarily in the highold market,
but around the higher market, right, And so as you
think about a lot of the headlines that have come
(10:37):
out more recently, whether it's on the private credit market,
or on the bank own market, or on things like AI,
these are things that I would argue are not things
that directly impact the higher market. A lot of the
headlines have noticeably not included the higher market, which is
kind of interesting because historically people would look at the
(10:59):
higher market it as a bit of a canary in
the coal mine for future problems that hasn't happened this
time around. I would not anticipate that will be the
case this time around. But this stuff matters, right. It
may not matter insofar as translating into higher anticipated default rates,
but when you think about what investors get paid in
(11:22):
investing in the HIGHO market, anticipated defaults and credit losses
is only part of what you get paid for. The
other part that you get paid for in investing in
risk your markets is some form of risk premium, and
part of what we've seen over the last couple of
years is that risk premium has been pretty compressed, and
so I would argue that the big risk to the
(11:44):
HYO market isn't so much a big pickup in default rates,
but a normalization in that risk premium that investors demand
to invest in risk year and in some cases more
illiquid parts of the financial markets.
Speaker 1 (12:00):
We've been having that conversation for quite a long time,
you know, possibly years on this show, and it's become
pretty much like gospel for most people that you don't
care about the spread, just look at the yield. I'm
surprised but also delighted to hear you mentioned that spread
actually matters, because you know, I think it definitely does.
But in terms of like unpacking that there are you know,
(12:20):
you just could talk about the fundamentals not being so
much of an issue, but again, the technicals are just
so strong, So every time there is a set off,
every time how it widens out doesn't last very long
because it's just so much cash. So again, you know,
you can't really fight the technicals. I just don't know
how you position you know, based on that dynamic.
Speaker 3 (12:36):
I would one hundred percent agree. And you know, just
like the old adage don't fight the fad, I think
you could easily apply it to what you just said,
don't fight the technicals, and we don't. I think the
best course of action. And you know how we're thinking
about managing our portfolios right now is we're not looking
(12:56):
to take too much in the way of directional bets
the markets, and we never really do. It's generally a
pretty poor information ratio strategy is to make back make
big macrobats in terms of overall direction of markets. So
we're staying pretty close to home in terms of overall
levels of risk. Where we're spending most of our time
(13:17):
and where we're allocating most of our risk budget and
where we hope to get most of our performance is
really in that bottoms up selection. Just given the amount
of dispersion, I think you use the word or I
would use the word decompression in terms of definitely one
of the themes that we've seen this year the underperformance
of the lowest quality part of the hyal market, in
(13:39):
addition to the increasing amount of dispersion that we're seeing
across sectors and across issuers. That's really where we're going
to get our performance and where we feel the most
confidence given the research team that we have given, in
the framework and the process that we've developed, that's really
where we have the most confidence and where we're going
to deliver performance our investors in the current environment. It's
(14:01):
not really in terms of taking directional bets. You know. Again,
you know, spreads are pretty tight, yields are I would
say about average, it's not the best time to be
investing in HYGYLID. I would argue, that's not the worst time.
You just need to know what you're getting into. You know,
what the higher market today offers is I would argue,
pretty attractive amounts of yield and income with probably a
(14:26):
tighter range in terms of the upside and downside, you know,
because of where valuations are and because of where duration is.
As part of we haven't talked about this, but the
higher market is a lower duration market today as well.
It does cap your upside a little bit, but because
it's lower duration and higher quality, it also capture downside.
(14:47):
So I would I would argue that the higher market
today is different than the higher market before.
Speaker 2 (14:53):
Some of that's good.
Speaker 3 (14:54):
Some of that's bad. It doesn't give you as much upside,
especially given where current valuations are. But I would argue
that the downside that people are usually fearful of in
the high yield is unlikely to materialize to the same
magnitude this this go around.
Speaker 2 (15:08):
Yeah, I think that's to pick that up. I think
that's an interesting point. You know what, I've noticed that
I think we've seen a migration at least in terms
of credit quality as you sort of defined by ratings
being more heavily weighted towards the double btre today and
fewer guys in that basket with trible hooks, right, So
you know, with that being the case, how are your
funds positioned? Do you guys overweight double b's given the
(15:29):
economic angst you guys see with some select exposure and
that sort of deeply high yield ban and you know,
obviously you highlight it. The structure of the market is
naturally a shorter duration. But you know what type of
duration we're talking very short term or we're talking three
to five year bucket, five to seven or seven plus
plus years for you guys, where you guys comfortable at?
Speaker 3 (15:49):
Yeah, so we don't take duration bets in our funds, Matt.
You know, the duration comment that I made earlier was
really around market composition, Like the duration of the entire
market is shortened, shortened by you know, depending on what
time payer you compared to, you know, a year, a
year and a half over the past ten to fifteen years,
and that does have some significant implications for the expected
(16:11):
return profile of the market. The market is just shorter.
Part of that is, you know, issuers have refinanced a
lot of debt, but on average, the tenors have probably
not been as long as they have historically. You know,
there's there's there's a lot of different reasons for why
the market is shorter today, so we're not really looking
(16:32):
to take on large rate bets within the funds. On
the credit quality side, we do have a structural bias
to be higher quality that the empirical analysis, and conceptually
it does make sense to be higher quality within high yield. Again,
risks are asymmetric in fixing income. In general, you don't
have a ton of upside. You have a lot of
(16:52):
downside that is accentuated in a market like high yield,
where you know your biggest risk is companies not paying
you back the money that you went to them, and
so the potential downside can be large, but you have
pretty limited upside, you know, if you're right. So conceptually
it makes sense to have an up and quality bias
in a market like high yield. We do have a
(17:12):
structural tilt towards being higher quality within high yield from
a portfolio perspective, but there can be and are really
really interesting opportunities down in quality. I view the triple
C part of the market as more of a id
iso syncratic stock picking type of environment liquidity, yeah, exactly,
(17:33):
as opposed to an allocation to a down in quality bit. Right.
If I think about some of the most interesting opportunities
that we see there, it's really in where characterized as
bottoms up kind of you know, it is 'cratic type
of opportunities where we have high conviction either in a
particular issuer and therefore we are happy to go down
(17:55):
in the capital structure happens to be triple C rated
in that in that issue and or you know issuers
that may be going through some period of stress and
that you know, we have some belief that you know,
they have the ability to repair their balance sheets and
turn things around, and so we're happy to invest in
some of the riskier issuers on that basis as well.
(18:17):
So you know, less of an allocation to down in quality,
more a reflection of this high dispersion environment where we
have C and D compression, and so there are certain
situations in the triple C portion of the market where
we feel like you are getting paid for the risk.
Speaker 2 (18:32):
Yeah, I think you know when history shows it. The
FED obviously cutting rates is really because of a weakening
macro economic backdrop right or potential recession, which see would
seem to be a pretty large threat to high old
issuers in your portfolio in general. So if I look
at m ip R on the terminal for those of
you home, you can run it. You can see that
(18:52):
for the US at least, it looks like we're going
to get one hundred base points of cutting down to
about three percent over the next year. Is that van
Guard's house view? And if so, you know, how do
you see that sort of filtering out into the high
old issuers? Is that going to help? Is it a
rising tide lifts all boats or there's where's the sector
(19:13):
overweights or underweights for you guys.
Speaker 3 (19:16):
Yeah, so I'm not a Ray guy. I would say
that in general, the markets have priced in, have consistently
priced in more cuts than have actually materialized. Well, we
are in a rate cut environment, right, We are in
an environment, at least for now, where the monetary policy
should remain somewhat supportive of credit markets, whether we get
(19:38):
one hundred based points of cuts or something more or
less than that. But you hit the nail on the head, Matt, right,
like you have to ask not so much how much
the rate cuts? How much are we going to get
in terms of rate cuts, but why? And you are
one hundred percent correct that a rate cutting cycle is
usually associated with a weaker economic environment. In any benefit
(20:00):
that whereverage issuers get from lower rates is usually more
than offset by the fact that the economic environment that
this rate cutting cycle is happening in is usually a
lot weaker, and that that tends to have much more
of an impact than any magnitude or rate cutting cycle itself.
And so to the extent we to the extent the
(20:22):
FED is cutting rates because they see a weaker econ
economy here in the US, that will not be good,
That will not be good for leverage credit in general
certainly won't be good for the kind of down and
quality issuers. That won't necessarily mean that they have easier
access to capital markets. In fact, usually the opposite occurs,
(20:44):
and so the why, which, as you reference, is usually
much more important than the what right, the what being
a rate cutting cycle, but the why being a weaker
economic environment is usually the much more important factor.
Speaker 1 (20:55):
How nimble can you be in this market than Michael?
I mean, it's not mentioned to the you know, it's
a trillion dollar platform you have. It's not Matt goidtn
AT LLC sitting in New Jersey moving thousand dollar lots around.
You actually have to take pretty big positions. And so
how easy or difficult is that?
Speaker 3 (21:12):
Well, it's never easy, James, you know, whether you're managing
you know, a billion or ten billion. One of the
realities of the highal market is the liquidity is there
when you don't need it, and it's not there when
you do. And so we need to always be mindful
of that when we are thinking about entering or thinking
(21:34):
about investing in particular situations. Right, I think one of
the things that investors tend to underestimate isn't so much
the cost of entry, but the cost of exit, and
that's something that we are very intentional about as we
think about building our portfolio. Right, Our portfolios in general
are built for the long term. Our time horizons for
(21:55):
investing tend to be very long term oriented. We're not
looking to generate out performance by trading the markets on
a daily basis. And so one of the nice things
for us, given the scale that we have is our
processes and our time horizons are built to scale, are
built to scale to be able to manage across large
sums of money, and also built so that most of
(22:19):
our our performance is driven more by long term views
as opposed to the kind of the daily very you know,
daily moves in the market. You know, that's not to
say that we can't and aren't opportunistic in terms of
trying to take advantage of opportunities as they pop up.
You know, but as you referenced, right, you know, liquidity
(22:41):
is is can be hard to come by, especially in
a market like high yield, and we do need to
be cognizant of that. And the good news is, you know, again,
the way we think about investing does tend to be
more long term oriented, and that does tend to lend
itself well to not being as reliant on needing liquidity
(23:02):
on a daily basis. We are you know, much better
positioned as providers of liquidity. You know, we have plenty
of dry powder in general to be able to deploy
when those dislocations do occur in the market, and so
we're I would argue, on the other side of that, right,
we can take advantage of the relative illiquidity of the
market because in general, you know, we're a little bit
(23:23):
more patient and disciplined around how and when we deploy
our risk and capital.
Speaker 1 (23:27):
So that implies you have fairly large cash balance right now.
How does it compare to history?
Speaker 2 (23:31):
Yeah, I was gonna ask the same question. I'd be curious.
Speaker 3 (23:34):
Yeah, so it depends on the fund I would say,
you know, within within the high O dedicated strategies, we
probably are reserving a little bit of extra cash. Just
given where valuations are, the opportunity cost right now of
holding a little bit of extra cash our view is
pretty low. You know, evaluations were to reprice wider, I
would say that the cost of holding that liquidity extra
(23:55):
equidity would be higher. But you know, just given where
valuations are, I guess that's the flip side. One of
the positives is holding extra cash isn't costing us that much,
and so you know, we are reserving a little bit
of extra liquidity right now because we do think that
there can and will be additional opportunities that pop up
(24:17):
in the near future. You know, we're kind of going
through earning season right now in the high yield market,
and you know, part of what we're seeing is is
an earning season of haves and have nots, right and
in the case of have nots or in the case
of companies or issuers that are you know, disappointing relative
to expectations, we're seeing some pretty outsize price moves as
(24:39):
investors have you know, relatively little patients right now for
for disappointment, and you know, we are again opportunistically using
our extra cash to take advantage of some of those
opportunities on an issuer basis.
Speaker 1 (24:52):
So when we talk to a lot of portfolio managers
who can invest across asset classes, they do flag opportunities.
Instruction finance, you know it he is safe. There are
triple A rated trunches, it's you know, pooled, so you're
diversifying your risk but how do you see that? I mean,
you know, we we've been around long enough to know
what happened last time there was a big boom instructured finance.
(25:13):
What what what signals are you getting from that?
Speaker 3 (25:16):
So I'm a big believer James and the fact that
there's no free lunch, and certainly that should applied all
financial markets. And anybody that tells you that that there's
you know, excess return to be had, relativity and a risk,
I would say is there's probably something else going on. Again,
I can't speak specifically to structor finance. I'm you know,
(25:39):
focused on the higo market. But as you think about
what you're supposed to get paid, you know, what do
you what do you get paid when when you're buying
a bond, whether it's a higher bond or a structure
of finance bond, private credit mode is some element of
anticipated future credit losses and risk premium on top of that.
(26:02):
And part of that risk premium in some of these
markets may be some component of mark to market premium
and some of it may be liquidity premium. And I
would I would say that you know, as you go
into some of the more esoteric parts of the financial markets,
you know, the lines get a little blurry in terms
of are you getting paid for? You know, what are
(26:24):
you getting paid in terms of the yields and spreads
and so you know, structure finance is, you know, probably
a pretty attractive market. We we do and it can
invest in instructor finance across many of our credit funds. Again,
you just need to know what you're getting yourself into, right,
and you know what you're getting paid for, and you know,
(26:45):
oftentimes it can make sense to invest in structure finance
bonds or higher bonds. You know, the transparency, the information
that you get, the level of granularity does vary across
different types of assets, different types of asset classes. You
should and you demand more compensation for that. The liquidity
(27:07):
or lack thereof can vary across asset classes. You can
and should demand different types of compensation for that. Again,
it's all risk return. I would say that, you know,
I would guess that structure finance is no different than
the high market in terms of it being essential to
do that bottoms up analysis and to kind of know
what you own.
Speaker 2 (27:24):
So what are some of those sectors where you are
where you do see your margetting paid that that sort
of risk prome. Like, obviously it seems like you're the
theme is defensive, so is that healthcare? Is it staples
or utilities, guys or A and D like where you
see that right now?
Speaker 3 (27:40):
Yeah, I got to be honest, Matt. Right now, when
I think about kind of sector valuations, nothing is standing
out in terms of things that look really cheap. And
actually that's part of the reason why, at least at
a sector level or at an industry level, we'll gravitating
a little bit more towards more of the defensive industries,
(28:03):
things like utilities or consumer products, food and beverage, because
our view right now is, given where those sectors trade,
or some of those sectors trade, you're not getting paid
that much more to go into some of the more
cyclical or riskier sectors at a top level. Right That's
not to say that there aren't interesting situations in some
(28:25):
of these other sectors at the issuer level, but just
at a sector level, the dispersion level across most sectors
not that high. Again, the uncertainty level, given what's going
on in the macro, I would say, is above average.
So why not be a little bit more defensive from
a sector perspective right now, and take more of your
risk at the kind of the bottoms of a single
(28:46):
name level, so you know, sector level, staying a little
bit more defensive and taking our shots really more on
the bottoms up atosymocratic issuers where you know, based on
the deep fundamental analysis that are researched are doing. We
feel really good about the risks that we're taking.
Speaker 1 (29:02):
On utility, so they always sound safe, but that being
kind of dragged into this whole AI boom. They will
be used to power all that stuff. So is that
going to be risk of much more issuance or other
associated risk.
Speaker 3 (29:13):
Yeah, we have seen a bit of a tick up,
James in some of the issuance on utilities. Would I
would say, we haven't seen that much so far in
terms of supply related to you know, some of the
AI power demands. We've seen a little bit, but not
that much. I would expect to see more. You know.
The the utility sector in high yield is one of
(29:36):
those sectors that is I would say emblematic of the
higher market overall. It used to be a riskier part
of the market. There used to be a lot more
issuers that that were you know, I would say taking
more bets on underlying commodity prices and using kind of
leverage balance sheets to do so, and that combination doesn't
work super well. What we see right now within utilities
(29:59):
by and large companies that have de risked their both
their business profiles as well as their balance sheets. And
so even if they do come to market with more issuance,
they have plenty of kind of financial capacity to do so.
And so we haven't. We haven't seen a ton of
frath so far or elevated amounts of issuance in utilities,
(30:19):
yet that could change. Obviously, we have seen more AI
adjacent issuance in the high yeld market and so you know,
again as of now, we haven't seen it that much,
but that could change over the next six to twelve months.
Speaker 1 (30:34):
Which is that to see you noted earlier how different
the highield market is now compared to let's say ten
years ago. A lot of it seems to be to
do with private credit and how much have the suppli
has possibly gone there and how that makes maybe the
the supply demand imbalance worse and keep spreads tights. But
also you know, we have seen a lot more so
called liability management exercises, which they look like defaults, but
(30:58):
they are maybe not counted by some agency. So I'm
wondering how you fat that into your your investment process
sitting on the leverage loan side, which is where they
seem to be most prevalent.
Speaker 3 (31:08):
Yeah, I mean, liability management exercises or lemies are are
relevant to both high yield as well as loans. You
know where we are this year is it's been happening
a little bit more on the loan side, but that
in part because we saw so much of it happen
in the high old side and in twenty twenty four,
and so you know, I would say liability management exercises
(31:29):
remained somewhat elevated across leverage finance today relative to history,
but have come down a little bit in the highal
market relative to off relative to like historic highs in
twenty twenty four. So I would say peak lmy activity
in high yield for this cycle is most likely to
have occurred in twenty twenty four. And you know, what
(31:52):
we're seeing in the loan market is a bit of
a you know, catch up to that. Lmes are are
a big deal. It's a big way for us to
actually add value for our investors. It's it's a different
type of process that we need to manage through above
and beyond traditional credit underwriting, different skill set, different type
of experience required, but has the potential to add a
(32:16):
tremendous amount of value. To be clear, we we we
would include lemis as defaults. We treat them as defaults
even if they aren't actual defaults. So any default you
know statistics that that we you know, look at and
or you know expect default rate that we that we
think about on a go forward basis, we will always
think about and include l activity as part of those
(32:39):
as part of those statistics. You Lems in and of
themselves not not a good or bad thing. They do
have the potential to be a bit of a win
win relative to more traditional defaults. Part of the biggest
win as it saves a lot in terms of legal fees,
(33:00):
and that actually is not insignificant. The danger of lemies,
at least historically has been you know, a bit of
a free for all or a bit of a wild
wild west is because they're not going through traditional bankruptcies. Uh,
there's a lot more, there's a lot bigger range in
terms of potential outcomes, and so you know, part of
(33:21):
what we've learned, part of what investors have learned over
the past couple of years is in order to maximize
value in general, it's a lot better to work together
than to fight amongst ourselves, uh, in terms of how
to maximize value for for for each investor. And so
you know, I think the market has learned over the
last couple of years to manage lemes better in order
(33:46):
to uh, not just to further market interest, but also
you know, from an individual investor as well.
Speaker 1 (33:53):
But to be clear, how do you actually make the
value is it? Is it you buy the asset when
people are selling and the full of a critical mess
to litigate otherwise pressure to get much more back on
your investment.
Speaker 3 (34:06):
Yeah, so we're we're not in distressed investors, James. So
that's not really part of our playbook. You know. What
we do within companies that are going through some element
of distress or stress is really thinking about how do
we maximize value for investors? And oftentimes that is not
selling when things go bad, but actually rolling up our
(34:28):
sleeves and being willing and able to hold on to
bonds and loans even in the face of you know,
you know, a pretty challenging fundamental situation, especially in situations
where we believe that the problems are temporary and that
(34:50):
if we hold on, that's the way to maximize value
for our investors. And you know, how we have been
able to maximize value oftentimes has been through work together
with other like minded creditors in order to negotiate or
you know, come to mutually beneficial outcomes with you know,
(35:11):
creditors and at time or or debtors and at times
private equity sponsors. And so it's not so much you know,
building a sizeable position, although given our scale, you know,
we have sizable positions in pretty much everything that we own.
And how we maximize value for us isn't necessarily buying more,
but really managing through those situations oftentimes in you know,
(35:36):
with other like minded investors.
Speaker 1 (35:38):
That's the sense of that they've kind of gone away
a bit in the US. Do you is that does
the temporary height heights is are they coming back in
in you know, large quantity? Do you think, lemies, I
think they're here to stay. I think that again, investors
have learned a lot about how to navigate through the
lem situations that, on the one hand, is good because
(36:02):
it you know, again maximizes returns for dead investors. On
the other hand, it could potentially reduce or depress the
number of future lemy exercises. You know, part of why
lemis became so popular over the last few years is
it allowed issuers or debitors sometimes private equity sponsors to
(36:28):
use the greater flexibility of outer court processes to their
own advantage, oftentimes by playing creditors against themselves, right, And
so part of the reason why lemies became so popular
over the last couple of years is because, you know, issuers,
private responsors were able to maximize more of their value
(36:48):
at the expensive creditors by taking advantage of out of
court processes that they could simply couldn't do in a
more traditional bankruptcy. As investors have gotten a little bit
smarter and worked a little bit closer together, part of
that value what's called reallocation to issuers or private acty
sponsors has gone away, and so it's not nearly as
(37:09):
beneficial again in general for an issuer to go through
an lemy as it used to be. And so that
does have the potential to put a bit of a
cap on a go forward basis for future lemy activity. Okay, okay,
that's a leverage finance invested. Do you prefer leverage loans
right now or hild bones It depends.
Speaker 3 (37:28):
We do like loans right now. You know, if you
think about tight valuations where most of your return is
going to come from let's call it carry an interest,
loans are pretty attractive from an asset class perspective because
that's what they provide, pretty attractive levels of income. Being
floating rate, you're not taken on any duration risk. So
(37:50):
there is a case to be made for why loans
look pretty good. On the other hand, the loan market
is a lower quality market than the higher market. Some
of the improvement in the higho market in terms of
credit quality has somewhat common at the expense of some
of the lower quality trends that we've seen in the
(38:10):
loan market. So you need to be a little bit
careful in terms of looking at loan market valuations compared
to high yield because they're not apples to apples. And
that's why I mean, you know, it's what I meant
when I said it's kind of case by case, and
so there are definitely parts of the loan market that
we view as pretty attractive apples to apples versus the
HIGHO market where we can pick up pretty decent income
(38:34):
and not take on extra risk. But you just need
to be careful not to compare the loan market to
the HIGHO market at a top level, because there are
some pretty material differences in terms of the underlying composition.
Speaker 1 (38:46):
Do you expect supply to increase substantially next year in
terms of high yield bonds and loans?
Speaker 3 (38:52):
I would say it all depends on the M and
A environment twenty twenty five. As I think back to
what everybody was saying, certainly the cell side going into
the beginning of this year, twenty twenty five was supposed
to be the year of M and A. This was
supposed to be the year where we saw a big
pickup in both M and A and LB activity, and
(39:14):
that was supposed to drive a big resurgence in primary
market activity. We have seen some we've seen in the
HIAL market. There's been about three hundred billion of issuance
year today plus or minus. We're already ahead of the
total amount of issuance that we saw in twenty twenty four,
So we have seen a bit of a pickup in
primary market activity in high yield, but most of that
(39:39):
has been and continues to be for refinancing. And so
as we look forward to twenty twenty six, in order
for issuance to take another like higher from current levels,
part of what you need to see is that recovery
potentially in both M and A and LBO activity. Yeah.
Speaker 2 (39:59):
I think for industrials it's like seventy to seventy five
percent has been refi And if you look at at
least for the industrials, it's like one hundred billion right
now that is callable over the next couple of years,
and a third of that is trading at or above
the call price right now. And if you just go
within one point, you're looking at close to fifty five
percent of the entire industrial sector that is not going
(40:21):
to be trading at or above the call prices. So,
like that's that's a spot on observation. There's definitely I'm
going to is what's going to need to pick up
to get that net that net benefit for issuance.
Speaker 3 (40:34):
Yeah, I mean a couple other factors that could drive
additional issuance, you know, AI adjacent issuance. We've seen a
few deals, one of which you mentioned earlier, come hit
the highal market, certainly nowhere near to the extent that
we've seen in the investment grade market, but you know
that that could certainly be a marginal driver of additional
(40:56):
issuance in twenty twenty six, which I have to see.
On that side. The other thing that could move the
needle is we have also seen over the course of
this year a bit of you know, a return of
issuance from the private credit market into the public is
syndicated leverage finance market, both the loan and the HIGHO market.
(41:18):
You know, we saw a lot of deals in the
private credit market that we're refinancing deals in the loan market,
in the higher market in the last few years, and
part we've seen this year is a bit of a
reversal to that. Again, not trying to predict that that
could happen, but you know, to the extent we continue
to see, you know, a bit of additional reversal in
terms of more private credit, existing private credit deals being
(41:41):
refinanced into either the you know, the syndicated loan market
or the higher market. That could also provide some additional
incremental issuance as well in twenty twenty.
Speaker 1 (41:51):
Six, But it sounds like it's a lot and in
which case we're kind of left under supplies still and
you know, spreads remain tight and you know, nothing really changes,
so you'll be get a lot more cash next year.
Speaker 3 (42:02):
Well, our hope, our hope is again there's there's a
lot of different things going on in the world, you know, again,
most of which have really no direct impact on high yield,
although certainly the economic environment is a big deal. There's
any number of things, given more valuations are that could
cause a repricing in the market. You know, our hope
(42:22):
and expectation is that, you know, right now the opportunity
cost of steeing relatively neutral on credit is pretty low.
We are ready willing and able to use the dry
powder that we have and deploy that as opportunities come up. Again,
you know, we're not short at the market. You know,
it's it's you know, being short hig yield or being
(42:44):
short the credit markets over the long term is not
really a winning strategy. So again, our goal right now
is not to be short at the market, is to
stay pretty close to home, take most of our risk
and in the bottoms up opportunities that we see and
and wait for a better entry point to deploy and
more capital when overall market valuations offer better compensation for us.
Speaker 1 (43:06):
And so, Michael, based on your long term strategy for
investment and how you look at things, where is the
best relative value right now?
Speaker 3 (43:16):
So that's that's the million dollar question. I would say,
right now, I love and trillion really yeah, the trillion
dollar question. I would say, right now, it's really hard
to find value in credit, and so in the absence
of value, it doesn't cost you much to be up
(43:36):
in quality our general preference. So I helped to run
multi sactor fonds in addition to our high old portfolios,
so that that really runs the gamut between you know,
how yould investment great credit, emerging markets, and structure products.
I would say, when I look across kind of the
(43:56):
spread sectors within credit, we see most value in some
of the higher quality parts in the market. Our preference
right now is on balance investment grade credit over high yield.
We've got a bit of a tilt for higher quality
within high yield relative to lower quality. And so you know,
again the opportunity cost of being up in quality right now,
(44:19):
given where valuations are is pretty small. That again, that
could change, and so I would say the biggest opportunity
right now that I see in corporate credit is to
stay up in quality because you're not really being penalized
right now, and to reserve that dry powder in capital
for hopefully better opportunities ahead. It's really tough to make
(44:42):
a case, at least within publicly traded credit that there
are tremendous opportunities to make tremendous outsize returns just given
where valuations are right now, and.
Speaker 1 (44:51):
The trigger for you to jump back in really is
just valuation. Then it's not anything you know, material in
the macro sets up all the rates or anything like that.
Speaker 3 (44:58):
You know, our macro you know view right now is
is someone benign. We're not calling for a recession. Certainly,
there's there's a lot of uncertainty around. We're going to
get more data, you know who. Everyone's waiting for more data,
so maybe our our view you know, potentially changes. I
think we'll be on the lookouts as many investors are
on what some of the data suggests in terms of
the future path of the economy as well as monetary policy.
(45:22):
I would say, in the absence of a change in
our macro view, which is somewhat benign here in the US,
fundamentals should stay pretty strong, technical should remain somewhat supportive,
And so it really just comes down to valuations.
Speaker 1 (45:36):
What level of high yield spread would jump you back
into the market, though, what's the what's the what's the
turning point for you?
Speaker 3 (45:43):
Well, I would say it all depends, right, just like rates,
it all it'll right, you know, spread spreads usually move
for a reason, right, I would say, in the absence
of any change in the economic environment, you know, it
probably won't take that much more in terms of spread
white before we see valuations that look a little bit
(46:04):
more compelling and or where our view is it's being
expensive not to be longer risk than we are. Right,
My belief is that it is unlikely that spreads are
going to widen significantly without something having happened, and so
we just need to figure out, you know, when that
something happens, how impactful that is, If at all it
(46:28):
is too kind of high yield fundamentals and or technicals
to the extent it's simply a repricing of that risk
premium back to more normal levels. I would view that
as more of a buying opportunity than an event that
would cause us to reconsider our macro view and or
our view on future default rates.
Speaker 1 (46:48):
Great stuff, Michael Chang, head of High Yield Corporate Credit
at van God many thanks for joining us today on
the Credit Edge.
Speaker 3 (46:54):
Great Thank you guys, and thanks thanks for having me.
Speaker 1 (46:57):
And of course I'm very grateful to joint up from
Bloombag Intelligence. Thanks for joining us today.
Speaker 2 (47:00):
Thanks jeving to be back. Thanks Mike, much appreciated for.
Speaker 1 (47:03):
More credit market analysis and insight. Read all of Matt's
great work on the Bloomberg Terminal. Bloomberg Intelligence is part
of our research department with five hundred analysts and strategists
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(47:24):
We're on Apple, Spotify and all other good podcast providers,
including the Bloomberg Terminal at b pod Go. Give us
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jcromb eight at Bloomberg dot net.
Speaker 2 (47:36):
I'm James Cromby.
Speaker 1 (47:37):
It's been a pleasure having you join us again next
week on the Credit Edge
Hello, Welcome to Credit Edge, a weekly markets podcast. My
name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 2 (00:23):
And I am at Wyner. I'm a credit analyst here
with Bloomberg Intelligence. This week, we're very pleased to welcome
Michael Chang, head of High Yield Corporate Credit at Vanguard,
the eleven trillion dollar money manager. Yes, I said, T
not b.
Speaker 3 (00:34):
How are you, Michael, I'm doing well good.
Speaker 2 (00:37):
Mike's been with Vanguard for close to a decade, with
stops at Goldman Winchester, Capitol, and Pimco along the way,
and he's the fund manager for Vanguard's bond funds, with
the largest fund with assets under manager being the High
Yield Corporate Fund, which you can actually find on terminal
under the ticker v w e h X. So with that,
do you want to kick us off here, James.
Speaker 1 (00:55):
Yeah, We've got loads of questions for you, Michael, but
first I just wanted to kind of set the scene
a bit. We are seeing a bit of a risk
off move in markets as investors fret over froth in
the AI boom and the risk that the Federal Reserve
does not cut rates at the December meeting. There's also
a fair amount of anxiety over the economy as inflation
stays high and consumers, especially at the low income end,
start to buckle. HI yield bond issuance is coming back,
(01:18):
but risky issuers are paying up for access. In some cases,
Applied Digital sold two point three five billion dollars of
bonds at one of the steepest discounts of the year
as the deals struggled to generate demand. And in the
leveraged loan market there's also issuance, including a notable pickup
in deals to pay dividends to private equity owners. Markets
still seem under supplied, though given a lack of m
(01:39):
and a So, Michael, what's your take. Is this a
time to lean into risk, take advantage of yields that
are still pretty high, grab some year end bargains.
Speaker 3 (01:46):
I think that what you just started with, James is
there's a lot of stuff going on in the world
right now, and a lot of the things that you
described I would characterize as kind of the macro environment.
When you think about certainly the AI boom, which has
some adjacencies to high yield, although a lot of that
is I would argue is stuff going on outside the
(02:08):
higher market. You did reference a deal that is and
I AI related deal that did come to market last week.
But the reality is there's a lot of uncertainty right
now in the markets. Certainly there's a lack of data
given the government shut down. There's a lot of uncertainty
around things like AI and what types of benefits and
(02:33):
you productivity and growth that could come out of that.
And the reality is that uncertainty is being met with
relatively tight valuations. And so when when I look at
the market today, and maybe this is specific to high yield,
spreads have certainly widened a little bit from the recent tights.
(02:55):
Yields I would say are generally okay, not great, But
the reality is where the market is today, it doesn't
weave a lot of room for negative surprises and or
room for elevated amounts of uncertainty. And so part of
what you've seen more recently, and maybe the specific to
the HYO market is a bit of widening just related
(03:18):
to more uncertainty, which has related which has translated maybe
less in terms of an increase in anticipated defaults, but
more just more premium that investors are asking for to
delve into some of the riskier parts of the credit markets.
Speaker 2 (03:38):
Yeah, Mike, I guess I'll jump in here maybe before
we get into the views on the outlook ahead. I'm
interested in hearing your thoughts on kind of how we
got to where we are today. Right, So you just
mentioned spread. So the IG index is at eighty two
over the hyolndus is about two hundred and ninety one
basis points, both levels that are effectively flat with where
we had started the year. But obviously the path has
been extremely volatile in twenty five, right, So in the
(04:01):
case of high yield, I think uncertainty certainly breeds opportunity,
particularly when events such as you know, Liberation Day takes
place where we saw all the pieces on the board
of the World Trade you know, game go sort of
flying in April, everything got turned on our heads as
President Trump wields tariffs to sort of reset the global
trade with the United States. So I'm kind of interested
(04:22):
in hearing your thoughts on, you know, what are some
of the opportunities that you saw come out of that.
You know, what did you overweight or underweight, whether it
be an entire sector or sectors, and sort of which
issuers were you guys able to identify some outside returns
or maybe even sidesteps some outsized losses.
Speaker 3 (04:38):
So there's a there's a bunch of stuff to unpack there, Matt.
So I'll try and take each one on their own.
You reference, current spreads ran around three hundred if you
exclude kind of that reached to the kind of very
brief peak of spreads that we saw post Liberation Day.
When you look on a twelve month basis, spreads have
(05:00):
been somewhat range bound, between two fifty to three point
fifty over and so all we're at right now is
somewhere in the middle of that range again if you
exclude kind of that April cell off where spreads went
out to four fifty for a second. And so you know,
when you look top down, things look pretty calm, kind
(05:21):
of in the middle of that kind of twelve month range.
I think, as you reference, when you get below the
surface is where things start to get a lot more interesting.
And so even in a market where spread has been
range bound, part of what we've seen over the past
six or twelve months is increasing amounts of dispersion, a
lot of disconnects within the market, a lot of differentiation
(05:47):
between kind of the haves and have nots. And so
when I look at the market today just at a
top level, while valuations aren't that attractive, there have been
and continue to be tremendous opportunities to add value. Actually
has an active manager really in terms of picking kind
of the right credits to invest in and and maybe
just if not more importantly, to avoid the wrong credits
(06:10):
to invest in. You asked about, you know, what are
the things that we've been doing over the course of
this year to take advantage of kind of the credit markets.
I would say it's definitely been a stock pickers market.
With this version comes opportunity if you are, you know,
if you've got the right team in place, if you
have the right process to really identify on a proactive
(06:32):
basis the right invest right issuers to invest in and
the right invest right issuers to avoid. And so that's
really what we've been focused on. Things like Liberation Day
can create some temporary dislocations. You know, part of the
benefit that we have here at Vanguard is just given
our structure, given our fee advantage, it does allow us
(06:54):
on balance to be a little bit more disciplined, to
be a little bit more patient around when and how
we take risk. And so when I think about the
beginning of this year, where spreads were tighter than they
were today, are about the same. Our feeling was we
weren't really being paid to take risk at a top level,
and so we were relatively defensive in our orientation, both
(07:14):
from a credit quality point of view as well as
staying a little bit closer to home in terms of
being a little bit more of a weight some of
the more defensive sectors that changed a little bit in April,
you know it with some of the kind of broad
market sell off, but also the disproportionate impact that we
saw on valuation repricing across different sectors. That kind of
(07:36):
brief period really gave us an opportunity to cover some
of the underweights in the some of the sectors that
we viewed as most sensitive in some cases to things
like tariffs, but where we thought valuations had repriced a
little bit too much. And so, you know, those types
of opportunities don't come around very often. You know, you
need to be willing and able to take advantage of
(07:58):
them when they do appear, and you know, in the
case of kind of Liberation Day that that sell off
was pretty brief.
Speaker 1 (08:05):
You sound a bit cautious, So Michael, and most people
that when we have them on the show on the
high yield specifically, they sound relatively optimistic, relatively bullish. You know,
balance sheets are in good shape, quality is high, earnings
have come in pretty strong, and you know, unless the
economy and we're also in you know, an easing cycle.
But unless the economy slips into a recession, and I
think no one thinks that the government will allow that
(08:27):
to happen, you know that everything will be fine in
high yield and you should just lean into risk.
Speaker 3 (08:34):
You should buy it.
Speaker 1 (08:34):
And you know, I mean it hasn't done particuarly well
on the fripple c side, but most of the rest
of the market is done. Okay, What is your caution
based on it? Is it around the economy? Is it
is there something else? Is it around the cockroach? Is
it something that's just bigger and bigger concern.
Speaker 3 (08:48):
I would say fundamentals don't concern us in terms of
the health of the high yeal market. Again, not not
to sound like a broken record, I'm sure many of
the guests that have come on your show have may
have referenced kind of the pretty strong balance sheets in
the higher market, the composition of the highal market today,
which is quite a bit different than than you know,
(09:10):
if you compare it to you know, fifteen years ago,
for example, it's it's a much higher quality market that
has and should translate into default rate activity that should
remain below historical averages. That's what we've seen over the
past couple of years. That's what we would anticipate, you know,
as we think about the next twelve months apps in
a recession. So fundamentals aren't really the issue, you know.
(09:34):
You know, if I think about reasons why we're somewhat
cautious on the hio market today, I would I would
highlight two things. One is, and I've already kind of
indirectly or directly, you know, talked about evaluations. Again, valuations are,
no matter how you look at it, pretty tight relative
(09:55):
to history. And so as I think about an economic
andvironment that is still pretty good, but it's probably on
balance getting a little bit weaker. As I think about
monetary policy that is still somewhat uncertain, and a lot
of the other kind of headwinds or potential issues that
are going on in the macro environment, it's really tough
(10:17):
to make a case from a valuation perspective that things
are great. So that's one thing, and then the second
thing is in you reference cochroactors, there's just a lot
of stuff going on, not necessarily in the highold market,
but around the higher market, right, And so as you
think about a lot of the headlines that have come
(10:37):
out more recently, whether it's on the private credit market,
or on the bank own market, or on things like AI,
these are things that I would argue are not things
that directly impact the higher market. A lot of the
headlines have noticeably not included the higher market, which is
kind of interesting because historically people would look at the
(10:59):
higher market it as a bit of a canary in
the coal mine for future problems that hasn't happened this
time around. I would not anticipate that will be the
case this time around. But this stuff matters, right. It
may not matter insofar as translating into higher anticipated default rates,
but when you think about what investors get paid in
(11:22):
investing in the HIGHO market, anticipated defaults and credit losses
is only part of what you get paid for. The
other part that you get paid for in investing in
risk your markets is some form of risk premium, and
part of what we've seen over the last couple of
years is that risk premium has been pretty compressed, and
so I would argue that the big risk to the
(11:44):
HYO market isn't so much a big pickup in default rates,
but a normalization in that risk premium that investors demand
to invest in risk year and in some cases more
illiquid parts of the financial markets.
Speaker 1 (12:00):
We've been having that conversation for quite a long time,
you know, possibly years on this show, and it's become
pretty much like gospel for most people that you don't
care about the spread, just look at the yield. I'm
surprised but also delighted to hear you mentioned that spread
actually matters, because you know, I think it definitely does.
But in terms of like unpacking that there are you know,
(12:20):
you just could talk about the fundamentals not being so
much of an issue, but again, the technicals are just
so strong, So every time there is a set off,
every time how it widens out doesn't last very long
because it's just so much cash. So again, you know,
you can't really fight the technicals. I just don't know
how you position you know, based on that dynamic.
Speaker 3 (12:36):
I would one hundred percent agree. And you know, just
like the old adage don't fight the fad, I think
you could easily apply it to what you just said,
don't fight the technicals, and we don't. I think the
best course of action. And you know how we're thinking
about managing our portfolios right now is we're not looking
(12:56):
to take too much in the way of directional bets
the markets, and we never really do. It's generally a
pretty poor information ratio strategy is to make back make
big macrobats in terms of overall direction of markets. So
we're staying pretty close to home in terms of overall
levels of risk. Where we're spending most of our time
(13:17):
and where we're allocating most of our risk budget and
where we hope to get most of our performance is
really in that bottoms up selection. Just given the amount
of dispersion, I think you use the word or I
would use the word decompression in terms of definitely one
of the themes that we've seen this year the underperformance
of the lowest quality part of the hyal market, in
(13:39):
addition to the increasing amount of dispersion that we're seeing
across sectors and across issuers. That's really where we're going
to get our performance and where we feel the most
confidence given the research team that we have given, in
the framework and the process that we've developed, that's really
where we have the most confidence and where we're going
to deliver performance our investors in the current environment. It's
(14:01):
not really in terms of taking directional bets. You know. Again,
you know, spreads are pretty tight, yields are I would
say about average, it's not the best time to be
investing in HYGYLID. I would argue, that's not the worst time.
You just need to know what you're getting into. You know,
what the higher market today offers is I would argue,
pretty attractive amounts of yield and income with probably a
(14:26):
tighter range in terms of the upside and downside, you know,
because of where valuations are and because of where duration is.
As part of we haven't talked about this, but the
higher market is a lower duration market today as well.
It does cap your upside a little bit, but because
it's lower duration and higher quality, it also capture downside.
(14:47):
So I would I would argue that the higher market
today is different than the higher market before.
Speaker 2 (14:53):
Some of that's good.
Speaker 3 (14:54):
Some of that's bad. It doesn't give you as much upside,
especially given where current valuations are. But I would argue
that the downside that people are usually fearful of in
the high yield is unlikely to materialize to the same
magnitude this this go around.
Speaker 2 (15:08):
Yeah, I think that's to pick that up. I think
that's an interesting point. You know what, I've noticed that
I think we've seen a migration at least in terms
of credit quality as you sort of defined by ratings
being more heavily weighted towards the double btre today and
fewer guys in that basket with trible hooks, right, So
you know, with that being the case, how are your
funds positioned? Do you guys overweight double b's given the
(15:29):
economic angst you guys see with some select exposure and
that sort of deeply high yield ban and you know,
obviously you highlight it. The structure of the market is
naturally a shorter duration. But you know what type of
duration we're talking very short term or we're talking three
to five year bucket, five to seven or seven plus
plus years for you guys, where you guys comfortable at?
Speaker 3 (15:49):
Yeah, so we don't take duration bets in our funds, Matt.
You know, the duration comment that I made earlier was
really around market composition, Like the duration of the entire
market is shortened, shortened by you know, depending on what
time payer you compared to, you know, a year, a
year and a half over the past ten to fifteen years,
and that does have some significant implications for the expected
(16:11):
return profile of the market. The market is just shorter.
Part of that is, you know, issuers have refinanced a
lot of debt, but on average, the tenors have probably
not been as long as they have historically. You know,
there's there's there's a lot of different reasons for why
the market is shorter today, so we're not really looking
(16:32):
to take on large rate bets within the funds. On
the credit quality side, we do have a structural bias
to be higher quality that the empirical analysis, and conceptually
it does make sense to be higher quality within high yield. Again,
risks are asymmetric in fixing income. In general, you don't
have a ton of upside. You have a lot of
(16:52):
downside that is accentuated in a market like high yield,
where you know your biggest risk is companies not paying
you back the money that you went to them, and
so the potential downside can be large, but you have
pretty limited upside, you know, if you're right. So conceptually
it makes sense to have an up and quality bias
in a market like high yield. We do have a
(17:12):
structural tilt towards being higher quality within high yield from
a portfolio perspective, but there can be and are really
really interesting opportunities down in quality. I view the triple
C part of the market as more of a id
iso syncratic stock picking type of environment liquidity, yeah, exactly,
(17:33):
as opposed to an allocation to a down in quality bit. Right.
If I think about some of the most interesting opportunities
that we see there, it's really in where characterized as
bottoms up kind of you know, it is 'cratic type
of opportunities where we have high conviction either in a
particular issuer and therefore we are happy to go down
(17:55):
in the capital structure happens to be triple C rated
in that in that issue and or you know issuers
that may be going through some period of stress and
that you know, we have some belief that you know,
they have the ability to repair their balance sheets and
turn things around, and so we're happy to invest in
some of the riskier issuers on that basis as well.
(18:17):
So you know, less of an allocation to down in quality,
more a reflection of this high dispersion environment where we
have C and D compression, and so there are certain
situations in the triple C portion of the market where
we feel like you are getting paid for the risk.
Speaker 2 (18:32):
Yeah, I think you know when history shows it. The
FED obviously cutting rates is really because of a weakening
macro economic backdrop right or potential recession, which see would
seem to be a pretty large threat to high old
issuers in your portfolio in general. So if I look
at m ip R on the terminal for those of
you home, you can run it. You can see that
(18:52):
for the US at least, it looks like we're going
to get one hundred base points of cutting down to
about three percent over the next year. Is that van
Guard's house view? And if so, you know, how do
you see that sort of filtering out into the high
old issuers? Is that going to help? Is it a
rising tide lifts all boats or there's where's the sector
(19:13):
overweights or underweights for you guys.
Speaker 3 (19:16):
Yeah, so I'm not a Ray guy. I would say
that in general, the markets have priced in, have consistently
priced in more cuts than have actually materialized. Well, we
are in a rate cut environment, right, We are in
an environment, at least for now, where the monetary policy
should remain somewhat supportive of credit markets, whether we get
(19:38):
one hundred based points of cuts or something more or
less than that. But you hit the nail on the head, Matt, right,
like you have to ask not so much how much
the rate cuts? How much are we going to get
in terms of rate cuts, but why? And you are
one hundred percent correct that a rate cutting cycle is
usually associated with a weaker economic environment. In any benefit
(20:00):
that whereverage issuers get from lower rates is usually more
than offset by the fact that the economic environment that
this rate cutting cycle is happening in is usually a
lot weaker, and that that tends to have much more
of an impact than any magnitude or rate cutting cycle itself.
And so to the extent we to the extent the
(20:22):
FED is cutting rates because they see a weaker econ
economy here in the US, that will not be good,
That will not be good for leverage credit in general
certainly won't be good for the kind of down and
quality issuers. That won't necessarily mean that they have easier
access to capital markets. In fact, usually the opposite occurs,
(20:44):
and so the why, which, as you reference, is usually
much more important than the what right, the what being
a rate cutting cycle, but the why being a weaker
economic environment is usually the much more important factor.
Speaker 1 (20:55):
How nimble can you be in this market than Michael?
I mean, it's not mentioned to the you know, it's
a trillion dollar platform you have. It's not Matt goidtn
AT LLC sitting in New Jersey moving thousand dollar lots around.
You actually have to take pretty big positions. And so
how easy or difficult is that?
Speaker 3 (21:12):
Well, it's never easy, James, you know, whether you're managing
you know, a billion or ten billion. One of the
realities of the highal market is the liquidity is there
when you don't need it, and it's not there when
you do. And so we need to always be mindful
of that when we are thinking about entering or thinking
(21:34):
about investing in particular situations. Right, I think one of
the things that investors tend to underestimate isn't so much
the cost of entry, but the cost of exit, and
that's something that we are very intentional about as we
think about building our portfolio. Right, Our portfolios in general
are built for the long term. Our time horizons for
(21:55):
investing tend to be very long term oriented. We're not
looking to generate out performance by trading the markets on
a daily basis. And so one of the nice things
for us, given the scale that we have is our
processes and our time horizons are built to scale, are
built to scale to be able to manage across large
sums of money, and also built so that most of
(22:19):
our our performance is driven more by long term views
as opposed to the kind of the daily very you know,
daily moves in the market. You know, that's not to
say that we can't and aren't opportunistic in terms of
trying to take advantage of opportunities as they pop up.
You know, but as you referenced, right, you know, liquidity
(22:41):
is is can be hard to come by, especially in
a market like high yield, and we do need to
be cognizant of that. And the good news is, you know, again,
the way we think about investing does tend to be
more long term oriented, and that does tend to lend
itself well to not being as reliant on needing liquidity
(23:02):
on a daily basis. We are you know, much better
positioned as providers of liquidity. You know, we have plenty
of dry powder in general to be able to deploy
when those dislocations do occur in the market, and so
we're I would argue, on the other side of that, right,
we can take advantage of the relative illiquidity of the
market because in general, you know, we're a little bit
(23:23):
more patient and disciplined around how and when we deploy
our risk and capital.
Speaker 1 (23:27):
So that implies you have fairly large cash balance right now.
How does it compare to history?
Speaker 2 (23:31):
Yeah, I was gonna ask the same question. I'd be curious.
Speaker 3 (23:34):
Yeah, so it depends on the fund I would say,
you know, within within the high O dedicated strategies, we
probably are reserving a little bit of extra cash. Just
given where valuations are, the opportunity cost right now of
holding a little bit of extra cash our view is
pretty low. You know, evaluations were to reprice wider, I
would say that the cost of holding that liquidity extra
(23:55):
equidity would be higher. But you know, just given where
valuations are, I guess that's the flip side. One of
the positives is holding extra cash isn't costing us that much,
and so you know, we are reserving a little bit
of extra liquidity right now because we do think that
there can and will be additional opportunities that pop up
(24:17):
in the near future. You know, we're kind of going
through earning season right now in the high yield market,
and you know, part of what we're seeing is is
an earning season of haves and have nots, right and
in the case of have nots or in the case
of companies or issuers that are you know, disappointing relative
to expectations, we're seeing some pretty outsize price moves as
(24:39):
investors have you know, relatively little patients right now for
for disappointment, and you know, we are again opportunistically using
our extra cash to take advantage of some of those
opportunities on an issuer basis.
Speaker 1 (24:52):
So when we talk to a lot of portfolio managers
who can invest across asset classes, they do flag opportunities.
Instruction finance, you know it he is safe. There are
triple A rated trunches, it's you know, pooled, so you're
diversifying your risk but how do you see that? I mean,
you know, we we've been around long enough to know
what happened last time there was a big boom instructured finance.
(25:13):
What what what signals are you getting from that?
Speaker 3 (25:16):
So I'm a big believer James and the fact that
there's no free lunch, and certainly that should applied all
financial markets. And anybody that tells you that that there's
you know, excess return to be had, relativity and a risk,
I would say is there's probably something else going on. Again,
I can't speak specifically to structor finance. I'm you know,
(25:39):
focused on the higo market. But as you think about
what you're supposed to get paid, you know, what do
you what do you get paid when when you're buying
a bond, whether it's a higher bond or a structure
of finance bond, private credit mode is some element of
anticipated future credit losses and risk premium on top of that.
(26:02):
And part of that risk premium in some of these
markets may be some component of mark to market premium
and some of it may be liquidity premium. And I
would I would say that you know, as you go
into some of the more esoteric parts of the financial markets,
you know, the lines get a little blurry in terms
of are you getting paid for? You know, what are
(26:24):
you getting paid in terms of the yields and spreads
and so you know, structure finance is, you know, probably
a pretty attractive market. We we do and it can
invest in instructor finance across many of our credit funds. Again,
you just need to know what you're getting yourself into, right,
and you know what you're getting paid for, and you know,
(26:45):
oftentimes it can make sense to invest in structure finance
bonds or higher bonds. You know, the transparency, the information
that you get, the level of granularity does vary across
different types of assets, different types of asset classes. You
should and you demand more compensation for that. The liquidity
(27:07):
or lack thereof can vary across asset classes. You can
and should demand different types of compensation for that. Again,
it's all risk return. I would say that, you know,
I would guess that structure finance is no different than
the high market in terms of it being essential to
do that bottoms up analysis and to kind of know
what you own.
Speaker 2 (27:24):
So what are some of those sectors where you are
where you do see your margetting paid that that sort
of risk prome. Like, obviously it seems like you're the
theme is defensive, so is that healthcare? Is it staples
or utilities, guys or A and D like where you
see that right now?
Speaker 3 (27:40):
Yeah, I got to be honest, Matt. Right now, when
I think about kind of sector valuations, nothing is standing
out in terms of things that look really cheap. And
actually that's part of the reason why, at least at
a sector level or at an industry level, we'll gravitating
a little bit more towards more of the defensive industries,
(28:03):
things like utilities or consumer products, food and beverage, because
our view right now is, given where those sectors trade,
or some of those sectors trade, you're not getting paid
that much more to go into some of the more
cyclical or riskier sectors at a top level. Right That's
not to say that there aren't interesting situations in some
(28:25):
of these other sectors at the issuer level, but just
at a sector level, the dispersion level across most sectors
not that high. Again, the uncertainty level, given what's going
on in the macro, I would say, is above average.
So why not be a little bit more defensive from
a sector perspective right now, and take more of your
risk at the kind of the bottoms of a single
(28:46):
name level, so you know, sector level, staying a little
bit more defensive and taking our shots really more on
the bottoms up atosymocratic issuers where you know, based on
the deep fundamental analysis that are researched are doing. We
feel really good about the risks that we're taking.
Speaker 1 (29:02):
On utility, so they always sound safe, but that being
kind of dragged into this whole AI boom. They will
be used to power all that stuff. So is that
going to be risk of much more issuance or other
associated risk.
Speaker 3 (29:13):
Yeah, we have seen a bit of a tick up,
James in some of the issuance on utilities. Would I
would say, we haven't seen that much so far in
terms of supply related to you know, some of the
AI power demands. We've seen a little bit, but not
that much. I would expect to see more. You know.
The the utility sector in high yield is one of
(29:36):
those sectors that is I would say emblematic of the
higher market overall. It used to be a riskier part
of the market. There used to be a lot more
issuers that that were you know, I would say taking
more bets on underlying commodity prices and using kind of
leverage balance sheets to do so, and that combination doesn't
work super well. What we see right now within utilities
(29:59):
by and large companies that have de risked their both
their business profiles as well as their balance sheets. And
so even if they do come to market with more issuance,
they have plenty of kind of financial capacity to do so.
And so we haven't. We haven't seen a ton of
frath so far or elevated amounts of issuance in utilities,
(30:19):
yet that could change. Obviously, we have seen more AI
adjacent issuance in the high yeld market and so you know,
again as of now, we haven't seen it that much,
but that could change over the next six to twelve months.
Speaker 1 (30:34):
Which is that to see you noted earlier how different
the highield market is now compared to let's say ten
years ago. A lot of it seems to be to
do with private credit and how much have the suppli
has possibly gone there and how that makes maybe the
the supply demand imbalance worse and keep spreads tights. But
also you know, we have seen a lot more so
called liability management exercises, which they look like defaults, but
(30:58):
they are maybe not counted by some agency. So I'm
wondering how you fat that into your your investment process
sitting on the leverage loan side, which is where they
seem to be most prevalent.
Speaker 3 (31:08):
Yeah, I mean, liability management exercises or lemies are are
relevant to both high yield as well as loans. You
know where we are this year is it's been happening
a little bit more on the loan side, but that
in part because we saw so much of it happen
in the high old side and in twenty twenty four,
and so you know, I would say liability management exercises
(31:29):
remained somewhat elevated across leverage finance today relative to history,
but have come down a little bit in the highal
market relative to off relative to like historic highs in
twenty twenty four. So I would say peak lmy activity
in high yield for this cycle is most likely to
have occurred in twenty twenty four. And you know, what
(31:52):
we're seeing in the loan market is a bit of
a you know, catch up to that. Lmes are are
a big deal. It's a big way for us to
actually add value for our investors. It's it's a different
type of process that we need to manage through above
and beyond traditional credit underwriting, different skill set, different type
of experience required, but has the potential to add a
(32:16):
tremendous amount of value. To be clear, we we we
would include lemis as defaults. We treat them as defaults
even if they aren't actual defaults. So any default you
know statistics that that we you know, look at and
or you know expect default rate that we that we
think about on a go forward basis, we will always
think about and include l activity as part of those
(32:39):
as part of those statistics. You Lems in and of
themselves not not a good or bad thing. They do
have the potential to be a bit of a win
win relative to more traditional defaults. Part of the biggest
win as it saves a lot in terms of legal fees,
(33:00):
and that actually is not insignificant. The danger of lemies,
at least historically has been you know, a bit of
a free for all or a bit of a wild
wild west is because they're not going through traditional bankruptcies. Uh,
there's a lot more, there's a lot bigger range in
terms of potential outcomes, and so you know, part of
(33:21):
what we've learned, part of what investors have learned over
the past couple of years is in order to maximize
value in general, it's a lot better to work together
than to fight amongst ourselves, uh, in terms of how
to maximize value for for for each investor. And so
you know, I think the market has learned over the
last couple of years to manage lemes better in order
(33:46):
to uh, not just to further market interest, but also
you know, from an individual investor as well.
Speaker 1 (33:53):
But to be clear, how do you actually make the
value is it? Is it you buy the asset when
people are selling and the full of a critical mess
to litigate otherwise pressure to get much more back on
your investment.
Speaker 3 (34:06):
Yeah, so we're we're not in distressed investors, James. So
that's not really part of our playbook. You know. What
we do within companies that are going through some element
of distress or stress is really thinking about how do
we maximize value for investors? And oftentimes that is not
selling when things go bad, but actually rolling up our
(34:28):
sleeves and being willing and able to hold on to
bonds and loans even in the face of you know,
you know, a pretty challenging fundamental situation, especially in situations
where we believe that the problems are temporary and that
(34:50):
if we hold on, that's the way to maximize value
for our investors. And you know, how we have been
able to maximize value oftentimes has been through work together
with other like minded creditors in order to negotiate or
you know, come to mutually beneficial outcomes with you know,
(35:11):
creditors and at time or or debtors and at times
private equity sponsors. And so it's not so much you know,
building a sizeable position, although given our scale, you know,
we have sizable positions in pretty much everything that we own.
And how we maximize value for us isn't necessarily buying more,
but really managing through those situations oftentimes in you know,
(35:36):
with other like minded investors.
Speaker 1 (35:38):
That's the sense of that they've kind of gone away
a bit in the US. Do you is that does
the temporary height heights is are they coming back in
in you know, large quantity? Do you think, lemies, I
think they're here to stay. I think that again, investors
have learned a lot about how to navigate through the
lem situations that, on the one hand, is good because
(36:02):
it you know, again maximizes returns for dead investors. On
the other hand, it could potentially reduce or depress the
number of future lemy exercises. You know, part of why
lemis became so popular over the last few years is
it allowed issuers or debitors sometimes private equity sponsors to
(36:28):
use the greater flexibility of outer court processes to their
own advantage, oftentimes by playing creditors against themselves, right, And
so part of the reason why lemies became so popular
over the last couple of years is because, you know, issuers,
private responsors were able to maximize more of their value
(36:48):
at the expensive creditors by taking advantage of out of
court processes that they could simply couldn't do in a
more traditional bankruptcy. As investors have gotten a little bit
smarter and worked a little bit closer together, part of
that value what's called reallocation to issuers or private acty
sponsors has gone away, and so it's not nearly as
(37:09):
beneficial again in general for an issuer to go through
an lemy as it used to be. And so that
does have the potential to put a bit of a
cap on a go forward basis for future lemy activity. Okay, okay,
that's a leverage finance invested. Do you prefer leverage loans
right now or hild bones It depends.
Speaker 3 (37:28):
We do like loans right now. You know, if you
think about tight valuations where most of your return is
going to come from let's call it carry an interest,
loans are pretty attractive from an asset class perspective because
that's what they provide, pretty attractive levels of income. Being
floating rate, you're not taken on any duration risk. So
(37:50):
there is a case to be made for why loans
look pretty good. On the other hand, the loan market
is a lower quality market than the higher market. Some
of the improvement in the higho market in terms of
credit quality has somewhat common at the expense of some
of the lower quality trends that we've seen in the
(38:10):
loan market. So you need to be a little bit
careful in terms of looking at loan market valuations compared
to high yield because they're not apples to apples. And
that's why I mean, you know, it's what I meant
when I said it's kind of case by case, and
so there are definitely parts of the loan market that
we view as pretty attractive apples to apples versus the
HIGHO market where we can pick up pretty decent income
(38:34):
and not take on extra risk. But you just need
to be careful not to compare the loan market to
the HIGHO market at a top level, because there are
some pretty material differences in terms of the underlying composition.
Speaker 1 (38:46):
Do you expect supply to increase substantially next year in
terms of high yield bonds and loans?
Speaker 3 (38:52):
I would say it all depends on the M and
A environment twenty twenty five. As I think back to
what everybody was saying, certainly the cell side going into
the beginning of this year, twenty twenty five was supposed
to be the year of M and A. This was
supposed to be the year where we saw a big
pickup in both M and A and LB activity, and
(39:14):
that was supposed to drive a big resurgence in primary
market activity. We have seen some we've seen in the
HIAL market. There's been about three hundred billion of issuance
year today plus or minus. We're already ahead of the
total amount of issuance that we saw in twenty twenty four,
So we have seen a bit of a pickup in
primary market activity in high yield, but most of that
(39:39):
has been and continues to be for refinancing. And so
as we look forward to twenty twenty six, in order
for issuance to take another like higher from current levels,
part of what you need to see is that recovery
potentially in both M and A and LBO activity. Yeah.
Speaker 2 (39:59):
I think for industrials it's like seventy to seventy five
percent has been refi And if you look at at
least for the industrials, it's like one hundred billion right
now that is callable over the next couple of years,
and a third of that is trading at or above
the call price right now. And if you just go
within one point, you're looking at close to fifty five
percent of the entire industrial sector that is not going
(40:21):
to be trading at or above the call prices. So,
like that's that's a spot on observation. There's definitely I'm
going to is what's going to need to pick up
to get that net that net benefit for issuance.
Speaker 3 (40:34):
Yeah, I mean a couple other factors that could drive
additional issuance, you know, AI adjacent issuance. We've seen a
few deals, one of which you mentioned earlier, come hit
the highal market, certainly nowhere near to the extent that
we've seen in the investment grade market, but you know
that that could certainly be a marginal driver of additional
(40:56):
issuance in twenty twenty six, which I have to see.
On that side. The other thing that could move the
needle is we have also seen over the course of
this year a bit of you know, a return of
issuance from the private credit market into the public is
syndicated leverage finance market, both the loan and the HIGHO market.
(41:18):
You know, we saw a lot of deals in the
private credit market that we're refinancing deals in the loan market,
in the higher market in the last few years, and
part we've seen this year is a bit of a
reversal to that. Again, not trying to predict that that
could happen, but you know, to the extent we continue
to see, you know, a bit of additional reversal in
terms of more private credit, existing private credit deals being
(41:41):
refinanced into either the you know, the syndicated loan market
or the higher market. That could also provide some additional
incremental issuance as well in twenty twenty.
Speaker 1 (41:51):
Six, But it sounds like it's a lot and in
which case we're kind of left under supplies still and
you know, spreads remain tight and you know, nothing really changes,
so you'll be get a lot more cash next year.
Speaker 3 (42:02):
Well, our hope, our hope is again there's there's a
lot of different things going on in the world, you know, again,
most of which have really no direct impact on high yield,
although certainly the economic environment is a big deal. There's
any number of things, given more valuations are that could
cause a repricing in the market. You know, our hope
(42:22):
and expectation is that, you know, right now the opportunity
cost of steeing relatively neutral on credit is pretty low.
We are ready willing and able to use the dry
powder that we have and deploy that as opportunities come up. Again,
you know, we're not short at the market. You know,
it's it's you know, being short hig yield or being
(42:44):
short the credit markets over the long term is not
really a winning strategy. So again, our goal right now
is not to be short at the market, is to
stay pretty close to home, take most of our risk
and in the bottoms up opportunities that we see and
and wait for a better entry point to deploy and
more capital when overall market valuations offer better compensation for us.
Speaker 1 (43:06):
And so, Michael, based on your long term strategy for
investment and how you look at things, where is the
best relative value right now?
Speaker 3 (43:16):
So that's that's the million dollar question. I would say,
right now, I love and trillion really yeah, the trillion
dollar question. I would say, right now, it's really hard
to find value in credit, and so in the absence
of value, it doesn't cost you much to be up
(43:36):
in quality our general preference. So I helped to run
multi sactor fonds in addition to our high old portfolios,
so that that really runs the gamut between you know,
how yould investment great credit, emerging markets, and structure products.
I would say, when I look across kind of the
(43:56):
spread sectors within credit, we see most value in some
of the higher quality parts in the market. Our preference
right now is on balance investment grade credit over high yield.
We've got a bit of a tilt for higher quality
within high yield relative to lower quality. And so you know,
again the opportunity cost of being up in quality right now,
(44:19):
given where valuations are is pretty small. That again, that
could change, and so I would say the biggest opportunity
right now that I see in corporate credit is to
stay up in quality because you're not really being penalized
right now, and to reserve that dry powder in capital
for hopefully better opportunities ahead. It's really tough to make
(44:42):
a case, at least within publicly traded credit that there
are tremendous opportunities to make tremendous outsize returns just given
where valuations are right now, and.
Speaker 1 (44:51):
The trigger for you to jump back in really is
just valuation. Then it's not anything you know, material in
the macro sets up all the rates or anything like that.
Speaker 3 (44:58):
You know, our macro you know view right now is
is someone benign. We're not calling for a recession. Certainly,
there's there's a lot of uncertainty around. We're going to
get more data, you know who. Everyone's waiting for more data,
so maybe our our view you know, potentially changes. I
think we'll be on the lookouts as many investors are
on what some of the data suggests in terms of
the future path of the economy as well as monetary policy.
(45:22):
I would say, in the absence of a change in
our macro view, which is somewhat benign here in the US,
fundamentals should stay pretty strong, technical should remain somewhat supportive,
And so it really just comes down to valuations.
Speaker 1 (45:36):
What level of high yield spread would jump you back
into the market, though, what's the what's the what's the
turning point for you?
Speaker 3 (45:43):
Well, I would say it all depends, right, just like rates,
it all it'll right, you know, spread spreads usually move
for a reason, right, I would say, in the absence
of any change in the economic environment, you know, it
probably won't take that much more in terms of spread
white before we see valuations that look a little bit
(46:04):
more compelling and or where our view is it's being
expensive not to be longer risk than we are. Right,
My belief is that it is unlikely that spreads are
going to widen significantly without something having happened, and so
we just need to figure out, you know, when that
something happens, how impactful that is, If at all it
(46:28):
is too kind of high yield fundamentals and or technicals
to the extent it's simply a repricing of that risk
premium back to more normal levels. I would view that
as more of a buying opportunity than an event that
would cause us to reconsider our macro view and or
our view on future default rates.
Speaker 1 (46:48):
Great stuff, Michael Chang, head of High Yield Corporate Credit
at van God many thanks for joining us today on
the Credit Edge.
Speaker 3 (46:54):
Great Thank you guys, and thanks thanks for having me.
Speaker 1 (46:57):
And of course I'm very grateful to joint up from
Bloombag Intelligence. Thanks for joining us today.
Speaker 2 (47:00):
Thanks jeving to be back. Thanks Mike, much appreciated for.
Speaker 1 (47:03):
More credit market analysis and insight. Read all of Matt's
great work on the Bloomberg Terminal. Bloomberg Intelligence is part
of our research department with five hundred analysts and strategists
working across all markets. Coverage includes over two thousand equities
and credits and now looks on more than ninety industries
and one hundred market industries, currencies and commodities. Please do
subscribe to the Credit Edge wherever you get your podcasts.
(47:24):
We're on Apple, Spotify and all other good podcast providers,
including the Bloomberg Terminal at b pod Go. Give us
a review, tell your friends, or email me directly at
jcromb eight at Bloomberg dot net.
Speaker 2 (47:36):
I'm James Cromby.
Speaker 1 (47:37):
It's been a pleasure having you join us again next
week on the Credit Edge
Host
James Crombie
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