Animal Spirits Podcast - Talk Your Book: 3 Reasons to Buy Bonds

Starting point is 00:00:00 Today's Animal Spirits Talk Your Book is brought to you by Pimco. Check out Pimco.com, learn more with their flagship product. Pimco, Active Bond, ETF. Might have heard of it. Ticker B-O-N-D. I mean, one of the better E-TF tickers there is, probably? The name's Bond. It's very good.

Starting point is 00:00:15 Pimco.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Michael, one of the big misnomer's, I think, for a lot of civilians when it comes to investing is they think if you're going to invest in fixing,

Starting point is 00:00:58 income, you have to be able to figure out where interest rates are going, right? You have to guess what growth is going to be, which direction interest rates are going to go, and then you make your bet. I bet interest rates are going to fall, so I'm going to buy this. Interest rates are going to rise. I'm going to stay away from this. And really, the way, I think the right way to think about it is thinking through the risk reward framework and the setup for where am I being paid to take risk. And so on today's show, we talked to Dave Brown, who is a managing director and general as portfolio manager at PIMCO. And he said, listen, the way that we think about the setup of all the different types of bonds we can invest in is what's the better risk

Starting point is 00:01:32 reward framework. It's not like we're buying and selling because we think this thing is going to go to zero and this thing is going to go straight up. It's more like this. We're getting paid to take more risk here than we are to take here. And I think that's the right way to think about investing in fixed income. I agree. And where do I go from here? I don't know. I'm not sure where to go with that, Ben. That was just so well said. I have nothing to add. It is interesting, though. Like we went from the worst fixed income market for, I don't know, 10, 12, 15 years. it was just awful. No yield. People were reaching everywhere. Then yields went up forever. And now that we've lived through that, the way, wait, hold on. Just think about how bad it was. So no yields forever.

Starting point is 00:02:09 And then rising yields caused the stock market to crash. And then, of course, because yields were rising, there was no cushion. In fact, it was the opposite. So not only did they get bad returns relative to the stock market. They caused the stock market meltdown, but they kind of did. So it's been a rough go for bond investors, for bond managers. And I feel comfortable in saying we are now firmly on the other side of that period. I picture Tim Robbins climbing through the pipe in Shawshank and coming out the other side with his hands up in the air, that's fixed income investors. They crawled through 100-yard sewer pipe.

Starting point is 00:02:46 And now you have four, five, six percent yields depending on where you're looking. And things are looking much, much better. And I don't think you have to be a person who decides, I think the first. Fed's going to do this, or I think rates are going to do this, you have a good margin of safety in a lot of places in fixed income. That's so true. You remember back, I don't know, 2012, 2013, people were just like buying AT&T and clipping the coupons instead of owning bonds.

Starting point is 00:03:10 Like, that's how bad it got. Right. Should I own dividend stocks instead of bonds? It's a much better place now for fixed income investors. Bond proxies. Remember that? Oh, yeah. There was a million of them.

Starting point is 00:03:19 What do I do in between stocks and bonds? So you don't really have to make those choices anymore. And now you can just own the bonds. Yeah. That's true. So we had a great talk with Dave, total pro. He talked about, you know, a real straight shooter. Yeah, just great. He talked about Pimco's thoughts on their baselines for the economy and for rates and for fixed income and what they're seeing in terms of the risk work to set up. So here's our conversation with Dave Braun from Pimpco.

Starting point is 00:03:49 Dave, welcome to the show. Thank you very much for having me. Excited to be here. So interest rates are easy. The Fed cuts. rates and bond yields go up. I feel like to the lay person who's not in the world of finance, this seems like something that doesn't make any sense. Can you make sense of it for us? Yeah. So what you're getting at is the dynamic that back in September, the week before the Fed cut, we had a tremendous rally all the way down to 360 on the 10 year. And since then the Fed's cut 100 basis points, and that 10 years, 100 base points higher. So that might not make a lot of sense to folks. But what you have to recognize here is a couple of things.

Starting point is 00:04:26 are in motion. First, the Fed only control is the front end. And what the belly and longer ends do is kind of their own beast. And right now, that rise in rates has really happened because you've got a couple things going on. You've got the Trump trade where animal spirits, no pun intended, and the view that we're going to have greater growth, potentially a little higher inflation, more sovereign inflation, has caused that belly to rise. The other thing I'd really want to harp on is what we saw in September. I mean, this happens, you know, many times throughout my career, prefer to buy the rumor, sell the truth. Everybody knew the Fed was going to cut. There was some debate was going to be 50 or 25. And all of a sudden, everybody rushed to get

Starting point is 00:05:04 bonds. All the Johnny come lately's and everybody wanted to get bonds. That caused, in our mind, rates to overshoot on the low end from where we thought fair value was, created a tremendous trading opportunity for an active manager like ourselves to lean against that and reposition. And now rates are much more attractively priced than they were in September. So very perverse logic, but if you look at history, and we wrote a nice paper on this on our website, that actually happens more often than you would expect, that to start the cutting cycle, the market's trying to figure out which way we're going, and the move of the Fed funds might not be in the same direction as the move of the kind of belly of the curve or the

Starting point is 00:05:39 tenure of the curve. The bigger point I want to emphasize is, look, we think overall rates are very attractive right now, right? We went through a once-in-40-year inflation fight, right? We had not had an inflation fight in the United States since the 80s. It was sparked by the COVID inflation, supply chains, pent up aggregate demand and that revenge spending that was unleashed. And boom, we get a once in 40-year inflation fight. That caused a generational reset and yields. Literally, the ag is yielding around 5% now.

Starting point is 00:06:07 That's the best that's been in almost 20 years. So you're getting meaningful real yields on bonds that we haven't seen in decades. This creates a tremendously attractive opportunity for investors to step into bonds. Dave, one of the theories for why rates have snapped back as violent. violently as they did is because people were bracing for a recession that never came. And so they were off sides and they need to unwind that trade and get, you know, neutral or whatever. And I bought that for the first leg up of the move, leg higher of the move in the tenure. But the recent price action in yields, I think it's telling a different story. And I'm not quite sure what. And it's never just

Starting point is 00:06:45 one thing. But if it were structural fears around maybe the deficit or the debt, the dollar wouldn't be so strong. So I think we could eliminate that as a potential. Is it because of a stronger economy, the term, I guess the catch-all term premium? Like, what do you think is moving the 10-year higher today? Yeah. So let's take a step back. So our bigger view is, look, we're on the precipice of the Fed pulling off a soft landing, right? Sad, but true, we're a consensus on that view. A lot of people have that view. It sounds like- Why sad? Why sad? Well, we would much prefer to be non-consensus, right? As an investment manager, you love it when your view is non-consensus.

Starting point is 00:07:26 You can make some more money that way. But we're not going to force a contrarian view if we don't believe it. So our base case is the Fed's going to pull the rabbit out of the hat and get the soft landing. And that's historically the exception, not the norm, right? Normally, when you have to an inflation fight, a central bank has to fight inflation by hiking rates this high, that usually ends in tears by causing a recession. They tried. They did.

Starting point is 00:07:48 And that was the narrative a couple years ago, as you just mentioned. So now we're at the point where everything's growth this long. Our view is next year we're going to grow like 1.8. That's a far cry from 2023. We grew at 3%. And 2024 is probably going to be closer to three as well. But we're growing slowly next year. And now, base case is only as good as the paper's written on.

Starting point is 00:08:08 You have to be humble in this profession and realize that's only one outcome. We live in a probability-based world. And right now we think the wings of the U.S. distribution, the scenario, are pretty wide. we could paint an easy scenario where we're wrong on the on the downside and growth comes a lot better think of all the pro-growth stuff Trump's trying to do deregulation tax cuts you know that could all grow up growth and we could be wrong on the downside we could also be wrong on the upside meaning we're too high and we could have a recession next year think about that path you make a mistake with the aggressive tariffs and protectionism you make a mistake on some of the fiscal contraction that we're trying to do you make a mistake on the fiscal you make a mistake on the fiscal you make a mistake on the the tariffs, and all of a sudden, and the immigration is the one I was thinking about. And then all of a sudden, you've got risk to the system where we could grow negative next year. And what we're trying to figure out is when you balance all the risks and look at your base case, what's priced in, where are you getting safety margin?

Starting point is 00:09:02 And right now, when we look at the forwards, we think the forward curves, say the 10 years of 460, most of the forward curves are around that. And we think eventually, once we're done with this inflation fight and the world settles out, Fed funds will be more with a three handle on it, right? Fed funds is currently at $4.50.50 basis points of cuts next year as growth slows and inflation comes down. But at the end of the day, eventually two, three years from now, we believe Fed funds neutral will be somewhere around three or a little bit of three. That means right now, if you're willing to take a long-term view, tremendous value out the curve

Starting point is 00:09:34 in fixed income. So we always like to say that the stock market is not the economy and obviously a good economy is typically good for the stock market, but they can diverge. It seems to me that the macro is way more important when it comes to bonds. Because to your point, if we do get a situation where growth slows and rates fall, the types of bonds that you're in are going to matter. And the other good news is that there is a margin of safety now, right? In 2020, 2021, when rates were on the floor, there was no margin of safety for rates going up at all. I don't think anyone predicted that they'd go to 5%, really, but there's now just a much higher margin of safety. If inflation comes back, rates are already at 4 or 5 percent. If a recession risk hits, yields go down. But there

Starting point is 00:10:16 are obviously going to be better bonds for a recession type scenario. So how do you try to play these different ranges of outcomes that rely around your baseline, I guess? Yeah, we try to be an active manager, right? People are willingly joining this call with PIMCO portfolio manager. You should expect us to endorse active management. And in this environment, it's perfect for an active manager. We've got tremendous uncertainty in the path forward on the U.S. economy and global economy, right? Some of the things we already talked about. We got a tremendous amount of volatility in the rates market. And then we also got quite a bit of dispersion in both the bond market, meaning some things are priced incredibly rich, some things

Starting point is 00:10:52 are attractive, but also globally, the global path of rates, right? We've got some countries that are way ahead of the U.S. in the cutting cycle, some countries like Japan that are still tightening policy. So uncertainty, volatility, dispersion is an active manager's dream because it creates an opportunity to generate alpha. And what you have to do is you have to get more of your investment calls right than you get wrong. That's the first thing you have to do. And second thing you have to do is be willing to trade against the market. And just look at the past couple years.

Starting point is 00:11:21 We've seen the tenure go up to 5% when everyone thought, you know, what was that summer of, or actually October of 2023, whenever we thought Paul had to go to 6% on Fed funds and inflation wasn't whipped. Then we had rates go to 340 when we had the mini banking crisis. Then we had rates go up to 470. Then we had rates go down to 340 or 350 when the Fed started cutting. Now we're currently a 460. That is what we need as an active manager.

Starting point is 00:11:45 But you have to have a process that anchors a forward-looking view. So, Pimpco, we focus on anchoring a one-year view and a five-year view called our cyclical and our secular. And then what we do is we try to figure out where we think appropriate range for the 10-year, let's say, is or any part of the curve. And then we'll trade against the market. We're in a market, I don't want to say rudderless, but the market really likes to romance and near over the day. Think of the nearer that was being romance back in September when the

Starting point is 00:12:10 10-year went to 360, right? The Fed hadn't even cut yet. And it was like, oh, inflation's whipped. The Fed's way behind the curve. They've got to get cutting. That's gone right now, right? No one thinks that. There's only two more cuts priced in for the next 12 months. Now everyone's romance in the Trump trade, how great this is going to be for growth, how we might have inflation come back, and therefore the Fed might have to go the other way. We think you've got to take a long-term view, have that true north, and lean against the market. And like I said, we expect this environment that can you continue for the next couple of years. I don't think anyone thinks what we have on the docket that uncertainty and volatility are going to go down.

Starting point is 00:12:45 They're probably going to go up. And that's what we need as an active manager. So Scherner-Gavin said to Happy Gilmore, you have to play the field as it lies. And the field that I'm talking about are credit spreads. Whatever spread you're looking at, they're painting a pretty rosy scenario. There's not a lot. Now, the absolute level of yields is great, but the relative level. is not and the margin of safety isn't there. So how do you navigate a world in which you're getting

Starting point is 00:13:11 a lot of a lot of rate from the government and not a lot of excess rate from riskier parts of the of the bond market? Yeah, that's a great point. So a lot of folks just chase yield and the all in yields are attractive like I mentioned. But, you know, sophisticated investors should bifurcate the two. How much am I getting from the risk fee rate? How much am I getting for the credit spread? And when you do that, you look at a generic investment. grade corporate credit and generic high yield credit are literally the richest they've been since the tech bubble. I mean, the spreads are the lowest they've been since the tech bubble, right? Now it's another world where we're hearing the narrative of a new paradigm, right? The internet and fiber optics

Starting point is 00:13:49 is going to change the world. Now we're hearing the Trump trade and this, you know, manufacturing renaissance here in the U.S. is going to change everything. You've got to be very careful because like you said, there's zero safety margin, right? There's tremendous amount of complacency in credit spreads. And, you know, you may be right. And in our base case, that credit price, probably does fine and you don't get hurt. But again, we don't live in a world where the path is guaranteed and you have zero safety margin. And if you look at the distribution of risk, probably more, much more density in the chance

Starting point is 00:14:18 that spreads widen from here rather than they continue to grind tighter, certainly feel skewed in our mind. And that's analogous to the stock market. That's almost seeming in our mind price to perfection. So what we try to do at Pimco is, you know, this is where style matters, right? Like hopefully folks are interested in active funds. I figure out what your active manager style is. A lot of active managers can just beat the ag by adding more investment grade credit and

Starting point is 00:14:41 high yield. And if you do that on a steady state, you know, over 10-year period, you're probably going to beat the ag because, you know, more of your credit spread that you're getting is above and beyond the true default risk. So if you just do that and hold it, it's going to be great. Problem with that strategy is twofold. One, we're starting at the richest levels in 20 years on spreads, so I don't know if that'll work.

Starting point is 00:15:00 And second, even if it does work, they haven't repealed the business cycle. and when we get a recession and perhaps a default cycle, you're going to have to apologize to your clients because your bond fund did not behave like a bond fund. So this is where style matters. So what we're doing at Pimp goes exactly what you alluded to. If spreads are rich, you know, don't buy them. Go buy something else.

Starting point is 00:15:21 And we're finding great value in non-generic corporates, meaning go outside of corporates, agency mortgages, you know, not the most exotic thing. Fannie Freddie Ginny mortgages, we think are very attractive versus corporates they're basically, you know, the cheapest they've been in years. And they're actually countercyclical, meaning their spreads usually tighten in fall when high yield invest rates spreads are winding.

Starting point is 00:15:43 So that nice countercyclical dynamics. Is the scruiness that's going on in the housing market making those bonds more attractive today? Like what's causing the fact that those bonds are more attractive? Yeah. So I think it's a couple of things. Rates are high and potentially involuntilates high in rates and people are a little averse to owning a negatively convex asset like mortgages.

Starting point is 00:16:03 don't want to get too nerdy. There's also questions of, well, if the Fed's not buying and the Fed's doing QT, is that going to be a bad technical? And we factor all those in, but we still think when we model them and properly adjust for the negative convexity, they're incredibly attractive. It's an up in quality trade, up in liquidity trade that barely gives up any yield versus investment grade corporates. Why would you not do that in a scenario like this where growth is slowing and credit seems frothy? So Mike, sorry to cut off. Michael and I have talked about this a lot, this huge spread in mortgages over treasuries compared to history. And I guess part of the reason for that is I guess investors don't want to own them because the duration is increased. People aren't

Starting point is 00:16:38 refinancing as much, right? Because mortgages saw it, is that part of the deal? Oh, yeah. So look, the duration of the mortgage index is six years or so now used to be, you know, a couple years lower than that a few years ago. But that's okay. Like as an active manager, like I don't need to manage duration asset class by asset class. Like I manage it holistically. Right. So I could, I could forego buying a bunch of overvalued corporates by the mortgages and manage my duration elsewhere. So again, just like I said before, people got to bifurcate the risk-free rate from the credit spread.

Starting point is 00:17:12 You got to separate where you're getting your spread and where you're getting your duration from. It doesn't have to be just in one asset class. Another thing I'd mention is a lot of the non-agency securitized product is also very attractive, right? When you think about it, like, I don't know, the more accessible in asset classes in the bond market, the more generic, it becomes benched. eligible, gets a tremendous halo effect once it's benchmark eligible, right? If you're a corporate

Starting point is 00:17:35 who's in the Barclays corporate ag or Bloomberg corporate ag, you know, people have to buy your bonds. All those replicators, passive folks, all those low active share active managers buy it. Your spreads are usually lower. What we try to do is go where the opportunity is, not where the comfort of a herd is. And right now we're finding that if you go out of the more, the most generic stuff, you're getting decent spreads. They're not great. They're not as good as they were in, let's say, the depths of or in early 20-22 and the Fed started hiking, but they're not at zero percentile or richest in 20 years. So things like non-agency mortgages where there's no Fannie Freddie guarantee,

Starting point is 00:18:10 things like consumer ABS, things like even CNBS, which has such a taint right now with what's going on in the office sector. You know, those spreads are nowhere near their historic tights, whereas corporates and investment and high yield are. Are you at all worried about the consumer? One of the things that people have mentioned are credit card defaults picking up. Is that something that concerns you at all? Yeah. So look, we're definitely keeping a keen eye on, right? The glory days for the consumer during COVID when, what, we had like six, seven excess savings deposits because everyone was getting stimulus checks and moratoriums on their rent and mortgage and student loans. And plus you couldn't consume anything because the economy was closed. That was when the consumer was its strongest, right? And all of that excess liquidity has largely been spent down. But we look at the consumer, you know, unemployment has risen, but it's still very low in 4.2% or so. Average hourly earnings is pretty,

Starting point is 00:18:59 decent right now, and household leverage is very light. Like the average LTV on a mortgage is in the mid-60s, and over 90% of those mortgages are 30-year fixed, and the bulk of those are refinanced at low rates. So the consumer, by and large, is in very good shape in our mind. This is not like your grandfather's consumer who, at this point in the cycle is doing crazy things, right, over-levered, over-spending based on what they think they're going to earn or what they think their paper wealth is. is this consumer has been pretty much in check. Now, look, the bottom part of the consumer market's going to have a tough go at it when growth slows to like we're hypothesizing below, too. So you just got to be careful on which part of the consumer market you're accessing.

Starting point is 00:19:41 And even more importantly, when we do these securitized product, what part of the capital structure you are. Like, you know, avoid the mezzanine parts of the capital structure. Because, you know, if you do get a bad cycle, an economic cycle and the consumer gets in trouble, some of those tranches are going to take impairments. Stay up in quality, top part of the capital structure. structure, cleanly underwritten deals, and you're getting more paid for a complexity, illiquidity premium rather than a credit risk premium. Michael and I were talking today about the, we're looking at the ag returns. And I think over the last 10 years, the ag is up a little more than 1% per year.

Starting point is 00:20:11 Over the last five years, it's gone nowhere. And we know why, because rates went from 0% to 5% in a hurry for the Fed funds. In a fashion, they've never really gone, especially from that level. Has this been the worst fixed income environment we've ever lived through in modern times? Yeah, I began my career in 93, and those guys all told me about the 80s. But yeah, you know, and they said, you missed it. The Fed's got the market under control. And all of a sudden, in 2022, we saw 2020, 2020 was a perfect confluence of events, right?

Starting point is 00:20:39 We started off at almost no yields, right? August 2020, the 10-year Treasury bottomed at 50 basis points, which actually seemed attractive versus the trillions of dollars abroad that were at negative yields. And then all of a sudden, in 2022, you get, you know, everybody off sides with, inflation is not transitory, it's real, and the Fed's got to get hiking. You start that year with the minimis yield on the Ag. I think the Ag was yielding barely above one and a half percent, and the Fed had to hike, you know, from zero all the way up to eventually 550. That is a perfect cocktail for the worst year in bonds, and that's what we had. That was worse than a year in the

Starting point is 00:21:13 80s, because back in the 80s, a couple things. One, rates were higher, so you had that for momentum, and two, the ag was lower duration then. So, you know, Ag was six years or so. You had to hike 400 or 500 basis points, that's pain. We think right now, think about why people buy bonds. Throughout my 31, 32 year career, you know, income, you buy bonds for three reasons. Capital preservation, income, and hedge versus your risky assets. Let's hit each of those. All three of them haven't worked well in last five years, to your point with the data, but we think we're in the process of them working incredibly well for the next several years. Let's talk about capital preservation. I get thrown in my face. How'd that work out for you

Starting point is 00:21:54 2022. I just gave you why that didn't work in 2022. Perfect recipe. The problem is people don't appreciate bond math enough. What hurt you in 2022 is now your friend. So when rates rise, that causes your bond fund to go down, you know, quite a lot in 2022. But now that rise in rates is your friend and your full momentum. So I mentioned before the ags yielded about 5%. That means the first 100 basis points of cellar rate rise because the ax yield duration is somewhere around 5.5, 6. The first 100 base point rise in in interest rates, is covered by the forward yield. So unless you're calling for a meaningful rise in rates

Starting point is 00:22:29 well above 100 basis points, hard to fathom bonds having a big negative year like they did in 2022. We're always fighting the last fight we lost. We lost that fight in 2022. Hard to imagine us losing that fight again unless you're, you know, really hawkish on rates

Starting point is 00:22:42 and then they're going up materially. Second income, again, back when they, 10 year was 50 base points and Ag was yielding 1%. Hard to sell bonds and argue this good income. Right now there's fantastic income. the ag's yielding 5% that's well above people's forward inflation. That's actually very attractive, even versus a lot of people's forecast for stock

Starting point is 00:23:01 return in the next couple of years. So boom, capital preservation is good, income's good. Last one, it hasn't really proven itself yet, but we think it has in small pockets is that hedge versus risk assets. This whole 6040 model was founded on the 40 bonds hedging the 60 stocks. Well, that broke down to 2020, 2020 during COVID. But after a first shock, Fed starts doing QE, cuts to zero, both stocks and bond funds go up. Correlation's positive.

Starting point is 00:23:28 Nobody complained when the correlation shifted from negative the positive. When they both went up, fast forward to 2022, correlation stays positive. Fed has to hike, hammers bonds, hammer the stock market. They both go down. Everyone complains the correlation's positive. Well, look at what's going on now. You've got a lot of gravity below you on rates for the Fed to cut if the economy gets a trouble or stock market gets trouble.

Starting point is 00:23:49 You saw in some, so bonds could rally. if the economy or stocks get in trouble. Hard to argue that when we're at 50 base points back in 2020. Second, you saw it in small pockets. Remember the Yen-Kerry trade blow up four or five months ago? Stocks sold off and bonds rallied quite significantly. So we think all three are green light right now. The capital preservation characteristics look good.

Starting point is 00:24:10 The income looks great. And you probably are going to see that negative correlation come back between stocks and bonds. Well, so, Dave, are you seeing the opportunity to change? in the high yield levered loan space with with such a dramatic increase in private credit now maybe eating the bank's lunch or maybe you could comment on that yeah so look private credit is uh you know the the topic de jure right and look private credit's been around a long time like a i think a lot of people think it's this brand new thing but like you know i grew up in the insurance industry they've been doing private corporate lending and private commercial mortgage lending for you know 50 years

Starting point is 00:24:47 it's actually was how pimpco is founded so why is it why is it seemingly blown up today. Yeah, so I, we have a couple of theories on this. One, think about what we went through. We went through the lowest rate environment we've ever seen. So, you know, a lot of people need yield. And if the 10 years yielding 50 base points, you've got to do something else and just buy the Treasury or the ag. So people went out of their comfort zone and their natural habitat into private credit. So I think a lot of this growth was fueled by the necessity to get people yield when there was no yield in public fixing home. Second thing, the second thing is, and this is more in the floating rate, like a lot of floating rate structures on the private side that have emerged.

Starting point is 00:25:20 that was to get them out of harm's way when rates were going to rise. So they both kind of did their job. Get out of publics when there's no yield. Get out of publics when the bulk of publics is fixing, fixed duration, and getting a floating rate, private credit with some yield. We get it. But right now, you've got to look at what's on offer now. And we've written a paper on this is on our website about the benefits of public versus private. You also have the option value if I could trade my public credit. So I could trade to try to get alpha. you do a private strategy, you know, you're kind of locked in. You can't really trade it. Yeah, but then you're mark to market. Yeah, yeah. So there you go, right. Ignorance is bliss, right? So that's, that's the, that's the beauty of private credit. Like, you kind of don't, you don't see your marks every day. You don't, you don't realize what's going on there. But that's okay. Most investors should be able to write out the near term mark to markets of public fixed income if the value proposition, the risk reward is more attractive. I think given the mosaic that we're painting, it does make sense that spreads are where they are giving, given financial conditions,

Starting point is 00:26:24 easing, and, you know, full employment and all that good stuff and the AI and defaults. I mean, you're not really seeing much in the way of defaults, are you? You know, you're absolutely right. So, you know, it's not us. When I say we're being cautious on investment grade and high yield public credit, it's not like we're chicken little and we're running for the exit and sounding fire alarm saying there's a big problem coming. We're just simply saying we've got better. opportunities, right? It's all risk-reward-based. It's all safety margin-based, and it's just

Starting point is 00:26:53 priced totally to perfection. And if you're a big shop like PIMCO, you know, a generalist portfolio manager like me, you know, most of my colleagues are specialists. I have 14 specialty desks that I can partner with to build a portfolio that traffic in just one part of the bond market all day. And why would I just go to my investment grade in my high-yield specialty desks and use their best ideas? No, I'm going to go where the opportunities are. And that's what we're saying now. You're absolutely right. Look, a lot of these companies were very smart. They termed out their debt and pre-refunded a lot of their debt at low, low rates, so they don't have a lot of interest burden. They don't have a big wall on maturity. And, you know, even in our

Starting point is 00:27:33 downside scenario, we're not comprehending a real deep, deep recession. You know, in the tail, it's probably pretty modest. The last two recession we went through COVID and great financial crisis were duzies, right? We're not positing anything like that. So most credit's going to be fine in that scenario, it just comes down to your safety margin. If you're wrong, it's something bad does happen and also better opportunities elsewhere. So that's what we're really saying there. One of the things that we had been speaking about for the past couple of years, and I was mentioned with Ben this morning, not so much actually in the past couple of months was office space and real estate in general. Like I was saying at the time, the reason why I thought this was

Starting point is 00:28:10 unlikely, again, what do I know? But unlikely to cause a wider recession is because this was not a surprise to anybody. The bonds had already well blown out, right? It's not like the wall of maturity that people are talking about. It's on the calendar. We could see it coming. That's usually not what brings the system to its knees. So where are you guys with real estate today? Any opportunity or not much? Oh, yeah. No, we have, you know, I don't want to be hypocritical, but we have a lot of private stuff. We didn't get to that. We have a lot of private asset classes at Pimco. And one of them is commercial real estate up and down the capital structure. You know, my comments, on privates were more just like, you know, be careful what privates you're buying because they're not,

Starting point is 00:28:51 they're not the end-all resolution to everything. So on commercial real estate, we're, we're quite constructive on pockets of it depending on valuation. Now, the public stuff is outpaced. When you look at some of the CNBS spreads, they've come back quite aggressively well off the peak wide from a couple years ago when, you know, the work from home, craze was, and in the fear of office and and the demise of our cities, you know, that's kind of somewhat past us. We'll never go back to the equities too. The equities too have bounced substantially. Yeah, exactly.

Starting point is 00:29:22 So you've got a couple things. One, the fundamentals have improved. People are getting back to work. Cities are more populated. You know, some cities are still really struggling. Two, you've had capital form, you know, funds have raised money to go after these opportunities. And therefore, you've had a stabilization. Now, the market's, you know, riddled with.

Starting point is 00:29:44 good properties and bad properties, right? It's not a generic asset class. So what our team tries to do is find the value, separate the value from the poor stuff, and get involved when we see value. And it's okay to buy things with hair on it as long as you're getting paid the right spread. And so we're being very, you know, active there, if you will,

Starting point is 00:30:06 both on the public and the private side. David, sounds like you're having more fun today than you were, say, I don't know, six years ago, when the reach for yield was really not fun and quite disgusting, if we're being honest? Oh, this is, like I tried to say before, this environment of high uncertainty, high volatility, high dispersion in the bond market, coupled with, you know, highest rates we've seen in 20 years, that's what we all sign up for, right? If you want to be an active portfolio manager, this is like your version of a Super Bowl

Starting point is 00:30:34 where you want to, you want to be involved, you want to be alert and try to make alpha for your clients because, you know, there's going to be other. environments where there's not as much volatility, not as much uncertain, not as much dispersion, and rates are going to be lower, right? Again, like I said earlier, we don't think, you know, Fed funds is permanently at a 450 level. So you've got to go out and get the getting while the getting is good. And that's what we're trying to do. Last couple of years of performance and almost all of our strategies has been, has been quite strong. And that's what we, that's what we sign up for. So if our listeners want to learn more about your flagship product, which is the

Starting point is 00:31:09 PIMCO active bond ETF. Where do they go? Yeah, so B-O-N-D is the ticker for it. You can go to our website. We have a section there on our ETFs or talk to your PIMCO advisor and contact and yeah. Perfect. Dave. Thanks very much. This is great. Okay, thanks again today. Remember check out Pimco.com to learn more and email us, Animal Spirits at the compound news.com.

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Animal Spirits Podcast - Talk Your Book: 3 Reasons to Buy Bonds

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