00:00And I am curious about the move in yields, which was relatively parallel across the curve.
00:04And I'm just curious what that says to us. I know on the short end, everyone's pricing out the rate
00:08cuts.
00:08But when you also see a similar move higher on the longer end, what does that say?
00:12Well, there's certainly concern about funding just in general.
00:14So, I mean, when you're seeing the curve move like this for the treasuries, I mean, you're also seeing the
00:19rest of treasuries and credit move wider as well.
00:24So it's a feedback mechanism. And you would expect to see something like that where you've got the volatility that
00:29is being associated
00:29with war right now and supply chain disruptions.
00:33Are you seeing that same type of volatility in the high-grade credit market?
00:38Or are we still kind of dealing with spreads that are relatively in check?
00:41Yeah. So I actually, if you were to say that oil was up above 100 and that there was all
00:49the other issues that are going on at the same time in the market,
00:52you know, concerns around the Fed and things like that, I'd be actually surprised that spreads aren't even wider.
00:57They've held it exceptionally well. Part of that is due to the makeup of particularly the high-yield market,
01:03but the market in general. Like the high-yield market has much higher quality than it had ever been in
01:08the past.
01:09So it's insulated a lot from the turmoil that you're seeing in other markets like private credit or even leveraged
01:14loans.
01:14Well, it's interesting. You mentioned, you know, spreads have held up relatively well against the backdrop of much higher oil
01:20prices.
01:21Some people would look at that and say, this market is complacent. It sounds like that's not what you're saying.
01:27No, I actually think the market is a bit complacent. I think the market, I would expect to see volatility
01:32continue and that you would see spreads back up further.
01:36However, when you're looking at different, you have to look at each market in particular.
01:39If you look at high-yield, high-yield has most, the largest sector is energy.
01:44So it's a direct beneficiary of what you're seeing in oil prices.
01:47It's much different than what you'd see in other markets like private direct lending or leveraged loans where it's very
01:52small.
01:53Well, let's talk a little bit about the private markets because, I mean, even before February 28th,
01:58you saw a lot of concern in what was going on specifically in private credit,
02:02specifically for those with a lot of exposure to the software space.
02:07And I'm curious, you know, even though we have these competing narratives right now, geopolitics and what's going on with
02:14the AI trade,
02:15particularly when it comes to private credit, I mean, how has that developed over the past four weeks?
02:19Where do you stand on it right now?
02:21Well, I mean, we've been saying for a while that private credit has some very lax lending standards.
02:25Underwriting has been very poor in private direct lending.
02:28So when you think of that as the eye of the storm, much too much of it was in software,
02:3325 percent roughly in software lending.
02:36So when you have that type of situation where it's focused in that and then you have new information coming
02:42out as far as AI,
02:43which will be changing considerably even over the next few years, it brings a lot of doubt into the market
02:49like that.
02:50But then you look through and you can look at other markets like high yield or leveraged loans where there's
02:54a smaller percentage of AI or software.
02:58So software is very small in the high yield market.
03:01It's only about 4 percent and it's about 15 percent in leveraged loans.
03:05So, yeah, I know there are some people who are kind of looking at also as opportunities in this space.
03:10The idea that, OK, you know, now that you've seen maybe potentially the baby being thrown out with the bathwater,
03:15you can maybe come in and find some bargains.
03:17But one of your colleagues earlier this week kind of said at least right now he's not seeing a lot
03:20of opportunity there.
03:21And I am curious as to whether you see that might actually open up where maybe some of the conditions,
03:27at least based on what we can see publicly, has been maybe a bit oversold.
03:30Yeah, I mean, there are other there will certainly be oversold conditions.
03:33I don't think we're there yet.
03:34But what we're seeing come out right now as far as the loans that need to be sold,
03:39starting with some of the least creditworthy is what seems to be coming out.
03:44There's a lot of BCs, a lot of private direct lenders that need to reduce their position.
03:49So they're starting with some of these loans that, quite frankly,
03:52do not have the yields that are attractive when you consider the amount of risk that's involved.
03:57Does that risk now seem even more heightened, given what's going on in the Middle East
04:02and the idea that the second and third order effects into the economy might start to show up soon?
04:06Absolutely.
04:06And when you think about what's going on in the Middle East,
04:08it's obviously it's oil prices, which leads into other things like fertilizer.
04:12It's also just a supply chain disruption.
04:14I mean, the amount of ships that can make it through, the cost of the supply,
04:18the cost of sending out those ships, they've gone up by six times to send out a ship with oil.
04:25And then the other things that are sent over, like parts for communications, parts for technology,
04:30all of that feeds into it.
04:32It's first seen in companies when they start talking about their supply chain disruption
04:36and the costs that go into producing their goods.
04:39And so, again, if you were wrapping this into a portfolio, this view on energy,
04:43it sounds like you're going to find that in the high-yield markets.
04:46I do want to talk a little bit more about what we're seeing in the private side of things,
04:51because, you know, you think about particularly when it comes to investment-grade credit,
04:55there is that concern that you're going to see some of that turmoil in private credit
05:00start to infect the IG space.
05:03I mean, is that a narrative that you subscribe to as well,
05:07or is the daisy chain sort of not as direct?
05:10All of the markets are interlinked.
05:11We started by talking about treasuries, right?
05:13So all of the markets are interlinked.
05:15It's not like you can affect one with nothing on the others,
05:18but they're completely different as far as the risk that are involved in, say,
05:21private direct lending and the full other side, which is investment-grade, or even high-yield.
05:25So it's almost like a stone being thrown into the pond.
05:28They're going to have a ripple effect, but it'll be much less in investment-grade.
05:31Investment-grade big companies, just like high-yield,
05:33but big companies that have strong balance sheets mostly,
05:37and that's why they're investment-grade.
05:38Well, to your point that, you know, everything is interlinked here,
05:41let's go back, of course, to treasuries,
05:43and let's go back to the Federal Reserve because, okay,
05:46we've seen rate cut bets be totally evaporated over the past couple weeks.
05:51Now the conversation of a rate hike is happening once again.
05:56If we actually saw that play out, if the Fed did have to raise interest rates,
06:00I mean, how does that affect the conversation that we're having right now?
06:04I mean, so when we're thinking about oil prices
06:06and we're thinking about the supply chains I was talking about,
06:08that all feeds into inflation, right?
06:10So that is clearly why there's more on the table,
06:13the potential for the Fed to hike rates.
06:15If that was to come to fruition, it was to come to,
06:19you would see markets sell off further.
06:21They'd be very nervous about that, right?
06:23So even the idea of inflation,
06:24we'd rather see the Fed fighting against inflation if it was coming out,
06:27we don't want them to do nothing.
06:29But at the same time, when you have the fear of inflation,
06:32it hurts borrowers and it hurts the value of the fixed income.
06:37But we don't expect that to come to play.
06:39It's very early to bring that up at this point, you know, in the argument.
06:44Absolutely.
06:44Well, David, it's really great to get some time with you.
06:46That is David Forgash.
06:48He is a portfolio manager over at PIMCO.
06:50Now coming up, President Trump saying moments ago
06:52that he has no plans for a ceasefire with Iran.
06:56We'll dig deeper into the president's remarks when we return.
07:00We'll dig deeper into the president's remarks when we return.
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