00:00Margaret, let me start with you because my understanding is you meet with a lot of borrowers
00:03every year, something like 2,000. What do rising rates in treasury bond yields mean for those
00:09borrowers? It's got to change their calculus of whether they borrow now or wait in hopes of lower
00:14funding costs in the future. Yes. Thank you again for having me. Yeah, so there's an interesting
00:20dynamic going on in the market right now, and there's actually been a bit of a shift that we've
00:25seen so far with the issuance that we've experienced in September. And there's very much
00:30a focus, I think, of borrowers on where the interest rate market is. And so specifically,
00:36a lot of the issuance that we saw during the summer was dominated by the hyperscalers and very focused
00:42on the long end of the yield curve. What we're seeing so far in September, and we expect it to
00:47continue throughout the month at least, is that borrowers are focusing their issuance on the
00:51shorter part of the curve. So, so far in September, it's actually been concentrated seven years in
00:56end. And I think that's very much in response to what we're seeing going on in the treasury market,
01:00and borrowers are responding to that. What does that mean, Zach, for how much will be raised for
01:06the month of September overall? How do you think about that? I mean, there were some estimates of
01:09like up to $250 billion of issuance in September for investment grade. Bank of America is on the other
01:16end at about $190 billion. Yeah, September is certainly a big month for issuance historically
01:22as we come out of the summer slowdown. So we are expecting issuance to remain robust in September.
01:29And I think the other side of the coin, when thinking about what we're seeing in rates today
01:33and what it may mean for rates going forward is you may want to pull forward funding for fears that
01:39rates continue to go higher. And I think when you look at what's going on at the Fed, what's going
01:44on
01:44with Treasury and the buybacks and the market reaction so far? Concerns that the Fed may need
01:49to hike more than once or twice and concerns that attempts to control the long end have failed
01:56might pull forward issuers to invest or excuse me, to issue sooner rather than later for fears that we
02:03could be dealing with even higher interest rates in 2027. Margaret, we hear a lot about how the big
02:08hyperscalers are kind of price insensitive compared to companies in other sectors. How are they
02:14thinking about their issuance because they still need to pay for a lot of the AI build out?
02:19They do. Yes. I think it seems like for this year, for 2026, a lot of the issuance is behind
02:26them.
02:26Now they could certainly come back to the market. So they're done with tapping the US dollar credit
02:31market for now? I don't think they're done, but I don't think it will dominate corporate issuance
02:35as it had this summer specifically. And you've seen their spreads widen in response. And so if you look
02:42at the investment grade corporate market today, there's sort of two cohorts, right? So there's
02:46the hyperscalers, which in tenure space are trading about 40 back of the broad IG index. And then
02:52there's the broad IG index where we're seeing all of this issuance come in September. And actually,
02:57there's very little concession on top of secondary spread. So there's sort of this interesting
03:01dynamic that's emerged in the last few months where the hyperscalers are trading a bit differently
03:06from the rest of the market that we're observing.
03:08Yeah, we're seeing average yields for investment grade bonds trading above 5.5%, matching Liberation
03:14Day highs, all of this against this backdrop of more debt issuance and rising treasury yields.
03:19I wonder at what point, Margaret, some buyers run up against concentration limits in their portfolios
03:28because aren't most fund managers capped at like 3% or 5% on a single company's bonds?
03:33I think those are typical limits for issuer concentration, yes. But a lot of different
03:40issuers are issuing in the markets. And you're seeing them issue in dollar markets. And you
03:45referenced some of the sterling deals that have come to market as well. I think just the breadth
03:50of issuance means that there's still quite a lot of opportunity for active managers to
03:56choose the credits where they think the issuers are going to pay back in time.
04:02So I think that there's still, I don't expect concentration to be an issue, just given the
04:08breadth of issuance that we're seeing.
04:10Zach, you mentioned the macro conditions right now. Our interest rate strategist, Ira Jersey,
04:14pointed out that he just sees more volatility for the rates market, bigger sell-offs, shallower
04:19rallies as a result. How does that impact how credit trades, if you're seeing the treasury market,
04:24the rate market behave that way?
04:28Historically, you'd expect to see spreads widen, Scarlett. And I think it's really
04:32interesting, even amid the big rise in rates we've had so far, volatility hasn't ticked up
04:37too tremendously, at least looking back at long-term averages. And credit has been extremely well
04:43behaved. So I think if we do see a pickup in volatility, we'd expect to see credit spreads
04:49widen from these historically tight levels, should that be the case. And we do think that that
04:54is a more realistic outcome as we think about the highs in rates becoming higher and the troughs
05:01becoming higher as well. So that trend higher that you mentioned from Ira, we kind of agree with that
05:06and have been surprised so far at how well-behaved spreads have been. I think a big reason for that
05:11is there are many investors looking at the all-in yield and considering it attractive. You just
05:17mentioned the overall IG index above 5.5% all-in yield. And there's still plenty of cash in the
05:22system
05:23to be put to work for these high-quality names that are actually kicking off reasonable income when
05:28you invest in their bonds. So I think there is a little bit of a push and pull on the
05:32technical
05:32side. And that's something that we've been talking to clients a lot about, particularly as it pertains
05:36to the hyperscalers and considering the technical overhang of heavy supply to what is still very
05:42solid fundamentals on their balance sheets. Okay, so that's the high-quality names. You're starting to
05:48see things percolate below the surface in high yield. We have a chart that tracks the gap between
05:52triple C and single B. So these are the two lowest tiers in junk. And what you see is it's
05:57widening,
05:58certainly nowhere close to what we had during the recession. But we did see a spike in late 2022,
06:03and we're seeing a pickup again. Margaret, is this going to lead to a wave of defaults?
06:09I think what's going on in the triple C market and in high yield is very different from what's going
06:15on in the rest of the credit market. So you just pointed out the dispersion that's taking place
06:20with triple Cs. That basket of borrowers is very idiosyncratic. So within that basket,
06:27there are some troubled issuers that may default. Yes. I think what's important to remember is that
06:32the triple C component of the high yield index today is much smaller than it was years ago. So today,
06:39it's I think 10% or less, where double B rated bonds within the high yield space are over 50
06:45%
06:45of the benchmark. And when you look at different ratings cohorts and a similar spread chart,
06:50like what you just showed, if you're looking at double B's to triple B's or triple B's to single
06:53A's, what you actually see is the opposite, which is dispersion at or near historic lows.
07:00And so yes, there are some stressed issuers within the triple C space, but by large,
07:07the corporate markets are trading with very low dispersion.
07:11Got it. Zach, before I let you go, we have Oracle reporting earnings after the close today. It's
07:15got $130 billion in debt due by 2066. It's not even remotely close to being done with borrowing.
07:21What are the odds that we're going to get Oracle downgraded to junk?
07:26We think the odds are low, Scarlett, but the amount of debt outstanding is certainly attracting
07:32a lot of attention. We think the fundamentals are still solid. There's a lot of concentration risk
07:38with respect to open AI. And so there are some idiosyncratic risks. I'd say that the name
07:43already trades like a mid-double B. So from a relative value perspective, it's attractive.
07:47We'll be keeping a close eye on earnings tonight, but we are not calling for Oracle to become
07:53a fallen angel.
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