We were just talking with Earl Davis, who said he's going to the back of the theater near the
exit door talking about how he's looking for 10-year Treasury yields to go between 5 and
5.25% and 30-year treasury to go to 6%, but he still wouldn't buy them. Do you see things the
same way? I think that's a very provocative statement. What I would say is that here we are
in a trading range on the tenure, and at the low end we've been down into the high 3s. At
the high end we're 470, 475, um, and at 475, that's pretty much the high end of our.
If we see 5% on treasuries on the tenure, I would tell you that is a buying opportunity.
I think the markets aren't able, particularly the equity markets, aren't really able to
function as well beyond that, and I do believe it tightens financial conditions. The 30 year,
however, historically has traded much more on inflation concerns. I don't see us going to
6% on the 30 year, and if it does, I would take the opposite view and I'd back up the
truck and I'd buy a lot of 6% 30 year Treasuries. I think that at
this point in time what we're also seeing, I said stratification earlier, we're seeing. Also
in the pull up another factor that's happening , and that is the sheer amount of debt that's
being issued not just at the Treasury level from fiscal spending, but also because of data
centers and AI trade, the AI trade that's happening at this point in time, and as a
result we're seeing this very significant amount of need for capital, and they want to
issue in the long. Which is pulling rates up. Do you want to invest in that debt, long
duration hyperscalar debt, or do you see that as potentially more toxic than US government
debt should things turn south? I think there are other parts of the infrastructure trade
that make a lot more sense power build out and other kinds of long term real asset investing.
My concern about the data center buildout and the cost of that. Is the obsolescence risk in
the long term. Now I am selectively an investor in shorter duration offerings,
but we have to be thoughtful because the AI offerings that are coming out of the capital
market are not in just one place. They are in unsecured investment grade credit. They're in
structured credit. They're in infrastructure. So you have to be really thoughtful to make
sure that you're getting the right amount of diversification. There's trillions of dollars
of capbacks in this space that is happening over the next several years, and as a result,
there's going to be continued need for capital , and I think being thoughtful and layering in
is probably a better way to be investing in this space going forward. And so much of that
is investment grade rated debt. Ee Davis of BO , Lisa was talking about the 6% core. The other
interesting take he had, he was de-risking on the credit side but dropping all the high yield
exposure. And then refilling at the front end of of IG. What do you think the risk is in
credit right now, because we've had a series of conversations that have raised the question
as to whether actually it might be sitting in investment grade and not in high yield with
regards to this story. Well, the high yield market has actually shrunk over the last number
of years anyway, and has actually moved up in credit quality. It is a very different market
than it was, say, 10 years ago even. With regard to the high level of capital issuance
and debt issuance that's happening, particularly in the long end on investment
grade, to fund this AI buildout, and by the way, I'm very positive on the AI technology in
the long run, but I am concerned in the nearer term with regard to the risk that's happening
and simply again that stratification that's happening because there's so much issuance
there that is demanding a higher level of coupon.
And for me to get invested, it has to be paying a lot more and that makes sense to me as
an investor. The risk is elevated and there is concern and of course we've become much more
aware of the fact that these issuers are free cash flow negative at this point in time, and I
think that's something to be concerned about whenever you see historically a huge amount of.
Issuance whether it's whether it's the fiber optic cable build out of the late 1990s or the
financial crisis, the lead into the financial crisis where so much debt came out, any time
you see that you have to sort of say to yourself, I think we need to be thoughtful with
regard to this concentration of risk and to be aware that it could have repercussions to
the credit market.