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- Well welcome back to
Markets Mindset, everyone.
It's Victor Forte here with
as always, Moshe Tomkiewicz,
and Moshe.
- It's that time of the year.
- It is. But you know what
time of year that means it is?
- It's holiday time.
- No, it's not.
It's our favorite time of the year.
It's end-of-year survey time.
- Ah, I forgot about that.
- So Moshe, what we're going to do this year
is we're going to pit you against the survey.
200 investors approximately,
probably over 250 individuals,
PMs, traders, et cetera, that responded,
asking them some of the more
pertinent questions about 2025.
So let's get right into it
and start with the topic of supply.
So background, $1.542
trillion this year, 2024,
we're closing down at.
That is a fairly substantial
increase from last year.
Last year when we
were at this time,
and we took the survey, investors,
well let's take it this
way, from last year,
investors were calling for
less than $1.3 trillion.
And we had a big influx this year.
So talk to me about your
expectation for supply next year.
What do you think it's going to be?
And then we'll tell you
what the survey said.
- I think it's going to be
higher than this year,
and if you asked me to pick a number,
I would be 1.7, 1.75.
And this is how I get there.
So if you look at the
maturity towers in 2024,
smaller than they were in 2025,
if you look at the M&A
volumes that we saw in 2024,
and the expected M&A volumes
we anticipate in 2025,
which are significantly larger,
that all adds up to a bigger number.
And then you look at
the 2026 maturity wall
that's actually bigger than 2025.
So you're going to see
some pre-funding there.
So as long as the treasury
market is willing to play ball,
from risk appetite perspective,
I think we're going to beat the levels
that we saw this year.
- Well, it's funny you should say that.
So in the market,
approximately 55% of the respondents think
supply is going to be equal to
or higher next year, in 2025.
We didn't have anybody say
$1.7 trillion specifically,
but 15% did say $1.6 trillion or higher.
But again, 55 of 70% total is calling
for equal to or higher.
Only 11% calling for
a down year right now.
So we're in line with that.
And you look back
over the course of the
supply from this year
we go to next year,
you talked about the maturity towers,
that's going to be a big factor, right?
We had $741 billion of
maturities this year.
We're going to be about
$840 billion next year,
and then we're going to be
over a trillion in 2026.
So advice to issuers,
what should they be thinking
about heading into ‘25
and how they address ‘26 looming,
which will be the highest year ever
of maturities in our market?
- Well now we're going into the rate view
and if people have dialed into us before,
tuned into us before,
they know we're pretty bearish treasuries,
we, both of us subscribe to
what our chief economist has been saying
about a year-end 10-year,
about 5% next year.
And that just factor,
that's just building on
growing above trend growth.
And also a situation
where inflation could be picking up steam.
That does not factor in
potentially higher term premium
courtesy of our deficit.
So when you factor in
just the fundamental rate outlook view,
which is 5% by the end of next year,
and then you have upside risk
just because of deficit concerns
that that would argue for pre-funding,
or taking some of your rate
risk off the table via hedger.
- Which means, you
know, if you take a look
at that $840 billion in maturities,
$500 billion is in the first
six months of next year.
With issuers normally getting ahead,
we saw that in 2024,
we saw a very active
first half of the year,
in fact, the first nine
months were over $100 billion,
five of those months set records,
in terms of monthly supply,
it feels like it's going to be that way again
with $100 billion of extra
supply coming in 2025.
But then also you think about the election
forced people into the
market earlier this year,
what's that 2026 wall going to do?
going to force people to think about using
the last three, four months of the year
to refinance or pre-finance,
I should say, 2026.
So that adds even more weight
to get ahead early in ‘25. Right?
- Exactly.
And we anticipate people doing that.
You know, our January funders
that we usually talk to,
they all want to get in
before Inauguration Day,
because they're concerned, you know,
do we see a potential
shift in the narrative
on Inauguration Day into
the State of the Union,
and into the first budget?
Because what we've been
dealing with since the election
is an environment where
we've had excess liquidity,
which has been turbocharged
by the promise of low taxes
and lighter regulations.
And so the sell off in rates
is just viewed as a
byproduct of expected growth.
If that changes,
and that's our view, that will change,
to one that's focused on
deficit rather than growth,
then that's a completely
different narrative
for risk assets including credit.
- Right. And you know, we talk
about handling the supply,
we go to the demand side of the equation,
and you think about those maturities
are not only a blessing but a curse, right?
You gotta refinance them.
But they're also going to
create natural demand.
And you know, we look at
the maturities going out,
it's going to take us till 2030
to get back to maturity,
a maturity tower for the
overall corporate bond market
that is at or below where we were in 2024.
So the next four years
are going to be elevated
maturities coming in.
But next year on top of those maturities,
I think you're going to have
the same thing right now,
you know, this year
almost a record setting,
Lipper in fund flows, $82
billion versus last year
was net inflows of what, $243 million?
We've got rollovers
from the equity markets
as the pension funds, the balance funds
get overweight into equities
because of this run-up,
they're rolling back in our market.
You got foreign demand coming in
and you have, you always talk about this,
you have those excess coupon payments
from just massive supplies
the last couple years
that have to get reinvested
if you want to stay neutral bonds.
It feels like the demand
side of the equation
is going to be there.
- I mean let's look at numbers Vic,
I mean for next year.
So let's say the $1.7 trillion number
I'm throwing at you is right.
You have $900 billion in maturities, right?
That gets you to $800 billion of net supply
and then you have $400
billion of coupon payments
on top of that
that are going to get
reinvested in the market.
So that all equates to real net supply,
of just an incremental $400 billion.
Seems like a big number, but it's not,
when you factor in the $7 trillion
that's still in money market accounts.
- Yeah, and the hard part I find is,
you know, LM was up,
liability management exercises
were up 57% this year,
but it was only $31 billion.
So you could even have a doubling of that,
it's only $62 billion.
It feels like you're throwing
pennies into a fountain.
It just no effect whatsoever.
But you mentioned before, rates.
So let's talk about the survey
on rates and what people had.
So last year at this exact time,
the 10-year was at 4.23%,
we're at 4.38% today.
So last year the survey for 2024,
78% of respondents said
rates would be below 3.5%.
- Oops.
- Again, oops again, on
the investor survey part.
Give us your rate outlook for this year.
Do you subscribe to what
you talked about with Steve?
Just go through that real quickly.
I'm going to tell you what the
investors thought after that
for 2025.
- Sure. Steve's been of the view,
and I completely agree with him,
is that the Fed's view
of the neutral rate is accommodative.
Right? It's not neutral.
In his view, the neutral rate is 4%
and the Fed's still not there.
Right. So if we have
policy that's basically
that they view as restrictive
but it's actually neutral, right?
And you put that on top of an economy
that's already growing,
on top of lower taxes
and lighter regulations,
it's hard to not all put
that into a bowl, and mix it,
and not come out with
something closer to 5% than 4%.
- So the survey, results of the survey,
74% believe by year end,
we will still be below
4.5% on the 10-year
with a full
36% believing
we'll be between
4.25 and 4.5.
The interesting thing is that year end,
a still 30% of the entire market
thinks we're going to be down near 4%,
4 to 4.25.
So if it's anything like last year,
we'll probably be at higher rates
if anything happens
close to what they had
predicted already this year.
- It's tough for me to rationalize that
because when I see the 10-year treasury
on election day was 4.27.
All right. That's before
we knew Trump got elected,
before we knew that they
had Republican clean sweep,
before we knew that he
won the popular vote
for the first time in 20
years for a Republican.
That all screams mandate, right?
So that mandate is worth
more than 10 basis points,
which is what the differential is
of today's levels versus
what we saw on election day.
- So then we also go to the survey
because we ask people about the Fed moves.
- Yep.
- So 81% of the market is thinking
the Fed's going to go 50 to 75 basis points
or higher still in 2025.
3% think they're going to pause completely,
15% think they'll be less than 50.
So there's still this bias,
this the market is still playing
with what you have termed
in the past the Fed put,
that they believe the Fed will
be the generator for returns,
the Fed will be the
thing that bails them out
should things go wrong.
I will also add to that,
that 73% of the market believes
we will be a steeper curve
by the end of the first half.
Last year that number was 94%.
You could see we've already
steepened a little bit.
So less people this year,
over the last year we steepen.
- The Fed put doesn't work
when you have elevated
bond market volatility
because of fiscal concerns,
that's when the Fed put's not going to work
because the Fed's not going to go in there
and reward fiscal actions which
aren't deemed to be prudent.
- So Moshe, we're going to
move on here to spreads.
Current index spreads are,
if I use the ICE index high 70s,
two or three basis points, whatever it is,
off the low for the year,
which is also the low since 1998.
Now you and I were both in
the market, unfortunately
during that time,
and the market only had $260 billion.
We had hair at that time.
$260 billion of supply during that year,
which you compare to
$1.54 trillion this year.
So very different market at that time.
But we're still hanging around
pretty close to those lows.
And as supply is abated,
we have tightened in.
That number is 25 basis points tighter
than where we were at the
beginning of the year.
It's 35 basis points tighter
than the year-to-date wides.
What's your expectation for
where spreads go from here?
- As long as the bond market
is willing to play ball.
You understand that's a caveat
I've been saying to everything
because I think the treasury market
is going to be the judge and jury
on risk appetite next year.
But as long as the bond
market is willing to play ball
and the market plays out in
that higher for longer narrative
that Steve's been talking about,
but it's stable,
credit's tight around that,
because fears of recession
just aren't there, right?
And so if you have elevated overall yields
and you factor in the demographics
that we have in States
and in all the developed economies,
that's more money
flowing into fixed income
and spread products specifically.
And that's how spreads get tighter.
Especially when the credit quality
of the United States
government's getting worse
and the credit quality,
some of these people are getting better,
you could argue that
there's a convergence there.
- Well here's the interesting
thing on the survey
and the response from investors,
once again, a little different than you.
- Yep.
- 76% think by year end we
will be unchanged to wider
and about 25% think definitively wider
by the end of the year in 76.
First half, you have roughly,
I'm going to say the number's about 64%
think we're going to be
wider by the first half.
So the number does go up
by the end of the year.
- Yep.
- There is still a small
contingent of people
I think will be unchanged
to tighter, about 38%.
And if I go back to
where we were last year,
it seemed like we were in the same,
the same exact place we were last year
with those numbers, plus
or minus a little bit.
How do you account for investors
feeling that differently
about spreads relative where you are?
Because to be honest,
historically they're used to
as rates have ground higher,
spreads have ground tighter,
as rates have come down,
spreads have lagged a bit,
but not lagged as much
as yields have come down.
- The way I think about it, Victor, is that,
you know, these investors,
I mean I completely agree with investors,
is the risk reward profile's
asymmetric right now,
just given how far we've run.
What I'm trying to say
is there is a pathway
to go even tighter,
but it's all predicated on the volatility
we've seen in the treasury market.
I think those school of investors
or that subset investors
who thought they were
going materially wider,
I would agree with that,
if we have sustained increase
in bond market volatility.
- So Moshe, ESG.
We've asked this question
now two years in a row
on people's exposure to ESG
and how they expect it to change
on the go forward basis into 2024.
And now we're asking again for 2025.
Answers are pretty similar
right now to last year.
There was one fundamental change.
So in general, you're looking at roughly
about 29% of the market believes
that their ESG exposure, ESG bond exposure
will increase in line with
their assets under management.
That they'll try to keep it
as a certain percentage of their assets.
68% are saying for 2025
it's not growing at all.
The remaining 3% expect it
to grow a little bit of net.
That's roughly in line
with where everything was last year
except for one thing,
which is that 68% said not grow at all
has increased to last year was 62, 63%.
So it was a little bit more bias to say
that ESG or ESG or green
bonds, sustainable bonds
aren't as high on people's list
as they were last year
when they were already starting
to kind of take more of a backseat
to credit fundamentals, et cetera.
How do you rationalize that?
- I think, Victor,
that we operate in one of
the most efficient markets
in the entire global capital markets,
and I think investors
have gotten to the point
where they're already factoring
in ESG characteristics
into their conventional spreads.
So this is much more
about a holistic outlook
for a specific company
rather than looking at this
on a transactional basis.
- And Moshe, one other topic here,
M&A, M&A expectations.
I know you're fond of those.
Last year we had just shy of $200 billion,
it was the largest on record right now
for M&A financing in a single year.
What are your expectations
for next year, and why?
- Bigger number.
You have a new administration,
you're in all likelihood going to have
a more M&A friendly FTC,
and there's certain sectors
that have been really bottlenecked
in terms of M&A activity
because of FTC concerns.
So I expect them to act.
I think people are going to want to get
a little bit of a better handle
on what the Trump
administration is going to be like.
So there's going to be a bunch of,
you know, let's see what's
going on over the first quarter.
But every treasurer that I talk to,
they are leaning in on M&A in 2025.
- Well it's interesting you actually agree
with the survey results here.
71% expected to be equal to 2024
or increase in 2025.
A full 18% expect it
to be possibly greater than $250 billion,
which would be a big
increase year over year.
And this one you might
want to take to the bank.
because last year, 2024 expectations,
51% of the market said
between $150-and-$200 billion,
and got it right this time.
- So they got one right?
- They got one right over
the course of time. Correct.
- All right, Victor,
we're wrapping up here.
So I want to flip the tables on you
because you're the syndicate guy
and I'm the capital
markets guy, all right?
And so what I want to focus on
specifically is the appetite for duration,
because that's all we've been hearing about
for the last 12-to-18 months.
Now I understood the mindset behind it.
Yields were up, spreads were up.
So great time to lock in
at least spread duration.
But now spreads are back to ‘98 levels.
And now there's concern about
where long-end rates can go.
I mean, we've already heard
from two of the biggest
investors out there
who've publicly expressed those concerns.
How does that all translate
into the appetite for duration
in corporate bonds in 2025?
- The biggest percent of the market
thinks that the intermediate
part of the curve
is going to be the one that
has the best returns
and the best outperformance,
almost 45%, just shy of that.
The second is the short
end of the curve.
That could still be the belief
that the Fed is still
going to be there
and the curve steepens
and that they're there.
That's 36, 35% of the
market thought that.
The remaining part,
not that much less,
but 30 odd percent,
32% still thinks
the long end could
be the place
where people could
have those returns.
So we'll see
what happens.
- I think you see spread
curves steepen in 2025.
Do you agree with that?
- I think they have to a little bit.
If you get the result that you have,
which is, you know, you
get the curve steepening
and you get higher rates,
I gotta think they've gotta flatten,
they've gotta steepen out a little bit.
We've already seen that happening
in some of the energy space
and some of the other industries,
especially where there's
a leaning on duration.
You know, and you're going to see that,
you know, you'll see that
and we didn't talk about it before.
You're going to see that
in some of those places
like maybe the utility space
where the capex is so big
over the next five years
that they're going to lean
on longer term bonds
because the assets are longer dated.
So we'll see how that plays out.
Well Moshe, that's going to wrap it up
for us here this time on Markets Mindset.
I'm going to leave you
with a few things here.
First off, all the survey
results that we have
can be found on a link on Mizuho's website
if you want to check them all out,
and see how things performed
or how investors are expecting
things to perform for 2025.
I would also leave you with the fact
that we did ask one question here,
and this is something
for you to think about
during the holidays,
was, "What is your least favorite
dessert at the holidays?"
Came out to be fruitcake.
So if you're going to
your family's house here
over the course of the next few days,
don't bring the fruit
cake, leave it at home.
So Moshe, thanks for being here,
and Happy Holidays to you,
and Happy Holidays to
everybody that's tuned in.
- Happy Holidays to you, Victor,
and again, Happy Holidays
to all our clients.
I hope 2025 is that much better than 2024.
- We'll see you then.