Adam Bloch shares insights on fixed income in Asset TV Masterclass

Transcript

Adam B, what is your macro outlook right now? So a lot of uncertainty this year. Obviously, amidst all of that, we continue to expect a low but positive growth environment for the overall U.S. economy and the continuation of a relatively low unemployment rate. Part of that comes from dynamics like labor hoarding, changing immigration dynamics, but overall low unemployment rate, but at the same time, certain weakening of undercurrents within the labor market. So we're seeing disinflation of wages. The wage hikes aren't as large as they've been in the past. Well, yours, you combine that with disinflation and in some cases outright deflation in certain housing markets and how that affects rentals, rental income, all of that sets up pretty well for the Fed to begin easing policy at some point later this year, probably not July, but they should be able to be in a position to be easing by September or at least at the very end of the year. And so, you know, all of that sets up for easier financial conditions and that should help the economy continue to to muddle through. Lower growth period and ultimately bring us out to whatever the other side looks like given some of the macro elements that we've been discussing. Is right now a good time and a good environment for bond investment? Well, I guess at the risk of taking all of our own books, simple answer is yes, it's a pretty phenomenal time for for fixed income and credit in particular. You know, if you think about historically the Fed on pause or in what we call preemptive easing cycles. So they're not easing in reaction to a crisis or or some other, you know, really negative. Situation that they're preemptively trying to get ahead of that sort of negative situation, either of that easing or preemptive pause or preemptive easing is really good for fixed income. You have strong credit fundamentals as Adam just went through and financial conditions that are going to continue to ease. So we should see the default rate remain relatively low. And at the same time as we talked about earlier, we're in a situation of. Disinflation or gradually approaching the Fed's target for inflation of low growth. So net net rates broadly should still be lower. Credit spreads should remain relatively constrained given those strong fundamentals and some of the technicals that that Adam in particular went through. So overall, you know we look at it as base case attractive level of yields right now. Upside case is yields really should be quite a bit lower. And so that creates a really strong setup for total return opportunities looking forward. Is there any sector that you think is? Particularly attractive right now. So we in most of our strategies take a very sector agnostic approach. So it's really a true bottom up relative value best ideas framework. The area where we are right now are finding the most relative value on a quality adjusted basis is within ABS. It's within the kind of commercial or what we call esoteric part of the ABS market. So not consumer student loans, the kind of things that everybody knows and remembers fondly or not so fondly from O 8, but more of the. CBS that's backed by some sort of commercial or corporate cash flow. So that can include a wide variety of underlyings. The places where we're most active right now, areas like data center warehouse securitization, so lending against the real estate that is being used to provide all the computing power associated with the growth in AI aircraft lease. ABS continues to be very active for us. So you know, in the US a lot of airlines own their own planes. Around the rest of the world, most don't own their own planes. They lease them from us, a sponsor and those sponsors. Aggregate to lease cash flows and borrow against it to either pay dividends or fund more acquisitions, et cetera. So lending against those lease cash flows through aircraft ABS is a really interesting place to be right now. There's some interesting technicals and fundamentals in the market. On the technical side, you have Boeing, you know, production is severely limited as they kind of continue work through a variety of issues. Airbuses is also quite limited. And now on top of that, tariffs is complicating their business quite significantly so. You know, you have very, you have record few planes being produced at a time when you have global travel peaking again for the first time since the pandemic. So you have a huge demand for aircraft around the world and not a lot of planes being built so. Then overlay on top of that, there was a significant amount of post COVID aircraft ABS issuance in 2021 and early 2022 right before the Russia Ukraine conflict began on those were all done at very low interest rates similar to the high yield commentary because base rates were very low at the time. So you have a lot of 3 to 4% coupon bonds that are trading at pretty reasonable discounts to par anywhere from 90 to $0.95 on the dollar. Now because of credit issues, just because of the movement interest rates over the time. Well, the technology in aircraft lease ABS is when a plane is sold out of a securitization. The proceeds from that sale cause a par paydown of the debt O you have bonds that you hold at let's just say $0.95 on the dollar that you think are a six yield to maturity single A rated. But as those lanes are sold to other more interested buyers of those planes, you're getting par pay downs on a bond that you bought at 95. So you shouldn't assume that that's going to happen, but it's kind of, you know, free upside or very low risk upside as we think about the underwriting. So we're we continue to be very active in really any part of the securitization market where you can get that. Idiosyncratic upside above and beyond a base case yield that's still pretty attractive. And you know, broadly across that wide swath of esoteric ABS we're getting in many cases close to double B corporate type yields for a single A rated asset class now. There are more complicated in some cases to analyze. The structures are unique. It's not as uniform as the corporate market is. The collateral packages can be a lot more complicated. We think in most cases we're getting paid to do that. Higher level and further due diligence and deep dive into the credit to understand, you know, and let's face it, since the global financial crisis, ABS has kind of been a four letter word for a lot of investors. And so it's not as widely participated in market as as corporates as the corporate market is. So we think that continues to create really good opportunity. What's your view on rates and basically is, is there any area that investors might want to consider in light of what the expectation is for the Fed? So broadly, we expect longer term rates, it's called the 10 year. To be relatively range bound roughly between 3 3/4 and 4 1/2%, you know maybe U to 4 3/4 in a real sell off. Add another 50 basis points on top of that for the 30 year and you know you're kind of relatively unchanged in our view, plus or minus, you know of 30 to 50 basis point range over the next several years. At the same time that you had that stability at the longer end of the curve, you have likely lower rates at the front end of the curve as the Fed begins easing again later this year and in the next year that's probably in line. For forward curves are projecting, so it's not a particularly novel rate call. But overall that long end stability and steeper yield curve is really good for a place like agency MBS, agency mortgages, you have the stability at the long end, which kind of discourages prepayments. If rates don't move a lot lower at the 30 year and not a lot of people are going out to reply. And then that steeper curve is giving you lower rates to discount front end cash flows out. So that's a really good setup for agency mortgages overall. Right now we're able to buy current coupon mortgages we focus on. Certain pools that have better prepayment profile or more protections against prepayments, we can get those at 130 to 150 basis points over the 10 year treasury. So you know call it you're knocking on the door at 6% for an agency guaranteed product that the market for historical reasons thinks has a lot of prepayment risk, but we think has relatively limited or mispriced prepayment risk. So that continues to be a really big area of opportunity. How can investors take advantage of this heightened volatility right now? Sure. So we talked about agency mortgages a little bit earlier, you know on some of the the the attractive characteristics there. But it's also a great asset class to take advantage of elevated interest rate volatility. If you think about what you're doing when you buy a pool of mortgages, you're effectively selling a stream of refinancing options to be underlying borrowers, right? And you're taking that prepayment risk. So you're getting paid for that, that sale of that option, that refinancing option. Well, as with any option, the higher the implied volatility, the higher the price of the option. So that in periods of. Elevated volatility manifests itself as a wider spread or higher yield on the pool of agency guaranteed mortgages O and done in a particularly positive carry way. So we think that that's one of the best, safest, most predictable ways to take advantage of these spikes involved. And then, you know, time and time again, we see Val kind of collapse back down after we get past these major risk events or surprise events and you see spreads tighten back end is no longer that the implied volume on the refinancing option is worth those much. Are there any areas? Of opportunity or risk that you see right now that are exciting. I mean there's a ton of risks. We could spend the next hour talking about all the rest of the market. But you know it was we think about high quality fixed income and the backdrop of a low growth, relatively low inflation, but pretty strong credit fundamental environment. We think investors are going to look back on this period and say this is a pretty phenomenal opportunity be adding to fixed income at record high level of yields.