US trade policy changes and tariffs in particular have dominated the minds of investors and businesses. They're a major driver of uncertainty and the increasingly shaky economic outlook globally.
Executives have flagged this uncertainty across earnings calls all year, and higher tariffs could hit corporate earnings for money. But just like the game seen in equity markets, the credit market doesn't appear to reflect this concern. Corporate credit spreads have remained tight, and easing central bank policy rates should technically continue to benefit the space.
You're listening to Asia Centric from Bloomberg Intelligence. I'm John Lee in Hong Kong.
I'm Katamitriva, also in Hong.
Kong, and this week we're looking at credit markets in light of growing global risks and investor appetite for debt.
This week we're chatting with Monica Shao. She is chief investment officer and founder of Treotic Capital. It's a hedge fund a base in Hong Kong, and she joins us here in our studio.
Welcome, thank you, thanks for having me.
So I wanted to start with something that's on a lot of investor minds, and you talked about this on Bloomberg TV last week as well. We've had incredibly tight spread since November of last year. And that's despite the sort of growing macro risks, growing risks to corporate So what is happening there and how much tighter can we go?
Well, so, just to define for the audience, corporate spread is you take the corporate all in yield of a bond and you subtract the treasury rate, which is presumed to be the risk free rate, and so we take the US Treasury and that's the corporate spread.
So the corporate.
Spread has indeed come quite tight in Asia in particular. We have been able to explain it for all year and all last year by the tight supply that we have with the redemptions coming through last year and this year we're still you know, net supply is not really additive by that much relatively speaking. So that's the reason why corporate spreads here are tight. And then in the developed markets in US Europe that's also quite tight as well.
But then then the US dollar denominated debt market, we see that the cash to debt ratio is relatively high because the corporates in general have been able to refund at relatively good rates, so you know, they have been in a pretty good spot in terms of their liquidity and monica.
You mentioned that the corporates have got a lot of cash on their balance sheets. But are you surprised by the actions in the credit markets considering you know, the tariffs, the economic consurgency that we've had this year?
For sure, I mean, I think that all of us would have hoped for more volativity and the credits spread, especially for hedge funds like ours. But that said, it's also been a really goldie locks environment for carry trade in terms of all in yield. You know, I would say that we all expect that in Q three there
should be some more volatility around earning season. But you know, keep in mind that for as much as we keep talking about tariffs, you know, the other part of the equation is that the market is expecting to see deregulation ahead. We have tax cuts also in the bill, So it
is a balance of all those factors. And you know, to the extent that we might have softening earnings ahead because of tariffs, to some extent, people have psychologically been prepped for that and the growth of embedded in equities valuation I think should be more hurt than credit credit. We really are just focused on debt servicing ability.
And where are you focused? I mean, is it regionally? I know you've recently expanded globally, so not just in Asia, but are there certain regions you like or industries you like right now?
Well, So just to back up a little bit, we launched in twenty fifteen as the Asia Credit Fund, which was focused on Pan Asia including Middle East as a non core region, and then we went through a route with China high yield debacle and post that period we came out of it globalizing the fund and pushing more towards DM markets as well. So today we are looking at global markets and you know, being a fund that is still more i would say em centric, with an
add on of develop markets as well. We are looking at how do we focus our time in spots and basically we go after pockets where there's you know, sell off or ability for us to be contrarian. So in the last couple of years, for example, we were very happy to kind of go into European bank financials and they still are you know.
Relatively good yield.
But we had a real event play with SVB with the UPSCS stories and each time we would look at the bank tier one, tier two and see there was a lot of value, so we would pick up in areas like that. We still like some regions that are recovering, for example Sri Lanka. We were in those as an event trade with a turnaround and under the IMF they have really beaten the expectations in terms of growth of GDP.
Of course, you know they also will potentially face headwinds from tariffs unless they come to an agreement really quickly, but those are still areas that have added value. We still like Mongolia on a relative value basis, and I think in terms of looking across at regions that are relatively tight, like India high Yield, there are particular names we like and we just really have to be going down into the grass to kind of like look at
the micro stories. So to be honest, in credit land right now, there's so much to look at because the new issues that are coming as well are starting to pay more premium. So even if GOLDI the spreads are relatively tight to the extent that everybody's rushing in with supply, especially in July, we are able to kind of bargain for more new issue premium.
Within Sri Lanka and Mongolia, are there certain industries or corporates you like without giving away your book obviously, but are there certain industries that you're looking at as well.
Yeah, Sri Lanka is pretty simple because it's just sovereign. It's a sovereign play that you know, a lot of real money guys have jumped into as well. And Mongolia they have quasisofts, they have financials as well. But you know, I think overall Mongolia to the extent that people were concerned about commodities earlier in the year and the pricing there, you know, there was a chance to get in in some volatility and Monica.
You mentioned Sri Lanka and Mongolia, now I should know these but apologies are they frontier markets.
They are frontier markets.
And actually I forgot to mention with Mongolia because there was a change in the prime minister, so there was some volatility around that as well. But you know, I think what we try to do is in our fund we would be looking at ourselves as sort of a multi strat credit fund, so we have event plays that you know, are really around turnaround stories, contrarian stories, and then we have relative value, which you know I was
mentioning to you. So particularly in investment grade where it's tight, you still can find some relative value across regions that we will look at comparisons on. And then we have also within relative value within the same capital structure. We might look at for example, and financials Tier one versus Lty two or the senior bonds, and we look across
each tranch to look at that relative value. So and then we have a base which is more like value investments, and we look at allocating opportunistically in the bonds that we might stay for a longer term for yield, but then we use the coupons to pay for some hedges like macro hedges and longer term meaning meaning well we've actually had bonds that we hold even to maturity in some cases and then maybe something like two to three.
Years, okay, and short term short.
Term can be a day or an hour, yeah these days. Well, so I mean that is the reason for us to be I think is that as a hedge fund, the idea is we can deploy all kinds of strategies and be faster to kind of think about some relative value on the curve and capture those. But you know, I
wouldn't characterize ourselves as the fastest momentum type. We tend to kind of be watching to wait for a time where we can swoop in, and then we tend to be more fundamental than most guys out in Asia, where we do take a real view on the actual credit story rather than just momentum.
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and share. So, Monica, I just wanted to clarify. So you're a long short hedge fund, so you would hit yourself across the capital structure.
So what we are when we say we're long shot is purely opportunistic. I can be all long and I can be all short, and we've had periods where we had three times notional short for every one million long that has happened as well. So the idea is just that we can do anything and be anything along the
way depending on the markets. In terms of the short's, generally speaking, we keep some ratio of macro hedges, right, So in Asia, so I came from London before, where it was a different type of market when I traded more DM. So I used to trade war US and European markets before I came out to Asia, and in those markets with all that depth, we have a very grown up, sophisticated market of single name CDs that we
don't here in Asia. So we don't do a lot of the plays that we used to do there in terms of event plays around orphaning, succession events around CDs, for example, Here it's very different because you don't really hedge out with single name CDs for the most part, right, because they're not so liquid, and so we tend to look at indices as macro hedges.
Okay, but would you be country neutral or can you go We don't have to be You don't have to be okay, So you talked about your Sri Lanka and your Mongolia positions, but you don't have to hedge those risks in the same country.
No, we don't. Actually we take a view on those.
You know, I think when I look back at what we went through in China, for example, I don't think that any amount of China CDs really would have helped you. So sometimes you have to look at if you were to really want to hedge something like a high yield, you would probably have to just take it off go to cash. We see cash as a hedge or another bond.
Are you referring to the property crisis in China where like that's been gone for a couple of years.
Yes, So in that case, it's like sort of the lesson that you learned through coming out of Asia is you know, not only do you have an issue of illiquidity of trading, but also because you don't have single name CDs as much unless you do some bespoke, which would have costed you a lot, then you really should just think about cash. You would have to have drawn a line.
Yeah, you're talking about hedging, and you hedge using cash, As you said, I mean, could you talk a bit more about how you hedge?
So when I say go to cash, I mean you literally just have to sell out and so that is something that you almost have to actively think about because you know, a lot of funds feel sort of pressure to have to use the cash and everything. But sometimes there are times you need to just get out because if you were to put a bond against another bond, so you short a bond against another bond, it may
be so usyncratic that they don't match up. You may have periods of time where they kind of are going to hedge in a crisis regionally, but you know you will have slipperridge. And then in terms of other sort of hedging, it's really about rates or beta. So if you hedge like a you know, investment grade against investment grade, say you do like Korean financials versus India financials, the assumption is that if like for like, you'll hedge out at least rates, and then you're left with some kind
of regional bias. But the way I see it is that whatever you show as DVO one flat and paper in terms of your risks is not real. You actually really need to look at line by line and you're never totally neutral.
Could you give an example of that, just how you actually practically hedge, like you know, there's funds where people use gold as a hedge, for example, it's like the classic one, But like, how do you actually hedge?
Again, it really depends on what you were talking about. So in that case what I was talking about the financials,
you literally just sell the bond. So you buy the bond that is, let's say a Korean financialism that example, and then you sell the Indian bond that you decide that you think it's relatively expensive, for example, and then you can just make it like for like in terms of five year, both are five year, or both our ten year, or you may take a view on the curve and you may deliberately want to short a ten year versus a five year because you have.
A curve view.
And credit is complex that way. It's not quite like equity because you do have the embedded optionality, say of a call or a put. You have rates, you have potentially FX cross effcts if you're a US denominated fund, and then trading Aussie dollar. So you can take a view that way by very simple instruments, but complex view underlying.
You mentioned liquidity or the lack of liquidity at certain times, and I think you prefaced China bonds, Is that an issue in executing your.
Strategy, Sure it is.
Trading liquidity is always something that we care more about in credit markets, I would think than equity, although I mean, I'm told in equity and EM markets, trading liquidity is also an issue. But basically in credit markets, we all know that anything that is trading very liquid and meaning
that bidask is very tight, can easily become illiquid. As we went through the global financial crisis, as I've gone through twenty eleven, the EM crisis, and as we've gone through China and you know, March twenty twenty, all of these right, all of these routes we've had, I've lived through where you suddenly have something that was super liquid become illiquid to the point of not only your bid ass going out as much as ten bond points, but also you simply just can't find people to show up
to trade, so suddenly all the traders are in the toilet or whatever. And you know, I think, first you have to live with the marks, which means like if you are a ten point bid ask, we always mark to mid. Then you suffer by that, and that is not real. It's not a real loss for your clients,
but you have to mark to that daily. And this is something that we all know, and this is the reason why for credit funds, it actually really works better when you have a lock up and you have time to actually take a view on credit because more or less that illiquidity will resolve at some point and you need to have a real conviction around what you're doing in order to get in and get out of that trade.
But the illiquidity can work for you as well because sometimes you can pick up really great things on a bargain because nobody else wants it and you have a real view talked.
About some of the longs, you know, opportunities in Sri Lanka for example, what are some areas of risk or places that you're potentially on the short side right now?
So on the short side right now, right now, right now, we have a view that it's relatively goldilocks period. So I don't have particular single name shorts that I really want to put on. I would rather put it on which I have through credit indices where we have macro hedges.
But the way I see it right now is that we're in a relatively okay period for yield carry which means I'm not really expecting a ton right now of you know, capital gain, but in terms of yield, we're able to pick up some pretty good bonds in the recent one month that is averaging between eight to eleven percent yield, which is pretty good for five years or under.
And this is in part thanks to all in yield, because we have you know, various times where you had rates of volatility, and also because we did go out and take a view that oil would not be totally crashing, and so some of the commodity bonds that were a bit sold off too much, you know, we stepped in in some of those as well.
That's after the Middle East Iran Israel.
Situation where well, I mean that actually helped oil, but more earlier when oil was kind of on a downward trend, especially after OPEC supply increase and people were worried about tariffs causing economics slow down. Then eventually probably they'll come back again. But my personal view is that oil doesn't really go much below sort of the high fifties or stay there. So in that case we can pick up some bonds where their break even is quite low per barrel.
So we'll look at things like that, and then we have some event plays on particular you know, corporate turnarounds that we can't name, but you know, usually those are ones where there's a lot of fear and we do some analysis on the base case of either they do a liability management exercise what what that be? Or recovery
or so forth, and you take a view. But typically we will look at things that tend to be more sold off or you know, we take a view that some bonds that we've known and liked, you know, we will always, even if we trade around a portion, will always keep something like thirty percent and take the ball on the price movement.
Are you seeing any issues regarding default rates across Asia?
Not across Asia, just because we only have a handful left that are even surviving out of China high yield, So the areas that were more sensitive tended to be that. And we literally have just a handful of names. So when people talk about Asia high yield returns coming back, I mean it's a little bit misleading because you're coming from a very low base and very few names, so
the data points you know, are a few, right. But that being said, I think the default rate on DM markets like US is ticking up, and you know, you do see some underlying weakness in sort of the consumer household balance sheet, So when that will come out to roost is another story. But in the meantime, we are really having to look at the technicals of bond flows. And you know, last week, you know, week on week you're still looking at twenty billion dollars of inflow into
credit markets across DM and EM. So despite supply coming, it's being very easily absorbed. We're seeing all the books over subscribed. So even if we want to focus on the fundamentals, I think the technicals are very important right now.
Monica, I love to talk about your performance. How have you fared this year? But it's been really chopping financial markets.
So we've actually done okay in that we started the year fairly positive. We had a wobble in between with the Liberation Day month, and then we kind of came back and so sequentially the last three months we've been up. So you know, so far a year to date, we're in the single digits up and in terms of our target we still are targeting high single to double digits. Historically before so the China route, we actually were pretty
much annualizing at mid teens net returns. And then after we went more global and after we tweaked the risk framework after what we learned from the China debacle, we
target sort of quote nquote safer returns. So we are more targeting kind of eight to twelve percent, whereas in the past we would target fifteen plus percent, and we had years where we were up almost thirty percent, you know, So you know, you can imagine that I tried to mirror the risk framework and my return target to what I would expect in terms of the environment in the
market that we're in. And I think given that we have gone more global and also looking at DM, this is the reason why we've dialed back our risk framework
and so we forced now a lot more diversification. I mean, to your point earlier about do you actually neutralize country risk personally, I've found that having traded through many prop desks in London in large hedge funds and then starting my own, I can tell you that if you are intellectually honest, you can't really do that on paper properly to neutralize P and L. Neutralizing risk on paper is one thing, but you know what you end up doing is people are being the system by putting on a
bunch of like CDs that may not go anywhere, because ultimately, what we've learned with all these instruments is that whatever you think is theoretically the risk, really the technicals of that particular instrument is what matters. For example, in the global financial crisis, we learned the huge difference between funded and unfunded products. The people who thought they had neutral basis trades, for example, CDs versus bond like for like,
same issuer name, completely blew up. And partly because you have this difference of funded vers unfunded and then suddenly you can't hold that position.
On Liberation Day tariffs, how do you trade around that? You know it is quite a big risk. Always seems to be on the horizon. There are sort of daily fluctuations and daily changes in trade policy. But is there a way to long or short US trade policy.
I think what we have experienced through this year to date is that it isn't just necessarily about actual policy. It's pretty much just the hot air of words and what is on tweets, and that is what makes it more difficult for traders who try to be intelligent and try to do analysis, because ultimately it's more about following Twitter and so that. Yeah, so that makes it difficult. And sometimes when I look at what we went through and that period, you're almost better off not thinking as much.
And so so what I think helped us somewhat is that although we took the pain of Mars, we didn't trade as much as I kind of personally was itching to do, because sometimes the lesson overall the twenty some years I've been trading is just to sit tight a little bit when you know things are in flux. So we had to trade a little bit around edges for risk management, but really you probably don't want to overtrade
in periods like that. And as through you know, March twenty twenty, where we fared relatively quite well, it's always been the same story, which is that if you didn't position somewhat prior, you just need to kind of like go along with it for a bit and then see what shakes out. Because if you had, for example, the March twenty twenty, we were que quote lucky, but then you know, we start to feel a little bit of
some quick to come. Although we didn't realize the extent of it was really that we went thirty percent to cash, and that allowed us to have kind of the confidence that we can write through and through Liberation Day is a similar thing. We had just enough cash, so we held through some But do I regret selling anything, Yes, I do. But when I look back, you can only kind of assess with the information you had.
And I actually.
Remember the time when he came in like sort of you know, tweeted his big like bombshell that he was going to, you know, do the extension whatever, right like basically at that point, it was I don't know, it was like three or four am, and I was still up watching this, and it was just it was sort of unreal because right before that tweet, he tweeted something like, you know, everybody should buy America or whatever. And I remember on ibchat we're all like chatting with the traders
and everybody's like, yeah, this is such bs. And but literally he sent you an Easter egg and then right after, you know, he came out with that, and so it was just at that point you had to like quickly make a decision to cover or not some shorts. And so I was lucky to be up at that point, but you realize you would have to be pretty much on like twenty four to seven then in order to
monitor his tweets. So we were quite lucky that right before that we did cover some shorts on some big beta bonds, and we took actual profits on some shorts. But of course you can look back and be like, why didn't I just like buy anything and everything? Then, like, that's kind of what people would say looking back at the global financial crisis, right. So, I think part of
doing what we do in this job. You ask about Liberation Day, but could be in any of those circumstances that I mentioned before where you don't know but you just know what you know today, you have to be comfortable with trading on the fly a.
Little bit, so comfortable trading on the fly, but not necessarily doing it as much.
Yeah, I think you would have to make some calls around bigger turns and that's it, and then you sort of like leave it and live with the fact that you think you've done the work on those trades and you know you live through. But I think this is maybe easier for me to say because we tend to be more fundamental. So maybe we deluded ourselves into the fact that we've done all this work and so we
know something. But with trading everything is about timing. And I'm not gonna lie, you know, I tell you that there isn't some luck always involved in every year.
Any big regrets that I mentioned sort of a general one like, ah, should I have bought maybe more, you know, sort of during the financial crisis as well, But any.
I think my big regret, if anything, is that I wish I had, So I would say, when I look back at my career path and what we've done in Triata, we had years in a row of like kind of really top tier performance until the China route, and we did suffer for a couple of years and then work our way.
Back kind of thing.
And I have to say, first of all, it was a little traumatic for me personally because up till then, I swear to God, I had never had one full year of being down, like I mean, I had not had a physical down year, and not even through the financial crisis. So the China debacle was traumatic for me personally.
As sort of lessons and so forth. And I look back, and you know, you have to always sort of reflect and think about the lessons learned, right, and I think I should have implemented what we are doing today, which is really force a certain amount of diversification by region, which we didn't because I never had that per se in some proper desks as well as in head fund, mainly because when we were focused on Asia or certain regions, and when I first came out in end of nine
twenty ten, Asia was only so big and you couldn't force diversification by regions so much if you were doing just pan Asia.
And you had to be invested in China property bonds, right, was all such a big portion of the market.
Yeah, exactly.
I mean China property bonds were seventy percent of Asia high yield at one point.
Yeah.
And just to educate some of our listeners who may not be for me live with the credit space, China property bonds used to trade. You know, if they were trading at ninety cents of the dollar, they traded it like sub ten cents.
You know, well that they were traded over one hundred by far in many cases, and actually you know, some traded as tight as six seven percent, So you know, those are the same bonds where they are now trading probably around like six seven eight cents. No, yeah, exactly, And I think that what we went through, I wish we had forced anyway some regional diversication. But the other thing that the lesson learned is that you know, not all em regions will behave alike in terms of how
the government response might be. Because I'm the first who you know, would be able to die on my sword for the views that I take from a business perspective and a risk assessment. But I think one thing we didn't expect was the difficulty for enforcement of the rights that you see on paper. And that's something that I still wish to that we had, you know, more of a regulatory overhaul. I mean, for example, we were here
post crisis when we saw japan reform. We had JL We've seen you know, I wasn't in it, but you know I saw people in it where it was going down to zero, right, there was zero recovery for JL, and that was seen as Japan in and that was you know, potentially quite harmful to the entire regime of the Japanese credit turnaround stories. And Japan came out with an alternative dispute resolution framework that was alongside.
The Bankruptcy Code, and I think.
That was important to have and so that we could look at restructuring turnaround stories. I think China today, the struggle we all have and we wish that China HYOA would come back, is that you don't have a framework that you can count on to actually think about your enforceability, recovery, do proper risk analysis. And if you can't do analysis, you can't hold onto something. Then that's where you know, it's been difficul got for us to kind of return to.
It's great having you one because a lot of the press and attention is focused on equity long short hedge funds, and you obviously are a long short credit hedge fund looking globally, but you you know the DNA is in Asia. Would you say Asia long short credit hedge fund business? Is that a growth business going forward? Do you see a lot of opportunities?
Wow, that's a really good question, but also loaded.
Yeah, like let's talk about your competitors.
No, I actually it's not even that I would say that our competitors are peers. We all I think would cheer each other on now if that were a growth opportunity.
Unfortunately, it's been very difficult.
Hand on heart, the truth is that even as P and L, like the fund's P and L come back or as managed well or you know, I mean in our case, I think our P and L is like relatively competitive across peers. Even if your performance is there for you to sell it as a product, it's been very difficult to raise aum being based in Hong Kong,
That's the truth. And I think there's always this kind of bias attached from so for example, you know, we used to have some money from the endowment types or pension types like from the US, right R they're not coming back, and I think there's still this overhang of potential political risk. All of that that with China, I mean with China, so just being based here, I mean, the truth is that for us, the funds are not here. We are physically here, but our funds are not here.
So it's perfectly safe and it's held by an administrator or whatever. Right so in terms of the technicality of how the fund is set up, they shouldn't worry about that. However, because it's harder for people to come here to Asia to do due diligence. For example, we still have the warning advisory for travel with Americans right, you know, I
think that's an added sort of nuance to that. And then in general, being based here, you know, having been Asia centric before and so forth, I think that our fundraising would as a whole really truly only benefit in momentum if Asia as a whole came back and the rest of Asia ex China is normal it's come back and so forth. But you know, we haven't had the huge growth explosion of market that can truly replace China
high yield. We've had a number of new issuers come in India right, for example, but unfortunately in Asia overall, besides China. Prior to that, we already had some kind of blow up stories in Indonesia, And so when you couple all of that in, I think we have more of a general confidence issue that we need to address in Asia credit and unfortunately we all get wrapped up in it, even if we are nimble and we are a long.
Short Maybe that's a good place to end it on. Thank you so much for being here. Sure, thank you very much for having me. You've been listening to Asia Centric from Bloomberg Intelligence. I'm Katie Dimitrieva on Hong Kong, and.
I'm John Lee also in Hong Kong. You can find all our episodes on Spotify, Apple Podcasts, or wherever you listen. This podcast was produced and edited by Clara Jan.
Thanks for listening.