00:00So there's a lot to get into when it comes to high yield, but we have to couch this conversation
00:04in what we just heard from the Federal Reserve. So a clear focus here on inflation, restoring
00:11and maintaining price stability, and the idea that, you know, we could see a Fed in a holding
00:16pattern for a while right now, and their next move is a coin flip. How does this sort of wrap
00:21into your world of high yield debt? Well, we pay a lot of attention to interest rates in the fixed
00:28income market. Fortunately, in high yield, we're in a very short duration asset class. So that kind of
00:33protects us somewhat. You know, the volatility we're seeing post the presser today, the volatility
00:40we've seen these with these various tensions in the market on a year to date basis, it's really
00:44impacted rates and equities much more so than in the world of fixed income. And in fact, the last
00:51couple of years, those those markets have had three to four times the level of volatility, as we've seen
00:57in high yield. So what we really focus on is true credit risk and underwriting the portfolios on a
01:03very disciplined basis. And as you mentioned, we are in a pretty good spot already. As we know,
01:10corporate earnings have been very resilient this year. That's going into the high yield market as
01:15well. We've got now more than 60 percent of our credits are double B rated and just about 8 percent
01:21of global high yield is triple C rated. So you're not seeing a lot of new junky assets coming in.
01:27I think only 3 percent of our market so far this year has actually had triple C ratings attached to
01:32it. Interesting. Well, within that that disciplined approach, I do want to talk about valuations a
01:37little bit because it's a conversation we've been having for both investment grade and high yield for
01:42months, maybe years now. The fact that spreads are very, very tight. They keep just seem to keep
01:49grinding tighter. You make the point, though, that the valuation discussion is a little bit more
01:53nuanced than that. So what different details and inputs are you looking at there? That's that's
01:59right. I think we have to take into consideration the structural changes of the last couple of decades
02:04in the market. So on an absolute outright basis, you can't argue that spreads look tight relative to
02:11the historical standards. But I think we've been in this long range bound zone because we are in a
02:17healthier market. If you go back over time and really adjust those spreads to be today's ratings
02:23composition, today's historically low short duration profile. We also have a record high level of
02:30secured bonds that make up our market. So if you make those adjustments, the spreads look not so not so
02:37tight. Also yields continue to stand out. They're really elevated. We can get double B credits between six and seven
02:44percent single B's seven to eight percent. And that story kind of works for good institutional clients
02:51like on the pension and insurance side. It certainly does. And there's been a lot of talk that those
02:55yields will remain relatively elevated no matter what the Fed does, certainly at least short term,
03:00no matter what the Fed does. I am curious, though, and I know we don't want to make too much
03:04of what
03:05we're seeing with regards to Treasury yields in terms of the effect on there. In fact, I've heard the big
03:09argument as of late that you probably get more of a cue on what's going on in the Treasury market
03:13from
03:13what's going on right now in the corporate space. But when you look at macro conditions and, you know,
03:18as much as you can divide them from your seat here, do you not see any risk that credit risk
03:24increases?
03:25Yeah. So there's definitely been a push and pull. You've had that strong corporate outlook. You've had
03:30the really AI fueled growth that's going on in that space. But on the other side, there's certainly been
03:36concerns around inflation because the ran war really complicated matters. You've had oil prices at
03:43at very high levels. Hopefully, let's hope that a piece deal really does get buttoned up soon. And I
03:49think that can really provide a nice reprieve to those concerns. But outside of energy, we definitely
03:57have seen pipeline pressures because of that AI build out. You know, you have pretty extreme prices
04:02and the input costs that are going there, difficulty in finding the labor and building out some of those
04:07data center assets. And so those those can be areas of concern.
04:13Is that an extreme concern, though? I mean, I mean, we talk about this that said being sold and
04:17obviously the actual sort of proof of life, if you will, or when these data centers are actually up
04:22and running. There is a longer duration to certain extent than maybe what some people realize.
04:27Is that a worry or do you sort of factor that in as you sort of look for whatever rate
04:31you're going to
04:31take? So in the AI space specifically, that's really a nascent but rapidly growing market within the world of
04:38high yield. And so at Bearings, we have come up with a very specific criteria and framework as to how
04:44we are
04:45going to underwrite those credits. And so it needs to check off certain boxes for us. Things like IG counterparties,
04:52take or pay agreements. Where are these locations of data centers? Are they near population centers?
04:59Who are the energy engineering companies that are building them out? There's just a number of things
05:04that need to kind of fit fit the box there. Overall, I think there are some very good investable
05:09opportunities. Right now, it's only maybe two, two and a half percent of our market. But based on what I'm
05:15hearing, it sounds like that could easily double by the end of the year. It's the AI space has really
05:21been about 40 percent or so of all new issue that's actually come our way in recent months.
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