00:00:19:05 - 00:00:21:07 Well, welcome back, everybody, to Markets Mindset. 00:00:21:08 - 00:00:22:02 It's been a while. 00:00:22:04 - 00:00:25:21 I have with me, as always, Moshe Tomkiewicz, head of DCM here at Mizuho. 00:00:25:21 - 00:00:30:06 And Moshe, it's been an interesting, I'll say, post-Labor Day period. 00:00:30:11 - 00:00:33:15 To give you an idea of the background before we get into it. 00:00:33:17 - 00:00:37:21 We've had record supply for the last three months, three monthly records in a row. 00:00:37:23 - 00:00:42:05 We went from being negative gross supply to positive. 00:00:42:06 - 00:00:44:10 We're now up 9% on the year gross supply, 00:00:44:10 - 00:00:49:23 6% positive on a net supply basis, although we're actually negative net supply 00:00:49:23 - 00:00:55:03 if you take into account that we've already paid down $140 billion of maturities for 2026. 00:00:55:07 - 00:00:59:00 When we walked into this year, 2026 was supposed to be over $1 trillion in maturities, 00:00:59:00 - 00:01:02:19 which I think some dealers are still counting. But we've actually paid down $140 billion 00:01:02:19 - 00:01:07:15 of that already, and we're down to $880 billion staring us in the face for 2026. 00:01:07:17 - 00:01:11:01 But at that exact same time, we got hit with, 00:01:11:01 - 00:01:14:19 let’s call it, for something, lack of a better term, the data center issue, 00:01:14:19 - 00:01:18:01 which came up and the supply out of the tech center at the exact same time. 00:01:18:03 - 00:01:24:08 And we've seen spreads retrench from a low of 71/72 around September 00:01:24:08 - 00:01:27:07 to now hitting 84/85 on the index. 00:01:27:07 - 00:01:30:23 And interestingly enough, the first move wider was on September 19th, 00:01:30:23 - 00:01:35:08 just after the Oracle transaction on the 18th, and the second move wider 00:01:35:08 - 00:01:38:14 was after the Meta transaction on October 30th. 00:01:38:14 - 00:01:41:11 And in between was the announcement that 00:01:41:11 - 00:01:45:21 the Beignet transaction, the data center deal backed by leases of Meta, had also hit. 00:01:45:22 - 00:01:48:01 So you had a ton of supply come in that period. 00:01:48:03 - 00:01:51:05 And since then, we've been just proceeding higher in spreads. 00:01:51:07 - 00:01:52:22 Where do you think we're going in spreads? 00:01:53:00 - 00:01:55:12 How do you think we're going to enter 2026? 00:01:55:14 - 00:01:58:01 And what's your view forward? 00:01:58:03 - 00:02:06:00 So I think December is going to tell us a lot about what to think about longer term. 00:02:06:02 - 00:02:08:19 You have the Fed on the 10th. 00:02:08:21 - 00:02:12:10 We expect an active week in the market that first week in December. 00:02:12:12 - 00:02:16:01 And then we're going to be in a period of basically no supply. 00:02:16:03 - 00:02:18:21 And if there's supply, it's just going to be episodic. 00:02:18:23 - 00:02:25:01 So that is the time for this market to recharge the technical battery. 00:02:25:03 - 00:02:31:17 If we're able to get below, let's call it 80 on an index spread perspective, which 00:02:31:17 - 00:02:36:04 let's call it 5/6 tighter than where we are right now, then we could have room to run. 00:02:36:04 - 00:02:41:15 My guess is, is that we've hit a floor. 00:02:41:17 - 00:02:45:18 And that's just a byproduct of the supply. 00:02:45:21 - 00:02:47:20 The floor being 80 or the floor being 85? 00:02:47:22 - 00:02:51:06 I think the floor is the early September floor. 00:02:51:11 - 00:02:55:06 But I think the 80 is going to be a very hard level to break. 00:02:55:08 - 00:02:57:17 Because I think, and I could be wrong, 00:02:57:17 - 00:03:02:19 when we get into this period of no supply, all the buy side is going to do 00:03:02:19 - 00:03:04:22 is talk about the calendar for next year. 00:03:04:22 - 00:03:08:01 Because you're going to have guys like me and you 00:03:08:01 - 00:03:13:12 talking about all the ingredients being sown for a record level of issuance. 00:03:13:16 - 00:03:18:08 We're already hearing some of those numbers come out $1.7 trillion to $2 trillion 00:03:18:08 - 00:03:19:17 expected for next year. 00:03:19:17 - 00:03:22:20 I know we haven't put in our estimate yet. 00:03:22:22 - 00:03:24:22 We're going to wait because we're going to be back. 00:03:25:00 - 00:03:26:01 Here's a shameless plug. 00:03:26:03 - 00:03:30:22 We're going to have our next Markets Mindset on the heels of our annual survey that comes out. 00:03:30:23 - 00:03:31:22 So we'll discuss it then. 00:03:32:02 - 00:03:34:18 But that's a pretty big number heading into next year. 00:03:34:21 - 00:03:36:03 That's going to be a record number almost. 00:03:36:06 - 00:03:36:21 Yeah. 00:03:36:23 - 00:03:38:05 And I mean, think about it. 00:03:38:07 - 00:03:39:11 You're going to have 00:03:39:11 - 00:03:45:01 $1 trillion capital need from the IG markets between now and 2028, 00:03:45:01 - 00:03:47:18 just for data center driven supply. 00:03:47:18 - 00:03:52:08 On top of that, we expect an elevated M&A environment. 00:03:52:10 - 00:03:56:22 I think anyone who is considering a transformational acquisition 00:03:56:22 - 00:04:01:21 is going to want to do it when the regulatory backdrop is fairly light. 00:04:01:23 - 00:04:04:03 So that's going to come into fold. 00:04:04:06 - 00:04:06:22 And we have close to $1 trillion maturing next year. 00:04:06:22 - 00:04:08:14 So you add it all up. 00:04:08:16 - 00:04:13:13 $1.8 trillion, which I think is the old record, feels eminently doable. 00:04:13:13 - 00:04:16:22 But it's a lot of supply for the market to digest. 00:04:17:00 - 00:04:19:23 And I think it's a price issue, not a capacity issue. 00:04:20:01 - 00:04:23:18 But we were dealing with nosebleed type evaluation levels. 00:04:23:21 - 00:04:27:05 And I just don't think it can hold given that supply backdrop. 00:04:27:07 - 00:04:27:19 I mean, you're right. 00:04:27:20 - 00:04:33:18 If supply continues, I mean, here we're at almost approaching $250 billion of tech supply. 00:04:33:20 - 00:04:35:10 Not quite there yet, but pretty close. 00:04:35:12 - 00:04:37:12 That's a quarter of all corporate supply this year. 00:04:37:15 - 00:04:41:21 Now, interestingly enough, there was a change in the composition of supply this year. 00:04:41:23 - 00:04:46:20 For the first, I'll call it what, nine and a half months, duration reigned king. 00:04:46:22 - 00:04:48:22 Issuers wouldn't issue it. 00:04:49:00 - 00:04:50:20 Investors wanted to buy it all day. 00:04:50:22 - 00:04:52:08 And then something seemed to happen. 00:04:52:10 - 00:04:58:19 If you take a look, issuers issued approximately $3 billion to $4 billion a week 00:04:58:19 - 00:05:02:18 of long-dated, 20-year-plus securities every week through October. 00:05:02:20 - 00:05:07:09 And from the last week in October to today, it's been about $11 billion 00:05:07:09 - 00:05:11:10 per week in 20-plus long-dated supply. 00:05:11:12 - 00:05:15:11 That's a big change from the issuers in terms of the pace of long-dated supply. 00:05:15:13 - 00:05:18:19 At that same time, we also saw underperformance of long-dated supply, right? 00:05:18:20 - 00:05:21:01 We saw this from some of our deals. 00:05:21:03 - 00:05:24:03 Some of the longer-dated deals, the attrition rate, right, 00:05:24:03 - 00:05:27:19 the drop of the book from IPT heights to pricing were over 60%. 00:05:27:19 - 00:05:30:19 And then we saw underperformance in the secondary market. 00:05:30:21 - 00:05:33:22 Do you think the performance or the underperformance 00:05:33:22 - 00:05:36:12 was caused by the increased issuance? 00:05:36:14 - 00:05:41:11 Or do you think that the underperformance was caused by a change in investor sentiment 00:05:41:11 - 00:05:46:06 because of ambiguities around the Fed, the employment number, the new CPI. 00:05:46:06 - 00:05:47:10 We didn't have an October CPI. 00:05:47:10 - 00:05:50:03 All the data coming up in December, are people just becoming more cautious? 00:05:50:03 - 00:05:53:21 I think it's 98% supply related. 00:05:53:23 - 00:05:57:11 The market got a ton of duration to digest. 00:05:57:14 - 00:06:00:20 I mean, remember you referenced that Beignet transaction 00:06:00:20 - 00:06:06:01 when we first started this discussion, that had a weighted average life of close to 17 years. 00:06:06:03 - 00:06:08:10 Okay, so that was sold to our buyers. 00:06:08:12 - 00:06:08:21 All right. 00:06:08:21 - 00:06:11:05 And then on top of that, you had more supply. 00:06:11:06 - 00:06:15:05 So you've had a lot of duration and it's coming from a sector 00:06:15:05 - 00:06:20:22 that one thing we know of is that they're going to come back and they're going to come back a lot. 00:06:21:00 - 00:06:25:14 So you basically had commodity duration thrown at the market. 00:06:25:16 - 00:06:29:02 And I'm not surprised at all that the market has taken a little bit of a pushback. 00:06:29:06 - 00:06:32:05 So do you think this outperformance is going to continue in the front end, 00:06:32:05 - 00:06:37:01 call it five years in, which is where you're seeing things outperform recently? In particular, 00:06:37:03 - 00:06:40:07 I mean, I take a look at one of the trades we worked on last week, the two-year floater 00:06:40:07 - 00:06:43:08 was probably one of the best performing assets we've seen in a while. 00:06:43:11 - 00:06:46:12 I would call it more demand normalization. 00:06:46:14 - 00:06:47:06 But then– 00:06:47:06 - 00:06:49:14 More balanced at this moment than having that strong bid 00:06:49:14 - 00:06:51:17 for duration that we had for most of the year. -Exactly. 00:06:51:19 - 00:06:55:05 And Victor, the one other thing that we haven't talked about for next year, 00:06:55:05 - 00:06:58:02 like we could talk about the impact of supply on spreads. 00:06:58:04 - 00:07:01:21 What we don't know is the tail risk in the market. 00:07:01:23 - 00:07:08:08 And I think we have a market that has elevated tail risk, especially for credit, 00:07:08:08 - 00:07:15:18 because this whole sell-off that we've seen in stocks, specifically in AI, has been credit related. 00:07:15:20 - 00:07:19:14 And we also know that assets under management and private credit 00:07:19:14 - 00:07:22:04 have basically doubled in two years. 00:07:22:06 - 00:07:25:05 And the banks have had excess liquidity deployed. 00:07:25:07 - 00:07:29:16 Mistakes are going to be made and probably may very well have been made. 00:07:29:18 - 00:07:34:14 And we know that they'll get magnified 10x when they happen 00:07:34:14 - 00:07:37:21 to make them feel a lot worse than they actually are. 00:07:37:23 - 00:07:42:17 So what I'm trying to say is that this spread outlook I'm giving you 00:07:42:17 - 00:07:45:21 doesn't factor in those tail risks materializing. 00:07:46:01 - 00:07:53:12 If those tail risks are materializing, that view gets that much more accentuated. 00:07:53:14 - 00:07:57:19 So I think it's safe to say you're a little bit bearish on spreads. 00:07:57:21 - 00:07:58:13 Yeah. 00:07:58:15 - 00:07:59:09 Okay. 00:07:59:12 - 00:08:03:02 Katie Lavino has dialed in a question from Staten Island, New York, 00:08:03:02 - 00:08:04:12 longtime listener, first time caller. 00:08:04:17 - 00:08:10:06 And she wants to know that over the course of time, you've talked a lot about the $7 trillion 00:08:10:06 - 00:08:11:21 that are sitting in money market funds 00:08:11:21 - 00:08:16:15 as a backstop that would push out the curve and start buying spreads. 00:08:16:17 - 00:08:21:21 One, how do you factor that view into being bearish on spreads? 00:08:21:23 - 00:08:25:17 Or two, do you just see it that that's part of what's going on here in the front end of the curve 00:08:25:17 - 00:08:31:00 is that those assets are pushing out, looking for yield, looking for additional spread? 00:08:31:02 - 00:08:32:21 How does that factor in now, given your view? 00:08:32:21 - 00:08:38:05 Well, I think the migration out of cash has reversed 00:08:38:05 - 00:08:44:05 in the past couple of weeks, given everything that's been going on that's AI related. 00:08:44:07 - 00:08:48:11 So you've seen cash levels actually increase over the past couple of weeks. 00:08:48:14 - 00:08:52:15 So I think last data I checked, that's close to $7.7 trillion. 00:08:52:15 - 00:08:55:20 Is that a backstop for the market? 00:08:55:22 - 00:08:58:12 Yeah, I think it is a long-term backstop for the market. 00:08:58:14 - 00:09:01:20 But the question is, at what level? 00:09:01:22 - 00:09:05:22 Because you're dealing with a situation that if you spread it out, 00:09:05:22 - 00:09:09:00 has some potential systemic concerns. 00:09:09:02 - 00:09:11:22 And we know people will feed off of that. 00:09:12:00 - 00:09:16:16 So cash isn't necessarily something that's burning a hole in people's pockets. 00:09:16:16 - 00:09:19:13 So you think if that treasury curve continues in the front end, 00:09:19:13 - 00:09:22:01 at least to flatten and invert in some cases, 00:09:22:01 - 00:09:24:03 that cash is going to go back to where it was a few years ago. 00:09:24:03 - 00:09:28:00 It's going to stay in cash because it's earning an outsized return. 00:09:28:02 - 00:09:32:21 And you made the point too, is we don't know what's going to happen with the Fed now. 00:09:32:23 - 00:09:33:19 Right? 00:09:33:19 - 00:09:38:17 And again, if I'm sitting in cash and there's a lot of volatility in the risk markets, 00:09:38:17 - 00:09:41:10 let's see what happens with the Fed. 00:09:41:12 - 00:09:44:00 So Moshe, switching topics here quickly to hybrids. 00:09:44:02 - 00:09:46:13 A lot of changes have gone on in hybrids over the last two or three years. 00:09:46:18 - 00:09:48:20 Supply has ballooned the last two years. 00:09:48:22 - 00:09:50:02 The structure has changed. 00:09:50:04 - 00:09:52:18 We're now, the dominant structure is the use of the floor, 00:09:52:18 - 00:09:56:19 which I don't mind saying, Mizuho was the pioneer in terms of getting the floor approved. 00:09:56:22 - 00:09:59:20 It's been one of the last salient changes in hybrid structures 00:09:59:20 - 00:10:02:08 in the last decade, you could arguably say. 00:10:02:13 - 00:10:09:01 But my question is, it's become more mainstream, it seems, or going outside its normal avenues. 00:10:09:04 - 00:10:10:14 It's going outside the utility space. 00:10:10:19 - 00:10:14:00 We saw Verizon do an extraordinarily successful trade in euros, 00:10:14:00 - 00:10:18:05 slightly different structure than we use in the States, but incredible trade 00:10:18:05 - 00:10:20:14 that came well through its dollar equivalents. 00:10:20:16 - 00:10:22:11 We obviously saw CVS use it at one time. 00:10:22:13 - 00:10:25:07 There's a lot of dialogue going around on hybrids. 00:10:25:10 - 00:10:29:07 Where do you see the use of them going forward in some of the sectors you cover 00:10:29:07 - 00:10:35:01 in the broader space of M&A or in rating agencies and other industries? 00:10:35:03 - 00:10:38:16 I think you're going to see it playing a much more prominent role 00:10:38:16 - 00:10:40:00 in M&A than you have done in the past. 00:10:40:02 - 00:10:45:07 Now, for some of these mega acquisitions with mega companies buying each other, 00:10:45:07 - 00:10:50:10 then probably not, because it's going to take too much to move the leverage needle. 00:10:50:12 - 00:10:57:12 But those companies with that sub, call it $20 billion debt portfolio, 00:10:57:12 - 00:11:01:22 who are doing an acquisition and where some form of equity is 00:11:01:22 - 00:11:06:12 needed from a balance sheet perspective, 100%, that's going to be part of the dialogue. 00:11:06:12 - 00:11:07:15 Okay. 00:11:07:15 - 00:11:13:09 What we've seen, if you have a stable market, and we have the floor reset structure 00:11:13:09 - 00:11:18:16 that you spoke about, there's a lot of capacity for that type of structure. 00:11:18:18 - 00:11:25:03 So, Moshe, let's finish on a prognostication, and you can't equivocate on this. 00:11:25:05 - 00:11:29:09 We don't really have a ton of data coming up that's 00:11:29:09 - 00:11:33:05 that important until we get to CPI and the FOMC meeting. 00:11:33:07 - 00:11:34:17 We've had a lot of different calls here. 00:11:34:18 - 00:11:35:19 Are they going to ease or not ease? 00:11:35:21 - 00:11:39:07 I remember at one time a Fed ease in December was down to 35%. 00:11:39:07 - 00:11:41:10 Now we're back up into the 70s. 00:11:41:12 - 00:11:44:08 What's your call for an ease or not an ease? 00:11:44:10 - 00:11:47:07 And what's your call for the leaning on the commentary afterwards? 00:11:47:09 - 00:11:50:13 I think it's a reluctant cut. 00:11:50:15 - 00:11:54:15 And I think that because in the absence of data, 00:11:54:15 - 00:11:58:09 this Fed has shown tendency to be hawkish rather than dovish. 00:11:58:11 - 00:12:00:19 And what happens if they don't cut? 00:12:00:21 - 00:12:04:13 I think if they don't cut, it's a dovish pause. 00:12:04:15 - 00:12:09:17 So I frankly don't see a huge delta between a dovish pause and a reluctant cut. 00:12:09:19 - 00:12:10:06 Okay. 00:12:10:08 - 00:12:12:19 Well, Moshe, thanks again for being here on Markets Mindset. 00:12:12:21 - 00:12:14:12 And I look forward to seeing you next time. 00:12:14:14 - 00:12:17:06 We're going to actually be doing one shortly 00:12:17:06 - 00:12:20:16 when we get all the responses from our annual survey in, over 300 accounts, 00:12:20:16 - 00:12:25:04 coming back on 20 of the most important questions of the day for 2026. 00:12:25:09 - 00:12:26:11 I hope you'll all join us. 00:12:26:13 - 00:12:27:23 But until then, thanks again. 00:12:28:01 - 00:12:28:07 Take care.