Why It's Time to Sell High Yield

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well high yelled bonds has been an area that a lot of investors have been hating for years, and yet it has continued to deliver, with almost an eight gain last year and on pace for a three point nine increase just year to date. We're not even halfway through the year. But now we have Peter Sheer, head of macro strategy at Breen Capital, saying that it is important to start being cautious on high yields, and I want to bring

them on to get a sense of why. Peter, thank you so much for joining us. So at this time when you don't have defaults picking up materially and you don't necessarily see a recession within the next six month horizon according to most forecasts, why is now a good time to start getting barished on high yield You know?

I think there's two overriding themes. One is that spreads are very tight, So credit spreads a contracted a lot, you know, on the back of last year's rally and what we've had so far this year, and overall yields are pretty low given where treasuries are, so a lot of these indices and index based products are kind of giving you five and a half maybe six percent yields,

which is a little bit low for the risk. And then the other big factor for me really is that oil had been such a tale wind in the past year. It had been very helpful to the whole industry and story to the whole high yield portfolio. Right now, I

think oils, you know, stalled out. Peach here can we read anything into this because spreads were below four in mid two thousand seven, we know what happened then, and then there was a decline in the high yield market, and then spreads also were below in and after that what happened drop in high yield is this said harbature of things to come. I don't know that we'll see that sort of drop, but I do think it is a warning sign that the risk reward is now skewed

to the downside. People have to remember that how yield does tend to when it sells off, it tends to sell off fairly quickly and fairly aggressively. Two other little warning signs that strike me as I look at some of the high yield ets they have as much as of their portfolio is technology and communications. If you go back to right before the energy problems hit, energy sector had to become a big part of these portfolios because all these industries, they basically are based on the amount

of debt outstanding. So companies that need money tend to, you know, issue a lot of debt become big parts of these indusseries, and then they become very problematic if that sector runs into a hiccup at all. So you're talking about Sprint, for example, on the telecommunication side, and then on the technology side, I mean, dell Is is obviously the big example, and they're going to be selling

more debt to finance their l BO. So, UH, do you think that we're going to see weakness in the tech and the UH and the telecommunications areas in the near term Because this has been a big question for a lot of people because of what you're saying the concentration in the index. And I'm not sure that we will see weakness, but what I am fairly confident if we see any weakness, it will be more than you

would expect otherwise, because the technicals will take over. Anytime you get these big sectors have weakness, people are forced to reduce exposure, and everyone already owns so much of that it tends to, you know, create a clearing price much lower than you would expect. So I think that's why we're very susceptible to a larger sell off. And it is a reason too. I think I would really

look to finding good managers that you like. You know, there's a whole debate passive versus active, I think right now in the high yield space in particular, you want to find a good active manager. Are you seeing money flow more to active managers as a result or P or investors sort of ignoring the tile is showing that that perhaps an active manager uh, And frankly, in high yield I think they have outperformed UH passive pretty consistently,

particularly in hig yield bonds. Yeah, and I think that's going to be an area that how yield the active did suffer with this whole kind of wards passive I think is people take a closer look, they'll realize this is a sector where credit expertise, building the right portfolio, finding the right bonds, being able to participate in the

new issues can offer a lot of values. So I think the active you know, if we're gonna draw a line in the stand where actives can be passes, maybe it's the high yield and that message has to get out there a little bit. So with respect to you sort of barish view on high yield saying that there's more downside than upside. Right now, what's the best way to play that? Do you recommend that people try to short this debt because it's notoriously very difficult to short. Yeah,

I think it's very difficult to short. I would say probably the best way to play it right now is if you can do it by some maybe puts on some of the e t F So there's j n K and h y G, which are two very large and liquid etf that have pretty deep options more market so that would probably be the easiest way to play it. Beyond that, you know you could short, you I would not recommend shorting individual issues. I think that's just too hard.

He Is there a way for an investor to get this kind of yield without taking this kind of risk? Who That's a tricky question. I think there are some other areas people have been very successful. We've had, you know best successful looking at the closed end fund arena. I also still like leverage loans, where that's the loan equivalent of the high yeld bond market, but it's senior

secured in this floating rate. So I'm more comfortable in that space because I don't think it's going to have quite the volatility the high yeld bond market, so you give up a little bit of yield, but I think that risk reward characteristic is much more in your favorite to be in the leverage loan space rather than the bond space, right even even with author of pricing, because basically what happens when people are flooding into into the leverage loan market is that the borrowers can go back

to the investors and say, you know what, we can get this loan for a better deal, so we're gonna cut the rate that we're gonna pay you, and they're doing that at a record pace. Doesn't that sort of create a downside. Well, that's the thing, it doesn't really create a downside. I mean your income will be less. So to me though high yield, the bond side has much more upside typically than the loans, and right now

I don't see that upside for the bond market. So you're not giving up as much, right because a lot of the bonds not only do they have fairly low yields, a good portion of these industries are now yield the calls, so they're say, trading at a one eighteen dollar price and are callable at one oh eight in two years. So there's no upside in the bonds either. So that's happening through time as those bonds become callable. So I

think that differential is less. I would agree. You know, if you get a bit of a sell off, then you're gonna want to high yield bonds and avoid that repricing risk. Peter, are there investors or even professionals that have gotten into the high yield business that shouldn't be there and will be washed out when or if there's

a decline? You know, I'm not sure about that, but I do think this whole friend towards index investing doesn't work quite as well in the credit space or the fixed income space, because there really does tend to be a longer term disconnect. The companies that issue debt are the ones that become dominant in these indices over time. They tend to be not the companies that you want to own the most of. So that's the big disconnect.

So I think in the fixed income space and the credit space and some of these ets, we should see a slowdown in et F and people look to managers and look to building their own portfolios. Even Peter, this is such a tough time. Imagine that when you talk to investment managers, they say to you, you know this is this is a boring market. I mean, we just don't see a big catastrophe on the horizon, and nothing looks that great either. Are people just like angsting to

you these days? Yeah? I think the industry of the whole seems every it's frustrated, right, it's we've been churning. I guess, for lack of a better word, we go up a little bit, we go down a little bit. There's been no clear trend. What seems to work one day gets banged up by Washington the next day. It's been a very tough and frustrating market. The strategies that I believe are winning are doing well. Are people who have moved to far less liquid bond given up some

liquidity maybe into more structured debt. But the bomb there is they're making it through yield and his excess, you know, interest margin that just takes a long time to show up in the numbers. It's not like you buy a bond and stuff eight points and you know everyone's high five in each other. It's the steady grind and not making mistakes. That's what we look for you to do. Help us navigate those potential mistakes. Thanks very much, Peter Cheer,

head of macro strategy at Breen Capital. You can follow him on Twitter at t F m k T s Now, however, we want to get an update on what is going on with auto sales and how the sales have been slowing and used car resell values have been declining. How long will this continue? Jamie Butters has that for us. He's UUs autos reporter for Bloomberg News and he comes

to us from Detroit. So Jamie, you know, can we just take a look, take scope of what's happened so far, how much uh, you know, car sales have declined, and how much more car executives think that they will continue to decline. But you know, that's the that's the billion

dollar question, Lisa. You know, sales are down only about you know, one and a half percent so far this year, and they might follow by you know, out of a seventeen and a half million market by two or three hundred thousand for the year, which is all pretty manageable.

But the big, the big question, the big issue hanging out you know, two or three years down the road is is this, uh we can do a lot of people are hoping and predicting that this is a plateaus sales will say, around seventeen million, uh, near the near the all time records, uh, and just kind of scuffle

along there. But uh, some other folks are looking at and saying, this is not an industry that plateaus, this industry that booms and bus and is this really the start of a traditional cyclical contraction that would take a few million units out of the market. So that's kind of really the thing to keep watching. And Jamie, can I interest you in a fifty dollar minivan is a lovely minivan that is a really nice car. Tell people

the story of this minivan, this Chrysler Pacific. I think it's a very cool product when you get into it. But what is going on with a fifty dollar minivan? I mean, it's it's like a entertainment center on wheels. I was. I was just so amazed I got the chance to drive this car and I and I got in and I was like, wow, you know, this is this is really nice. I had heard about and I

had read about. How you know, it's so much better made than all the previous Chrysler's, which you know, are traditionally not the highest quality, really among the among the lowest quality, uh, in all the big surveys. But this is a really well made vehicle. It's got great materials. And then you get in the back seat and their twin touch screens. You can play multiple videos on them, you can play video games against each other. The third

row seats reclined. There's the the built in vacuum cleaner. I guess if you spill your hundred dollar cheerios or something. Uh. And it is just it is not at all, not at all a traditional you know, kind of family holler, it's more like a more like a luxury vehicle. It was just fantastic, But then I look and it was, you know, forty nine for fifty before taxes or license

or any of that, and it is. It just kind of blew my mind at how we really keep reaching into new levels of luxury and higher prices, because that's of course where the automakers make their money. The higher price tickets, higher price items they can sell you, the bigger the margins are well and are there people out there who have a robust demand and appetite for a fifty minivan? Well, we'll see. I mean, it's certainly worth exploring.

Right if you're a Fiat Chrysler and you invented that segment. They still have a lower end minivan, the Dodge Caravan is still on the market, and and the range of the Pacific as uh, you know, starts in the high twenties and then reaches up. So we'll see. You know, they have had they've given a lot of thought to

many vans over the years. Up at Auburn Hills, where Chrysler is based has long been based and uh, and there have been some who believe that it's really going to be the vehicle of retirement, you know, for boomers who drove them when they were uh young and had young families, that they might might be what they want in retirement. Is it's easier ingress and easier to get in and out of than than a big suv h But we'll see it's certainly it's a it's an exciting offering.

Anyone else going down the same road. We'll see, you know, we're gonna see a new minivan from Honda, I believe later this year, and we'll see how how far upscale they go. Honda is has has gotten higher prices traditionally for their Odyssey minivan than Chrysler got for the town and country that the PACIFICA replaces. Whether they try to go this far up, it'll be really interested to watch that what the high end is on the new Odyssey.

We'll go for a ride with you. Jamie Butters are US Autos reporter joining us from our Detroit bureau, and you can follow him on Twitter at mitten hawk. That's m I double t e n Hawk. Jamie Butters, thank you very much talking about fifty dollar Chrysler minivans. We want to take a moment to let you know about

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extension on the Chrome Store to try it out. Learn more at Bloomberg dot com slash lens. Well, we'd like to find out what's going on in Washington, d C. And there's no one better than Eric Watson are a congressional reporter for Bloomberg. Eric, thanks for being with us. Where do you want to begin the spending bill that gets rid of some of Donald Trump's favorite programs, or should we look internally at the White House and what's

going on between cabinet officials and White House advisors. Where do you want to go? Well, I want to talk about the spending bill that released that was released at to eighteen in the morning. This is a typical practice for Congress to drop a trillion dollars spending bill in the middle of the night when no one's looking. Uh.

This deal is a real winner for Congressional Democrats. President Trump was looking to make about eighteen billion dollars and cuts to the budget for the bill that will fund the government through September. Those cuts are not being made. He was also looking for border wall money to build the wall on the border with Mexico. That's also not

happening in this bill. Uh. Democrats were basically able to get Republican leaders to go along under the argument that if the government were to shut down, which it would on Friday evening without another spending bill, that Democrats would be would not be the ones blamed. Instead would be Trump and Republicans because they control Congress. Well, Eric, what does this particular bill that got passed say about Republican

support for President Trump's agenda? Well, I should mention, first of all, it's it's not been passed yet, it was released in the middle of the night. It's probably going to be voted on Wednesday, and it will probably be a biparson vote with Democrats and and and most Republicans going for it Altho'll be a number of fiscally conservative Republicans who won't be able to support it because it

does not cut spending. I think it shows at this point, at least on spending bills which require Democrats, Republicans don't have a sixty vote uh filibuster proof majority in the Senate. Trump doesn't have the upper hand that he might have on on tax or or healthcare, where they can use special budget procedures in order to sort of ram bills through Congress without democratic support. You know, Eric, you started off by saying that the budget was delivered at two

in the morning. What was it to eighteen? That's right, all right? So is there any possibility that the actual system, the machinery of government has broken down to the point where people just shrugged their shoulders when the federal government threatens to shut down. I think it's it is interesting the way that these things are done. You know, we have a democracy, yet bills are often rammed through before

people really have a chance to read it. I think a lot of people will be voting on this bill on Wednesday, and they'll have really very little idea of what's in it. We all hear at Bloomberg. We have very good team at Bloomberg. Government as well are combing through all the texts of this and there's a lot of hidden provisions. Uh there. There's benefits from everyone from home builders to mining companies in here, you know. But the way these things are released it does raise questions

about democracy, I have to say that well. And not only that, but also it only extends the deadline and for one, government would get shut down until September, right, I mean, we're gonna be doing this all over again in a couple of months, that's right. We are already seven months into the current fiscal year. There couldn't be any agreement. Actually it's spending Panel members tried to come up with an agreement in December, but President Trump, when he was coming in said he wanted to weigh in

in order to influence the bills. But what's really striking about it is the lack of influence that the administration has on these bills. It's very much similar to the deal that was on the table in December. One notable exception, though,

is a fifteen billion dollar increased to the Pentagon. Trump had sought a thirty billion dollar increase in Pentagon funding and he's going to get about half that well, and he will get about a billion dollars and a half for border security, but it can't use to be used for the border wall or additional ICE officials, immigration and Customs enforcement agents, right, I mean, so in other words, it's sort of he kind of got more support for some of his law enforcement push, but not really to

exactly back his initiatives. Correct, that's right. I mean Democrats, many Democrats have been on record saying they support you know, increased border security, better you know, technology along the border, upgrades to existing equipment. They do not want to be seen backing Trump's call for a quote, deportation force. So that's why they put a restriction in the in this

bill on hiring additional ICE agents. And they also do not want to fund a coast to coast border wall, which they view as an incredible waste of money, and they say that it would actually cost about seventy billion dollars if you went through and built that. I was looking at the reports about this legislation. It's over sixteen hundred pages. Correct, that's right. And that's just the text. There's also what's called explanatory statements where they explain or

have other hidden provisions. So there's just a lot of paper that was was dumped on us in the middle of the night. Okay. The reason I bring that up is because I mean, has do you believe anybody has actually read all sixteen hundred and sixty five pages. I don't think there's one person I know there's Uh. The way they do is they have teams of staff re being through but that's that's broken up into eleven different subcommittees.

So yeah, as to whether the chairman or anyone who's actually read the whole thing, I would tend to doubt it. So Eric, is the fact that the House and Senate Democrats and Republicans came to this agreement in itself representative of actually somewhat of a truce between both members of the different parties, I think so. I think it also.

You know, the Trump has for for the next budget, the one that begins in September, called for very big changes, called for fifty four billion dollars and cuts to federal agencies, and already is having places like the Environmental Protection Agency and State Department prepare for a massive reductions in the federal workforce. I think it shows that Congress has very little appetite for that, and and those who work for the federal government may rest a little bit easier tonight

that their jobs are more likely to be secure. Eric Wasson, thank you so much for joining us. Eric Watson as Congressional reporter for Bloomberg News based in Washington, d C. Talking about the one point one trillion dollar are spending bill that will likely be passed this week to stave off a government shutdown. Definitely something we will keep you up to date as we hear more details. Let's turn to a potential media deal I want to bring in

Paul Swiney. Paul, of course, is our chief director of Research. I guess us director of Research, a senior media Internet analyst for Bloomberg Intelligence. He wears a couple of different hats in that role. Great to have you, as always, Paul, Um, what is this deal or not deal going to look like? Fox?

Century Fox maybe buying or teaming up with black Stone Stephen Schwartzman's Blackstone in order to what purchased some TV stations from Tribune even more, that's right, that's right true Tribune as as a large TV station group owner, and they've been you know, rumored to be for sale. Um,

I guess it. Really over the last several weeks, Sinclair Broadcast Group, which is the largest owner of TV stations in the US, has been widely reported to be talking to them and trying to get a deal done maybe in the high thirty dollars per share range that would create an even bigger TV station group. And and just most just over the last day or so, I think Fox g maybe not so fast. Maybe we want to

take a look at these Tribune stations. And and I think they were also looking for a financial partner to come in and help them finance it and create maybe a separate, standalone broadcasting company consisting of Fox stations, which they own a lot of the big Fox affiliates in the New York, l A, Chicago, the big markets, uh, and combine that with the Tribune stations across the country. So Blackstone is the one that supposedly is talking with

twenty one century Fox to make this bid four Tribune. Um. And it sort of came as a surprise to me that Blackstone is teaming up with twenty century Fox. I mean, do they have a history of doing deals together Uh no, they don't, per se. But the private equity business um has has been a big fan of the broadcasting business

for decades, you have, believe it or not. The radio and TV business, while it's not the fastest growing, sexiest business in the world, it produces tremendous cash flow and tremendous free cash flow which then of course can support debt which drive equity returns. So we've seen TV stations, uh, you know, being swapped in and out by the private

equity sector for really thirty or forty years. And so this is another example of I think, uh, you know, prop probably you know, the Blackstone folks coming in and teaming up with obviously the great strategic partner in Century Fox to invest money in the sector. So before we get to what the potential gain would be for Century Fox, I have to ask does Tribune have a lot of debt and how much could they potentially add with this

partnership with Blackstone and Century Fox. So so the broadcasting industry in general can support very high levels of debt, you know, four or five times net debt the IBADA, which is very good if you're private equity player. Tribune does have some debt and even twenty or Century Fox has some debt and they're also Century Fox is also trying to close on a multibillion dollar acquisition of Sky in the UK, so they're trying to keep their powder

dry a little bit there. So I think twenty one Century Fox said, listen, we could go out and by Tribune. It's only about a four billion dollar transaction value, but there's a lot of debt that would be that we'd have to assume, and that would, you know, constrain us a little bit, uh in some of the other things we want to do globally. So let's bring in a

financial partner in terms of black Stone. Uh. They love the business, they understand the business, and we can then you know, we will contribute our TV stations and black Stone will contribute to cash, and that'll be a nice, well capitalized company consisting of really a lot of big Fox affiliates, uh, and some other stations around the country.

I want to understand that there's one radio station, correct w g N, that's the big station that that is currently owned by Tribune, and then there are forty three additional television stations that are also up for grabs. Other regulatory hurdles that twenty for Century Fox would have to jump over. Yes, and and and what's driving this M and A consolidation is we are, in fact getting a

lot of deregulation under the Donald Trump f CC. I was just at in Las Vegas last week at the National Association of Broadcasters conference, and the dominant discussion point was M and A and consolidation. Uh. We've already seen the FCC just in the last several weeks rollbacks some ownership restrictions on the television industry. Uh, most investors feel like we're going to get even more deregulatory moves coming

out of this FCC. If in fact we do that, could then you know, help some of these deals get done. Most notably twenty one Century Fox will need some more deregulation than than what's already been ad been announced to get this deal done. So Centric Foxes shares are down almost per cent. I'm just wondering, what's the benefit here

for for that company? UM. I think the benefit for Century Foxes there's probably a little bit of a balance sheet uh improvement proformer for this deal by bringing in Blackstone. But I think if you're any first Century Fox, you really think of yourself as a global content player with the movie studio and cable networks, and and you know those are maybe faster growing, a little bit more sexier

businesses content in the digital world. Maybe the ownership of local television affiliates around the United States isn't necessarily core to your business. It's certainly core to your Fox network in the United States, but maybe you don't need to have full ownership of those stations. So I think it's a little bit of strategic move on the part of Fox to focus more on their faster growing global businesses, including this pending deal for Sky in the UK. Uh. And then it's also a way to for them to

give them some financial flexibility with their balance sheet. Just comparing Fox to the other broadcasters, whether it's CBS or Comcast, who's in the best position right now? Well, CBS is is interesting. CBS really is a pure play US broadcasting company. They own the CBS network, they owned Showtime, UH, they

own their big affiliates. They've pretty much gotten out of a lot of their other businesses, including right now they're trying to uh emerge their radio business with Intercom, So they're really going to focus on their US broadcast and premium channel, and they've their stock has done really well over the last four or five years as Les Moonves has been able to drive higher ratings at his broadcast network and higher revenue from advertising and from retransmission fees.

Real quick, you think the sale is gonna get done with twenty century Fox and Blackstone. I don't know there's a big competitor out there that once this company and that Sinclair Broadcast Group, but I think this Fox Blackstone group is really the group to beat. Paul Sweeney, thank you so much for joining us. Really an interesting development and I'm sure there will be more consolidation to come, as Paul was saying, because some of the regulation by

the FCC has been ruling back. Paul Sweeney as US director of Research and senior Media and Internet Analyst for Bloomberg Intelligence, and he is here with us in our Bloomberg eleven three oh studio. Thanks for listening 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 abramowits one before the podcast.

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