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A
Today's Animal Spirits Talk youk 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 Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain.
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B
Positions in the securities discussed in this podcast.
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A
Welcome to Animal Spirits with Michael and Ben. Michael, I feel like investing in bonds used to be relatively easy. 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. 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 does it make sense for me to invest in this stuff and it's, it's floating rate or it's tied to this asset or, or whatever it is. So anyway, on today's show we brought on Jason Duco, 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 a asset manager their size that manages tons and tons of money. What's, what does Pimco manage these days?
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B
I don't know, trillions, trillion dollars or something. You know, this was, this was one of the first talks that we've done 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 a, it felt, this felt like a real professional interview. Not to brag.
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A
Well, here's the thing. It started out very professional. By the end, he said, you know what, that was very conversational. Thank you, guys. Right.
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B
Oh, did.
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A
He thought it was going to be a CNBC like thing. And then you were sitting back in your chair, lean back and. Yeah, I think we got him to kind of loosen his tie a little bit.
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B
Yeah, it was good.
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A
Yeah. Fun conversation. As fun as it can be about Fin. Right. So here's our talk with Jason Duco from Pimco.
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B
Jason, welcome to the show.
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C
Thank you guys for having me.
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B
So Pimco is, I guess, are you guys the largest active bond shop in the world?
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C
About 2 trillion in assets. And we focus on, only on Active Management.
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B
$2 trillion in assets, not bad. 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 year. Where do you guys think we are today?
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C
Yeah, I mean, obviously there's been a lot of iterations and where things are to your point, you know, including today, we upward revision in second quarter 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 coming in place. The tariff policies in particular, kind of slowing some growth. But we're looking ahead to 2026 and we think some of the monetary and fiscal policy that's out there should be stimulative and offset some of the tariff impact. And so we're looking for a return to decently positive growth in 2020 26, somewhere in that mid plus 2% area.
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B
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 Torsten Slok. We're 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?
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C
Yeah, I think everyone was Caught a little off guard by the resilience of the consumer and I think also by the reaction function of the corporates themselves. 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, 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. But I think that's the balance that everyone's looking at is 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?
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A
So I'm curious from an overall perspective how you think Pimco has handled this decade. Because I looked at the numbers and if you look just at Treasuries, so the five year, the ten 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 5 or 10 year 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 2020-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 we went 0% to 5% 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 is kind of been maybe one of the worst bond markets we've ever seen.
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C
Yeah, fair question. And I think a lot of people were starting to question the 6040 model in general because it's been such a challenging backdrop for a number of years. But I feel like that's behind us. Obviously that move we saw in 2021 was quite painful. In 2022, sorry, was quite painful. But where it leaves us now is, and we've been saying this pretty vocally that bonds are back. I mean we have real yields now unlike we had for a decade plus coming out of the gfc. And this isn't just Pimco speaking. You can see it in the returns you look year to date. Most core fixed income type products are returning high single digits. Some of our the Barclays AG itself is up six and a quarter percent with a quarter to go. I think the numbers kind of reflect where we are and then the question becomes where do we go from here? I think you have a little bit of a tailwind with the Fed in cutting mode and your starting yield is still quite attractive. You're going to get the benefit of that duration I think for a number of years. The duration wasn't acting as that diversifier that we thought it typically would be in that 6040 model. But I think that's clearly not the case today. And we're still pretty optimistic that bonds have a nice place in most investors portfolios at this point in time. Just given these starting yields diversification it provides in most models.
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B
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. Is it the move index? It's at a four year low. It's really interesting, right?
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C
Yeah, it definitely is and we've been paying attention but we also been pretty vocal. If you look at some of the PIMCO literature that comes out, you're right. You look at the ten year, it's been plus or minus four and a quarter, 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, 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, there's been a little bit of range bound but we were inverted a couple of years ago. The curve got pretty steep. It's been flattening most recently. So there's been some nuance to that view that rates aren't moving. I think the curve has definitely been moving. We generally favoring the front end of the curve. Today we're favoring the 5 to 10 year part of the curve. But I think that's where when you take an active duration approach, which again we do in most of our portfolios, you can find value. Even if it looks like the 10 years sort of been range bound, there's been a lot of movement around that 10 year point.
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A
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 a margin of safety? Because it seemed like high quality corporates, the credit spread is pretty tight these days. Are there any areas like that where you're just saying we're not being paid to take risk right now that we're being paid to take it elsewhere?
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C
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. There 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'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 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 and 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 more leverage on these structures. You see elevated 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 for that. Historically the rule of thumb has been at least 200 basis points. 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. So I personally don't think it's going to be systemic in any way. I think it's mostly a real VAL trade that just feels very tired at this point. So that's one area of the market that you could argue is 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 think about high yield spreads are definitely tight There as well. But there's a lot of dispersion happening. Everything on the surface looks okay. It's been a decent year in high yield. Returns are approaching 8%. But beneath the surface triple Cs remain wide. If you miss on your earnings, it's been quite painful in the secondary market where things are trading off. And then the other point to mention on high yield is the composition of the high yield market has changed pretty dramatically in the last call 10 years where it's a much higher quality index than it had 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.
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A
So what is the higher quality coming from? Is that a private credit story or why is that?
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C
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 actually taken significant share from the high yield. The CLO market in particular, which represents about 70% of the market, started to.
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B
I'm sorry to cut you off. What's the difference between bank loans and high yield?
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C
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 secured debt. So typically senior in nature.
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B
But it would be the same type of borrower, right?
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C
Same type of borrower below investment grade. Large corporate borrowers, 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, 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 across a wide range of sectors. 30 plus sectors in these indexes.
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B
Is it unusual for these companies to opt to finance their debt in multiple ways? Can they do some of the bank loan and some of the high yield stuff or is it either or?
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C
Yeah, I mean that's one of the clear trends right now that's taking 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 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, more, more often than not, you might see an issuer issue a first lien public bank loan and a second lien private direct lending, as a solution to their capital structure. Because the public bank loan market is not set up or is equipped to kind of offer that second lien rate risk, which is often rated triple C. So yes, you will see the markets kind of, you know, play off of each other a little bit there.
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A
So back to the private credit thing. I'm curious if it's having any 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.
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C
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 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 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 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. 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 you if you find yourself with a good company but a bad balance sheet. We've seen private capital come in and refinance some bank loans where they have a little bit more flexibility with I mentioned earlier, picking or amending or maybe even putting equity capital injection into the capital structure. And it could potentially mute defaults for certain borrowers that historically wouldn't. 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.
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B
I feel, I feel like there's, 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 for these companies to make sure that they don't default and assuming that they're doing in a responsible way, not just piling on debt and debt and debt which listen, they want to get their money back, I think on balance is probably not a bad thing.
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C
Yeah, that's definitely the positive. Having that capital out there, it's going to mute your default rate. And by the way, in high yield, we're seeing default rates for two years in a row now, less than 2%.
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B
Unbelievable.
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C
That is definitely 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're constantly getting pitched. These private lending funds, they've raised 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 to deploy. And then when you have that kind of timeframe with limited deal flow, you're going to compromise some things that maybe in the past you wanted to compromise, ie, structure and spread.
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B
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.
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C
Yeah, that's what we're seeing. But lower returns. But you're giving up transparency and liquidity, which I think is critical because unlike the public markets, you know, where things trade, there's an active market. So you're getting, I would argue 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 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, periods of dislocation. So that's, that's the trade off. 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.
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A
How do you think those fund structures will handle that? Because the way that they've set these, you know, 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, this crazy event where everyone rushes for the exits to sell because the investors themselves are kind of stuck, right or wrong?
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C
No, that's right. But I wouldn't say that's a positive right. You want your money back at times of dislocation or times of fear and you can't get that. 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 gates and limitations, flows back in a very large vehicle. And it was quite frustrating. Eventually they found capital away from the traditional retail investor to solve some of that problem. But I think that's a real problem. 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 in that period of risk, off dislocation, et cetera? 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 it 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% yield product. It's probably more like a 7 plus percent yield product.
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B
All right, so you are one of the portfolio managers, along with the very famous Dan Iverson of the Pimco Multisector 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 are actively turning over the portfolio based on relative value and things like that?
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C
Yeah. Good. Question and I'm glad we can clarify that. So first and foremost Pyld is benchmark agnostic. So one of the differences thinking about Pyld versus like a core product, it's not beholden to the Barclays ag. So we can more actively manage duration and we can also access parts of the market that maybe the Barclays AG can offer you such as securitize or agency mbs. So active management to us is a multifaceted approach. 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 and really utilizing the broad PIMCO platform to. 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 views from the credit standpoint and that's kind of how we think about portfolio construction at PIMCO is public or if the mandate allows for public or private, corporate or securitized. I mentioned earlier we think corporate's a little bit tight right here. We find better value in funds like Pyld on the securitized side or on the agency mortgage side where the technicals are very different There I described overwhelmingly positive technicals on the corporate side. It's not the case on the securitized side. You've had the banks.
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B
What does technicals mean? I'm sorry, what do you mean in that sense?
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C
Just demand for issuers. There's a lot of buyers. You were mentioning earlier, the amount of people pitching direct lending funds to you guys or corporate funds, you guys, 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 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 of the market. And being benchmark agnostic, it just gives it a bigger toolkit to express our best relative value views.
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A
So I'm curious what you think about the mortgage backed security market because that's been an 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 seven to eight years. It probably went to, you know, much higher than that on average. People want, seem to want mortgage rates to come down. They're falling a little bit, not, not as much as most people would like. So what do you think about that space?
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C
It's one of our 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. You know, what's happening there again is banks are not, you know, buyers of these, of these agency mortgages. And also the Fed has been in a, in a selling program. So you have a lack of demand, you know, leading to those historically wide 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. And then lastly, if you kind of look, you're right that with the Fed not really cutting until just this month and the cycle just beginning, typically agency mortgages are going to perform well in a Fed cutting cycle. As implied vols are down and the curve is steepening. It's a positive backdrop for them.
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A
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? What is going to make it do? Because I keep saying maybe the Fed needs to buy mortgage backed bonds again or something to make the mortgage rates go down. Is there a more natural way to do that?
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C
Yeah, I mean there are things that Scott Bessen himself has talked about that I think there's a focus from the administration in general to get mortgage rates lower. So yes, the Fed could step in potentially. They could also start reinvesting the proceeds from the runoff back into that market. Besson's talked about different things with the curve 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.
- [25:01]
B
Jason, let me ask you about the hyperscalers. There was news last week between the deal between Oracle and OpenAI and we're onto this new chapter of hyperscalers 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 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?
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C
No, it's a great question and I think the need for capital is just so great, Michael, that 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 build outs, you know, energy build outs, 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, 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, all things AI related, whether it's the fiber, the data center or the energy needed.
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A
So you talked before about how you're kind of agnostic to a piece of paper coming publicly or privately. I'm sure you have plenty of funds that can invest in both public or private debt. So in those funds, are you now is the public debt more attractive to you because of what's going on in the private space or are there still areas of the private debt market where you see a lot of value?
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C
No, it's a good question because I think sometimes that question can lead to a little bit of misunderstanding from 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 as being the most obvious. Private corporate debt is offering great value today. But where we do see value in our strategies, we have one PIMCO Flexible Credit Income fund, we call it Pflex, that is set up to be a little bit more. We mentioned Pyld earlier. Pflex is a little further out in the risk spectrum. It can go public or private, corporate or securitized. And it's in an interval fund structure. So it can take advantage of 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 of the market with the PIMCO platform. Our ability to invest outside the purview of a regularly syndicated like abs, rmbs, CMBS or CBN CLO deal, which are kind of the standard securitized type markets, we can sort of capture incremental excess spread. Just because I mentioned earlier the bank's retreating from the broad markets, we can offer bespoke financing solutions to isolated assets. And so that's what I mean when I define private securitized market. And these assets can be pools of receivables, mortgages, physical real estate, other forms of technology infrastructure like data centers 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, et cetera, 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 broad syndicated parts of the securitized market.
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B
Jason, last question for me, I saw somebody, I believe it was yesterday, so I apologize 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?
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C
Yeah, good question. I definitely have some insight and opinions related to that. No, unlike the, you know, 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 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 it's offering the resilience that you want of a true aaa. You'd really have to have some dramatic, I don't think dramatic defaults, recoveries, et cetera, to even come close. And the way the waterfall works the vehicle effectively de if 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 gains traction, I think there's been a little bit of an investor education in general that's leading to improved liquidity in that market as well. So I think you're seeing improved liquidity. Now, granted there is credit risk here, so I think someone treating this as no credit risk is, is misunderstanding what they're exactly buying. But you do have transparency and you do have really good resilience in the underlying credit risk of that CLO debt.
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A
It's interesting, we've been getting more and more questions from people listening 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 trade off there is that when rates go down, you don't get as much of a bump on the duration piece, probably because it's floating rate. You don't get a big bump when rates falls at. Pretty obvious, correct?
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C
Yeah, it's a SOFR plus product. So obviously with the Fed cutting, looking at the forward curve, you've seen 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, I mentioned earlier, a very resilient product picking up a decent amount of spread and it's offering a little bit of that diversification that you might want with the floating rate nature of it, even in a Fed cutting cycle.
- [31:57]
B
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 to? I'm making up a number 10 trillion and the other two are like two or three. Where do you see this headed?
- [32:20]
C
No, I think it's not going away. Private Credit's here to stay. I think it provides, I mentioned earlier, a really important pool of capital to the broader markets, especially in a risk off market where there's certainty of execution that the sponsors like to have. But you're starting to see that growth kind of slow down and plateau a little bit, which is why generally you're seeing a pivot from the large managers looking into private investment grade, looking more into securitized. I think as that market starts to 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 Bangalore market maybe five years ago or so where you had 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.
- [33:19]
A
One more question from 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?
- [33:29]
C
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 again. So I think that would generally be positive for the US 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 sees sort of.
- [34:01]
A
So does that mean more arms?
- [34:02]
C
Probably, probably more arms, yeah. So Michael, you might be putting yourself in a seven year IO initially until, until the, the curve cooperates and then you can get back into a lower, you know, 30 year mortgages. But that might be, it might be a multiple step process, but we'll see how it plays out. You know, again I mentioned earlier that the administration is keenly focused here, so maybe, maybe they can move the needle a little bit on where rates are perfect.
- [34:25]
A
All right, Jason, for people who want to learn more about Pimco, where do we send them?
- [34:28]
C
You know, 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 Flexible Income Fund, our income fund, our total return strategy. It's all kind of on the Pimco website. Perfect.
- [34:41]
A
Thanks very much, Jason.
- [34:42]
C
Yeah. Thank you guys for having me today.
- [34:45]
A
Okay. Thank you. To Jason. Remember, check out Pimco.com to learn more about all their different strategies, like Pyld or Pflex. Right, Michael?
- [34:53]
B
Right, Ben.
- [34:54]
A
Yeah. P. Flexi. Well, you're the one that names these things. Email us animalspiritscompoundnews.com.