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00:00:24:12 - 00:00:26:02
Welcome back to Markets Mindset, everybody.
00:00:26:02 - 00:00:26:21
I'm Victor Forte.
00:00:26:21 - 00:00:29:14
I'm here with Moshe Tomkiewicz, Head of Debt Capital Markets here at Mizuho,
00:00:29:14 - 00:00:32:11
and Colby Griffith, Head of U.S. Debt Syndicate.
00:00:32:11 - 00:00:33:12
And Happy New Year to everybody.
00:00:33:12 - 00:00:35:18
Happy New Year to both of you,
belatedly by a little bit.
00:00:35:18 - 00:00:39:11
Well, guys, we have a lot to talk about since we last got together, Moshe and I at least.
00:00:39:11 - 00:00:46:11
We left last year with a big issuance of tech bonds that kind of put the market a little bit on notice.
00:00:46:13 - 00:00:47:14
Things got a little wobbly.
00:00:47:17 - 00:00:51:16
But all of a sudden, we walk in after 2-3 weeks down in December of no issuance,
00:00:51:16 - 00:00:54:17
and it looks like the market's
just got back to basics.
00:00:54:21 - 00:00:58:10
I mean, we're sitting here with
$90 billion of supply over the three days
00:00:58:10 - 00:01:00:21
that have just passed, first three days
of the year, setting some records.
00:01:00:21 - 00:01:02:21
I know, Colby, you're going to talk to us about that.
00:01:02:23 - 00:01:07:13
But it feels like the market's taken it completely in stride, 4+ times oversubscriptions,
00:01:07:13 - 00:01:13:05
3-4 basis points of new issue concession, attrition rates on moves from IPT to final price.
00:01:13:05 - 00:01:16:17
You know, relatively holding at
averages for all of last year.
00:01:16:19 - 00:01:20:00
Colby, what do you make of this
here as we open up and have,
00:01:20:00 - 00:01:22:19
three of the biggest days that we've
ever had back to back to back?
00:01:22:22 - 00:01:25:15
Well, I think on one hand, it's not all that surprising.
00:01:25:15 - 00:01:30:20
I think all the commentary and the conversations that we had both with issuers and investors during
00:01:30:20 - 00:01:36:10
the month of December was all about the supply that we're going to see not only in January, but for all of 2026.
00:01:36:12 - 00:01:41:07
You look at the estimates for this year,
and they are above normal numbers.
00:01:41:12 - 00:01:46:06
If we do hit some of the estimates out there, they will be record years for our market.
00:01:46:08 - 00:01:46:23
But, let's talk about that.
00:01:46:23 - 00:01:53:12
So $1.65 trillion last year, and I think the ranges for many of the banks on the street ranged
00:01:53:12 - 00:01:55:21
from flat to north of $2 trillion.
00:01:55:23 - 00:01:56:20
Correct.
00:01:57:00 - 00:01:58:12
And where is that coming from?
00:01:58:14 - 00:02:00:13
So a couple of things are going to drive that.
00:02:00:15 - 00:02:02:23
Our number is right, kind of, in the middle of that.
00:02:03:02 - 00:02:06:10
We're right around a $1.85-$1.86 trillion number,
00:02:06:10 - 00:02:09:16
which would still be a pretty sizable
increase versus last year.
00:02:09:18 - 00:02:12:10
For us, there's a couple of primary drivers.
00:02:12:10 - 00:02:17:18
One is obviously going to be the data center supply and broader tech supply that you alluded to.
00:02:17:20 - 00:02:21:05
That theme is going to continue
from last year into this year.
00:02:21:07 - 00:02:25:11
The other big factor is going to be, at least that we think, is going to be M&A.
00:02:25:14 - 00:02:27:19
$180 billion last year.
00:02:28:00 - 00:02:33:16
I think we're going to see something certainly with a two-handle, probably closer to the mid twos.
00:02:33:18 - 00:02:34:16
Why is that?
00:02:34:18 - 00:02:38:17
Last year, people had very high expectations for M&A as well.
00:02:38:19 - 00:02:43:05
Obviously, the first quarter, that got a little bit disrupted with the noise around tariffs.
00:02:43:07 - 00:02:48:04
This year, it seems to be a much more clean type of a calendar from that perspective
00:02:48:04 - 00:02:50:21
as far as a geopolitical standpoint, I guess.
00:02:50:23 - 00:02:52:14
So we think that will increase.
00:02:52:16 - 00:02:55:13
On the financial side, so we think most of the driver will be corporates.
00:02:55:16 - 00:02:59:14
On the financial side, we're expecting a lot more of the same.
00:02:59:16 - 00:03:03:02
The one sector we do think that could increase is likely Yankee banks.
00:03:03:06 - 00:03:06:02
And so, Moshe, turning it over to you.
00:03:06:02 - 00:03:07:18
We walk into this year, Moshe, right?
00:03:07:18 - 00:03:08:10
We talked about this.
00:03:08:10 - 00:03:14:00
It's three days of supply, epic supply, and yet the market has taken it relatively in stride.
00:03:14:01 - 00:03:17:15
What are the things that you're looking at going forward that maybe people
00:03:17:15 - 00:03:22:18
should be more concerned about as we head here into 2026 that don't seem to be reflected in
00:03:22:18 - 00:03:25:20
how they absorb the new issue of supply here over the last three days?
00:03:25:22 - 00:03:27:14
The way I look at it right now
00:03:27:14 - 00:03:33:08
is what we're seeing in the broader market is an ever increasing bet on productivity growth.
00:03:33:08 - 00:03:39:18
Because the narrative in the market right now is we have an economy that's growing above trend.
00:03:39:20 - 00:03:44:07
We're in the midst of getting a healthy dose of both fiscal and monetary stimulus.
00:03:44:09 - 00:03:49:09
And at the same time, the bond market continues to play ball.
00:03:49:11 - 00:03:54:17
Ten-year yields have traded between 4 and 4.20 since early September.
00:03:54:17 - 00:03:57:08
Market feeds off of that lack of volatility.
00:03:57:08 - 00:04:02:22
So the narrative of non-inflationary growth is a big one right now.
00:04:03:02 - 00:04:06:09
And so I think the main test for the market is
00:04:06:09 - 00:04:12:23
are we able to deliver on the productivity growth the market is currently assuming?
00:04:13:01 - 00:04:14:15
And how are we going to see that?
00:04:14:20 - 00:04:20:12
Well, right now what we're seeing is a rotation out of the Mag Seven into everybody else.
00:04:20:14 - 00:04:28:05
And that everybody else is basically a call on efficiencies and growth going forward.
00:04:28:07 - 00:04:34:00
So what we're going to want to
hear during earnings is an uptick
00:04:34:00 - 00:04:39:22
in companies using AI, an uptick in companies claiming efficiencies on AI.
00:04:39:22 - 00:04:44:05
If we do see that, then this narrative
is going to continue.
00:04:44:07 - 00:04:46:09
And that's going to be very bullish for risk.
00:04:46:11 - 00:04:51:00
So how much of the rush to the market do you
think is from issuers looking to get ahead of,
00:04:51:00 - 00:04:55:18
what we all know is a big earnings season at the end of January, beginning of February,
00:04:55:18 - 00:04:59:10
for most of the major tech companies where, whether it's on their earnings call,
00:04:59:10 - 00:05:04:04
they're going to be announcing their need, their CapEx needs, and whether those are going to go up or not.
00:05:04:05 - 00:05:07:21
Because we've seen what's happened in the past to bond spreads for certain issuers
00:05:07:21 - 00:05:11:07
when you see them announce
ever-increasing CapEx needs.
00:05:11:11 - 00:05:15:11
But also, if there is issuance on the other side of that, it can be very large.
00:05:15:11 - 00:05:19:20
Do you think a lot of what's driving the issuance now in these first possibly two weeks
00:05:19:20 - 00:05:21:21
is from people looking to get ahead of that
00:05:21:21 - 00:05:22:19
inflection point?
00:05:22:21 - 00:05:23:05
One hundred percent.
00:05:23:10 - 00:05:28:05
I mean, if you think about what debt capital market officers have been doing for the last three months
00:05:28:05 - 00:05:32:02
is we've been crying wolf on all the supply that's coming in 2026.
00:05:32:06 - 00:05:33:05
Well, guess what?
00:05:33:06 - 00:05:37:15
Investors have been hearing that same story, and they're positioned for it,
00:05:37:15 - 00:05:41:19
and yet market's trading tighter
in the face of record supply.
00:05:42:00 - 00:05:44:22
That's market code for
00:05:44:22 - 00:05:50:20
“We're ready for that supply as long as we continue to see this volatility backdrop that we're seeing today.
00:05:50:22 - 00:05:53:02
We're ready for it, and we're willing to take it.”
00:05:53:04 - 00:05:56:11
And, Colby, so I remember in the fourth quarter,
00:05:56:11 - 00:06:01:22
we all were concerned about this big tech supply and spreads widening out.
00:06:01:22 - 00:06:06:20
But when we stripped away the tech issuance
00:06:06:20 - 00:06:12:17
from those companies, spreads in most of the other categories really didn't widen out.
00:06:12:20 - 00:06:15:02
And are you thinking that's the same thing that's going to happen here?
00:06:15:03 - 00:06:20:18
Do you think that the other industries, other sectors, will be able to glide through
00:06:20:18 - 00:06:25:05
a heavy issuance window from the tech companies once again and kind of
00:06:25:05 - 00:06:28:03
have the tech be offset by itself?
00:06:28:06 - 00:06:32:08
Well, I mean, to Moshe’s point, if you look at what has come this week as kind of a
00:06:32:08 - 00:06:38:21
barometer of that, right, because the names that have come this week should be no surprise to anyone.
00:06:38:23 - 00:06:44:08
There's the quote-unquote frequent flyers, if you will, that always come the first week in January.
00:06:44:08 - 00:06:46:20
We've hit on about 17 or 18 of them.
00:06:46:22 - 00:06:49:03
There's only a handful of them that have not come yet.
00:06:49:07 - 00:06:54:14
And so it's a lot of the names that people expected to come, a lot of the sectors that people expected to come, right?
00:06:54:15 - 00:06:57:20
If you look at the supply that has come of that $90 billion or so,
00:06:57:20 - 00:07:02:00
about 55 of it is either from Yankee banks or from the auto space.
00:07:02:00 - 00:07:05:03
Those are two of the biggest users of that first week every single year.
00:07:05:07 - 00:07:11:23
So the market got that other supply that it was expecting, right, the non-tech supply that it was expecting.
00:07:11:23 - 00:07:16:00
And it got it in pretty good size, right, as you alluded to earlier.
00:07:16:05 - 00:07:18:23
We're, you know, the biggest week we've ever had in the first week.
00:07:19:01 - 00:07:27:02
We're fourth all-time right now as it sits today, with, I guess, an outside chance of getting to third for total week size.
00:07:27:02 - 00:07:32:01
And to your point, concessions were very minimal.
00:07:32:03 - 00:07:38:11
And so I think that is a pretty good insight into what I hope will be the response
00:07:38:11 - 00:07:43:07
or could be the response from investors as they start getting hit with some of the other kind of
00:07:43:07 - 00:07:45:18
quote-unquote tech or data center supply.
00:07:45:20 - 00:07:49:21
I mean, you have to consider, though, that you've had $90 billion of supply in three days.
00:07:49:21 - 00:07:57:21
At some point, when do you outpace the natural demand of the market and it starts to weigh on spreads at some point?
00:07:57:23 - 00:07:59:09
That is absolutely the risk, right?
00:07:59:11 - 00:08:05:05
And so to your point, we had an earlier end to the year this year from last year, excuse me,
00:08:05:05 - 00:08:07:23
with the Fed being slightly earlier than it traditionally is.
00:08:07:23 - 00:08:11:18
So we really had three or four weeks,
basically, of no supply.
00:08:11:20 - 00:08:18:19
If we continue to run at this historic pace, it is going to have to weigh on spreads, right?
00:08:18:20 - 00:08:23:09
I think this first week, certainly it was benefited from being there early
00:08:23:09 - 00:08:26:22
and taking advantage of that kind of lack of supply over the last four weeks.
00:08:27:00 - 00:08:32:12
I think as it continues and as it kind of grows longer, if you will, from a streak perspective,
00:08:32:12 - 00:08:37:02
that's where I think the risk for not only spreads widening but concessions growing
00:08:37:02 - 00:08:39:05
really start to kind of come into the market.
00:08:39:05 - 00:08:44:12
If that brings us toward the data center supply, that probably is the biggest risk out there.
00:08:44:14 - 00:08:49:08
This is really for both of you because maybe you look at it in a different way, but we talked last year about
00:08:49:08 - 00:08:51:22
the longer-dated bid that was in the market, right?
00:08:51:22 - 00:08:55:03
It was a very strong bid through most of
the year for long-dated paper.
00:08:55:05 - 00:08:58:18
That waned a little bit in the fourth quarter because we upped the ante.
00:08:58:22 - 00:09:03:12
We were averaging relatively de minimis numbers of long bonds,
00:09:03:12 - 00:09:06:04
20 years and longer being issued on a weekly basis.
00:09:06:06 - 00:09:10:12
And all of a sudden at a point in the fourth quarter last year, we upped that pretty heavy.
00:09:10:14 - 00:09:11:22
And that weighed on the market a little bit.
00:09:12:00 - 00:09:13:17
We saw long-end spreads give it up.
00:09:13:19 - 00:09:18:18
Long-end spreads have come back in yet, again, it's a small sampling of three days.
00:09:18:20 - 00:09:22:13
Last year we were what Colby, 8% was roughly 20 years and longer.
00:09:22:13 - 00:09:23:18
At this point yeah.
00:09:23:20 - 00:09:26:21
And now we're at 10%, 20 years and longer.
00:09:26:23 - 00:09:34:06
How do you feel about the long bond bid here and the desire of issuers to go after it in a steepening market right now?
00:09:34:09 - 00:09:36:04
Let's start with the bid.
00:09:36:06 - 00:09:42:10
I think as long as rates stay in a very tight range and you have kind of generational low volatility,
00:09:42:10 - 00:09:46:19
you're going to have people reaching out the curve to maximize yield on the demand side.
00:09:46:21 - 00:09:53:10
And I think as that basis versus the rest of the curve comes in, I think you're going to entice more
00:09:53:10 - 00:09:59:03
issuers out the curve, especially that they feel that the rate backdrop that we're looking at right now
00:09:59:03 - 00:10:01:12
is more likely the one going forward.
00:10:01:14 - 00:10:04:18
You don't think there's going to be, or maybe I'll ask Colby, you don't think there's going to be
00:10:04:18 - 00:10:08:20
pushback from issuers because we have seen —
00:10:08:20 - 00:10:13:08
There has been a decent steepening during the month of December heading into today.
00:10:13:10 - 00:10:16:10
And obviously spreads haven't tightened enough on 10s, 30s to make that up.
00:10:16:13 - 00:10:18:13
It's gotten more expensive to go out the curve.
00:10:18:13 - 00:10:22:11
And we always see issuers who
don't want to add extra.
00:10:22:13 - 00:10:27:11
Let's just say they don't want to have the cost of the earnings per share, the debt weigh on the earnings per share.
00:10:27:14 - 00:10:30:14
Do you think that that's going to hold them back from issuing out the curve?
00:10:30:16 - 00:10:34:11
I mean, Moshe can answer from an issuer perspective, but I think a couple of things that
00:10:34:11 - 00:10:39:00
we've seen over this week, and again, it's only three days of issuance, right?
00:10:39:00 - 00:10:42:23
So it's pretty hard to take too many kind of big themes out of it.
00:10:43:01 - 00:10:47:12
But a couple of things I've seen is one, we've seen five-year issuance increase
00:10:47:12 - 00:10:50:04
probably the biggest change on the corporate side.
00:10:50:04 - 00:10:54:03
So it's increased 10% versus where it was at this point last year.
00:10:54:05 - 00:10:58:15
Now it's all about the same amount of issuers as far as the names that are there.
00:10:58:17 - 00:11:03:03
But they have chosen to use more 5-years versus 10-years from a historical perspective.
00:11:03:06 - 00:11:05:20
So you have seen some issuers maybe shorten up from that standpoint.
00:11:05:22 - 00:11:09:16
Further out the curve, we haven't seen much of it yet, to your point.
00:11:09:18 - 00:11:13:18
Part of that has to do with who's in the market in that first week of the year, right?
00:11:13:20 - 00:11:14:10
As I mentioned —
00:11:14:10 - 00:11:15:01
Heavy financials.
00:11:15:01 - 00:11:15:20
— it's a lot of financials.
00:11:15:21 - 00:11:18:10
It's a lot of autos, a handful of utilities.
00:11:18:10 - 00:11:20:18
They will use the long-end of the curve.
00:11:20:20 - 00:11:25:09
I think that will remain to be tested as we get kind of further into January.
00:11:25:11 - 00:11:31:19
In early February, when we see more of a, I guess, pure corporate type of a calendar.
00:11:31:21 - 00:11:33:13
What I was going to add is keep in mind that
00:11:33:13 - 00:11:39:00
since the Fed started raising rates in 2022, people have been biased for shorter rather than
00:11:39:00 - 00:11:41:05
longer from an issuance perspective.
00:11:41:07 - 00:11:46:16
You add that on top of all the Covid maturities that we're seeing this year and the next year
00:11:46:16 - 00:11:50:02
and the year after that, that really starts stacking up.
00:11:50:07 - 00:11:53:14
So you're going to see issuers being pushed out the curve
00:11:53:14 - 00:11:58:07
out of somewhat necessity, just given how much they've been relying on the front end.
00:11:58:09 - 00:12:01:11
And that doesn't necessarily
translate into dollar supply.
00:12:01:14 - 00:12:07:19
Your multinationals may look at a bunch of different currencies, just given the nominal differential on coupons.
00:12:07:21 - 00:12:12:03
But again, I think if you're looking at this current rate backdrop and that holds,
00:12:12:03 - 00:12:15:01
I think you're going to see some extension going out the curve.
00:12:15:03 - 00:12:18:03
And yeah, I mean, and Moshe, from your standpoint, you've
00:12:18:03 - 00:12:20:01
done a lot of work with issuers going into Europe.
00:12:20:06 - 00:12:23:23
Europe's a different factor nowadays as it was even two years ago, right?
00:12:24:01 - 00:12:27:17
Europe is deeper, it's stronger, it's larger.
00:12:27:20 - 00:12:32:11
The rates in some cases or the swapped equivalent rates in some cases are better
00:12:32:11 - 00:12:34:02
than what we're able to issue in the States.
00:12:34:04 - 00:12:39:08
How much of a factor do you think that's going to be on our supply this year going forward?
00:12:39:10 - 00:12:45:12
Do you think numbers that are $1.85 trillion take into account the idea that we could have a lot of supply going into Europe
00:12:45:12 - 00:12:50:13
if people have either the net interest hedging availability or are willing to do the swap back to dollars?
00:12:50:15 - 00:12:55:04
Yeah, I think when we look at our business right now, in terms of our book of business,
00:12:55:04 - 00:13:00:16
probably have the most amount of Euro mandates lined up at this point in my career that I've seen.
00:13:00:19 - 00:13:03:05
And it all goes back to what you're talking about.
00:13:03:07 - 00:13:05:00
And I think there's two things going on in Europe.
00:13:05:04 - 00:13:10:19
One is just a nominal lower cost of funding for people who have net investment hedging capacity.
00:13:10:19 - 00:13:18:05
And I think two is concerned about crowding out of the U.S., just given tech and M&A supply,
00:13:18:05 - 00:13:25:04
let's hit that diversification lever and hit a market that's not seeing that level of paper.
00:13:25:06 - 00:13:30:04
I'm going to try to end this on something that I think would be great to do collectively
00:13:30:04 - 00:13:31:20
between the two of you so we cover all the bases.
00:13:32:00 - 00:13:32:23
And I'm going to start with you, Colby.
00:13:32:23 - 00:13:33:18
Okay.
00:13:33:20 - 00:13:38:03
What are the things that you look forward over the next few months to say, these are the seminal events,
00:13:38:03 - 00:13:42:19
and if they don't turn out the way the market's feeling about it right now, this is going to make a change in things?
00:13:42:23 - 00:13:44:00
It's a tough question.
00:13:44:02 - 00:13:51:21
I feel like right now, to be fair, I think the market has a much better handle on the events that are coming up.
00:13:51:23 - 00:13:58:01
I think part of the issue was the fourth quarter that we saw and the impact that it had on spreads was
00:13:58:01 - 00:14:01:16
that data center supply kind of caught the market a little bit off guard.
00:14:01:18 - 00:14:04:07
That topic is no longer a surprise to anyone.
00:14:04:08 - 00:14:08:15
So does that mean it could be a surprise to the upside if it doesn't materialize or if it goes to Europe?
00:14:08:15 - 00:14:11:17
Listen, from some extent, yeah, I think that could be an upside.
00:14:11:17 - 00:14:13:03
Now, will that happen?
00:14:13:05 - 00:14:13:19
We don't know.
00:14:13:19 - 00:14:14:00
Right.
00:14:14:00 - 00:14:18:01
It feels like that will be a couple of weeks away still.
00:14:18:03 - 00:14:22:08
That would have been a concern, but I think the market's in a pretty good spot there.
00:14:22:10 - 00:14:30:10
It feels like, from a Fed perspective, the market is not expecting too much from the Fed too soon.
00:14:30:12 - 00:14:34:06
So I think that is in a better spot than maybe where we were a month ago.
00:14:34:09 - 00:14:38:15
So more likely any change would be a higher expectation of Fed eases or sooner —
00:14:38:15 - 00:14:39:03
Potentially.
00:14:39:03 - 00:14:42:16
— than what they currently are, which is you don't get to
00:14:42:16 - 00:14:46:00
a full probability of a Fed ease until, what, June now at this moment?
00:14:46:00 - 00:14:46:10
Right.
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So I think those are things that would have been an issue that have kind of settled themselves out.
00:14:51:16 - 00:14:58:03
You know, I think the big question is going to be if other issuance continues at the rate it is right now.
00:14:58:06 - 00:15:01:19
I think everyone, when they were looking at their projections for 2026,
00:15:01:19 - 00:15:05:19
as I said, it was all about data center supply and it was all about M&A.
00:15:05:21 - 00:15:13:16
If other sectors that people weren't expecting become much larger, that could be something that pushes on spreads.
00:15:13:18 - 00:15:14:22
Same thing to you, Moshe.
00:15:15:00 - 00:15:19:21
Any other things that you're concerned about that you're telling your clients to look out for and just keep an eye on
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or have in their thoughts around timing as they look at the markets over the next three, four months?
00:15:24:18 - 00:15:28:05
My two main things are inflation and AI implementation.
00:15:28:07 - 00:15:34:07
So when you have a non-inflationary growth narrative in the market, these two things matter.
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What are we seeing on the inflationary front in terms of pricing pressures?
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As importantly, what are we seeing in terms of AI implementation to give us a better crystal ball
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in terms of future efficiencies?
00:15:47:04 - 00:15:54:09
So to me, those are the two most important things aside from obviously earnings and any geopolitical events.
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The last thing, I'll leave you with both.
00:15:55:20 - 00:15:58:00
So do the midterms matter?
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We have so many other things going on.
00:15:59:12 - 00:16:04:15
I usually know in this time of year, we start to worry that the midterms start to have an effect on the markets
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because of the ambiguity between will we have full government one way or will we have split government?
00:16:10:21 - 00:16:12:21
Who will be the Fed chair, et cetera?
00:16:12:23 - 00:16:18:04
Where do you put those kinds of things into the mix of things you're looking at or do you not care about them right now?
00:16:18:04 - 00:16:25:01
I think the market already assumes that the Supreme Court is going to strike down tariffs
00:16:25:01 - 00:16:30:07
and I think the market already assumes that we're going to get a very accommodative Fed chair.
00:16:30:09 - 00:16:38:16
So I think those obviously matter, but I think the market is already assuming the stuff that normally creates volatility.
00:16:38:16 - 00:16:40:02
Well, that'll be it for this session.
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Thanks again for tuning in to Markets Mindset.
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Gentlemen, thank you very much and we look forward again to seeing you next time.
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And again, Happy New Year.