After the Selloff and Rebound: What's Ahead in Q3?
Robert Abad: Good morning everyone and thank you for joining today's call. I'm Robert Abad, Product Specialist at Western Asset and with me is Mike Buchanan, Western's Deputy CIO and Head of Global Credit.
Robert Abad: In today's conversation, we'll be discussing key developments in credit markets over the past quarter, global policy response to date and what all of this means for investment opportunities going forward. At the end we'll have a brief question and answer session. If you wish to participate, please submit your questions by typing them into the Q&A box on the left hand side of your screen. With that, let's get started. Mike, good to have you here.
Michael Buchanan: Hey, thanks, Robert. Appreciate everyone tuning in and happy to be here.
Robert Abad: All right. Well, let's set the table. I think it's just worth acknowledging the incredible turnaround in market sentiment from the March lows. You know, if everyone recalls back then there was a lot of fear, plenty of concern that we might experience a global depression. Yet the policy response, whether you look at the U.S. or Europe as examples, has been equally impressive. And here we are with the S&P 500 back to where we started the year. What's your take on this, Mike?
Michael Buchanan: Yeah, I think it's really interesting. I mean, if you look at these two, the reaction of the different quarters on page three, in some ways they're really mirror images of each other. But we would argue that the magnitude of the first quarter selloff really overwhelms the scale of the second quarter rally. And in some ways, I think, you know, you have to look at the drivers of each one of these quarters. The selloff did make sense. You know, there was so much uncertainty. There was a virtual halt to all economic activity. There was tremendous uncertainty as you alluded to. Questions, open questions on employment, small-, medium-sized businesses, the stress they would witness and perhaps default. The virus itself, you know, how does it spread? How lethal is it? Would it mutate? So many uncertainties and policy obviously was another one. Although we had some insights on where policy may be going, we didn't really have a lot of direction on that. And markets priced in all that uncertainty. And then you move over to the second quarter and we learned a lot. We learned a lot about the virus. We've all seen that there's been more effective treatments of the virus. I think the vaccines there's, I think the number is 26 and counting companies or consortiums that are working on a vaccine. So real hopeful developments on that front and the reopenings have started to occur. Not with, you know, not perfectly smooth, but we at least have seen roadmaps of how those reopenings might look in China, in Europe. And probably most importantly, we have a much better understanding of the policy response.
Robert Abad: Right. And to your point, we do have a better idea of that roadmap. So let's talk a little bit more about that. The Fed not only dusted off that 2008 playbook of theirs, but they really showed flashes of creativity this time around. Can you elaborate a little bit more on what's transpired?
Michael Buchanan: Yeah, I mean, in terms of policy, it obviously started with with monetary policy. That was, you know,the first wave of policy, if you will. And it wasn't just the Fed, it was global. Coordination in the form of rate cuts, you can see on this page, on page four, you know, just how dramatic they were and how global in nature they were, as well as quantitative easing. So I think the very first response was was really impressive and really a very powerful tool against the virus. You know, it didn't just stop there, obviously.
Michael Buchanan: I think if you go to page five, fiscal policy has been equally impressive. And if you tuned in to our Chief Investment Officer's prior webcast, this page probably looks somewhat familiar. But really, you know, it shows this is in the US we had the Cares Act that went a long way towards addressing some of the stress at the individual level, which you can see on this slide, really offset a lot of the damage from lost employment but also really extended to small- and medium-sized businesses, as well as large businesses, most notably and probably most high profile being the support that the airlines were given. We know that this stimulus package runs out at the end of July. Our team is doing a lot of work in terms of understanding how the next round of stimulus will evolve and develop. We do think ultimately there will be a next round, probably won't be without some political wrangling and some volatility along the way. But clearly, more stimulus is needed. And we do think ultimately there will be a Cares Act 2, or a second round of stimulus.
Robert Abad: Right. And if we go to slide six, you can see how the stimulus measures across other major economies have helped prevent what could have been an even bigger catastrophe. So here we're showing PMI data.
Robert Abad: So this is Purchasing Managers Index data. This basically gives you a sense of the direction of manufacturing and services activity. Now, we've seen a decent bounce in China, Europe and the U.K., but there's no question that the repair process globally is going to take some time. And especially if you consider the amount of damage caused by a pandemic. And obviously, the path of the virus is still an unknown.
Robert Abad: On that note, Mike, you know, the U.S. economy is still facing a number of headwinds, even with all the monetary and fiscal stimulus you mentioned. Let's think about the fact that estimates for second quarter GDP are expected to come in around maybe negative 30 percent, maybe higher on an annualized basis. We have a number of states facing budget shortfalls. We've got industries facing a sharp decline in revenues. Obviously, unemployment is still up in double-digit territory. Against this backdrop, Mike, how are the corporate credit fundamentals expected to hold up here?
Michael Buchanan: Yeah, it's a great question. And obviously, like you said Robert, you know a lot of uncertainty with respect to second-quarter GDP. We're starting to see second-quarter earnings right now. I think almost investors are going to look through that, recognizing that this is truly a, you know, just an unprecedented quarter and really focus more on the outlook going forward.
Michael Buchanan: But if you look at page seven, I always like it when you're talking about corporate credit, I always think the best place to start is with the banks. If you think about it, they're just a vital part of the overall economy and obviously a very large issuer within the investment-grade corporate credit market. In the US, we have we have four major banks, approximately 50 percent of the overall banking system. And these banks came into 2020 with really the strongest balance sheets that they've had, as well as really the best core earnings power that they ever had. All four banks have reported their second-quarter numbers and the slide we're looking at, our Global Financials Team put this together very recently, and it shows just how quickly banks were able to redirect shareholder payouts, redirect strong earnings and move those towards loan loss reserves. I think banks and regulators have really learned from the global financial crisis in 2008/2009, that a larger and more rapid response can often and does lead to less severe banking downturns. So I think what this slide really is showing us is, one, banks get it. They understand what could be the magnitude of the problem. But also they're being very conservative. They're increasing reserves very rapidly in excess of where they increased or where those reserves were back in the global financial crisis.
Robert Abad: And you can apply what you just said to other sectors beyond financials, right?
Michael Buchanan: Yeah, I think you certainly can. I mean,this is telling us about behavior. This is conservative behavior by the four major banks. But yeah, extending it into other corporate sectors, Robert, we see the same kind of conservative balance sheet oversight. Everyone's seeing the same uncertainty, the same lack of clarity that we all individually see. And what they're doing is really trying to take control of their balance sheet. They're increasing their cash positions. They're really focusing on paying down debt. They're doing everything they can to control expenses. We've even seen companies tendering, actually going out and taking out short-term debt like Boeing and G.E. and Occidental Petroleum. You know, the whole goal really is let's control our balance sheet, let's not be at the mercy or the whims of the capital markets and let's just focus on balance sheets. So I think the same conservative oversight and the same conservative nature that we see with the banks, it's fair to say it does apply to all corporates.
Robert Abad: Right. So that's a fundamental side of the equation. What else is helping to drive IG markets here?
Michael Buchanan: Yeah, I mean, I think that everyone knows the big technical factor when it when you talk about U.S. credit and what's really a game changer has been the Fed. And for the first time ever, the Fed's in the market buying corporate credit. And we saw hints that this was evolving and developing and thought it was likely, you know, as far back as midway through March.
Michael Buchanan: But I think what's probably more impressive than the fact that the Fed's in the credit game for the first time is really just how malleable their policy has been and how responsive it's been to the changes in market conditions. So they're really adjusting to all the complexities in the corporate credit market. I think the first thing that the Fed noticed was there was this lingering problem. There was anticipated to be a lot of what we would call fallen angels. These are companies that are going to get downgraded or were likely to get downgraded from investment-grade to high-yield.
Michael Buchanan: So you can see on this slide on page eight, the first modification was really figuring out a way where the Fed could actually include those fallen angels into their secondary market purchases, because initially it was just aimed to be investment-grade credit, zero to five years. After that, they also noticed an issue because the first range of policy suggested that any company receiving benefits through the Cares Act could not be eligible for purchases. They've been able to see some of the challenges and complexities in the market and they worked their way around that. And now they are in fact, buying the debt of some of these companies like Boeing that have benefited from some of the policy of the Cares Act. And, you know, we see that firsthand. They report all the data of bonds that they're buying.
Michael Buchanan: Final step, and really this was really a challenge. Companies were having a hard time passing their self certification hurdle that the Fed put in place. There was a lot of uncertainty. If you are a company, what this would mean for your everything from executive compensation to what you could do with the balance sheet, share repurchases, dividend policy and so forth. The Fed saw this. They recognize this challenge and they worked around it by creating an index.
Michael Buchanan: So, again, you know, I would say that what's really impressive about Fed policy has been they totally get it. They're seeing challenges in the market. They're responding to those challenges in the market.
Michael Buchanan: If you go to the next page, page nine, this really is just showing sort of the path of corporate buying so far. Now, what I would suggest here is in the upper chart, you can see that this appears to be diminishing somewhat. What I would say about this, and I think what our team would say about this is this in no way is to reflect that the Fed is running out of buying power, or ammunition, quite the contrary. They are being responsive to market conditions. And in some ways, the investment-grade credit market is rallying and doing their work for them. So they're still taking their foot off the accelerator and they have brought down their purchases.
Michael Buchanan: We have every bit of confidence that if you were to start to see dislocations in the market again, if you were to start to see spread-widening, they would once again be back in the market very aggressively. They've probably only spent about $12 billion roughly on corporate credit. And at that run rate, you know, they probably spend about, let's say, $50 billion by the time this program expires in September, compared to $750 billion of buying capacity. So, you know, they have many levers to pull still. They can be very responsive to market conditions.
Michael Buchanan: The other thing that that I didn't mention, you can see on the lower chart ETFs. They initially started buying ETFs. Now that's migrated more to bonds. By buying ETFs initially, they did extend that to high-yield. So in any given week, in any given period, approximately 10 to 25 percent of those ETF purchases were aimed at high-yield, which again, has really kind of helped stabilize the high-yield market.
Robert Abad: Right. Right. And we look at just IG credit that's been off to the races, not just in terms of the recovering spreads, but also the amount of new issuance, even at elevated spread levels, Mike. What can you say about that dynamic?
Michael Buchanan: No doubt. You know, if you look at page 10, when our Credit Team got together and started talking about the dislocations and the stress in the market back in March, one market that we identified as being a first responder market was the investment-grade credit market. And this was really happening or evolving as we started to see very high quality companies accessing and getting financing in the investment-grade market, albeit at very, very cheap levels, very wide spreads. But what it was telling us was that the credit markets were open. And what were these companies doing with the money that they were getting? They were really, as I alluded to earlier, they were solidifying their balance sheets. They were increasing their cash positions. They were taking control of their own destiny. So, you know, you look at these you know, you look at these companies on page 10 where they priced on a spread level. You venture to say that most of these bonds are up anywhere from 20 percent to 30 percent or even more since the time of new issue. The performance has been tremendous. But investment-grade credit, to my point, was really this first responder market. And as it started to stabilize, as it showed access to capital was available, and then certainly with the Fed coming in late March, that's really given a nice tailwind to the investment-grade corporate credit marke
Robert Abad: Right. Any other drivers of demand out there? That's on your radar?
Michael Buchanan: Yeah. Well, our investment-grade credit team does a lot of work on not only the fundamentals, that's really where we at Western Asset, that's where we spend most of our time. But we also don't ignore the technical factors.
Michael Buchanan: So if you look on page eleven, our team does a great job monitoring demand drivers out of Asia. And what this chart shows is that the cost of hedging, the cost of a Japanese investor investing in U.S. credit and then hedging that back to yen has improved dramatically from only three to nine months ago. So despite the fact that that actual valuations have tightened since March, you can see that the cost of hedging has come down almost as quickly. So when you look at the yield advantage for an investor, whether it's a big insurance company in Japan, a bank, even individuals, they can go in, they can buy U.S. credit, hedge that back to yen and still have over a 100 basis point yield advantage. And you just compare that with that green line of where we were, like I said, anywhere from three to six months ago. I think that's very powerful. That's a real powerful demand driver. Doesn't necessarily guarantee that this money will be coming into the market. But we do think that, you know, there's this latent source of demand that's out there. And certainly hedging plays a vital role in determining if that demand actually comes to fruition.
Robert Abad: That's right. So IG has done really well, but high-yield is still negative on the year, even after a very strong second quarter. What do you think explains that?
Michael Buchanan: So great question. High-yield, I think, again, as we were talking about sort of the investment-grade market being a first-responder market, the high-yield market, from our perspective, is more of a second-responder market. And we are starting to see traction in the high-yield market. What probably has caught most attention so far this year has just been the massive amount of new issuance. Clearly, we are, as you can see on this chart, we are going to break the record for all-time, new issuance. And there's been a lot of focus on that. But I think what's really important about new issuance is what is that new issuance being used for and what does that new issuance look like in terms of quality?
Michael Buchanan: So at the top of page 12, one thing you note here is that 60 percent of high-yield issuance has been double B rated in high-yield market breakdown, breaking down into double B, single B and triple C. Double B being the highest quality cohort of the market. So what we're seeing is a lot of high quality companies are accessing the market. Secondly, if you look below, what are they using? This issuance, the proceeds that they're raising, what are they using that for? A lot will tell you it's for GCP or what we call general corporate purposes. But one of those purposes can be cash. And you see, that's definitely what's happening. Companies are hoarding cash. They're putting a lot of cash on their balance sheet. Goes back to what I was talking about earlier. It's absolutely vital right now in this time of uncertainty that companies really control their balance sheet. I think that's a really encouraging sign. Again, it's telling you that corporations are being conservative. Obviously, we as as lenders like to see that.
Michael Buchanan: If you if you turn to the next page, Robert, page 13. Just take a deeper look into, you know, what high-yield companies are are not only issuing but but how they're behaving. On the top chart, we already talked about this, more double B issuance versus single B and triple C and that quality profile, I think is is encouraging.
Michael Buchanan: But on the bottom chart, so I talked about the general corporate purposes and how much of that in the middle there is being used to just put cash on balance sheet, but probably even more importantly is how much is being used for refinancing. So, you know, again, companies aren't going out taking this money and spending it on capital expenditures, spending it on capital expansion. What they're really doing is they're saying let's take a look at our debt amortization schedule and let's attack that front end. We don't you know, as I mentioned earlier, we don't want to be at the mercy of the capital markets. So you're seeing a lot of refinancing. Walter Kilcullen, who's the head of our High-Yield Team, would tell you that that's high quality issuance. We love to see that because, again, it says the companies are being very conservative in their behavior. And very little quite frankly, on the left side, you know, acquisition finance, levered buyout finance. Very little financing in that category.
Robert Abad: Yeah, well, these are all great points, Mike. And you know, something you mentioned a little bit earlier about fallen angels. You know, when you look at the Moody's data. It seems like we have around 600 downgrades over the past three months. That number obviously is not ending there. This is across a number of sectors. Is there any sector in particular that, you know, maybe is on your radar that you're concerned about?
Michael Buchanan: Well, I think on page 14, you have to talk about the energy sector for a number of different reasons. One, because what you just mentioned. A lot of fallen angels, a lot of investment-grade companies that have been downgraded and made their way into the high-yield market, but also just performance. I mean, go all the way back to 2011 and just look at how dramatic the underperformance of energy versus the entire high-yield market. Now we look at this sector as really a sector that has both the greatest opportunities in it as well as the greatest risks. And I think this highlights just some of the real interesting, what I would call, idiosyncratic opportunities in the high-yield market. We're finding a lot of opportunity here if you look at the subsector of energy, the exploration and production sector. Our team is really using and they're leaning on, their focused, disciplined, fundamental research process to highlight and find, you know, what are the companies that operate in the best basins? What are the companies that have relatively low and manageable leverage, strong balance sheet and very good cost structures? And those are really being dragged down with, as I mentioned earlier, some of the companies that have continued to have, even at these valuations, the greatest risk. So, you know, taking advantage of weakness in the sector, but finding those companies that we think are truly survivors and have a lot of the relative value merits that our team always looks for.
Michael Buchanan: I think it's worth noting, this week alone, you saw Chevron buying Noble Affiliates. That's a very high-quality company buying a lower triple B rated company in this sector. Now, we're not suggesting that you're going to see a continuation of merger and acquisition activity in the sector, but I don't think it's unreasonable that we could see that. You know, I think these assets, when you're looking at the individual company basis, are very, very cheap right now. And perhaps rather than spending money on capital expenditures, it might be cheaper for these very large, high quality, integrated companies to go in and selectively buy companies at very cheap valuation. So, our research isn't based on hope of a buyout. But I certainly think that's something that that you could see evolve over time and could be an added benefit to some of these companies that I mentioned earlier that we're that we're buying.
Robert Abad: Right. Mike, you know, a close relative or let's just call it sister to the high-yield market is the bank loan market. What are you seeing there at this time?
Michael Buchanan: Yeah, I think the bank loan market has been a little bit of a head-scratcher or a little surprising, because, you know, Robert, earlier you talked about high-yield with negative returns year to date. The bank loan market is actually underperforming high-yield, which you wouldn't expect when you think about what it is you're investing in with respect to the bank loan market. These are corporate obligations that are senior in nature. Most of the time they're secured. So they are or at least should behave a little more defensively. Yet we haven't really seen this play out. And it's one of the reasons why we think there's real opportunity in this sector or in this space. On page 15, what you can see here is that the market implied default rates--so the default rate that's implied by current pricing in the market--according to our team, is a little over nine percent. You can also see the trailing 12-month default rate roughly around, let's call it five to six percent. I think you could look at other measures that would suggest the default rate's even lower than that. But ultimately, our team doesn't see defaults this year going above the four to six percent range. So the market's pricing in something that's quite a bit more severe than what we see materializing. And with loans at an average price of about 91 cents on the dollar, you know, it really does stick out to us as being one of the cheaper asset classes in the spread markets.
Robert Abad: All right. And anything to say about CLOs, because you know, a lot of headlines on that market.
Michael Buchanan: Yeah, I think you were calling the loan market the sister of the high-yield market, let's call the CLO market a cousin of the high-yield market. You know, all related, all correlated, ultimately all investing in the same kinds of corporations. But, yeah, a lot of confusion, I think, when it comes to the CLO tranche market. And we would say based on that confusion, also a lot of opportunity. If, you know, we were talking about the investment-grade credit market being a first-responder market and perhaps the high-yield market being a second-responder market. And, you know, maybe we're midway through that right now. I think CLOs probably more of a third-responder market.
Michael Buchanan: But what we see here and we've got a lot of information on this chart, a lot of different things to point to. One, I would say if you just look in the upper left, triple A CLO tranches, at let's call it anywhere from 175 over versus maybe 190 over. In that range to us really stick out as as one of the cheapest assets in the fixed-income universe. You compare that with investment-grade credit, let's say in the low one hundred's triple A CMBS perhaps at plus 125. And we would argue both those asset classes, you know, have real opportunities. But, you know, you compare triple A, CLOs, you know, just from a relative value standpoint, you know, they truly stick out to us as being very compelling. And I do think that investors are underestimating the resiliency of the CLO structure.
Michael Buchanan: The other chart I would draw your attention to would be in the lower left on page 16. You can see that double B CLO tranches as well as triple B CLO tranches really haven't enjoyed the same kind of bounce that we were looking at in investment-grade credit or even in high-yield credit. You know, still kind of at or near the wides. So, again, we look at this market as being a real opportunity. There's probably going to be a point where you get a lot of total return by investing in CLO tranches. But it's definitely kind of one of the the laggards to date. And you know what we would call maybe a third-responder market.
Robert Abad: All right. Well, Mike, let's switch gears here. So a few weeks back, our Structured Team put out a note that highlighted the stress that the pandemic is having on residential and commercial tenants, property owners and lenders. Initially, the market was focused primarily on the pain in the retail and hospitality sectors. But now there's increasing concern directed at the office sector. And that's reflected, I think, in the lack of any meaningful...(Inaudible)...Two months structured credit market.
Michael Buchanan: Yep. Robert, I apologize, you cut out there for a second, but so I think a broadly I'll talk about the commercial real estate market. It's as I was mentioning with CLO tranches, some of these markets just haven't responded like we've seen in more developed markets. And I think structured credit in particular, the commercial space is a real good you know, a real good example of that, really, from our standpoint, a deep value market right now. Security prices are at very depressed levels. Everyone knows that you've got a lot of uncertainty, you know, not only with the path of the virus and how that will evolve, but what does the future of office look like in retail and hotel and lodging and the industrial space? A lot of open questions there.
Michael Buchanan: But I think also there are some reasons to be somewhat optimistic and these charts point to it. One on the on the left, hotel occupancy is starting to bounce, albeit from very, very low, low levels. And I do think, you know, our team does a really nice job of of sorting through and looking at all the granular data. It's different if you're a business hotel, a business destination versus a resort or, you know, a leisure destination. Those resort and leisure destinations holding up better for sure. Also within the office category, I know everyone. It's probably one of the biggest questions I personally get in my portfolio management interactions with clients is, you know, what's the future of office space look like? And it's clear it's going to look different. But I also think as much as we can focus on maybe, those, let's call it densely populated cities and you know how commercial office space might be facing some headwinds. So if you're talking New York or London or Hong Kong, there are also areas that are that are benefiting or could likely benefit as office occupants push out to less dense cities.
Michael Buchanan: So I really think you have to do your work. We're fortunate here in that we have a really good team that does look at all the granular data. And again, I think security pricing is reflecting something that is, you know, significantly stressed.
Michael Buchanan: The other thing I was going to point to is just a lot of talk about delinquencies and forbearance. But you can see that the late loan payments are delinquencies have come down still relatively high. But whether you're talking about the conduit market or the single asset, single borrower market, in both cases, you're seeing a decline there. That's an encouraging sign. I'd also say our team has started to see some indication it's very, very early, but there are some large industrial loan deals that are starting to come together in terms of being able to access the market and get financing. And I think that's an encouraging sign. Again, we're early here. You know, as I talk about the first responders, second responders, third responders. This is clearly going to be a market that probably is going to take a little more time to truly gain a lot of investor focus and attention. But as I mentioned, we think it's a real deep value market and there's a lot of latent opportunity here.
Robert Abad: That's great, Mike. So, look, why don't we round out the discussion on that one area that we're still seeing some headwinds, which is emerging markets, right? A number of countries have faced some serious challenges due to the lack of policy tools to buffer the impact of the pandemic. And, you know, they also have weaker health care infrastructure. And, you know, obviously, some of that pain was initially reflected across the EM currency complex. We saw a lot of volatility through April or May. That said, central banks have been able to bring local yields down successfully, which is supportive for growth. And on the demand side, we are seeing more client interest and inquiries on EM, especially like in a new issue area. What would you say are the opportunities in this segment the asset class?
Michael Buchanan: Well, if you look at page 18 and you look at emerging market, hard dollar, dollar denominated sovereign spreads, not surprisingly, they they've enjoyed a nice comeback from where we were at the wides back in March. But certainly not all the way back. And certainly still a nice discount to where we were. But probably even more importantly, Robert, if you look at that lower chart and you just compare the relative value, you know, what is the yield pickup if you're looking at an emerging market triple B or an emerging market single A, again, dollar denominated fixed-income investment, and you compare it to what you could get in the U.S.? You can still see it's a pretty nice yield advantage, a pretty nice yield pickup from where we were only a few months ago. So our team's doing a lot of work in that market, finding a lot of opportunities.
Michael Buchanan: And again, you know, putting it all together, I would say going back to that very first page, you know, the magnitude of the comeback, although significant, has not been as strong as the drawdown that we saw in the first quarter. So a lot of these markets, to us, are still flashing opportunity. Granted, you know, two or three months ago, perhaps they were greater opportunities because of valuations. But the level of uncertainty was it was a lot higher. So as we've evolved, as we've been able to get greater insight on everything from the virus to corporate fundamentals and emerging market fundamentals. A lot of these markets are still flashing opportunity to us. And I'd say, you know, the EM dollar denominated market certainly is one of those markets where selectively we see opportunity.
Robert Abad: Thank you, Mike. You know, we covered a lot of ground here and for everyone's benefit, the main points of this conversation are captured on slide 19 for you. Now I think what we do is we use the remaining time we have to tackle some questions. But before we do that, we would really appreciate it if all of our listeners could just take a moment and answer the poll question that's in front of you. As always, we value your feedback. So if you could just do that, we'd be thankful for that.
Robert Abad: Now, as I look at the questions they have come in some of these, I can really roll up into some general questions. But one did pop out, Mike, and it says here: Are you concerned that all the stimulus programs and the build up in overall debt levels in the U.S. may cause a sudden spike in U.S. interest rates? And how do you position for that?
Michael Buchanan: You know, fair question for sure. I think one thing we have to look at is what the Fed is telling us. And the Fed has been very, very clear. They are looking at inflation. Their bias for easing is stronger than their bias for tightening right now. And I think, you know, we're nowhere near that two percent inflation target that the Fed wants to get to. And they're really looking at that. Not only do they have a tolerance to get there. I think they have a tolerance to let inflation run hot, be above two percent. So, yes, we are issuing a lot of debt to pay for all this stimulus. That's concerning. Probably longer term there are ramifications there, probably manifests itself more in slower growth. But I think near-term, the Fed's been very, very open, very transparent. They have a desire to keep rates pinned here at essentially zero in the short end. And we don't see that that really changing anytime soon.
Robert Abad: All right. So we have a second question here: What would you say are the near-term drivers of market direction and perhaps longer term risks?
Michael Buchanan: Good. Good question. Near-term drivers of the market. You know, I would say that it's challenging because of where valuations are and valuations have come a long way. But that being said, I still and I think our team still leans a little more towards being bullish. And the reason for it is it really starts with the virus. That's what got us into this mess to begin with. But we continue to see evidence of advancements in treatment. I think the vaccine is coming. I mentioned earlier, you know, 26 different teams that are working on a vaccine. I think there's news out this morning on Pfizer that, you know, they'll begin phase three trials for for their vaccine sometime this month. And you could see doses available as early as December. But point being, we've got a lot of progress and we've got some of the best minds in the world working on a vaccine. So I think there's reasons for optimism there. And with that optimism, you know, comes a reopening of the economy. I also think stimulus is on the way. I alluded to this earlier, but, you know, there were the first round of stimulus is going to run out at the end of the month here. We are confident that you will see a second round of stimulus. I mentioned earlier may not happen without a little volatility along the way. But we think the ultimate destination is that Congress gets there. Banks, as I mentioned earlier there, and they're in great shape. Banks are really the fluid for a well functioning. They are the engine, I should say, of a a well functioning economy. And we think banks are in great shape. Central bank accommodation clearly is on our side. We don't see that going away anytime soon. We think central banks globally are going to continue to be very accommodative. And, you know, I think I probably mentioned this earlier, but, you know, look to China and maybe to a lesser extent Europe as showing us a little bit of the roadmap for how the reopenings might occur. So I think, you know, not without some stumbles along the way here in the U.S. But I think the path is clear. We are moving towards reopening the economy. And I think all those things are going to be good for risk in general and for risk markets. But in particular, for the for the spread sectors, the credit sectors that we talked about today.
Michael Buchanan: Longer term, Robert, you asked about the risks. There are many for sure. You alluded to one earlier, which is, you know, just the massive amount of debt that's been taken on to combat this virus. But I think one of the ones, I don't know if you'd call this near-term or longer term, but it's it's not super near-term. But but election is coming up very quickly. So obviously, that's something that at Western Asset we're spending a lot of time on now trying to it's difficult to predict outcomes of elections and we all recognize that. But in terms of preparing our portfolios for, you know, different outcomes and being able to thrive in either one of those outcomes, I think is really important to us. So, you know, we're spending a lot of time understanding what industries perhaps may be at risk. And, you know what what overall macro policies might be effectuated if certain outcomes are to evolve in the election. So the bottom line is election's a big one. And I think all investors really have to spend some time thinking about what the results might mean.
Robert Abad: Mike, we have time for one last question. This one really popped out. Very interesting take here. It says equity markets continue to move higher. For example, the Nasdaq recently hit new highs, while credit markets appear to be lagging here. There are a lot of different opinions on the disconnect between both markets but I would appreciate your interpretation. What do we have to say about that?
Michael Buchanan: Yeah, I think it's I mean, no question, credit and equities are correlated to some extent. But I do think you have to look at the different equity indices. I don't think you can, you know, just look at the Nasdaq and say, OK, so Nasdaq you know is setting records and doing, you know, very well year to date. Why isn't credit also following suit? The composition of companies within the corporate credit market looks different than than the Nasdaq. Yeah, I would say for investment-grade credit, look to perhaps the S&P as a pretty good proxy of the types of companies, the types of credits that occupy the investment-grade credit market. And I think, you know, you look at returns between the S&P and investment-grade credit, they kind of have moved in tandem. There's definitely been a pretty strong correlation, I think, for high-yield you probably have to look more towards some of the smaller cap markets, maybe the Russell 2000. And there you'll see underperformance of the Russell 2000 versus certainly the NASDAQ and the S&P. And I think the Russell 2000, I mean, that's a good, good representation of the types of companies that occupy the high-yield and the bank loan space. And those have definitely struggled. Those have seen more pain. And so, not surprisingly, you do see, we talked about this earlier, negative returns year to date for both the high-yield as well as the bank loan market. So I don't look at the disconnect or the seeming disconnect between equities and credit as being really out of line. I think it's been more rational and I think it does kind of make sense. But I do think you have to take a deeper look into the different indices.
Robert Abad: That's a great response, Mike. So, look, that's all the time we have for questions. Mike, thank you so much for all the great insights during this call. And a big thank you again to all of our listeners for dialing in today. For additional commentary, timely insights, please visit our blog at WesternAsset.com.
Take care and stay safe.
Western Asset: The opinions and views expressed in this audio are as of the date indicated. Such opinions are subject to change and may differ from others in the firm or the firm as a whole. This audio is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security or product. Statements in this audio should not be considered investment advice and are not intended to be relied upon as a factual prediction or forecast of future events or performance or a guarantee of future results. Likewise, past results are not indicative of future investment. Results in plays and or clients of Western asset management may have a position in the securities mentioned.