Animal Spirits Podcast - Talk Your Book: Investing in Public and Private Credit

Starting point is 00:00:00 Today's Animal Spirits Talk Your Book is brought to you by Pimco. Go to Pimco.com to learn more about their whole suite of funds and strategies that invest in fixed income from public to private credit. That's 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

Starting point is 00:00:34 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, I feel like investing in bonds used to be relatively easy.

Starting point is 00:00:53 It was kind of like there was treasuries and there was the ag. And you kind of picked one of those or maybe you put them together. And that was kind of it. And now it just seems like there's so many other opportunities to find yield in asset-backed securities and CLOs and private credit and all these different areas that investors really didn't have to think about before.

Starting point is 00:01:14 I feel like the debt people have been just in their lab for the last 30 years. Venture debt. Concocting stuff. And it's an interesting thing to think about that. It's just way more complicated. And I think you have to be way more thoughtful about fixing. Because we've got a lot of questions from people in the last. few years just about these different spaces and like doesn't make sense for me to invest in this

Starting point is 00:01:33 stuff. And it's floating rate or it's tied to this asset or whatever it is. So anyway, on today's show, we brought on Jason Ducco, who is an executive vice president and portfolio manager at Pimco to kind of walk us through this whole thing. And I thought he did a really good job of walking through like the difference between public and private credit and how Pimco thinks about that and how an asset manager of their size that manages tons and tons of money. What does Pimco manage these days? I don't know. Trillions. trillion dollars or something? You know, this was one of the first talks that we've done,

Starting point is 00:02:05 and I don't know if this is more a reflection of him or us, maybe a little bit of both, felt pretty buttoned up. I'm going to say that's him, not us. It felt like this felt like a real professional interview, not to brag. Well, here's the thing. It started out very professional, and by the end, he said, you know what? That was very conversational.

Starting point is 00:02:21 Thank you guys, right? He thought it was going to be a CNBC like thing, and then you were sitting back in your chair, lean back, And it's, yeah, I think we got him to kind of loosen his tie a little bit. Yeah, it was good. Yeah, fun conversation. As fun as it can be about things can come, right? So here's our talk with Jason Dukego from Pimco.

Starting point is 00:02:43 Jason, welcome to the show. Thank you guys for having me. So Pimpco is, I guess, are you guys the largest active bond shop in the world? About $2 trillion in assets, and we focus only on active management. two trillion dollars in assets not bad um all right so you guys are well known for your house view you have opinions you are doing something different than the indexes where is the house view today it's been a really bizarre market been an interesting interesting uh year where do you guys think we are today yeah i mean obviously um there's been a lot of iterations and where things are to your point

Starting point is 00:03:20 uh you know including today we saw an upward revision and second quarter you know GDP to 3.8 And where it leaves us today is we think we'll see a little bit of a deceleration in the back half of the year. We're coming in on the end of the third quarter right now. I think our expectation for GDP there is around 2%. And then a little bit of a further deceleration going into the fourth quarter, probably closer to 1%. But nothing too alarming there because we think that's just a little bit of effects of some of the policies that we've seen come in in place. You know, the tariff policies in particular kind of slowing some growth. but we're looking ahead to 2026 and we think, you know, some of the monetary and fiscal policy

Starting point is 00:03:58 that's out there should be stimitive and offset some of the tariff impact. And so we're looking for a return to a decently positive growth in 2020, 26, somewhere in that, you know, mid plus 2% area. Are you guys surprised that we have not really seen a significant impact that tariffs have had on consumer spending? We saw, to your point, we got higher revisions today for GDP. I just saw a chart from Tars and Slocke were pulling in $350 billion annualized in money from tariffs, which has not seemingly slowed down the economy dramatically. You guys surprised by what's happened there? Yeah, I think everyone was called a little off guard by the resilience of the consumer. And I think also by the reaction function of the corporates themselves,

Starting point is 00:04:47 you know, they have passed through some of the costs. So there's a little bit of upward pressure on inflation, which you can't have a conversation to talk about GDP without talking about inflation. But what we're really starting to see, and what's concerning us a little bit, is the corporates are offsetting some of the tariff pressure with a little bit of labor weakening, which I think puts the Fed in play. One thing we didn't talk about is we recently, obviously, we had our first Fed cut earlier this month, and we're anticipating two more cuts by the end of the year.

Starting point is 00:05:15 But I think that's the balance that everyone's looking at is, you know, how did this policy end up playing out. I think most broad economists got it wrong initially. Post-Liberation Day, we obviously saw the big sell-off. There was a lot of backing away from some of those initial plans that Trump had put in place. I think where it leaves us from now is the Fed is in this precarious spot of trying to find that balance of the labor weakening that the corporates are utilizing to offset the tariffs and how do we find that balance going into 2026. So I'm just, I'm curious from an overall perspective, how you think PIMCO is has handled this decade. Because I looked at the numbers. And if you look just at treasuries,

Starting point is 00:05:53 so like the five year, the 10 year, the long term, I plotted it out by decades because I think Deutsche Bank did this thing where they said, this is about one of the worst five or 10 years stretches ever for treasuries. And if you added inflation on the end of it, it's even worse. So I think you could make an argument that the 2020s to this point has been one of the worst decades ever for just high quality government bonds because rates rose from such a low level in such a hurry. And, you know, we went zero percent to five percent. effectively in a couple of years. I'm just curious how that's been managing money through that type of period where you had such in what has kind of been maybe one of the worst bond markets we've

Starting point is 00:06:30 ever seen. Yeah, fair, fair question. And, you know, I think a lot of people were starting to questioning, you know, the 6040 model in general because it's been such a challenging, you know, backdrop for a number of years. But I feel like that's behind us. Obviously, that move we saw in 2021 was quite painful, or in 2022, sorry, it was quite painful. But where it leaves us now is, you know, and we've been saying this, you know, pretty vocally, that bonds are back. I mean, we have real yields now, unlike we had for, you know, a decade plus out of it coming out of the GFC. And this isn't just Pimpco speaking. You can see it in the returns.

Starting point is 00:07:02 You look here to date. Most core fixed income type products are returning, you know, high single digits. Some of our, you know, the Barclay's ag itself is up, you know, six and a quarter percent with a quarter to go. So I think the numbers kind of reflect where we are. And then the question becomes, you know, where do we go from here? I think you have a little bit of a tailwind with, you know, the Fed in cutting mode and your starting yield is still, you know, quite attractive. You know, you're going to get the benefit of that duration. I think for a number of years, you know, the duration wasn't acting as that diversifier that we thought it, you know, it typically would be in that 6040 model.

Starting point is 00:07:37 But I think that's clearly not the case today. And we're still pretty optimistic that, you know, bonds have a nice place in most investors' portfolios at this point in time, just given these starting yields and the diversification it provides in most models. It's pretty remarkable that there is a lot of headline volatility, at least in the news, the Fed, the economy slowing, cooling a little bit. People are watching the labor market. I mean, there's a lot going on, but bonds are not moving. I saw the bond volatility index. I think that's what it is.

Starting point is 00:08:11 Is it the move index? It's at a four-year low. It's really interesting, right? Yeah, yeah, it definitely is. And we've been paying attention to it. But we also have been pretty vocal. If you look at some of the PIMCO literature that comes out, you're right. You look at the 10-year.

Starting point is 00:08:25 It's been plus or minus, you know, four and a quarter, you know, four to four and a quarter percent. It's stuck in a very tight range for a number of years. There's been obviously some volatility in those periods of time, you know, some shocks along the way in both directions. But kind of the baseline going back, it's been stuck in a pretty stable range. I think the curve, though, has not been as stable. So like on the surface, to your point, you know, there's been a little bit of range. bound, but, you know, we were inverted a couple of years ago. The curve got, you know, pretty steep. It's been flattening most recently. So there's been, you know, some nuance to that view

Starting point is 00:08:57 that, you know, rates aren't moving. I think the curve has definitely been moving. You know, we generally favoring, you know, the front end of the curve. Today we're favoring the five to 10 year part of the curve. But I think that's where when you take an active duration, you know, approach, which again, you know, we do in most of our portfolios, you can find value even if it looks like the 10 years sort of, you know, been range bound. There's been a lot of movement around that, around that 10-year point. So to your point from earlier, obviously, there's a lot more yield today and there's a much bigger margin of safety. Are there any areas of the market where you don't see much of the margin of safety? Because it seemed like, you know, high-quality

Starting point is 00:09:30 corporates, the credit spread is pretty tight these days. Are there any areas like that where you're just saying, like, we're not being paid to take risk right now. We're being paid to take it elsewhere? Yeah, the most obvious one would be in the corporate direct lending space. We've seen record fundraising there. It's been a great run for them. It hasn't been a recession. The elevated base rate has been helpful for their all in yields. But I think our concern there is what we're seeing is very healthy competition coming from the public markets. There's been pressure on spreads in general. You know, you've also had the Fed in a cutting cycle. So there's going to be pressure on the yields from that standpoint as well. And then the lack of deal flow in

Starting point is 00:10:15 general. I mean, we're optimistic that maybe, and we're starting to see a little bit of it here in the back half of the year, but M&A and LBO activity just really hasn't picked up in a meaningful way. So you're competing in this ferocious manner with the public markets. That's leading to, you know, more leverage on these structures. You see elevated, you know, pick, paid in kind interest on a lot of those direct lending corporates. You don't have great transparency. You don't have great liquidity. And you're all in compensation, you know, for that, you know, historically the rule of them has been at least 200 basis points. You know, we're seeing regular way direct lending deals get priced right on top or just outside of where a public, broadly syndicated bank loan might get priced today.

Starting point is 00:10:53 So I personally don't think it's going to be systemic in any way. I think it's mostly a rail value that just feels very, you know, kind of tired at this point. So that's one area of the market, you know, that you could argue is, you know, not offering great relative value. So we generally have been shying away from that area of the market and many of our multi-sector products. away from that and you know think about high yield you know spreads are definitely tight there as well but there's a lot of dispersion happening you know everything on the surface looks okay it's been a decent year in high yield returns are approaching 8% but beneath the surface you know triple Cs remain wide if you're missing on your earnings you know it's been quite painful in the secondary market

Starting point is 00:11:30 where things are trading off and then the other point to mention on high yield is you know the composition of the high yield market has changed pretty dramatically in the last you know called 10 years where it's a much higher quality index than it have been historically, somewhat justifying these lower spreads. So when you kind of quality adjust the high yield index, and JP Morgan actually just put out some good data on this, we are not back to the all-time tights on spreads on high yield on a quality adjusted basis. So what is the higher quality coming from? Is that a private credit story or why is that? Yeah, it's interesting. You're asking that. That's coming more from the bank loan market, actually. If you kind of step back in the last five or so years, the bank loan market has

Starting point is 00:12:08 actually taken significant share from the high-heel market, the CLO market in particular, which represents about 70% of the market, you know, started doing unidronous deals. I'm sorry to cut you off. What's the difference between bank loans and high yield? Yeah, good question. Thank you, Michael. High yield is unsecured, fixed rate coupon debt, typically. You can have secured debt. And then bank loans are floating rate, secure debt. So typically senior in nature. But it would be the same type of bar. borrower, right? Same type of borrower, below investment grade, you know, large corporate borrowers.

Starting point is 00:12:44 The market has generally been migrating up in tranche size. So these are larger borrowers, typically a billion-dollar tranche of debt or more in these markets because the private credit market is taking a lot of smaller issuers out of the market. Again, private credit, just to clarify there as well, that is also corporate borrowers. It's just typically smaller corporate borrowers, you know, EBITDA, 50 to 200 million versus in the large corporate high yield and bank loan markets, the typical differentiation, and again, these lines are getting blurred as the markets evolve, is EBITDA greater than 200 million. But again, these are all below investment grade corporate borrowers, you know, across a wide

Starting point is 00:13:20 range of sectors, you know, 30 plus sectors in these indexes. Is it unusual for these companies to opt to finance their debt in multiple ways? Like can they do some of the bank loan and some of the high yield stuff? Or is it either or? Yeah. I mean, that's one of the clear trends right now that's taking. taken place in the market is the convergence of these three markets. And just coincidentally, all three markets are about $1.5 trillion, give or take in size. So you have a pretty big

Starting point is 00:13:46 pool of capital looking to buy these respective deals that come to the market. And so you'll see the sponsor really take advantage of that demand that's coming from high yield bank loans and direct lending. And so less often you'll see an issuer issue high yield bonds and a corporate direct lending deal. But more often than not, you might see an issue or issue a first lien public bank loan and a second lien private direct lending as a solution to the capital structure because the public bank loan market is not set up or is equipped to kind of offer that second lien risk, which is often rated triple C. So yes, you will see the markets kind of play off of each other a little bit there. So back to the private credit thing. I'm curious if it's having any

Starting point is 00:14:31 impact on the spreads in high yield or corporates or any other area and is all the money that's flowing into private credit having an impact on the flows into fixed income at all. I'm just curious how that interaction between public and private is happening just because, you know, in the advisor space, we're seeing it. We get pitched private credit funds all the time. And there's a ton of money flowing into there. And it's got to be having some sort of ancillary impact on the fixed income markets as well. Absolutely. It is, you know, first of all, you know, the spread competition that you're pointing to is real and happening in real time. You know, one of the unique things that the PIMCO platform is that we can dual track. We are agnostic if the deal goes public or private. We have capital

Starting point is 00:15:09 for both. So oftentimes we're talking to the sponsor about a solution that could be either or. And they're proposing, you know, spread, you know, spreads are a little bit more elevated in the direct lending market. So more often than not, when the competition's healthy, you'll see them kind of, you know, price in the public markets to take advantage of that lower spread. But yes, there is competition on spread. There's also competition on structure because you you can maybe get a looser structure in the public markets. We've seen a little bit of a degradation in the structures for the private credit market as it's competing.

Starting point is 00:15:38 And the last thing, one thing that is positive, you know, these are negatives I'm pointing out, but there is a positive element to this capital coming in. If you think back historically, you didn't have this private capital out there looking to deploy. If you find yourself with a good company, but a bad balance sheet, we've seen private capital come in and refinance, you know, some bank loans where they have a little bit more flexibility with, you know, I mentioned earlier, picking or amending or maybe even putting a equity capital injection into the capital structure. And it could potentially mute defaults for certain borrowers that historically wouldn't,

Starting point is 00:16:10 you know, they run into a maturity, they run into a liquidity wall. Isn't that a good thing? Yeah, that's what I'm saying. That's a positive. I feel like there's, like the cynical person would be like, yeah, well, they're keeping these crappy companies alive. It's like, well, I guess, I mean, maybe in some cases, I'm sure there's a lot of nuance in there, But having the ability to get surgical and for this not to be syndicated and for these companies to make sure that they don't default and assuming that they're doing in a responsible way and not just piling on debt and debt and debt, which, listen, they want to get their money back.

Starting point is 00:16:40 I think on balance, it's probably not a bad thing. Yeah, that is definitely a positive. Having that capital out there, it's going to mute your default rate. And by the way, in high yield, we're seeing your default rates for two years in a row now less than 2%. So that is definitely, you know, having a positive impact from that standpoint. I think the negative, though, Michael, to your point, though, is that that amount of capital, think about the success of the direct lending product and Ben, you're mentioning it, you know, you constantly get pitched these private lending funds, they raise incredible amount of capital the last number of years, and they have to deploy. So there's a little bit of this urgency or necessity, you know, to deploy. And then when you have that kind of time frame with limited deal flow, you're going to compromise some things that maybe in the past you want to compromise, i.e. structure and spread.

Starting point is 00:17:26 But so don't you think a reasonable and then onto this is not necessarily an implosion or systemic risk or people getting hysterical about too much money chasing too few deals? It's probably lower returns. Yeah. And that's what we're saying. But lower returns, but you're giving up transparency and liquidity, which I think is critical, right? Because unlike the public markets, you know where things trade. There's an active market.

Starting point is 00:17:54 So you're getting, you know, I would argue. you, you know, there will be periods like Liberation Day earlier this year as an example where that lack of liquidity can be really painful where you can't, you know, go sell your private loans because there's not an active bid for them to rotate into an asset class that maybe gets oversold in those periods of dislocation. So that's, that's the tradeoff. And you should get compensated for that liquidity. Historically, I mentioned earlier, you should get at least 200 basis points. You're not seeing that today. How do you think those fund structures will handle that? because the way that they've set these, you know,

Starting point is 00:18:25 interval evergreen fund structures is you can take like 5% out. It's a very small amount that you can take. So you can't have an investor rush for the exits. So does that actually help with the illiquid nature of these? Like you can't get this crazy event where like everyone rushes for the exits to sell because the investors themselves are kind of stuck right or wrong. No, no, that's right. But I wouldn't say that's a positive, right?

Starting point is 00:18:49 You want your money back at times of dislocation or times of fear, and you can't get that. You know, I won't mention by name, but we had a large competitor a number of years ago in the real estate space that did put up, you know, gates and limit, you know, flows back in a very large vehicle. And it was quite frustrating. Eventually, they found capital away from, you know, the traditional retail investor to kind of solve some of that problem. But, you know, I think that's a real problem. And also you have the question, Ben, of, okay, in that time of the gates are going up and you're not really getting a daily mark to market, how much do you trust the marks as well, you know, in that period of risk off, dislocation, et cetera. So then those are our fundamental concerns is that not necessarily systemic, Michael, to your point, but that you should be getting compensated for the risk that you're taking and just doesn't seem that way. And with the Fed cutting and spreads competing with public markets, all of a sudden, this isn't a 9, 10 percent yield product.

Starting point is 00:19:45 it's probably more like a, you know, seven, seven plus percent yield product. All right. So you are one of the portfolio managers along with the very famous Dan Iveson of the PIMCO multi-sector bond active exchange traded fund. The ticker is P-Y-L-D. When you say you guys are active, does that mean that you're making bets away from the benchmark? Or, and maybe, does it mean that you?

Starting point is 00:20:15 you are actively turning over the portfolio based on relative value and things like that. Yeah, good question. I'm glad we can clarify that. So first and foremost, PYLD is benchmark agnostic. So one of the differences, the thing about PYLD versus like a core product is not beholden to the Barclay's Ag. So we can more actively manage duration. And we can also access parts of the market that maybe the Barclay's Ag, you know, can't offer you, such as, you know, securitize or agency MBS. So active management to us, you know, is a multifaceted approach.

Starting point is 00:20:49 It's duration and it's also going where we see the best relative value in these other asset classes outside of just corporates. I think that's very important. So it's a risk-adjusted total return orientation, you know, and really utilizing the broad PIMCO platform to, you know, we talked earlier in my kickoff comments about our top-down views where we see value today. And then you combine that with some bottom-up, you know, views from the credit standpoint. point. And that's kind of how we, you know, think about portfolio construction at PIMCO's, public or, you know, if the mandate allows for public or private, corporate or securitized, I mentioned earlier, we think, you know, corporate's a little bit tight right here. We find better value in funds like PYLD on the, on the securitized side, on the agency mortgage side,

Starting point is 00:21:32 where the technicals are very different there. I described, you know, overwhelmingly positive technicals on the corporate side. It's not the case on the securitized side. You've had the What does technicals mean? I'm sorry. What do you mean in that sense? Just demand for issuers, right? Like there's a lot of buyers, you know, you were mentioned earlier, the amount of, you know, people pitching direct lending funds to you guys or corporate funds to you guys.

Starting point is 00:21:55 It's not the case on the securitized side. The banks have been in retreat for a number of years now. You had the regional bank crisis, you know, just two years ago. So they don't have the same kind of balance sheet or footprint in this securitized market. And that's where strategies like PYLD can come in and find some excess spread. in those areas to market. And being benchmark agnostic, you know, it just gives it, you know, for a bigger toolkit to kind of express that, express our best relative value views. So I'm curious what you think about the mortgage-backed security market because that's been an

Starting point is 00:22:26 interesting one, too, that seems to be kind of messed up by this decade. You have higher than average spreads there. And I understand why they're there because essentially the duration of these bonds got pushed out, right? Because people haven't been refinancing, right? They got stuck in their 3% mortgage, then rates went to 7%. Why would you refinance or why would you sell your house and get a new mortgage? So I don't know what the numbers went to, but I think the usual mortgage duration is something like 7 to 8 years. It probably went to, you know, much higher than that on average. People seem to want mortgage rates to come down. They're falling a little bit, not as much as most people would like. So what do you think about that space? It's one of our,

Starting point is 00:23:03 you know, favorite trades at PIMCO for a variety of reasons. You're right. It's, you know, been elevated for for a while now since the fed started raising rates you know this the spread is still at historically wide levels i mentioned the word technicals earlier um you know what's happening there again is you know banks are not you know buyers of these of these agency mortgages and also the fed has been in a selling program so you you have a lack of demand you know leading to those historically wide you know spreads why we like it is you know when you kind of risk adjust it it trades cheap to investment-grade credit. It's very resilient.

Starting point is 00:23:40 And then lastly, if you kind of look, you're right that, you know, with the Fed, you know, not really cutting until just this month and, you know, the cycle just beginning, typically agency mortgages are going to perform well in a Fed cutting cycle as implied vols are down and, you know, the curve is steepening that, you know, it's a positive backdrop for that. So what does it take to get those spreads down? Because obviously people in the housing market want to see those spreads compress. Is it just the lack of volatility?

Starting point is 00:24:04 Like what is going to make it do? Because I keep saying maybe the Fed needs to buy mortgage back bonds together or something to make the mortgage rates go down. Is there a more natural way to do that? Yeah, I mean, there are things that, you know, Scott Besson himself has talked about that. And I think there's a focus from the administration in general to get mortgage rates lower. So, yes, the Fed could, you know, step in potentially. They could also start reinvesting, you know, the proceeds from the runoff back into that market. You know, Besson's talked about different things with the curve.

Starting point is 00:24:35 that he could do as well. So I think there is a focus on getting that rate lower. So far, the Trump administration in general has pushed pretty hard when they have an agenda. So we'll wait and see what happens going into 2026. But it does seem like with the beginning of the Fed cutting cycle and these other tools that are potentially out there that there's at least positive momentum to getting those rates meaningfully lower. Jason, let me ask you about the hypers. There was news last week between the deal between Oracle and OpenA.I. And we're on this, we're on to this new chapter of hyper-scalers where not only are they going to be funding the expansion of their data centers with free cash flow, there's now going to be an element of debt involved. Are you guys

Starting point is 00:25:20 exposed to the AI trade? And what do you think this next phase of whatever the heck we're entering in looks like? Where do we go from here? No, it's a great question. And I think the need for capital is just so great, Michael, that, you know, the, the big seven can't do it themselves. So you're right that they've begun to go out, you know, to large asset managers or private debt managers and look for debt to kind of fund needs, you know, whether it's data center buildouts, you know, energy buildouts, whatever, whatever the need related to AI capital will be. So I think that's a new trade that's, that's emerging. And yes, we are actively looking and involved in that trade where, you know,

Starting point is 00:25:59 I think the term that they're using is private investment grade. So you've seen a number of transactions taking place, you know, with asset managers where they can fund a high quality borrower that effectively has an A rating, but pick up 100 basis points or more in additional spread for that risk, just given the private nature of that transaction. So that's a growing, again, in this multi-sector active management approach that we have. That's a very lucrative part of the market potentially that could be a secular trend as we continue to build out all things AI, you know, all things AI related, whether it's the fiber, the data center, or the energy needed. So you talked before about how you're kind of agnostic to

Starting point is 00:26:39 a piece of paper coming publicly or privately. I'm sure you have plenty of funds that can invest in both, right, public or private debt. So in those funds, are you, are you now, you know, is the public debt more attractive to you because of what's going on in the private space? Are there still areas of the private debt market where you see a lot of value? No, it's a good question because I think sometimes, you know, that question can lead to a little bit of misunderstanding from, you know, your end client. What is private debt today? Because I think different people have different definitions of private debt. We don't see, I mentioned earlier, direct lending is being, you know, the most obvious private corporate debt is offering great value today.

Starting point is 00:27:23 But where we do see value in our strategies, you know, we have one PIMCO. flexible credit income fund, we call it P-Flex, that is set up to be a little bit more. We mentioned P-Y-L-D earlier. P-Flex is a little further out in the risk spectrum. It can go public or private, corporate or securitized, and it's an interval fund structure so it can take advantage of, you know, a little bit of the lack of liquidity we might find on the private market. But where we really find a lot of value today is on the structured private credit side

Starting point is 00:27:53 of the market. You know, with the PIMCO platform, our ability to invest outside the program, you know, the purview of a regularly syndicated like ABS, RMBS, CNBS, or CLO deal, which are kind of the standard, you know, securitized type markets. We can provide, we can sort of capture incremental excess spread just because I mentioned earlier the bank's retreatment, retreating from, you know, the broad markets, we can offer bespoke financing solutions to isolated assets. And so that's what I mean when I define private, uh, securitized market. And these assets can be, you know, pulls of receivable, mortgages, physical real estate, other forms of technology infrastructure like data centers

Starting point is 00:28:33 like we were just talking about. So this is where we see the best value in the market. So this leads to origination, having access, having relationships with both banks, partners, banks, or strategic corporates, etc., are going to lead to these kind of bespoke transactions where we see a lot of value. And again, you're picking up a decent amount of excess spread relative to what you would get in the broadly syndicated parts of the secure. market. Jason, last question from me. I saw somebody, I believe it was yesterday. So I apologize

Starting point is 00:29:04 too. I'm lifting this from. I can't remember. Talk about CLO issuance and there being a lot of supply of it. Is there any concern there about the potentially opaque nature or maybe misunderstanding of what buyers are actually buying? Like, you have any opinion on that side of the market? Yeah, good question. I definitely have some insight and opinions related to that. No, unlike the the direct lending market. In the CLO market, you have full transparency actually into what you're buying. So if you're buying, and I know there's been explosion in some of the AAA ETFs that are out in the market, particularly the last year or so, you do know what the underlying risk you're buying is and there's marks for everything in that portfolio. I also think as that market

Starting point is 00:29:50 continues to grow. And again, the AAA market is about a $700 billion market. So it's not a small market. It continues to grow. CLO creation is on pace to kind of break 2024's record again this year. I'm pretty confident that, you know, it's offering the resilience that you want of a true AAA. You'd really have to have some dramatic, I don't think, you know, dramatic defaults, recoveries, et cetera, even come close. And the way the waterfall works, you know, the vehicle effectively de-levers be further there ever is any real impairment risk at the AAA level. So I think impairment risk is incredibly low. And I think as the market matures expands and as this ETF product in the AAA space and games traction, I think there's been a little bit of an investor education in

Starting point is 00:30:35 general that's leading to improve the liquidity in that market as well. So I think you're seeing improve liquidity. Now granted, there is credit risk here. So I think someone treating this as no credit risk is a misunderstanding what they're exactly buying. But you do have transparency and you do have, you know, really good resilience in the underlying credit risk of that CLO debt. It's interesting. We've been getting more and more questions from people who listen to our show asking about CLOs. And I think people really liked the idea that they were floating rate, especially in 2022. Anything that had floating rate was good. So obviously, the tradeoff there is that when rates go down, you don't get as much of a bump on the duration piece probably

Starting point is 00:31:14 because it's a floating rate. Like you don't get a big bump when rates fall. Is that pretty obvious, correct? Yeah. It's a software plus product. So you're, you're, you're, you know, obviously with the Fed cutting, looking at the forward curve, you've seen, you know, spread compression in that product, or you're going to expect to see yield compression in that product going forward. But what's interesting is I think people are utilizing. And PIMCO, by the way, is, you know, we are active investors in the AAA space ourselves. We do like that part of the asset class of the market. You're getting a, I mentioned earlier, a very resilient product, you know, picking up a decent amount of spread. And it's offering a little bit of that diversification

Starting point is 00:31:52 that you might want with the floating rate in nature of it, even in a fake cutting cycle. All right. Sorry. One more question. You mentioned earlier that the bank loan, high yield, and private credit market are all around the same size at $1.5 trillion. Do you see the ascent of private credit continuing where that goes on making up a number, $10 trillion and the other two are like two or three?

Starting point is 00:32:18 Like, where do you see this headed? No, I think there's a, it's not. going away, private credit's here to stay. I think it provides a, I mentioned earlier, you know, a really important pool of capital to the broader markets, especially in a risk off market where, you know, there's a certainty of execution that the sponsors like to have. But you're starting to see that growth kind of, you know, slow down and plateau a little bit, which is why generally you're seeing a pivot from the large managers looking into, you know, private investment grade, looking more into securitized. I think as that market starts to

Starting point is 00:32:51 mature and you're competing with the CLO market in general, you're not going to see the same kind of growth that you've seen the last number of years. So I think you see a little bit of a maturity in that growth, a little bit like what you saw in the Bangalow market maybe five years ago or so where you had an initial explosive growth. The market continues to grow, but at a slower pace. That's my expectation here. Especially if yields are coming in a little bit, I think maybe there's a little bit less demand for that product as well. One more question for me. Michael just bought a new house, he got a new mortgage. Is he going to be able to refinance soon? If you're bullish on mortgage-backed securities, Michael should be good for refinancing in the coming year, right?

Starting point is 00:33:29 Yeah, I think that's our hope. I mean, it's obviously been the hope for a little while here. I think the market really could use some stimulation in the housing market. Think about all the knock-on effects if we can get housing moving against. I think that would generally be positive for the U.S. economy. We've seen some pretty bad numbers coming out of some of the home builders reporting recently. So I think the broad economy could use that. I do think you'll see people get a little bit more creative as well with IOs and things of that nature. If the front end is low and the back end stays sort of the same. So does that mean more arms, probably?

Starting point is 00:34:02 Probably more arms. Yeah. So, Michael, you might be putting yourself in a seven-year I.O. initially until the curve cooperates. And then you can get back into a lower, you know, 30-year mortgages. But that might be a multiple step process. But we'll see how it plays out. You know, again, I mentioned earlier that the administration is.

Starting point is 00:34:19 It's keenly focused here, so maybe they can move the needle a little bit on where rates are. Perfect. All right, Jason, for people who want to learn more about PIMCO, where do we send them? To our website, you know, PIMCO.com, I think you can go on there, find many of the funds that I mentioned today, whether it's PYLD, PIMCO Fund, our income fund, our total return strategy. It's all kind of on the PIMCO website. Perfect. Thanks very much, Jason. Yeah, thank you guys for having me today. Okay, thank you to Jason, remember check out PIMCO.com, to learn more about all their different strategies like

Starting point is 00:34:49 P-Y-L-D or P-Flex, right, Michael? Right, Ben. Yeah, P-Flex. Well, you're the one that names these things. Email us, Animal Spirits, at the CompoundNews.com.

Animal Spirits Podcast - Talk Your Book: Investing in Public and Private Credit

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