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00:00:18:14 - 00:00:21:20
Welcome everybody back to Markets Mindset here at Mizuho.
00:00:21:20 - 00:00:27:21
And usually, guys, we do this Markets Mindset and discuss what went on for the previous quarter.
00:00:27:21 - 00:00:31:05
But obviously, with what happened on April 2nd,
00:00:31:05 - 00:00:36:18
I'm not sure the quarter means as much now as it did maybe a short while ago.
00:00:36:18 - 00:00:39:08
So we're going to try to take things as
they are now.
00:00:39:08 - 00:00:43:17
Year-to-date supply is running maybe two percentage points behind where it was last year.
00:00:43:17 - 00:00:46:01
So we're pretty flat there.
00:00:46:01 - 00:00:50:04
10-year treasury is probably at its average yield, at least today it's at its average yield,
00:00:50:04 - 00:00:51:15
where it's been year-to-date.
00:00:51:15 - 00:00:53:22
And the index is sitting around 107.
00:00:53:22 - 00:00:58:15
Keep in mind highs of 172 during SVB,
275 during Covid.
00:00:58:15 - 00:01:00:21
I think our tight we got to was 77, 78.
00:01:01:04 - 00:01:01:23
So, Moshe,
00:01:01:23 - 00:01:06:06
describing where the macro is at this moment, how do we translate that into recommendations
00:01:06:06 - 00:01:11:22
for an issuer, specifically for an issuer who has a short-term horizon, looking to raise money in the
00:01:11:22 - 00:01:14:15
shorter term, but also then people
looking out further,
00:01:14:15 - 00:01:15:21
shorter term, but also then people
looking out further,
00:01:15:21 - 00:01:20:22
people who maybe don't need the money until, call it late third, early fourth quarter?
00:01:21:08 - 00:01:23:01
Yeah, two different answers there, Victor.
00:01:23:01 - 00:01:27:22
So, if someone is looking for capital
in the short-term,
00:01:27:22 - 00:01:31:04
and let's define the short-term, three-to-six months.
00:01:31:04 - 00:01:36:03
If you're a corporate, that means you have limited windows within that three-to-six months
00:01:36:03 - 00:01:38:12
because of earnings blackouts, et cetera.
00:01:38:12 - 00:01:45:05
So, given what we're seeing in terms of overall macro volatility, but at the same time
00:01:45:05 - 00:01:47:17
looking at the current strength of credit,
00:01:47:19 - 00:01:53:11
I would advocate looking at those windows when they present themselves.
00:01:53:11 - 00:01:58:13
Because right now, you have a little bit of a dichotomy between what credit is telling you
00:01:58:13 - 00:02:00:13
and what you're hearing in the equity market.
00:02:00:13 - 00:02:03:16
Equity market is a little bit more doom and gloom than we're seeing in credit.
00:02:03:16 - 00:02:07:05
In credit, we have seen real money start
to buy at the wides,
00:02:07:05 - 00:02:12:13
and we have seen new issues, to your point, work well and trade well, all right?
00:02:12:13 - 00:02:17:19
But there is a point where maybe the equity
story starts moving into credit
00:02:17:19 - 00:02:23:19
rather than the other way around, and what is a window right now may not be one in the future.
00:02:23:19 - 00:02:28:07
Because as Colby's going to tell you, what we're seeing in the market right now is one of a
00:02:28:07 - 00:02:34:00
recalibration of risk premium, not a closing
of the liquidity window.
00:02:34:00 - 00:02:36:19
Longer term, I'd just wait.
00:02:36:19 - 00:02:43:10
I'd wait to what we're going to see over the next two-to-three-to-six months, potentially,
00:02:43:10 - 00:02:47:02
because what we're dealing with right now
00:02:47:02 - 00:02:54:02
is arguably not sustainable for the long term, just given the amount of volatility it creates.
00:02:54:02 - 00:02:57:12
So, there's going to have to be some leveling off,
00:02:57:12 - 00:03:02:12
and we just don't know exactly where that's going to be for the better or for the worse.
00:03:02:12 - 00:03:06:15
So, I think time you should view as an
asset rather than a liability,
00:03:06:15 - 00:03:10:21
and take full advantage of it so the crystal ball becomes that much clearer for you.
00:03:11:20 - 00:03:15:01
So, Colby, that's just appropriate
to turn it to you now.
00:03:15:01 - 00:03:15:20
Alright.
00:03:15:20 - 00:03:18:08
One of the bright spots in this market has been
00:03:18:08 - 00:03:23:07
that when we've opened up strong in the morning, or with a positive tone,
00:03:23:07 - 00:03:25:09
and new issues have showed up, the
bid has been there.
00:03:25:09 - 00:03:26:07
and new issues have showed up, the
bid has been there.
00:03:26:07 - 00:03:30:04
The liquidity has been strong, and it's remained pretty strong, both the front end and out the curve.
00:03:30:04 - 00:03:32:09
Discuss a little bit of that and what
we're seeing and why.
00:03:32:15 - 00:03:33:14
No, absolutely.
00:03:33:14 - 00:03:36:16
As Moshe said, it never was a liquidity issue
00:03:36:16 - 00:03:40:12
when it comes to the investment grade market, particularly the new issue market.
00:03:40:12 - 00:03:47:04
Sure, we had two weeks of lower than anticipated or lower than average supply.
00:03:47:04 - 00:03:49:12
If you look back to the two weeks prior to last
00:03:49:12 - 00:03:53:02
where you had $5 billion and just under
$10 billion of supply.
00:03:53:02 - 00:03:56:22
But to Moshe's point, that was more about the issuers not being willing to pay the
00:03:56:22 - 00:04:01:19
new issue concessions or the spreads that would have been required to bring a new issue.
00:04:01:19 - 00:04:03:00
The demand was there.
00:04:03:00 - 00:04:04:08
How do we know that?
00:04:04:08 - 00:04:07:12
You look at the secondary trading
volumes, right?
00:04:07:12 - 00:04:08:21
You look at T-Flow.
00:04:08:21 - 00:04:12:12
Each day, in aggregate over the
last couple of weeks,
00:04:12:12 - 00:04:16:18
we've seen a net add by investors of
$8 billion of paper.
00:04:16:18 - 00:04:21:17
Dealers have been able to de-risk by $8 billion, and accounts have added $8 billion of risk.
00:04:21:17 - 00:04:25:18
That's despite seeing some pretty sizable outflows.
00:04:25:18 - 00:04:28:09
Liquidity is definitively there.
00:04:28:09 - 00:04:31:11
It's more about issuers being willing to access it.
00:04:31:11 - 00:04:35:22
The other thing that we've looked at is certainly the other asset classes that are out there.
00:04:35:22 - 00:04:37:11
The commercial paper market,
00:04:37:11 - 00:04:42:06
even during the worst days, whether
it was the rate moves,
00:04:42:06 - 00:04:49:07
whether it was the equity moves, remained open, remained functioning, and remained very orderly.
00:04:49:07 - 00:04:54:03
Sure, we've seen some adjustments as relates to tenor in the CP market.
00:04:54:03 - 00:04:55:07
Absolutely.
00:04:55:07 - 00:04:58:01
But what’s been open and we've seen some readjustments from price.
00:04:58:01 - 00:05:01:10
Even this week, we've started to see the ABS market come back alive.
00:05:01:10 - 00:05:06:18
For a period, we really hadn't seen any issuers come to the ABS market.
00:05:06:18 - 00:05:10:09
There were deals that had announced–or done 15Gs, excuse me,
00:05:10:09 - 00:05:12:22
and then did not follow up with the transaction.
00:05:12:22 - 00:05:15:08
Those deals are starting to come now.
00:05:15:08 - 00:05:17:02
We're on two of them this week right now,
00:05:17:02 - 00:05:20:02
and both of them are going very well at this stage
in the game.
00:05:20:02 - 00:05:21:10
We're seeing cash.
00:05:21:10 - 00:05:23:11
We're seeing the investors want to add.
00:05:23:11 - 00:05:26:03
It's more about just finding the right price, to Moshe's point.
00:05:26:03 - 00:05:30:21
The last thing I'll say is that when you look at the movement that we've seen in risk
00:05:30:21 - 00:05:32:10
or the movement we've seen in spreads,
00:05:32:10 - 00:05:37:21
obviously it was a very quick move wider post the announcement on the 2nd.
00:05:37:21 - 00:05:42:00
We went from about, call it low 90s, depending on which index you look at,
00:05:42:00 - 00:05:47:13
to roughly right around 120 basis points
or so at the highs.
00:05:47:13 - 00:05:50:03
That took only about four or five days.
00:05:50:03 - 00:05:54:05
Since then, we've steadily moved tighter.
00:05:54:05 - 00:05:59:06
We're sitting probably about 10 basis points inside of those highs over the last couple of days here.
00:05:59:06 - 00:06:01:07
Where are you versus other markets?
00:06:01:07 - 00:06:03:17
I mean, we've talked about the dollar market
here, but we have
00:06:03:17 - 00:06:08:06
a difference here where the ECB has
eased on a relative basis
00:06:08:06 - 00:06:12:00
an enormous number of times compared to the US.
00:06:12:00 - 00:06:12:01
What are you telling your clients about opportunities in, say, euros relative to the dollar?
00:06:12:01 - 00:06:16:10
What are you telling your clients about opportunities in, say, euros relative to the dollar?
00:06:17:03 - 00:06:23:18
Victor, I've been having a lot of conversations with people about euros for two reasons.
00:06:23:18 - 00:06:27:00
First off, the differential versus the US
00:06:27:00 - 00:06:32:19
has been expanding and pretty materially over the last week or so.
00:06:32:19 - 00:06:39:17
And given the strength in the euro, the ECB is in a position of a lot more latitude versus the Fed.
00:06:39:17 - 00:06:43:16
And I think that's going to continue to get reflected in the rate market.
00:06:43:16 - 00:06:45:16
So that's one.
00:06:45:16 - 00:06:51:09
I think two, you're going to be seeing a fair amount of fiscal spend in Europe, which, again,
00:06:51:09 - 00:06:54:22
I think is going to be a credit positive for people.
00:06:54:22 - 00:06:58:11
So there's going to be I think tailwinds in Europe
00:06:58:11 - 00:07:02:10
that aren't exactly going to be here in the United States right now.
00:07:02:10 - 00:07:07:11
And if that gets amplified by a growing funding difference or growing basis
00:07:07:11 - 00:07:11:07
between mid-swaps and treasuries, then that's going to be very attractive to people.
00:07:11:22 - 00:07:14:03
One thing I wanted to follow up and ask you before,
00:07:14:03 - 00:07:17:11
always a tough one to ask you where
spreads are going.
00:07:17:11 - 00:07:22:16
But in particular, as the treasury curve is steepened, we've seen 10s, 30s have steepened,
00:07:22:16 - 00:07:28:06
5s, 10s have steepened quite a bit, even 3s, 5s are at 17, 18 basis points.
00:07:28:06 - 00:07:32:10
Very different than what we've seen
going back a year.
00:07:32:10 - 00:07:34:11
What do you expect to happen
with spreads overall?
00:07:34:11 - 00:07:39:07
What do you expect to happen with spreads on a relative basis, 3s, 5s, 10s, 30s?
00:07:39:12 - 00:07:41:05
I mean, that's a great question.
00:07:41:05 - 00:07:45:04
I think there's a lot of other factors that are going to drive where those spreads are going to be
00:07:45:04 - 00:07:47:11
outside of just the treasury shape.
00:07:47:11 - 00:07:50:11
I think if you think about traditionally
00:07:50:11 - 00:07:54:02
what you would expect to happen as the
treasury curve steepens,
00:07:54:02 - 00:07:55:04
what you would expect to happen as the
treasury curve steepens,
00:07:55:04 - 00:07:58:15
you'll see a flattening of that credit curve.
00:07:58:15 - 00:08:03:01
I think we've already started to see that, particularly in the front end.
00:08:03:01 - 00:08:10:05
3s, 5s has probably flattened anywhere from 5 to as much as 10 basis points on a spread standpoint,
00:08:10:05 - 00:08:12:10
depending on the name and
depending on the sector.
00:08:12:10 - 00:08:20:02
I think we could see that theme develop thematically between 3s, 5s and 5s, 10s.
00:08:20:02 - 00:08:22:14
So one of the interesting things that we've seen,
00:08:22:14 - 00:08:27:04
and we can look at T-Flow to use this, so look at secondary volumes to drive this, is that
00:08:27:04 - 00:08:33:11
if you look at the $8 billion of net buys by investors that we've seen since April 2nd,
00:08:33:11 - 00:08:38:07
over half of that has been from out the curve,
so 12 years or longer,
00:08:38:07 - 00:08:42:08
which I think is certainly a driver of that kind of flattening of a credit curve as investors are
00:08:42:08 - 00:08:43:05
looking to add duration, and we're hitting the yield bogeys, particularly with the move higher
00:08:43:05 - 00:08:47:01
looking to add duration, and we're hitting the yield bogeys, particularly with the move higher
00:08:47:01 - 00:08:50:08
in treasuries, combined with the move
higher in spreads.
00:08:50:17 - 00:08:52:02
The front end of the curve,
00:08:52:02 - 00:08:53:12
we certainly saw some, what I would call,
00:08:53:12 - 00:08:54:12
we certainly saw some, what I would call,
00:08:54:12 - 00:09:00:06
disorderly behavior immediately following the announcement, as investors,
00:09:00:06 - 00:09:02:22
we’re getting ahead of,
we’re getting prepared for outflows,
00:09:02:22 - 00:09:07:08
we've started to see some more positive behavior from investors in the front end of the curve,
00:09:07:08 - 00:09:10:01
and a more return to normalcy there.
00:09:10:01 - 00:09:12:10
I went through the numbers, we're pretty close,
00:09:12:10 - 00:09:16:16
maybe off 2% total supply versus last year,
00:09:16:16 - 00:09:19:20
little bit more, maybe 13% on net supply we're running behind.
00:09:20:04 - 00:09:23:04
As we roll out of blackouts,
00:09:23:04 - 00:09:27:13
we went from supply numbers that were averaging $50 billion a week
00:09:27:13 - 00:09:29:12
for the four weeks prior to April 2nd,
00:09:29:12 - 00:09:34:14
and we have, other than last week, if you take the average over the last three weeks, it's pretty light.
00:09:34:14 - 00:09:36:11
What do you think happens supply-wise
going forward?
00:09:36:11 - 00:09:38:04
Do you think there's enough issuers who
00:09:38:04 - 00:09:41:14
are worried about where we're going to be six months from now,
00:09:41:14 - 00:09:44:12
that they're going to come out of blackout and look to hit the market?
00:09:44:12 - 00:09:48:04
Or do you think it's really going to depend on the opportunistic kind of view of the world and whether
00:09:48:04 - 00:09:49:16
they hit a bogey they might be thinking about?
00:09:49:23 - 00:09:52:03
I think it's going to be somewhere in the middle.
00:09:52:03 - 00:09:55:14
This isn't going to be Covid all over,
00:09:55:14 - 00:10:00:04
where everyone's out there with a liquidity grab, at least that's what it feels like right now.
00:10:00:04 - 00:10:06:20
That being said, I could see someone who has bonds maturing in 2026,
00:10:06:20 - 00:10:10:05
and Powell's term is up in May of 2026,
00:10:10:05 - 00:10:12:10
and they want to hit the fast forward button on that
00:10:12:10 - 00:10:14:08
because they want to have
to deal with the noise of that.
00:10:14:20 - 00:10:21:13
I could see that, but I don't see, like when we saw Covid, we hit all-time volume levels.
00:10:21:13 - 00:10:23:09
We're just not going to see that based on that.
00:10:23:09 - 00:10:26:16
People don't think–in Covid, they thought their cash flow was going away,
00:10:26:16 - 00:10:28:02
that their business model wasn't going to work.
00:10:28:08 - 00:10:29:14
Exactly, exactly.
00:10:29:14 - 00:10:35:11
And so you also have clients who looked at their free cash flow and had M&A budgeted for that.
00:10:35:11 - 00:10:38:05
Well, that M&A is in the hibernation closet for the time being.
00:10:38:05 - 00:10:40:20
So that's additional cash flow they can tap.
00:10:41:01 - 00:10:46:08
So we are by no means, at least in my opinion, going to overwhelm this market with supply.
00:10:46:10 - 00:10:49:07
So we'll finish with what are we looking
at going forward?
00:10:49:07 - 00:10:50:07
I'll give you both an opportunity.
00:10:50:07 - 00:10:51:03
Moshe, you first.
00:10:51:03 - 00:10:51:22
Colby, you second.
00:10:52:01 - 00:10:52:08
Absolutely.
00:10:52:11 - 00:10:56:20
What are the two or three key barometers you're going to be looking at?
00:10:57:01 - 00:10:59:08
I'm very macro right now, Victor, as you know.
00:10:59:08 - 00:11:03:13
So the two things that stand out to me are the dollar and the shape of the curve.
00:11:03:13 - 00:11:08:19
So if we see 2s, 10s, which is already
steepened into 60 basis points,
00:11:08:19 - 00:11:11:05
if we see that momentum continue,
00:11:11:05 - 00:11:15:01
and the dollar becoming that much more
vulnerable at the same time,
00:11:15:01 - 00:11:19:08
then it's really hard to construct a rosy picture
for risk assets.
00:11:20:09 - 00:11:20:22
And Colby?
00:11:21:02 - 00:11:23:14
I'll be a bit more specific, I'd say, to
investment grade.
00:11:23:14 - 00:11:25:02
I think it's going to be above flows, right?
00:11:25:02 - 00:11:25:06
I think it's going to be above flows, right?
00:11:25:06 - 00:11:28:18
I mean, that both from looking at the
secondary side, as I mentioned,
00:11:28:18 - 00:11:32:16
we've been very fortunate to see accounts
adding risk during this period, right?
00:11:32:16 - 00:11:35:20
Real money stepping in and buying at the wides.
00:11:35:20 - 00:11:40:15
And so we have not seen dealer balance
sheets be put at much pressure.
00:11:40:15 - 00:11:44:03
It's been more about a lack of selling by investors.
00:11:44:03 - 00:11:48:10
If they start selling, we start seeing the
outflows, forced outflows,
00:11:48:10 - 00:11:50:07
either because they're losing money or
just because
00:11:50:07 - 00:11:53:16
they start feeling less comfortable with their risk.
00:11:53:16 - 00:11:55:20
That's when I start to get more concerned about,
00:11:55:20 - 00:12:00:18
you know, the liquidity picture as it relates
to the primary market and investment grade.
00:12:00:18 - 00:12:01:19
So that takes the place of, I remember
back in Covid,
00:12:01:19 - 00:12:03:01
So that takes the place of, I remember
back in Covid,
00:12:03:01 - 00:12:05:21
difficult market, and then the issuers
were the sellers,
00:12:05:21 - 00:12:09:04
just dumping a lot of supply in the market,
and that really put us under pressure.
00:12:09:04 - 00:12:12:13
So you're looking, maybe not the magnitude, but you're going to be watching secondary spreads.
00:12:12:17 - 00:12:13:05
I think so.
00:12:13:07 - 00:12:13:19
Secondary sales.
00:12:13:21 - 00:12:14:04
Exactly.
00:12:14:05 - 00:12:14:13
Net sales.
00:12:14:14 - 00:12:15:08
Exactly.
00:12:15:08 - 00:12:18:17
The movement that we've seen from a spreads perspective has been,
00:12:18:17 - 00:12:22:06
we move wider, we find kind of some stability.
00:12:22:06 - 00:12:25:03
We move wider again, we find some
sense of stability.
00:12:25:03 - 00:12:30:20
It does not feel like it's been the same dramatic or quick movements that we saw during Covid
00:12:30:20 - 00:12:34:05
where it felt like you were, you know, trying to
catch a falling knife.
00:12:34:05 - 00:12:38:09
Right now, it's been about a readjustment of spreads, readjustment of price,
00:12:38:09 - 00:12:43:13
and not necessarily a de-risking or a selling down of positions from accounts.
00:12:44:02 - 00:12:46:03
Well, listen, I thank both of you for being here.
00:12:46:05 - 00:12:48:21
As always, Moshe, Colby, appreciate
you coming out.
00:12:48:21 - 00:12:50:00
Probably have you back.
00:12:50:00 - 00:12:53:08
Hopefully next time we bring you back, it'll
be a little bit calmer,
00:12:53:08 - 00:12:56:02
a little bit more stable, and we'll be able to talk more about what went on in the quarter.
00:12:56:02 - 00:12:58:03
But until that time, thank you very
much for joining us.
00:12:58:08 - 00:12:58:15
Thank you.