Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crumby. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome to the show Gary Gurramoti, who covers high yield bonds at Bloomberg News in New York.
How are you, Gary, all well water anized opportunity. Thank you for having me.
Gary truly is the guru of junk bonds, so we're delighted to have her on the show and get her take on the markets. We're also very pleased to welcome back Rob Schiffman, a credit analyst with Bloomberg Intelligence in New York. We'll be coming back to Rob a bit later in the show to discuss artificial intelligence and how it's affecting credit. So do stay with us. But first, Gary Gurramoti with Bloomberg News, you're all over the junk
bond market. It's where the drama is. It's at one point four trillion dollar market that includes household names like Ford, American Airlines and Uber. Essentially, we're talking about risky companies raising debt in the bond market for a wide variety of things projects, acquisitions, refinancing, payment of dividends to shareholders. They're typically the companies, though, that run into trouble when interest rates jump or if there's a slowdown in the economy.
They have less of a cushion when the going gets tough. But despite the huge surge in rates and therefore funding costs that we've seen over the last few years, not to mention a banking crisis in March, growing recession fears, slower earnings, and a whole load of proliferating macro and geopolitical risks, junk bonds have had a great year, haven't they so. Gary, You've been covering this for a long time. We've had the pleasure of working together for many years.
What's the story. How are junk bond's doing so well against all the odds?
First, I would just say I agree with you that with all this secession fears, rate high drama, banking crisis, financial system coming to a halt, US high held has been doing pretty well. But there's a mildly disagreement in the sense there are there are there is no recession fear. They were early in the year they were talking about likely recession, possible recession, end of the year, etcetera. Etcetera. But recession fears have really gone out of the window.
Nobody's thinking of recession, not in the near term, not likely. They're talking of you know, soft landing, slow landing, slow growth, etcetera. Growth creeping near a halt, but not really a recession. And therefore Hyyel has benefited from this sort of what should I say, goldilocks, You have a stable growth sort of tugging along and no corporate corporate balancees look reasonably healthy, so I really and that explains why hyl has been
performing well. Hi Heel is not as read's sensitive as investment grade are investment grade bonds are, and therefore Hireless outperformed investment grade as well.
I definitely agree with you that markets don't seem to be pricing in any kind of recession. But in house economists Bloomberg Intelligence, they think that there will be a recession starting in the fourth quarter in the US. Maybe it's not going to be a deep recession, but you know, possibly just a mild, you know, shallow dip. But going back to the junk bond market, also surprising to me at least, is that the riskiest bonds those rated triple C.
That's the lowest credit rating. They've done really really well this year that you know, they're up, you know, double digits again. Are you surprised by that?
Not really.
Again, Triple c's are are very small, about ten to twelve percent of the total index, so it's very it's a very small percent. Even something small, they always can do a lot better than the rest of the market. Second, triple cs are more sensitive to equity volatility rather than rates volatility. Equity volatility, if you're going to just check the index, historically they have been below twenty. You know,
it's been practically very low volatility there. Equities have performed very well here today, and so triple c's are reflecting equity performance.
That's one.
Secondly, as I said, it's a very small person, here's a total index, so I see no surprise there. And Thirdly, as I just mentioned a few minutes ago, it is more great concern now than growth concerns. Actually, people are pretty much there, all the big dealers, everyone talking about soft landing, slow economy, including the FED. They don't expect a recession in the near term or an immediate future, so growth concerns not really top of the mind. Equity
markets are doing pretty well. Triple c's are very small. Person is a total market, so it naturally will outperformance to the market.
I still worry, though, because you know, triple c' is typically you know, they're the ones most likely to default on their debt when things get hard. We've seen a lot more bankruptcies this year, you know, so there is stress and as a funding costs jump, some of these companies just aren't going to be able to pay about the money. So I'm just wondering why, you know, markets just seem so blase about all this.
I know that's a very predictable sort of response or question. People wonder triple c's are junkiest of junks and therefore they should default one default traits. Even the forecasts for default traits is not really very high. Even they predict about four percent five percent, when even the egregious default rate would be about five percent end of twenty twenty four, twenty twenty week, twenty twenty five, and that's not very high by historical standards. Number one two triple cs. Not
the whole of triple c's is really bad. Triple cs are some sometimes technically triple c they are pretty reasonably good companies with high coupons, they're not necessarily going to default spike and default is not really expected. And the recent months we have seen that distressed universes also shrink. And with the economy, if the economy chugs along, you mean, you may see some default, but it's not going to
really sort of bring the market down. It won't sort of crash the triple C market altogether.
So we were kind of all wrong about worrying. I mean, there was a chicken licking and the sky was falling down earlier this year.
Right, they always say it's a very cliche thing. You know, broken clock is right twice a day. So we may turn out to be right sometime someday, but not this year. And there's plenty of time for that.
So we think that this continues this kind of performance.
I you know, I'm not in the business of forecasting or predicting, but still I would say, I see no reason why there'll be a serious derailment or disruption. Why interstates have already pequed, they're not going to raise interest rates, so that they've ruled out almost higher for longer. The markets sort of uprising it in and growth is still okay for you. Perhaps four C will perhaps be still over than three Q. And earnings still look okay, though they are much lower than what they were in the
earlier quarters. So corporate balance sheet looks pretty okay. Interest coverage may fall, but have no cause for concern. So I really don't see a major derailment in twenty twenty four, not in the fourth quarter. What happens in the first quart of twenty twenty four is again it's an open
ended question. But even there one does not see a major disruption because economy is going to chug along, and if they say any serious disruption in the economy, you know, by the end of US quarter the FED will start cutting rates, though they are not thinking that. They're saying
they will not cut rates. Markets think. Markets dually expect if there is going to be a serious disruption geopolitical disruption or major chaos, government shut down or gun or the counter doesn't pass the CR continuing resolution bill or does not pass the government budget, all this may cause some disruption, and FED intervene and try to not let things escalate. So I don't say anything happening till the
first quarter of twenty twenty four. Nothing serious, there may be some volatility, spreads widening, and even now you see spreads around four hundred. Nothing, no sign of recession there.
You're an economists. So one of my basic theories about this market, and you can tell me if it's all nonsense to you, is demand and supply that you know, there's consistent demand for yield, especially when the coupons are so high. Now double digits for stuff that you know previously not that long ago, you're getting five percent on it, so it looks really attractive. But meanwhile, the actual supply of this stuff has gone right down. I mean, this
is a very bad year for issuance. So in that sense, I think the price just gets better and these things go up.
There, you made my us you answered my question. So another important reason growth is not an important concern for the high yaled market. Equity volatility is pretty low, not really, not for any concern at all. And overall supply of new bands is very it's sort of maybe fifty percent about twenty twenty two, but that's a very low bar. It is still perhaps the lower since two thousand and eight or two thousand and nine, So supply is very thin.
Economy is pretty robust. People have a lot of cash to invest in, so more demand fuel supply basic econ one oh one.
On the supply side, though, you look at this stuff very closely, and everyone listening should should follow Gary on the terminal for her updates on the supply side, because it's essential stuff. What are you saying, what do you expect? Is there going to be a big increase next year and there's refinancing to do, right.
I don't see a big sharp jump and used a junk band supply because, as I've always telled my colleagues and friends, supply comes for three to two broad reasons. One is funding acquisitions.
Or leveraged buyouts.
That's also broadly acquisitions, and second is refinancing outstanding bards. And third perhaps is you know, capital expenditure projects, et ceteraba. That's a third refinancing and repaying debt.
So these are the two broad things.
And see in the first category of acquisitions and LBOs you find they are very far and few and fewer and far between. They don't see very large number of them because of high cost of borrowing, not easy for private equity guys to buy companies and make money. There margins are every thin, so that's not super attractive high.
Cost of borrowing.
So given that LBOs and acquisitions are fewer in number, the reason for issuing new bonds is sort of not very exciting. So refinancing people talk of, and I was just looking at refinancing numbers. This could differ from day to day, and you wort three hundred billion expected roughly about till end of twenty twenty five. If I bring a twenty twenty four is I don't think much is
really two twenty twenty four. So we're already refinancing all the outstanding bonds, pretty steady and so rEFInd and therefore I don't see a big jump and supply you may see it pretty much now it's going it's going to be about less than two hundred this time, two hundred million, maybe next year around the same, a little more couple of more LBOs, and I don't know if I'm carrying on, But you also see acquisitions and LBOs have another source
of funding. They're dependent on high bonds and now and leverage loans. Now you will see a third source of funding is jet lending of what they call private credit. So even the fewer and far between LBOs are also sort of going into the private credit world, so that again takes out of bond supply bond is.
Shoes, and again low supply means higher price.
Higher price, and better returns.
Let's just go back to the macro signals. I mean, I'm really interested in this concept of you know, the spreads being way lower than they should be if if anyone expects a recession. So presumably junk bond markets don't expect recession. But what else the signals from the market you're seeing.
I'm not seeing any recession signals. Spreads are pretty tight, people are comparing, people complaining the spreads are very tight, not enough to give. And yields are pretty decent under ten percent, and you know, even triple CS is about under fourteen percent, pretty high yield, which is making attractive for that So that even that high yields narrow spreads do not suggest that there is a recession at all.
And demand for junk bonds also high yield, I should say junk is a very sort of trivializing the bond market. I think also shows that there's a willingness for embracing risks.
Risk appetite is still pretty robust.
So although all these things don't indicate capital market open, is still open. People can still come in and borrow money for a price. So access to capital markets, willingness to embrace risk, tight spread, it's all these indicate to me that there is no sign of any immediate recession, not in the near term.
What would it take, though, to derail the rally? What are you mostly worried about in terms of your I mean, you sound quite upbeat and optimistic about this market. But what worries you about the outlook?
Sudden unexpected geopolitical tension? If this Israel Hamas conflict expands into Middle East thing, that was one thing. Oil prices it's been up and down. It's been pretty high. Now will it go? What happens and what happens to China's growth? If China really slows down, I think the fear of China's slowing down seems more exaggerated. But if China slows down, something happens in Europe that could detail market. But I still don't see a major disruption at all from any
I cannot see where can it come from? High leverage? No, leverage is still not high. It is not what it used to be in two thousand and six, seven and eight, So leverage is pretty under control. Economy is chugging along. People have the willingness to embrace risk. Federal Reserve is watching like a hawk is on the sort of watching anything untoward. They're going to introvene. There's no doubt about that, whatever they say. So given all these things, I do
not know where will the disruption come from. Unless there is an unexpected geopolitical tension, some bank failure. Nobody thought a regional bank would fail. Something that nobody is watching happens, we could see something. But otherwise I see some here and there, up and down, but no major derailment.
And even some of those things you mentioned, I mean they have resulted in better prices on junk bonds because you know, oil goes up, that's positive for high yelk. There's a lot of energy in the index. The other one is that you know, if you see problems in other parts of the world, often there's a kind of flight to the US as a kind of you know, home bias, just to just as a kind of haven.
So all these things you mentioned, the potential risks that she have, you know, and also we had a banking crisis and the market just bounced right back.
So you seem to be agreeing with me that I mean, no major disruption do you expect in the near term, As I said, something very unexpected, We can't think of. I cannot think of anything in the fourth quarter. At least you may have thin supply here and there's some volatility MisOr spread widening. Even the forecast was spread windening. Morgan Stanley was talking about fifty to seventy five basis on from end of September, which is four fifty four to seventy five, which is hardly and that is not
any sign of recession. So interest coverage is dropping, yes, but nothing to worry about yet. Refinancing is still getting done, markets are still open, so I don't know where the disruption is going to come from.
I just as a you know, a journalist who covers credit, I spend my time just worrying about bad things that could happen. But that's just me true.
As a journalist, I do want something to be writing about. But as I said, market primary market is shut down for a whole for a whole week in October. Kick off to the four quarter was not great. Because of all this fear about higher for longer and people who've been talking about one more rate hike that'll make things worse. So all these things made and the sudden this Middle East conflict, all these things made people worry as to what is going to happen.
Will there be a recession?
But then FED officials quickly sort of came out and said that we are at the peak, unlikely to raise rates, and soft landing is what they all expect. So all these things again reassured the market and their story coming back to, you know, September.
So before we talk to Rob Schiffman at Bloomberg Intelligence, tell us Gary, what else is on your radar? What else should we we've been watching for in junk bonds or higher bonds as your protocol?
No, I think the higher bonds will end the year beating. I mean triple z's will beat so they corporate fixed income, they're going to be the best.
Performing as a class.
And of course leverage loans will always beat high bonds. I think leverage loans will do well and the HILD market is going to be pretty steady and chugging along. I see nothing to worry about in the market.
And the bears will be just destroyed.
They're waiting for it to happen and they have to come and go.
Great stuff. Gary Guren Murty from Bloomberg News, thank you so much.
For joining us, and thank you for having me read.
All of gary scoops on the Bloomberg terminal and of course at Bloomberg dot Com. Pay attention to junk bonds everyone. Now, I'm delighted to welcome back to the credit Edge Rob Schiffman, who covers tech credit for Bloomberg Intelligence based in New York. How's it going, Rob?
Awesome?
Great?
So, as we all know, the big theme in markets right now is artificial intelligence. Black Rock calls it a mega force for investors, but it's not really new. Stanley Kubrick was all over it in nineteen sixty eight with his sci fi classic two thousand and one, A Space Odyssey. Great film, by the way, I watched it again on the plane recently. So we've been talking about and mostly fretting over AI for at least the last fifty five years, and the machines haven't beatn us yet. But Rob, what
does it all mean for credit? We're starting to see a bit more electronic trading of bonds. And I'm sure there's more people using chat GPT to write their daily market wraps. But how's it affecting the world? Do you cover? What's the scoop?
Rob?
Sure? Well, listen. Six months ago when we had our last chat, I told you spreads were a lot wider and there was a much more concern about a recession, that technology credits had never been better positioned than they were today. And I'll tell you six months later, technology credits have never been better positioned than they were than they are today. And a big part of that is the semiconductor space, where demand is just starting to boom.
And I think that an explosion of AI has really hit the market in terms of concept and hope more so than fundamentals at this point. But I do think that there's a path for a large segment of the semiconductor space, both from the developers as well as the foundries, to take enormous advantage of a growing pie of revenues and cash flow over an extended period of time. You're
spot on, Listen, Is AI really something new? The answer is no. Computing power has always made an enormous difference in how everybody lives and works, and there's always been this massive rapid advancement of how things change over time
with technology. I do think the real benefit though, from a credit perspective, is that this is not just going to change how people live their lives, or how work is done, or how commuting is done, or how healthcare the act on the healthcare system changes, but we're really going to see I think a boom from a fundamental standpoint over the next few years that's supportive of both credit and equity.
Let's talk about some names though, that you cover in video. What is it is, how important is it to credit investors? And how are they using AI?
Yeah, so listen, why is everybody talking about in Vidia and not talking about so many other chip designers? And the real reason is that right now in Vidia has a stranglehold on the most powerful AI chips. Effectively, they're dominating seventy percent of the market. And the type of financial guidance that they've given creates a path towards numbers from revenue to ebitdata free cash flow in terms of
growth rates that really haven't been seen before. I mean back in the early two thousands and the days of the dot com boom. You know, there were hopes that at least from a valuation perspective, that you know, eyeballs would be followed by dollars, and in this case, we're starting to see the dollars lead. So Nvidia's ramp up in terms of free cash flow, for instance, over the next five years might be going from you know, two three billion of free cash flow to fifty billion a
free cash flow five years from now. This is real, This is no longer just theoretical. They're not going to be the only winners here though. In fact, I think there's winners across the board, from the cloud players, whether that's Amazon, Google, Microsoft, to hardware providers i e. Apple, to a whole host of foundaries, whether that's Taiwan, Semi or Micron, or even an Intel, which is a separate story and of itself but is likely to catch up.
And then you layer on top of that all the other designers, whether it's somebody like an NXP or an AMD or an Intel itself. There's a tremendous room for growth, because again, this is going to be an enormously growing pie. That being said, though, in video really is the only one from a fundamental standpoint, that's really starting to see that increase in demand show up on their balance sheet.
The interesting thing, though, you know, I started off by talking about how tech is so well positioned from a credit perspective. You can make an argument that it's the biggest names, the ones that I rattled off that are the highest rated, that are going to benefit the most. You know, the rich get richer in videos rated single A. They're going to have so much excess free cash. I think over the next few years the only option they're going to have for their money is to give it
back to shareholders. It becomes an Apple Microsoft style story. How much better can their credit get? Well? Listen, in theory, if they wanted to be a double A credit, they could be, but they don't need to be. They have very few borrowing needs. They're going to have again a build up in cash and listen, this is not just me saying it. They announced an increase in their buyback program by twenty five billion dollars. You know, I already mentioned I think that they can grow free cash flow
to fifty billion in the next five years. So I think that's just going to get sort of bigger and bigger. So if you own in Vidia bonds, Congratulations, you're in great shape. You're not getting a ton of yield. But it's sort of like the it's sort of a microcosma the rest of the tech space is that you're not buying Apple bonds, or Google bonds, or Microsoft bonds or in Video bonds because you think they're going to tighten dramatically.
You're buying them because you think that they're safe and there's lower volatility in bond spreads, and that in times of stress, whether that's higher recession concerns or increasing rate environment, that your bond prices are going to hold in a lot better than capable investment grade names. And that's what I think is going to happen here. So in Video becomes a great poster child for AI. They're going to benefit from a credit perspective in terms of stability, and
from an equity perspective. Obviously, with a valuation now over a trillion dollars, you know, the market is seeing those same sort of dollar signs that we are, and quite frankly, you know, buying back twenty five billion dollars a stock for a trillion dollar equity doesn't really make a difference. It's just a sign of I think, how good things are to come.
But the stock has basically gone up five times in one year. I'm old enough to remember the dot com boom and bust. I start to worry when I see that level of you know, enthusiasm and excitement over one stock. It's just too good to be true. I mean, are you not worried at all? The no risk?
Well, luckily I'm the credit guy and not the equity guy, so I don't have to really worry about multiples. I do think though, when you just think about justification about why there's been such multiple expansion, it's again, it's one is that it's it's not just a multiple, but it's a multiple expansion on top of what's likely to be a big earnings boom. And again, I you know, you have to sort of wait and see it. But this is not a promise of hope that you can monetize something.
They are already starting to monetize their chips. You know, the cost of an Nvidia AI chip is multiples of that of what would be a typical chip for standard GPU in a cloud or an on premise based server, so you have a higher margin product that's there's almost a monopoly style business here, likely for the next few years, where the demand is known and we're actually seeing it flow through financials. The Again, this this is the beginning phases, so you know there could be a lot that goes wrong.
That being said, clearly, Nvidia is the best positioned all the semiconductor names that we cover from a credits perspective. Let's say I'm wrong, and I'm wrong by fifty percent that that free cash flow is not fifty billion in five years, it's only twenty five billion. Let's say it's only fifteen billion. I would argue it could still be
a single a credit. So the real concern would be, hey, if you have growth rates that are slower and the stock loses fifty percent of the value, do they start buying a lot more stock and say, hey, let's be like Oracle, Let's load the balance sheet up with debt to buy back stock and fall a triple B. That's the type of concern you can have as a credit analyst.
I think the probability of that in the near to intermediate term the next two to three years is really very very low, and it doesn't really make me pause. I do think when you look at some of the other names. You know, if you look across the board at how equity and credit have performed this year. Credit's been pretty stable, you know, Returns are basically close to zero. Spreads are mildly tighter, you know, measured by basis points. But equities are up dramatically.
Now.
Part of that is that they were down so much last year. Part of that is that there's real hope that there's a fundamental shift. I'm actually seeing that fundamental shift. We're getting a lot of green shoots in terms of return of revenue and cash flow growth in twenty twenty four. So listen that credit markets are always a little bit less excited than the equity markets and a little less violatile.
But I think credits telling you something that even with a much higher rate environment, equity values don't have to worry about credit as one of the reasons why they're not going to go up.
What about AMD, I remember when they were junk. Now they're the stars. How do they get there? And why are they doing so well?
Yeah, you know, everyone does does a little bit different. You know, it's so funny, like in technology, you tend to talk about it as one giant group. But the reality is no company does something exactly the same as another, and even within semiconductors, it's it's meaningfully different. You know,
a MD had benefited over the years. You know five years ago that they were single V and now they're single A, and you know they were able to really build a little bit better mousetrap than Intel and steal a significant amount of market share when it comes primarily to the PC market. And listen, you know the power
that's been needed, you know forgetting about AI. Think about the last ten years about the power of gaming related PCs and and how the explosion of both gaming and at home PC use, particularly post COVID, has really exploded higher.
And I think what happens when you're a much bigger, larger company, particularly like Intel, where you're both a designer of chips and a manufacturer of chips, and you're spending a tremendous amount of capital on foundriies, sometimes you take the eye off, you know, you take your off the ball when you're the industry leader. And AMD was just able to create you know, a whole set of of chips. You can talk to, you know, Equity team about the real differences. You know, I'm just sort of the dumb
right hand side of the balancey guy. But really create a little bit of better chips that created much more demand that dramatically increase cash flow. The thing though, is that you know, you can't stake your future on the PC business. You know, PCs are extraordinarily cyclical. You know, we're seeing that now in terms of during COVID. There's such huge demand for PCs, both personal and enterprise, and we've seen a significant drop over the last twelve to
eighteen months. So even if you have a bigger piece of a smaller of a smaller pie, that that doesn't really create the future. But the the real future is going to be creating chips uh for enterprises, for servers, for storage, for cloud computing, and taking a much bigger piece of what is this cloud related enterprise business in particular.
Obviously the AI side has has the biggest upside, but that's what that's what you're starting to see, you know, names like you know NXP for instance, moving you know, from graphics and gaming more towards the server side. You're going to see a lot a lot more of that. So the market is expanding certain parts of the market are not uh a m D I think from a credit perspective is sort of in the Nvidia category. How much better can it get? Probably not that much better.
You know. What differentiates a name like that from other credits is absolute size of debt. They just don't have a lot of bonds outstanding, you know, in the scheme of investment grade, they're almost a non player. It's just, you know, you have a couple of billions of bonds outstanding.
You know, when we're comping that to names like Apple with one hundred billion of bonds or the Intels or Oracles of the world with fifty or seventy five or eighty billion, you know, they're sort of a small player. So it's really much more of an equity story that being said to me, Names like an AMD that don't have the free cash flow run rate that in Nvidia have they could benefit in theory from issuing more bonds
and being more aggressive on a financial policy. I would argue maybe the reason why they don't do that is just simply the rate environment. Right, if we were back two years ago, names like AMD probably would be issuing more bonds. But when you have a you know, five year trading close to five percent. You know, even if your spreads are only one hundred basis points. You know, over treasuries, you know, you're talking about six percent bonds
versus a few years ago. You know, these names were issuing one percent and two percent bonds.
So rule should we expect less supply from tech in tons of issuance?
Well, you know, there's less of a need. Over the last couple of years, a lot of companies have done a significant amount of refinancing. You're definitely seeing a drop in both high yield and investment grade issuance. I think that's likely to continue in the near term. The benefit of this space and having such high credit quality is
that they you know, they don't need to borrow. And I could say that about almost any name that I cover, and that's a huge, you know, differentiating factor among but you know, between this sector and others. It's why you know, on a consolidated basis, high yield and IG tech trade tighter than pretty much every other sector. It's because of that financial flexibility. In terms of upcoming maturities, they're just
not that great over the next year. You know, it's in the neighborhood of sixty five odd billion dollars, the vast majority of which is coming from the largest credits that don't really need to borrow. There there was the potential for some large scale m and a related financing broadcom buying VMware, of which thirty plus billion dollars was a bridge facility, including eight billion dollars of assumed debt,
so forty billion dollars of new debt. They could have easily went out and the deal's supposed to close at the end of the month and just borrowed all that money. The reality, though, is that it's cheaper and easier for them to borrow from banks. So they replaced their thirty thirty two billion dollar bridge with twenty eight billion dollars of bank term loans. And could they turn that out
over time? Yeah, the answer is of course. But if you can get a much lower rate and banks are willing to write you the check, why term it out now? So I think funding needs from that. That transaction, you know, which people thought could have been the biggest deal of the year, might end up being a zero this year. Then on the other side, when you're talking about super high quality, it looks like Microsoft event is going to be able to buy Activision. It's sixty nine billion dollars
of cash. I mean that's sort of like again just goes back to our theme of like who can write a sixty nine billion dollar check? And they didn't have
any bank loans, they had no bridge wrote it. Because they have one hundred plus billion dollars of cash on the books, it would have made you know, a year plus ago when they announced this, it would have made sense just to turn that out or at least a big chunk of it, add cash to the balance sheet, continue to buy back you know, fifty sixty billion dollars a stock each year, pay big dividends, and then still be on the lookout for more M and A. But again,
in this sort of rate environment, you know, do they really need to have one hundred billion on the books right now? Probably not, And they can continue to buy back just as much stock as they have without borrowing. They don't have massive maturities coming up. So when we just think about like the natural course of like what A maturities look like over the next year, they're reasonably low. What does M and A needs look like over the
next year, they're reasonably low. So so I think That's one of the things that also benefits this space is that we're seeing a meaningful decline in new issuance, and that helps improve technicals. Everyone is sort of looking for
higher quality, higher yielding names. The tech space, particularly out the curve, has historically offered that they've been pretty steep curves because there's a lot of twenty and thirty year paper out there, but there's not a lot of new paper coming and I just don't see that happening at least until early next year, and who knows what the rate environment will be like then.
So before we wrap things up, well, where is the value here? As you've noted, even though they have very high credit ratings, most tech bonds have been trading below PA. You know, Microsoft's rated triple A is one of the few names that is yet some of its bonds look like they're actually distressed when you look at the price, even though there's no danger of default. So shouldn't everyone be loading up where they can? It seems like a screaming buy. Where would you say is the value in
the market right now? Credit market?
Yeah?
You know, we just put out a note highlighting you know, ninety percent of the indexes that we cover high grade and high yield tech bonds are trading below par and the reality is the primary reason for that or rate moves. You know, if you have a triple A or double A bond trading in the fifties, that's not a it's not a statement about credit quality whatsoever. It's purely math and rates. If you look at spreads, spreads year to date both in high yield and IG are tighter. Total
returns are reasonably flat because of rates. You know, the vast majority of investment grade portfolio managers are hedging treasuries, so it's really about spread, not about dollar price. So it sort of makes you salivate, like I can buy Apple for fifty eight cents on the dollar. Wow, that seems like a home run. But the reality as your yield is still reasonably low relative to others. So what's
the play. The play is that if you are concerned about a recession, rate volatility or spread volatility, the tech space remains a place to park your money and hide and wait for a better day to invest. I do think that there's a Barbell style strategy with owning super high quality names the double as and triple a's that we've talked about as well as moving down the curve.
You know, you can pick up pretty good incremental yield for names like Broadcom or Oracle that have levered their balance sheet meaningfully over the past couple of years but really have little to no risk of falling to junk. But you can pick up fifty or seventy five basis points, depending upon what part of the curve you're looking at, and that can create excess returns that could help create
outperformance within the space. In terms of high yield, there's some you know, some higher quality names like Uber or even names like Match that generate a lot of free cash that could be rising towards investment grade. They trade tight to peers. Though, listen, you're just going to hear that over and over again from me talking about tech. The vast majority of names trade tight to peers. Doesn't mean you don't want to own them, but it certainly
means if you're going to own them. On the names whose credit quality has lower volatility or has some upside. But this is definitely a game where you're not looking to hit home runs. You're looking to hit singles. And I'll tell you you can make the hall of fame by hitting a lot of singles.
You can just get your automated investment managers to do all the work for you as well.
Eventually you'll have a computer talking a lot smarter than I will.
Thank you very much. Rob Schiffman Bloomberg Intelligence. You can read all of his great analysis on the Bloomberg Terminal. Do check it out, and Rob's Bloomberg messages all bear the legend tech is my life call me so do take him up on that. Thanks Rob, Thanks James, hope to see you back on the show soon before the machines take over. And thanks again to Gary gour Murphy from Bloomberg News. Read all of her great scoops on the terminal and at Bloomberg dot com, and please do
subscribe where you get your podcasts. We're on Apple, Google and Spotify. Give us a review, tell your friends or email me directly at jcrombieight at Bloomberg dot net. That's j C R O M B I E as in my surname and the number eight at Bloomberg dot net. Please do get in touch. I'm James CRUMBI. It's been a pleasure having you join us again next week on the credit edge