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Hello everybody.
Welcome back
to another segment of Markets Mindset.
I'm here
with Moshe Tomkiewicz, head of Mizuho's
Debt Capital Markets here in the US.
Moshe, it's the middle of October, 3rd
quarter's in the books
in the IG capital markets
and we are staring down
a very important presidential election
just three weeks away
and another Fed meeting.
They just went 50 basis points,
a lot of things going on in the world
as well, geopolitically.
We just hit another post-financial crisis tight.
Tight spreads on the index
during the last, was it 16, 17 years?
Why are we where we are?
There is a couple things at play
here, Victor, but I'd first start off,
and I'm sure you would agree with me
as a syndicate professional,
that this is the best liquidity backdrop
I've seen in my entire career.
So like I said,
there's a couple things at work here.
You got the central bank's easing,
so that's a headwind into a tailwind.
You got China throwing the kitchen
sink at its property crisis
and you have the US economy
that's still flexing some serious muscle.
I think the Atlanta Fed, their current
estimate of Q4
GDP growth is still north of 3%.
And then on top of that, you still have
a mountain of investable cash
still sitting on the sidelines.
I heard one large money manager quantify
that as in the context of
about $23 trillion when you add up
money market balances in bank deposits.
So, you have a massive liquidity well
on top of improving fundamentals
and technicals
and that sets up
this type of liquidity
wave we've seen in the market.
So what has that generated?
Well in equities,
I think as of last Friday,
we hit our 45th record high for the S&P this year.
There's been 199 trading days
in the market this year.
So that means we hit a new record high
once a week.
And in credit we've had close to $7 trillion of demand
just for IG dollar product.
So we're seeing
just the manifestations of the liquidity
that's out there and now the central banks
are pushing on it.
Now we're having fiscal initiatives
in some parts of the world pushing on it.
So even though we've hit
record tights in spread product,
I still think the path is set for us
to go tighter,
potentially considerably tighter.
The bid for duration still goes on,
even though we could argue
with the way
rates have moved
post the Fed 50 basis point easing,
which has been higher in the long end,
then maybe that's not the right move.
But that bid for duration is still
there, isn't it?
Yeah, they're just trying to lock it up.
I mean, I'll tell you Victor,
one of my big concerns is that when you
have this type of liquidity,
then you run the risk of asset bubbles.
And I'm thinking about asset
bubbles in risk assets specifically,
in equities,
and even in our product.
I mean if you look at our product,
one of the gauges I look at in
terms of risk appetite
is the basis between high yield and IG.
Right now
we are basically at record tights and
there's definitively fat tail risk
that remains out there in the market.
We've spoken about geopolitics
till we're blue in the face.
We can't dispute the fact
that the current backdrop in the Middle East
is one of the most dangerous
I've seen in decades.
We have an election less than three weeks
away, which is completely deadlocked
right now, and this market is very prone
to sweep risk on both sides.
But when you have this type of liquidity,
it tends to minimize those risks
until those risks get to the place
where you can't ignore them.
And that's one of the things that does
concern me.
I mean it's interesting Moshe,
you talk about bubbles.
I mean I sit there and I look at,
while we worry
that this demand bubble
for IG capital markets bursts,
I still think
about what would cause that to burst.
That could be a rapid move down in rates.
But if you get a rapid move down in rates,
what's going to happen
to all the short-term cash? What was it?
You've mentioned over $6 trillion of cash
sitting in short-term money
market accounts,
which at least for the last two years
has actually been earning interest.
It's been decent amount of income.
If that starts to go the other way
and the curve
either normalizes and front-end rates
do come down for whatever the reason,
I could see some of that cash looking
to push out for opportunity as well.
Could you not support the longer
term?
I do. Listen, when I think of the primary risk,
the kind of this bubble narrative,
the thing that pops immediately
in my head is the bond market,
but for a different reason
than you're looking at it.
Because if I see a material rally in term rates,
that means something went haywire.
And assuming that haywire isn't
something that's very inflationary,
the market knows the Fed has its back.
So that'll limit that damage.
Do you think the market still has the Fed
put at their backs
if something goes wrong in the world?
Yeah, I do
because that's basically what we've heard
from virtually every Fed speaker
post CPI,
that they
didn't love the number,
but they stand at the ready in the case
that we see a real hiccup in labor
to jump in.
So Moshe, we're in the middle of blackouts right
now, middle of October, so supply is down.
A lot of people got their funding done early,
some even prefinance 2025,
which is still going to be
a big year in terms of refinancing
needs of maturities,
much bigger than it is this year
even with the pre-funding that's gone on.
Post-election early November, post
the Fed meeting early November.
What are you telling clients
about the fourth quarter here?
I said stand at the ready.
Look Victor, and you know this,
our fundamental call at Mizuho
is that the neutral rate
is considerably higher than the Fed
has said it was.
So specifically Steve Ricchiuto
has said 4%’s the neutral call,
and if he's close to right
and he's been seeming pretty right so far,
then even at 4%, the tens are
a sell from an investor perspective,
and a buy for an issuer.
So I still like rate locks
because I think when I look at the market,
I think spreads are going tighter,
but especially for our higher quality clients,
I think your cost of funding
is going higher.
But one thing I have been spending
a lot of attention on
is actually the international markets.
Because with the US economy
doing what it's doing,
and more importantly with the European
economy doing what it's doing,
which is almost polar opposite
than what we're seeing in the US,
then you're seeing a growing basis
differential
between funding costs in Europe versus
funding costs in the US.
To be specific, the current gap
between 10-year treasuries
and 10-year bunds is 180 basis points.
That's 30 basis points
higher than it was a month ago,
but you have the ECB later this week.
If they come out with a more
dovish than expected narrative,
then you could see the market
really start taking a run
at that 220 level that we saw in April.
And I think for multinationals
who have a wall of Covid debt coming due
in '25 and '26,
that is going to be a very relevant market
if our view in the US
turns out to be right.
Having said all that,
Yep.
I know we've talked about this a lot,
not getting political, Trump-Harris win.
What are you looking for from the election
that could cause this market
to get roiled?
What's the outcome?
A sweep
by either party is a market negative.
A divided government
will be a market positive,
and I think the market right now
is pricing in a divided outcome.
So as long as we have a divided outcome,
you feel pretty confident there's
going to be
financing opportunities post the election?
Yes.
Okay.
So Moshe, we've spent most of our time
here at a more macro general level
about the IG markets.
Let's just get into something a little
specific that I think is a hot topic
this year with the changes that occurred
last year from Moody's in particular.
But hybrids,
give you some background stats.
Last year, $33 billion
worth of hybrids came to market.
Of that 33, maybe a little over
$5 billion was from non-financials.
In 2024, year-to-date, $71 billion.
Of total hybrids, five times
the number of non-financial hybrids.
$25 billion, most of them
coming from the utility space
to fund large capex expenditures going forward
here over the next four to five years.
What are you seeing from
other non-financial borrowers
and where do you see the use of hybrids
going forward right now, not just in
the utility space to fund capex,
but where else are you seeing the interest
and the thought process around
using them?
Victor, I think where we're starting
to see some applicability to it,
at least in the corporate space,
is in deleveraging situations.
So in some of the situations
specifically we've been working
on, we've had some clients
who've done some material M&A,
deleveraging for a number of different
reasons, hasn't happened as quickly
as they anticipated.
So they're looking at a situation
where they buy back debt
in the market and fund that transaction
with hybrid capital.
So you're basically raising
50 cents of debt
to take out
every dollar of debt in the market.
So it's a way of essentially turbocharging
that strategy.
I'm seeing non-traditional
hybrid users really start
to get engaged in that product.
What do you think
the demand profile is going to be like?
Is there going to be sufficient demand
to absorb that?
Well, it's interesting
because we're sitting at
subordination and extension premiums
at some of the lowest levels
we've seen of all time.
Meaning accounts are willing to buy them
as tight versus senior debt
as they ever have.
And that usually would be something
that would contradict demand
being there from investors.
You'd figure at the tights
so it wouldn't be there.
But the need for yield in people's
portfolio, the desire
to lock that yield in,
especially if you think
you have the Fed put,
you think the Fed's going
to eventually have to lower rates
and rates will follow.
That product is seeing and I think
will continue to see demand in it.
The question is
what the levels are going to be. We've had
deals approach breaking the
6% initial yield threshold.
We haven't had one non-financial
go through just yet.
And with this rate back up
post the Fed, it's going to be interesting
to see where we come out.
But there have been changes.
The Moody's tax
deductibility was a big change last year.
And then of course
recently, we've had a couple of deals.
One of the few things that has changed
is some new options for issuers.
We have deals
that now can put floors on the reset,
which make investors
a lot more comfortable
with the extension risk going forward.
It's increased demand.
It's lowered coupons
by anywhere from 25 to 50 basis points.
So it's another arrow
in the quiver of issuers
on how to structure their hybrids
that I think are very investor friendly
that can keep this party
going in terms of demand for hybrid.
But look, Moshe, we've talked a lot,
spreads at their tights
post-financial crisis,
new issue premiums at almost
flat to maybe a handful of basis points
over subscriptions at relative highs
versus last year.
And the ability of dealers of
syndicate desks to move deals
from the original IPT to their final price
has never been greater.
We're nearing like 30 basis
points of average move that we're priced
for perfection right now.
And I guess
we're going to see where it goes over
the next couple of weeks
and what happens after the election
and the next Fed meeting.
And we'll be back
during a Holiday edition,
I guess, to go through everything
that's gone on since this meeting.
That sounds like a plan, Victor
You got it. We'll see you
next time on Markets Mindset.