Steve Kane, Bloomberg Barclays, John Tucker discussed on Bloomberg Markets


Paul. All right, John Tucker, good stuff. We appreciate that. You know, you think about 2022, Matt, I mean, yeah, it was tough for the equity investors, but the fixed income folks got just walloped and, you know, to the level that they hadn't seen in decades, some of them hadn't seen ever. So the question is it's someone told us yesterday it was the worst year for fixed income since 17 like 46 or something. These guys were getting just ripped last year. So hopefully better this year. Let's bring in one of the big players in the fixed income biz that Steve Kane co CIO and generalist portfolio manager. It's this little shop out in LA TC W investment management. Steve, we're licking the wounds on 2022. I mean, are you guys out there TC W saying? It's gotta be better this year. Yeah, I'll go out on a limb here and say that 2023 bond market returns are going to be better than -13%. Last year. So you can put that. You can write that one down. By the way, is that total return? That's total return for the Barclays aggregate index. And yes, it was a blue probably year. And it was actually, it was actually the second consecutive calendar negative year for bonds. They were slightly negative in 2021. So we're due for a good year. Yeah, we wanted to point out that's the Bloomberg Barclays aggregate index. Yeah, we paid good money for that. So where in the fixed income space are you guys starting to do your early 2023 work? Well, we are we've been positioned for a few months now for kind of a turn in the turn in the cycle and improving conditions in the bond market. So throughout last year, we were lengthening our duration. We view the rate environment today is mildly attractive. I think that we're kind of long in terms of our duration positioning, but I would say that we recognize we're going to see some volatility. We're not blue skies ahead. We're likely to see some negative surprises and some volatility. So but nonetheless, I think as we look out over the long term, we see four to 5% yield for investment grade corporate bonds and investment grade bonds in general is very attractive. So yes, we're positioned for that. We like what I would say generally speaking is a high quality areas of the market. The areas of the market that are not default sensitive. So we do expect defaults to pick up across a range of lower quality assets. But when you look at agency mortgage backed securities, triple-A and double-A rated securitized assets yielding 200 to 300 basis points over treasuries. We view that as really attractive value today. The concern is that we hit a recession in 2023, and that's why you like the high quality stuff, right? Because we've started to see some little cracks in the credit market in terms of, well, let's see, massive leveraged loan issuance. Pulsinger said, the global financial system is vastly over leveraged and Matthew mish warned that defaults could rise to 9% this year if the fed stays on its aggressive monetary aggressive hiking path. Is that why you say high quality? Absolutely. Yeah, that's exactly right. Meaning, if you're a triple C company trying to finance yourself in the high yield market of loan market, you're looking at double digit cost of capital anywhere between 11 and 15% or maybe even not getting that rate at all. And a lot of companies with high leverage just can't finance themselves. That financing rate just doesn't work. So that's how you get defaults. Is the market just won't sort of accept what won't land. Well, you get another mini budget issue. I mean, anywhere around the world, right? And it was so interesting to watch the fallout in the guilds market. And it contagion spread from that tiny island nation, you know, to New York City, the capital of global finance. I know that Apollo Apollo chief executive Mark Rowan said, that was maybe the first of many hiccups and that we could see other issues like the LDI blow up that we saw in the UK. Yeah, I think you will see a problem. I think though what you're like to lead to see is what I would say is on the Richter scale, something of the 5 level type problems as opposed to what we saw in 2008 with the financial system on the brink. And the reason is the banking system both particularly in the U.S., but globally is a much better shape than it was going into the financial crisis. So you're likely to see some problems we don't see it turning into some catastrophic global meltdown of any of any sort. We think this is going to be more your garden variety default cycle recession that the last one we had that I would say is most similar is the one in the early 2000 period post tech bubble. Hey, Steve, unlike my partner Matt here, I'm willing to take a little bit of risk in life. It says the guy who sits on his munis every weekend, cutting coupons. How about the high yield space? Do I dare venture there? Is that maybe taking a little bit too much risk and ahead of a recession? Here's what I'd say about high yield. High yield yields about 9% and if you bought the high yield market today and its totality and you put it in a drawer and came back in two years or two to three years, you'd be okay. You'd get a nice positive return, maybe earn that 9% or a little bit less. And you'd be okay. But between here and there, we think you're going to see a lot of volatility and you could see some negative returns in high yield over the interim meaning we think things get worse before they get better. So I think that depending on your time horizon and ours, we are looking to make total return. We're going to save our powder and wait for better buying opportunities. But again, if you buy high yield today at 9%, you're not going to lose money

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