00:00:02 · Tom Keene, Priya Misra, Paul Sweeney
[00:00:02] S0: Bloomberg Audio Studios, podcasts, radio, news. Priya Misra is the only one I know who's read all 1,800 pages of Crescenzi's Stigum, the Bible, short-term money buy. She's nodding her head like, yeah, that was a ruined summer. And then Lisa Katmany with us as well, Christina Katmany with us as well from Invesco. We start strong this morning with the debacle of the markets. Priya Misra is with JPMorgan. So I got a junk bond chart up. It's 15% yield. Frankly, it's an elegant chart that screams lower price, higher yield. How separate or attached is your full faith and credit world to the garbage everybody's hyperventilating about? [00:00:49] S1: It's a great point. Treasuries are working as the hedge. I think your point around, Tom, in terms of the high yield market, I would even say the high yield market is You know, it's like a world of two markets. There's the triple C sector, which I would argue is idiosyncratic. It's not a Canadian, the coal mine. It has widened a lot. We're being very careful with that sector because when cost of capital goes up, the most levered companies and sectors can struggle. And then at some point, there's no good price to buy some of that. But then there's the double B, single B, actually doesn't have that much AI exposure. It's been remarkably resilient. It's widened 20 basis points in this whole move, which is impressive. The credit market's been very resilient given the equity market. [00:01:34] S2: Bottle that, folks. [00:01:35] S0: If it's too advanced, you know who we need to talk to? Donna McLean, Virginia, Magnolia listens.
00:01:35 · Tom Keene, Paul Sweeney
[00:01:35] S0: If it's too advanced, you know who we need to talk to? Donna McLean, Virginia, Magnolia listens. [00:01:42] S2: Oh, is that right? [00:01:42] S0: She sent me a Thanksgiving card with her handwriting. I'm guessing second grade. maybe fourth grade. Good morning, Magnolia. [00:01:49] S2: Sure. [00:01:50] S0: Magnolia was the only one that knew what Priya was talking about there. The answer is, Paul, is there's a, you know, to Bart Simpson, there's a total cow right now about AI debt. [00:02:01] S2: Yeah. And some of it's doing okay. How do you think about that AI debt? Because we had another active week this week with Meta and Eurobonds. It seems like the IG market's continues to be open for these issuers. How do you guys think about it?
00:02:13 · Priya Misra, Tom Keene
[00:02:13] S1: Yeah, absolutely. I mean, not only did secondary market spreads not widen, the new issue, I mean, in the last seven days, we've had about 70 billion of issuance from all of, you know, Oracle, Meta, Alphabet, Microsoft, Apple, and they've all, the new issue concessions have been 15 basis points, which is high given, you know, normal concessions of three to four basis points. But the oversubscription, three, four times, So I think there's a haves versus have-nots in the credit market. And if you're in the haves, now that's the tricky part. That's what you want your bond portfolio manager to know, which are the haves. The hyperscalers are doing fine. The data centers that already have the permits, that have the power, that have the steel, that are structured well in our view, they've actually, they become more valuable because if it's going to be harder to get new data centers, maybe these do better. So I think those are doing fine. If you're in the new clouds or in the highly levered parts of the AI ecosystem, that's where that cost of capital starts to become a real hindrance for their business model. So I think that's where the bond market's closed for them. But I would highlight, look at the inflows coming into bonds. And I think that explains, and the fact that AI is, 15% of the total IG market. So it's not that concentrated. We have banks, we have utilities, we have lots of other sectors. [00:03:32] S0: You can buy.
00:03:32 · Tom Keene, Paul Sweeney, Priya Misra
[00:03:32] S0: You can buy. [00:03:32] S2: How do you manage your risk to AI as a portfolio manager? Because maybe if you own a utility bond, one could argue that has exposure to AI. You have like a risk manager that comes in, knocks on your door and says, hey, I think you have too much exposure here. How's that work? [00:03:46] S1: Well, I think the first line of defense is the portfolio manager. So we're always looking at how much, you know, you think in risk factor terms, there's an AI risk factor. And if you have too much of that in the portfolio, then you have to think about sometimes the best hedge is actually reduce the risk. We've actually, we don't mind the AI risk factor. I mean, the technology works. I think we can question the economics. So let's look at, make sure we know the fundamentals. We like the companies that we're buying and then we hedge it. So much of the economy is dependent on the AI trade. I think this is why owning some treasuries as a hedge in case the economy slows down. [00:04:21] S0: She has three phones plus a red phone on her desk for the hyperscaler bond orders. So next week and on, you see no let up to these mega 6, 8, 10 tranche deals involving billions of dollars. You've got a single sentence in your note that they've been well received.
00:04:21 · Tom Keene, Priya Misra, Paul Sweeney
[00:04:21] S0: She has three phones plus a red phone on her desk for the hyperscaler bond orders. So next week and on, you see no let up to these mega 6, 8, 10 tranche deals involving billions of dollars. You've got a single sentence in your note that they've been well received. [00:04:42] S1: They have. Inflows into bond funds have been very strong, right? If you're getting 6%, 7% high quality fixed income yield and the equity market's super volatile and moving, you know, 15% sometimes in a day in certain stocks, Actually, owning bonds might be a safe haven to just ride out. Is this consolidation of the AI trade? Is this just slowing? Is it unraveling? So I think the inflows is allowing, you know, the good companies, the haves. to issue. We do expect a lot of supply because the hyperscalers came out and talked about CapEx needs. And, you know, I don't know if it's peaking this year or next year, but we're in the process of peaking in terms of CapEx. That's a lot of funding in not just the bond market. I think we're going to see some equity market equity issuance as well. [00:05:31] S2: Priya, thanks so much. We appreciate it. As always, Priya Misra, Portfolio Manager, Core Plus Bond Fund for J.P. Morgan Asset Management.