Hello, Welcome to the Credit Edge Weekly Muket's podcasts.

My name is James Crumby.

I'm as senior editor at Bloomberg.

Hello, my name is Arnold Kakuda, senior analyst at Bloomberg Intelligence.

This week, we're very pleased to welcome Dave Albricht, President and CIO of new Fleet Asset Management.

How are you, Dave, I'm doing welve today.

Thank you, guys.

Okay, great, great, so fun.

Fact So, Dave is a market veteran and he started his career before Gordon Gecko was a household name.

In addition to his executive responsibilities at Newfleet, which has about seventeen billion of assets on her management, he's a senior portfolio manager of several multisector fixing some strategies and then in his role as CIO, mister Albrich drives top down strategy for new Fleet's investment platform.

So basically, James, he knows everything.

His knowledge is limitless, and I think we've saved the best for last in terms of podcasts for this year.

So let me turn it back back to you for the first Q.

Thanks great to have you on the show, Dave.

So your credit had has has had an extraordinary year, from the April tariffs shop to the recent cut croaches outbreak, But bond spreads are finishing up pretty much where they started.

Everyone sounds so upbeat about next year.

The low level of defaults is being taken as a sign of health.

But is it really, Dave?

Are we fooling ourselves that the trouble's gone away?

Well?

I think that, you know, if you look at the investment great space, you look at the high yield space, you look at leverage finance, I think a lot of debt maturities have been pushed out, which is good.

The faults are down due to the abundance of liquidity in the market, and I think private credit helped on that front.

So defaults are something that you know, are much lower than the historical average.

You've looked at high yield, the faults right now are running much below the historic average.

I think we're at one point eight two in the historic averages, somewhere in the mid rees.

If you look at bank loans, we're probably right around the historic average.

And then we really don't have a faults in investment grade.

I think, you know, the last time we actually had a default in investment grade, not a downgrade, but a default was back with Orange County, which was quite some time ago.

But faults typically don't happen in the investment grade space.

I think that we've only seen one default in the last seven years, and that was fraud.

And if you went back, you know, years and years ago, and you looked at Enron World Commadelphia, those are all fraud.

So I think we're in a good, good place right now.

I think, you know, if I look at three the barometers I look at all in yields are still very attractive.

Where you get insurance companies, pension funds and institutional investors excited about fixed income.

When you get corporate bonds yielding in the high fours, you get securitized yielding in the five to six percent range, and then you still have discount dollar prices, which if you do a good job in credit selection, you're going to get a nice total return in addition to that yield.

Now you're exactly right.

Credit spreads are on the tight side without question.

You know, if you look at investment grade corporates are at seventy nine, and you know seventy three was a twenty seven year low, so we're not far from that high yield is you know, approaching tights, even though we do have the highest credit quality ever with the abundance of fallen angels that we've seen there.

But we're at somewhere around the two seventy level, and then loans are again on the tighter side, so's there's not a lot left.

However, they could still grind tighter.

One of the areas that actually, you know, fixed income in general had positive excess returns for last year, which was good.

If you look at you know, one of the sectors that is outside of domestic credit, you look at emerging markets.

You did see significant spread tightening in emerging markets fifty to sixty basis points, with the high yield market tightening by over one hundred and thirty five basis points.

So you did see some meaningful spread tightening to put to bring us to these levels, which are I think pretty fully valued from a spread perspective.

So are we looking to buy right now?

Are you looking at tread credit less less versus cash or what are your thoughts there?

Yeah, I mean, you know, I'm a bond guy, so I'm always going to be fully invested in fixed income.

The nice thing about multisector is I have fourteen levers to pull, so there's always something that seems exciting out there.

You know.

Some of the moves that we made this year, we're selling bank loans.

Obviously, as the FED was you know, cutting rates in a you know, a rate cutting mode, bought agency mortgage backs, which for the first time in years, we saw the yield of corporate bonds and the yield of agency mortgage backs on top of each other.

They were right around four eighty six four eighty seven.

Typically you're getting fifty three additional basis points when you're in an investment grade corporate, but they were on top of each other.

So we felt it a good entry point to start buying agency mortgage backs.

And they've had a great return.

Agency mortgage backs are up right around eight percent this year, so a nice total return, but a lot of the dislocation in the market, and that's when we get excited.

When you start to see the market dislocate and something that's cheap, the dislocations are much narrower and much quicker to rebound.

You know.

We we went back we had the Enkerry trade, where the dislocation and the leverage finance markets were about five weeks, so it was very short lived.

We had some of the elections in Europe and then the stamp election in France, which was another five week dislocation, and then you know, as you guys had just mentioned earlier in the call, we had Liberation Day where we saw a dislocation for about eight weeks.

But they're nowhere near what they used to be.

I would just say, we get excited about high yield when you know spreads get to six fifty seven hundred.

We didn't see that.

We had spreads get to four fifty, and then a bunch of money came in and spreads tightened back up inside of three hundred.

So you have to be much more quick, you have to be much more tactical, and you got to do it quickly.

I think derivatives market has allowed us to execute efficiently and then fill out those trades in the cash markets.

So it's much more efficient that we can get exposure immediately.

And again when they're short lived, when there's so much cash on the sidelines, when you have seven trillion in money market waiting for that opportunity to get involved in the markets, you got to be quick, and you got to be tactical.

Maybe some of the banks might be stepping in a little bit bit more with the rate cuts.

And then also I think we saw an article in terms of Fanny Freddy they're kind of bulking up their portfolios but perhaps kind of limiting the supply of agency mbs.

So is that a sector that you're kind of really more favoring, continuing to favor more into twenty twenty six.

I would say that it was a great opportunity.

Last year they had a great return.

You had that anomaly where they traded on top of corporate bonds.

Now they're back to pretty much fair value.

So I mean we like the non agency space a little better.

We think that has underperformed versus agencies.

You know, if you look at the metrics, you know, if I look at you know, both, I think we like the housing market in general.

I think good underwriting, very strong, credit supply is down dramatically, good structures, low inventory.

You know, if you go back to two thousand and seven, they were building about a million houses per year.

Two thousand and nine and after was about two hundred and fifty thousands.

So the shortage of housing has been about seven hundred thousand per year going all the way back to nine.

So there's insational demand that it really provides a nice floor for the market.

One of the other reasons I think I talk about this that I think we could we avoided a recession in the US.

If you went to Europe, about eighty plus percent of their mortgages are floating rate, So when rates got the seven percent, you know, your mortgage payment went up threefold.

That's very, very painful.

In the US, sixty four percent of mortgages are at three and a half percent or lower.

So mortgage rates go to seven percent, your life doesn't change.

You're probably not selling your home.

You've locked in a nice equity build up.

But I think that avoided, you know, helped us avoid a recession.

So I think there's a lot of metrics that are working for us.

We do like the mortgage market.

Think going forward from a value perspective right now, I think non agencies percent a better opportunity.

Going back to the credit cycle, Dave and the default cycle in particular, I mean, people are telling us across the board that we're late cycle, you know, with seventh eighth innings in terms of you know, what's going to happen.

And you know, there are a lot of companies that did borrow way too much when rates were near zero and they just keep you know, kicking the can.

There's been a lot of liability management exercises, has been a lot of you know, private credit has helped some.

But are we just delaying the inevitable here or has all the problems?

Have all the problems gone away?

Well, ill on me.

It is definitely a problem in the bank on the market.

We're watching that very very closely.

Those that you know, it's guys like us that lose rights to you know, go after the collateral and it becomes a problem.

So that's something you have to be very cognizant of.

So our bias has been up in quality in the loan market, but we've been better sellers due to the fact that the Fed's been cutting rates and liboard has been going down, and obviously the yield that you get has been much less.

Going forward, if you believe that we're at the end of the rate cut cycle, which possibly there's possibly one or two more cuts to come, I think the loan market becomes a good avenue of for investment.

You know, if you look at a lot of the finance in the area has been refinancing and repayments.

It's been almost three quarters of what's been going on, which provides a nice fundamental backdrop.

If you went back to the last time the loan market imploded, it was back in the global financial crisis, when probably about thirty to forty percent was retail.

Now only seven percent of that market is retail.

The big portion of that market is clos which you know probably are about seventy percent of that market, which is really much a buy and hold as opposed to the emotional investor in the retail space.

So we're looking at loans once the FED stops cutting rates as an opportunity to get back in.

You have a very high current yield right around eight percent, you know, very good technicals.

You've had seventeen billion of flows into that market.

We think that makes sense a little less concerning when I look at the high yield market.

You know, the high market is the highest credit quality ever.

You had about two hundred and eighty four billion of downgrades.

Some of the fallen angels, occidental craft times for Twitter, NORDG froms cement in a few which has actually improved the overall credit quality of that market.

So at two seventy, with the faults at one eighty two, I feel a little more comfortable.

We're more market like and exposure there, and again I think we're defensively postured.

You would ask this question before it defensively postured and a dip buyer.

But as I had mentioned, the dips are shorter and you have to be much quicker and much more tactical.

So you know, as we see opportunity, we will buy in both those markets, both in the loan market and the high yield market.

You have to be very, very cautious of being in late innings.

I've heard that for the last three or four years, and it keeps on getting extended out, so we'll watch it closely.

We're cognizant of l me risk, We're cognizant of being higher quality in the high yield market, and you know, something that will take into consideration when we look to add exposure in the future.

But do the problems then ultimately end up in twenty twenty seven, twenty twenty eight.

I mean, we're going to have a good year next year, but but then we'll hit the wall after that well.

We're starting to see some of the cracks, you know, and you talk about, you know, some of the things that we've seen.

We've seen, you know, fraud with Tricolor and First Brands.

We saw some of the bankruptcies in private credit, Zip, car Wash and Renova Home Partners.

You know, do you know do the fact that they're only priced on either a monthly or quarterly basis and prices dropped pretty quickly.

That's something we have to watch very very closely.

When I look at the private capital markets, private credit, that market has grown to one point seventy five trillion.

It's a it's a good sized market.

About one and a quarter trillion are invested.

Five hundred plus billion is waiting to be invested.

Provided great liquidity and alternative financing in the markets.

It started out coming to weak single bees that we're going to default.

And you know, some of the best news that we would hear as my loan manager would walk in my office and you say, hey, that deal that was trading an eight cents to the dollar, we thought was going to default.

You know, one of the BDCs took us out at one hundred cents on the dollar.

We're like we'd love you guys.

In private credit.

That's changed.

It's now there's such an abundance of money.

It's providing liquidity at every tier.

You know, a lot of companies that we thought, you know, that needed to finance in the private credit markets were able to get financing, they got their financial house in order.

Then they were able to go back and refinance into the public market set you know, a much lower rate.

So it provided a nice source of capital.

And there's still plenty of liquidity.

There's still five hundred billion looking to be invested in that market.

So I think that's helped pushed out the default cycle.

That's helped with liquidity in the overall market, and it's something we're watching very very closely.

It starts to be a little concerning when a lot of the companies are doing pay in kind.

They're not actually generating cash flow, they're actually accumulating more debt.

That starts to get me worried.

And a lot of dollars are invested, you know, And it's it's when a lot of people are telling me how great of a market it is.

I mean, the spread between public and private has compressed.

It used to be about three to four hundred basis points now it's inside of one hundred.

So and then two other things that I when I look at private credit, you have a concentration in commercial service and software.

It's about forty percent.

You compare that to the public leverage loan market, they're only about twenty percent.

So they're overexposed to AI disruptions and we have to watch that closely.

And also i'd say they're heavily skewed to lower credit ratings B three in triple c's versus the public loan market.

So again, I think it's provided great liquidity, it's done its job.

You have to be very very cautious and could there be hiccups in the future.

Let's see what four negative quarters of GDP due to these markets.

You know, we haven't seen that.

We've seen a pretty much a bull market, right private credit, the bulk of it has come out in the last five years.

It's been a bull market.

We've had pretty positive fundamental backdrop.

We'll have to wait and see if we do start to see a dislocation or slow down the economy, you know, we'll take that the consideration.

We'll go up in quality, we'll hold you know, higher quality assets looking for an entry point.

Dave, on the point you made about the difference in pricing between public and private, you're saying that it was three to four hundred basis points over let's say, for a private loan over the public equivalent, and now it's gone below one hundred.

It's gotten much more competitive due to the fact that you've had so much cash come into the market and you still have about four hundred I'm sorry, five hundred and fifty fourteen billion waiting to be invested.

Yes, at one hundred, though, does it even make sense?

Is that compensate you for the lack of liquidity.

Again, that's you know, that's sort of your choice.

There's there is positive to it where you only you know, you know, I have to disclose your financials to more than one or two brokers.

There's things that are positive for me.

You know, I invest in the public markets.

I don't.

We don't invest in private credit.

I do have private credit exposure through the BBC's that's how we sort of get our private exposure.

You know, business development companies are larger liquid companies, so you know, we we sort of lack the transparency there.

However, I feel very well about the large, well capitalized issuers like a Blackstone, Apollo and areas.

That's why I can get exposure to private credit.

I'm not actually buying the individual transactions, but yes, that that premium has narrowed pretty dramatically.

And you've gotten great performance.

You know, you've defaults have been limited.

Performance has been good, but you've also been in a bull market.

You talk about, you know, the liquidity that all the private credit, you know, alternative asset managers have provided.

What do you think will make this kind of music stop?

Well, I think you know, when you start to see, you know, some of the problem problems with credits, you start to see some defaults, you start to see when you start to see the market have cracks, that that would be my thing.

When you start to see the market have cracks is sort of the top of the market.

You've you've had a nice run.

You know, I own it personally.

I think it's made sense me personally.

I'm taking some profits.

I think it makes sense to take profits now.

You've had a great run.

You pretty much have haven't had many credit impairments.

You know, you've got a very strong backdrop.

You look at, uh, you know the economy has been chugging along in the two to three percent range.

Defaults even you know, are much more manageable right now.

Leverage is lower than historical averages.

You know, earnings have been relatively strong.

Those are all those are all very good backdrops to have, you know, right now.

So we're taking a hard look at that.

If that starts to change, then I'd be a little more cautious.

Got it.

And so I guess some of these recent things that have popped up in I guess the past few weeks months, little cockroaches.

I guess that that Jamie Diamond has said, those you've view as kind of more as one offs versus like canaries in the coal mine.

In terms of ask a question again, No, that's a that's a really good question.

I mean, I think Tricolor and first brands, when you have fraud, I mean those are few and far between us something that you can't really detect.

You know, fraud is fraud.

When you have bankruptcies, that's something that you can detect.

And you know, obviously you have to do credit work, and credit work is part of the exercise.

You know, it's I don't want to buy an indexed etf.

You know, without knowing what the underlying credits are, especially if we're that late in the cycle.

The point you made, I want to make sure I'm doing independent credit research.

I feel very good about the underlying credits, and I want to know what I own.

So I would say that fundamental credit work is of utmost importance, especially as we get towards the end of the cycle.

Other than private credit, which is what everyone wants to talk about, AI has taken over the discussion and the amount of money that is being borrowed to fund the build out, not just on the AI specific but also the associated infrastructure, the power, the utilities, everything else around it.

It's going to be you know, three trillion dollars of funding.

A lot of that that's going to hit the public markets.

But what does that say to you, Dave?

I mean, you know, you've been around quite a long time.

We've seen these euphoria moments about certain you know, new things that come along and everyone's borrowing furiously to get in there.

But is that really a great opportunity to think for credit investors?

So, you know, I call it one of the one of the headwinds is the leverage in the tech space.

You know, if you look at on an issuance basis, it was about two percent about six months ago.

That's grown to ten percent.

You've seen the issuance of companies like Amazon, Medica, I'm sorry, Meta, Oracle, Google, Netflix, and then you've seen the poster child I'd call it, you know, Oracle, you know, have negative ratings impact.

I think now they're a mid triple B.

We do not believe that it's realistic to believe in the near term they're going to go to junk.

But they're issuing a lot of debt.

You know, they currently have I think about one hundred billion of index eligible bonds.

We expect this to grow to somewhere in one hundred and fifty billion dollar range over the next two to three years.

You know, if it was to fall into the high yield market at one point five trillion, to be ten percent of the high yield index, which would be scary.

So you know, we don't think that's going to happen.

We're not.

We think would be reckless if they did that.

I'm just making the point that it's massive issuance.

I think the best way to categorize it is is that you have investment grade companies taking on debt to finance equity like risks.

And I stole that from Howard Marks.

That's not my two cents, but Hard Marks said that, and I think that's spot on.

You want to be cognizant of what they're doing, what the investment is, and what risk that it entails.

And it is these big, well capitalized companies, unlike the dot com bubble, which were over levered, you know, weak companies that were issuing debt before they even put fiber optic cable in the ground.

It came with three deals and then defaulted.

These are much better capitalized companies, but it is equity like risk that you're financing.

With that say, Oracle doesn't really want to be junk, and they have said that they want to defend their investment grade ratings, but they may not have a choice.

And they are trading.

Some of their bonds are trading, you know, with double b yields at this point, and the CDs is blown out, so the market is sort of telling us something else.

I'm curious, you know, as someone who could look at either you know, if that big capital structure of one hundred billion dollars of debt, you know, jumps into the high yield market.

Is that posentially more of an opportunity for you.

So I'd say that during the pandemic, when we saw two hundred andy four billion of fallen angels, that was right in our wheelhouse.

When you have pension funds that are insurance companies that are forced to sell because a company goes from investment grade to blow investment grade and then it falls into the high yield category.

He had forward with thirty year bonds.

I mean, typically you're seeing five and seven year issues in the high yield market.

Now you have thirty year bullet paper available, they become some of the best performers occidental craft times as I had mentioned, you know for Twitter, nor Trum's just mentioned a few those were great opportunities.

Now, Oracle, I never said they're going to junk.

They're a solid, solid, you know, mid triple B.

But you know it's an investment that we're looking at.

You know, we're not going to position too aggressively.

But I just say the current sell off has this feeling like the risks are starting to be priced in, so it may be starting to look a lot more attractive to us.

So something that we're falling very very closely in our investment grades with our investment grade team.

Let's go move on to other kind of AI uh, the more single A double A you know, ones that are kind of right raising a lot of debt but also in in in special kind of SPV type form.

So what are some of your thoughts, like, what's the best way to kind of play that space, right is it?

Is it through the public markets or like you know, at the company level or at these special entities or you know, what do you think the best bank for the buck is?

I mean, you know, for us, it would be playing it at the company level.

That's just that's just our our forte.

So I would say that looking at the companies evaluating what they're doing, we haven't jumped in with both feet.

We've sort of been a little hesitant and wait and see, sort of a wait and see mode.

But we have been reviewing it and we actually just did an industry review today.

So something we're talking about and we're falling very closely, but haven't jumped in with both feet as of yet.

Do you wonder about the rationale for long dated debt?

I mean you talked about equity like dreams for you know, credit risk.

You know, you're funding something for forty years that could be obsolete in you know, much much less time.

Given the change in technologies and the way you know, things are rapidly evolving.

Would it make Does it make sense for a credit invested by forty year bonds from a tech company?

Absolutely not.

I mean unless you're so comfortable that it's going to be the right investment.

Now, I think it's it's a it's a big risk.

That's that's that's that's probably the biggest risk out there is you know, investing you know, in debt for something that may go away in three to four years with forty year maturity.

So no, that's something we're definitely considering, and it's it's one of the biggest risks out there.

So something you have to evaluate when something seems too good to be true.

There's no free lunch in the bond market.

That's why, that's the why I was that's why I was brought up in investing.

Anything looks too good to be true, it probably is to be careful.

And you know, obviously, you know, we want to have we want to have diversification, we want to be safe.

If we did it, it would be you know, smaller investment sizes, we'd be extremely well diversified.

So it's something we're evaluating.

Does it remind you of anything else you've seen?

Was it like the dot com bubble or the mid mid two thousand's housing expansion or anything else like that?

Those were you know, those were definitely things that were a little crazy.

I mean I started in nineteen ninety for managing money.

That was the year of seven rating pieces, the Mexican pace of evaluation, and the end of the high yield, the bacle.

I remember, I remember getting a call from Lipper and they told me that you were ranked number one.

I said, but I'm a short term bond fund that's down one point eight percent, Like you were number one out of one hundred.

You won the lip Award.

I'm like, I'm not sure that's the objective.

It was short term bond fund to be down one point eight percent.

So we've I've lived through a lot of that.

We had nineteen ninety eight, which was the we had the long term capital.

Two thousand and two was the telecom bubble of the faults.

Two thousand and eight was the long term capital crisis we had, you know, obviously the downgrade of the US.

We had some other oil concerns China.

I've been through a lot.

This is a little different because you have well capitalized, large companies, but you have a lot of people jumping on the bandwagon.

So I want to just be cautious as we approach it.

And again we're taking everything to do with consideration and we'll make a decision whether we want to allocate there or not.

So if you had to put you know, obviously we're not in you know, your forecast for twenty twenty six, would you say it's it's the continuation of the AI bubble or will it pop or we are not in a bubble?

Do you have any thoughts on that or.

You know, I just if I look at twenty twenty six, I think the current backdrop will persist.

I mean sort of the tailwinds we had last year was an accommodative FED there were cutting rates.

We had a good economy, decent consumer unemployment was low, earnings were good, leverage was you know, below long term averages.

As we had mentioned, we had positive flows and you know, really strong returns and fixed income.

We talked about some of the headwinds which tariff's uncertainty, tight spreads, as you guys had mentioned, some geopolitical uncertainty, and then elevated inflation.

We haven't got to the Fed's target in four years of two percent, and then some policy uncertainty.

If I look at you know, twenty twenty six, I think that current backdrop persists.

You know, the Fed's easy monetary policy and you know, yeah, they're going to the rates by cuts will come to an end.

I don't see a recession, still see moderate growth, and as I had mentioned before, I see you know, sort of coupon plus type returns as a possibility.

You know, AI is only one of the areas that we're we're considering for investment and could it, could it correct, absolutely, Could it go on and run for a few years.

Absolutely, So we'll watch it very very closely.

You know, if I had to look at some of the other headwinds going forward, we have midterm elections coming up, we still have geopolitical risks, We still have the Middle East, we still have Rushia, Ukraine which is now going on to its fourth year, China, which is the second largest economy in the world.

You have to look at what are the growth projections for China and you will continue to grow it five percent.

We talked about the leverage in the tech space, which is definitely a concern.

I'm not saying it's going to blow up next year and not saying you can't run for a little longer.

And then Fed policy, you know, we have to talk about FED policy.

Not only you know, you know what will they do?

Will they continue to cut rates?

But what's the composition that FED going to look like when Paul's term is up in May?

And you know, and how will the how will the FED look and you know what will the what will they do going forward?

And then as you guys well mentioned, we continue to be in a tight spread environment and are we at the end of the credit cycle is a big concern.

So again, diversification is very very important defensive posturing being up in quality, having the ability to buy on dips when you know the opportunity presents themselves and people start getting emotional about investments, that's when we typically make our most money.

One of the defensive trades for this year that everyone seems to love is banks, certainly the big banks, but you also, Dave, you mentioned the like regional banks.

Since we have Vinyld here who also covers the banks, I'm keen to get both your thoughts on those because there still seems to be too many of them, and they still seem to have a lot of real estate trouble and they're exposed to the consumer which isn't doing great.

So why do we like banks?

Yeah, I would say that, you know, in investment grade, you know, I think the areas of focus US are Triple D is number one at seventy five percent of the investment grade marketplace is triple b's second.

Financials is another area that we focus on, and it would be the regional banks.

The better capitalized regional banks like a fifth third of citizens a Huntington Bank Corp.

Those that are better capitalized, the g said banks.

They all trade cheap, they all have abundance of issuance.

You know, we started buying those when we had the Silicon Valley debacle and you got, you know, some very cheap valuations.

They're still cheap.

We still like, you know, capital goods.

But you talked about the banking segment.

One of the things we're very cognizant of is is the commercial real estate exposure, especially hotel and office.

A lot of those guys have you know, twenty to forty percent of their balance sheet and commercial real estate, as you had mentioned, consumer lower and consumers starting to feel the bite of you know, higher defaults and delinquencies, and that's something we have to be very very cautious on.

But for us it's been up, you know, the higher quality bias, better capitalized.

You know, we haven't really dug down into the some of the questionable regionals, So I think our bias has been the better well capitalis regional.

Banks maybe I G and high yield are tight, but you know, preferreds could be just right.

So that's that's you know, kind of going down the capital structure of the banks.

Uh and in the US, kind of going down to the preferred level actually you know, might not be a bad area kind of given you know, like you said, the economy looks, you know, decent, right, and then you know, with deregulation.

You know, the thing that I look at is, you know, with deregulation, yeah, you're you might lose some of the a little bit of the equity buffer that you have, but you know, the debt requirements that that all these big banks have to do that's actually going down as well.

So again, big banks are big issuers, but you know, hey, there their issuance needs are going down, so you might see that pair back a little bit, right, and you know, the fundamentals look solid, and then potentially the technicals, right, might be a little bit better next year.

And then on top of that, you contrast that with you know this all the tech guys, you know, these hyperscalers issuing a lot of extra debt.

And then also you know with M and A right, I don't think we've touched on that too much today, but with M and A looking to pick up right, and that's more of a you know, non financial thing where where the risk might be, you know, you might have some spread widening potentially with more M and A back debt.

So you know, we see the financial space, which I think trades about flat overall to the Corper Bond Index, but it used to trade about ten tighter, right and back in twenty twenty one, so hey, maybe that's that's something.

You know, maybe spreads might widen this year, right, But but on a relative basis, we view financials as perhaps a little bit.

Cheap if we're worried about AI and the banks of funding it, and you know, they're also at the same time quietly trying to get this risk off their books and the forms of SRTs and they're doing you know, CDs and a bunch of other stuff.

So they clearly, you know, they see the risk.

How much does that filter through to the actual bank risk itself.

I mean, it's something that we're that we're definitely watching very very closely.

And you know, you obviously made some great points on finance and the banks.

You're exactly right.

I mean, the banks used to trade at you know, at a much tighter spread than the overall index, and Silicon Valley caused that to revert the other way, especially the GISIB banks, and that's when we started getting involved, and we did not only play in the debt, but we also played in some of the preferreds and the hybrid preferreds.

We subsequently have taken profits there.

We also did that in some of the utility hybrids, which got very very cheap at the end of last year.

But that's that's what some of the errors that we focus on.

But you're you're exactly right, they're offloading risks they're trying to get diversified.

You know, they they want to be in the AI game, but they also don't want to have all that risk on their balance sheets.

So again it's a case by case basis.

We'll look at the underlying bank, we'll look at the fundamentals, and it comes back to you know, independent credit research.

James so on the AI kind of risk hedging.

Right, I think you know the bank to look at there is Morgan Stanley and what they're doing kind of given right at some articles out on saying that they've taken the lead on you know, tech AI related issue ince So if they're looking to you know, kind of offload risk and you know, I think the thing that helps them.

You know, in the US we have a great capital market system.

It's great that all these guys looking at issue at are you know, really high grade companies and then the investors will handle it.

But right I think there's still going to be a portion that you know, the banks might need to you know, it can come in loan format, right, so that the banks might have some risks.

So if they're looking to do hearties on this stuff, yeah, it's saying something right where you know, again we might have a lot of record issues potentially, and I corporate bond land, you know how much will come there versus you know, special vehicles, right, but still you know some of that might end up on bank bound sheets.

And for them to be looking at hedge, I think it tells you something that, yeah, you know we're hearing what multiple trillions right of potentral issuesrillion views.

But on issuance generally, I mean I have looked at net issuance being very very low over the last few years, and that is part of the reason I think why spreads have been so tight, because there aren't enough bonds to supply all the demand for that yield bid that you talked about earlier on.

I'm wondering when we go into next year, when there is expected to be a significant increase in net supply of issuance, you know, Morgan Sandy not to keep naming them, but they did say that there'd be a trillion dollars in net new supply of IG debt, which we've never seen before.

I think maybe had a big year in twenty twenty, but not a big year you know, like that for a long time.

So how does the market absorble that debt DAVE without spreads blowing.

Out, well, I think number one, it could be painful, and I think you could see spreads widen.

But when I start looking at us versus some of our you know, some of the other areas.

You know, right now we're yielding for eighty seven, Europe is yielding three twenty one, and ages yielding three seventy five.

We're still the best game in town.

So I think we'll still be attractive.

If you see spreads widen for us, that's when we get interested.

You know, if we start to get back to the right now we're at seventy nine, if we start to get back to the eighties nineties up to one hundred off, for me, that's a you know, something I'd look at very very, you know, closely to reallocate to that sector.

So I don't have a problem with spreads widen.

If we see an abundance of issuance, fields go higher and there's opportunities, and again it will be obviously a case by case basis.

And you don't think that's going to be a problem with demand.

Do you think they'll be an ample bid for all that extra new supply?

I think you know, this year, I think you had net supply was actually down from last year because a lot of it was refinancing of existing debt.

I think if net new supply comes out, we'll have to wait and see and see if they're still demand for it.

But as it cheapens up, you know, and you get some decent valuations again, you know, you get five plus percent on corporate debt.

That's when you know pension funds and insurance companies can meet their liability payments and they get excited about it.

So I think it you know, again, it depends on the context of the rest of the market and what happens.

But if you start to see spreads widen here and it becomes a better investment opportunity and you get overall yields in excess of five percent, I think that could be very interesting.

Do you prefer IG or high yield?

And then within that, you know, what are some of your picks and pans within both of those segments.

Yeah, I would say that, you know, IG were probably underweight to what we've been historically, just due to the fact that securitized has really good value in the IG space.

If I look at you know, some of the other things we invest in I throughout you know, we talked about the mortgage market.

That's one we had been doing agencies, and we still like the non agency market.

But asset backed securities you look at tap of the top of the capital stack from part of the curve, very solid underwriting.

You know, we do stuff there like franchise, franchise least receivables.

If you own a Jersey Mics, a Dunkin Donuts, a Domino's, you know, Domino's Pizza, Carl Juniors, you make a payment to the parent for using their name.

They turn around and securitize that and sell it to a guy like me.

Very short paper that deliverges very quickly, and they take the proceeds and build more properties.

Those have been an absolute home run.

Right now, you're getting somewhere in the upper fours for two year paper double A three type ratings.

We think that that's much more attractive than corporate bonds in the front end.

And another one that's been good.

I told you were a little cautious on hotel and office building single atset single bar ordeals in the commercial mortgage market, rule office data centers, industrial warehouses, some trophy properties like the Bellagio, Willis Toller, some of the sixth Avenue properties in New York City that are fully occupied.

It's giving you a great return this year, seven point four percent on you know, things that are very very attractive.

You know, we talked about that maturity wall of one hundred and ten billion coming due.

I used to call it survive till twenty five.

Now it's survived till twenty six, especially in the office market and the data center market, where you know the recoveries on some of these properties.

I'm looking at the United Healthcare building out my window.

They had a one hundred and twenty million dollar mortgage on that building.

United Healthcare left and it's sold for in the twenties.

You've got to be very very cautious of write downs.

But being selected with single acid, single barrower, it's been very very rewarding, especially getting into some of the office properties that are in high demand.

So that's been supplementing us, and we've been taking some of our assets out of IG and putting them there.

If we do see that dynamic where IG starts getting a lot wider and yields get a lot higher, we'll reallocate back into the IG market high yield.

I would just say that, you know, spreads have moved pretty dramatically.

You're up a little over eight percent.

You're up about eight point one percent this year.

You've got a big move.

Our bias there has been you know, number one, you've had very good flows, supportive technicals, very good fundamentals.

Maturity wall has been pushed out.

Earnings are good.

As we had talked about before, leverage is low when you look at long term historical averages, and we mentioned defaults being below the historical average.

We have a market like exposure here, and we're a better buyer on depths.

Like I said, if we see a sell off and it's not going to get to say fifty or eight fifty off, it may be a sell off that gets you to four hundred.

Right now, we're at two seventy.

That's where we start adding exposure, and it's pretty much diversified.

You know, our focus there is pretty much market like type exposure.

So no one sector we're jumping up and down about just you know, getting a market like exposure.

On the asset back security today.

I mean, I know this is nearly a holiday shown and I shouldn't be so down, but I'm worried about the just massive increase in supply we're seeing across the board in asset backs, and then you know the signs of stress we're seeing in some of the markets xclos some of the equity checks aren't being paid, for example, do you think that there's any sign of froth at all in ABS right now?

When we think whereas froth, we're defensively postured and we're up in the capital stack, We're not taking a lot of risk.

We're staying in double A, triple A single, a type paper friend of the curve where there's underwriting that it's very very solid, and we do our own analysis and we're comfortable with it.

If we start to think that the market is, you know, there's not as much paper, not as much issuance, you know, then we'll express our views by moving down in the capitol structure.

But right now, i'd say up in the capital stack, not taking a lot of risk, getting you know, quality exposure of deals that deliver very very quickly, and I think we're comfortable with our exposure there, so not taking a lot of risk in that market.

I'd say up in the capital stack and still looks more attractive than short corporate bonds.

So if you look around everything, you get to see, Dave, where's the best relative value right now, let's say for the next twelve months.

That's a tough call.

I think, you know, we're divers pretty well diversified, defensively postured.

We do have exposure to leverage finance.

But I'd say probably a little blower long term averages, a little more insecuritized due to the fact that asset backs through the fact that you mentioned a lot of issuance have gotten cheap.

CMBs have moved quite a bit this year.

They're probably pretty fully valued.

One that we didn't talk about, which I think everybody loves to talk about and I will buy, is the uni market.

You know, Muni's started the year with heavy, heavy supply.

You had supply overwhelmed demand, so you know, pretty poor performance, but you had taxable equivalent yields that we haven't seen going back to the global financial crisis.

An investment grade you're getting six percent on high yield, you're getting nine and a half percent.

That's insane.

But if you just start to corporates, Dave, is there anything that think sticks out as a screaming buy right now.

I'd say in the corporate market, you know, spreads are tight, you know, nothing there screaming as a buy for us.

I would say that one that we didn't mention is midstream energy, those with contracted cash flows like gas, gas processing, and pipelines look somewhat attractive.

You know, we talked about the banks.

I would just say that some of the capital good companies also look attractive, but nothing screaming there for a buy.

Not when spreads are at seventy nine and the twenty seven year OD heights in seventy three.

And if you are long credit and you're going into next year thinking, you know, you're a bit worried, what's the best hedge for credit exposure.

I'd say securitized.

I mean, that's how we're sort of hedging our book, going into short, high quality paper that's very, very liquid, and if we see this location in the corporate bond market, we can quickly turn that into liquidity and quickly moving back into the investment grade market.

Great stuff, Dave Albright, President and CIO at new Fleet Asset Management, It's been a great pleasure having you on the credit edge.

Many thanks, Thank you, guys, thanks for having me.

And to Arnold Kakuda with Bloomberg Intelligence, thank you very much for joining us today.

Thanks for having me freedom more analysis.

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