Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crombie. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome Matt Mish, head of credit strategy at UBS. How are you, Matt, I'm great, James, thanks for having me. Thank you so much for joining us today. We're very excited to have you on the show. Also delighted to see Julie Hung with Bloomberg Intelligence.

Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crombie. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome Matt Mish, head of credit strategy at UBS. How are you, Matt, I'm great, James, thanks for having me. Thank you so much for joining us today. We're very excited to have you on the show. Also delighted to see Julie Hung with Bloomberg Intelligence.

Hello, Julie, good morning, Thanks for having me back.

Hello, Julie, good morning, Thanks for having me back.

So just to set the scene a bit here, credit markets have rallied in anticipation of rate cuts. Most people are pretty bullish on corporate debt. A resilient US economy and likely soft blanding or a real boost lower rates will take some pressure off week Companies that were struggling with high borrowing costs over the last few years. Triple C rated bards in particular, are doing very well at the moment. There's more demand than net supply of corporate debt, which is a big technical boost to credit markets. Companies are taking advantage. We've seen a ton of bond and loan issuance, but there also seems to be a real urgency to the pace of debt sales across bonds, loans, structured finance, and muni bonds. Big borrowers seem worried about what the next few months may bring. All markets are bracing for volatility in the run up for the US election in November. While in credit specifically there's a fair amount of distress defaults and bankruptcy. That's against the backdrop of commercial real estate stress war, global geopolitics, and recession risk hasn't really gone away. So Matt, we'll get into the specifics of the election positioning a bit later run in the show. But where do we go from here? Is this a bullish credit market? Some people are saying a golden age? Is it still a great place to be?

So just to set the scene a bit here, credit markets have rallied in anticipation of rate cuts. Most people are pretty bullish on corporate debt. A resilient US economy and likely soft blanding or a real boost lower rates will take some pressure off week Companies that were struggling with high borrowing costs over the last few years. Triple C rated bards in particular, are doing very well at the moment. There's more demand than net supply of corporate debt, which is a big technical boost to credit markets. Companies are taking advantage. We've seen a ton of bond and loan issuance, but there also seems to be a real urgency to the pace of debt sales across bonds, loans, structured finance, and muni bonds. Big borrowers seem worried about what the next few months may bring. All markets are bracing for volatility in the run up for the US election in November. While in credit specifically there's a fair amount of distress defaults and bankruptcy. That's against the backdrop of commercial real estate stress war, global geopolitics, and recession risk hasn't really gone away. So Matt, we'll get into the specifics of the election positioning a bit later run in the show. But where do we go from here? Is this a bullish credit market? Some people are saying a golden age? Is it still a great place to be?

Yeah? We still like credit a lot here, right, And I think three main points. The first is, you know, no landing fears, which were a big concern and certainly one of the key tail risks earlier in the year, have largely receded. The inflation data has been right where it needs to be, I think, right where the Fed wants it to be. And so the risk of rate hikes, which is one of the three key risks to spread product is really off the table, particularly unexpected FED hikes. Second thing I would say is that rate cuts are driving flows into the product and pushing people also off the sidelines. So a lot of discussion about the six plus trillion in money market assets, but there's also a lot of clients that currently own credit, particularly US credit in the short end of the curve, so that's zero to two years, and we're seeing those clients decide to push out the curve so extend duration in anticipation of rate cuts. So I think there's a lot of positive momentum in the market in terms of not just inflows but clients looking to exten duration. And then the third is, you know, I think we have built a name for ourselves at UBS in terms of looking for the cracks, looking for some lines of material weakness and credit quality and signs of a more sinister slow down in economic activity. And I would just characterize those signs as fairly narrow and limited. And so we think most of the data is coming in consistent with a softish landing, and as a result, we think credit returns, you know, aren't going to be certainly as good as they were a few months ago. The market has had very good performance across in particular IG and high yield in the third quarter, But we think coupon like returns with still yields in the five to six seven percent context for kind of core liquid credit is a very good return profile, particularly going into an environment where we're expecting slower growth and where you know, again we acknowledge there are risks out on the horizon, a recession, potentially credit issues as we look into twenty twenty five, but overall, we still like credit here.

Yeah? We still like credit a lot here, right, And I think three main points. The first is, you know, no landing fears, which were a big concern and certainly one of the key tail risks earlier in the year, have largely receded. The inflation data has been right where it needs to be, I think, right where the Fed wants it to be. And so the risk of rate hikes, which is one of the three key risks to spread product is really off the table, particularly unexpected FED hikes. Second thing I would say is that rate cuts are driving flows into the product and pushing people also off the sidelines. So a lot of discussion about the six plus trillion in money market assets, but there's also a lot of clients that currently own credit, particularly US credit in the short end of the curve, so that's zero to two years, and we're seeing those clients decide to push out the curve so extend duration in anticipation of rate cuts. So I think there's a lot of positive momentum in the market in terms of not just inflows but clients looking to exten duration. And then the third is, you know, I think we have built a name for ourselves at UBS in terms of looking for the cracks, looking for some lines of material weakness and credit quality and signs of a more sinister slow down in economic activity. And I would just characterize those signs as fairly narrow and limited. And so we think most of the data is coming in consistent with a softish landing, and as a result, we think credit returns, you know, aren't going to be certainly as good as they were a few months ago. The market has had very good performance across in particular IG and high yield in the third quarter, But we think coupon like returns with still yields in the five to six seven percent context for kind of core liquid credit is a very good return profile, particularly going into an environment where we're expecting slower growth and where you know, again we acknowledge there are risks out on the horizon, a recession, potentially credit issues as we look into twenty twenty five, but overall, we still like credit here.

And in terms of the rate cuts, there's just a lot of talk how much, what are your what's your perspective on that, What's what's a good amount? Like what do you think is going to help generate activity?

And in terms of the rate cuts, there's just a lot of talk how much, what are your what's your perspective on that, What's what's a good amount? Like what do you think is going to help generate activity?

I mean, we're looking for the FED to cut three times this UH this year, starting with twenty five basis points this week, and then next year we have them cutting essentially twenty five basis points at every meeting, and so that really will drive the funds rate closer to what we think is let's say, roughly neutral, and we think that that's going to incentivize again clients to come off the sidelines because when you know, short end corporate yields are you know, falling from let's say the mid to high five percent range or low six percent range down two percentage points, and cash rates right are falling from let's say five and a quarter down to something like three or three in a quarter. We think that's enough of a move, Julie, to really push people in to fixed income and out the curve, and so I think that's going to be quite strong. What we would like to hear from the Fed this week is that growth is actually fine and that these cuts are driven but more by inflation getting closer to target. They've said that inflation risks to the upside have lessened. We agree with that, and really that they just want to get policy back to a more normal level from what we would argue as a fairly restrictive level currently. I think that's what the market wants to hear. Growth is fine, this is a recalibration of policy in line with inflation data, and basically getting out of restrictive territory because some of the upside risks are largely behind us.

I mean, we're looking for the FED to cut three times this UH this year, starting with twenty five basis points this week, and then next year we have them cutting essentially twenty five basis points at every meeting, and so that really will drive the funds rate closer to what we think is let's say, roughly neutral, and we think that that's going to incentivize again clients to come off the sidelines because when you know, short end corporate yields are you know, falling from let's say the mid to high five percent range or low six percent range down two percentage points, and cash rates right are falling from let's say five and a quarter down to something like three or three in a quarter. We think that's enough of a move, Julie, to really push people in to fixed income and out the curve, and so I think that's going to be quite strong. What we would like to hear from the Fed this week is that growth is actually fine and that these cuts are driven but more by inflation getting closer to target. They've said that inflation risks to the upside have lessened. We agree with that, and really that they just want to get policy back to a more normal level from what we would argue as a fairly restrictive level currently. I think that's what the market wants to hear. Growth is fine, this is a recalibration of policy in line with inflation data, and basically getting out of restrictive territory because some of the upside risks are largely behind us.

On the money market flow, Matt, We've had a lot of people talk about that, I mean, going back to almost a year ago, about the potential for that to come into credit. But then when you look at the history, it does tend to operate with quite a bit of a lag. Also, you know, we've had some people recently talk about how these rates needs to go down a lot more before there's really an incentive to rotate. Plus, you know, money market is really a place for you know, safe haven, and we're heading into a period potentially of very volatile times, you know, around the election, around the FED easing and so on, and the economy. What gives you kind of real conviction in this, you know that the money market cash will flow into credit.

On the money market flow, Matt, We've had a lot of people talk about that, I mean, going back to almost a year ago, about the potential for that to come into credit. But then when you look at the history, it does tend to operate with quite a bit of a lag. Also, you know, we've had some people recently talk about how these rates needs to go down a lot more before there's really an incentive to rotate. Plus, you know, money market is really a place for you know, safe haven, and we're heading into a period potentially of very volatile times, you know, around the election, around the FED easing and so on, and the economy. What gives you kind of real conviction in this, you know that the money market cash will flow into credit.

Yeah, for us, it's really a two part story. And let me emphasize on the top that we think that a lot of clients that are already in credit at the short end of the curve. And for example, James, you and Julie have discussed the importance of foreign investors right the resk of world demand, particularly coming from the APAC region, and those clients in a lot of cases are wealth management or high net worth clients have rotated into credit, but they're in the short end of the curve. Over the last twelve to eighteen months, and that really was out of in part local assets that we're underperforming, and so I want to stress that part of this is really just a rotation out the credit curve. But at the margin, right, that is increasing duration in the portfolios, and that is a way to take on more risk, and it is very supportive for credit if those flows move from the short end already in credit and just push out the curve into a new five year or seven year or ten year deal. The second thing I would say on the money market side is I agree with the narrative, this is not a silver bullet. These lead lag relationships are several quarters. Normally, what you need to see is the FED needs to cut in a consistent fashion. And I think a lot of clients need to see those cuts and then see essentially the short rate right their money market fund rate fall and fall pretty dramatically. So I would say, if the FED only cuts a few times, we've had the position that that doesn't really move the needle. But through next year, if the FED is cutting let's say cumulatively two hundred or two hundred or two hundred and fifty basis point points, we think over time through next year, this is going to be kind of a constant source of support. And it's true that money market flows don't necessarily go negative, but the rate of growth through periods of FED cuts does tend to fall pretty dramatically to the low to mid single digits. And so some of that money that would continue to go into money markets is essentially, we think, moving into fixed income. But it really is kind of a one two punch, so to speak, where that first part really just rotation out the curve of clients already in credit, I think is probably the underappreciated factor that we're dialing in on.

Yeah, for us, it's really a two part story. And let me emphasize on the top that we think that a lot of clients that are already in credit at the short end of the curve. And for example, James, you and Julie have discussed the importance of foreign investors right the resk of world demand, particularly coming from the APAC region, and those clients in a lot of cases are wealth management or high net worth clients have rotated into credit, but they're in the short end of the curve. Over the last twelve to eighteen months, and that really was out of in part local assets that we're underperforming, and so I want to stress that part of this is really just a rotation out the credit curve. But at the margin, right, that is increasing duration in the portfolios, and that is a way to take on more risk, and it is very supportive for credit if those flows move from the short end already in credit and just push out the curve into a new five year or seven year or ten year deal. The second thing I would say on the money market side is I agree with the narrative, this is not a silver bullet. These lead lag relationships are several quarters. Normally, what you need to see is the FED needs to cut in a consistent fashion. And I think a lot of clients need to see those cuts and then see essentially the short rate right their money market fund rate fall and fall pretty dramatically. So I would say, if the FED only cuts a few times, we've had the position that that doesn't really move the needle. But through next year, if the FED is cutting let's say cumulatively two hundred or two hundred or two hundred and fifty basis point points, we think over time through next year, this is going to be kind of a constant source of support. And it's true that money market flows don't necessarily go negative, but the rate of growth through periods of FED cuts does tend to fall pretty dramatically to the low to mid single digits. And so some of that money that would continue to go into money markets is essentially, we think, moving into fixed income. But it really is kind of a one two punch, so to speak, where that first part really just rotation out the curve of clients already in credit, I think is probably the underappreciated factor that we're dialing in on.

And going back to your comment before that, everybody wants to hear from the FED that growth is fine. In covering the consumer stable sector, we're hearing from the food and beverage management teams that the consumer is still stressed. So what they're doing is they're going to the supermarket less, but they're trying to stretch out their dollar more. And then you see that recently the jobs report was altered down by about eight hundred and eighty thousand, So you're kind of wondering, is growth really fine? What like do you have an opinion on that? Because you were saying, like you guys like to look for the cracks to me, there's a kind of a dislocation in what's what the FED is saying or what's coming out of you know, economic data versus what we're hearing from company specific comments.

And going back to your comment before that, everybody wants to hear from the FED that growth is fine. In covering the consumer stable sector, we're hearing from the food and beverage management teams that the consumer is still stressed. So what they're doing is they're going to the supermarket less, but they're trying to stretch out their dollar more. And then you see that recently the jobs report was altered down by about eight hundred and eighty thousand, So you're kind of wondering, is growth really fine? What like do you have an opinion on that? Because you were saying, like you guys like to look for the cracks to me, there's a kind of a dislocation in what's what the FED is saying or what's coming out of you know, economic data versus what we're hearing from company specific comments.

Yeah, I think, look, the US consumer and the strength of the consumer is critical, and so you know, when I say growth is fine, certainly the commentary you get from companies, I think is very consistent with a deceleration, which is what we're looking for.

Yeah, I think, look, the US consumer and the strength of the consumer is critical, and so you know, when I say growth is fine, certainly the commentary you get from companies, I think is very consistent with a deceleration, which is what we're looking for.

Me.

Me.

We're looking for real GDP growth to fall in the next two quarters for Q three and Q four down to kind of a low one percent range in real terms, and so relative to where we've been over the last several years, that's a notable downtick, and I think is consistent with recency bias, right, and with management teams talking about how consumers are essentially being more selective or they're trading down potentially to more staple goods. Having said that, the second point really that I would convey is that the consumer is very heterogeneous and a lot of the comments I think from some of the consumer good or staple companies that reflects all consumers that they see. Right, everyone buys essentials, everyone buys basic necessities, but we would argue that the high end of the consumer profile by income is really the strongest, and that does matter at least from a macroeconomic perspective, because over sixty percent of PCE or spending in the US is driven by the top forty percent by income, and so I think you can reconcile these two narratives. I don't think they're necessarily mutually exclusive. It really is just that you are sitting more pressure at the lower particularly the lower but lower to middle income consumer. But the high end we still think is fairly robust. And so I think again that slowdown is consistent with weakness that starts at the bottom. I don't really think it's moving aggressively into the middle. That's really where the risk is. But at the higher end, those top two what we call quintiles, or the top forty percent by income, they are still, so to speak, driving the bus. They're still sixty one or sixty two percent of spending, and we think they're in quite good shape. And a lot of this is based on foundational, long term structural work that we've done using the FED Survey of Consumer Finances. We basically show using three credit ratios that in many cases, consumer health or consumer balance sheet strength has rebounded aggressively essentially back to where it was in the mid to late nineteen nineties. And so you know that I think really is a point to emphasize for people that are in the markets or investors that have been in the market for ten or fifteen years, you haven't really been in a situation like the nineteen nineties where the consumer was just starting from a much more solid footing. So we think you can reconcile a lot of these We are looking for quote unquote, as I said, cracks. We wrote a piece last week about auto delinquencies, but on net I would just say the high end we still think is quite strong and resilient. And what that means is some of these traditional quote unquote cracks or signs of weakening at the lower end consumer, they really need to, as we say, accelerate in terms of the deterioration that you're seeing. So I should be able to send you and James, you know, four or five charts showing very scary deterioration or weakness in some of these metrics that really key in on the lower income consumer. And we're just not there yet.

We're looking for real GDP growth to fall in the next two quarters for Q three and Q four down to kind of a low one percent range in real terms, and so relative to where we've been over the last several years, that's a notable downtick, and I think is consistent with recency bias, right, and with management teams talking about how consumers are essentially being more selective or they're trading down potentially to more staple goods. Having said that, the second point really that I would convey is that the consumer is very heterogeneous and a lot of the comments I think from some of the consumer good or staple companies that reflects all consumers that they see. Right, everyone buys essentials, everyone buys basic necessities, but we would argue that the high end of the consumer profile by income is really the strongest, and that does matter at least from a macroeconomic perspective, because over sixty percent of PCE or spending in the US is driven by the top forty percent by income, and so I think you can reconcile these two narratives. I don't think they're necessarily mutually exclusive. It really is just that you are sitting more pressure at the lower particularly the lower but lower to middle income consumer. But the high end we still think is fairly robust. And so I think again that slowdown is consistent with weakness that starts at the bottom. I don't really think it's moving aggressively into the middle. That's really where the risk is. But at the higher end, those top two what we call quintiles, or the top forty percent by income, they are still, so to speak, driving the bus. They're still sixty one or sixty two percent of spending, and we think they're in quite good shape. And a lot of this is based on foundational, long term structural work that we've done using the FED Survey of Consumer Finances. We basically show using three credit ratios that in many cases, consumer health or consumer balance sheet strength has rebounded aggressively essentially back to where it was in the mid to late nineteen nineties. And so you know that I think really is a point to emphasize for people that are in the markets or investors that have been in the market for ten or fifteen years, you haven't really been in a situation like the nineteen nineties where the consumer was just starting from a much more solid footing. So we think you can reconcile a lot of these We are looking for quote unquote, as I said, cracks. We wrote a piece last week about auto delinquencies, but on net I would just say the high end we still think is quite strong and resilient. And what that means is some of these traditional quote unquote cracks or signs of weakening at the lower end consumer, they really need to, as we say, accelerate in terms of the deterioration that you're seeing. So I should be able to send you and James, you know, four or five charts showing very scary deterioration or weakness in some of these metrics that really key in on the lower income consumer. And we're just not there yet.

And you know, We've been hearing a lot about the bifurcation of consumer spending. Higher income consumers are spending, they haven't really slowed down. And what we're also hearing and seeing is that a lot of the spending at the walmarts and the targets are from higher end consumers. When do you think the lower end consumers will quote unquote come back or be able to come back, like what would be triggers that kind of will push them into spending on furniture, vacations, things that are outside of the essentials.

And you know, We've been hearing a lot about the bifurcation of consumer spending. Higher income consumers are spending, they haven't really slowed down. And what we're also hearing and seeing is that a lot of the spending at the walmarts and the targets are from higher end consumers. When do you think the lower end consumers will quote unquote come back or be able to come back, like what would be triggers that kind of will push them into spending on furniture, vacations, things that are outside of the essentials.

As you look in let's say into a medium to longer term horizon, I think into twenty twenty five, and our real GDP forecast, which again is anchored on consumer spending, does pick up. It picks up, you know, modest leads and moderately. So we're talking about moving from the low one percent level in terms of quarterly real GDP to something that is in the mid or slightly mid to higher end in terms of real GDP, but still you know, below two percent. And what we think drives that in a lot of cases is the lagged effect of rate cuts in terms of stimulating financial conditions and incrementally reducing interest burden. The other key part is essentially that the labor market holds up and the weakness is contained, and as you go into next year, inflation, at least in terms of year on year comps continues to fall. So I think the you know, the goldilocks scenario for the consumer is easing financial conditions, easing pressure in terms of interest burden, the labor market holding up or softening, let's say, incrementally from here, but really inflation continuing on a path that is down in line with the FED target. And that means that real wage growth can still be reasonable again in an environment where we think a lot of you know what we've what we're seeing as a normalization too, you know, clute too or much closer to trend, you know, but that's okay, right for credit, that's essentially goldilocks.

As you look in let's say into a medium to longer term horizon, I think into twenty twenty five, and our real GDP forecast, which again is anchored on consumer spending, does pick up. It picks up, you know, modest leads and moderately. So we're talking about moving from the low one percent level in terms of quarterly real GDP to something that is in the mid or slightly mid to higher end in terms of real GDP, but still you know, below two percent. And what we think drives that in a lot of cases is the lagged effect of rate cuts in terms of stimulating financial conditions and incrementally reducing interest burden. The other key part is essentially that the labor market holds up and the weakness is contained, and as you go into next year, inflation, at least in terms of year on year comps continues to fall. So I think the you know, the goldilocks scenario for the consumer is easing financial conditions, easing pressure in terms of interest burden, the labor market holding up or softening, let's say, incrementally from here, but really inflation continuing on a path that is down in line with the FED target. And that means that real wage growth can still be reasonable again in an environment where we think a lot of you know what we've what we're seeing as a normalization too, you know, clute too or much closer to trend, you know, but that's okay, right for credit, that's essentially goldilocks.

Let's talk about the cracks, so, Mat, I mean, you have been great in the past acording these things out, and you know, we've been looking at your research for years. Canaries and the coal mine, all that stuff. It worries me slightly that you just sound so positive at this moment. I mean, are you really you know, I mean you mentioned auto delinquencies what else you worried about.

Let's talk about the cracks, so, Mat, I mean, you have been great in the past acording these things out, and you know, we've been looking at your research for years. Canaries and the coal mine, all that stuff. It worries me slightly that you just sound so positive at this moment. I mean, are you really you know, I mean you mentioned auto delinquencies what else you worried about.

I mean, the biggest thing I think that we have have focused on is private credit, and you know, the signals in private credit are mixed, so you are seeing certainly a fairly you could point to a number of indicators that would be you know, on the more concerning end, right, the number of pay in kind or the number of what I would call essentially actions that by time amendments has certainly been elevated. That's coming off a little bit, but there's certainly underlying concern that there's a number of companies that have fairly low interest coverage ratios, a lot of essentially the incremental cash flow is going to higher interest burdens. Now that should improve as the FED cuts rates, but there's always you know, again and acknowledgment that the signals from that market, we would say are mixed. We think there will be portfolio deterioration in the next twelve months, there will be higher defaults, but I think it will be measured and not necessarily a significant concern. You know. Away from that, I would just say commercial real estate has been an area of focus. You know, you've seen a lot of pressure on office that seems in terms of office delinquency rates, that seems to have migrated into multifamily. But I still think if the unemployment rate remains fairly low and we essentially don't have a significant uptick to hear certainly we're below five percent through next year in terms of the forecast, then ultimately we think that you know, office is probably largely worked through some of the structural issues. The decline and interest rates certainly will help cap rates and valuations, and multifamily likely holds up in the context where most households still have a job and still have income growth. So I would say right now, you know, private credit is the area of concern for us. That's the kind of area that's front and center. The other ones I think are not really you know, they're they're on our radar, on our scorecards, so to speak, but are not really flashing uh, you know, signs of of red or even signs I would say of orange at this point to use a stop stoplight analogy.

I mean, the biggest thing I think that we have have focused on is private credit, and you know, the signals in private credit are mixed, so you are seeing certainly a fairly you could point to a number of indicators that would be you know, on the more concerning end, right, the number of pay in kind or the number of what I would call essentially actions that by time amendments has certainly been elevated. That's coming off a little bit, but there's certainly underlying concern that there's a number of companies that have fairly low interest coverage ratios, a lot of essentially the incremental cash flow is going to higher interest burdens. Now that should improve as the FED cuts rates, but there's always you know, again and acknowledgment that the signals from that market, we would say are mixed. We think there will be portfolio deterioration in the next twelve months, there will be higher defaults, but I think it will be measured and not necessarily a significant concern. You know. Away from that, I would just say commercial real estate has been an area of focus. You know, you've seen a lot of pressure on office that seems in terms of office delinquency rates, that seems to have migrated into multifamily. But I still think if the unemployment rate remains fairly low and we essentially don't have a significant uptick to hear certainly we're below five percent through next year in terms of the forecast, then ultimately we think that you know, office is probably largely worked through some of the structural issues. The decline and interest rates certainly will help cap rates and valuations, and multifamily likely holds up in the context where most households still have a job and still have income growth. So I would say right now, you know, private credit is the area of concern for us. That's the kind of area that's front and center. The other ones I think are not really you know, they're they're on our radar, on our scorecards, so to speak, but are not really flashing uh, you know, signs of of red or even signs I would say of orange at this point to use a stop stoplight analogy.

Does private credit cause such stress that it rips across other parts of credit?

Does private credit cause such stress that it rips across other parts of credit?

We don't believe so unless you kind of have a confluence of instances or occurrences that that that that that feed on one another, and I think for that to happen, to be clear, you would likely need a more material economic slowdown or a recession relative to what we're forecasting, which in the baseline is no recession. Again, it's slow growth that starts to incrementally pick up into twenty twenty five. So I think you need a macroeconomic recession in the US, but you'd also need weakness in profits, right, and we use different profit measures. One that we continue to like is just the simple GDP account based profits, and those were up almost five percent through the second quarter year on year. Now that trend will decelerate, but historically it's been a better indicator for what the state of profits are at the economy wide level. In a lot of cases that captures medium and smaller companies, and so right now that's in positive territory. Normally that series goes negative several quarters before the recession. But I would emphasize that we would really need to see earnings in profit weakness. And despite the material increase in interest costs, heuristically, what we learned over the last one to two years is that interest expense alone is not going to cause a problem if underlying nominal earnings and EBIT dog growth, and that's what we've seen. So I think the second thing we would look for is a profit contraction, particularly in those sectors where the concentration in private credit portfolios is quite high, and in particular I would highlight tech and also business services, and so you'd have to have I think a confluence of those two events that might drive default rates higher and potentially materially higher than what clients are forecasting at this point. And that cycle, potentially, given a number of the measures that you've seen to kind of amend and extend or amendments to kind of extend the runway for these firms, that could lead us to a cycle that looks a little bit more like the late nineties for corporate debt, right, which is a more longer and drawn out default cycle. If in fact, some of these vulnerabilities had been let's say, tapered over or dampened down. If we get into a real kind of series of shocks as I describe, then the cycle may be larger. Default rates may be notably higher on a cumutive basis, and that could cause problem for credit investors. I don't necessarily believe James that it's quote unquote systemic, but we're certainly watching and trying to calibrate that as the cycle evolves.

We don't believe so unless you kind of have a confluence of instances or occurrences that that that that that feed on one another, and I think for that to happen, to be clear, you would likely need a more material economic slowdown or a recession relative to what we're forecasting, which in the baseline is no recession. Again, it's slow growth that starts to incrementally pick up into twenty twenty five. So I think you need a macroeconomic recession in the US, but you'd also need weakness in profits, right, and we use different profit measures. One that we continue to like is just the simple GDP account based profits, and those were up almost five percent through the second quarter year on year. Now that trend will decelerate, but historically it's been a better indicator for what the state of profits are at the economy wide level. In a lot of cases that captures medium and smaller companies, and so right now that's in positive territory. Normally that series goes negative several quarters before the recession. But I would emphasize that we would really need to see earnings in profit weakness. And despite the material increase in interest costs, heuristically, what we learned over the last one to two years is that interest expense alone is not going to cause a problem if underlying nominal earnings and EBIT dog growth, and that's what we've seen. So I think the second thing we would look for is a profit contraction, particularly in those sectors where the concentration in private credit portfolios is quite high, and in particular I would highlight tech and also business services, and so you'd have to have I think a confluence of those two events that might drive default rates higher and potentially materially higher than what clients are forecasting at this point. And that cycle, potentially, given a number of the measures that you've seen to kind of amend and extend or amendments to kind of extend the runway for these firms, that could lead us to a cycle that looks a little bit more like the late nineties for corporate debt, right, which is a more longer and drawn out default cycle. If in fact, some of these vulnerabilities had been let's say, tapered over or dampened down. If we get into a real kind of series of shocks as I describe, then the cycle may be larger. Default rates may be notably higher on a cumutive basis, and that could cause problem for credit investors. I don't necessarily believe James that it's quote unquote systemic, but we're certainly watching and trying to calibrate that as the cycle evolves.

To what extent though, does it affect spreads in public bond markets in that you're effects we be taking away some of the supply.

To what extent though, does it affect spreads in public bond markets in that you're effects we be taking away some of the supply.

I definitely think that the natural quote unquote contagent point would be leverage loans in the US. The portfolios are both floating rate, generally lower quality. They have similar sector concentrations, so I think you would see it there. I do think that high yield in the US and particularly high grade are on firmer footing. But if you had an issue where default rates were rising and rising above average and private credit, I think that would likely spill into leverage loans. Again, given the similarity of the companies, the sector, the rating profile. And then you're talking, you know, realistically about call it three trillion of debt where you have pretty material losses. Potentially that will affect risk appetite, it will affect the capacity to raise capital, and I think you will see spill over to US high yield and ultimately US investment grade.

I definitely think that the natural quote unquote contagent point would be leverage loans in the US. The portfolios are both floating rate, generally lower quality. They have similar sector concentrations, so I think you would see it there. I do think that high yield in the US and particularly high grade are on firmer footing. But if you had an issue where default rates were rising and rising above average and private credit, I think that would likely spill into leverage loans. Again, given the similarity of the companies, the sector, the rating profile. And then you're talking, you know, realistically about call it three trillion of debt where you have pretty material losses. Potentially that will affect risk appetite, it will affect the capacity to raise capital, and I think you will see spill over to US high yield and ultimately US investment grade.

Can you put numbers on the default rate you're expecting private credit? It's just so hard to see. You mentioned the amend and extent. Sometimes these things just don't get actually reported as defaults because they just keep getting amended and extended.

Can you put numbers on the default rate you're expecting private credit? It's just so hard to see. You mentioned the amend and extent. Sometimes these things just don't get actually reported as defaults because they just keep getting amended and extended.

Yeah, I want to clarify. I mean first, right, so the starting point to your question a little bit earlier in the discussion. You know, we have high yield default rates in the US, which is a key benchmark for credit for macro investors, that essentially is running below one percent. It's six tenths of a percent on a debt weighted basis. A lot of the numbers that you'll see in the marketplace that are higher are countweighted, and we think that that's not the right metric to look at in terms of the overall impact on our client portfolios, our client's portfolios. So six tenths of a percent is the high yield default rate currently. We have that rising to one percent at the end of the year, but it's still quite low. Leverage loans are at about two to two and a half percent. We have it peaking there. So the message overall from high graded or excuse me, from high yield and leverage loans is fairly benign.

Yeah, I want to clarify. I mean first, right, so the starting point to your question a little bit earlier in the discussion. You know, we have high yield default rates in the US, which is a key benchmark for credit for macro investors, that essentially is running below one percent. It's six tenths of a percent on a debt weighted basis. A lot of the numbers that you'll see in the marketplace that are higher are countweighted, and we think that that's not the right metric to look at in terms of the overall impact on our client portfolios, our client's portfolios. So six tenths of a percent is the high yield default rate currently. We have that rising to one percent at the end of the year, but it's still quite low. Leverage loans are at about two to two and a half percent. We have it peaking there. So the message overall from high graded or excuse me, from high yield and leverage loans is fairly benign.

Sott. Let's talk about the election. You've written a great report on that. That's all we seem to be hearing about these days, from Taylor Swift to Stolen Peece. It's really dominating the news cycle. How does it affect markets? I mean, I've been asking this question a lot over the last thirty so years, covering markets particpally in the emerging world, but when it comes to the US so often it seems to be just noise that doesn't really make a huge amount of difference to portfolios. Why does it matter now?

Sott. Let's talk about the election. You've written a great report on that. That's all we seem to be hearing about these days, from Taylor Swift to Stolen Peece. It's really dominating the news cycle. How does it affect markets? I mean, I've been asking this question a lot over the last thirty so years, covering markets particpally in the emerging world, but when it comes to the US so often it seems to be just noise that doesn't really make a huge amount of difference to portfolios. Why does it matter now?

So we kind of agree and disagree with that narrative. So at the macro level, we've done some work to show the large swing and polls. I'm kind of using some UBS Evidence lab data which essentially uses offshore probabilities for the outcome of the presidential election, essentially so betting sites offshore that help us calibrate precisely kind of how the polls are moving in terms of favoring now former president Trump versus the vice president president Electris. We've used that to kind of look at how the markets move, and I would say overall, at the macro level, we don't think that there's a large story there. And I think when you get under the issues a lot of the reason for that is a lot of the key issues that are in focus on the client side. Whether you look at immigration, you look at tariffs, you look at fiscal policy and economic policy, they're either back loaded, so none of these are going to probably impact markets or where you'll actually see actions or legislation or policy. It's not going to happen, we think in a lot of cases until the middle or second half of twenty twenty five or twenty twenty six. And I think that's one reason why the macros, not macro credit indices are not really trading, let's say, on those probabilities. The second thing I would say, though, is on the micro level, we are seeing and I think continue to see alpha or dispersion at the sector level. And you know, some of this I think is useful because it also allows us again the large run up in the polling in favor of President Trump in the summer and then the commensurate fall in those probabilities as Vice President Harris started to really build momentum in the polls, gives us a natural case study to kind of look at how sectors are trading through those changes in probabilities. And so with a Harris Victory, we think very clearly there's three sectors that will benefit. One is utilities, the second is capital goods, and the third is basic industry. And I would put it in that order, and a lot of that we think is tied to the preservation of the Inflation Reduction Act and support of many of the Biden era stimulus policies. On the flip side, we think at a Harris Victory, tech, telecoms and banks underperform, and that really is on an expectation of higher regulatory scrutiny and basically lower M and A and financial activity. And then we also think autos underperform. We believe that's mainly on potentially faster adoption of electric vehicles which are less profitable, and just softer defense of US manufacturers from imports or from offshore competition. So bottom line macro less of a story, but micro we think there's a lot of interesting sector stories depending on the outcome in November.

So we kind of agree and disagree with that narrative. So at the macro level, we've done some work to show the large swing and polls. I'm kind of using some UBS Evidence lab data which essentially uses offshore probabilities for the outcome of the presidential election, essentially so betting sites offshore that help us calibrate precisely kind of how the polls are moving in terms of favoring now former president Trump versus the vice president president Electris. We've used that to kind of look at how the markets move, and I would say overall, at the macro level, we don't think that there's a large story there. And I think when you get under the issues a lot of the reason for that is a lot of the key issues that are in focus on the client side. Whether you look at immigration, you look at tariffs, you look at fiscal policy and economic policy, they're either back loaded, so none of these are going to probably impact markets or where you'll actually see actions or legislation or policy. It's not going to happen, we think in a lot of cases until the middle or second half of twenty twenty five or twenty twenty six. And I think that's one reason why the macros, not macro credit indices are not really trading, let's say, on those probabilities. The second thing I would say, though, is on the micro level, we are seeing and I think continue to see alpha or dispersion at the sector level. And you know, some of this I think is useful because it also allows us again the large run up in the polling in favor of President Trump in the summer and then the commensurate fall in those probabilities as Vice President Harris started to really build momentum in the polls, gives us a natural case study to kind of look at how sectors are trading through those changes in probabilities. And so with a Harris Victory, we think very clearly there's three sectors that will benefit. One is utilities, the second is capital goods, and the third is basic industry. And I would put it in that order, and a lot of that we think is tied to the preservation of the Inflation Reduction Act and support of many of the Biden era stimulus policies. On the flip side, we think at a Harris Victory, tech, telecoms and banks underperform, and that really is on an expectation of higher regulatory scrutiny and basically lower M and A and financial activity. And then we also think autos underperform. We believe that's mainly on potentially faster adoption of electric vehicles which are less profitable, and just softer defense of US manufacturers from imports or from offshore competition. So bottom line macro less of a story, but micro we think there's a lot of interesting sector stories depending on the outcome in November.

Do you feel like a lot of her policies are just exts mentions of the current Biden administration.

Do you feel like a lot of her policies are just exts mentions of the current Biden administration.

I think that she has tried to differentiate herself on a number of issues, and I think she's continuing to try uh and do that if you look at the policy, uh in terms of fiscal if you look at some of the policies that she's announced really in the last few weeks in terms of in support of middle income families, and certainly I think she has a different nuance on foreign policy. So I think that that's the natural response is to believe that, you know, she's essentially largely embracing the Biden agenda. But I think what you're seeing is is a fairly fairly savvy and selective approach to kind of making certain issues her own in terms of what she and what she's proposing, and and I would suspect that we'll see that continue again in terms of her candidacy and uh uh and and and and the issues and the policy that she wants to put in place as we move closer to November.

I think that she has tried to differentiate herself on a number of issues, and I think she's continuing to try uh and do that if you look at the policy, uh in terms of fiscal if you look at some of the policies that she's announced really in the last few weeks in terms of in support of middle income families, and certainly I think she has a different nuance on foreign policy. So I think that that's the natural response is to believe that, you know, she's essentially largely embracing the Biden agenda. But I think what you're seeing is is a fairly fairly savvy and selective approach to kind of making certain issues her own in terms of what she and what she's proposing, and and I would suspect that we'll see that continue again in terms of her candidacy and uh uh and and and and the issues and the policy that she wants to put in place as we move closer to November.

Because going back to your comments about we're probably not going to see legislation or you know, an impact to the macro level heading into twenty twenty five, twenty twenty six, or until twenty twenty five, twenty twenty six, I would think that if she was kind of embracing more of the current Biden policies, that the MACRO would react positively towards that because they generally, you know, they like what Biden has been doing, like what specifically that Harris is doing or not doing. Do you think we'll delay that kind of legislation or we're not going to see the results for another year or two?

Because going back to your comments about we're probably not going to see legislation or you know, an impact to the macro level heading into twenty twenty five, twenty twenty six, or until twenty twenty five, twenty twenty six, I would think that if she was kind of embracing more of the current Biden policies, that the MACRO would react positively towards that because they generally, you know, they like what Biden has been doing, like what specifically that Harris is doing or not doing. Do you think we'll delay that kind of legislation or we're not going to see the results for another year or two?

I mean, I think again a macro, I'm not really arguing that there's going to be a material impact, but let me be specific. So our economics team has looked at the proposals for you know, Harris and a Trump win and basically argue that fiscally, the delta is quite small, right, both of them are likely to spend a lot of that is essentially I don't want to say institutionalized, but it is likely to occur because in a lot of cases, the tax changes or the potential tax changes aren't going to go into effect until twenty twenty six. If you look at tariffs, we believe the Trump administration has de emphasized tariffs in terms of their overall list of kind of key agenda items and the topics that they want to try and address, and things like energy independence certainly for former President Trump, and as well things like immigration are certainly higher on the agenda, and so we don't believe that the tariffs will be announced or go into effect again until at the earliest probably the second half of twenty twenty five. And then immigration is certainly a critical issue. But in terms of credit, I think again it is a a it is, so to speak, in not at the forefront, but kind of in the uh in the back, so to speak. And we think that really is just because if people want to trade tighter slack potentially you know, lower immigration leading to labor market impacts and tighter slack, they're likely to do it in rates markets in particular through tips first, and I think credit investors are not going to use that instrument to communicate that view. But it's also going to take some time, I think, to really know exactly what policy is going to be put in place in terms of the severity of the change in in immigration that we've seen. Obviously, the direction of travel is quite clear, probably clear under both administrations, but even in a Trump administration, the delta and the actual actions that that try and address immigration, I think are still a more medium to longer term issue.

I mean, I think again a macro, I'm not really arguing that there's going to be a material impact, but let me be specific. So our economics team has looked at the proposals for you know, Harris and a Trump win and basically argue that fiscally, the delta is quite small, right, both of them are likely to spend a lot of that is essentially I don't want to say institutionalized, but it is likely to occur because in a lot of cases, the tax changes or the potential tax changes aren't going to go into effect until twenty twenty six. If you look at tariffs, we believe the Trump administration has de emphasized tariffs in terms of their overall list of kind of key agenda items and the topics that they want to try and address, and things like energy independence certainly for former President Trump, and as well things like immigration are certainly higher on the agenda, and so we don't believe that the tariffs will be announced or go into effect again until at the earliest probably the second half of twenty twenty five. And then immigration is certainly a critical issue. But in terms of credit, I think again it is a a it is, so to speak, in not at the forefront, but kind of in the uh in the back, so to speak. And we think that really is just because if people want to trade tighter slack potentially you know, lower immigration leading to labor market impacts and tighter slack, they're likely to do it in rates markets in particular through tips first, and I think credit investors are not going to use that instrument to communicate that view. But it's also going to take some time, I think, to really know exactly what policy is going to be put in place in terms of the severity of the change in in immigration that we've seen. Obviously, the direction of travel is quite clear, probably clear under both administrations, but even in a Trump administration, the delta and the actual actions that that try and address immigration, I think are still a more medium to longer term issue.

And you know, you're talking about the three sectors that would benefit under Harris administration. I'm a consumer stables analyst, so I have to ask, where do you see consumer staples in a Harris wind? What would happen to the sector? Positive? Negative, neutral?

And you know, you're talking about the three sectors that would benefit under Harris administration. I'm a consumer stables analyst, so I have to ask, where do you see consumer staples in a Harris wind? What would happen to the sector? Positive? Negative, neutral?

Yeah, we have not seen at the aggregate level a significant amount of deviation relative to the index, Julie. And so you know our approach, and I think one of the things that's valuable to our approach is it essentially takes the market tell and again I'm looking to be clear at a sector level. We've also done subsector, but we're not necessarily looking at individual names at least for this exercise. And you haven't really had much deviation from the overall index level, and so you know, I'd like to have a more commercially interesting response. But on the staple side, we really aren't seeing the changes in the probabilities again around polling for the presidential election really swinging and influencing the sector more so than what we're seeing just in the general index. So I think the overall implications are limited. Acknowledging that there are tariff and other underlying issues that could have you know, pretty substantial effects on individual companies, but at the aggregate level just not really seeing evidence that the market's actually trading that or at least that sector as prominently as some others like I mentioned.

Yeah, we have not seen at the aggregate level a significant amount of deviation relative to the index, Julie. And so you know our approach, and I think one of the things that's valuable to our approach is it essentially takes the market tell and again I'm looking to be clear at a sector level. We've also done subsector, but we're not necessarily looking at individual names at least for this exercise. And you haven't really had much deviation from the overall index level, and so you know, I'd like to have a more commercially interesting response. But on the staple side, we really aren't seeing the changes in the probabilities again around polling for the presidential election really swinging and influencing the sector more so than what we're seeing just in the general index. So I think the overall implications are limited. Acknowledging that there are tariff and other underlying issues that could have you know, pretty substantial effects on individual companies, but at the aggregate level just not really seeing evidence that the market's actually trading that or at least that sector as prominently as some others like I mentioned.

So maybe not the consumer stable sector, but what about the consumer Like in a Harris win, how would the consume the underlying consumer benefit or not benefit?

So maybe not the consumer stable sector, but what about the consumer Like in a Harris win, how would the consume the underlying consumer benefit or not benefit?

Yeah, I think I mean so in a Harris win, again, we think autos underperforms and that signal that behavior has been consistent over the last few months. Again, we think that that's largely because the transition to EVS, which is probably accelerated, and also in the Trump administration, the stronger defense from the Trump administration of imports of competition we think essentially are part of the reason why the market is trading autos with a with a skew that's more negative when Harris increases in the polling. Away from that, I think on consumer cyclicals, a lot, you know, really remains to be seen in terms of how much policy actually gets initiated optically. You know, certainly some of the proposals for tax credits for the down payments for first time home buyers, you know, those things conceptually should improve consumer finances, consumer buying power, and so you think you would think that that naturally would be positive for cyclicals. But again, you know, we're going to have to see how many of those policies stick if she is elected, and then how many actually can get through what may be a divided Congress. And so that's the other important part of this is some of the policies, for example, preservation of a lot of the IRA policies, that is probably going to be easier even if the congressional makeup is split between Democrats and Republicans. New legislation, for example, the twenty five thousand that's going to be potentially offered to first time home buyers, that is new legislation. It's going to be harder to get through or very difficult, we think if the Congress is split between parties.

Yeah, I think I mean so in a Harris win, again, we think autos underperforms and that signal that behavior has been consistent over the last few months. Again, we think that that's largely because the transition to EVS, which is probably accelerated, and also in the Trump administration, the stronger defense from the Trump administration of imports of competition we think essentially are part of the reason why the market is trading autos with a with a skew that's more negative when Harris increases in the polling. Away from that, I think on consumer cyclicals, a lot, you know, really remains to be seen in terms of how much policy actually gets initiated optically. You know, certainly some of the proposals for tax credits for the down payments for first time home buyers, you know, those things conceptually should improve consumer finances, consumer buying power, and so you think you would think that that naturally would be positive for cyclicals. But again, you know, we're going to have to see how many of those policies stick if she is elected, and then how many actually can get through what may be a divided Congress. And so that's the other important part of this is some of the policies, for example, preservation of a lot of the IRA policies, that is probably going to be easier even if the congressional makeup is split between Democrats and Republicans. New legislation, for example, the twenty five thousand that's going to be potentially offered to first time home buyers, that is new legislation. It's going to be harder to get through or very difficult, we think if the Congress is split between parties.

Let's talk about the Trump trade, though, I mean a few months ago before Biden stepped out, you know, everyone was just talking about high yield, as the Trump Trade is by high yield, your report points to you, in the event of a Republicans suite, we would see a triple c's rally because of the potential benefits to small caps. We are seeing that right now. Is that what the market's betting on.

Let's talk about the Trump trade, though, I mean a few months ago before Biden stepped out, you know, everyone was just talking about high yield, as the Trump Trade is by high yield, your report points to you, in the event of a Republicans suite, we would see a triple c's rally because of the potential benefits to small caps. We are seeing that right now. Is that what the market's betting on.

Yeah, it's a great question James, and one that we were discussing literally an hour ago. I think. So part of it is what you've seen in the trip Sea bucket over the last week is really outperformance in telecommunications and distressed capital structures in that sector, and that is on the Verizon bid for Frontier. So we think a majority of that move at Triple C's right now is probably more tied to idiosyncratic risk or what I would call sector specific risk basically M and A. Away from that, though, there is part of that outperformance in Triple C's, which you know, months to date are over fifty basis points tighters. They are outperforming Double b's and single bees. There is part of this that is I think in expectation of lower interest rates providing relief to interest expense and also lower interest rates I would say just galvanizing or easing financial conditions right it gives an incentive for potentially for investors to extend the runway, to look at amend and extend type structures, and or as we see for M and A potentially to pick up and for buyers to be a little bit more aggressive. So the other part of this, though is growth, and we always think that growth matters most for Triple c's, and I think what we're seeing even in the retail spending data this morning, is that the overall softish landing the resilience of the US economic data is probably also helping. So bottom line, it's hard to disentangle these three effects. But I think what you're seeing in the last few weeks with Triple c's, it was particularly the last week, is mainly related to telecommunications rallying, and that really is on the back of M and A, which we think of as a little bit more idiosyncratic.

Yeah, it's a great question James, and one that we were discussing literally an hour ago. I think. So part of it is what you've seen in the trip Sea bucket over the last week is really outperformance in telecommunications and distressed capital structures in that sector, and that is on the Verizon bid for Frontier. So we think a majority of that move at Triple C's right now is probably more tied to idiosyncratic risk or what I would call sector specific risk basically M and A. Away from that, though, there is part of that outperformance in Triple C's, which you know, months to date are over fifty basis points tighters. They are outperforming Double b's and single bees. There is part of this that is I think in expectation of lower interest rates providing relief to interest expense and also lower interest rates I would say just galvanizing or easing financial conditions right it gives an incentive for potentially for investors to extend the runway, to look at amend and extend type structures, and or as we see for M and A potentially to pick up and for buyers to be a little bit more aggressive. So the other part of this, though is growth, and we always think that growth matters most for Triple c's, and I think what we're seeing even in the retail spending data this morning, is that the overall softish landing the resilience of the US economic data is probably also helping. So bottom line, it's hard to disentangle these three effects. But I think what you're seeing in the last few weeks with Triple c's, it was particularly the last week, is mainly related to telecommunications rallying, and that really is on the back of M and A, which we think of as a little bit more idiosyncratic.

So in the event or in the scenario of a Trump win, have you guys explored what sectors would perform well, will benefit in which ones would not.

So in the event or in the scenario of a Trump win, have you guys explored what sectors would perform well, will benefit in which ones would not.

Yeah, we think in investment grade, to kind of flip the coin, we think a Trump win would be positive for energy, both for in high yield for energy. We think it would be positive for autos. And the other one that shows up is really aerospace defense. And we think essentially that's because overall, you know, the administration, the Trump administration seems to be certainly pro energy independence. I think at the margin production and increased production. A rollback in some of the regulations is on net positive for the energy sector, particularly the pipeline sector. On the auto sector, as I say, it's more I think his stance essentially that's more supportive of essentially internal combustion engine vehicles and basically more profitable vehicles, particularly trucks, and then also his defense against competition and imports, particularly from China. And then lastly on aerospace defense. I think there's a perception, although marginal, that he would be more supportive of defense spending. And during his last term you saw the rate of spend on defense that was certainly exceeding inflation and just a broader spending. Harris is not necessarily I think negative, but the Trump administration is seen as more supportive, and that would be consistent also with traditionally what you see from Republican candidates, which is there perceived to be incrementally more constructive on defense.

Yeah, we think in investment grade, to kind of flip the coin, we think a Trump win would be positive for energy, both for in high yield for energy. We think it would be positive for autos. And the other one that shows up is really aerospace defense. And we think essentially that's because overall, you know, the administration, the Trump administration seems to be certainly pro energy independence. I think at the margin production and increased production. A rollback in some of the regulations is on net positive for the energy sector, particularly the pipeline sector. On the auto sector, as I say, it's more I think his stance essentially that's more supportive of essentially internal combustion engine vehicles and basically more profitable vehicles, particularly trucks, and then also his defense against competition and imports, particularly from China. And then lastly on aerospace defense. I think there's a perception, although marginal, that he would be more supportive of defense spending. And during his last term you saw the rate of spend on defense that was certainly exceeding inflation and just a broader spending. Harris is not necessarily I think negative, but the Trump administration is seen as more supportive, and that would be consistent also with traditionally what you see from Republican candidates, which is there perceived to be incrementally more constructive on defense.

With six weeks out that it's very uncertain, no one really knows what's going to happen. But is credit credit market is telling us anything. Is there a signal either way.

With six weeks out that it's very uncertain, no one really knows what's going to happen. But is credit credit market is telling us anything. Is there a signal either way.

In terms of the economic outlook or in terms of the election the election, No, I don't. I don't think credit is telling us anything In particular other than I do believe, you know, again that the sectors are trading very much as we described, and so particularly over the last week host the debate, you saw a number of those sectors that I would say are winners in a Trump administration victory. In November underperform right, we saw energy. Part of that was on oil prices and weaker demand, but I think part of that selection saw the same thing with autos again not just an election narrative. So I think the market, you know, we believe is trading and is kind of separated winners and losers, you know, and incrementally, we think the polls are pretty consistent with the way credit is trading, which is, it seems like there is a you know, a margin of and in the polling as well. The support is certainly in the Harris camp, but that is not necessarily by an overwhelming majority. In our latest Evidence Lab poll essentially looks similar to exactly what we wrote a few weeks ago in this report, which is it's kind of a fifty four to fifty five percent in favor of Harris and about fifty percent in favor of Trump.

In terms of the economic outlook or in terms of the election the election, No, I don't. I don't think credit is telling us anything In particular other than I do believe, you know, again that the sectors are trading very much as we described, and so particularly over the last week host the debate, you saw a number of those sectors that I would say are winners in a Trump administration victory. In November underperform right, we saw energy. Part of that was on oil prices and weaker demand, but I think part of that selection saw the same thing with autos again not just an election narrative. So I think the market, you know, we believe is trading and is kind of separated winners and losers, you know, and incrementally, we think the polls are pretty consistent with the way credit is trading, which is, it seems like there is a you know, a margin of and in the polling as well. The support is certainly in the Harris camp, but that is not necessarily by an overwhelming majority. In our latest Evidence Lab poll essentially looks similar to exactly what we wrote a few weeks ago in this report, which is it's kind of a fifty four to fifty five percent in favor of Harris and about fifty percent in favor of Trump.

In terms of the polling, when you talk to global portfolio managers, certainly those that aren't based in the US. What do they make of all this? Are they selling US assets because of the volatility and uncertainty or is it just the cleanest dirty shirt out there. They have no alternative but to be highly exposed to US credit markets right now.

In terms of the polling, when you talk to global portfolio managers, certainly those that aren't based in the US. What do they make of all this? Are they selling US assets because of the volatility and uncertainty or is it just the cleanest dirty shirt out there. They have no alternative but to be highly exposed to US credit markets right now.

I think it depends on the client and the region and the country, But I would just say in general, you know, the narrative that win is winning I think currently is you know, if that is your friend, the trend is going to be your friend. Interest rates are coming lower, and clients in a lot of different markets either need diversification or they simply don't have enough net supply of credit in corporate supply, which is a point that you made at the top and the introduction for the discussion. As a result, they are incentivized to look at US credit and the nominal yields. While spreads are tight, the nominal yields are still very attractive with IG just below five percent and high yield with roughly a seven handle. You know, that's a very good cupon that A lot of clients are incentivized to look at, particularly with interest rates going in a favorable direction. And particularly with credits still suggesting, you know, to your point on Triple C's outperforming over the last week or two, that the risk, the overall risk in terms of markets and the downside risk is fairly contained.

I think it depends on the client and the region and the country, But I would just say in general, you know, the narrative that win is winning I think currently is you know, if that is your friend, the trend is going to be your friend. Interest rates are coming lower, and clients in a lot of different markets either need diversification or they simply don't have enough net supply of credit in corporate supply, which is a point that you made at the top and the introduction for the discussion. As a result, they are incentivized to look at US credit and the nominal yields. While spreads are tight, the nominal yields are still very attractive with IG just below five percent and high yield with roughly a seven handle. You know, that's a very good cupon that A lot of clients are incentivized to look at, particularly with interest rates going in a favorable direction. And particularly with credits still suggesting, you know, to your point on Triple C's outperforming over the last week or two, that the risk, the overall risk in terms of markets and the downside risk is fairly contained.

What though, if there's no clear result, we have to weigh through months of legal battles. One side refuses to concede. Right, No, we have another January sixth event to credit investors have anywhere to go? And I mean, you know, we've we've just been through a volatility event early in August, which surprise a lot of people, the vics really the jump credit got a bit of a beating. You know, surely there must be some concern.

What though, if there's no clear result, we have to weigh through months of legal battles. One side refuses to concede. Right, No, we have another January sixth event to credit investors have anywhere to go? And I mean, you know, we've we've just been through a volatility event early in August, which surprise a lot of people, the vics really the jump credit got a bit of a beating. You know, surely there must be some concern.

I mean, I might answer it differently. The three things when we think about credit and what could disrupt what feels like a goldilocks environment that's extended for much of the year to your point, with exceptions of bouts of volatility but very short lived. The August bout, as we wrote for credit, the big spike to sixty five, credit spreads were much more well behaved. I would say involved was much lower in credit than it was in areas like certainly equity volatility, but also currencies and also rates, and so what disrupts that is three things. One is unexpected tightening and monetary policy, but as I say, the no landing risk in the market I think has fallen dramatically. The second is a profit really a profit contraction or a material profit or economic slowdown. And we talked a lot about that over the last call it thirty odd minutes, just not seeing a lot of signs that that is starting to fester or matriculate into something larger than just a slowing. And then the third is really systemic risk. And in a lot of cases that that is credit quality deterioration, and it generally is something that's obviously impacting the banks in particular. And so if the first of those three concerns is let's say, largely off the table, then it really should be all eyes on growth and profits, or it should be all eyes on systemic risk. But you know, to circle back to some of the discussion we had earlier away from private credit, and I don't even think private credit is systemic, but just in terms of signs of cracks, you know, we're we're we're diligently looking for those signs, but I just don't think there's a lot of evidence of systemic risk rising and rising, you know, in a sinister way at this point.

I mean, I might answer it differently. The three things when we think about credit and what could disrupt what feels like a goldilocks environment that's extended for much of the year to your point, with exceptions of bouts of volatility but very short lived. The August bout, as we wrote for credit, the big spike to sixty five, credit spreads were much more well behaved. I would say involved was much lower in credit than it was in areas like certainly equity volatility, but also currencies and also rates, and so what disrupts that is three things. One is unexpected tightening and monetary policy, but as I say, the no landing risk in the market I think has fallen dramatically. The second is a profit really a profit contraction or a material profit or economic slowdown. And we talked a lot about that over the last call it thirty odd minutes, just not seeing a lot of signs that that is starting to fester or matriculate into something larger than just a slowing. And then the third is really systemic risk. And in a lot of cases that that is credit quality deterioration, and it generally is something that's obviously impacting the banks in particular. And so if the first of those three concerns is let's say, largely off the table, then it really should be all eyes on growth and profits, or it should be all eyes on systemic risk. But you know, to circle back to some of the discussion we had earlier away from private credit, and I don't even think private credit is systemic, but just in terms of signs of cracks, you know, we're we're we're diligently looking for those signs, but I just don't think there's a lot of evidence of systemic risk rising and rising, you know, in a sinister way at this point.

Great stuff. Matt Mish, head of Credit Strategy at UBS. It's been a pleasure having you on the Credit Edge. Many thanks. Thank you, James and Julie Hung with Bloomberg Intelligence. Thank you very much for joining us today. Thanks James, we're even more analysis. Read all of Julie's great work on the Bloomberg Terminal Bloomberg Intelli. This is part of our research department with five hundred analysts and strategists working across all markets. Coverage includes over two thousand equities and credits and outlooks on more than ninety industries and one hundred market indices, currencies and commodities. Please do subscribe to the Credit Edge wherever you get your podcasts. We're on Apple, Spotify and all other good podcast providers, including the Bloomberg Terminal on b pod Goo. Give us a review, tell your friends, or email me directly at jcrombieight at Bloomberg dot net. I'm James Crombie. It's been a pleasure having you join us again next week on the Credit Edge.

Great stuff. Matt Mish, head of Credit Strategy at UBS. It's been a pleasure having you on the Credit Edge. Many thanks. Thank you, James and Julie Hung with Bloomberg Intelligence. Thank you very much for joining us today. Thanks James, we're even more analysis. Read all of Julie's great work on the Bloomberg Terminal Bloomberg Intelli. This is part of our research department with five hundred analysts and strategists working across all markets. Coverage includes over two thousand equities and credits and outlooks on more than ninety industries and one hundred market indices, currencies and commodities. Please do subscribe to the Credit Edge wherever you get your podcasts. We're on Apple, Spotify and all other good podcast providers, including the Bloomberg Terminal on b pod Goo. Give us a review, tell your friends, or email me directly at jcrombieight at Bloomberg dot net. I'm James Crombie. It's been a pleasure having you join us again next week on the Credit Edge.