00:00I think it's thinking about timescales locally the market is very well supported. I mean crisscrossing the world and there's
00:06demand everywhere in Asia, in Europe, domestically. So that's very, very strong. And it's exactly the story you've been telling.
00:12Yield, yield, yield is what is the name of the game. Longer term perspective exactly to the speaker before. The
00:20cover is quite thin here. We're really at very, very tight levels and there's quite a few risks. So longer
00:25term I think spread should be wider. Just again locally despite the huge issuance, the
00:29demand has been absorbing that extremely well. Well, Natalie, let's bring you in there because you think about spreads. I'm
00:36taking a look at your notes. You write that you believe that spreads could fall into the 60s. I mean,
00:42we haven't been at those levels since the 90s. What are the different dynamics that would actually lead us there?
00:48Yes, I think we could on a couple of factors. First, the technicals that Dominique mentioned, the demand for credit
00:54at yield above 5 percent is extremely compelling. But there's still the fundamentals
00:59picture with these companies that are really producing strong earnings. And even when they disappoint some of these companies, which
01:06may have big moves on the equity side to the downside, the bonds are rock solid. So, you know, I
01:11heard you talking about hyperscaler issuance early. There's been over $100 billion in U.S. dollar supply in corporates. And
01:20that's been met with incredible demand. Amazon came with $37 billion and had over $120 billion of demand.
01:27Well, that being said, I mean, talk to us about the idea out there. And we were just discussing this
01:31with James Crombie of Bloomberg News, that there is some concern about concentration risk, both at a sector level, but
01:38also when it comes to single names as well. I mean, you have the hyperscalers coming out and reaching into
01:44the couch cushions in a big way here. How are you thinking through that?
01:49I think that in the IG universe, and there's been a lot of supply, but the market is able to
01:55absorb it. It is a little bit concentrated.
01:57But some of the names in this universe, such as Microsoft, are the tightest trading names. They traded a spread
02:03in the 30s in their 10-year credit.
02:05And, you know, to the point that spreads could fall into the 60s. Back in the 1990s, mid-1990s, they
02:10were there from 1995 to mid-1998.
02:13So they can stay at these tight levels for a while.
02:16And, you know, as Natalie mentioned, when you think about the issuance that has come out, and I think we're
02:22approaching a trillion dollars right now in new issuance, certainly the demand so far has been strong.
02:27Do you expect that to continue? Or is there a certain point, you know, a certain threshold where we might
02:33start to see some indigestion?
02:34I think you're saying already all these issues, trying to tap all the possible markets, right, from the ABS, CNBS,
02:40private credit, public credit, in all the currencies possible.
02:43And so they are trying to tap all this market because the financing links are quite high.
02:48So in the index itself, you tend to have some saturation maybe because some of the investors we talked to
02:55have a 2% to 3% single-name issuer limit.
02:57That's, you know, the largest issuer is JP Morgan, $175 billion in the index.
03:02So you probably need to get to $250, maybe $300 to get to that threshold.
03:06They would have to pay more if they do that. Are they ready to pay more?
03:09Maybe because if they think the investment is so much worth it, they can't do it.
03:12But I think the bigger question is that all this issue that's appearing in these other asset classes is coming
03:18into the hands of the same investors at the end of the day.
03:20What I'm hearing from investors is now starting to commingle the risk, right?
03:24What is my exposure to meta to the public, private, different currencies, etc.?
03:28And that's going to reduce my appetite in this market.
03:31So, for instance, some large investors told me this hyperscaler issued in the private credit.
03:36I bought a lot in this. I'm not buying in the public market anymore.
03:39So I think you're going to start to see more and more of that dynamic.
03:42So what is coming just in the index is one thing.
03:45But I think what is coming outside of it will also impact what's happening in the index itself.
03:49Yeah, it's a great point that you have to have sort of a holistic view here, especially if you have
03:54issuers jumping between public and private.
03:57I do want to couch this conversation, what we're seeing in the broader macroeconomic backdrop here.
04:02Because, you know, we're talking about over the course of this show, the idea that you do have rate hikes
04:07entering the conversation.
04:09You're seeing that work its way through the treasury market.
04:11But you take a look at the credit market.
04:13It seems like it's being driven by earnings right now.
04:16At what point, though, do you think that you would start to see, you know, more of an impact of
04:21those geopolitical factors,
04:23those macroeconomic factors make themselves known in spreads?
04:26So if you look historically, you need two things really to derail credit.
04:29You need either to have tighter financial conditions or growth not being there.
04:33Right. In essence, companies have no solutions to just move forward.
04:37If it's just a Fed hike, it can be OK.
04:40But if growth slows down at the same time, it can be quite bad.
04:442018, the last latter part of 2018 was an illustration of that.
04:48So to me, that's the big risk we have to think about here, not just hiking in isolation.
04:52Is growth there as well?
04:53The issue for me is if you look growth in the first quarter, 1.6 percent, two-thirds of that
04:58is related to AI.
04:59So we also are starting to have a huge correlation around AI across the board, across the whole economy, across
05:05all the sectors we're looking at.
05:07And that's inherently is a danger.
05:08We like diversification.
05:10Well, AI is really the big driver of everything at this point.
05:13Absolutely.
05:14It certainly feels that way just looking at the price action.
05:16But, Natalie, I want to bring you in on the same point.
05:19I mean, we just heard from Dominique what he thinks could derail what we're seeing in credit markets right now.
05:24What's on your worry list as a potential concern?
05:28It is going to be the higher oil prices.
05:30Even if we get an extension of the ceasefire, high oil prices are likely to persist and we're running out
05:36of reserves.
05:37So that's one of the big concerns, and that's going to feed through to inflation.
05:41Also, tech has been a big part of inflation as well.
05:45So that's what we're thinking could derail markets and maybe cause a steepening of the underlying Treasury curve.
05:51And, Natalie, I'm taking a look at the notes that you sent over to our producers.
05:55You know, you write that we might not get any Fed cuts this year to help boost total returns.
05:59But let's talk about the other side of that conversation.
06:02What if we started to see Fed hikes come through as, you know, some markets are pricing in right now?
06:07What would be the read-through into credit?
06:11That would probably have a slightly detrimental effect.
06:13But if it's only one hike, that's not going to do a lot.
06:16That's kind of what we're pricing in already.
06:19And we're seeing generally when you see rates move sharply higher, you'll see a widening in credit spreads.
06:24And we haven't seen that in this last move.
06:26So investors are just focused on the yield and not the spread.
06:29And there's still a lot of money on the sidelines that are looking at long duration.
06:33It's the 30-year bonds, which are always getting the most demand in corporate.
06:36So we think there's still money on the sidelines that if we see a move higher in underlying rates, that
06:41they're going to be there to buy.
06:42People want to buy the dip.
06:43And we just aren't really getting that much of a dip in terms of credit spreads.
06:47But maybe we'll get one in rates, which is a buying opportunity.
06:50Absolutely.
06:50Well, let's talk about that a little bit, Dominique, because it feels like for so long,
06:54duration has been kind of a dirty word.
06:56People have been really reluctant to extend out there.
06:59And I wonder how you're thinking through that, especially if we do start to see some slowing growth.
07:05So generally speaking, what is key to what Natalie is talking about is the demand for high-quality long-end
07:11comes from investors,
07:13insurance company, pension funds that don't do mark-to-market.
07:16What they're really looking at is the entry point on the yield.
07:18So you can get 5.5, 5.6, 5.7 percent in single-A long-end.
07:23It's fantastic for them.
07:25So this is a very, very good entry point altogether.
07:29Now, again, as we discussed earlier, if we start to feel a fear of recession that's increasing,
07:34which is nobody's base case at this point, but if we have that, then they might slow down into what
07:38they buy
07:39to maybe buy a better entry point, fly to quality, and this kind of trade that we tend to see.
07:44But it's, again, not at all in the cards right now.
07:46The U.S. economy looks robust.
07:48All the data we're getting are pretty good.
07:50So you get this yield historically, that's a very good entry point.
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