Credit Crunch: Around the World of Global Credit in 60 Minutes

Welcome to FICFocus, where Bloomberg Intelligence fixed income credit currency and commodity strategists and analysts discuss their short and long-term views on debt markets and issues. Now here's the Bloomberg Intelligence FIC research team. Welcome, ladies and gentlemen, to this episode of the Credit Crunch Podcast. This time it's a special episode, around the credit world in 60 minutes, where we go around the world of credit strategy with all our credit strategists across the globe with their views and key research that they've published. So this time, given that it is middle of the year, we will review what credit has done in the first half and the view of all our strategies for the second half. This is Mahesh Bimalingam, global head of credit strategy at Bloomberg Intelligence, your host as always. And before Vicky Koff has always I point you all to our dashboards. So BISTRT for credit strategy and then you pick your region, STRTA for Asia, STRTE for Europe, STRTN for North America. For our Middle East to your credit research, please refer to BIEM FIG and the Middle East module on that database. So welcome you all and let's kick off from the frontier credit markets. For people who are only interested in the big credit markets, I would request you to hold off. Please listen to Asia, Middle East and so on. There were some interesting things are going on. Europe and the US of course are right at the end. So with that, let's kick off. Welcome, Thim Tan, lead Asia credit strategist and our macro man, Perma Bear and I'm sure he has even more bearish views to say, especially given that credit has tightened a lot, particularly in Asia. Welcome, Thim. Good evening, good morning and good afternoon. So how has Asia credit done? Both dollar and non dollar, I guess we focus a bit more on the dollar and what do you think is your prognosis for the second half? Okay, just to give a guide, Asia dollar investment grid spreads are probably at the lowest ever seen and is tighter than the US investment grid. So it gives you an idea how much spreads are compressed and to make it even more astounding, the break even for excess returns for a second half of this year is only 11 basis points for so as long as spreads go back to where it was maybe three months ago, you have lost money for the rest of the year. So it's not a great environment for credit spread investing. On the other hand, base use continued to remain relatively high, not necessary for a long duration, but at least for the belly two to three years, the break even rates around for the you is around 2.44% to 1.23% two years to five years. So there is still some value from an interest rate you perspective, but credit spreads will be ahead when for the second half of the year. High you is definitely better due to its short duration. So break events remain very robust, meaning returns are likely to be positive even though spreads are near record lows. Within the frame of slight widening, more than enough cushion exists to help the market generally positive returns. Right. Do you think the high yield versus investment grid play has more to go in Asia? Well, as I said, investment grid is very, very tight. High yield is not nearly as tight as it was in, let's say, a few six months ago, but it's still not considered what we call wide. All right. The positive effect of high yield is because it's short duration, which means the yield, the aggregate yield over 7% provides a lot of cushion for total returns. All right. Now, this works in a normal market. However, if there's a disruption, well, high yield tends to widen a lot faster and a lot bigger. And that's where the returns possibly could turn negative. So clearly, we can see that in Asia, you're more positive, lower down the credit spectrum. How have your Asia credits done in general in terms of fundamentals? Have the head? How do you seeing any deterioration? All right. Let's, we look at the history of last five years actually credit fundamentals have actually deteriorated despite no stress going to record lows. So what's clearly driving a market? It's not fundamentals. However, for a second half of this year, we are more cautious on the fundamental front, largely because we see stagflation coming into play for many, many Asian countries. And we see policy issues that could lead to credit deterioration, basically rising interest rates domestically. And for the sovereign perspective, fiscal support is going to come in a big way. So we see sovereign debt metrics deteriorating as well. So from that fundamental perspective, definitely spreads don't look like they should tighten further. That said, supply continues to shrink. So that technical factor is keeping cap on the rates. When will spreads reactive fundamentals as a spec when defaults start coming in? Not anytime soon. I don't think second half this year we're going to see major default default cycle. But next year, we may face one of those. So it's a matter of timing, I think. Cool. No, on the $0.00, how have the $0.00 done relative to the $0.00? Well, the $0.00 ironically, the spreads have been, well, let's wait for the last six months, dims some spreads have been trading within three basis points. Nothing has changed. So the good thing is a damn stable market. The bad thing, there isn't a lot of trading opportunity per say. Markets continue to grow, issuance continue to rise. But the restarting of the five year of yuan bond futures may encourage more people to take a trading view. That means they can actually hedge the interest rate portion of their risk. And that could engage with more trading activity. And perhaps we can see spreads move more attractively or non attractively depending on where the markets are going. But overall, dim sum faces one major hurdle because inflation is rising in China. So we do not expect PBOC to be aggressively cutting rates or be aggressively lose on policy because they are very inflation focused in their sense. So if inflation does get too high, we do expect the PBOC to let raise rise a bit and that could act as a hit win for dim sum returns. Okay. Now, given that you are, he hands down the most bearish in this group. So warned our listeners about what all things can go wrong. Well, the MOU that's been signed, I think very carefully about the incentives. And obviously we are already seeing cracks being formed one week after it's been done. This is going to be continuing. Now, the question is whether after the midterms, the US will continue to align with the MOU or they will decide to tear it up. This is a very political issue. I'm not going to comment too much on it. But I do believe the risk is that we are pricing in too much good news in terms of middle East peace. And potentially we could see a reversal sometime in the next six months. Cool. And should Asia investors also be worried about currency appreciation versus the dollar? Well, at this point in time, our effect strategy is I will quote him. Those people who need all to see their currency continue to weaken or be struggling is a dollar. Those who don't like China will see continue strength. This is driven by the need to for dollars predominate to get energy. Whether if obviously if the peace does carry true, then this could materially change how the currencies market will react. But at this point, I think uncertainty is the only thing certain about this market. Cool. Many thanks Tim. And with that warning, we move on to Jason Lee, Asia credit strategist or man covers all the even more frontier markets in Asia. Including China dollars which are shrinking thanks to everything moving to the Dim Sum and non dollar China right nowadays. Yeah, he also covers India and Singapore and so on. So welcome Jason. Thank you, Mahesh. Good morning, good evening, audience. So thanks for having me right now. Yeah, China dollars. How have they done and you think supply will keep shrinking? Will that market even disappear? Well, I mean, disappearing markets really an overstatement right there, but it's definitely shrinking. We've seen in people talking on the year on year basis, issuans grow up the issuance have been down by 31 32 percent. Wow, why? So for first, you know, we are approaching for the first half, 2026 right now. So I think the total growth is just at 32.5 billion US dollars, which is a really small market right now. Yeah, and then I think, I think, you know, all, you know, was driven by all these is, you know, as Tim mentioned, right? You got, you got the theme song bonds getting more popular right now because of the lower rates versus, you know, you have elevated US Treasury yields, which is basically the base rate for issuing the dollar bonds, no matter which soft runs or, you know, country of risk of the corporate that you are on. So, you know, it's really very devastating in terms of the gross issuance. What's actually driving the gross issuance though is, you know, demand from, you know, financial institutions, right? Fundamentally, we got, you know, China has a very good trade surplus versus, you know, in terms of the international trade right there. So financial institutions, they need to recycle all these trade surplus and they demand for dollar bonds. And that perhaps is one of the reason why we still have some supply to maintain these demand side. But, you know, overall, we still think that the market is going to be shrinking for over a 2026. Yeah, I mean, I was just kidding when I said disappear because globally the world needs a China dollar still. Yeah, China dollar did to be part of the indices and keep investing and so on to get China exposure because not many of many people can buy the人民 be debt and swap it, right? Yeah, it's still the fourth, still the fourth largest market in terms of the E.M. dollars. But that is all behind a past so it's market right now behind Saudi Arabia and UAE. Correct. And I think Mexico is also about China, no? No? Yeah, exactly. Right. So with that in terms of performance, how has a chain of dollars done, you know, absolutely and also relatively? And what do you think about the second half? Yeah, I think a part of the figures that I have in my right now is the return so far for this year for China was about 1.4 to 1.5 percent. And that is still outperforming the entire E.M. A.Shua dollar-bound market, which is 1.1 percent year-to-date. But, you know, we've been keeping saying, hey, you know, since the last couple of months saying the credit spread has been too tight right now, you know, it's not going to sustain. And we continue to hold that bill. But it's just, you know, the dollar-bound particularly for the China investment grade dollar-bound spreads has been tightened to 39 basis point in June, which is another new record low level. So how low can it continue to keep tightening? You know, we really don't have an answer for that right now. But I think the big question to ask right there is, can you really believe that kind of record low credit spread is going to sustain for over the maybe 12-month period if you are going to hop onto the market right now? You are just perhaps 9 basis point, you know, you have 9 basis point bandwidth to underperform the US Treasury market. So this is something to think about whenever you want to, you know, add on duration for that part of the market. Are you seeing a lot of tech Chinese dollar issuance? Yeah, I think so. Yeah, so, you know, for the latest 15, you know, the five-year plans for China, you know, the policies has been supporting, you know, development in AI, development in advancing, you know, advanced chipmikings. And that really helps, you know, driving capital expenditures for at least listed companies in China, right? So we did an aggregation right there for the next five years. They're going to exceed $30 billion US dollars, which means all these, you know, a capital that's going to be funded by either dollar bonds or a team of bonds. So that's going to drive up the tech issuance from, you know, from the tax status going forward. It's just, you know, whether they need that dollar part or whether they need, you know, whether they don't need foreign currency to invest into that kind of capital expenditures. Cool. So that brings us to your, I think, second biggest market of coverage, or a growing part of your coverage, India dollars. So how have they done particularly related to China and related to the, you know, rest of the EM world in terms of performance? And how is it growing? Yeah, when we when we wrote our 2026 outlook a couple of months ago, we really liked this market. And the reality is it's the most outperforming market within the EMH-Chutlapal market right now by generating 2% of return year dates. This is investment. No, this is for the whole market. For the investment grade plus high yield. And the reason why we like India at the first place is because we expect a low issuance for 2026. And, you know, it goes back to the excess return, bring even concept as well. India offers wider credit spreads as well as a shorter duration profile, which means the excess return rate even for India is the widest among all the EMH-Chutlapal peers. So we really like that market in general. But I think for the second half, people gonna need to stay more cautious. Essentially, spread for India have tightened 40 basis point. That's for investment grade plus high yield since January. And the break even advantage is just disappearing right now. So you're gonna be more cautious if you get that kind of fear of missing out concept right there. Okay, what is your prognosis for India performance in the second half? I think the wider spreads versus other markets are still gonna drive the performance. You're gonna have that kind of return right there. And the short duration, I think that's around two years for the entire market average. It's gonna, you know, whether a lot of volatility, if we believe that interest rate is gonna be more volatile in the second half of 2026. So, you know, we're still like this market. I think, you know, in general, we are looking to mid to higher teens of total return for the entire 2026 for India. Well, you heard that probably one of the highest performing markets for cash, plain markets, by the way, not structured markets, which we will hear later on. So thanks, Jason. So for all our listeners to access Tim, Tim Tan and Jason Lee's research, please visit BISTRTA where you have all their valuable insights, research as well as lots of proprietary data on all the Asia dollar as well as non-dollar. Thank you, both. With that, we move on to where most of the world's attention is right now, the Middle East. Welcome, Basel Al-Wakian, our Middle East, our main GCC, fixed income strategist. He covers, of course, everything credit. If not just the sovereigns, the banks, the rail well, the quasi-sukukes versus conventionals, and also some local rates within that region. Welcome, Basel. Thanks, Mahesh. Thanks for everyone. We're joining our call today. He's been clearly leaving the dream for the last three months. So shed light on the ground situation before we get to credit. shed light on the ground situation in the Middle East right now. How are things feeling? What do you think has activity returned to what it was before and how are people thinking about it? Yeah, we'll get to credit later. Yeah, first thing that jumps out of my mind is basically where oil prices are today and how quickly they drop to pre-war levels after the announcement of the MOU and the deal. And there's been estimates that Gulf exports right now are close to two-thirds of normal levels, really suggesting maybe how much the market overpriced supply risks, I think, heading into the war. And the second factor that I think where most of the redirection has happened now is on the counter-cyclical sort of fiscal policy of the GCC sovereigns, how much they've diverted attention towards energy infrastructure, defense, and logistics. That might not necessarily play out in the second half, it's more of a medium term sort of outlook, but really those are the sort of the two key sort of prioritizations that are happening at the moment, really, on the ground, I would say. Okay, so in that sort of environment, how has credit failed from pre-war, war, or no? - You know, I'm gonna start off from an issuance perspective, maybe. I just wanna highlight some numbers. We've ended up the half, actually 15% higher in gross supply. So we closed and benched more card currency issuance in the GCC at 74.5 billion versus 65 billion last year in the first half. And that's largely been driven by sovereigns, which have really added five extra billion from last year and top to 26 billion. And we've also seen integrated oils, exploration, and pipeline really increased from seven and a half last year in the first half to around 12. Where banks and FI were largely similar. Just to speak of the resilience, we've had issuance across every country grow, from UAE to Saudi to Qatar, Kuwait, Bahrain, among every country as opposed to around a 10% increase. But the real surprise for me in the first half versus last year is the drop in the Sukukes. So we've had 19 billion in Sukuk formats issued by GCC countries this year versus 29.2 last year in the first half. So that's a drop from 45% of the total issuance to 26. And that's mainly been because the UAE has really opted to go to conventional formats. They've done only 3.4 in Sukukes in the first half versus 11.5 last year. A second quarter was really dominated by the banks. We've seen FAB and Emirates, MBD really come out with a lot of funding. And I think that speaks to the ability of governments to sort of support these banks and funding their credit growth cycles. But Saladi has broadly been the same 12 billion across in Sukuk formats. And I think we're heading into the second half as things normalize. We should expect to see more and more Sukuk formats come out to level the playing field, I think. From a returns and spreads perspective, very interestingly, I've been talking about IG spreads being very tight. They've actually come off tight levels. They're trading mildly cheap. I would say we're running at a 84 base point spread, 5.2% yield. I think initially our target here was for IG to really post closer to 4% to 7%. That was my outlook in terms of total return. I think we're tempering it down now somewhere closer to 2% to 4% carry-like projections for the IG space. And in Z-score terms, over a three-year period, we're at 0.5%. So that's the bulk of the GC credit. We know it's 87% of the credit space. But the real story has been in the non-rated space, the perpetuals. So if I look at the non-rated index, which covers 76% of bank perpetuals, that has significantly tightened and how outperformed all the sectors were at 1.6% year to date. I think the story is really about where the all-in-year levels are today, given the backdrop of rates, you're getting 6% for non-rated bank credit risk. And I think a lot of investors have really liked that. So really, that segment has outperformed, whereas the high yield and IG are close to flat returns. Obviously going forward with agreement, there has been a significant bias on the inflation side. Having hikes come into play in market pricing. But I'm more biased towards getting more of a steeper of the yield curve going forward. I expect the Fed to keep rates on hold for the rest of the year. And that has come into play. And I think where the mid to long duration, the 5 to 10 year, which has significantly underperformed, I'd say in the first half, would be a play going forward in the second half. So that's what I have my eyes on. Just in terms of country overall, country aggregate relative value, I think it's important to note this. If you look at all countries on aggregate, and I compare spread ratios over one year rolling, Oman, Egypt really stand out as being very rich. They're on the 15th percentile at the moment. And we all know Oman's story there, Egypt being a high yield, obviously recovering from the backdrop of lower oil. And then we have Kuwait sitting at the 30th percentile due to low supply in the market. Bahrain still stands as the cheapest overall, 70th percentile, relative to other GC countries. We know that Bahrain is in a peculiar situation, but I think with the Hormuz opening, that should alleviate some of the, I think, the near term risks that are there. But in terms of the bigger core markets, Saudi Arabia, UAE, and Qatar, they're still cheap, relative to the broader EM aggregate. But within those three, I think KSA has still kind of been tighter. UAE and Qatar are trading at that 70th to 80th percentile relative to KSA. So that's the broader picture. In terms of just what we see in the high yield space, I think a lot of investors were questioning real estate. That hasn't really normalized yet. We expect investors to still hold a precautionary measure on the UAE real estate developer segment. That's around 17% of our high yield index. We expect fourth quarter. I think the fourth quarter is when we can expect some of those spreads to start normalizing even further. The negative watches that we see in Qatar, as in sovereign and GRE, are expected to reverse, I think, from Fitch, and then near future. I think that's it. I've given a pretty broad measure of what really transpired in the first half. So yeah, you heard it from Basel. There's still returns to be heard. He identified pockets of value by country. Banks seem to be outperforming the sovereign. A quick question on quasi versus sovereign. Yeah, obviously. So with sovereigns widening by 15 basis points following the rally, quasi sovereign differentials are extremely tight. So usually, quasi is 10 to lag, spread, widening, and sovereign. So we're actually we're at five basis points right now, which is around the standard deviation tighter relative to three. Yeah, so we've already entered with quasi is being relatively tight. They've just gone even tighter right now due to the lag and movements. How about Sukuk versus conventional? Same issue. Same issue. I mean, we've had non-rated corporate GCC secook and IG secook all in the 20th percentile at the moment. These are the more expensive sectors in the market. So IG secook is more of a global. That's in the 20th GCC secook, as we know, is also has also been really tight. The corporate sector itself has been outperforming sovereign and quasi and that's that's relatively tight as well as the non-rated segment. And that's because of the captive demand that that product has. Absolutely. Unlike the conventional. Okay, you heard it all value to be had in GCC. Things are recovering and more to go as you heard from Buzzle. Thank you, Buzzle. All his research you can find in the Middle East module on BIEM FIG. With that, we move on to the most complicated section of our webinar to structured credit. Welcome, Rita Beckman, Chief Securitization Structured Credit Strategist. He sits in London. So it's continues our Pock Westward. Rita, so the last time we had, we were just coming back from the SASPO Calyp's. The absolute disaster that has happened in the Zeylo Pools, the downturn in loans and so on. I think there's been quite a bit of recovery in the underlying, but set more light on the pools and how has Zeylo's done? Yeah, so just picking up from where we left off last time. For those who joined us last time as well, you may remember that I discussed how you, you can put together a little bit of a back of the animal exposure calculation. And what I said at the time is, first you look at what's the exposure in the collateral pool to technology. Within technology, what's the exposure to software within software? What's the exposure to cloud services? Within that what's the exposure to SAS providers, then you make an assumption on default. So they're going to have in that segment what the lost awareness will be. And eventually decide over how many years those losses would occur. And that's the end of the story. And so that's the last time around that if you put in b-small assumptions for all of these steps, then you can come up with a fairly low loss rate. We certainly lowered and people felt at the time. And so where we now, well, the loans dropped maybe five and a half points. So as a result of this, the box ellipse. And I should just put this in context. So the chemical loans in 2025, they dropped by maybe nine points. So the sasthons did not pass much as the chemical loans. And maybe we can come back to chemicals later if we have time. And then so more recently they have regained and some, you know, maybe 30% or so. And they're now so net net, they may be down four points. And you, this recovery happened over two months, but the recovery in the first and second month were different. And then the first month of the recovery, the recovery happened not just in absolute terms, but also relative to other collateral. So that was a proper reassessment of the sasthons very risk by investors. But I think after that reassessment, investors were quite happy with their loans price. Because in the second month there was a bit more recovery. But that recovery was not really relative to other collateral. It was just that collateral in general traded up at that point. So I think where we now are is where investors feel they have sort of come to grips sort of at the first degree, at least with what the exposure might be, what the risks might be. And I suspect it will take quite a bit longer to figure out at a more granular level who exactly amongst the sasthobard is going to win as a result of the introduction of AI, who is going to lose and for whom it's actually going to end up being a wash. My sense is because AI is so new and it's not something I've seen with it before. It will take quite a while to figure out exactly where everything will shake out in the end. But at this for now, as a first assessment, I think investors are fairly happy with where things are. And so long as there's no new information coming in on this topic, my guess is going forward the loans will sit round about where they are now. Only new information will then force a reassessment. You have another troublesome sector joining that pack recently, isn't it? The chemical sector. Yes. So you published on that as well. So shut some like-- yeah. So the chemicals, obviously, that came again into focus this year as a result of the closure of the straight home, almost and the disruption to some areas to natural gas supplies. And of course, natural gas is one of the key basic inputs into the chemical sector. And the situation there is actually quite similar to-- in some respects, similar to the sasthobard, where you have chemicals making up the-- by far the largest part of the materials sector. So really materials almost is chemicals. And when you look at especially the European situation, yes, so last year, it sold off by nine points, very severe sell off. It didn't recover really after it sell off last year. But this year, the interesting bit that happened is that, yes, the disruption of feedstock supplies into the sector was probably a bit of a change for European chemicals. But it was more of a change for the comparison Asia. So it actually happened this as a result of the disruption. The chemical zones in Europe traded up. And the trade-up quite a bit. The issue now is, of course, if we have peace breaking out in the Middle East, if gas treatments resume in full from the Middle East, then chances are the disruptions will be cut for less. And the Asian competitors are likely to benefit more from that than the European industries. So we might actually be in a situation where the gains that we've seen on chemical zones may end up melting away as the situation in the Middle East normalizes. I like the way Rito says peace breaking out in the Middle East. So the next question would be, we had a pretty strong start in terms of CLO deal volumes, demand for loans at the beginning of the year, and then the war happened. The loan volumes have dropped, particularly in Europe. CLO volumes have been have moderated. I mean, how are you seeing it and how contrast the US? Absolutely. Correct. So there is-- you see-- actually, you see the same patterns in Europe and the US. When you look at just the aggregate numbers for Q1, it looks like it was a very strong Q1. Like a very exuberant Q1, despite all the news flow, which is a bit perplexing. But overall, just if you look at how the CLO managed straight, there were very much buying collateral pretty much across all rating categories, except for the stress credits, and pretty much across all industries. So this was very a bullish sentiment. That comes through in the data. But when you look at it more closely, the reason why we have this bullish sentiment and this negative news flow in the first quarter, side by side, is because most of the bullish sentiment was really in January. So when you look at how the collateral purchases and their purchases look over the course for month to month, you see that they were by far stronger in January, and then they weakened over the course of the quarter. And you see a very similar pattern in terms of CLO new issuance. So it is really a situation where people were very bullish in the beginning of the year. Then this has Coppallix hit. Then they released it. And now we're sort of possibly getting back to a more stable situation with the mid-least stabilizing. Having said that, if you look at spreads-- That was my next question. Yeah, so when you look at spreads, obviously, the spreads did widen over the course of the first three months, both in Europe and in the US. But more recently, we see actually by vacation. And I have to say to you know, triple-aids spreads are not very volatile in the first place. But if you look at triple-b spreads, so you see that the spreads in Europe are actually tightening again. So that's what you would think. Middle East is getting a bit better. So spreads are tightening. That's not what's happening in the US. So the spreads, the triple-bisperts in the US are actually the most recent few weeks. They have been widening still. So we end up in a situation where we now have quite a spread differential between Europe and the US with the US being substantially cheaper. And we'll see what happens next. Whether we'll end up in a situation where once we see a proper increase in flows who are distraighted for moves, whether then even the US spreads come back in as well. But currently, we've had this massive difference. This difference is also sort of reflective of a difference in demand. If you look at outstanding in the US and in Europe. So if you look at-- you can proxy those withholdings. So if you look at EU holdings, EU-seal-all holdings, they have reached a new record. So they're now at 265 billion euros, depending on how exact the measure is. They're pretty much there. So the demand has been very strong, which is why the market has continued to grow very steadily. What standings have been growing very steadily. And that's also very effective in the spreads, which have tightened sooner than at least the ahead of the US spreads. But you look at the US, the outstanding are at record level, but they're not growing at the moment. They're for the past few months have been sort of bumping around at the record level, which is about $900 billion for only for the BSL sellers. There's the demand market sellers, which you would have to add to get the total market. So you can see the difference in the intensity of demand both in the spread behavior most recently and in the holdings behavior most recently. Which I think sort of gets us to the point that the loan market still hasn't fully come back from the sell off and so on, while the CLO spreads have been pretty reason of the resilient, which brings them to a pretty good arbitrage. Correct. The point is that we have sort of seen a good arbitrage in primary. So when you look at CLO and racial spreads versus new loan spreads, most recently we have seen a very generous increase in the arbitrage. But when you look at the CLO spreads versus the second name market pricing of a debit stones, we had a very nice uptick in the arbitrage, but it has declined again, not fully gone away. That's because of the small loan rarely we had. But it's still, but secondary is still much wider than primary. It is. Yeah. So CLO is still pretty hefty arbitrage, strong demand. And we should see pretty good volumes in the second half, do you think? That's an interesting hope, because you have-- OK. So that gets into the question of the call incentive. So clearly we're going to have-- we have now an enormous amount of deals that are in the non-qual period. That's the first two years of their life, because we've had so many resets and replacement transactions last year. So we're a very active primary market on both sides of the Atlantic. So both on both sides, we have very high levels, possibly record levels of deals in the non-qual period. And that's a result of that they now all-- there's a lot of volume exiting the call period, or the non-qual period. So the question is, what happens as these deals exit the non-qual period? Do they get called or not? And that comes down to the question of the call incentive. So the call incentive very much depends on where the primary spreads to use go when the deal is for issued. And now when they're coming out of the non-core period. So when you, the rule of thumb is this, right? So if spreads now are much lower than they were two years ago, chances are you want to call because you can re-finance to at much, like, the funding cost. If the reverse is true, if current spreads are much higher than two years ago, you would not want to call at all. So you would see very few calls as a result of that, very few resets, very few replacement transactions, and very little primary market activity. At the moment, we are sort of in the middle of this. We've been neither in the one extreme, not the other extreme, in the middle, because what has happened is that as we've had business-table spreads compared to business tree, so but two years ago, the spreads kept tightening and tightening. So because they kept tightening and tightening, we have moved out of the situation where current spreads are much lower than spreads to years ago, and hence the current sentiment was high, the situation now where the call incentive is much lower. And it's very tenuous. And if, depending on exactly what's going to happen with spreads in the next few weeks or months, we are now at the point where it's difficult to argue that you should call. Some deals may call, other deals may not call, there may be other reasons to call, not to call. Some deals may start to call because they start to amortize. But of course, that's much older deals. But yes, it becomes very tenuous. So now we at the point where, secondly, market activity, so a primary market activity in the second half depends heavily on how exactly the call incentive works out. And we are pretty much on a nice edge at the moment. Yeah, I can tell in the underlying loan market, we've had like repressions completely dying down, tiny t-cup, but the repressing and referencing act today has become very small compared to prior loan issuance is very, very small in Europe, particularly. So before we move on, any quick word on your other coverage area very boring cowards bonds? I'm afraid not much is happening to cowards bonds. The key factor there remains that, just other asset-backed sectors, the volume we can bring to market is, to some extent, restricted by the availability of collateral that can back the bonds. And we're just stuck in a situation where in Europe the population is growing, housing markets are not growing, mortgage firms are not growing. So unless there's a change in the percentage of mortgages that get allocated to collateral rules, then in increase, we can't really see a lot of additional issuance of cover bonds. So what happens is that, yes, I mean, there's a lot of cover bonds coming to maturity. They're currently falling out of the index because the index excludes-- They need an index. Yeah, exactly. So cover bonds with asset money to go. So they're all coming out of the index, and they're about to all mature. And of course, they have to be replaced. And presumably, you want to replace them a little bit ahead of time, if you can. So yes, there's a lot of bonds simply coming out. I shouldn't say a lot in historical. There's a reasonable amount of bonds coming to market. But it's mostly just replacement activity. It's not net growth. OK? So to access all of readers wonderfully complicated research on the product, please visit BISTRTE and STRTN because a CLO coverage is global, and that product is on both the dashboards in the securitized modules, both data wise, as well as in research. So with that, we move on to the two big markets. So first, Europe, as we had Westwards, and normally we would be grilling Hema, but Hema supposedly come back from holiday, badly injured from an accident. So everyone, credit investors and lezners, be careful when you're on holiday. Don't get too adventurous, otherwise bruises, injuries, and so on. So as a result, I thought we'll spare Hema the grilling. And she says she's going to ask me questions. So over to you. That's right. That's right. And before we get started, a quick public service announcement, if anyone is planning to visit Nusa Penida in Bali, don't read a moeped, just hire a car. The roads are far worse than you have expected. And as Maya Shas said, speaking from personal experience, you may end up with a road accident. Now, that's not why we are here today. So as Maya said, usually he's the one asking question, but today I get the rare opportunity to be on the other side of the fence and turn the tables slightly. So Mahesh, let's start with European credit. So European credit spreads are very closely historical tight as we have seen in global credit spreads. Despite rising fiscal spending, or we haven't reached the complete piece they'll get. So what are your thoughts and views for European credit? Also, you can share some views for the second half and the outlook. And where do you see value across IG or higher from now on? OK. So it feels very odd answering questions on this webinar, but we will. So we published at the beginning of the year that returns wise in investment grade. We are looking at under two because spreads were too tight. And we weren't expecting rates to do much. And the spread upside was minimal. In high yield, we published 3.5%. And guess what? The high yield return is exactly half of where we are. First half, half. The bulk of it was spread delivered as predicted for high yield. So the high yield was bang on. I mean, despite all the swing that it has been through, the investment grade is quite interesting. In investment grade, we've done actually more than what we predicted. Like here, we were predicting about 1.71%, we've done nearly 1.2, 1.3%. First of, bulk of it rates, spreads are about 0.6%, like 0.7% is rates and carry. So the story in IG was rates and will remain rates. Given that you pointed out that spreads in investment grade are already pretty close to multi-year tights, it becomes a quasi-rate spread. It's not a complete rate spread, but it's a quasi-rate spread. The beauty of it is though, if you're a fixed income investor, compared to rates, investment grade is a better risk reward. So that will keep fund flows going as we just published today. And once again, we can see that after the war, break out in March, April, May, June, IG has fully recovered all outflows that it has had. So why? Because it stands out as the clear cut, better risk reward than rates. And I think that fact will remain so. So rates driven fund flows will be there, but I think within credit and within looking at other options, within credit, I think investment grade, I think sort of pills in terms of rate of potential. That said, if you are going to, if you're an inflation pool, in the sense like, oh, inflation is going to really drop, we're going to have as readers at peace breaks out. And we're going to have this very hunky-dory atmosphere where inflation keeps dropping. And hence, as Trump wants, wars and co-keep cutting rates and so on, and that filters into other rates markets, then you will have much more upside available in IG, wire rates, wire spreads. There isn't much to gain. Spreads are quite rich right now. And I don't think they will, I mean, the propensity to get richer is minimal. In high A, there's a lot, despite half of our returns being realized and spreads being rich, there is still room. It is, it is also close to multi-a-trades. I don't deny that. But there is still compression room available. It's still 250 plus given where bundles are. That is 5 to 5 and 1/2%. I mean, depending on which day you're looking at, obviously we pay a lot less than the Americans, because of course, it's a completely different inflation environment and completely different underlying yield environment. Obviously, when we swap, we actually pay more than dollars. So European high yield, I think, still has more juice. You got-- you asked for where is value. So to take this into the next level, looking at rating buckets between AAA to AAA C, I mean, AAA C obviously is cheap, but for a reason. So we leave that. So if you look at everything from AAA to single B, the clear cut cheap area is the single B bucket. The single B bucket is about 30% of high yield, European high yield. It hasn't got the bid that the double B bucket is getting, because everybody seems to love double base. The investment grid guy is love double base, because they all want to deepen to that area to get some spread and yield. And in high yield, everybody wants to be conservative. And hence, everybody is long-- - Thank you. - Thank you. recommend moving down in the quality but what about you know the best opportunity along the credit code do you recommend also extending duration to pick up the carry? I wouldn't because as we've just discussed credit is a rate slave and the long end on the belly are actually I wouldn't say cheap but the extreme front end is actually quite rich right so probably the the middle part of the credit curve is where you should be the long end I think comes with some health warning it once threats are not cheap so the 10 plus part of the credit curve is quite rich actually compared to the belly and also it comes with mega duration this so I wouldn't go down that route right now apart from relative value let's also look fundamentally what's happening are the corporate balance sheet you know strong enough what have we seen in the first quarter and what are your thoughts on it? So I think when she means when she says first quarter she means first quarter earnings which came in second quarter of course and I have to say that includes a bit of the value I mean what just started I have to say the fundamentals had very well both across I.G and I yield and what hasn't broken out let's say because March 31st is when the quarter ended so up until then I have to say leverage is in control coverage mildly worse junk coverage actually improved because you see the issuance net issuance has not been as strong the second quarter net issuance is much worse so corporates particularly junk operates have been very good at managing their leverage in tune with what is going on in the market so I don't expect a major deterioration in leverage or in balance sheet metrics in Q2 there will be some deterioration don't get me wrong but it'll be it'll be contained yeah and lastly the you know one area where we don't always spend enough time is the CDS market so when you look at the iTRAX curve today is it is it sending the same message as the cash market is the you know CDS curve steep as the cash curve and are there any you know divergence in the pricing or positioning that investors should be paying attention to okay now when she says we are spending much attention a much time it is in terms of in the podcast there is ample research going on every month there is a trilogy of CDS decks there is a deck on the corporate and financial CDS cash basis outliers so that's the deck one on basis deck two is on curves talks about every part of the curve on the CDS market iTRAX main corporates main financials and crossover three five and five stands and then there is a index alert which talks about global indices and all their internal derived metrics so ample CDS research coverage but we generally don't get it in the podcast so let's give it let's give it some sunlight so what is the CDS market saying part one part one is on the basis the basis is I mean it was it went you know at the wartime what happened was you know the CDS market initially obviously sold off a bit more and then you you obviously because the basis is calculated as CDS minus cash we got to positive basis but that is correcting we've got to flat mildly negative but we need a proper piece deal as once again to use the RITOS words piece breaking out if it breaks out then we'll break through the parity in basis and then you'll get to negative regime which is usually the case in a normal world we are looking at negative regime and I'm sure Sam can confirm later on in the US where it is continuously negative right in Europe it tends to be you know around parity goes positive in case of crisis but goes negative when things are normal so that's on the basis so secondly on the curve the CDS curves are I have to say very very very steep right and the peculiarly the crossover curves are even steeper so if you look at main given where main spreads are the curve steepness is actually in line with history but in crossover that is not the case in crossover for where the crossover spread is the curve is way too steep now I can even throw some numbers so on the 3s 5s crossover the current steepness implies a 20 basis points tighter spread on the 5 stands the the current crossover curve implies a 60 basis points tighter spread in fact it is out of the chart so the point is curves are very steep and I do see very limited upside even if piece breaks out because it's being priced in quite actively by CDS and lastly on in terms of derived measures the most important one is dispersion dispersion particularly in crossover is going up is not going down even though spreads are going down this person is going up so what does that mean it means there is increased differentiation in credits particularly down the spectrum so things are not moving together let's put it that way skews have corrected there is still more to correct volumes are down wall is down which you'd expect because as we're heading towards peace yeah so that's where the CDS markets are I think I should stop on that note yeah thank you and this was fun to be on the other side now back to you so that you can continue your credit before I before we move on to the US all European credit strategy research of mine and Hema on BIS TRTE with that we move on to the largest credit market the United States either I'll keep quite on this but I can't we wish Sam gear all the best in his career Sam is leaving us after wonderful work in credit strategy on to his and he's getting on the AI bandwagon so all the best in his startup efforts his work his stellar all of it is can be found on BIS TRTN that dashboard and all of our dashboards would not have reached where we are without Sam's contribution so before we kick off on the US good luck Sam appreciate it thanks for having me on yeah so from Tomorov you won't be able to I be the guy so today is the last chance for you to ask any questions so Sam how has the US market done and how did your predictions do in the first half and prognosis for the second half yeah I mean right now we're headed pretty much right to where we were expecting on spread and total return terms so first half of the year just a quick recap you know we're looking at a little over 1% in terms of total return for investment grade closer to 1.7% for the high yield space so our expectation going into the year was 2 to 4% for the investment grade side 3 to 6% for the high yield side so we're right on pace to kind of reach that lower end of the total return expectations but I mean in terms of drivers I think stories of here are pretty similar to what Mahesh was getting into what Tim was getting into spreads of now pushed towards some of the tightest levels we've seen over you know the entire history of the index for both investor grade and high yield so you know in terms of drivers investment grade the yield that we're seeing for the index just with where treasuries have been headed I think has been a big driver of demand for the asset class same idea for high yield right you're getting over 5% in investment grade just clipping that coupon you're getting over 7% in high yield so really really attractive in terms of just overall yields yeah going into the rest of the year I think our expectations again are staying the same 2 to 4% for investment grade 3 to 6 for high yield and then in terms of what our model is saying it's saying a you know piter spreads are kind of expected just based on where the macro picture is right now in the US we see things starting to potentially deteriorate slightly in certain areas maybe in the jobs market so you know we could see spreads push wider to 80 basis points for investment grade and then a little over 300 basis points on the high yield side so that's kind of where we're expecting things to be headed over the rest of the year interestingly Sam mentioned our spread models we have similar ones for Europe where we are predicting is slightly slightly wider spreads not tighter spreads so how much how we supplying coming along the Sam are you seeing if a flood from the tech sector yeah exactly that's been the big story right for the investment grade space and for the high yield space too right it's obviously not the hyper scalers in high yield but a lot of AI adjacent deals around data centers in high yield but for investment grade you know we're heading towards 1.75 trillion in total issuance for the investment grade space and I mean the vast majority of that is just driven but again by those hyper scalers and tech communications issuance I think over you know through what we've seen this year I think we've seen or out of those five largest deals have been AI related and all of those were over 20 billion dollar deals so really really significant and you're seeing demand for for those deals too it's not like there's no demand for for this debt you have strong companies issuing that debt investors are really wanting to get in on that again going back to where yields right now I think it's attractive with just where coupons are so overall issuance gross and net is going to be pretty elevated for investment grade and high yield kind of across the board okay how how has US credit quality had all through the war and through this issuance yeah in terms of credit quality I would say the story for investment grade has been you know you've seen some deterioration in certain metrics if you're looking at leverage or interest coverage those have both been steadily deteriorating over the past couple of years but it's really being propped up from what we're seeing around EBITDA margins is kind of the area where investment grade is held up so again these are strong companies I don't think leverage rising to where it has is anything of major concern and obviously the market feels the same way of spreads of state in a two basis point range over the past month so things are are looking relatively good there for high yield I would you know have some some caution there just in terms of the lower part of the spectrum we've seen deterioration kind of across the board for most metrics EBITDA margins have been relatively flat but I will add a caveat that you know the single B and triple C rated tranches is where you're actually seeing metrics deteriorating quite a bit so just with index composition double B's are over 50% of the index so they're kind of propping up the the higher level view but if you're looking you know into those lower parts of the market lower rated parts of the market things are starting to get a little dice here so that I think that's something to keep an eye on and just given again that that high issuer and so we've seen across investment grade and high yield just that's I think going to only add to some deterioration and leverage is obviously going to increase interest coverage is also going to start to deteriorate a little bit as well so that's where we're at right now yeah we forgot to mention in Europe that defaults are extremely low here for the whole year we've seen just one in high eight is it similar are you seeing very low default rates in the US too yeah yeah it's I mean again with with the spread being so tight and the market not really reacting to much defaults have been really really low historically low and if you're also looking at something like distress ratios across investment grade high yield and leverage loans also really really manageable not a whole lot of concern there so again if macro conditions start to deteriorate a little bit default start to take up I think you start to see a little bit more concern on the high yield side and start to push wider and you know depending on some of those macro scenarios too is something that we'd be keeping an eye on our interest rate strategy team Ira Jersey will often put out an interesting piece just in terms of scenario analysis in terms of where the market might be headed for their world the macro picture in the US and you know essentially waiting each specific scenario to see like okay what is your stackflation type environment look like in terms of probability what's your consensus view things like that so I would definitely suggest people take a look at that on the side too thank you Sam and all the best thank you appreciate and with and with that we we bring the curtains down on this episode as always please visit b i strt for all our research and data and click pick your region strta for ratio strte for Europe strtn for the us and bie mfig for the middle east credit thank you all and we will see you again in the next episode of credit crunch