Hello, and welcome to What Goes Up, a weekly markets podcast. My name is Mike Reagan. I'm a senior editor at Bloomberg and Donna High across Acid reporter with Bloomberg and this week, well, on this show, we obviously like to talk about what's going up, and this year, one thing that's going up noticeably is interest rates on corporate bonds as well as their spreads above treasury yields. So what sort of signal is that setting about the economy and risks to other markets? And with the yields on investment grade bonds approaching five percent this month and almost thirteen year high, is there enough value there for investors to start boosting allocations to corporate debt. We'll get into it with a very well known credit markets veteran and one of our own Bloomberg editors who covers the space. But first Vil Donna, I feel like, guy, do owe you an apology? You do? Um? I do? Yeah? That is because we had a zoom call earlier to plan the podcast, and for some reason my video was not working. I my face was not showing up on video, and I had assumed you had figured out some way to have zoom block block my face on video, which I thought was something you would probably do. That would have been fun, That would have been really fun. But it turns out it was just I needed to upgrade some driver or something on my laptop, and the nice folks at the Bloomberg I T department, who are incredible by the way, they hooked me up. So I do apology. It's kind of a halfhearted apology though, because I think that if you could figure out a way to do that, you you probably would. Actually if any of like the Zoom uh you know, the CEOs or whoever the product managers at Zoom are listening, that could be a really fun feature for like, you know, blocking some of your friends or I don't know, it might be fun just blocking me, me blocking Mike Reagan basically, yeah, exactly. But I'm excited to say our Zoom is working totally well now, so we're able to perform the podcast here in in uh HD video I suppose, and uh I see our guests are are ready to get at it, So why don't you why do you bring him in? Tell us a little bit about the guests this week. Yeah, I was going to say that our guests were definitely not blocking, And so I do want to introduce Oxana Aaronov. She's a head of market Strategy of Alternative fixed Income at JP Morgan Asset Management. And also we have James Crombie, Senior editor A Bloomberg, both joining us this week. Thanks so much for joining us, Thanks for having me ye Axanna, can we maybe just start with you and I just I read your title title out loud, but maybe you can just tell us a bit more about your role at Jippy Morgan and what you do. Sure, absolutely so. I am part of a platform that is focused pretty much exclusively on absolute return investing and fixed income, and to be honest with you, you know, I think that's even a little bit of a misnomer, if you will, because fixed income until certainly maybe the last ten years or so, when the Fed and other central banks got very very involved in bond markets. Um pixicon has always been thought by investors as an absolute return asset class. Right. This is where investors put money to sleep well at night. This is the diversification part of their portfolios versus equities. This is the stay wealthy part of their portfolios. And that's really you know, been somewhat diluted, if you will, and maybe even lost. Over the last ten years, fix income has become a get rich asset class. We have really tried to preserve this focus on capital preservation first and then with that, what's the best return I can deliver And of course that's really come into the spotlight over the last well year to date, I should say. And what that does in terms of our focus versus you know, the focus of more traditional fixed income teams out there, is that UM. We really look at any fixed income opportunity or any investment opportunity, I should say, from both a long and short standpoint. In other words, typically when you ask a fixed income investor whether they like an investment opportunity or not, they're going to look at the yield and they're going to sort of base their decision on that, So they're looking at it from a long only standpoint. We always look at UM sectors across fixed income UM as well as alternative investment opportunities and even in very select cases private market opportunities from the standpoint of is this compensating me for the risk that I'm taking on, in which case I want to be long? Is this fair value? In which case I probably don't want to be in this trade, or is this so overvalue that I actually may want to be short or used this as a hedge versus another kind of risk in my portfolio. So we do pull a lot of livers on this team in terms of having a lot of flexibility to deliver returns. But our goal always is to think like bond investors, and bond investors should absolutely always be focused on capital preservation and with that in mind, what's the best return I can deliver? And I do wanna talk about what returns are sort of attractive to you and where you're seeing value or not UM, But I think before we get into that um, the credit markets are are important, uh, even to investors in other asset classes. I think they're often looked at as a signal, sort of a macro signal of of where the economy is going and what that might mean for you know, markets large, you know, risk your assets especially, you know, and I'm looking at some of the signals and say, the treasury market, the break even five year break even rate is actually coming down pretty aggressively, so perhaps signaling that that inflation, that hot inflation that we've been experiencing all year um, at least in the bond markets. View might might be cooling off, but those spreads are are widening still, um, And I'm curious, you know, what does that signal to you? I mean, it doesn't seem like they've widened out to the to the point where spreads loan would be a sort of macro risk to the economy. But they were you know, elevated and and they don't really appear to be coming down at the moment. So what what is the signal there about the economy to you? I mean, is it is it, you know, as obvious as a recession is on the way, or is it is it more nuanced? Well, I'm going to probably zoom out a little bit and express a little bit of skepticism around the bond market stability to be that kind of you know, predictive force, because if that were the case, then um, you know, yields have been at lower and lower and a new record lows for so many years, indicating a recession. I guess then if we really believe in the indicative or in the predictive function I said, should say of the bond market, and that of course it's not materialized that we had a pretty dramatic dip around the pandemic, but that was a very esoteric event. Outside of that, we haven't really seen the kind of recession that the bond market would have been predicting at these record low yields every year um so, and of course has to do with just the tremendous amount of meddling by central banks. So so, I think that has frankly, frankly distorted UM the bond markets ability to be that predictive or forecasting mechanism. Having said that, certainly we're seeing, um, you know, a leveling off of investment, not investment, of inflation expectations certainly around you know, the ten year break events have kind of stuck around in the mid twos, but you are seeing them climb up UM with respect to two year and five year break events and inflation expectations there are continuing to kind of tick up or remain elevated. In fact, the two year part of the curve, we still do not have a positive real return, right and that's, by the way, something that Powell and the Fed are very much focused on. But taking a step away from that for a second to talk about the spreads. But you asked about So, yes, we have seen, we have seen some spread widening. But to put it in perspective, we, uh, the last time we had a hiking cycle and a tiny bit of inflation was of course, the two thousand fifteen two thousand eteen hiking cycle UM, and we had inflation of like barely about two percent maybe, and the unemployment rate was higher UM and the cycling higgle, the hiking cycle was incredibly benign, right, I think we would all agree, And yet we still saw highield spreads for one go into the mid fives and we are barely crossing that threshold now with inflation at a four decade high, and no one can really tell you whether it is in fact moderating or it will continue to tick up and unemployment rates significantly below where we are doing the during the last much more benign hiking cycle. So I think that you know to call this UM certainly uh, you know, an opportunity to get invested, To call this a bargain from a spread standpoint, I think we're far from that, and we can talk more about you know, what would make this a bargain? What what needs to be reflected in the price but at this point, all the carnage we've seen in the bond markets, whether it's in the interest rate sensitive part of it or in the less interest rate sensitive part, Like how you, it's all been interest rate driven, very very little of it has actually been spread or credit risk driven, and we need to see that punch in order to start to talk about opportunities. James, I know you talked to a lot of investors um is ox on his view sort of the consensus is there is there sort of a you know, a counter argument to be made that you know, maybe spreads are due to come in. Well, there's no doubt that the performances he has been terrible. Um we're down yesterday on junk bonds, which has never happened before. You know, we've got records going about forty years UM and we've never seen such terrible returns. We've never been double digit returns by the time in the year. So you know, definitely it looks pretty scary out there. And I agree that if we slip into recession, then you know, the potential for defaults and principal loss and all the things that keep h fix income investors up at night worrying are going to be upon us. And you know, as as Oxana says, you know, spreads could go a lot wider get into recession based on history, but also default rates, but easily go into the double digits um if we get into a recession as well. So you know, there's a lot of worrying stuff out there and there is more distress um. But you know, you could also say that we're in much better shape than we were even a couple of years ago. Companies have taken advantage of the sheep out there too to turn out their maturities, you know, to push those into the future, so they don't really have much of an immediate worry in terms of you know, big payments coming due on their debt um. You know, at the same time, earnings have held up, so they've got cash. Particularly the investment grade companies, they've got a ton of cash on their balance sheets. They're buying back stuff, They're going to probably buy back bonds. Um. Credit ratings. You know, Oxana might have a view on whether they are good accurate predictus or not, but they're much higher now than they were in the past. You know, there's any about ten of the market that triples see now, which is the lowest rated stuff. So you know, really you could you could argue that there is no real stress, there's no rollover risk. Um. You know, of course we're going to lose some zombie companies along the way. They may blow up, but who cares about them? You know, they probably should have died a long time ago. You know, you might you might just say it's different this time, and that's been definitely a very popular view. And look, the reality is that the HIGHLD market and we and we talked about the HILD market because of course those are some of the best opportunities that tend to materialize out of the stress that we're seeing right um. And also it's a it's an interesting kind of harbinger, if you will. That's where stresses tend to appear first, and so it's an important part of the market to to consider. But it's also a relatively young market, right Hi. You'd really didn't exist at the current size and technicals until really well into the two thousand's, and the last time we had inflation even above you know slightly four was in the very early two thousands and it was a very different high old market back then. So we really don't have a ton of history to go on. You know that that corresponds to what we're going through now, which is essentially the FED hiking into a decelerating earnings environment. Right. We went from the FED hiking into um economy strength and strong earnings into now the FED is is hiking into a decelerating earnings environment. And what we know, or what we can say about a decelerating earnings environment that is also inflationary for the time being, is that profit margins are going to be squeezed because and particularly for high elituors which tympically do not have the pricing power and cannot necessarily offset their costs accordingly, and so their profit margins will be squeezed. And yes, exactly as you said, you're going to see some amount of these or all these zombie companies, a lot of which are lower rated, so you know, low beds or even triple seeds, and roughly ten anywhere between ten and of this market, by the ways, estimated to be zombie UM companies. They could sort of disappear, and you're right, no one should care about them. They shouldn't probably exist to begin with. But the reality is that when cracks like that appear in one part of the market, it tends to reverberate to the rest of the market. And an example I always like to give is where you have legitimate, very serious, fundamental issues in energy, but you have the entire high old sector completely repriced, even though you had no fundamental stress in technology and healthcare and gaming and lesion and a bunch of other sectors. It was all energy driven, but the entire market went to almost a thousand over And the last thing I will say on kind of descry to you know, let's get invested now, is again, we don't know what the future will bring, but it is fair to talk about the fact that liquidity will be reduced with the FED kind of removing itself, and broader market liquidity is very different today with the south side no longer playing the shock absorber that they used to be. It's also fair to um to say that, look, markets have to grapple with this kind of squeeze to to profit margins. But from a purely kind of quantitative standpoint, right the higher market right now is running at a spread duration of four point two roughly, and what that tells us is that it will take less than two hundred basis points of widening to wipe out that very juicy eight percent yield that everyone is salvating over now. And two hundred basis points or high, let me tell you, is not a lot. It can happen very very quickly. And so right now, with defaults at one percent, I think it is absolutely reasonable to expect them to go to long term averages of three and a half percent, if not through that average, and we haven't seen that yet. And it is when we start to see that reflected in the spreads that's really when those bargains are going to start to appear. I think it is way too early to talk about them now. So as a follow the last time we were in this mess much the FED came in and save the day, and that was a huge trade for a lot of people. Um, what are the chances that I don't extend to say the day again, but what are the chances they might just take the foot off the accelerator and help people out. Really important to talk about this because I think a lot of investors are treating this as yet another kind of blip in the mean reversion that the feed is engineered for close to fifteen years now, right. But the reality is that even in the pandemic, in the worst part of the FED got involved because you had blue chip companies truly struggle and unemployment soaring because they were laying off so many people, and so their involvement really was about supporting well capitalized, strong companies that fell on hard times because of a completely exogenous factor. You may re all that when one of the best programs included buying hid a t S how was met with very stringent questioning in Congress and there that ceased very quickly, but the market overall kind of took a cue that looked the FETE is. Therefore, we're in a very different environment today. The FETE has zero appetite to support you know, certainly the zombie companies, much less the rest of jun graded universe and credit. And really I think that the threshold for the FED to get involved is two fold. They will continue to choose inflation over growth. First of all, because they have no choice. They need to clam down on this inflation. It is the most regressive tax there is, and they do not want to find themselves in kind of the political corsairs. And I think Powell has made it very clear that it is important to him to him to go down in history as the person who contained inflation. So they will continue to choose inflation over growth as long as inflation remains an elevated problem. And the second thing is, I do not think they get involved in terms of any kind of support to the market until we see investment grades spreads go way north of two hundreds and right now we're roughly at one fifty. You know, we've been in the past and very serious, you know, like Great Financial Crisis invest from great spreads got closed as close to six hundred over. You do not think the FED gets involved until you know investment grade spreads probably start to push three hundred um. The FED is likely not getting involved at all as long as inflation continues to be the problem because the very thing, the only tool available to the FED is to tighten financial conditions, and by definition, tighter financial conditions mean less access to capital, mean and accelerated default rate. Right, all of these things that we as investors, or at least that you know equity investors bread, this is what the FED is trying to engineer. It's the only tool they have available to them. It's a blunt tool. So unfortunately, the fed foot is really not here for investors. So then the problem realized at the bottom end of the market. The junkie is risky, is most indebted companies that are probably having trouble with earnings the way the economy is changing, maybe their consumer related companies. But um, do we really care beyond that? I mean, is there a contagion effect? Is there a broader impact of of you know, that small part of the market blowing up? Absolutely, So it's not really just about that small part of the market. It's about the fact that the market will start to price in, and it hasn't yet, but we'll start to price in. What does it mean, um, that you know, the default rate moves towards an average of the historic average of three and a half percent. What does it mean that, you know, companies do not have access to cheat capital anymore? What does it mean that their profit margins are squeezed? You know, very little of that is actually in the price We're starting to see it, you know, kind of come into a spread and and and push spreads wider. But as the market reckons with this reality. You know, one of the things that I always hear about is, Oh, you know how you'll doesn't have a maturity wall that's imminent, right, this normantu like the next huge maturity wall is and thereafter. But the reality markets don't work like that, right, My markets don't wait for an event. Markets price in an event. And so if the market believes that a lot of these companies are going to have difficulty tapping UM capital markets to refinance themselves, that's going to come into prices way before that maturity will materializes. So you can have almost like recessionary pricing even without an actual recession, without actually you know, double digit defaults if you will UM. It's all sort of about expectations. And if expectations around recession and around a slowdown continue to build, you're going to continue to see spread widening. And as spread winding continues, what happens investors yank their money. So much of high old exposure is in mutual funds and ETFs, right, all of these instantaneously look with instruments, and as spreads widen, investors continue to yank their money. So selling begets more selling, pressure begets more pressure. Remember, you don't have the same liquidity underpinnings in this market that you used to UM. The cell side is not there to take these bonds off your hands. So price discovery becomes very, very violent. We've seen it all before and it's going to happen again. Is there a clear trigger on the horizon and is it earnings? Is that margins? Is it something else to do with the bed and what what really is on the horizon that could tip this over? And that's really the question I think on everyone's minds is sort of what is that capitulation tipping point right? And and we never can estimate or predict what that is. There's not been a single sort of point in past UM cycles, you know, or the part of the cycle where something breaks that you could kind of look forward and say, look, this is what it's going to be. So I don't think we're going to be able to predict it, but I think all of the components are certainly there, and the components being that it's just simply not reflected in the price yet UM And as it starts to you're gonna see reevaluation in terms of you know, do I really want this in my portfolio? I thought i'd be because remember a lot of people did get into high yeld at five percent or six percent, and now they're seeing nothing but losses. And this sort of entire generational investors. You know, if we were to get into investor psychology here, UM, this entire generation of investors is not really see the market that's been continuously challenging for a prolonged period of time. So UM, I think that anything can become that tipping point. But we haven't even touched on the geopolitical um tensions obviously, but something that sends the oil prices even higher. Oil prices have seen a reprieved recently. UM. It could be any number of things, but certainly you have the makings of this sort of capitulation, and we need to see that capitulation for our mandate to start to get aggressive and start to get invested in this market. And one other point I would like to make is that when you look at you know, if we use the nineteen eighties kind of on the bat or in nine seventies and early nineteen eighties UM as a sort of parallel to the investment environment that we're in right now in terms of the high inflation, UM, you can see that assets generally struggled, particularly on a real return basis right, It was a struggle to generate a positive real return and it will probably be you know, maybe somewhat similar this time around. So getting in at the right price is really important. Buying that you know, bond at a bargain price is really important. That's really maybe the difference between generating that positive long term real return and not. Just to talk to Mike's point about, you know, if you're not in these markets all day long from a cross assets white, why should you care about what's going on in credit right now? Why should you care about what's going on in credit right now? I mean, it's the backbone of everything that goes on in great question from a credit markets journalist, James, I gotta say, but that's a question a dumb guy like me should ask. But I appreciate it. I allow you for taking that bullet for me. Okay. So I mean, look, it's it's really the backbone of everything, all kind of risk taking, right, And it's the it's it's the sentiment of the investor, because if credit markets start to fall out of bed, it's certainly not going to be positive for equity markets. Right as the cost of capital rises, generally um, that is going to have dramatic impact on earnings. I mean, that's the kind of the direct mechanism that translates into, of course, your equity investment experience. So without a doubt, what happens in credit is incredibly important to the rest of the market. Well, you know what Oxon is, Sometimes a credit market stress can be so cute and so dangerous that it actually does either tip the economy into recession or perhaps exacerbate a recession. I sort of get the impression right now, though, that corporate balance sheets are are healthy enough that we don't necessarily have to really worry about either one of those issues. If we do get a recession, the effect on the from the credit markets might not be enough to really worsen it too bad. Is that? Is that too optimistic? Do you think? I think it's absolutely fair to say that corporate balance sheets are coming into this in as good a shape as we could probably desire, at least on the you know, somewhat higher, higher quality side of the credit market, right if we kind of leave those zombies and those really really um john Kie companies out of it. Yes, I think corporate balance sheets are are generally in good shape, and I think they're that you know, spreads are reflecting that, and that's really good. It goes back to what's in the price UM. But the the reality is that you can have recessionary pricing without an actual recession, and we've seen it happened time and time again. UM. And the other thing too is you can have UM stress and credit market exactly as you said, without necessarily a recession too in the broader economy. Right, So these two things, just like we've had strong financial markets UM and ascid appreciation even through periods of so so economic underpinnings right over the last twelve years, UM, we can now have the reverse. We can have you know, very anemic asset returns and asset growth against a backdrop of an okay UM economy. So UM one doesn't necessarily cause the other. I think that given that valuations are UM, you know, pretty strong, and we're we started this episode of you know, the hiking cycle and quantitative tightening which is now beginning and inflation. We started all of this. We came into all of this with elevated valuations and so it's unfortunately, it's it's going to be difficult to UM reset or it's going to take time to reset so that we can start earning those outsized returns. Everyone has gotten so used to UM. But certainly I agree with you. I think corporate balance sheets are are relatively in decent shape UM. But again, that pressure on profit margins will continue to drive spreads wider because it just needs to be reflected in the price, and at this point it is not. So what's the trade here then, A stand? I mean, we've talked in the past about going into cash, but in tempers and inflation environment, you're losing money on that cash. So what do you do? So I've been hearing about investors losing money on sitting in cash and that cash is trash for as long as I've been in this industry. But the reality is that if you have been in cash for the last you know, five years, you've essentially outperformed the Barkley the Bloomberg excuse me, Barkley's aggregate index UM over the year today, one year, three year, and depending on the day, yes, even five years and now to three years. That's a positive return versus a negative return. So I think that we have to sort of dispense with these absolutes and really think about it. This is like one of the craziest things to me, frankly, about how our industry functions. Because in fixed income you absolutely have very identifiable tops. When the tenure was at fifty basis point, it had nowhere to go but up. So why are we not, like, why aren't there wide splayer spread, you know, alarm bells um sounding off about this? Did you do you remember hearing that? No, that the rhetoric was the same cash it's trash and you should be invested, and because something else you yield more than treasury, you should buy that even though you know valuations there were equally over priced. So I think that instead of resorting to these absolutes, we have to really think about what's priced in and we have to think about Yes, inflation right now is a serious problem. And yes, you are earning eight percent in high yield versus you know, still significantly less in cash. But what is your price appreciation or what is your capital preservation potential? Right? And which of those are most important to you? Because maybe they're not important to you, but again to us, as absolute return investors, we focus on capital preservation first. And so given all of the push and pull forces in the markets today, we look at it and say, look, we think that the risks are skewed to the downside. So we prefer to have a lot of liquidity in our portfolio because right now it serves as a free option essentially on as any class in the world, and we think that the opportunities that will continue to get better on balanced, just like it has for the entire you know, six months of this year, and we've been hearing people about getting invested in January and February and March and in April, and it continues to get better, and we think that spreads will continue to go wider. So for us right now, again it's absolute return investors that are trying to manage and outperform cash irrespective of whether the regime is a benevolent one for bonds or not. Right we're not investing versus a market risk driven benchmark. We're investing versus capital preservation essentially, and so for us, we believe that a focus on capital preservation continues to be warranted, and we prefer to being very liquid structures at this point in a combination of liquidity, high quality floating rate to continue to like that trade and really for us, this is still a capital preservation part of the cycle, although I think we're closer to the end of it than we were a couple of months ago, and you know, probably in the next month or two, we're going to start to transition into the start to get aggressive, start to go after those returns part of the cycle UM as we see spreads widen and some of these more barish expectations get reflected in the price. But at this point, absolutely we think that capital preservation is still the name of the game. Why not in this environment by apple bonds for training at thirty points discounts to you know, there's someone very long dated obviously, but why not go into very high rated investment rate, very cheap bonds. So we don't have a problem with someone doing that if they're doing it in a portfolio that is ladder. Generally, I think that you know, right now a portfolio there is a ladder portfolio is an approach that we don't really have a ton of problem with. I think where investors are going to UM struggle is, you know, frankly, mutual funds, because mutual funds have a UM perpetual maturity and so unlike a physical bond that you own, right there's no maturity that you mature up to UM or down to. You're sort of stuck at that price until um, the market gives you a better one UM. And that's really where that's really why kind of the losses that mutual fund investors have experienced, the real losses that they went and tried to sell right now, they will have label turn those paper losses into real lasses UM. But we do not have a problem with someone buying you know, deeply discounted bonds at this point, UM and and putting them into a ladder portfolio. We think that's okay. UM. You know, deeply discounted stuff. There's really not a ton of it out there um at this point. And if something is deeply discounted right now, there's generally a pretty good reason for why it is trading at that price. UM. Some of the market, you know, sectors that we've been looking at that we think are starting to look more right for getting invested are kind of around the edges of fixing comp and have more equity correlated risks, So things like convertibles, things like closed down funds UM. Both of those tend to you know, track equity risk more closely and have a higher beta to equity, and we're seeing, you know, significant discounts there, and I think that that is maybe at the top of our shopping list in the foreseeable future. Um. But we'll see how how the rest of this market place out, Axana, Can I actually ask you to go back to the basics, if I can call it? That? I know in some notes recently you had been saying recession is the only thing that's capable of shutting down inflation, and at the same time you said there's no easy way out of this, and this is not yet in the price So maybe can you just go over what specifically you're actually projecting. Yeah, so we've gone that obviously through a number of years of central bank support, and it's been UM said many times, and I certainly believed that view as well, that really the only thing that could have shut down that central bank party, if you will, was inflation, and we didn't see it for many years, and therefore the central banks had no impetus to stop the support that they were providing to the markets into financial assets, and then we saw this inflation sort of you know, roar back to life, Um, and at this point it's really hard to see. How does it glide back down effortlessly the way you know FED um forecasts are promising us that it will UM. And even some former FED officials have come out and said, look, this is really not these these forecasts are not realistic. You know, we're not gonna see inflation glide back sort of effortlessly UM in a soft Lenning scenario by the end of next year. UM. Yes, it can go back to significantly lower levels, to single digit levels via recession. And some of the inflation mechanisms are nearly recessionary right in terms of inflation crimps consumer spending, makes it more difficult for consumers or or reduces consumer sentiment, I should say, And we're seeing that. UM. So it seems that the most natural way for this inflation to calm down is a recession. And that means again that has to be priced into credit valuations, which we're not really seeing yet. UM. Although I think the consensus in the marketplace right now is to the tune of we're going to see in recession in three but that's not really yet being reflected in the price I don't think UM. And if we do see a recession. Unfortunately, it will coincide with still elevated UM inflation levels. So it's not really clear to me that long dated bonds are going to be necessarily a great hedge in that environment for your risk, for the riskier parts of your portfolio. UM. And finally, you know, the said is as I said, you know, there are tools are quite blunt. The only thing they can do is tighten financial conditions, raise the cost of capital. And those things are you know, inadvertently perhaps, but they are also contributing to recession, risks becoming elevated and to the reality of recession, which is what Powell told us recently, right, he said that the possibility of recession is rising, as much as he doesn't want that to be the case. Um, he's being very transparent about that. You know. Uh. On one thing we haven't touched on, which is so important to credit markets is issuance. UM. And I have seen some stories recently of companies either sort of postponing or canceling deals or maybe tapping credit lines instead of issuing corporate bonds. How do you see that unfolding in the near future and and sort of what the effect on the market would be if people corporates get a little gun shy about issuance. Yeah, we saw you know that boots deal. Get next right, the Walgrains boots um deal, and we're going to see more of that. And essentially, you know, credit markets in terms of issuance, it's been very very slim um and and in many cases simply shot down. And on one hand, you know, there is an opinion out there that that is going to maybe keep spreads tighter because you still have some demand right for this paper, but it's not being issued at the same clips, so maybe the demand kind of overrides supply. But the reality is that what is a shutdown um credit market? Essentially right, noitions means that there's no bid at the price that the company wants to actually issue that debt. And I'll give you an example. A few weeks ago, I think it was Carnival Um that came to market and had to borrow at ten and quarter to ten and a half percent, whereas a few months before that, I would assume they're borrowing it was probably five to six percent. So a few months nearly doubled their cross of capital. And so you know, companies that can afford not to do that. They don't want to do that, but that's not really a healthy that's certainly not a healthy market. And in that environment, market participants will be pricing in the fact that, look, you can't finance yourself in this market, and that's also going to find its way into valuations and it's going to push spreads wider. And I don't think that that's actually a constructive um dynamic for credit market and AXNA. Just to wrap things up, since we tend to focus so much on the stock market on the podcast, I know our our colleague Katie Greifeld at Bloomberg she had written recently the rising rates across the fixed income landscape are chipping away at the there's no alternative mantra that we tend to hear in the stock markets. I wanted to ask you if credit is becoming more attractive than the stock market even so, Um, yes, I think the higher rates is certainly shipping away at Tina, there is not alternative, certainly chipping away of that. But again, just like you know, you don't simply but I mean, I don't know who are these people that are simply buying stocks for the divondend field, right I mean, it's all it's always about the price, and I think in fixed income it also has to be about the price. I think it is because we've forgotten that price matters, and investors were buying HI bonds at one oh seven or even higher, you know, many dollars above part that they're sitting on the losses that they're sitting on right now. So I think price absolutely still matters, and especially in an environment where we are at such tiny default levels that they almost have nowhere to go but up, which means that again, paper losses have the ability to become realized, you know, real actual losses. UM. I don't think you can look at the yield and isolation. I think at the end of the day, you have to really look at what it is priced in UM, your respect of what you're buying. Great stuff, box SONA. We UH really appreciate your insights. Uh, price matters. I'll tell you what matters on this podcast too, is the craziest things we all saw in markets. Uh. This week our tradition, and we can't let you go until we per year. Yours your favorite crazy thing of the week. I'll get us started though, rare attempt where I get us started. Um well, don as you know, one of my favorite asset classes are these ridiculous collectibles that people pay ridiculous amounts of money for it auction. I think I found the most ridiculous one of all time from the New York Times, better than the vh vhs you you had the other week that went for Here's the headline from the Times. Dead roaches that eight moon dust went off went up for auction. Then NASA objected. I'll read that again, dead roaches that eight moon dust went up for auction, and NASA objected. What happened is in ninety nine when uh, the U S astronauts landed on the Moon. If you do believe that that happened, there's some conspiracy theories out there that it did not happen. That's a that's a topic for a different podcast. But assuming it happened, Uh, they brought back a bunch of moon rocks and moon dust and they fed it to you know, uh, cockroaches and I guess you know mice and goldfish too, just see if it would be toxic to them. Um there, you know, is one of the experiments they performed afterward. Uh so one of the scientists who performed this experiment with the cockroaches. I don't know how they got them to eat the moon moon dust. Maybe they put some hot sauce on it or something. But she kept she kept the roaches. She determined that they were not harmful to the roaches, but she kept them in a safe for years and years, and then they went up first auction. Uh NASA heard about this and they put the kibosh on the auction, saying, those are our roaches. You cannot sell those roaches. But as you can probably guess, it's time to play prices, right and ask you what price do you think the highest bid was for these dead roaches that eight moon dust before the auction was canceled. It's kind of a tricky one because we don't have true price discovery. But first you go first. I mean, who would buy dead roaches? And where did she keep them? By the way, in a freezer in a fireproof safe in her basement. Oh my gosh. Okay, I will go with fifty five dollars on what's your bid for dead rutches that eate moon dust? Like you said, there's no price discovery in that market, single issue market, Um I have absolutely no idea, and I can't even imagin why anyone would want some dead roaches, no matter what they ate. Um, I have no idea. I'm gonna go with let's just for the sake of the why not. Okay, so you're out bidding Volda on the dead roaches. That James, what's your bid for the dead roaches? That eight moon does? Think? Uh? Six months ago probably a million bucks now, Tan Ground. That's a great point. It's a great point. You know, it is not a very satisfying one because we did not see the winning bid for the auction. NASA came in and spoiled it. High spid was forty So you guys, we're both pretty pretty close. Wow. They expected it to go much higher, of course, as auctioneers tend to. But so we were close here. You guys are pretty close. Roaches, I think James right though that a year or two ago they probably would have gotten seven figures. But uh, the times are tough now, you know. It's uh, it's it's a different market, different valuations across all asset classes, including dead roaches. About you, Bill Donna, what's the what's the craziest thing you've seen mine has to do with the CEO. There's this wonderful Bloomberg story that I read about Andrew for Micah. I hope I'm pronouncing his name right. He's a chief executive officer of Jupiter Fund Management. He had announced that he's leaving his company, and what he told Bloomberg is I just want to go sit at the beach and do nothing. I'm not thinking about anything else, which I love. It's like everybody's thinking this, but nobody wants to admit that. Nobody wants to say it. He just wants to sit at the beach. I think that's the sanest thing. I hear it all week, not the craziest things. Onto something. All these people on Twitter are like, oh, you know, I think he's based in the UK, like in America. CEO says like he'll retire, then he'll go back to doing like ten other jobs. This guy literally just wants to sit on the beach. I took my hat to him too. That guy's a role model for us, all I believe. How about you, ox On, have you seen anything crazy recently? So I certainly cannot top the roaches, but I will um and I you know, I think that The stuff that I see that is crazy is daily. But at the same time it is very um much more broad than anything that's kind of specific to this week or last week. And it is certainly in the phones in the realm of like, let's just be sane, you know, and and and and I want to offer some sanity here and for me that the stuff that really is crazy is how investors in fix income are so desperately trying to fight this FED. Right when the FED was on your side, the mantra was don't fight the FED, and so I offer the same advice. Now the FED is only at the starting point of this high cycling hiking cycle. We do not know what quantitative tipening is going to bring. Frankly, we didn't talk about that, but that's a wild card in and of itself. A recession fears are are rising um and the FED is telling you that they're choosing inflation over growth over and over. Don't fight the FED. But at the same time, to James's point, they did kind of set that precedent with the corporate credit facility in the pandemic and sort of broke the seal on that, uh, that idea of buying corporate credit. If if times get bet enough, is there is that in the price to some degree? Do you think that that they might one day return? I think that that is what's key keeping a lid on the spread widening for the time being. And I think, you know, we talked about what is going to be that tipping point for the capitulation. I think it's going to be this realization that, look, the FED put is a lot of basis point doubt if it's even alive anymore. It is not here now. It's not here for probably several hundred basis points of high whining certainly, and you know at least probably another hundred base points whining of investment grade. So it's it's not there for you. The feed is not there for you. This market has to learn to stand on its own fundamentals and on its own merit like it used to be. Yeah, I would say the second craziest thing I've seen this week Bildanna is we actually got James to come on the podcast for once. He's he was very shy about coming on, but but we got him on. So so James, your turn. What's the craziest thing you've seen in markets recently? A couple of things that fed today's saying they didn't know what inflation was. That's pretty scary crazy, um. But sticking with credit, I mean, I do look at bond prices all day long of geek um, and you rarely see bond prices moved in the morning when you come in more than a point or so if you stare it, you know the feed. Recently, we've seen bonds dropping ten points, twenty points, forty points in one trade, um, And that's that's crazy price action. That speaks to some of the points well eximate during this podcast. You know the Boston Beyond today ten points, those bonds yielding, how you distressed the still rated sorry single beat plus um. The same thing happened to Party City recently, whole bunch of retailers, and I'm pulling the bond white outs. We haven't seen this sort of price action. I don't think you know, you can disagree outside I've seen this sort of level extreme. I agree with you. I would also add to that, you know what you alluded to, what you just refer to. Those are bond prices that we can sort of very readily observed because they're in the public corporate space. But then there are parts of the bond market right where pricing is is much more over the counter, if you will, right, so um areas like mortgage credit, for example, there's a whole area out there where you know, the family and Freddie step back from providing guarantees to the number of mortgages and throw them back into the market to kind of live on their own um and price on their own without the government guarantee. And we're seeing um to various degree stresses in in that part of the mortgage market, even though we're not really seeing stress in the housing market yet yet. Mortgage rates are higher, and yes, we expect to slow down and housing, but certainly they're none of the systemic problems that existed there back in two thousand and eight. But we're seeing, yes, bonds that are off ten twenty points in this mortgage credit space. This is kind of like the non agency part, particularly the you know, lower than the most pristine parts of that market. So without a doubt, there are some canarreas. Usually how repricing broad repricing start, they start in more esoteric um parts of the market like that, and with kind of some you know, credits here and there, that are may be weaker and then transition to a broader repricing. So I think we're just at the starting of this. Is it a summer liquidity issue at all? To or now um liquid of the issue to the extent that it can be that it is, you know, seasonal, I think will be a huge issue. You know. One of the things that Jamie Diamond wrote a shareholder Leo alluded to the fact that market liquidity is very different. That sells to the cell side is not there for you like it used to be, and it makes for a significantly less liquid market. And just to give you an idea, you know, the top five corporate bond etf so things like l q D and g J and K and h y G like that, the top largest corporate bond ets, their total assets are several times bigger than the corporates the street is inventory. So these things, you know, start to really redeem in size, and you know, dramatically, there's really no other side to take that down, so you're gonna have very dramatic prices covery downwards. So, yes, liquidity plays a huge role. The way this market operates, the liquidity it has on any given day is so different than pre two eight and the FED plugged that hole repeatedly for a very long time, and they're not anymore. They're not at this time. So liquidity has completely shifted to the buy side, but the bye side is fully invested across the entire cycle. They have to sell something to buy something, and so we just think it's a completely different market and that's why we want to be the liquidity providers um that will be very, very sorely needed as this group pricing gets going well. Axada, We really again appreciate your insights. Hopefully we can have you back again sometime to talk markets again, and please bring Jamie Diamond along if if you see him, Tom Tom, He's invited to sounds great, Thanks so much, thank you, thanks very much. What Goes Up will be back next week and so then you can find us on the Bloomberg Terminal website and app or wherever you get your podcast. 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