As of 9-1-2023, you may earn a 5.5% annualized yield with 6-month T-bills of held to maturity.
But who's got time to purchase U.S. Treasuries? Doesn't that involve going to a bank?
Or navigating a government website that looks like it was designed in 1996? Turns out,
you can go to public.com, purchase treasury bills in seconds, and you may be able to earn some
of the highest yields we've seen since the year 2000. Visit public.com slash T-Bill podcast to get
started. This is a paid endorsement by public.com, fees and conditions apply, treasury accounts at
public.com or through GICO Securities Inc. Member Finra and SIPC. Not FDIC insured? No bank
guarantee. May lose value. Full disclosures can be found at www.public.com slash T-Bill podcast.
Hello, and welcome to another episode of the AdLots podcast. I'm Joe Weisenthal.
And I'm Tracy Alloway. Tracy, we just got back from California. We're at the future
proof conference. I love going to Southern California. I mean, you can't be hunting ten
BHOs pretty sweet. It was so beautiful. It was really cool. We were out on the beach.
We walked up to the pier. Watch the surfers. Perfect weather. Watch the surfers ate some
really good food and had some pretty good conversations about the state of financial markets.
Yep. And we finally got to record an episode that we've been meaning to do for a while.
We dived into not the ocean, but the credit market. I guess like the credit market
like comes up here or there in various aspects of our conversations. I guess typically when we
talk about real estate, maybe a little bit about the Fed, but the credit market is obviously
so diverse and it's such a, it's own world that like we really, it had been too long since we
like talking about, okay, what is happening in credit? Well, also, I think there was this
expectation that as interest rates went up, you were going to see lots of drama in the credit
market. And even though we've seen bankruptcies rise a little bit, we haven't really seen the big
fallout that a lot of people had been expecting. Right. And you know, look,
the way people think about the Fed is that it works by tightening credit conditions, right?
Like in theory, like that's what, like how the, it's all supposed to work. As you said,
when interest rates go up and yet we have got this rise in interest rates for sure.
We definitely see it on the mortgage side, like less housing activity, but the sort of like
broader tightening of like business credit. We certainly haven't seen much of a widening
and spreads at all. So it's a confusing time. Absolutely. So we really do have the perfect guess
to talk about this. That's right. Our guest, we spoke with Wayne Doll. He's a managing director,
portfolio manager, an investment risk officer at Oak Tree. We talk about all things credit.
What do you see? Why did rates move so hard? Why are they still like pressed up against the ceiling?
We went through a period so long where interest rates were very low and money was very easy.
And unfortunately during the period of COVID with some of the supply chain issues with,
you know, a lot of the stimulus that was put into the economy, both through the monetary channel
and the fiscal channel, that really set up kind of the perfect storm for demand to go through the
roof and supply to be diminished. And ultimately, we ended up with this big inflation push,
which if you go back to the formula from the 70s and 80s, how do you cure inflation?
You raise interest rates quickly. And I think that's the playbook that the central banks,
not only in the US, but really globally, had no choice but to follow.
What does risk actually mean to you and Oak Tree and does it differ from maybe other financial
firms definition of risk? Yeah, that is a great question. Anyone who's read our Chairman Howard
Marx's memos knows that he's very clear that risk is more than just the measure of volatility.
I mean, when typically at Oak Tree, when we talk about risk, it is our number one investment philosophy
and investment tenant to keep risk under control. Really, it's to avoid loss. And the tag line
there for Oak Tree is if you avoid the losers, the winners take care of themselves. So as credit
investors, especially in a market like this where yields are high, you want to earn that yield and
keep that yield and not give it back in the form of default. So to us, minimizing risk is largely
related to kind of minimizing loss for investors. All right, let's dive deeper into credit.
I mean, let's start like sprints are still pretty narrow. And credit is such a huge role.
So I know we have to like go from like slice to slice to slice to slice, but like big picture.
People don't seem particularly concerned about like defaults.
Yeah, I mean, look, I think one of the one of the things with credit that has changed
is largely related to the backdrop of interest rates and to quote Howard again, our Chairman,
you know, he wrote a memo in December called a sea change. And in that memo, he talked about this
change in what was a low return world to a high return world. And that has really, I think,
shifted the dynamic and the expectations around credit. And you're right, have credit spreads moved,
maybe as wide as people thought. No, but the yields have become very attractive. And ultimately,
I think if you look at credit, this is something we did a lot last year, there's kind of three ways
I would look at value in fixed income. Number one is what is the yield? Well, that was very
attractive. Number two, what is the price? If I can buy fixed income at a discount, then I can,
you know, earn more than just the coupon. And number three, what is the spread? The first two were
at very attractive levels and spreads, maybe kind of at median levels, but you know, two out of three
makes a pretty good investment. Well, how are you thinking about default risk now? Because
certainly there were a lot of people, I mean, just last year in 2022, who were warning about,
we're going to get this big recession. There's going to be a big spike in defaults. We certainly
haven't seen, you know, the bankruptcy rate has picked up a little bit, but we haven't seen
this wave of failures that a lot of people were predicting. Yeah, that is definitely true. And I
think for part of that, you have to think about what happened during COVID. And in a way, you could
almost say COVID was maybe recession part one, and we're on our way to recession part two. And the
reason why I say that is because if you think back to the end of 2019 before COVID, the Fed had
stop hiking rates in December 2018. And at that time, actually had planned to continue to hike,
Chairman Powell pivoted in early January 2019, and ultimately ended the year by cutting rates three
times. There were a lot of the similar signs of slow down in, in ISM data, in industrial production
data, a lot of your typical signs of a recession. So in a way, COVID potentially just accelerated us
into a recession that was maybe on its way already. But what it also did is brought forth a number
of defaults. You had, you know, default rates in the high yield bond market, the broadly syndicated
loan market anywhere from kind of four to six percent. And in a way, that was kind of a cleansing
event that prepared us for this time here in the high yield bond market. Because of that default
rate, you cleared out a lot of the lowest rated companies that were under the most stress. Simultaneously,
you had a number of downgrades. So triple, triple B rated securities into double B or single B
rated into high yield. So you up the quality of the high yield bond market, maximum triple B's,
minimum triple C's, and kind of created this environment where everybody just refinanced
at the lowest rates in history. And they don't really have a cash flow problem or a maturity problem.
So you anticipated my next question. And I appreciate that you brought the 2019 experience because
we don't really talk about 2019, but it's that much anymore. But of course, that was an interesting
year. And then so, okay, so we have these defaults, then the pool of credit gets better,
and then the big terming out of debt. And so everyone refinances fixed rate ultra low.
Talk to us about like today in September 2023, how they're terming out is playing into things now.
And like, you know, people talk about the maturity wall. No, Joe, you have to say looming maturity wall.
That's the rule. The looming maturity wall. Talk to us about like the effects we're seeing today
from that terming out. You're absolutely right. I mean, just to kind of put some numbers to that
in 2020 and 2021, the high yield bond market in the US had gross issuance of about $800 billion
in a $1.3 trillion market. So you had two thirds of the market refinance. Wow. Now today,
you're right. We've obviously the duration has shrunk in that market because refinancings have
declined, but it does kind of become a 2026 maturity, you know, kind of problem. Companies don't
wait for the last minute to refinance their debt. That wouldn't be wise because what if the capital
markets freeze up? So you kind of bring that forward maybe one to one and a half years. So I think
as we get into 2024, you will start to see a situation where companies are going to have to come
to the capital markets. Well, I was about to ask though, because this month we have seen
a pickup in new issuance. So what's going on there? Like, why are companies deciding this is the
moment to start selling new bonds? I mean, there are certainly companies. I mean, I can't remember
the exact number. Maybe less than 20% of the market that comes due over the next 18 months. So
there is some amount to refinancing. There is some capital activity going on. And some of it,
I think, is moving exposure from one market to another market. If you look at the broadly syndicated
loan market, that market is made up of floating rate debt. I mean, there is a market where people's
interest cost has gone. Well, it's more than doubled in the last 18 months. And the high yield
market has seen some refinancing out of the loan market into secured bonds in the high yield
market. So there has been some kind of new entrance in there as opposed to simply refinancing.
Are there sectors or types of borrowers who, in your view, are going to have a trickier time
over the next 18, 24 months as some of these refinancing pick up? Well, like I said, I mean,
if you want to talk about the places in, I'll say that non-investment grade or speculative grade
market that's going to have trouble, it will, I think, potentially be some of these issuers in the
loan market. And again, the reason for that is they have seen their cost of financing really go
up as their index to short rates, which are now five and a half percent. What type of borrowers
in the loan market? So you certainly get exposure to many industries, but the loan market today
has really shifted into the financing source of leverage buyouts. That is the majority of the
issuance in that market. When you talk about a pickup and issuance in the loan market,
you're typically expecting a pickup in M&A activity using loans to refinance. And one of the
biggest areas that's seen a lot of M&A activity from private equity sponsors over the last few
years is in some software and technology related business. So that is the largest single sector
in the loan market today.
On public.com, you may earn a 5.5% yield with U.S. Treasury bills, the highest rate since the year
2000. It's one of the safest ways to put your cash to work, and it's one of the easiest too.
There are no minimum hold periods, no settlement delays. Just a low-risk place to park your cash
and earn the highest yields the U.S. Treasury has offered in over 20 years. Plus, you can access
your cash at any time. In other words, you get the backing of the U.S. government and the flexibility
of a traditional bank account. As of 9-1-20-23, you may earn 5.5% annualized yield with 6-month
T-bills of held to maturity. Go to public.com slash T-bill podcast to get started. This is a paid
endorsement by public.com, fees and conditions apply. Treasury accounts at public.com or through
GCO Securities Inc. Member Finra and SIPC, not FDIC insured, no bank guarantee, may lose value.
Full disclosures can be found at www.public.com slash T-bill podcast.
The Bloomberg Sustainable Business Summit returns to New York on October 5th,
featuring leaders driving innovation in sustainable business and finance.
Looking at the latest trends in green financing and ambitious ESG goals,
speakers include executives from KKR, Macy's, Green Giants, C-16 Sciences, Environmental Defense Fund,
and more. Summit Advisor, Principal Financial Group. Visit BloombergLive.com slash SBSNY
slash radio to learn more. Do you see Froth in the leverage loan market? Because this was an
area of concern for years, even before COVID, you saw a lot of financial regulators start to crack
down on capital requirements for leverage loans. I should tell a story about I was in a bank
one time, and I won't name the bank, but I was going to see their leverage loan bankers,
and they had a frame t-shirt in their office that said, I stole this shirt off my client's back.
So that kind of encapsulated... What year was this? I think it would have been maybe 2015,
2016. It was definitely the high of the leverage loan boom, but is there Froth?
Look, I mean, there's definitely been Froth in that market, and maybe to define that a little
more clear to say there are certainly borrowers that probably are at risk of having extended
their balance sheet too much. And in the face of borrowing costs or interest rates going so high,
they've kind of put themselves in a tough situation. I think one of the things to remember in the
loan market that has maybe masked some of the potential volatility over the years is the majority
of buyers in that market. Almost 70% are coming from the CLO market or collateralized loan
obligations, and those buyers are not active traders. So you don't see loans traded like you do some
of the other investment grade bonds, high yield bonds, and in a way that can kind of mask some of that
building volatility. Again, one of the stories pre-pandemic was this idea that a lot of the power
in the market had shifted from lenders to borrowers. So the companies who are issuing debt or taking
out a loan could dictate the terms of that deal. And so we saw a lot of cufflight deals, maybe some
sketchy leverage loans. Is that still the case or does it feel like the pendulum has swung a little
bit as interest rates have risen? I think in a broadly syndicated loan market, that's probably still
largely the case. There is a lot of demand. And obviously over the last, call it 18 months,
supply has been diminished. So you have people who want to buy loans as institutions, you're competing
against CLOs buying loans. So that demand has kept up. I think one of the places where maybe you
have seen a little bit more of a shift there is in the private credit market that's issuing loans.
Where are you interesting? You've seen kind of a pullback from some of the buyers that were very,
very active in 2021. And either the new buyers or continuing buyers have been able to be a little
bit more strict with their demands for terms, covenants, things like that and those deals.
When a private credit comes up all the time and we probably should even do more on this, but it
always seems like for whatever reason, and I don't really understand it, I don't know much about
the market. For whatever reason, it seems like it doesn't matter where the cycle is. It just seems
it just grows and grows in private credit. What's the buy BDC? How does that happen?
Well, I mean, who wouldn't want to put an asset in their portfolio that has no volatility and
the price doesn't move? Is it really that simple? Is it like, because people say that and I'm like,
I can't really be like that. They can't really be the story. What is that the story?
I mean, Joe, to date, I think that largely has been the story. I mean, you're right. There has been
a story, can tell the well, the time will come for the day of reckoning of all this, all this
borrowing in this private credit market, all these marks that are staying at par are going to
are going to come down. Perhaps we are getting closer to that date, but you're right. That really
still has not been tested. Although, I think people are preparing a little more for that day to come.
Every time I hear about like PE or VC or private credit and people was like, well, the big nice thing
is like it doesn't move. I'm like, that can't be it. It can't be that. Maybe that is a big thing.
It has kind of been that easy to date, but like I said, I think people are getting a little more
concerned where you see, I think some private credit managers deciding, do I want to deploy this
incremental capital that I can draw down or do I need to preserve this to potentially rescue
some of the deals that are already in my portfolio? I think investors are getting a little more
picky as well when looking at some of these legacy portfolios going, hey, I like private credit and
I like where it's priced today, but do I want to buy the portfolio that was built in 2021 when
money was free? Does the rise of private credit affect Oat Tree at all? And what I mean by that is
like maybe there are certain opportunities that end up getting taken by private lenders versus
publicly traded, you know, a company will decide I'm going to do a private deal. There's a lot of
appetite, a lot of demand rather than go down the publicly traded group. Maybe the caveat is
it depends which group you talk to. Yeah, but no, I think the growth in private credit, especially
over the last few months has has been positive for Oat Tree and has potential to be to be positive
for more areas. I mean, we are certainly active in these private credit markets, seeking to,
you know, find value and really fill a gap that I think has grown over the last 18 months,
where some of the larger players have, you know, maybe step back and including some of the banks.
Yeah. I think on the other hand, you know, Oat Tree, obviously, we're known for our distressed
as distressed debt business, which now is our global opportunities business. You know, here's an
here's an opportunity for, you know, a group like that to maybe, you know, step in and support
some of these deals if if things go south. So I think there's multiple ways where where we can
see a benefit from from this growth. You mentioned, you know, maybe like some of these private credit
managers and maybe they don't want to like take it deploy that additional marginal capital for that
risk. It made me wonder just going back to the sort of the beginning of the conversation, like
you can get a real return risk free these days, which you haven't been able to get in a long time.
And you don't even have to take any like duration risk. You can like the positive rates at the
short end. Does that change risk appetite? Or you see people was like, yeah, look, I could make
money and I don't have to take any risk. Does that change like how money gets deployed in your
view? Yes, I definitely think it does. And really from our standpoint, it kind of shifts even where we
take risk on the, you know, on the maybe the risk spectrum or the duration spectrum. I mean,
it's rare that you have short rates being the highest part of the curve. So what's what's kind of
resulted in that is securities that pay interest index to those short rates have become even more
and more attractive. So just to again, kind of put some numbers of that, if you look at the high
yield market, a fixed rate market, sure, their yields have gone up, but their income they generate
has stayed, you know, right around low sixes despite the call it 9% yields. Can you just explain
that a little further? What I mean is the coupon on a high yield bond is under 6%. Their price is
currently below par. So you take that coupon divided by the price. That's your current yield.
That's going to be in the low sixes. Whereas if I can buy a high quality floating rate security,
that might be a structured asset. That might be a broadly syndicated loan. I'm earning that
foot near five and a half percent. So for rate plus a spread of call it 400 basis points. Now I'm
earning nine and a half percent. So yes, risk-free is is a, you know, certainly a viable investment,
but you know, so are a lot of other investments that are, you know, reasonably safe that have,
you know, an appropriate kind of spread for their risk. So we're talking about yields sort of
enticing buyers at this moment in time, but there's something else that has happened since the
pandemic, which is the Federal Reserve announced this massive corporate bond buying program that in
theory is now a permanent backstop for the market. Do you think that's affected investing behavior?
There's no doubt that had a significant impact on investing behavior in 2020, just knowing that
that backstop was there. I'm not sure how much today. I mean, I think in the case of say the
high yield bond market, you have seen that market kind of shrink over the last 18 months shrink
because deals have come due that haven't been refinanced. You've had actually more upgrades than
downgrades in that market, which may be surprising given the, you know, all the talk of recession
and the need for spreads to be wider. So, you know, you do kind of have this almost supply-demand
mismatch on the side of, you know, maybe demand kind of pushing those, those spreads tighter.
But I think it's in the back of people's mind somewhere. How do you think about the Fed here? Tracy
mentioned the backstop, but in terms of like the sort of good old fashioned where they are on the
rate, rate side. Obviously, there's hope that maybe they could cut rates even in the absence of a
recession, but is the Fed, like, are we clear? Is the Fed going to, like, we got the inflation
thing licked? I think that's a mistake that the market has made for the last year that inflation
would come down regardless of what the economic backdrop is, regardless of what happens to asset
prices, the Fed would turn around and cut rates. That was a big story in January of this year when
you had kind of everything rallied, spreads compressed, rates rallied, high yield rallied, investment
grade credit rallied, kind of everything rallied on this expectation that rates would come down
before the end of the year, despite the fact that people called for a recession. And that I think
the market's kind of coming around to the fact that it's probably maybe a little bit too much
wishful thinking. My memories kind of hit me. At some point, people were thinking that by, like,
they would already be cutting by this one. Yeah. Oh, yeah. In January. Well, yeah, the other,
the other triggering event for the Fed was in March. Right. In March this year, when you had the
Silicon Valley bank signature bank, kind of regional bank flare up, the market really pivoted to
expecting rates to be cut by about 150 basis points by the end of this year. That's completely
reversed. And everyone said, like, historically, the Fed hikes until something breaks. And then,
like, a few weeks later, but it's still red hot. I think the Fed's kind of in an interesting spot
right now. And obviously you guys were at Jackson Hole and had a number of guests out at Jackson
Hole. And I think looking at Chairman Powell's speech this year, maybe compared to the last two,
I think he's got to be feeling pretty good about himself right now because clearly last year,
he kind of had to give the market a bit of a scolding and say, hey, all you dreamers out there
that think inflation is going to come down and we're going to immediately kind of ease financial
conditions. You're wrong. We're in this for the long haul. And this year, he was kind of able to
stand up and say, thank you for listening to us. We're still in it for the long haul as long as the
data dictates on public.com. You may earn a 5.5% yield with US Treasury bills, the highest rate since
the year 2000. It's one of the safest ways to put your cash to work. And it's one of the easiest
two. There are no minimum hold periods, no settlement delays, just a low risk place to park your
cash and earn the highest yields the US Treasury has offered in over 20 years. Plus you can access
your cash at any time. In other words, you get the backing of the US government and the flexibility
of a traditional bank account. As of 9-1-20-23, you may earn 5.5% annualized yield with six month
T-bills of hell to maturity. Go to public.com slash T-bill podcast to get started.
This is a paid endorsement by public.com, fees and conditions apply, treasury accounts at public.com
or through Gico Securities Inc. Member Finra and SIPC, not FDIC insured, no bank guarantee,
may lose value. Full disclosures can be found at www.public.com slash T-bill podcast.
This is Lisa Brahmowitz here to tell you about another podcast we think you'll enjoy listening to.
Bloomberg Surveillance. Join Tom Keane, Jonathan Farrow, and me every weekday for a unique
perspective on the worlds of economics, finance and investment. Plus, insight from the names that
shape the world's markets. Seven Solomon, the Goldman Sachs, CEO. Ian Bremmer of Eurasia Group.
Please unsaid president of Redamesta. Subscribe to Bloomberg Surveillance Today on Apple,
Spotify or wherever you get your podcasts.
Given your credit perspective, what do you think about the R-star debate? So the idea that the
neutral rate of interest might be higher than we once thought, or to put it another way, the idea
that maybe the economy is more interest rate resilient than it was previously. I will say personally,
I don't really have an opinion on what R-star could be and should be, and I feel like I get a little
cover from that because I believe Chairman Powell in this stage also said that. But I do think if
you look at kind of where the market moved from a rate perspective, maybe leading into Jackson Hole,
if you look at that kind of shift, maybe, you know, call it like a shift in term premium across
the curve, I think there's no doubt that investors were probably thinking that there's a possibility
that we may kind of have some form of higher rates for longer and in order to compensate that,
let's lift the yield curve. Well, how much does the term out of debt that we talked about a few
minutes ago explain the lack of impact? You know, we haven't had a recession, we have it
a slowdown, the rates have gone a lot higher than many people would have guessed, certainly in
January, certainly in March, etc. How much is it just the fact that all these charts that people
look at where it's like, yeah, rates are here, but actual net interest payments, share GDP
whatever are still pretty low. How much is that just a function of, yeah, when so much fixed rate
these rates, I just don't wait that quickly. I think that's definitely true in the corporate
space and don't forget, I mean, a lot of corporates built up a lot of cash during the COVID period,
so much was poured into the economy that yes, they turned out that yes, the rates were lower,
but they also built cash and you know, saw leverage come down, but I think from an economy perspective,
one of the keys to kind of why we haven't felt that interest rate push is in the residential housing
market. Yeah, I mean, that to me is the real, one of the real keys to why 2023 from a consumer
standpoint, from a spending standpoint, from a confidence standpoint, from a gross standpoint,
has been a lot more robust than people would have expected. You mean the refinancing boom,
basically putting money in a lot of people's pockets? Well, what I mean is if you look at the
house prices since COVID, so from December 2019 through, you know, 2021 house prices were up 30 percent,
mortgage rates were 3 percent. If I told everyone in the room at that time, hey, by the way,
in the next 18 months, the mortgage rate on a 30 year mortgage is going to go from three to seven
and a half, how many would have said, oh, great, I think house prices will go up another 15 percent.
I don't think anyone would have done that, but that's exactly what happened because in this country
with our ability to lock in that financing, like the companies for a long time, everyone just
immediately said, well, great, honey, I'm sorry, that means we're not moving for the next 10 years
and nobody has. We didn't episode about a 13 or 14 months ago, and our guess was like, yeah,
house prices aren't going to fall. And for this reason, and the back of my head is,
this guy's really going out on a limb, but I'm glad it is like, he gets, he was right.
Yeah, but I mean, think about what makes people happy, they see the equity in their home.
I mean, that is a big part of, I think, consumers kind of propensity to spend, maybe spend down
some more of that excess savings. It's a real driver, I think, of just kind of overall
kind of balance sheet stability and from a consumer standpoint, for sure.
The last time interest rates were really high would have been the 1970s. And I think,
at the time we all remember fondly, obviously. Well, so I think a lot of people remember the 1970s
for inflation, you know, the oil crisis, things like that. Not many people, except maybe me,
remember it as the birth of the junk bond market. And there are a lot of people who made their names
in that environment. Mike Milken being one, Howard Marx, I think, got his start then as well.
Do you see the opportunity in the current environment of higher rates, maybe more volatility
around bonds, things like that? For a similar dynamic, could you see something brand new?
Enter the market. Oh, good question. Yeah, that is a great question. I mean, look, you're right,
the junk bond market, the high yield market did really kind of benefit from that, that kind of
peak in rates. And you're right, Howard Marx did start one of the first kind of public high yield
bond funds back in the late 70s. You know, I think the one difference maybe then versus today is
rates were, you know, 15 to 20% and, you know, fixed income just rode that way for 40 years. And
Howard mentioned this in his memo, you know, most recently that one thing he's certain is rates
probably won't fall 2000 basis points again over a 20 year period. So I don't know if you get that
same dynamic and fixed income, but the market seems to always find a way to, you know, find a new
way to solve an old problem. I'm buying a house right now. And one of the things that people
will tell me is like, oh, it's a good time to buy a house too. Yeah, they're like, oh, well,
it's okay that like paying cash. That's a long story. That's sort of funny. You should say
that. No, I'm not. But one of the things people say is like, oh, it's, yeah, it's all right,
you're just refined in a few years. And what that tells me is like, everyone is a bunch of people
of these like are like of this generation locked into like a sort of dessert mentality where it's
like 7% more, you're just like super high, right? And so it's like, this is abnormal. And the fed's
going to, and then they're going to cut and it's kind of what we were talking about before. But like,
could it go in the other direction? Could we have like, I mean, it just seems so unfathomable
that like fed funds rates or ever like above 10, but it's like, is there some natural limit?
Could we go like much higher on rates like that were none of us are thinking about?
Look, that debate has certainly come up more often in the last 12 months and it certainly
didn't the previous 10 years. You, you mentioned kind of that belief about mortgages. And I think
that's true. I can tell you with somebody who refinanced a mortgage in 2021 that wasn't a 30-year
and thought, okay, I have seven to 10 years rates will probably come down again or won't stay high.
But I think the big wild card in that is really just the cost of public debt. And I know you guys
have spoken about this with other guests, but I mean, that burden on the, on the, you know,
our budget annually to to see rates at that level to refinance what's now, you know, $32 trillion
of debt. You know, that's not a good story in the long run. I don't know how you have a kind of
viable economy with persistent rates that high. So we've been talking about inflation and rates
and yields and default risk. But I'm curious, even before COVID, there was a massive discussion
around how bonds and credit are actually traded. And a lot of people talked about liquidity issues.
They talked about the rise of exchange traded funds as a mechanism for maybe trading more liquid
assets. And I'm curious, in 2023, in the current environment has the way we traded, we trade bonds
changed even further. Not being a definite expert to answer the question, but I think one thing
that's happened for sure is that these exchange traded funds have increased liquidity in certain
pockets of the markets. I speak a lot about the high yield market and not surprising. That's where,
you know, non-investment grade credit is kind of where where oak tree makes its name and we focus a
lot. But, you know, that is a market to where today, if you wanted to trade a lot of double-be-rated
bonds, there's probably more liquidity because that's where the ETFs are going to be buyers. But
if you still want to trade that maybe, you know, smaller, you know, slightly sketchier issues,
single B minus or triple C, you know, you're still going to have some challenges from a liquidity
standpoint. So, I guess it kind of depends exactly what you're buying. It certainly hasn't been,
you know, equally distributed across all of these different segments of the market.
I want to go back to real estate for a second. You know, we talked about the residential component.
One area where there's like obvious weakness is it's certainly like large swathes of the commercial
real estate market. And I understand that it's not the entire market and that commercial real estate
is diverse, but offices in a lot of cities aren't doing great. Has that been felt like,
are there people under, are there like further shoes to drop in commercial real estate?
What's your view on that? You mean beyond like the the challenges in the office?
So, right. So, we've seen like these big jobs in office and but then there's questions.
Or will office get worse?
Have they like, have to get, will they get worse or have have the holders of these assets really
taken their marks yet? Or are they still living in some sort of fantasy where next year everyone
comes back to the office and vacancy rates drop and everything?
There's still like chapters to the CRE story.
Yeah, I mean, look, there's no doubt that office has, has its challenges and I'm sure we have
certainly not heard the end of it. One of the things in commercial real estate, maybe unlike some
of the corporate markets when you have a maturity in a bond, you've either paid the bond
or you've defaulted from a, because the maturity's dictated that in commercial real estate,
you don't quite have that same dynamic. There's extensions. You don't have to, you know,
in the case of securitizations, you can go into real estate owned. So, you're effectively
defaulted, but the asset maybe didn't change hands. A mezzanine buyer can step in. So,
there's a lot of ways to kind of, you know, honestly like kick the can down the road to some
degree. So, I don't think we've seen the end button to your other point is there is a lot of
dispersion and the, what is perceived today as the quality parts of the commercial real estate
market certainly don't trade like stresses around the corner and I'm not sure it is we've had
this debate at work a few times of, hey, are we going to get a chance to buy this high quality
industrial asset at a 15% yield and so far that answer has been no.
Well, real estate owned is a blast from the sort of like 2008, 2009 past.
Well, your job is to think about risk on a day-to-day basis. So, I'm going to ask the very obvious
lazy journalistic question, which is what do you worry about the most?
Well, in today's environment, yeah. I think one of the, one of the things that's really
challenging right now is it's very hard to define I think what is normal and a lot of people look
at, you know, different kind of majors of what they perceive to be normal. Oh, look at the jobs
market. We're seeing an uptick in part-time jobs. We're seeing an uptick in or a down draft in full
time jobs. Oh, no, that's a sign that the labor market's weakening. We're going to follow into
a recession, but really in reality, we're kind of getting back to what we, the labor market,
look like pre pre 2020, you know, with inflation is inflation going to remain sticky. A lot of that
has to do with shelter prices. How quickly will those feed through? I think to me, there's just a
big kind of unknown in how to interpret some of these kind of traditional economic measures that,
you know, historically, were our kind of benchmark or indicator for how much risk,
and in this case, maybe a risk of recession was building. And I think this year is an example for
how hard that's been because, and I think you mentioned this earlier, Joe, the market went from
thinking we were near an imminent recession 12 months ago to now thinking we might not have
a recession at all. Yeah. We end all, thank you so much for doing the live podcast here as a real
treat, great perspective, and appreciate you coming up. Thank you very much for having me. It's my pleasure.
That was our conversation with Wayne Dal, managing director, assistant portfolio manager,
an investment risk officer at Oak Tree, recorded live at the Future Proof Conference in Huntington
Beach, California. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Wyzenthal. You
can follow me at the stalwart. Follow our producers, Kerman Rodriguez at Kerman,
Irman, Dash O'Bennett at Dashbot and Moses Adnan. And for all of the Bloomberg podcasts,
check out at podcasts and for more AdLots content, go to Bloomberg.com slash AdLots.
We have transcripts of blogging and newsletter. And you can chat about markets in this topic and
others at discord.gg slash AdLots. And if you enjoy AdLots, if you like it when we talk all
things credit, then please leave us a positive review on your favorite podcast platform. Thanks for