Market Trends amid Global Uncertainty

SPEAKER_1 (0:02)

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Tom Keene (0:27)

What we're doing here folks, and again, I've really seen some really good literature in the last number of days. You see what we did record high in NASDAQ at that, and you learn the hard way enjoying losing money, that if you're in the equity game, you better be briefed on fixed income at all time. Even unlike Kelsey Berro, you have no clue what they're talking about. Executive Director Kelsey Berro, her chair is closest to, I call it dangerous provisions. Okay. It's like a breakfast place at the JP Morgan building.

Kelsey Berro (0:56)

Yep.

Tom Keene (0:56)

You go, I think, do you have to go there or is it just like comp?

Kelsey Berro (1:00)

It's like a standard coffee shop.

Tom Keene (1:02)

It's like a standard. Do you get a full English there at daily provisions? Sometimes.

Kelsey Berro (1:08)

Sometimes.

Tom Keene (1:08)

Kelsey Berro with us with JP Morgan today. Let's pick up right where Gennady was there on the idea of crowding out full faith and credit paper. Do you and Bob Michael actually worry that the next Amazon trunche, am I picking on Amazon?

They're all there, like six others. Can they really crowd out your world?

Kelsey Berro (1:29)

I understand the concern. We are looking at very large numbers, but when I look at it holistically, we're not really seeing a lot of evidence of crowding out. There's a couple reasons that I say that. If you look at the investment grade market more broadly, if there was really a crowding out of a hyperscaler supply, you should start to see spreads more broadly within the investment grade market start to widen and they haven't. In fact, if you exclude hyperscalers from the investment grade index, in most cases, spreads are actually tightening.

So that's one sign.

Tom Keene (2:07)

Worry, worry, worry, angst, hand-wringing.

Everybody's getting gray hair except Kelsey and Alexis. Okay, fine. Why haven't they widened?

Kelsey Berro (2:16)

Fundamentals are still very strong within the market. And I think the other thing, we're talking about this risk of crowding out.

Well, on the other side of that, higher yields are bringing in more buyers. And so people are not necessarily looking explicitly at the credit spread in terms of their investment decision. They're looking at the all-in-yield and they're seeing all-in-yield at five, six, seven percent depending on the maturity and the credit quality. And they're saying that is an attractive entry point. So when I look at the fundamentals, a couple of things stand out to me. The first is the breadth of those fundamentals within the investment grade market make for a lot of different opportunities. So if you look at the 11 sectors within investment grade, this is the first time in five years that all 11 sectors are seeing positive earnings growth.

Paul Sweeney (3:11)

Interesting. And I'm seeing, like in your world, they're in a fixed income world, the best performance in US fixed income is in my old business, US leverage loans total returns three and a half percent.

People are not afraid to take risk in this marketplace, it seems like.

Kelsey Berro (3:27)

Right. So there's two components to that. One of that is the floating rate component of the leverage loans. Yields have risen. So you're getting a lot more protection.

Paul Sweeney (3:37)

I used to live or plus three. Yeah.

Three.

Kelsey Berro (3:40)

Yeah, you're darn right.

Tom Keene (3:41)

Listen, can we still quote Libor on air?

Paul Sweeney (3:43)

Well, we were lending to the cellular telephone business when that was just starting. So you had to go to your credit manager and say, yeah, we're lending against air.

And that was a tough sell. But leverage loans are still the way to go, it seems like.

Kelsey Berro (3:55)

So that is one area, right? And the floating rate is one part of that. And then the other part is what we've been just talking about, which is credit spreads. They're perhaps narrow relative to history, but they're stable.

And a lot of the concerns around the loan market, particularly, let's just say, six months ago, we were talking about loans we were concerned about, for example, the concentration in software within loans, haven't you seen a lot more stabilization on that front? Now, there's certainly still going to be disruption, but there's been stabilization. And then you take those loans and the other source of demand for leverage loans is CLOs, which is an area where we've been seeing some opportunity as well, where you get that package of loans from the manager, you can get a lot of credit quality as well as spread pickup.