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That's Bloomberg This Weekend. Saturdays on Sundays, starting at 7am Eastern on February 28th. Take us part of your weekend routine on Bloomberg Television, Radio and wherever you get your podcasts. Hello, welcome to the Credit Edge, a weekly markets podcast. My name is James Crumby. I'm a senior editor at Bloomberg. Hello, my name is Arnold Kakuda, senior analyst at Bloomberg Intelligence. This week we are very pleased to welcome Dave Albrecht, president and CIO of Newfleet Asset Management. How are you Dave? I'm doing well today. Thank you guys. Okay, great, great. So, fun fact. Dave is a market veteran and he started his career before Gordon Gecko was a household name. In addition to his executive responsibilities at Newfleet, which has about 17 billion of assets on our management, he's a senior portfolio manager of several multi-sector fixing some strategies. And then in his role as CIO, Mr. Albrecht drives top-down strategy for Newfleet's investment platform. So basically, James, he knows everything, his knowledge is limitless. And I think we've saved the best for last in terms of podcasts for this year. So let me turn it back to you for the first cue. Thanks, Arnold. Great to have you on the show, Dave. So your credit has had an extraordinary year from the April tariffs shop to the recent Cockroaches outbreak. But bonds' breads are finishing up pretty much where they started. Everyone sounds so upbeat about next year. The low level of defaults is being taken as a sign of health. But is it really, Dave? Are we fooling ourselves that the trouble's gone away? Well, I think that, you know, if you look at the investment-grade space, you look at the high-yield space, you'll get leverage for an ounce. I think a lot of debt maturities have been pushed out, which is good. The faults are down due to the abundance of liquidity in the market. And I think private credit helped on that front. So defaults are something that, you know, are much lower than the historical average. You have to look at high yield. Defaults right now are running much below the historic average. I think we're at 1.82 in the historic average, somewhere in the mid-threes. If you look at bank loans, we're probably right around the historic average. And then we really don't have defaults in investment-grade. I think, you know, the last time we actually had a default in investment-grade, not a downgrade, but a default was back with Orange County, which was quite some time ago. But defaults typically don't happen in the investment-grade space. I think that we've only seen one default in the last seven years. And that was fraud. And if you went back, you know, years and years ago, and you looked at N-RON World Commodal, those were all fraud. So I think we're in a good place right now. I think, you know, if I look at three of the bombers I look at, all in yields are still very attractive, where you get insurance companies, pension funds, and institutional investors excited about fixed income when you get corporate bonds, yielding and the high forage, you get a securitized yielding and a 5% to 6% range. And then you still have discount dollar prices, which if you do a good job in credit selection, you're going to get a nice total return in addition to that yield. Now you're exactly right. Credit spreads are on the tight side without question. You know, if you look at investment-grade corporates are at 79, and, you know, 73 was a 27-year low. So we're not far from that. High yield is, you know, approaching tights, even though we do have the highest credit quality ever with the abundance of fallen angels that we've seen there. But we're at, you know, somewhere around the 270 level. And then loans are again on the tighter side. So it's, there's not a lot left. However, we think they could still grind tighter. One of the areas that actually, you know, fixed income in general had positive excess returns for last year, which was good. If you look at, you know, one of the sectors that is outside of domestic credit, you look at emerging markets, you did see significant spread tightening in emerging markets. 50 to 60 basis points with the high yield market tightening by over 135 basis points. So you did see some meaningful spread tightening to bring us to these levels, which are, I think, pretty fully valued from a, from a spread perspective. So are we looking to buy right now? Are you looking at credit less, less versus cash? Or what are your thoughts there? Yeah, I mean, you know, I'm a bond guy. So I'm always going to be fully invested in fixed income. The nice thing about multi-sector is I have 14 levers to pull. So there's always something that seems exciting out there. You know, the, some of the mid moves that we made this year were selling bank loans. Obviously, as the Fed was, you know, cutting rates and, you know, a rate cutting mode, bought agency mortgage backs, which for the first time in years, we saw the yield of corporate bonds and the yield of agency mortgage backs on top of each other. They were right around 486, 487. Typically, you're getting 53 additional basis points when you're in an investment grade corporate, but they were on top of each other. So we felt it a good entry point to start buying agency mortgage backs. And they've had a great return. Agency mortgage backs are up right around 8% this year. So a nice total return. But a lot of the dislocation in the market. And that's when we get excited when you start to see the market dislocate and something that's cheap. The dislocations are much narrower and much quicker to rebound. You know, we went back. We had the N Carrey trade where the dislocation and the leverage finance markets were about five weeks. Some of the elections in Europe and then the stamp election in France, which was another five week dislocation. And then, you know, as you guys had just mentioned earlier in the call, we had liberation day where we saw a dislocation for about eight weeks. But they're nowhere near what they used to be. I would just say we get excited about how you'll when you know spreads get the 650 700. We didn't see that we had spreads get to 450 and then a bunch of money came in and spreads tighten back up inside of 300. You have to make much more quick. You have to be much more tactical. And you got to do it quickly. I think derivatives market has allowed us to execute efficiently and then fill out those trades in the cash markets. So it's much more efficient that we can get exposure immediately. And again, when there's short lived, when there's so much cash on the sidelines, when you have seven trillion in money market waiting for that opportunity to get involved in the markets, you got to be quick and you got to be tactical. Maybe some of the banks might be stepping a little bit more with the rate cuts. And then also, I think we saw an article in terms of Fanny Freddy, they're kind of bulking up their portfolios, perhaps kind of limiting the supply of agency and BS. Is that a sector that you're kind of really more favoring continuing to favor more into 2026? I would say that it was a great opportunity last year. They had a great return. You had that anomaly where they traded on top of corporate bonds. Now they're back to pretty much fair value. So I mean, we'd like the non agency space a little better. We think that has underperformed versus agencies. If you look at the metrics, if I look at both, I think we like the housing market in general. I think good underwriting, very strong credit. Supply is down dramatically. Good structures. Low inventory. If you go back to 2007, they were building about a million houses per year. 2009 and after was about 250,000. So the shortage of housing has been about 700,000 per year going all the way back to 09. So there's sensational demand that it really provides a nice floor for the market. One of the other reasons I think I talk about this that we I think we could we avoided a recession in the US. If you went to Europe about 80 plus percent of their mortgages are floating rate. So when rates got to 7%. You know your mortgage payment went up threefold. That's very, very painful in the US. 64% of mortgages are at 3.5% or lower. So mortgage rates go to 7%. Your life doesn't change. You're probably not selling your home. You've locked in a nice equity build up. But I think that avoided, you know, helped us avoid a recession. So I think there's a lot of metrics that are working for us. We do like the mortgage market. Think going forward from a value perspective right now. I think not agencies present a better opportunity. Going back to the credit cycle, Dave and the default cycle in particular. I mean people are telling us across the board that we're late cycle, you know, with seventh eighth innings in terms of, you know, what's going to happen. And you know there are a lot of companies that did borrow way too much when rates were near zero. And they just keep kicking the can. There's been a lot of liability management exercises. Been a lot of, you know, private credit has helped some. But are we just delaying the inevitable here or has all the problems have all the problems gone away. Well, let me is definitely a problem in the bank loan market. We're watching that very, very closely. Those that, you know, it's guys like us that lose rights to, you know, go after the collateral and it becomes a problem. So that's something you have to be very cognizant of. So our bias has been up in quality in the loan market. But we've been better sellers due to the fact that the fed's been cutting rates and libors been going down. And obviously the yield that you get is been much less going forward if you believe that right the end of the rate cut cycle which.
there's possibly one or two more cuts to come. I think the loan market becomes a good avenue of for investment. If you look at, the financing there has been refinancing and repayments. It's been almost three quarters of what's been going on, which is provides a nice fundamental backdrop. If you went back to the last time the loan market imploded, it was back in the global financial crisis when probably about 30 to 40% was retail. Now only 7% of that market is retail. The big portion of that market is CLOs, which probably are about 70% of that market, which is really much a buy and hold, as opposed to the emotional investor in the retail space. We're looking at loans. It wants the Fed stops cutting rates as an opportunity to get back in. You have a very high current yield, right around 8%. Very good technicals. You've had a 17 billion of flows into that market. We think that makes sense. A little less concerning when I look at the high yield market. The high yield market is the highest credit quality ever. You had about 284 billion of downgrades, some of the fallen angels, accidental craft hines for Twitter, Nordstroms to mention a few, which has actually improved the overall credit quality of that market. So at 270 with the faults at 182, I feel a little more comfortable, where more market-like and exposure there. And again, I think we're defensively postured. You would ask this question before. It's defensively postured and a dip buyer, but as I had mentioned, the dips are shorter, and you have to be much quicker and much more tactical. So as we see opportunity, we'll will buy in both those markets, both in the loan market and the high yield market. You have to be very, very cautious of being in late innings. I've heard that for the last three or four years, and it keeps on getting extended out. So we'll watch it closely. We're cognizant of LME risk. We're cognizant of being higher quality in the high yield market. And it's something that will take into consideration when we look to add exposure in the future. But do the problems then ultimately end up in 2027, 2028? I mean, we're going to have a good year next year, but then we'll hit the wall after that. We're starting to see some of the cracks. You talk about some of the things that we've seen. We've seen fraud with tri-color and first brands. We saw some of the bankrupt season private credit, the Zip Car Wash, and run over home partners, doing the fact that they're only priced on either a monthly or quarterly basis, and prices drop pretty quickly. That's something we have to watch very, very closely. When I look at the private capital markets, private credit, that market has grown to 1.75 trillion. It's a good-sized market about one and a quarter trillion are invested. 500 plus billion is waiting to be invested. Provided great liquidity and alternative of financing in the markets. It started out coming to week single bees that were going to default. And some of the best news that we would hear is my loan manager walk in my office. And he said, hey, that deal those trading at 8 cents a dollar, we thought was going to default. One of the BDCs took us out at $1,100 on the dollar. We're like, we'd love you guys in private credit. That's changed. Now there's such an abundance of money. It's providing liquidity at every tier. A lot of companies that we thought that needed to finance in the private credit markets were able to get financing. They got their financial house in order. Then they were able to go back and refinance into the public market set a much lower rate. So it provided a nice source of capital. And there's still plenty of liquidity. There's still 500 billion looking to be invested in that market. So I think that's helped push out the default cycle. Let's help with liquidity in the overall market. And it's something we're watching very, very closely. It starts to be a little concerning when a lot of the companies are doing pay and kind. They're not actually generating cash flow. They're actually accumulating more debt. That starts to get me worried. And a lot of dollars are invested. And it's when a lot of people are telling me how great of a market it is. I mean, the spread between public and private has compressed. It used to be about three to 400 basis points. Now it's inside of 100. So then two other things that I, when I look at private credit, you have a concentration in commercial service and software. It's about 40%. You compare that to the public leverage loan market. They're only about 20%. So they're overexposed to AI disruptions. You may have to watch that closely. And also, I'd say they're heavily skewed to lower credit ratings, B3 and triple Cs versus the public loan market. So again, I think it's provided great liquidity. It's done its job. You have to be very, very cautious. And could there be hiccups in the future? Let's see what four negative quarters of GDP do to these markets. We haven't seen that. We've seen pretty much a bull market, private credit. The bulk of it has come out in the last five years. It's been a bull market. We've had pretty positive, fundamental backdrop. We'll have to wait and see. If we do start to see a dislocation or slow down the economy, we'll take that. The consideration will go up in quality. We'll hold higher quality assets looking for an entry point. Dave, on the point you made about the difference in pricing between public and private, you're saying that it was three to 400 basis points over, let's say, for a private loan over the public equivalent. And now it's gone below 100. It's gotten much more competitive due to the fact that you've had so much cash come into the market. You still have about 400-- I'm sorry, 514 billion waiting to be invested, yes. At 100, though, does it even make sense as that compensate you for the lack of liquidity? Again, that's your choice. There is positive to it where you only have to disclose your financials to more than one or two brokers. There's things that are positive. For me, I invest in the public markets. I don't-- we don't invest in private credit. I do have private credit exposure through the BDCs. That's how we get our private exposure. Business development companies are larger liquid companies. So you sort of lack the transparency there. However, I feel very well about the large well capitalized issuers like a Blackstone, Apollo, or an Aries. That's why I can get exposure to private credit. I'm not actually buying the individual transactions. But yes, that premium has narrowed pretty dramatically. And you've gotten great performance. The faults have been limited. Performance has been good. But you've also been in a bull market. You talked about the liquidity that all the private credit alternative asset managers have provided. But what do you think will make this kind of music stop? Well, I think when you start to see some of the problems with credits, you start to see some defaults. You start to see-- when you start to see the market have cracks, that would be my thing. When you start to see the market have cracks, it's sort of the top of the market. You've had a nice run. I own it personally. I think it's made sense. Me personally, I'm taking some profits. I think it makes sense to take profits now. You've had a great run. You pretty much have haven't had many credit impairments. You've got a very strong backdrop. You look at the economy has been chugging along in the 2% to 3% range. The faults are much more manageable right now. Leverage is lower than historical averages. Earnings have been relatively strong. Those are all very good backdrops to have right now. So we're taking a hard look at that. If that starts to change, then I'd be a little more cautious. Got it. And so I guess some of these recent things that have popped up in the past few weeks, months, little cockroaches, I guess that Jamie Diamond has said, those you view as more as one-offs versus canaries in the coal mine in terms of as a collaboration. No, that's a really good question. I mean, I think Tri-Color and First Brands, when you have fraud, I mean, those are few and far between. That's something that you can't really detect. Fraud is fraud. When you have bankruptcies, that's something that you can detect. And obviously, you had to do credit work. And credit work is part of the exercise. I don't want to buy an indexed ETF without knowing what the underlying credits are, especially if we're that late in the cycle, the point you made. I want to make sure I'm doing independent credit research. I feel very good about the underlying credits. And I want to know what I own. So I would say that fundamental credit work is of utmost importance, especially as we get towards the end of the cycle. Other than private credit, which is what everyone wants to talk about, AI has taken over the discussion and the amount of money that is being borrowed to fund the build out, not just on the AI specific, but also the associated infrastructure, the power, the utilities, everything else around it. It's going to be $3 trillion of funding. A lot of that is going to hit the public markets. But what does that say to you, Dave? I mean, you've been around quite a long time. We've seen these euphoria moments about certain new things that come along and everyone's borrowing furiously to get in there. But is that really a great opportunity to think for credit investors? So I call it one of the headwinds is the leverage in the tech space. If you look at an issue in space, it was about 2% about six months ago. That's grown to 10%. You've seen the issuance of companies like Amazon Meta, I'm sorry, Meta, Oracle, Google, Netflix. And then you've seen the poster child, I'd call it, Oracle have negative ratings in fact. I think now there a mid-trip will be. We do not believe that it's realistic to believe in the near term. They're going to go to junk. But they're issuing a lot of debt. They currently have about 100 billion of index eligible bonds. We expect this to grow to somewhere in the $150 billion range over the next two to three years. If it was to fall into the high yield market at 1.5 trillion to be 10% of the high yield index, which would be scary. So we don't think that's going to happen. We think it would be reckless if they did that. I'm just making the point that it's massive issuance. I think the best way to categorize it is that you have investment-grade companies taking on debt to finance equity like risks. And I stole that from Howard Marks. That's not my two cents. But I heard Marks said that. And I think that's spot on. You want to be cognizant of what they're doing, what the investment is, and what risk that it entails. And it is these big, well capitalized,
companies, unlike the.com bubble, which were over levered week companies that were issuing debt, before they even put fiber optic cable in the ground, it came with three deals and then defaulted. These are much better capitalized companies, but it is equity like risk that you're financing with that. I'd say Oracle doesn't really want to be junk and they have said that. They want to defend their investment grade ratings, but they may not have a choice and they are trading some of their bonds of trading with double B yields at this point and their CDS has blown out. So the market is telling us something else. I'm curious as someone who could look at either, if that big capital structure, $100 billion of debt jumps into the high yield market, is that essentially more of an opportunity for you? I'd say that during the pandemic, when we saw $200,000,000 for a billion of fallen angels, that was right in our wheelhouse when you have pension funds that are insurance companies that are forced to sell because a company goes from investment grade to below investment grade and then it falls into the high yield category. He had Ford with 30-year bonds. I mean, typically you're seeing five and seven-year issues in the high yield market. Now you have 30-year bullet paper available. They become some of the best performers, accidental craft times, as I mentioned, Ford, Twitter, Nordstroms, as mentioned, a few. Those were great opportunities. Now Oracle, I've never said they're going to junk. They're a solid mid-triple B, but it's an interesting thing. They're invested, but they were looking at, we're not going to position too aggressively, but I'd just say the current sell-off has this feeling like the risks are starting to be priced in, so it may be starting to look a lot more attractive to us. It's something that we're falling very, very closely with our investment grade team. Let's move on to other AI, the more single-aid, double-aid ones that are raising a lot of debt, but also in a special SPV-type form. What's the best way to play that space through the public markets or at the company level or at these special entities? What do you think the best bank for the buck is? For us, it would be playing at the company level. That's just our forte. I would say that looking at the company is evaluating what they're doing. We haven't jumped in with both feet. We've been a little hesitant and waiting to see mode, but we have been reviewing it. We actually just did an industry review today. Something we're talking about and we're falling very closely, but haven't jumped in with both feet as of yet. Do you wonder about the rationale for long-dated debt? I mean, you talked about equity like dreams for credit risk. You're funding something for 40 years that could be obsolete in much less time given the change in technologies and the way things are rapidly evolving. Does it make sense for a credit invested by 40-year bonds from a tech company? Absolutely not. Unless you're so comfortable that it's going to be the right investment, no. It's a big risk. That's probably the biggest risk out there is investing in debt for something that may go away in three to four years with 40-year maturity. That's something we're definitely considering and it's one of the biggest risks out there. Something you have to evaluate when something seems too good to be true. There's no free lunch in the bond market. That's the way I was brought up and investing. Anything looks too good to be true. It probably is. It doesn't. Be careful. Obviously, we want to have diversification. We want to be safe. If we did it, it would be smaller investment sizes. We'd be extremely well diversified. It's something we're evaluating. Does it remind you of anything else you've seen? Was it like the dot com bubble or the mid-2000s housing expansion or anything else like that? Those were definitely things that were a little crazy. I started in 1994 managing money. That was the year of seven rating cases, the Mexican pace of devaluation and the end of the high yield, the buckle. I remember getting a call from Lipper and they told me that you were ranked number one. I said, "But I'm going to short-term bond fund that's down 1.8%. If I could you were number one out of 100? You won the Lipper award." I'm not sure if that's the objective of a short-term bond fund to be down 1.8%. I've lived through a lot of that. We had 1998, which was the long-term capital. 2002 was the telecom bubble of defaults. 2008 was the long-term capital crisis. We had obviously the downgrade of the U.S. We had some other oil concerns to China. I've been through a lot. This is a little different because you have well-capitalized large companies. But you have a lot of people jumping on the bandwagon. I want to just be cautious as we approach it. Again, we're taking everything to its consideration and we'll make a decision whether we want to allocate there or not. If you had to put, obviously, you're forecast for 2026. Would you say it's the continuation of the AI bubble or will it pop or we are not in a bubble? Do you have any thoughts on that? If I look at 2026, I think the current backdrop will persist. The tailwinds we had last year was an accommodative fed. They were cutting rates. We had a good economy. Decent consumer unemployment was low. Earnings were good. Leverage was below long-term averages. We had mentioned. We had positive flows. Really strong returns and fixed income. We talked about some of the headwinds, which tariffs on certainty, tight spreads, as you guys had mentioned. Some geopolitical uncertainty and then elevated inflation. We haven't got to the feds target in four years of 2%. Then some policy uncertainty. If I look at 2026, I think that current backdrop persists. The feds' easy monetary policy and the rates rate cuts will come to an end. I don't see a recession. Still see moderate growth. As I had mentioned before, I see coupon plus type returns as a possibility. AI is only one of the areas that we're considering for investment. Could it correct? Absolutely. Could it go on and run for a few years? Absolutely. We'll watch it very closely. If I had to look at some of the other headwinds going forward, we have midterm elections coming up. We still have geopolitical risks. We still have the Middle East. We still have Russia Ukraine, which is now going on to its fourth year. We know which is the second largest economy in the world. You have to look at what are the growth projections for China and it will continue to grow at 5%. We talked about the leverage in the tech space, which is definitely a concern. I'm not going to say it's going to blow up next year and not say you can't run for a little longer. Then, fed policy. We have to talk about fed policy. Not only what will they do or they continue to cut rates, but what's the composition of the Fed going to look like when policy terms are up in May? How will the Fed look and what will they do going forward? As you guys well mentioned, we continue to be in a tight spread environment and are we at the end of the credit cycle is a big concern. Again, diversification is very, very important. Defensive posturing, being up in quality, having the ability to buy on dips when the opportunity presents themselves and people start getting emotional about investments. That's when we typically make our most money. One of the defensive trades for this year, everyone seems to love his banks, certainly the big banks, but you also Dave, you mentioned regional banks since we have Arnold here who also covers the banks. I'm keen to get both your thoughts on those because there still seems to be too many of them and they still seem to have a lot of real estate trouble and they're exposed to the consumer which isn't doing great. Why do we like banks? I would say that in investment grade, I think the areas of focus are sort of treble b's, number one, at 75% of the investment grade marketplace is treble b's. Second, financials is another area that we focused on and it would be the regional banks, the better capitalized regional banks, like a fifth third of citizens, a Huntington bank corp, those that are better capitalized. The G said banks, they all trade cheap, they all have abundance of issuance. We started buying those when we had the Silicon Valley debacle and you got some very cheap valuations. They're still cheap. We still like capital goods, but you talked about the banking segment. One of the things we're very cognizant of is the commercial real estate exposure, especially hotel and office. A lot of those guys have 20 to 40% of their balance sheet in commercial real estate. As you had mentioned, the consumer, lowering consumers, starting to feel the bite of higher defaults and delinquencies and that's something we have to be very cautious on. But for us, it's been up the higher quality bias, better capitalized. We haven't really dug down into some of the questionable regionals. So I think our bias has been the better, better well capitalized regional banks. Maybe IG and high yield are tight, but the ferds could be just right. That's kind of going down the capital structure of the banks and in the US going down to the preferred level might not be a bad area, given the economy looks decent. With deregulation, the thing that I look at is with deregulation, you might lose some of the equity buffer that you have. The debt requirements that all these big banks have to do, that's actually going down as well. Again, big banks are big issuers, but their issuance needs are going down, so you might see that pair back a little bit. The fundamentals look solid and then potentially the technicals might be a little bit better next year. Then on top of that, you can see the difference.
you contrast that with all the tech guys, these hyper scalers issuing a lot of extra debt. And then also with M&A, I don't think we've touched on that too much today, but with M&A looking to pick up, and that's more of a non-financial thing where the risk might be, you might have some spread widening potentially with more M&A back debt. So we see the financial space, which I think trades about flat overall to the carbon index, but it used to trade about 10 tighter, right, in back in 2021. So maybe that's something, maybe spreads might widen this year, right? But on a relative basis, we view financials as perhaps a little bit cheap. If we're worried about AI and the banks are funding it, and they're also at the same time quietly trying to get this risk off their books in the forms of SRTs and they're doing CDS and bunch of other stuff. So they're clearly, they see the risk. How much does that filter through to the actual bank risk itself? I mean, that's something that we're definitely watching very, very closely. And you obviously made some great points on finance and the banks. You're exactly right. I mean, banks used to trade at a much tighter spread than the overall index. And Silicon Valley caused that to revert the other way, especially the G-Sid banks. That's when we started getting involved. And we did not only play in the debt, but we also played in some of the preferds and the hybrid preferds. We subsequently have taken profits there. We also did that in some of the utility hybrids, which got very, very cheap at the end of last year. But that's some of the errors that we focus on. But you're exactly right. They're offloading risks. They're trying to get diversified. They want to be in the AI game, but they also don't want to have all that risk on their balance sheet. So again, it's a case-by-case basis. We'll look at the underlying bank. We'll look at the fundamentals. And it comes back to independent credit research. Yeah, James. So on the AI kind of risk hedging, I think the bank to look at there is Morgan Stanley in what they're doing, kind of given-- some articles out on saying they've taken the lead on tech AI-related issue. And so if they're looking to offload risk, and I think the thing that helps them in the US, we have a great capital market system. It's great that all these guys looking at issue debt are really high-grade companies, and the investors will handle it. But I think there's still going to be a portion that the banks might need to-- it can come in the loan format, right? So that the banks might have some risk. So if they're looking to do sirties on this stuff, it's saying something, right? Where again, we might have a lot of record issuance potentially. And I corporate bond land, how much it will come there versus special vehicles. But still, some of that might end up on bank balance sheets. And for them to be looking ahead, I think it kind of tells you something that we're hearing what multiple trillions, right, of central issues. Three trillion, yeah. But on issuance generally, I have looked at net issuance being very, very low over the last few years. And that is part of the reason I think why spreads have been so tight, because there aren't enough bonds to supply all the demand for that yield bid that you talked about day earlier on. I'm wondering when we go into next year when there is expected to be a significant increase in net supply of issuance-- Morgan Sandi, not to keep naming them, but they did say that there'd be a trillion dollars in net new supply of IG debt, which we've never seen before. I think maybe had a big year in 2020, but not a big year like that for a long time. So how does the market absorb all that debt without spreads blowing out? Well, I think number one could be painful. And I think you could see spreads widen. But when I start looking at us versus some of the other areas, right now we're yielding 487 Europe is yielding 321. And age is yielding 375. We're still the best game in town. So I think we'll still be attractive. If you see spreads widen, for us, that's when we get interested. And if you start to get back to the-- right now we're at 79. If we start to get back to the 80s, 90s, up to 100 off, for me, that's something I'd look at very closely to reallocate to that sector. So I don't have a problem with spreads widen. If we see an abundance of issuance, fields go higher, and there's opportunities. And again, it will be obviously a case-by-case basis. And you don't think there's going to be a problem with demand? Do you think there'll be ample bid for all that extra new supply? I think this year I think you had net supply was actually down from last year, because a lot of it was refinancing of existing debt. I think if net new supply comes out, we'll have to wait and see, and see if there's still demand for it. But as it cheapens up, you get some decent valuations. Again, you get 5 plus percent on corporate debt. That's when pension funds and insurance companies can meet their liability payments, and they get excited about it. So I think it, again, it depends on the context of the rest of the market and what happens. But if you start to see spreads widen here, and it becomes a better investment opportunity, and you get overall yields in excess of 5%, I think that could be very interesting. Do you prefer IG or high yield? And then within that, what are some of your picks and pans within both of those segments? Yeah, I would say that IG were probably underway to what we've been historically just due to the fact that Securitized has really good value. In the IG space, if I look at some of the other things we invest in, I thought we talked about the mortgage market. That's one we had been doing agencies, and we still like the non-agency market. But as it back securities, you look at top of the capital stack from part of the curve, very solid underwriting. You know, do stuff there like franchise lease receivables. If you own a Jersey Mike's, a Duncan Downance, a Domino's Pizza, a Carl Juniors, you make a payment to the parent for using their name. They turn around and securitize that and sell it to a guy like me, very short paper that delivers it very quickly. And they take the proceeds and build more properties. Those have been an absolute home run. Right now you're getting somewhere in the upper fours for two-year paper, AA3 type ratings. We think that that's much more attractive than corporate bonds in the front end. And another one that's been good, I told you, we're a little cautious on hotel and office building. Single assets, single bar or deals in the commercial mortgage market, rule office, data centers, industrial warehouses, some trophy properties like the Vallagio, Willis, Tyler, some of the sixth avenue properties in New York City that are fully occupied. It's giving you a great return this year, 7.4% on things that are very, very attractive. We talked about that maturity wall of 110 billion coming due. I used to call it SurviveTool25. Now it's SurviveTool26, especially in the office market and the data center market where the recoveries on some of these properties, I'm looking at the United Healthcare Building out my window. They had a $120 million mortgage on that building, United Healthcare Left, and it sold for in the 20s. So you got to be very, very cautious of write downs. But being selected with single assets, single bar where it's been very, very rewarding, especially getting into some of the office properties that are in high demand. So that's been supplementing us and we've been taking some of our assets out of IG and putting them there. If we do see that dynamic where IG starts getting a lot wider and yields get a lot higher, we'll reallocate back into the IG market. High yield, I would just say that spreads have moved pretty dramatically. You're up a little over 8%, you're up about 8.1% this year. You've had a big move. Our bias there has been-- number one, you've had very good flows, supportive technicals, very good fundamentals. Maturity wall has been pushed out. Earnings are good as we had talked about before. Leverages low. When you look at long-term historical averages and we mentioned defaults being below the historical average. We have a market like exposure here, and we're a better buyer on depths. Like I said, if we see a sell-off and it's not going to get to 650 or 850 off, it may be a sell-off that gets you to 400. Right now we're at 270. That's where we start adding exposure. And it's pretty much diversified. Our focus there is pretty much market-like-type exposure. So no one sector, we're jumping up and down about just getting a market-like exposure. On the asset back security stage, I mean, I know this is nearly a holiday show and I shouldn't be so down. But I'm worried about the just massive increase in supply we were seeing across the board in asset banks. And then the signs of stress we're seeing in some of the markets like CLOs, some of the equity checks aren't being paid. For example, do you think that there's any sign of froth at all in ABS right now? When we think there is froth, we're defensively postured and we're up in the capital stack. We're not taking a lot of risk. We're staying in AA, AAA, single-A-type paper. Friend of the curve. Where there's underwriting that is very, very solid. And we do our own analysis and we're comfortable with it. If we start to think that the market is-- there's not as much paper, not as much as you once-- then we'll express our views by moving down in the capital structure. But right now, I'd say up in the capital stack, not taking a lot of risk, getting quality exposure of deals that deliver very, very quickly. And I think we're comfortable with our exposure there. So not taking a lot of risk in that market, I'd say up in the capital stack, and still looks more attractive than short corporate bonds. So if you look around everything you get to see Dave, where's the best relative value right now that's safe for the next 12 months? That's a tough call. I think we're pretty well diversified, defensively postured. We do have exposure to leverage finance, but I'd say probably a little below our long-term averages. A little more insecure ties due to the fact that asset backs do the fact that you mentioned. A lot of issuance have gotten cheap.
the invasive move quite a bit this year, they're probably pretty fully valued. One that we didn't talk about, which I think everybody loves to talk about, and I will buy is the menu market. Munees started the year with heavy, heavy supply. You had supply overwhelmed the man, so pretty poor performance. But you had taxable equivalent yields that we haven't seen going back to the global financial crisis. You're getting 6% on high yield, you're getting 9.5%. That's insane. But if you just start to corporate, Dave, is there anything that sticks out as a screaming buy right now? I'd say in the corporate market, spreads are tight. Nothing there, screaming as a buy for us. I would say that one that we did mention is mid-stream energy. Those with contracted cash flows like gas processing and pipelines look somewhat attractive. We talked about the banks. I would just say that some of the capital good companies also look attractive, but nothing screaming there for a buy. That one spreads are at $79, and the $27 you're tights at $73. If you are long credit and you're going into next year thinking you're worried, what's the best hedge for credit exposure? I'd say securitized. That's how we're sort of hedging our book. Going into short, high quality paper, that's very, very liquid. If we see a dislocation in the corporate bond market, we can quickly turn that into liquidity and quickly move back into the investment-grade market. Great stuff, Dave Allbright, president and CIO at New Fleet Asset Management. It's been a great pleasure having you on the credit edge. Many thanks. Thank you guys. Thanks for having me. And to Arnold Kakuda with Bloomberg Intelligence. Thank you very much for joining us today. For even more analysis, read all of Arnold's great work on the Bloomberg Terminal. Bloomberg Intelligence is part of our research department with 500 analysts and strategists working across all markets. Coverage includes over 2,000 equities and credits and outlooks on more than 90 industries and 100 market indices, currencies and commodities. Please do subscribe to the credit edge wherever you get your podcasts. We're on Apple, Spotify and all other good podcast providers, including the Bloomberg Terminal at B Pod Go. Give us a review. Tell your friends or email me directly at
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