00:00Megan I'll start with you because I'm taking a look at your notes and you said that you're still bullish.
00:04You still forecast U.S. investment grade spreads to tighten to the 60s which certainly we're getting tight here. And
00:12I wonder you know how that intersects with all of that issuance that we've been talking about.
00:17Yes. So we I think we're out of consensus in terms of thinking that spreads can continue to grind tighter.
00:24And there's really three pieces to that view. I think the first is more medium term our site credit cycle
00:29view. We think we're mid cycle in credit markets still. So despite some signs of releveraging debt borrowing debt surging
00:36in certain sectors that we've just talked about overall there's a lot of sectors that are still very rate sensitive.
00:42So I think the supply absorption has is still manageable.
00:46And then also if you look at more tactical if you look at investor positioning investor positioning is not yet
00:52extended in in credit markets. We think we're just back to more of a neutral level. But there's still room
00:58for investors to add here. So for now we think yields will continue to dominate in terms of the demand
01:03picture supporting demand and then keeping supply at bay from those type of sectors and issuers that are a little
01:09more sensitive to the overall absolute level of yield borrowing.
01:13And that's the evergreen debate. Right. Yield versus spread. It seems like yields certainly are still attractive here. But Sonali,
01:20I want to talk about issuance with you as well, because that feels like the big topic when you talk
01:25about these public markets.
01:27And as Christina Minnis from Goldman was saying, it's not just an investment grade story. It's a high yield story
01:33as well. And I wonder, you know, how how you're thinking about all of this issuance coming through from especially
01:40the hyperscalers in a tech sector that classically hasn't been as active when it comes to the primary markets.
01:46Yeah, it's been a considerable amount of issuance. And when we look at this year's year to date issuance, it's
01:51already outpaced 2025 with respect to the AI focused issuance, you know, and none of these markets are big enough
02:00for the amount that needs to come.
02:02So we do expect issuance across asset classes, high yield, investment grade, asset based securities, direct lending as well.
02:11And, you know, I think it's providing opportunities for us to look at it and see where there's relative value,
02:18where there's either structure or covenants that can kind of help advocate on behalf of our investors in terms of
02:26the right type of issuance that's aligned with the type of credit exposures we're taking.
02:32So we do expect this issuance frenzy to continue. And in levered markets, to some extent, they've had much less
02:39net supply in recent years that this is somewhat of a welcome change.
02:43Although, again, being selective is going to be critical here.
02:46Let's talk about how this impacts demand overall, because some numbers here, as we've been talking about, you think about
02:53U.S. investment grade bond sales.
02:54They hit the one trillion dollar mark earlier this week. That's the quickest that they've reached that milestone since 2020.
03:00Then you think about U.S. Treasuries. The U.S. Treasury has announced around $1.4 trillion in new cash
03:08this fiscal year from Treasury sales.
03:11We heard from Apollo's Jim Zelte earlier on Bloomberg Television basically saying that you're seeing the potential for a long
03:18-term crowding out of government debt as you have more and more of this long-duration CapEx boom around the
03:24globe.
03:25And I wonder, Sonali, to start with you on that point, if that's a concern that you share, that demand
03:32for this very top-tier rated paper could crowd out demand for government debt.
03:38Yeah, I think there are different types of debt, right?
03:42And also remember, too, we're talking about AI, tech-related debt, where as you go out the curve, you start
03:47to worry about obsolescence.
03:49And that's where, again, when we talk about the structuring of this debt is so uncritical, right?
03:53So meaning having amortization alongside, say, if your security is GPUs or the like, right?
03:59There's ways to structure this that the credit itself is attractive, getting a meaningful pickup for if there's complexity in
04:06the structure as well in terms of spread.
04:08In terms of governments, the long-end, we're seeing under pressure to some extent with the heavy deficit financing of
04:20tax cuts and the like.
04:22And, you know, that's, I think, pressure independent of what we're seeing with corporates.
04:27Although the sheer amount that corporates need to issue, there will be those that are hedging and compounding to that.
04:32Yeah, duration is a dirty word.
04:34That certainly continues to be the case.
04:37And Sonali makes a fair point, of course, that it's not an apples-to-apples comparison, exactly what Jim Zelter
04:42is talking about here.
04:43But that concern does exist, Megan, and I wonder, you know, how you think about how this might impact demand
04:50across these two different asset classes.
04:52Yeah, I think there was more of a stronger substitution effect argument maybe a year ago.
04:58So rewind a year ago, before all these hyperscalers started to sell so much debt, there was more of an
05:04argument that they had very strong cash position,
05:06very low leverage, potentially a credit quality that was more aligned with a sovereign borrower.
05:13But now, fast forward this year, year to date, we've already seen $160 billion of borrowing.
05:18There's risk of potential downgrades.
05:20Of course, they're starting from very high and very strong credit ratings.
05:24But I think there is that story as well in the background.
05:28But for now, I think demand remains incredibly robust for the hyperscaler issuance in particular.
05:34It is skewed towards longer dated.
05:36So we've seen about 70% of the issuance common in 10-year plus.
05:41And it's not just domestic.
05:42You have foreign buyers as well that are finding this very attractive and a place for it.
05:48For example, in Taiwan, life insurance policies, life insurers have been a large buyer of a lot of this debt.
05:54Well, let's talk about the other big story out there, and that's what's happening in private credit.
05:59And I wonder what the read-through from what we're seeing in pockets of the private credit market,
06:04whether or not that extrapolates into the public markets.
06:09And, Megan, I would love to hear your thoughts on the ripple effects, potential ripple effects.
06:14So private credit, you know, no arguments.
06:16It's definitely the area of vulnerability this cycle.
06:19For now, we see kind of deterioration is moving very slowly, and it doesn't disrupt our constructive view on public
06:27markets.
06:28And I think you're continuing to see headlines around redemptions.
06:31We think that will continue with the BDCs.
06:34They don't have to meet all of the redemption requests.
06:37And we think that they will continue to cap those redemptions as they're permitted to do.
06:42I think the good news is, so far, why is all of this a risk?
06:46It's because people are worried about software and obsolescence, which Sonali mentioned earlier.
06:51What did we learn from earnings?
06:52So far, software, we got good news from earnings.
06:55So guidance was pretty good.
06:57People were very forward-looking in terms of addressing some concerns of investors.
07:02So we don't have that hard evidence yet that obsolescence is spreading across the software sector.
07:08On the contrary, exactly.
07:10And so for now, we are less worried and think the risks in private credit are contained in terms of
07:15the fundamental piece.
07:16Yeah, you talk about that strength that we've seen in earnings certainly has manifested in the equity markets and in
07:22the public credit markets.
07:23But, Sonali, the question is still out there.
07:25I mean, are you worried about any potential contagion there?
07:28Because at least when you think about some of these redemption requests, there are at least liquidity concerns.
07:34Yeah, I think what we're seeing so far is a re-rating of multiples, right?
07:37Deals done in 2021, multiples are coming down considerably.
07:41But still at this stage, it does seem a bit idiosyncratic, industry-specific, and not yet systematic.
07:49I think the important piece here, though, is as we see convergence between the public and private markets from a
07:56financing perspective,
07:57where issuers are having more choice, we are not seeing convergence from a liquidity perspective.
08:02There's a lot of hurdles here to get private credit to be liquid.
08:06For example, differences in access to information, differences from whether the issuer will approve the transaction to a new buyer.
08:17And these are hurdles that mean it's very difficult for it to become liquid.
08:21And I think where we are in the cycle and the opportunities set ahead,
08:26we are favoring having flexibility and liquidity in the portfolio construction.
08:29This is important.
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