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00:00:23:14 - 00:00:25:01
Welcome back to Markets Mindset.
00:00:25:06 - 00:00:27:09
Once again here with Moshe Tomkiewicz, Head of DCM, and
00:00:27:09 - 00:00:28:22
Colby Griffith, Head of Debt Syndicate.
00:00:28:23 - 00:00:30:07
It's been a while since we've been together.
00:00:31:06 - 00:00:34:04
A lot has happened in that short while here.
00:00:34:10 - 00:00:38:02
We're, what are we, eight weeks into hostilities overseas,
00:00:38:15 - 00:00:41:00
and we are at an epic pace in terms of
00:00:41:00 - 00:00:42:01
supply at this moment.
00:00:42:04 - 00:00:44:19
So let's just kick it right off, start with you, Colby.
00:00:45:16 - 00:00:48:23
We're sitting here, end of February, beginning of March,
00:00:49:04 - 00:00:50:16
hostilities kick up over the world.
00:00:50:16 - 00:00:54:21
We see an initial reaction that seems familiar, right?
00:00:54:21 - 00:00:58:04
Volatility kicks up, spreads widen out to begin with, but
00:00:58:04 - 00:01:01:17
then now we stand here roughly four months almost into
00:01:01:17 - 00:01:07:01
the year, record-setting supply pace, $775 plus minus
00:01:07:01 - 00:01:09:00
billion of supply.
00:01:09:04 - 00:01:10:15
We're on a record, we're on a pace for, what,
00:01:10:15 - 00:01:12:20
$2.2 trillion if we kept this, even when you
00:01:12:20 - 00:01:13:23
take out some of the holidays.
00:01:15:18 - 00:01:18:07
Spreads are within, back to within seven basis points of
00:01:18:07 - 00:01:20:08
three decade tights.
00:01:20:08 - 00:01:22:14
Market seems to be, every time something goes on in
00:01:22:14 - 00:01:24:05
the world, market seems to be seeing light at the
00:01:24:05 - 00:01:24:16
end of the tunnel.
00:01:24:18 - 00:01:27:00
They seem to be seeing, you know, that there's a
00:01:27:00 - 00:01:29:10
point where it's going to be all rainbows and roses
00:01:29:10 - 00:01:31:16
at some point, and it's held together extraordinarily well.
00:01:31:19 - 00:01:34:19
Technicals on new issues, plus minus five basis points, new
00:01:34:19 - 00:01:37:00
issue premiums over subscriptions four plus times.
00:01:37:05 - 00:01:39:10
Why, what is it, what's the dynamic going on right
00:01:39:10 - 00:01:43:23
now that's just kept us pretty much intact, except for
00:01:43:23 - 00:01:45:13
a couple of bumps along the road, and maybe a
00:01:45:13 - 00:01:49:04
few days that aren't issuer-friendly, but able to digest
00:01:49:04 - 00:01:51:15
that kind of supply, in good fashion, mind you?
00:01:51:16 - 00:01:53:15
Yeah, no, I think you hit on a lot of
00:01:53:15 - 00:01:57:00
the points that we've been making over
the last couple of weeks.
00:01:57:00 - 00:01:58:15
Concessions are slightly elevated.
00:01:59:00 - 00:02:01:01
We've gone from a zero to, call it two or
00:02:01:01 - 00:02:03:18
three basis point average concession, to something that's
00:02:03:18 - 00:02:06:14
more, on average, about five basis points, which, sure,
00:02:06:16 - 00:02:10:05
it's a little elevated, but not by big,
00:02:10:05 - 00:02:12:10
large standards by any means.
00:02:12:20 - 00:02:13:17
What's been driving it?
00:02:13:17 - 00:02:15:23
I think, one, there were, coming into the year, there
00:02:15:23 - 00:02:18:02
were huge expectations for supply.
00:02:18:09 - 00:02:18:12
Yep.
00:02:18:15 - 00:02:21:02
So I don't think the fact that we're running 25%
00:02:21:02 - 00:02:25:16
ahead versus last year is really catching people off sides.
00:02:25:19 - 00:02:26:03
Right.
00:02:26:03 - 00:02:28:04
If you look at the average expectation for the year,
00:02:28:05 - 00:02:31:11
it was really somewhere between $1.9 and $2 trillion.
00:02:32:03 - 00:02:34:21
If you take 25% above where we finished last
00:02:34:21 - 00:02:38:01
year, it gets you right to, effectively, a $2 trillion number.
00:02:38:05 - 00:02:40:19
So I think that's one positive factor that has helped
00:02:40:19 - 00:02:41:21
us manage this supply.
00:02:42:11 - 00:02:45:13
Two, as far as the Iran war goes,
00:02:45:19 - 00:02:49:00
I think the market investors have certainly been looking
00:02:49:00 - 00:02:51:20
towards it being more of a short-term versus a long-term.
00:02:52:16 - 00:02:56:09
Expectations that there would be some form of an
00:02:56:09 - 00:02:59:11
off-ramp in the, you know, call it more short versus
00:02:59:11 - 00:03:01:22
medium or certainly not a long-term type thing.
00:03:01:22 - 00:03:04:13
I think that's been very supportive.
00:03:04:20 - 00:03:07:06
I think, to some extent, a lot of investors in
00:03:07:06 - 00:03:09:14
our market view our market as a —
00:03:09:14 - 00:03:11:10
We were out with an investor last night, and they mentioned
00:03:11:10 - 00:03:13:16
how the IG is very much a mean reversion type
00:03:13:16 - 00:03:16:10
market where you may have swings, high or low, but
00:03:16:10 - 00:03:18:09
we tend to kind of move back to the middle.
00:03:18:09 - 00:03:21:00
And so I think whenever we saw that widening, we
00:03:21:00 - 00:03:24:08
saw investors kind of step in and move us back lower.
00:03:24:08 - 00:03:26:07
I think this is part of the importance, or one
00:03:26:07 - 00:03:28:08
of the more important, is where we are from a
00:03:28:08 - 00:03:29:19
yield perspective, right?
00:03:29:21 - 00:03:32:00
If you look at where we are on the index,
00:03:32:14 - 00:03:35:02
we've been over 5% of the index since the
00:03:35:02 - 00:03:37:00
beginning or since about the middle part of March.
00:03:37:03 - 00:03:39:20
We're about 25 or 30 basis points higher on the
00:03:39:20 - 00:03:41:09
year from a yield perspective.
00:03:41:17 - 00:03:44:04
We really haven't been at these types of yields on
00:03:44:04 - 00:03:47:15
the IG index since about July of last year.
00:03:47:21 - 00:03:50:04
And so I think that's been very helpful for spreads
00:03:50:04 - 00:03:52:20
as you have yield buyers come into the market.
00:03:53:01 - 00:03:55:22
I've been fascinated with the fact that supply for the
00:03:55:22 - 00:03:57:13
year, net supply for the year, right?
00:03:57:13 - 00:04:02:06
We've talked about this.
Up 60%, which to me says this
00:04:02:06 - 00:04:04:00
supply is being taken down by new money.
00:04:04:19 - 00:04:06:09
Where is that money coming from?
00:04:06:12 - 00:04:07:11
Where do you see it?
00:04:07:11 - 00:04:09:14
Because it's not just, we knew we came in this
00:04:09:14 - 00:04:12:16
year with large maturity towers increasing over the next
00:04:12:16 - 00:04:16:01
five years, but that's not what's driven the demand over
00:04:16:01 - 00:04:17:00
the first four months.
00:04:17:00 - 00:04:19:23
When you think about net supply up 60%, up over
00:04:19:23 - 00:04:21:22
100% net supply for financials.
00:04:21:23 - 00:04:24:01
Right, so I think some of that is kind of
00:04:24:01 - 00:04:26:23
a calendar or a timing thing as far as the
00:04:26:23 - 00:04:31:10
net numbers because if you look at net issuance in,
00:04:31:17 - 00:04:33:11
call it the first quarter or the first four months
00:04:33:11 - 00:04:36:23
of last year, and particularly the start of the second
00:04:36:23 - 00:04:40:23
quarter, there was very high redemption numbers because
00:04:40:23 - 00:04:43:08
there was a lot of the five-year paper that
00:04:43:08 - 00:04:45:14
was issued in the early days of Covid, right?
00:04:45:17 - 00:04:48:19
March, April, etc., May, which were the largest months
00:04:48:19 - 00:04:50:09
we've ever had from an issuance perspective.
00:04:50:13 - 00:04:53:17
And so last year's net issuance, kind of in this
00:04:53:17 - 00:04:55:12
part of the calendar, right where we are right now,
00:04:55:14 - 00:04:58:09
is a little bit suppressed because there were such high
00:04:58:09 - 00:04:59:05
redemptions last year.
00:04:59:15 - 00:05:00:14
So technically lower.
00:05:00:16 - 00:05:01:09
Technically lower.
00:05:01:23 - 00:05:03:18
As we get into the later part of this year,
00:05:03:18 - 00:05:06:05
I think that will normalize because we do see higher
00:05:06:05 - 00:05:08:21
redemptions in this year kind of more evenly balanced
00:05:08:21 - 00:05:09:12
throughout the year.
00:05:09:16 - 00:05:12:03
Now, to answer your question about where the demand's
00:05:12:03 - 00:05:14:23
coming from, I think one of it is we are
00:05:14:23 - 00:05:16:23
seeing some yield buyers that have been maybe a little
00:05:16:23 - 00:05:20:06
bit more cautious because of where
coupons were, come back
00:05:20:06 - 00:05:21:03
into the market.
00:05:21:04 - 00:05:25:02
So we've seen, if you look at insurance participation over
00:05:25:02 - 00:05:28:00
the first quarter of the year and something that we
00:05:28:00 - 00:05:31:21
track in our new issues, we've seen their order sizes
00:05:31:21 - 00:05:34:23
from insurance companies or percent of the orders go up
00:05:34:23 - 00:05:37:18
from 10% to 15% during the first quarter.
00:05:37:23 - 00:05:40:10
We also saw their percent of allocations go from
00:05:40:10 - 00:05:41:16
15% to 20%.
00:05:41:16 - 00:05:42:23
So I think that's part of it.
00:05:43:13 - 00:05:46:13
We've also, outside of two weeks, a couple of weeks
00:05:46:13 - 00:05:50:05
ago, had seen pretty good inflows into our market.
00:05:50:11 - 00:05:50:18
Right.
00:05:50:18 - 00:05:53:10
Two weeks before tax day, actually.
00:05:53:10 - 00:05:54:02
Before tax day.
00:05:54:04 - 00:05:54:11
Think about it.
00:05:54:13 - 00:05:57:13
And so we were sitting at about $37 billion if
00:05:57:13 - 00:05:59:06
you look at one of the providers.
00:05:59:16 - 00:06:01:12
At this point last year, we were only at $8
00:06:01:12 - 00:06:03:14
billion by that same metric.
00:06:03:21 - 00:06:06:18
We didn't get to the $37, $38 billion type number
00:06:06:18 - 00:06:08:22
until really kind of the middle of the year.
00:06:09:01 - 00:06:10:18
And so I think that's been helpful as well.
00:06:11:05 - 00:06:12:01
I'm going to switch to Moshe.
00:06:12:02 - 00:06:13:05
I'm going to switch to you on the issuer side
00:06:13:05 - 00:06:13:16
of the equation.
00:06:14:14 - 00:06:16:15
So there is a truce taking effect.
00:06:17:01 - 00:06:20:00
We can all debate whether it's going to be durable
00:06:20:00 - 00:06:22:06
or not, but let's for a second say that it's
00:06:22:06 - 00:06:24:01
relatively durable.
00:06:24:10 - 00:06:26:12
The last two months, we've come through in pretty good
00:06:26:12 - 00:06:27:16
stead, as you heard Colby go through.
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The demand is there.
00:06:28:10 - 00:06:31:06
Do you think now that there's more of an official
00:06:31:06 - 00:06:34:11
attempt at a truce, do you think issuers have the
00:06:34:11 - 00:06:35:13
ability now to sit back?
00:06:35:21 - 00:06:37:14
Do you think issuers have the ability to wait to
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see if oil prices come back down, we get a
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grind back in rates lower because the Fed now maybe
00:06:45:04 - 00:06:46:02
has more leeway?
00:06:46:08 - 00:06:48:14
Although I will say right now, you look at the
00:06:48:14 - 00:06:51:08
World Interest Rate Probability (WIRP) index,
it's saying there's only maybe a third of
00:06:51:08 - 00:06:54:15
an ease built into the system by the end of
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the year even.
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I mean, we at one time were at two and
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a half eases.
00:06:57:18 - 00:06:59:23
Right now we're back at maybe a third of an ease.
00:07:00:11 - 00:07:02:16
Do you think it gives issuers an ability to wait
00:07:02:16 - 00:07:04:03
now and be a little more selective?
00:07:04:06 - 00:07:06:09
Or do you still think there is a reason to
00:07:06:09 - 00:07:08:17
move forward, get your financing done in this window and
00:07:08:17 - 00:07:09:13
not take chances?
00:07:10:00 - 00:07:12:18
I'm more of a no chance guy to be completely
00:07:12:18 - 00:07:13:16
candid with you.
00:07:13:20 - 00:07:18:05
So if you just take a step back, so before
00:07:18:05 - 00:07:22:02
February, right before February, tens were trading at 4.20%.
00:07:22:17 - 00:07:24:10
Then we kicked into February.
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Then you started to see yields fall and oil rise.
00:07:28:08 - 00:07:31:22
So the market was already starting to bake in some
00:07:31:22 - 00:07:36:02
geopolitical premium into crude and some flight to safety
00:07:36:02 - 00:07:37:05
factor into rates.
00:07:37:08 - 00:07:39:08
It turned out to be the wrong bet, but that's
00:07:39:08 - 00:07:40:10
what ended up happening.
00:07:40:23 - 00:07:44:02
So when I think about, like in terms of a
00:07:44:02 - 00:07:48:07
valuation reference point, kind of pre-war, post-war,
00:07:48:07 - 00:07:50:04
I don't look at 4% tens.
00:07:50:06 - 00:07:52:08
I look at more 4.20% tens.
00:07:52:08 - 00:07:55:04
And that's basically where we are.
00:07:55:10 - 00:07:58:23
So I think, sure, all our clients have financial
00:07:58:23 - 00:08:01:08
flexibility that they could sit back and wait.
00:08:01:17 - 00:08:03:13
At least from where I sit, I think the risk
00:08:03:13 - 00:08:07:04
reward profile is somewhat asymmetric, at least on the risk.
00:08:07:04 - 00:08:10:16
So you don't think the view changes if the war
00:08:10:16 - 00:08:11:17
starts going behind us?
00:08:11:22 - 00:08:14:02
Fed testimonies, Fed hearing has started, confirmation
00:08:14:02 - 00:08:15:01
hearings have just started.
00:08:15:03 - 00:08:17:19
And obviously people have a view that the new Fed
00:08:17:19 - 00:08:21:01
chair is more of a dove or at least maybe
00:08:21:01 - 00:08:22:15
wants to get what the administration wants done.
00:08:22:17 - 00:08:24:21
You don't think that necessarily bleeds into the market
00:08:24:21 - 00:08:28:13
where an issuer should be waiting for 4% or the 3.95%?
00:08:28:13 - 00:08:30:18
I mean, if that bleeds into the market, it'll bleed
00:08:30:18 - 00:08:32:07
into the front end, right?
00:08:32:09 - 00:08:35:05
If you're looking to go out the curve, then you go.
00:08:35:13 - 00:08:38:19
If you're dead set on doing a two-year fixed
00:08:38:19 - 00:08:42:10
rate paper, then maybe you wait, but most of our
00:08:42:10 - 00:08:45:02
clients aren't just doing a two-year fixed rate paper.
00:08:45:06 - 00:08:46:17
Now talk to me about going forward here.
00:08:47:02 - 00:08:48:16
You try to get the war behind you.
00:08:48:16 - 00:08:51:15
A lot of people ask when do, when or if,
00:08:51:21 - 00:08:53:23
I'm not going to say when, when or if do
00:08:53:23 - 00:08:58:22
midterms become maybe a question mark,
a point of volatility?
00:08:59:04 - 00:09:01:12
When do we start getting into that where maybe it
00:09:01:12 - 00:09:04:10
becomes an issue to talk about with issuers and do
00:09:04:10 - 00:09:05:22
you want to finance earlier or later?
00:09:06:01 - 00:09:08:15
Do you want to wait to the third quarter to
00:09:08:15 - 00:09:09:03
do things?
00:09:09:12 - 00:09:11:20
My conversations about the midterms haven't been
00:09:11:20 - 00:09:16:16
necessarily about it being as this pivot point in either
00:09:16:16 - 00:09:18:11
the rate backdrop or risk sentiment.
00:09:19:00 - 00:09:23:01
My point in the conversation I'm having with my clients
00:09:23:01 - 00:09:27:09
is about the M&A impact of the midterms because
00:09:27:09 - 00:09:32:16
I think most CEOs, if not all CEOs, will see
00:09:32:16 - 00:09:38:13
a progressive wave in the midterms
as a potential precursor to 2028.
00:09:39:08 - 00:09:42:12
And so as a result, any big ticket M&A
00:09:42:12 - 00:09:44:14
that they're thinking about, they're going to want to hit
00:09:44:14 - 00:09:45:23
the fast-forward button on it.
00:09:46:09 - 00:09:49:22
So that's really where the midterm conversation comes into
00:09:49:22 - 00:09:52:07
the dialogue with the clients, not as much of what's
00:09:52:07 - 00:09:53:07
going to happen in the market.
00:09:53:13 - 00:09:53:18
Okay.
00:09:54:02 - 00:09:55:06
Colby, so back to you.
00:09:56:08 - 00:09:57:20
You know, we talked about spreads.
00:09:58:09 - 00:10:00:06
I think it's the Bloomberg Index
spreads right now, are what,
00:10:00:07 - 00:10:01:03
78, 79?
00:10:01:22 - 00:10:04:21
I think maybe during the height of the situation here
00:10:04:21 - 00:10:08:07
over the last eight weeks, we got as high as
00:10:08:07 - 00:10:10:11
the mid-90s, low mid-90s, somewhere in 93.
00:10:10:18 - 00:10:12:20
Given where we are right now and given the backdrop,
00:10:12:20 - 00:10:14:14
where do you see spreads going?
00:10:14:21 - 00:10:15:21
What I would say is it does feel
00:10:15:21 - 00:10:17:20
like the market, to your point, has moved
00:10:17:20 - 00:10:19:13
past the war at this point, right?
00:10:19:14 - 00:10:21:06
And so we've kind of returned back to
00:10:21:06 - 00:10:23:07
the things that we were worried about or
00:10:23:07 - 00:10:27:03
talking about pre— you know, middle of February.
00:10:27:03 - 00:10:31:14
So obviously the economy, earnings, private credit,
00:10:31:17 - 00:10:33:05
although that's caught in kind of a bid over
00:10:33:05 - 00:10:34:11
the last couple of days here.
00:10:35:00 - 00:10:37:01
I think the other big factor is supply.
00:10:37:04 - 00:10:38:18
It kind of goes back to that again.
00:10:39:18 - 00:10:41:15
As far as kind of where we are
00:10:41:15 - 00:10:43:17
from a spread perspective, as you pointed out,
00:10:43:20 - 00:10:45:09
we're in that high 70s type number.
00:10:46:12 - 00:10:48:15
I think, quite frankly, I think it's going
00:10:48:15 - 00:10:50:15
to be hard to go much tighter than
00:10:50:15 - 00:10:51:18
where we are right now.
00:10:52:06 - 00:10:54:09
I think if anything, there's probably a little bit of
00:10:54:09 - 00:10:57:15
a bias to move higher, but I still believe, particularly
00:10:57:15 - 00:10:59:21
if we sit where we are from a rates perspective,
00:11:00:00 - 00:11:02:10
to Moshe's point, kind of around a 4.20% plus or
00:11:02:10 - 00:11:05:22
minus, I think anytime you move into the low to
00:11:05:22 - 00:11:08:14
mid-80s, you're going to find some more support from
00:11:08:14 - 00:11:09:06
the investor base.
00:11:09:19 - 00:11:11:20
And so I think it's a boring answer to say,
00:11:11:23 - 00:11:14:04
but unfortunately I think it's the answer I believe in,
00:11:14:15 - 00:11:16:03
is that we're going to be in some kind of
00:11:16:03 - 00:11:19:23
a range between maybe as best in mid-70s and
00:11:19:23 - 00:11:22:23
probably as wide as call it mid-to-high 80s
00:11:23:16 - 00:11:25:03
for the next couple of weeks here.
00:11:25:10 - 00:11:30:18
So take that spreads are relatively
in a band, treasuries maybe
00:11:30:18 - 00:11:31:20
relatively in a band.
00:11:32:05 - 00:11:35:06
We've seen the effect with the VIX coming down below
00:11:35:06 - 00:11:37:13
20, the MOVE Index is back down at 70.
00:11:37:16 - 00:11:39:07
We're all at levels that were well before the war.
00:11:39:20 - 00:11:42:17
Hybrids, which are coupons, forget spreads for a second,
00:11:42:19 - 00:11:46:01
those are coupon, resurgence of demand in that product.
00:11:46:09 - 00:11:49:03
We saw a couple of issuers recently do non-call
00:11:49:03 - 00:11:50:22
seven that went extraordinarily well.
00:11:51:03 - 00:11:53:01
We saw an issuer who for the first time put
00:11:53:01 - 00:11:57:07
the floor product on their dual-tranche transaction, $9,
00:11:57:10 - 00:11:59:10
$10, $11 billion book for that trade.
00:11:59:17 - 00:12:02:10
We saw some of the BBs get done recently.
00:12:02:21 - 00:12:04:13
That product seems to have caught a bid.
00:12:04:15 - 00:12:05:15
It kind of faded for a little bit.
00:12:05:16 - 00:12:06:08
Now it's got a bid.
00:12:06:11 - 00:12:08:21
If we're going to stay at such a kind of
00:12:08:21 - 00:12:11:16
dull, I'll say band in terms of spreads and yields,
00:12:11:22 - 00:12:13:10
should that not help that product?
00:12:13:12 - 00:12:15:07
And do you see it returning to the types of
00:12:15:07 - 00:12:18:04
coupons we saw before where the five-year product is
00:12:18:04 - 00:12:20:13
coming in at the 5.75 to 5.78 type
00:12:20:13 - 00:12:22:16
coupon ranges, or do you think there's still going to
00:12:22:16 - 00:12:25:12
be a little bit of indigestion as we get back
00:12:25:12 - 00:12:26:00
down to fives?
00:12:26:01 - 00:12:27:23
Because we couldn't fully hold them for a long period
00:12:28:11 - 00:12:29:18
when we got there last time.
00:12:30:04 - 00:12:32:00
Yeah, well, I'll give you my view, and certainly love
00:12:32:00 - 00:12:33:09
to hear your view as well.
00:12:33:12 - 00:12:36:20
I think, you know, when you talk about stability, right?
00:12:36:22 - 00:12:39:14
And what does that usually mean for spreads if you
00:12:39:14 - 00:12:40:22
think about it historically, right?
00:12:41:05 - 00:12:43:23
In that type of scenario, you usually see duration
00:12:43:23 - 00:12:46:21
outperform and quality arguably underperform.
00:12:47:11 - 00:12:49:13
And so if we believe, and we've kind of talked
00:12:49:13 - 00:12:51:13
about it, you pointed out the MOVE Index has moved
00:12:51:13 - 00:12:54:20
back below to the levels that we were pre-war, and
00:12:54:20 - 00:12:59:11
quite frankly, lower than where we were for most of 2025.
00:12:59:22 - 00:13:02:20
Outside of a couple of weeks in the fourth quarter,
00:13:03:15 - 00:13:05:22
that should be positive for hybrids.
00:13:06:04 - 00:13:10:00
You know, it's certainly lower rated, not AA, single A
00:13:10:00 - 00:13:10:16
type paper.
00:13:10:16 - 00:13:14:13
So as we've seen kind of spreads continue to compress,
00:13:15:01 - 00:13:16:23
I would put hybrids in that category.
00:13:17:06 - 00:13:18:19
You know, I was having a conversation with our index
00:13:18:19 - 00:13:21:11
trader the last couple of days, 13 of the last
00:13:21:11 - 00:13:25:13
14 days, high yield has outperformed the IG CDX index.
00:13:25:17 - 00:13:29:01
As that compression trade just continues to grind tighter,
00:13:29:04 - 00:13:30:10
and I think that's part of the reason you're seeing
00:13:30:10 - 00:13:31:06
it in hybrids.
00:13:31:18 - 00:13:33:18
If that continues, there's no reason to think that it
00:13:33:18 - 00:13:37:05
won't kind of maintain a very good market for hybrid issuance.
00:13:37:05 - 00:13:39:09
I have to admit, I'm with you on that.
00:13:39:09 - 00:13:42:10
I've always had that belief that, and when I look
00:13:42:10 - 00:13:44:16
back and you look at the MOVE Index, whether one
00:13:44:16 - 00:13:46:16
is cause for the other, it's the other way around.
00:13:47:05 - 00:13:50:06
When the MOVE Index got to its lows, our index
00:13:50:06 - 00:13:51:21
spreads got to their lows, right?
00:13:51:23 - 00:13:53:00
In January, February.
00:13:53:08 - 00:13:56:02
But I always maintain that when treasury volatility comes
00:13:56:02 - 00:13:59:19
down, that the bid for product that prices in coupon
00:13:59:19 - 00:14:02:06
or trades in price always seems to get better.
00:14:02:07 - 00:14:05:02
And that's high yield is compressing, and we see the
00:14:05:02 - 00:14:05:23
hybrids compressing.
00:14:06:00 - 00:14:07:19
And if you take a look, we've done some deals
00:14:07:19 - 00:14:10:01
lately where some of the big buyers have been high
00:14:10:01 - 00:14:14:10
yield buyers, going up and buying BB hybrids, BBB hybrids.
00:14:14:13 - 00:14:18:08
They're getting high BBB or weak A credits in
00:14:18:08 - 00:14:21:12
hybrid format, but they're getting yields they can't get in
00:14:21:12 - 00:14:23:13
the BB range even in the shorter end.
00:14:24:00 - 00:14:26:23
And so we've seen that bid, I think, just been
00:14:26:23 - 00:14:30:04
a resurgence with the lower volatility in treasuries.
00:14:30:10 - 00:14:31:00
I'm with you.
00:14:31:02 - 00:14:32:14
I think if we stay here, if we don't get
00:14:32:14 - 00:14:35:06
a big sell-off in rates and rates stay in
00:14:35:06 - 00:14:37:04
this band, I do think we're going to get the
00:14:37:04 - 00:14:39:07
best of the best, the real high quality hybrid issuers
00:14:39:07 - 00:14:42:05
are going to be pricing between five and five eighths
00:14:42:05 - 00:14:43:23
and five and three quarters on the five, non-call
00:14:43:23 - 00:14:45:12
five stuff, and the non-call ten stuff will be
00:14:45:12 - 00:14:47:08
hovering around six at some point.
00:14:47:19 - 00:14:49:11
And we'll see how much supply they can take.
00:14:49:23 - 00:14:52:12
When we look at where we were before the war,
00:14:53:05 - 00:14:58:04
Europe in many aspects on hybrids and on a spread
00:14:58:04 - 00:15:00:19
basis for a lot of issuers had an advantage, even
00:15:00:19 - 00:15:04:04
on a swap-back basis to where U.S. levels were.
00:15:04:05 - 00:15:07:17
And we saw a lot of issuers, it wasn't huge,
00:15:07:20 - 00:15:10:16
but enough, an increase in issuers going over and taking
00:15:10:16 - 00:15:14:20
advantage of European credit markets that despite decent
00:15:14:20 - 00:15:17:04
amounts of supply, granted much smaller than we see here
00:15:17:04 - 00:15:20:14
in the States, but were trading at all-time tights.
00:15:20:23 - 00:15:23:02
And we saw a lot of credits that were inverted
00:15:23:02 - 00:15:25:11
compared to their swapped equivalents in the States.
00:15:26:08 - 00:15:28:09
That sold off a little bit more than we did
00:15:28:09 - 00:15:30:02
in the States or hasn't recovered, I should say, as
00:15:30:02 - 00:15:33:02
much as we've gotten what seems to be towards the
00:15:33:02 - 00:15:36:05
end of the hot portion of the war.
00:15:37:01 - 00:15:38:13
Where do you see that going forward?
00:15:38:16 - 00:15:41:02
Do you see that as still a draw for U.S. issuers?
00:15:41:05 - 00:15:43:04
Will it come back to those kind of levels as
00:15:43:04 - 00:15:43:19
it was before?
00:15:44:04 - 00:15:47:12
Or do you think it'll stay where it is and
00:15:47:12 - 00:15:50:07
we've kind of reverted back to a situation where Europe
00:15:50:07 - 00:15:52:16
is better for European names, U.S. is still better for
00:15:52:16 - 00:15:53:12
most of the U.S. names?
00:15:53:18 - 00:15:55:20
Europe's underperformance is due to two things.
00:15:55:23 - 00:15:58:20
First off, their reliance on energy coming out of the
00:15:58:20 - 00:15:59:13
Strait of Hormuz.
00:16:00:01 - 00:16:02:12
And two, the fact that the central bank has a
00:16:02:12 - 00:16:06:02
single mandate, which is price stability, which meant that
00:16:06:02 - 00:16:10:00
the central banks went from potentially cutting rates to
00:16:10:00 - 00:16:11:13
raising rates multiple times.
00:16:12:03 - 00:16:16:01
So you saw a real de-risking in European credit
00:16:16:01 - 00:16:18:10
when the war kicked off.
00:16:18:13 - 00:16:21:03
So definitively lagged what we saw in the U.S.
00:16:21:07 - 00:16:24:17
If we have a true resolution here, we're going to
00:16:24:17 - 00:16:29:01
be seeing a re-risking in European spreads, okay?
00:16:29:10 - 00:16:32:04
And at the same time, we're likely to see a
00:16:32:04 - 00:16:37:00
divergence between European rates and treasuries, just
00:16:37:00 - 00:16:39:21
given the convergence that we've been seeing over the last
00:16:39:21 - 00:16:40:16
month or so.
00:16:41:02 - 00:16:42:21
And I think if you have both those come into
00:16:42:21 - 00:16:47:03
play, you'll definitively see supply being stolen from over
00:16:47:03 - 00:16:48:04
here to over there.
00:16:48:13 - 00:16:49:19
What are the things you're going to be looking at
00:16:49:19 - 00:16:51:14
over the next two or three months that you're going
00:16:51:14 - 00:16:54:13
to be keeping an eye on that issuers should be
00:16:54:13 - 00:16:55:02
thinking about?
00:16:55:05 - 00:16:57:03
And I'll let you go first Moshe and
00:16:57:03 - 00:16:57:19
Colby, you follow up.
00:16:59:04 - 00:16:59:15
Earnings.
00:16:59:15 - 00:17:03:09
Market is assuming basically 20% earnings growth for the
00:17:03:09 - 00:17:04:08
S&P this year.
00:17:04:13 - 00:17:07:06
Now we've had five consecutive quarters of double-digit
00:17:07:06 - 00:17:09:13
earnings growth, so it may not be as big of
00:17:09:13 - 00:17:10:15
a lift as we think.
00:17:11:15 - 00:17:16:15
But earnings help solidify the floor for all risk markets.
00:17:17:04 - 00:17:20:20
So even if you have massive geopolitical turbulence
00:17:20:20 - 00:17:21:10
whatsoever.
00:17:21:21 - 00:17:23:23
So that's going to be number one for me.
00:17:24:02 - 00:17:28:01
Then given what's going on, oil will clearly be number two.
00:17:28:01 - 00:17:32:09
And then finally, very focused on not only the absolute
00:17:32:09 - 00:17:34:19
level of rates, but the shape of the curve.
00:17:35:11 - 00:17:39:09
Because the fiscal situation here is not getting any better.
00:17:39:12 - 00:17:42:03
We've seen the treasury market, for all intent and
00:17:42:03 - 00:17:44:08
purposes, be dismissive of that.
00:17:44:16 - 00:17:47:10
If that changes, that is a notable development.
00:17:48:01 - 00:17:48:15
Colby.
00:17:48:16 - 00:17:50:05
The only thing I would add, and it's kind of
00:17:50:05 - 00:17:52:19
piggybacking on Moshe's third one around rates, is not only
00:17:52:19 - 00:17:54:22
the shape of the curve, but I would say the
00:17:54:22 - 00:17:56:00
speed of any change.
00:17:56:11 - 00:17:58:06
Because I think that will have an impact not only
00:17:58:06 - 00:18:02:08
on the MOVE Index, but also on investors' behavior and
00:18:02:08 - 00:18:03:23
where they participate on the curve.
00:18:04:02 - 00:18:05:23
Particularly given the amount of supply that we're going to
00:18:05:23 - 00:18:08:07
have to see, or we're expecting to see, I'll say.
00:18:09:06 - 00:18:12:04
And where that issuance will have to come from a
00:18:12:04 - 00:18:12:19
curve perspective.
00:18:13:19 - 00:18:17:09
If some of the big tech data center, large M&A
00:18:17:09 - 00:18:20:03
type transactions do come to market, they're not going
00:18:20:03 - 00:18:21:20
to be able to avoid the long end of the curve.
00:18:22:10 - 00:18:24:17
And if we do start seeing some rate volatility, we
00:18:24:17 - 00:18:29:08
do see some of those concerns around the fiscal situation,
00:18:30:00 - 00:18:32:02
we could see some pretty rapid movement out the curve
00:18:32:02 - 00:18:33:04
and changing in that shape.
00:18:33:05 - 00:18:35:08
And I think that could have an impact on the
00:18:35:08 - 00:18:37:07
flatness of the credit curve that we've been able to
00:18:37:07 - 00:18:40:02
live with and benefit off of over the last couple
00:18:40:02 - 00:18:40:14
of months here.
00:18:40:22 - 00:18:42:06
Well, we'll keep an eye on the data centers.
00:18:42:06 - 00:18:43:16
And we're going to keep an eye on, if your
00:18:43:16 - 00:18:46:17
estimate's right, another two times issuance of what we've
00:18:46:17 - 00:18:48:08
already had during the course of the rest of the year.
00:18:48:10 - 00:18:50:04
We'll see how the market handles it.
00:18:50:04 - 00:18:51:22
But both of you, again, thank you very much for
00:18:51:22 - 00:18:52:09
being here.
00:18:52:15 - 00:18:53:13
We appreciate it.
00:18:53:13 - 00:18:56:18
And to everyone watching on
Markets Mindset, thanks for joining.
00:18:56:23 - 00:18:57:14
We'll see you next time.
00:18:57:17 - 00:18:58:02
Thank you.
00:18:58:05 - 00:18:58:12
Thank you.