[ Music ] ^M00:00:11 >> Richard Lander: Good afternoon to everybody, and welcome to this event today, which is hosted by PGIM Investments and CityWire Virtual. My name is Richard Lander of CityWire and with me today is Mike Collins of PGIM Fixed Income. A lot of you will know Mike, he's pretty well-known in the industry but for those who might not, he is a senior portfolio manager on several strategies within PGIM's fixed income range, and that range has around $850 billion of assets, and that makes it one of the large -- worlds' largest players in this field. Mike has won numerous awards over the years for performance of his funds. He's held a CityWire Fund Manager racing for almost five years. And he's covered, in this time, every grade of paper from high yield to investment grade, and possibly a few -- a few grades of page that defy a description as well. But before I bring in Mike for our discussion, and it is a discussion, it's a sort of fireside chat, or as much of a fireside chat you can have in a virtual circumstance, please do feel free to join in with questions when you see fit. The best way of doing it is the Q&A function, which is at the bottom of your screens. There also a chat function as well, and we'll keep a lookout for those. So, Mike, welcome, and thank you for joining us today. So, where else are we going to start but with the extraordinary shock that the COVID-19 pandemic has -- has brought to the financial system? And as one has been around a few years, Mike, you've seen some crisis in your time at PGIM, how does this one compare with the others, and a particularly, the global financial crisis of 2008 and '09? >> Mike Collins: Yeah, it's really interesting, Richard. There are actually hints of different recessions and depressions and financial crises all -- all rolled into one in this current event. There's actually a little bit of a whiff of the -- of the Great Depression, not that we've lived through that, but from the 1930s, right, something that we never thought we would experience in our lifetimes. But the -- the drawdown you're going to see are -- or are seeing in economic activity, in earnings, and in -- in labor, the -- the unemployment rate is going to go levels we haven't seen since the Great Depression. The good news is that was a -- a 10 year slog, effectively, this is going to be, hopefully, a 3 to 6 month jolt to the global economy, and we'll be back in growing hopefully over the summer. It also looks and feels a little bit like -- believe it or not -- the -- the long term capital management crisis that I certainly lived through in 1998. LTCM, which this was a giant hedge fund that was highly levered. They invested in government securities only, but a lot of -- you know, long one treasury short another, and -- and was multiple times levered, and that blew up, and they were forced to unwind positions. You had a similar phenomenon this time, where you had dozens of mini versions of long term capital, all running these fixed income arm hedge funds, and you saw huge dislocation in an off the run treasury versus an on the run treasury in mortgage spreads, and swap spreads, and futures, like the most liquid parts of the government market became very dysfunctional. And a lot of those hedge funds, again, were forced to deliver and unwind, and it created really unprecedented dislocation in the government markets. And then finally, to your point, this -- this definitely smacks a little bit of the '08, '09 crisis, in terms of the liquidity shock to the system. But you had -- you know, 6, 12, 18 months of kind of really weak growth. Here, it happened all at once, but you had the same type of liquidity shock where the markets actually stopped functioning. I mean, back then, you actually went in months with no new corporate issuance. In this case, you -- you went a week or two, but it was a really brutal week or two. And -- and liquidity, for a very short period during March, was so bad that you could not get a bid, you could not sell a very high quality, a very short maturity bond of almost any quality. So, really, the -- the -- the market just dried up, and that's when the Fed came in with guns blazing, and they continue to come in today, and I'm sure we'll talk about that. >> Richard Lander: Yeah, right. I mean the Fed came in 2 1/2 weeks ago, we had the Congress pass the fiscal bazooka. What effect did that have? ^M00:04:39 >> Mike Collins: Yeah. Well, I think that an initial programs that were announced -- even a -- a couple of weeks ago, like the for -- the Fed's first QE announcement just seems like a drop in the bucket compared to what they've ultimately rolled out and continue to roll out. Remember, just a couple of weeks ago, I think was on March 23rd they said they're going to buy 200 billion of mortgages. Very shortly thereafter, they went to unlimited QE effectively, right? So, they knew they needed to fix the liquidity problem. They knew they needed to fix the dislocation, and -- and mispricing, and -- and lack of liquidity in the treasury market, the world's biggest -- supposedly, most liquid efficient market was broken, they fixed that. Agency mortgage backed securities, the old fashioned Fannie and Freddie, government guarantee bonds widened to spread levels that we saw in 2008. It was the only spread sector to actually hit spread levels that were as wide as what we saw in 2008. The Fed came in and has fixed that and now certain parts of the mortgage market are trading actually at zero or even negative spread versus treasuries, believe it or not. So, they continue to roll out these programs. When they first announced them, it didn't seem like enough, and they keep adding to it, and they will continue to add. This is really one of the biggest distinctions, Richard, between this crisis and 2008. In 2008, remember that the -- the legislators, the -- the politicians, the regulators, the Fed, they were all pointing fingers at each other, and everybody -- there was enough blame to go around between the bankers, and the regulators, and the borrowers, and homeowners, and -- and the rating agencies, this is very different, right? There is general consensus agreement that this is a -- a -- a problem, it's a healthcare crisis that needs to be addressed through multinational bipartisan means, all bodies of government are working together. There is no finger pointing, it's -- it's an exogenous shock that we need to -- to work together to solve, so that is a huge distinction. What the Fed has done in the last couple of weeks exceeds what they did throughout the entire 12 or 18 month financial crisis in '80. >> Richard Lander: Right. And you don't have the treasury secretary going down on bended knee in front of Mandy -- Nancy Pelosi and saying, please pass this act, do you -- >> Mike Collins: No, I mean -- I mean there's some wrangling, right? Obviously, the democrats and republicans are, as we sit here, negotiating on -- on a fourth and a -- ultimately, a fifth fiscal package that will be rolled out, right? Because they do not want to see people lose their jobs because some of that may be permanent, right? It's really tough to reengage back into the labor market if you've kind of lost contact with your -- your employer, so they want to really nip that in the bud. So, there will be agreement and there continues to be agreement, but there will be old fashioned -- you know, political -- political wrangling, to some extent. But by and large, that is not an impediment to the rollout of these programs. >> Richard Lander: Okay, and we've seen more today, we've seen another 2.3 trillion, I mean we're just getting used to these absurd numbers by the day from Jay Powell. What -- what does today's package bring? >> Mike Collins: Yeah, so it's really hard to keep track of the numbers, as you said, Richard, of the names and the alphabet soup of these programs. But the message is clear that the Fed, and the treasury, and the government will do whatever they -- they need to do to limit the amount of -- of bankruptcies we have, and amount of job losses we have, and to get this recovery going again, and they recognize that -- that companies and people, large and small businesses, need a bridge line. They need liquidity, they need cash to allow them to survive, so when we get to the other side of this, that they can continue to open their businesses and -- and employ people. So, today's announcement -- believe it or not -- probably had the biggest impact, so far, of all the programs on the credit markets, that is one of our big emphasis -- areas of emphasis, as you mentioned, I've been involved in all different parts of the credit markets. We own a lot of different types of credit product in the portfolios that -- that we jointly manage a PGIM fixed income. And today's announcement was really an expansion of a lot of things, one was this health program, which is a program, TALF, to buy asset backed securities that they used in '08, and they had rolled it out a week or two ago in a limited fashion. And today, they came in, they said they are going to expand the amount of securities in there to include private label CMBS, which is your commercial mortgage backed securities backed by -- you know, large -- you know, office, and apartment, and -- and -- you know, retail, and -- and hotel loans, so they're going to actually buy some of those at triple A. They're going to buy CLOs, or collateralized loan obligations at the triple A level. They also came in and said they are going to buy, not only investment grade bonds, which, up until today, had been their purview, one to five year high quality investment grade corporate bonds and municipal bonds, they're going to buy fallen angels, which are corporate bonds that got downgraded to junk or double B, as long as they were downgraded within the last few weeks. They also gave themselves the ability to buy high yield exchange traded funds, or funds of high yield bonds, which they've never dipped that low in -- in -- in quality, right, in the capital structure, if you will, in providing support. So, today, I mean there are high yield bonds that are up 5 or 10 points today. Credit spreads on a lot of these asset backed securities are 50 to 100 basis points tighter today. So, on that news, it seemed to be kind of another shot across the bow that the Fed is all in, you do not want to be -- underweight these things, you do not want to [inaudible] them, and people are scrambling to cover those positions. Fortunately, we own a lot of these things and they're performing really well today. >> Richard Lander: Good. I mean are we seeing a sort of modern day version of what used to be called the Fed put in the equity markets where -- you know, it was a conspiracy theory, to some extent, that the Fed is always there to keep the equity markets up, is that happening, or is it -- is it just fixing what's broken? >> Mike Collins: Well, I mean two things, but the old adage is -- you know, don't fight the Fed, and that has never rang truer than it -- than it does today. But too, remember, they have two primary legislative mandates, one is -- you know, stable prices -- you know, i.e., control inflation, at some level. Two is full employment. And here, we are in a world where we're going to see the unemployment rate get up as high as possibly 30% -- ^M00:10:50 [ Inaudible ] ^M00:10:521 Yeah, and it's going up really fast, right, by the time we're out of this. And a lot of people think, by the end of this year, the unemployment rate is actually going to come down more slowly and probably still be above 10% at the end of this year. So, if -- if your mandate is full employment, you do whatever you can -- or within the -- the rules that you have, and the laws, and -- and those even those laws are changing every day, to provide support, to make sure people hold onto their jobs, who can get back into their jobs, once -- once we recover. And in fact, that this is viewed as a relatively short crisis to short drawdown neck -- and economic activity, I think gives the Fed, and the regulators, and investors more confidence that -- that we just -- again, need to bridge a relatively short time horizon, a relatively short gap to get to the other side. >> Richard Lander: Good. I mean there's -- there's all sorts of talk about what shape this recession is be you, L, someone -- someone came up with some Greek letter the other day, which I -- oh, I think it was the square root side upside down. Where do you see it going? Is it as short as you've been im -- implying in the last couple of minutes? >> Mike Collins: Yeah, so I -- I think it's going to be all of the above, to be honest with, and it really depends on -- on the industry, the sector, the type of l-- of company, the type of business. A lot of businesses already are actually benefiting from this, right? I mean there's a whole slew between technology companies. Look at us, right? We're on -- I have four screens in front of me right now that I -- and two of them, I didn't -- I didn't own them a month ago, right? So, there's a lot of technology, obviously telecom, cable, streaming, packaging companies, shipping companies, supermarkets, consumer products, things like -- you know, weights, bicycles are on backorder, right? So -- so there are -- there's been a shift in the type of things people are buying, obviously, healthcare companies, quantity -- you know, biotech companies that might have a solution. So, there are companies that are actually seen their earnings go up as a result of this. And there are other businesses that will come back pretty quickly, some manufacturing sectors, presumably -- you know, retailers -- you know, you have to -- you can't live with the same clothes for too long, auto sales. And then there are things that are going to be more of that -- that L shape, right? And it's hard to imagine in six months from now, Richard, that cruise lines are all packed again, these giant cruise ships are full or every -- you know, we we're traveling on -- on -- on airlines to the pace we were just a month ago, I -- I think some of these things will come back more slowly. I mean I'm worried about office space, in general. Our commercial mortgage people are really focused on the loans we have on the office space side because as we get more comfortable and realize how -- how productive and communicative we can be working from home -- I mean I speak more with my co-portfolio managers than I did when they were sitting on the desk with me, to be right honest with you, right? It's really incredible all the forums we have to communicate, so there will be behavioral, kind of structural, more permanent changes that cause some of these things to come back more slowly. So, it is a stock pickers -- or in my case, a bond pickers market, right? And -- and the real job here is to discern between those winners and losers and this bounce we're having in the markets today, where the Fed is effectively rising the tide and lifting all boats, this actually may be an opportunity to -- to sell into some of these big games. We have some energy bonds that have doubled in price in the last few days, from say 30 cents on the dollar to 60 -- >> Richard Lander: And I was going to say, what did they do before that? >> Mike Collins: Yeah. Well, they went from [inaudible]. Yeah, but they've had a big bounce, and maybe there's an opportunity to -- to -- to rotate here, right? So, it's really going to be, I think, the next 6, 12, 18 months, the -- the -- the winners and losers are going to be shaken out. And hopefully, active managers and active fixed income managers can -- can separate the -- the winners from losers in their portfolios. >> Richard Lander: Exactly, that's your job. I'm going to jump in with a couple of questions. The first one is from [inaudible]. And he says, Mike, thanks -- thanks for this, another interesting day in fixed income markets, well, definitely. And he says, with the Fed's policy intervention now getting into investment grade, now high yield, how do you -- how do you balance the technical tailwind from the Fed with fundamental uncertainties? And I think you just touched on this, but is it hard to be a fixed income analyst in this environment? I think know your answer to that -- that bit of the question. >> Mike Collins: Yeah, I mean -- I mean, to some extent, there's -- there's a battle between the technicals and the fundamentals here, right? And -- and yeah, even the Fed can provide support, the government can provide support, to an extent. I mean if people are not going to be taking a cruise for the next two or three years -- and right now, these big cruise lines, they burn -- you know, as much as a billion a month to maintain this huge slew of -- of -- of ships they have. And it's kind of -- and -- and the debt service on top of that, right? So, that is not sustainable, over a longer period. I don't know if there's any amount of -- of government money that will bail out these businesses that are permanently changed. So -- so there's clearly an opportunity to add value from a fundamental bottom up perspective, and again, our -- you know, team of 100 analysts are -- you know, working everyday, trying to make sure we get in front of this, and stay in front of this. We actually have five lists of credits we're maintaining right now. With an investment grade, we have three. One is kind of a -- you know, downgrade risk. Two is -- is -- you know, -- one is things that won't get downgraded, two are things that will get downgraded with an investments grade. Three is things that have a probability of getting downgraded to junk. And then within high yield, we have what we call an early warning list, and then a watch list. And the watch lists are things that -- you know, very well could go through a restructuring at some point in the next 6, 12, 18 months, especially if their business doesn't come to -- come back. So, we're all over this assessing the -- the near term, which is open by liquidity, and in confidence, and -- and -- you know, volatility. And the long term, which will change the -- the fundamentals of a lot of these businesses. So, for sure, there's -- there's going to be plenty of opportunities to -- to pick the winners and losers. >> Richard Lander: Yeah, I mean just sticking with cruises for a while, we had Carnival come to the market last week with a -- a huge bond issue, for which it paid the princely sum, I think, 11% on the coupon. Was that something you participated in? >> Mike Collins: So, we -- I -- I can't talk about individual credits or bonds, but we have actually -- within our high yield team, looked at some of these -- I would say -- more cyclical credits, casinos, in some cases, travel related, leisure related businesses, in some cases, energy related businesses, where we felt the worst price -- worst case scenario was already priced into their bonds. And -- and -- and I would say the low hanging fruit in fixed income that has been picked, meaning, two weeks ago, you could buy the highest quality, double A rated corporate municipal bonds, first mortgage utility bond, a gigantic senior debt of a big bank at gigantic spreads, and now those spreads have collapsed because the highest quality credits have already been scooped up, and the Fed is act -- actually going to be buying those directly. So, the next step here -- the next lowest hanging fruit are the somewhat more cyclical credits that are survivors in our mind and or being priced for a -- a -- a worst case scenario that probably won't play out. So -- so there's still a lot of alpha opportunities that are on the table, even in some of these more cyclical sectors. ^M00:18:11 >> Richard Lander: And just a statement of primary market from the moment, that seems to be functioning well if you're prepared to pay the price. >> Mike Collins: Yeah, the primary market is -- is wide open. In the last four weeks, three of those weeks were the top three weeks ever in terms of investment grade corporate bonds supply. So, companies are doing what they're supposed to do, and they're -- they're concerned about their liquidity, and cash, and the big cash drawdowns are going to have over the next few months. What do you do? You tap your credit line, you tap the markets, you get money from the government, if you need to, you do whatever you can. You cut your dividends, you cut your share of purchases, you cut your CapX, and they're doing all of those things, right? So, there have been a huge wave of -- of new issuance from corporations. And sure enough, it -- it's been sequenced just how -- how we described. Initially, it was only the highest quality, most blue chip, most offensive, least cyclical companies that could access the market, and now it's expanding into the Carnival Cruises of the world, right? And -- and it's moving down the spectrum, and there's a lot of activity in those different markets. So -- so companies do have -- have tremendous access. Yeah, nice view. Companies do have a tremendous access to the markets right now, which is actually a real godsend, right? I mean in -- in like I said, '08, there were months where there was no new -- new supply of corporate bonds and -- and here, we went a week or two -- you know, where the markets were kind of shut down, even the high yield market is [inaudible]. >> Richard Lander: Yeah, everything is at hyper speed. A couple more questions. [Inaudible], I hope I got that right, is asking, how have bond ETF funds held up, or not, in these times? >> Mike Collins: Yeah. So, the ETFs probably added to the problems on the downside, I would argue, and this is something that we've raised as a potential concern. I know folks who have -- have spoken within your audience, many of them, thank you for -- for being involved and -- and working with us over the years, understood that -- that we've highlighted the ETFs as potentially being one of the risks in the market, meaning there's been a proliferation of index -- you know, funds and strategies out there, and that's new, right? That really wasn't around to the extent it is back in '08, and we felt if there was a redemption wave, if there were concerns about credit risk and downgrade risk that you would see big outflows out of these ETFs, and it would put downward pressure on the markets, and you'd have an overshoot, and that's exactly what happened, right? I mean the ETFs were part of the dilemma here because they were viewed as being super liquid. I did the compliance training a few weeks ago for my regulatory licenses and one of the questions was, are ETS like abundantly liquid? And I said, no, and I got that question wrong. And I'm thinking, oh my God, these -- this is the regulators that are giving these tests, so they're actually telling financial advisors that ETFs kind of have this natural unlimited liquidity, right? And we know that's not the case. We know they're only as liquid as the underlying security [inaudible] them, and if they're loaded up with junk bonds, or bank loans, or corporate bonds, they're going to have problems, and they get. Now, of course, the Fed is in buying ETFs, right? And -- and the ETFs went from big discounts back to fair value, maybe even a premium, so -- so they got hurt on the way down I think, but they have kind of recovered and they -- they're functioning pretty well right now. ^M00:21:23 >> Richard Lander: Okay. And that relates to another question from Robert Porfirio [assumed spelling], who asked, why did the Fed pick the March 22nd date for fallen angels, but then started by ETFs, which owned -- you know, CCC, and -- and possibly worse? >> Mike Collins: Yeah, it sounds like a pretty random date, right? So, I think that was the day when they first came out with one of their initial pro -- pronouncements of their -- of their purchases, so I think they're just going back to their initial decision, and announcement, and using that as kind of their starting day, kind of back dating it to that date, so I don't think it was -- as -- as -- as randomly selected as you think. But -- but there are some credits we went through this morning that were downgraded just before that, right, that will not be eligible for them to purchase. But that being said, if they're buying all the double B fallen angels around that, that's going -- that's going to generally lift -- lift all the boats and it has already today. >> Richard Lander: Excellent. And one from Angela too, and Angela asked if we're investing on the side of the Fed, i.e., not fighting the Fed. The logic is we -- we should you should be going down into the distressed part of the market, given that the -- the Fed is going there as well. If that's the case, what's the next part of the market the Fed is likely to smooth? >> Mike Collins: Yeah, I mean I would draw a -- a -- a distinction there, Richard, between -- you know, buying fallen angels, and double Bs that were recently downgraded, and -- and maybe some index -- you know, high yield funds to buying distressed debt, right? It -- it really feels like the Fed, at this point, has drawn the line between buying triple A asset backs, versus triple B asset backs, buying high quality companies, versus -- you know, distressed companies that may not make it, right? Sso -- so I actually think, even though on a day like this, again, all the boats are rising, right? The Fed is lifting up all asset prices, I think what you're going to see -- maybe this is true in the equity market too where we've had a big rebound in equities, and typically, the equity market comes back -- you know, later than even the -- the bond market and the credit markets, there may be another shoe to drop, right? And I really believe there's going to be more differentiation across the capital structure. So, if you look at a triple A, commercial mortgage backed security [inaudible], or -- or triple A [inaudible] of a CLO which, we own big positions in, these are the -- the double B, or triple B, or equity tranches of these things, there are going to be credit losses in some of those lower rated mezzanine tranches of structures. There's going to be permanent credit losses, there are going to be defaults by retailers, by travel related companies, by energy companies, it's going to happen. And I don't think that -- I don't think the Feds job is to bail them all out, right? If their -- their job is to -- is to provide liquidity, make sure the financial system is functioning. You know, and there was -- you know, one year triple B corporates that you could not sell a week or two ago, and -- and now the Fed is stepping in to -- to improve the functioning of that market. So -- so I actually think there's going to be an increased differentiation between the -- the survivors and -- and the losers here, and that's where the -- hopefully, the active management value comes in. >> Richard Lander: So, there's -- there's still, despite -- despite -- you know, whatever it takes, as [inaudible] continues to say, there's still a degree of moral hazard in the market. >> Mike Collins: Yeah, I mean the -- the Fed put, as you -- as you mentioned earlier is clearly alive and well, right, especially when it comes to the employment -- full employment side of the equation. The fund's rate is close to zero, it's probably going to stay there for a year. I think, ultimately, they're going to move it back up, but I mean the Fed, the government on the fiscal side, I mean they've done nothing, it -- if not show their hands, even more, that they are all in to support the -- the financial system, but not necessarily to fort -- to support every company. ^M00:25:08 >> Richard Lander: Okay. Brett [inaudible] wants to ask about high yield munis and what your views are on -- on that. >> Mike Collins: Yes. our munis are actually an -- an interesting one, we actually really like the higher quality parts of the muni market and the taxable, and tax exempt munis, they've really dislocated. They are at levels relative to let's say treasury yields that we've rarely seen before, they're snapping in today, of course. But I think there's a lot of value in the high quality part of the muni market. When you get into high yield munities, again, these states and local municipalities are going to be challenged, right? I mean tax receipts are going to be way down so there's going to be a lot of fit -- Federal support at the municipal level, at the state level, at the local level, but it's going to be tough. There is going to be a lot of credit challenges for some of these structures, right? A lot of the muni -- more riskier bonds are -- are healthcare oriented, or airline oriented, or kind of project, I mean sports stadiums even, which are sitting empty, right? So -- so I think within the high yield muni market, just like the high yield bond market, I think you're going to have a big differentiation between winners and losers. But I think, in general, municipal bonds are attractive, I think it's actually a pretty good asset class to be in today. >> Richard Lander: Cool. I was going to ask you about inflation and I've got someone else who's asking about inflation, they haven't given their name, because Jay Powell said today, the one thing I don't worry about is inflation right now that -- you know, maybe in a few years, people will -- he'll be accused of doing the wrong thing, but heck, he's just going to do it on the fly now. Obviously, inflation comes into inflation back securities, or inflation linked securities, are we going to see an uptick or even worse in inflation, maybe next year? And -- and what does that mean? >> Mike Collins: Yeah, I don't think so, right? I mean we're trying to fight deflation. We went from inflation, to disinflation, and now we're in a deflationary spiral, right? So, prices on everything are going down. I saw some projections for inflation a year from now, they could be negative, right? So, CPI can be negative a year from now, as you've seen -- you know, used car prices, and airline fares, and -- and even house prices might come down, and so I think we're in a deflationary shock right now. It's been a demand shock, right? It started out with everybody worried about supply coming out of China and it's turned into a global demand shock. Obviously, energy is in a deflationary spiral right now, and I was standing this is hopefully this OPEC plus agreement we're seeing right now. But I -- I just think the impetus is not there over the long term to be worried about inflation. I think deflation is going to be a bigger problem over the next 5 or 10 years even than inflation. People think if the Fed is printing money and issuing -- and the treasury is issuing debt, that should ultimately be inflationary. But if the Bank of Japan, and the ECB, and -- and the Bank of China, and the Bank of Canada are all printing money as well, it's kind of a zero sum game, right? So -- so I am not in the inflation camp here, that's something that we really are not that concerned about. We have seen wage pressures go up in certain periods like this, mostly because the lowest wage earners are the ones getting laid off, so average wages look like they're going up. Sometimes you come out of these shocks, and -- and there are supply shortages, and -- and there are so -- there are some pricing pressures, but again, I think there's just -- there's going to be so much excess capacity in so many industries for -- for several years to come, until we kind of grow -- grow out of this hole that -- that inflation is not something on our radar, no. >> Richard Lander: Okay. We've got other things to worry about I think is [inaudible]. Okay. From John Pagla [assumed spelling] has got a question. He'd love your thoughts on U.S. senior secured floating rate believer, its bank loans. And so, that's a new sector, but tell us about those. ^M00:29:06 >> Mike Collins: So, the leveraged loan market or the floating rate bank loan market, it goes under a different name, you see it in prime -- you know, like the leverage loan funds or -- or floating rate funds, is a -- is a big market, it's a -- a -- a riskier market than it's ever been in the past, meaning the -- the quality of the companies that have issued in that market has deteriorated. The amount of leverage, on average, is much higher than it has been in the past. The lever of seniority, you have, by being in that senior secured part of the capital structure, isn't worth what it used to be because you don't have as much debt or equity below you. There are a lot of what we call top heavy -- or bank loan only capital structures in that market, so you issue -- you know, a billion of bank loans and there are no high yield bonds below you, so -- so if you have a default, your recovery on those loans, which, historically, was about 70 cents on the dollar because you were at the senior part of the capital structure. Today, you're going to see recovery is much lower than that, on average. And in some cases, you're going to have -- you know, recoveries of 10, 20, 30 cents on the dollar, akin to what you've seen in the high yield market when -- when you get default. So, we actually expect average recoveries. Instead of being 70, are probably going to be 55 or 60 cents on the dollar, on average, over the next year or two. We are going to see a lot of downgrades in that market, from even single B to triple C. Right now, the own -- owner -- the holder of that market is primarily the CLO businesses -- the CLO tranches, they owned a big part of the bank loan market, the retail investor is a smaller part of that total market. The good news is that CLOs are generally buy and hold investors, you can't pull your money out of a CLO, so they're long term investors, which is really helpful. And we've seen that market, which was down 20 points, at the worst, is now down about 10 points. So, there's been a 50% recovery in the prices of the bank loan, so they went from par to 80, and now their average of around 90, right? So, there has already been a big recovery. In general, we're still a little concern or a little more defensively positioned in that market. There is some value and the higher quality names in that market and the CLOs will be buyers at discounts, but we do worry if you have more downgrades that, at some point, these CLOs get frozen, and they can't step in and -- and be buyers, they have to start liquidating. And all the -- all the cashflow from the CLO goes to the triple A investor, which is why we're really happy we're almost solely invested in the triple A tranches on those CLOs. Even if you have defaults in the loan market, we don't get -- we don't get hurt. So, the bank loan markets had a big move, and -- and I wouldn't put it as one of my top five best ideas in the bond market right now. >> Richard Lander: Just to go back to high yield for a second, I've got a question from Brian Schaeffer. Is it too late to get -- you know -- you -- you've had the uplift in high yield in recent days, is it too late to get in there, or is -- or does the Fed effectively provide a long term floor there? ^M00:31:55 >> Mike Collins: Yeah, I mean when the spread was over a thousand, we thought the asset class was really, really cheap, right? Because that's basically -- that's basically pricing in almost a 10% annualized -- excuse me -- default rate, indefinitely, and we knew that that was unlikely, even though this year, we might see a 10% default rate. In fact, we probably will see something pretty -- pretty close to that. But we've had a big snapback. I would argue high yield bonds, on average, are still slightly undervalued, especially the higher quality ones. And -- you know, these -- if you -- if you buy a high yield portfolio today, I think you would still benefit from -- from the catch-up you see in pricing, right? And it tends to have a lot of momentum, so I actually think that's Fed buying -- it was just announced this morning is going to have some legs to it and I think the markets will continue to improve, so it's probably not too late, even though you might have missed the first -- you know, handful of points. >> Richard Lander: Good. Yeah, I mean that relates to another question, you're talking about implied default rates on high yield and floating rate. Where are they now? Are they still at [inaudible]? They were at 10%, now -- >> Mike Collins: Yeah, so now it's about 7% is the implied default rate with a recovery rate of about 35 cents on the dollar for -- for the high yield market. And we have a simple equation we use to -- to back into that. And even if you get that -- say, 7% default rate, every year for the next five years, the high yield market will still give you a premium over treasuries. So, when we do that calculation, we actually back out the need to have a permanent premium or yield spread over treasuries that you -- that you keep, even in this worst case scenario, because high yields are less liquid asset class, it's a more volatile asset class, it's a riskier asset class. You need to be paid some kind of risk premium above and beyond treasury, so -- so we assume that that's 2- to 300 basis points. So, you earn that, even if you get that 7% annualized default rate, so that's why it's actually a pretty conservative assumption, and it's still portends that there's -- there's value in high yield market. >> Richard Lander: What are your analysts in the emerging market bonds telling you? >> Mike Collins: Yeah, they're -- they're looking at the IMF to -- to bail them all out, right? Just like the Fed and the treasury bailing out the -- the companies and the businesses, so it's -- it's not dissimilar in the emerging markets, especially the smaller, poorer countries are really going to struggle here. There are a lot of commodity oriented companies in emerging markets -- or countries -- I'm sorry -- that are struggling and companies. A lot of the emerging market countries borrow in dollars, there's been a shortage of dollar, there's -- they -- you know, their assets are and -- the -- and their revenues are in their own home currency, a lot of those currencies have depreciated versus the dollar. It's one of the reasons the Fed is one of their programs. They -- they implemented swap lines, they call them, between the U.S., Fed, and other central banks. Effectively, a way for those other central banks -- even in -- in the emerging markets, like Brazil, to get dollars into the hands of their banking sector, of their companies, to be able to service their dollar denominated debt. So -- so clearly, again, there's international cooperation among central banks to support the emerging markets. One thing we've seen even -- even as their currencies have depreciated, they haven't had a big spike in inflation, which normally follows a currency selloff in an emerging market, so I think that actually bodes well because what that means is the central banks normally in a -- in a -- in a crisis, they're raising rates to protect the currency and defend against inflation, which drives them into a bigger recession. In this case, that really hasn't happened, by and large, and maybe one or two countries that are talking about raising rates. But by and large, I think the central banks in these emerging markets -- when all is said and done -- will still have some capacity to actually reduce rates, which gives their local bonds the opportunity to go down in yield and up in price. So -- so I would say, within the dollar denominated part of the emerging mark, debt markets, and even the local currency interest rate markets, there's -- there's actually a fair amount of value. We have something we call a basis dashboard that lists every relationship in the bond market and every sector, and how far back they've come, since the worst of this crisis two to three weeks ago, and the emerging market sector has been the laggard. That has actually come back the slowest of any other part of the credit markets, right? You didn't hear the Fed come in today and say, we're buying emerging market debt, right? So -- so that's kind of still out there, I think as an opportunity, and -- and -- and -- you know, high yield has snapped back, bank loans have snapped back -- back, corporate bonds have snapped back, but emerging market I think have been slower to snap back, so I think there's actually some value in that market. >> Richard Lander: And again, I guess you got to be selective, so which -- which issue is what you go for in emerging markets? >> Mike Collins: Yeah, I mean issue -- emerging markets, you always have -- have to be selective. The best quote I ever heard about emerging markets was, I love the asset class, I just hate all the countries, right? And -- and that's almost always been the case. If -- if you just look at these countries, and look at the political systems, the economic systems, the debt, the social systems, I mean it's hard to get comfortable with any of them, to be frank with you, other than -- you know, a handful of real high quality ones that don't offer a lot of spread. But as an asset class, the fixed income, the debt part of the emerging markets is actually one of the best performing asset classes in the world over -- over decades. And -- and typically, when they have a big selloff, you buy it, you hold your nose, and -- and -- and they tend to come back really quickly, right? I mean governments are not like companies, they generally don't want to default, if they don't have to. They tend to get more multilateral government support from places like the World Bank, and the IMF, and other multinational financial institutions. So -- and I think, in this case, because it is viewed as a -- again, a healthcare crisis, the -- the multinational support is going to be more significant than ever, right? You will get World Bank, you will get IMF program supporting the emerging market, so -- so again, I think as an asset class, as a whole, it's probably a good value, but you have to be super, super selective, and you will have countries that -- that have major challenges, for sure, as you always do in emerging markets. >> Richard Lander: And quite brave as well, I would think. >> Mike Collins: Yeah, you have to be brave to buy emerging [inaudible]. >> Richard Lander: Cool. We're going to wind things up quite shortly, we've been talking for almost 40 minutes, it's flown by. One question that I've got and it -- it sort of fittingly looks to the longer term. So, it's great that the Fed is doing what Congress has failed to do. Try and look forward 18 months, I know it's pretty hard to look forward 18 hours, at the moment, how does the Fed unwind here? You know, this questioner is remembering taper tantrum two, are we going to get that again, or that -- how's the Fed going to get out of it? Indeed, does it want us out of it? >> Mike Collins: Yeah. Yeah. I -- I think we're -- were past the point of no return, Richard. I know we've been saying this a long time, but the end game, in the big developed countries, with all the debt, from China, to Japan, to parts of Europe, to the U.S., is not that we're going to pay off our debt, right? It's that the Fed, the central banks are going to buy the debt, right? And that QE -- what we saw in '08 and QE was just the tip of the iceberg. And sure enough, we're living through that now, right? And the Fed's balance sheet will probably be 10 trillion before it's -- you know, 3 1/2 trillion again. Right now, it's probably 6 and it was under 4 a few weeks ago, and it's going up really fast. So, it's not a -- a pretty long term story, in terms of getting -- getting out of this. I think on the -- on the rate side, the Fed gets the funds rate back up at some point in the next couple of years. In -- in a year from now, I'm hoping that they can move the funds rate from 0 to 1/2. And that in 18 months or 24 months from now, they can move the funds rate up to 1%. We actually think, as we've been saying for a while, that we think 1% is probably the long term neutral funds rate. So, over the next 10 years, it's probably going to average 1%. Between the 10 year, treasury is probably going to average 1 1/4 to 1 1/2, which is one reason we're short -- we've gotten short duration here is because it's way below that, and ultimately, it's got to move back up. With all this treasury supply, we are concerned is the owning treasuries is not a good idea here, especially at these yields. The supply is going to be just incredible, and -- and constant, immense, and you do not want to be in front of that, right? So, I -- I think there's going to be a more of a risk premium built into the treasury market, over time, which is why you want to own spread product, and not own the treasuries, and -- and play that spread tightening game. >> Richard Lander: Brilliant. Mike, thank you so much for joining us today, it's been an absolute pleasure. It's been an education I think, definitely for me, and hopefully for everyone who's attending. Thanks again. Thanks to everybody who has attended, and we hope you enjoyed it, and we look forward to the next occasion. So, from me, and from CityWire, and from PGIM, goodbye. And thank you very much for attending. >> Mike Collins: Thank you, everybody. ^M00:41:00 [ Music ] ^M00:41:09