PineBridge Sees Worsening Value in CCC, BBB Rated Bonds

is Stephen Oh. He is the global head of Credit and fixed Income and co head of Leveraged Finance for pine Bridge Investments, helping to manage more than ninety billion dollars. He is based in Los Angeles. Stephen Oh, thank you very much for being with us. Do you see more potential for distressed and leverage loans in the marketplace currently? Well, we've been in a ironment where there has been very strong fundamentals and earnings growth, therefore reasonably low default rates.

While distress will be increasing in the future, there currently isn't enough excesses to create material problems. Where we see the distress forming is not broad based but much more idiosyncratic in nature. All right, I'd love to take a look at where we're coming from in the year and where we're heading. I know you just put out your mid year outlook for fixed income, and I'm struck by the huge outperformers in the first half, at least in the US, the worst rated companies did the best. The

riskiest securities outperformed. I'm just wondering how long do you think that can continue. Well, we're we're in an environment where a combination of risk seeking, desire to stretch for yield, combined with a benign fundamental near term environment. And so in that environment, we've had really two components out performing, and one you noted, which was the highest risk component

within the leverage finance space. But the other element of that is asset classes that have less interest rate sensitivity, because so far, year to day, most of the differentials and fixed income performance has really been around interest rate risk as opposed to credit spread fears, with the exception of the emerging markets Arena. Well, Stephen, and maybe you

could just offer a little bit more detailed. Is it the desire for yield that drives the price up or is it actually the increased performance of the asset, the underlying asset the company for example, it's a combination of both that's taking place right now, and so in that environment in the short term, yes, the macro GDP growth is very good. We're in a benign environment of very

low default race within the leverage finance space. Earnings are broadly improving, so there is an element of justification for or credit improvement, particularly the area that has perhaps the highest yield, which fits investor appetype. But the way we like to think about it is this is the type of environment where portfolio should be getting more defensive because when we think about what we're getting paid in terms

of incremental units of risk. While triple cs and the highest risk component maybe outperforming right now, we don't believe that you're getting paid adequately for a large component of that arena, and we never have present insights into exactly when is going to be the top or one is going to be the bottom. But as we recognize the fact that we're not getting paid adequately for some element of risk, the prudent manner and approach is to reduce the risk in your portfolio, not to take more risk.

As we're seeing more people doing Stephen, have you witnessed either at Pine Bridge or in your colleagues and competitors of business the increase sort of build up of cash in order to anticipate that potential opportunity. We're not we haven't particularly seen that at this point. I think right now cash is being fully invested uh in most asset classes because in the market environment where performance is about generating current income and current yield, and cash acts as

a dragon that arena. But having said that, as what you get paid in cash has increased in recent months, being in cash and having the liquidity flexibility is I think a relatively prudent approach for portfolios and looking to increase cash or alternatively what we like to call cash plus substitute, so high quality generally floating rate assets where

you're getting paid a premium above cash. But feel comfortable us sitting in for now, what's the most dangerous spot in the fixed income market right now, heading into your end, the most dangerous spot our areas that we believe are tied to developed market sovereign Yolk curve and so less so on the U S side, because the US and the FED has already been engaged in a long process

of normalization. But as we look at you know, Europe as we look at Japan and as we see the shifting in their approach UH and as they hit an inflection point in their monetary policy, that really is set up to cause downward volatility for the next eighteen months.

So that's interesting, especially because other people are pinpointing, perhaps concerned that they have with either leveraged loans which have been expanding very quickly and have had much more aggressive structures, as well as on the investment grade side, with triple B rated bonds with the lowest cheer of investment grade. You're saying, again, that's not where the real risk lies. It's really in sovereign rates and developed markets. Is that?

Is that what I'm hearing From a broad based standpoint, That's correct, But you actually hit upon something that's very important, because risk is not solely about asset classes, but within asset classes overall. And just as I noted the fact that we believe that we're in an environment right now, we're on the leverage loan or the HIO bond side, triple C risk is not being adequately compensated on the

investment great credit side. Triple B s are entering that territory as well, and I think The dilemma that most portfolio managers face is as they look into the future, the next six to twelve months looked fairly benign for continuing to take that risk. So it's about timing of when does one feel comfortable reducing that exposure, And it's always the ongoing issue of short term performance versus long term. Well do you believe that this is something that professionals

are selling down as a result of this condition? Uh, we're not seeing a broad base, but we are taking the approach and have always taken the approach of a contrarian mindset that it when risk appetite is extremely strong, the right approaches to become more defensive and similarly the

time to buy and reach for more risk. And there's a lot of fear in the marketplace, uh right now, And so you know, I think we're in an environment where we're starting to as an analogy, you know, we're heading into the baseball playoff push, but now is not

the time to swing for home runs. It's really more about timely singles by taking opportunist to advantage of technical driven deviations, and it's really more about shoring up your defenses right now when it looks like everything is going smoothly, Stephen, just a mountain twenty seconds. You also are favoring emerging markets, especially in Asia heading into year end. Is that correct?

We favor asset class as an area where you're getting incremental only paid for complexities, whether in the form of structure like clos or bank loans, or in geographic complexity and emerging markets overall. And so yes, we like the fundamental outlook of We think that a component of the sell off that's occurred this year is more technical driven.

But you have to be very targeted in your purse to e M and within Asia Asia, it's really more about a corporate story, not a sovereign story the e M. Steven, Oh, thank you so much for being with us. That was great. Steven though, Global head of Credit and fixed Income at pine Bridge Investments. Pine Bridge menages ninety point five billion dollars globally. Right now it is that special time of day we take a look at small and mid cap stocks. They are turning up, but not as much as the

larger cap piers. Your communists bloggard, I'm left go on the bloomberg, not at all. In fact, the rust of two thousand is actually lowered by a tenth of at the moment it was higher, just like stocks are bouncing around. What can I mean? You've got the S and P five hundred up a quarter of percents just in the last few minutes or so that the Russell has taken a leg down here. Of course, you're not talking about

much movement from yesterday's close in either direction. That said, since we're down, let's talk about the stock with the biggest decline. De Bold nick Storff. The ticker on that one is DBD, the maker of automated telemachines, has tumbled thirty three and a half percent. De Bald had an unexpected second quarter loss, cut annual forecast, and said it's asking banks to ease loan terms. You've got New Linked

Genetics ticker n l n K down twenty percent. The drug developer reported second quarter revenue the trout estimates and said it's cutting thirty percent of its staff. Also is its chief financial officer will be leaving in a few months. Biggest gain in the Russell belongs to what Constainer Store Group,

whose ticker is TCS. It's up almost the thirty nine percent fiscal first quarter results at the reds Ollers showed a narrower loss and higher revenue than analysts expected based on Bloomberg survey and Pandora Media tick her p one letter up eighteen percent. The internet radio company posts a smaller loss and higher sales for the second quarter than

analysts predicted. Thank you very much, David Wilson, Bloomberg stocks comust remember to send him an email at d Wilson at Bloomberg dot net, sign up for his daily free email newsletter, and also you'll get his chart of the day featuring Apple and its share buy backs. D Wilson, Bloomberg dot net. Return our attention now to CBS and

it's chief executive, Less Moonvest. The Los Angeles District Attorney's Offers said it would not prosecute Mr Moonvest for alleged sexual crimes because too much time has elapsed to pursue incidents from the nineteen eighties. Here to tell us about CBS and potential risks for the company's Brian Weezer. He is the senior research analyst for Pivotal Research Group. Brian, what's the outlook for CBS with Less Moonvest? Well, the question is that is it with or without even though

it is um clearly indicating he intends to stay. Um. I mean it's uh, it's hard to fathom that he can continue to do so for very long. UM. You know, you have two issues. One is that although really this is as much now a board issue as anything, uh, it is studying that the board and this day and age would not have investigated uh previously, given that reports are rumors of this were out there months ago, the board, as a sort of press reports of indicated wasn't aware

of reports for this months ago. On top of the CBS news issues that were widely reported in the way to the Charlie Rose episode, shall we say, uh, and that they didn't act suggests strongly that you have a board that was in, for lack of better word, management's pocket. Uh. That's a problem. Then when you look at what's going on with Viacom and the murder potential, where one of the concerns is that you have a board CBS who is really acting primarily in the CEO's interests, not in

shareholders interests. They're going to go to Viacom at some point. This is just delaying it. Well, but you bring up a lot of good points there I mean also the fact that the board is coming out and saying that they're hiring outside council to investigate the issue. They're doing that now after the news before it came out. Why didn't they do that, uh, you know, six months ago

or however long ago when they first found out. But Brian translate all of this and concern about the board into what a shareholder ought to be doing, or what somebody who's looking at the decline and CBS shares ought to be thinking. Is this a buying opportunity or does this indicate that there are a lot of problems that really maybe haven't even been flushed out yet. You know, A joke that uh, CBS is board has managed to

make Viacom's board look good, which is a very difficult task. Um. Unfortunately, that is the outcome here. Whereas prior to all, the CBS had a chance to kind of well, they had a fighting chance at independence, a fighting chance at persuading investors to fight as hard as possible to keep CBS independence so that it could be sold on to someone else for a higher price than what Viacom might pay. And now here we are, Viacom will be We'll have

the upperhand in any negotiation. Um, you have to assume the combination happened and not unfavorable terms to CBS. Of course, it's impossible to know what those terms will be, what the combinations, what the ratios will be for any sure exchanges or anything else like that. But it will happen, and so I wouldn't It's hard to call the buying opportunity of a hold rating on the stock. Brian. What are the jewels in the CBS business? Is it the

television network and the TV studo? Yeah, I mean, certainly they they've been in power, although it does so many questions are are are are opened up by movies if he is in fact eventually removed um, because you know, he singularly was involved in most of their businesses, I mean Simon and Schust the part that he was least involved with, and of course is probably the least important. Um. Show Time has developed in its own right, um and is doing well and you know, has relatively a significant

degree of autonomy. But of course, the flagship broadcast network is you know, the kind of where the the flywheel moves, Um for the whole business. It's it's certainly they're all access business, which is one of the more promising and issues for streaming service from you know, a traditional broadcaster UM.

Obviously that they've been successful in driving retransmission consent, blade revenues UM and recapturing economics from their local broadcast affiliates UM, but primarily because of the success it had at the broadcast network level. So you know, that's all without movies, it's it's not clear that it would be as successful. Brian Weezer, thank you so much for joining us and for your insights. Brian Weezer is senior research analyst for

Pivotal Research Group. And right now I'm looking at these shares of Viacom down about three quarters of a percent and CBS shares down about a half a percent. It's been a rocky period, though, rocky couple of days for both shares, although Viacom has come out the better of the two by far, in particular from Friday last week, when Viacom shares were up about four and a half

percent and CBS down more than six percent. What do Puerto Rican municipal bonds as well as tobacco settlements and bonds tied to a New Jersey Mega mall have in common. Here to tell us is Matt Winkler. He is columnist and for Bloomberg Opinion. It's also editor in chief emeritus of Bloomberg News. And you can follow Matt Winkler on Twitter at Matthew Underscore Winkler. Alright, Matt Winkler, what do

these three assets have in common? Uh? They depend on a booming economy and ours is just a year away from perhaps surpassing the longest expansion in our time, UM, and that was back in the nineties. And uh, there's every indication that the economy can at least match that record and keep going. And UH, the reason why these very risky, high yield investments are doing as well as they are is typically investors want the greatest yield wherever they can get them, and when times are good, which

they are right now. Uh, the so called risk on trade is very attractive, especially UM in the debt market where you have some of these issues with coupons of six plus and that is a very very attractive UM bond h to say the least, when we've had interest rates as low as they've been for ten years now. So that's what they have in common. And UH, so far so good, so far, so good. You highlight some

really important statistics here in this column. For one, UH, the sales tax bonds in Puerto Rico, which has been decimated by Hurricane Maria, has yet to fully rebuild. Those have doubled in price. UH. You talk about how junk graded municipal debt has gained more than four percent so far this year. Well, investors who went to top rated corporate debt in the US debt of the likes of

Apple and Amazon, you would have lost money. UM where where just sort of the tipping point comes where we will have to face the reality of perhaps a not yet built New Jersey mega mall that they are supposedly going to be financing and then paid back so LESA.

The dichotomy is that when you're in a normal economic cycle, like presumably the one we're in, when the Fed UH is very excited about the expansion, so excited that it has announced several times that's going to raise interest rates, all the investment grade debt behaves as you would expect it to. It retreats because higher interest re means that at some point, UH, the economy has to UH slow

down for the highest yielding investments. However, in the debt market, it goes its own way until the music stops, and it's very sudden. But it's kind of like, for example, two thousand six. Uh, if we look back now, we should have been pretty concerned, um, because it was just two years from the worst or meanest recession since the Great Depression. But in two thousand six, everybody was partying.

Highest yielding investments were sought after around the world. It was a little bit different then because we were making those investments as trip away so it was a bit of a um, uh, misleading and can and con actually to the world. But here we are today. We have very legitimate high yield investments. They are rated or not

rated at all. They're rated low and um, they're not going to follow the behavior patterns of the of what the Fed does the way conventional investment grade debt does, and investors for their part, are gonna say, look, as long as things are going well, um, getting the compound interest from the high yielding investment is a far better return total return, even if it's at a discount on the dollar. And so that's why you've had some of

these bankrupt issues. To say the least appreciate as they have, because as long as they're paying something, people want them, so then there This really raises an important question, especially as you raise the rating agency issue, the rating a rating company issue from leading up to the prior crisis.

Do investors recognize the risks that they're taking the specific issues of these different municipalities or are they investing through index funds that don't necessarily delineate or do the fundamental research that would unearth the problems and figure out what the correct compensation ought to be for investors. So, Uh, most of the performances actively managed, so it's not an algorithm. UM. And since you mentioned the context of ratings, you know,

ratings themselves have been essentially contrary indicators. UM. When rating companies downgrade in sen grade debt, particularly sovereign debt. Uh, it's been a buying opportunity and you've seen that over and over again. So the reality probably is that the investors who are buying these high risk communities or muni junk aren't really paying any attention to the credit rating. Uh,

it doesn't mean anything to them. What they're looking at is something more fundamental, which is what are these borrowers able to pay right now, Um, what is the return I likely will get for the preeseeable future? And is that reward much greater than the risk that the world's going to come to an end tomorrow? And the way they see it is the world's not going to come to an end tomorrow or the day after or the day after. Therefore, this is very attractive and it's a

very rational decision. Um. So that's the mindset. And so far, as I said, so good until it ends. Well. This is in about thirty sex and I was wondering, is it possible that things are really not as good as many have scribe because state and local pension plans they have less than three quarters of the money that they need in order to meet their promised payouts. Is it possible that things are really not good under the surface.

It's possible, Um. Bloomberg News uh just published a piece that said, uh, you know, the faults by municipal issuers is relatively low this year. I think only three I think I've mentioned so far this year. So that's another indication that in a booming economy, the big and small state and local governments have tax revenue that is more than adequate to cover their expenses. Matt Winkler, thank you

so much for being with us. Matt Winkler is a columnist for Bloomberg Opinion, also editor in chief Emeritus of Bloomberg News. Our next guest has been a long time proponent of free trade and the importance that it brings two economies and how much it has helped the American economy. Dr Adam Posen, President of the Peterson Institute for International Economics in Washington, d C. Dr Posen, I'm so glad that you could join us today. UM, I want to start with a question of who's in your camp now.

Republicans traditionally were the party of free trade. Where do we go when the populism of that party flips that narrative on its head. Thank you very much for having me on Bloomberg Markets today and to talk about this issue in in in terms of flipping. Yeah, there's there's various times in American history where the parties have had different roles on trade. There were periods where the Republicans were anti trade and the Democrats were not, or we

pro free trade. One can think of Cordell Hull, FRANKL. Delo, Roosevelt Secretary of State and Anclendela Roosevelt and um then President Truman pushing the idea that trade deals with Europe, with Japan, with the major economies were necessary for peace and security, UM as well as the economic benefits. So when you look today, however, it is hard in the

Congress to find anybody who's really pushy it. There's a handful of some older Republican senators who are standing by their principles on free trade, and there's a handful of moderate Democrats. UM. But I think that's kind of misrepresents the situation. I promised not to go on too long,

but two points. First, there are a lot of people in the Congress who may or may not be have free trade out of conviction, but it can be convinced on national security or a job safety grounds, and for whom being anti trade isn't as much of a priority

as it is safe for President Trump. And the second thing is, if you look at the polling data, and we're going to be hosting a release from the Pew Research Group on these polling in September, all the recent polling data suggests there is a growing pro trade, pro globalization feeling among younger people of all parties in the US, and so that's where we have to hope the allies

come from for everybody's good. Dr Polston, It's been written that low cost airfares in Europe have done more for the integration of Europe than all of the political moves on the part of the various countries in the European Union. Do you believe that internationalization and globalization can be stopped? I think internationalization and globalization for the world as a whole can't be stopped, but it can be halted, temporarily, reversed and limited. Um. So, getting out of the vague

into the specific, you're absolutely right, Pim. What matters in some ways, both for politics and economics is how international integration affects people's day to day lives. Do they meet people from other countries? Do they value goods and services from other countries? Do they look at those people as allies and friends? Do they interact in a business sense

and see the opportunities? And if the US pulls out and pulls back from leading and supporting an open world economy, which the US has done for seventy years, then there will be a lot more small countries and emerging markets who will get bullied either by the US or by China or by Russia, and their associations will be less. But at the same time, the economic advantages are so overwhelming that it's like, you know, trying to plug the dike,

something else will get through. And so this is why I wrote in Foreign Affairs a few months ago, as much as I dislike what the Trump administration is doing on trade, that what they're doing is probably going to be more harmful. Through other channels, Trade and the rest

of the world will continue. So Dr Posen, I want to note that you also sit on a panel of economic advice the United States Congressional Budget Office, and with that perspective and that interaction with the current administration, I'd love to get your view on how many people within the administration are proponents of free trade and UH and how conflicted it really is there or whether the message is pretty consistent UH consistently for tariffs across the board.

My sense is the message is consistent across the board. There are one or two people I know who serve in various capacities in the administration who I believe are trying to fight internally. But look, the President has chosen to make this a priority. I've said for two years when when he was the nominee, that this is a sincere conviction of his and other people have now documented he's been saying the same things on trade with great

fervor for thirty years. He hasn't. It's one of the few things he hasn't changed his mind or flip flopped on in his thirty years of interfering in public life. So you know, UM, I shouldn't say interfering intervening inublic life. Um, so I think it's not worth be it people betting in markets or journalists getting into Oh does there somebody in the White House who secretly cares deeply? This is

like the nonsense about Colin Powell and Iraq fifteen years ago. Um. In the end, the President has a priority on being anti trade, anti globalization, against US interests, and that dominates he is. The people who fit his role his view on that are the ones who advance just to push back for a second doctor post. I mean the President said that he is for fair trade. Yeah, yeah, you know, it's it's but his definition of fair trade doesn't make

any sense. Um. Fair trade is about the idea that you, the people have the choice, and uh that you don't get ridiculous cheating in the sense of substandard goods and services or huge government subsidies. There is a that of goods and services, notably in steel and aluminum, where China has huge subsidies and probably is cheating. But you know, it's actually a very small piece of the world economy.

It's worth fighting about. But you know, think of it in football terms, right, Um, there's a difference between oh my god, somebody tackled low and you call a penalty and they should suffer the penalty, versus oh my god, these guys have like destroyed the playing field. It's unsafe and taking my team off the field. Trump when he says his definition of fair trade is to claim everything is due to an uneven playing field with unsafe surf, hazardous surfaces, and that's just wrong. It's just you got

a team to play. You're playing. It's a team to plays a little dirty and you want to make sure the ref makes most of the calls and that you you you play the game and you beat him. Anyway, Just twenty seconds here a doctor pose in I want to just go back to what you said about how younger people are increasingly for free trade. Just how significant is that wave. I don't know politically, I'm frankly not a political scientist. I don't know how to assess how

influential will be. But poll after poll, especially from credible places like pube but other mainstream posters, shows that there is actually majority support for trade now if you ask the question um, and that it's increasingly correlated with age, meaning the younger you are, the more in favor you are.

And so, you know, this is one of those things where, yeah, there are certain individuals whose communities feel they were hurt by trade, and probably they were hurt by some combination of technology, trade and cultural change they didn't want to face UM. But you know that's not most of the people in the US. You've gotta leave it there. Thank you very much, Dr Adam pose And he is the president of the Peterson Institute for International Economics. Thanks for

Liz ening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio