Bloomberg Audio Studios, podcasts, radio news.
Joining us now Bruce Richards, founder and CEO of Marathon Asset Management. His firm specializes in public and private credit markets, with over twenty three billion dollars in assets. It's interesting, Matt reminds me. In the morning, I will look at the ten year It's the first thing I do every morning. We're only at around four point four percent. The market
has been digesting this. We don't need to be in any state of alarm or anything like that, but a lot of people are really bell ringing about the deficit. How do you feel about the long term.
I'm not a state of alarm either. The long bond is of concern. But start with there's three things guaranteed in this country, death, taxes, and deficits. And the deficits are becoming front of mind for everybody. And when you have a big, beautiful bill which will probably add to deficit pro growth and so you know best. And the theory is that will grow out of this. Dimon even said it just a minute ago. That will grow out
of this. The truth of the matter is we're running seven percent of GDP in terms of deficits and seven percent equals about two trillion that we're adding to debt each year. And when you have a tariff policy that leads to a week er dollar and maybe some some indigestion by foreigners and owning our treasuries, and they own thirty percent of the treasuries, it becomes that much more alarming because there's ten trillion of treasuries at the current pace of what we need to roll off and refinance,
as well as the new debt that we add. Given the deficits trillion of treasuries in the next year to sell. And so while there's a big bid for the front end treasuries, when you get out longer along the curve, the thirty year treasuries, it becomes a little more difficult to digest because it has some pretty big price risk. The duration for the thirty year treasury is eighteen which means eighteen years, which means that if you raise rates base points, the price falls eighteen percent, So it's a
pretty big price decline. So you have these macro funds, hedge funds that are starting to short the long end, knowing that the Fed's not buying treasuries and knowing that foreigners will be more reluctant to buy long end treasuries, and yet you have so many treasuries for sale, and so I can't tell you. I think rates are a really tough thing to call, and we try not to make a rate call. But you know, earlier this century, pre you know GFC, you know, long bonds were up
around six percent. Could we go to six percent? Yes? And when we do, it becomes much more difficult to fund our government because of the higher interest charges. Right.
We had a great story I think yesterday that Double Line and TCW and PIMCO, they're all they're in a buyer strike. So even American companies are not buying our long dated treasuries. Some of them are even shorting long dated treasuries. Obviously, the foreigners right now feel a little bit offended by what's going on in trade, so they could stay out as well well. And as a result, maybe Treasury moves issuance to the front end of the curve. Does that solve things?
I mean, you know it does, but we'll just put pressure on the front end. And the bottom line is inflation's really well behaved at two point one percent. You think treasures should be doing better on that basis, But the FED knows that later this year, when terris really start to kick in, that we might see a higher inflation. I think the five or seven percent doomsdayers are kind of,
you know, off the reservation and making those calls. We think more like two point one percent PC number becomes a two point eight to three point two range, and that's reasonable. A one percent increase from here kind of tops. And with that the FED will want to see how inflation you know, factors through and before making a move. So the Fed's got hold for an extended period of time.
Despite what the ECB is doing and the Bank of England's doing, and the Bank of Cannon is doing, which is the ease rates, the FED will keep rates where they are now. The real issue, I think is the knock on effect when you have higher rates, whether it's the front end or the longer and when you have
higher rates, there's a crowding out. And so whether it's municipalities that have to pay a higher rate, whether it's companies that have to pay a high rate, whether it's homeowners that have to pay a higher rate and get crowded out because they can't afford to buy that home, or the real estate markets, commercial real estate that is dealing with higher cap rates, this crowding out effect that impacts markets and impacts the consumer.
I want to double down on those risks because I want to be very clear about this when we talk to big credit funds, private credit funds, the higher for longer environment has also meant higher yields. Hence that goals and opportunity. We get it, but I want to talk about the cracks because to your point, if we do see long end rates remain higher, what cracks where exactly will that pain be? Because we're also equally hearing about
people starting to want to dive into rescue financings. Are they worth it?
So it is a great time to invest, and as a lender, we're making returns that equity markets would wish they were making, and we're making these really high re rates return with really low level volatility. So we're equity markets, the public equity markets that have sixteen vol in the private credit markets that can speak for us at Marathon, our volatility and our private credit lending books are like four to six percent. It's really low relative to the
rate of return that we're making. So the risky ward is phenomenal to your point that you're making. There are some cracks. The number one crack is the consumer. And so the consumer. If you look at the high your market, you look at every sector across the high you walk and hio walk is doing well. It's yielding seven and a half percent, you know, a nice bread of three
hundred and fifty off. It's it's doing great. But there's one sector that's underperforming and negative on the year, and that's you know, consumer discretionary type, you know, retailers and that sort and and so we've been avoiding that because we've understood that the consumer would be weak in this type of marketplace and consuming less because of the higher inflation that we've traditionally seen and now higher rates. So there's one sector that's really causing me to take a
lot of pause. And software that's interesting.
We talked to garget Shaw Jory from Blackrock earlier and she loves software right especially because of the AI.
You have to love software because of AI, and when you have AI first software companies, and that's what Google's becoming, that's what Microsoft is today, that's where salesforce is moving towards. In Snowflake and Adobe and these big incombing companies that will see enterprise value even sore further from here, given AI, it's hugely positive. Do you know, Matt, that there are five thousand companies owned by private equity, five thousand that are software companies.
Thousand software software.
Companies owned by private equity, and not all those companies will make the AI adjustment, and there will be creative at destruction that comes their way, which will make them much more valuable because they'll make that adjustment. And so when you look in their data room of how they've performed, the pe sponsors, how their software firms have performed, you'll see companies which have much higher multiples because of AI.
The exact point that she was making that you were making, right, But then you'll have a bigger cohort of companies that'll have that blockbuster moment video. Think about Mark and Treason, Mark Intreason making this common fifteen years ago that AI will eat the world. And AI has done a lot for the economy, done a lot for the equity markets and wealth creation. Now his new saying is AI will eat software, and so what software companies will make it through? Now?
Think about being a lender, Sonario.
Right, this will credit blockbuster moment.
So because because our loans are capped at par, we don't have the upside of equity, but we have the downside if there's a default. Marathon manages to never have need to fall, let alone a loss, and so we're avoiding software companies. I think private credit has somewhere between twenty to thirty percent of their book in software related companies. And I think that when you make a private investment that you have no real exit and it's a five to seven year loan. You can't sit here today and
tell me that this company it's a software company. A traditional software company can make that we switch to be a AI software first company. And so I think they have all the downside with none of the upside other than getting your coup on your cash flow and par. So I think those spreads need to be a couple hundred bases points wider. I think that the decade email ratios that they're lending at, which has been very very high, because the arr because the reoccurring revenue needs to be
considerably lower. In fact, we're taking a much greater degree of position as it relates to these software companies in the private credit markets by saying time out, We're going to wait and see for a period of time how it settles in and which companies can make the transition and which companies can But I think the default rate will go from one third of the marketplace that you see in software relative to the market to three times
the default rates of the traditional marketplace. So I think it's a great place to invest as private equity and as equity, but it's not such an intelligent place to invest if you're private credit cap a par on these software companies