Latest / Bloomberg Intelligence / Anything Over 3% On 10-Year UST Is Overreaction: PGIM’s Collins

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Anything Over 3% On 10-Year UST Is Overreaction: PGIM’s Collins · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm PIM Fox.
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Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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Speaker 1: bring you the most important, noteworthy, and useful interviews for
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Speaker 1: you and your money, whether you're at the grocery store
0:17
Speaker 1: or the trading floor. Find the Bloomberg p m L
0:20
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. The
0:32
Speaker 1: big mystery in bond markets this week is whether or
0:37
Speaker 1: not ten year treasury yields can break out of the
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Speaker 1: range that they have been in. Can they break out
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Speaker 1: rising above three? P Here to answer that mystery, Mike Collins,
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Speaker 1: Senior investment Officer and portfolio manager at PGIM Fixed Income. Mike,
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Speaker 1: what's the answer? Why? Why is? Why is the tenure
0:55
Speaker 1: treasury yield pegged below three percent? No matter what? Good morning, Lisa. Yeah,
1:00
Speaker 1: it looks like it's breaking out to the downside if
1:02
Speaker 1: anything here right, uh, in the near term. And that's
1:05
Speaker 1: really been our view all along. Our view has been,
1:07
Speaker 1: you know, three is really probably the high water mark.
1:10
Speaker 1: Anything above that would be an overshot kind of scenario
1:13
Speaker 1: where rates, you know, really overreacted to what's likely to
1:17
Speaker 1: be the path of growth and inflation. And and fed
1:20
Speaker 1: rate hikes. You know, we came into the year understanding
1:23
Speaker 1: that the one thing that we had the most conviction
1:26
Speaker 1: and is that volatility is probably going to be higher,
1:28
Speaker 1: right because you have bigger tail risks. Right last year
1:32
Speaker 1: it felt like, you know, over the last few years,
1:34
Speaker 1: we're going to grow at two percent and everything steady
1:36
Speaker 1: as she goes. But with the you know, aggressive removal
1:38
Speaker 1: of monetary accommodation, the downside and upside tails have have
1:42
Speaker 1: increased sharees what I'm struggling with. There were a couple
1:46
Speaker 1: of weeks there where the narrative had shifted to a
1:48
Speaker 1: supply demand dynamic where all of a sudden, the US
1:51
Speaker 1: was about to issue a record amount of the deficit
1:55
Speaker 1: was deepening, Will there be enough demand? The Federal Reserve
1:58
Speaker 1: is letting its balance sheet an awful little bit. So
2:01
Speaker 1: what happened to that whole discussion? Well, the treasury market
2:05
Speaker 1: the very large, efficient market and attends to reprice new
2:09
Speaker 1: information really quickly, and that's why you get these kind
2:11
Speaker 1: of you know, jerky moves and rates. And we've seen that,
2:14
Speaker 1: you know, a couple moves from two you know, last
2:16
Speaker 1: September to two and a half and then close to three,
2:19
Speaker 1: you know, in a couple of big steps. And you know,
2:21
Speaker 1: the first half of that move I think was just
2:23
Speaker 1: repricing in the re acceleration of growth and the potential
2:27
Speaker 1: for slightly higher inflation and certainly the expectation for for
2:31
Speaker 1: more aggressive FED rate hikes. And it feels like the
2:33
Speaker 1: last you know, basis points was probably trying to find
2:37
Speaker 1: a clearing level for all the incremental supply. But that
2:39
Speaker 1: that's in the market now right Everybody basically knows what
2:43
Speaker 1: the funding requirements are for the government for the next
2:46
Speaker 1: few years, so that I think has been priced in
2:49
Speaker 1: at this point. So where do we end the year
2:52
Speaker 1: for tenary treasury yields? You know, again, it's really a
2:56
Speaker 1: bifurcated you know, binary outcome potential. It's it's really weird.
3:00
Speaker 1: Normally have a base case that's like and you have
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Speaker 1: these small tails, but right now it feels like, you know,
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Speaker 1: one tail is that we're sitting here at the end
3:08
Speaker 1: of the year and growth is lower and inflation is lower.
3:10
Speaker 1: I'm looking at the tips market this morning, you know,
3:12
Speaker 1: break evens are falling, meaning people's expectations for inflation are
3:16
Speaker 1: actually coming down um, which which actually makes sense to us,
3:19
Speaker 1: and maybe rates are back at you know, to fifty.
3:22
Speaker 1: The other tail is, you know, maybe we continue to
3:24
Speaker 1: get this re acceleration, maybe finally we get some you know,
3:28
Speaker 1: signs of inflation rearing its head, and maybe it ends
3:30
Speaker 1: at three. But you know, it feels like to us
3:33
Speaker 1: that the FETE is not going to be able to
3:36
Speaker 1: raise rates all the way to that long term dot
3:39
Speaker 1: they have, which is right about three and a half
3:41
Speaker 1: percent is what they expect the funds rate to be
3:43
Speaker 1: at the end of two thousand twenty, and I think
3:46
Speaker 1: that is highly unlikely. So if they pull back at
3:49
Speaker 1: all from that, you can see a rallying rates. So, Mike,
3:53
Speaker 1: given that sort of bifur Kidd potential, it sounds like
3:57
Speaker 1: you're positioning yourself for more of a rally in treasuries
4:01
Speaker 1: and inflation undershooting and people ratcheting back their expectations. So
4:05
Speaker 1: as a portfolio manager, how are you positioned around that? Yeah? So,
4:07
Speaker 1: so we um added to duration, you know, at these
4:10
Speaker 1: higher levels, and we continue to be slightly long duration
4:13
Speaker 1: in our portfolios relative to our our benchmarks. We continue
4:17
Speaker 1: to have a curve flattenuron which really worked well last
4:20
Speaker 1: year and it's actually worked this year despite you know,
4:22
Speaker 1: consensus view that all the curves bounce is steep, and
4:25
Speaker 1: you know, we don't believe that, right because if the
4:27
Speaker 1: Fed insist on moving along that very aggressive hiking path, uh,
4:32
Speaker 1: the curve is going to flatten, right, If they get
4:33
Speaker 1: the funds rate to three or above three, the curve
4:36
Speaker 1: is going to be flat or inverted. So yeah, so
4:38
Speaker 1: we've you know, maintained a slightly long duration bias at
4:40
Speaker 1: these higher levels towards three and and a guild curt flattener.
4:44
Speaker 1: So what about credit? Credit is actually a tricky qual
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Speaker 1: I think that's going to be a bigger deal over
4:50
Speaker 1: the next year or two or three uh than the
4:52
Speaker 1: rate scenario. And and I think we're at a bit
4:54
Speaker 1: of an inflection point in credit. We're definitely seeing more
4:58
Speaker 1: competition among companies. And you just see the volatility that's
5:02
Speaker 1: reared its head in the in the equity markets, and
5:03
Speaker 1: a lot of the business models are being called into question.
5:06
Speaker 1: Whether you know, it's a car company, what's that Tesla? Yeah, Tesla,
5:11
Speaker 1: your name is Netflix. Netflix bonds are actually selling off today.
5:15
Speaker 1: It's sort of interesting. It's not just you know, Tesla's
5:17
Speaker 1: down in the mid eighties their bonds, right, and um,
5:20
Speaker 1: you know they came not that long ago at a
5:22
Speaker 1: five handle coupon, which we thought was was way too
5:24
Speaker 1: low for a pretty risky company's burning three billion in
5:27
Speaker 1: cash this year, So um, it's gonna be you know,
5:30
Speaker 1: a lot of idiosyncratic, nagging credit problems, I believe, over
5:34
Speaker 1: the next few years. So you really have to be
5:36
Speaker 1: careful on credit. We have paired back our exposure to
5:40
Speaker 1: investment grade and high yield industrial corporate bonds to to
5:44
Speaker 1: really become a little more defensive here. How concerned are
5:47
Speaker 1: you about the swath of triple B rated investment grade bonds?
5:51
Speaker 1: Just to put this into perspective, the amount of triple
5:55
Speaker 1: B bonds, which is the lowest chair of investment grade credit,
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Speaker 1: accounts for the biggest portion of the six trillion dollar
6:02
Speaker 1: you as corporate debt market that is rated investment create
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Speaker 1: Are you preparing for a sort of rash of downgrades
6:09
Speaker 1: among that debt? You know, this is a trend we've
6:11
Speaker 1: been seeing throughout my entire thirty year career, right invest
6:14
Speaker 1: in great corporate indexs has gone from double A to
6:16
Speaker 1: things like the triple B effectively, and you see even
6:19
Speaker 1: the banks have moved along that same negative credit migration path.
6:24
Speaker 1: But what happens is the higher quality companies, the double
6:26
Speaker 1: as and single as are really not incentivized to stay there, right,
6:30
Speaker 1: so they are levering up their capital structures to move
6:32
Speaker 1: into triple B. That's really what's happened. Once you get
6:35
Speaker 1: into triple B, companies are extremely reticent to lever up further. Right.
6:40
Speaker 1: They do not want to go into junk land because
6:42
Speaker 1: then their financing costs or their access to markets and
6:44
Speaker 1: liquidity really become restricting. A lot of these companies, as
6:47
Speaker 1: you point out, I'll have a lot of debt that
6:49
Speaker 1: they're going to have to refinance at some point. So
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Speaker 1: we actually believe it or not, our underweight the double
6:53
Speaker 1: A single A part of the market because of that
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Speaker 1: negative credit migration as we call it, and overweight select
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Speaker 1: triple bes because there is a lot more opportunities to
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Speaker 1: add alpha or add value by avoiding the triple bs
7:04
Speaker 1: that might go to junk and picking the ones that
7:06
Speaker 1: you know, maybe just did a big M and A
7:08
Speaker 1: deal and have levered up and issue new bonds that
7:10
Speaker 1: you know attractive spreads, and you can take advantage of
7:12
Speaker 1: that as an entry point so you've been reducing exposure
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Speaker 1: to some investment grade credit, also to some high yield credit.
7:19
Speaker 1: What have you been adding to instead? It sounds like
7:22
Speaker 1: long term treasuries and well, well treasuries to some extent,
7:26
Speaker 1: but really uh, a little more of a credit barbell.
7:29
Speaker 1: So a lot of the proceeds have gone into triple
7:32
Speaker 1: A asset back securities. I know it's a little esoteric,
7:35
Speaker 1: but these are actually really undervalued in our mind for
7:38
Speaker 1: the underlying credit risk. Right, if you're worried about waking
7:41
Speaker 1: up and reading the paper and seeing Trump tweet or
7:44
Speaker 1: or something happening, and your you know your company is
7:46
Speaker 1: having some competitive issues, you don't have to worry about
7:48
Speaker 1: that when you're in the triple A of a CMBs
7:52
Speaker 1: or collateralized loan obligation security that has tremendous, tremendous credit
7:56
Speaker 1: enhancement or support below you. So we've actually built pretty
7:59
Speaker 1: big position in that paper. But on the other side
8:01
Speaker 1: of the barbell, we have added on the margin to
8:03
Speaker 1: some emerging market debt. Right at some of the emerging
8:06
Speaker 1: market and even European peripheral sovereigns have come out of
8:09
Speaker 1: recessions in the last few years, right and they're on
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Speaker 1: an improving path. Mike Collins, thank you so much for
8:14
Speaker 1: being with me. Always wonderful to hear what you have
8:16
Speaker 1: to say. Mike Collins, Senior investment Officer and portfolio manager
8:21
Speaker 1: at PGIM Fixed Income talking about the current h fixed
8:25
Speaker 1: income market that he oversees. Helps oversee about seven billion dollars.
8:30
Speaker 1: This is Bloomberg. Amazon stocks down the most for three
8:50
Speaker 1: days since February two thousand and sixteen. Why well, perhaps
8:55
Speaker 1: because President Trump confirmed that he is now focused on
8:58
Speaker 1: Amazon in a Twitter post today. But perhaps there's more
9:02
Speaker 1: to it than that. Joining us now, Shara o Vida
9:04
Speaker 1: Bloomberg Gadfly columnists. We always love speaking with her, Shira,
9:08
Speaker 1: what's going on with Amazon today? In a word, Trump
9:12
Speaker 1: is it? Yes? I think it is so. We saw
9:15
Speaker 1: both yesterday and today Amazon shares responding to news yesterday.
9:20
Speaker 1: There was an Axios story today. Trump himself tweeted earlier
9:23
Speaker 1: this morning about basically his concerns that Amazon is hurting
9:29
Speaker 1: U S cities and states by not paying taxes quote unquote,
9:33
Speaker 1: hurting the U S. Postal service, um, hurting retailers. It's
9:37
Speaker 1: the Acio story described Trump as obsessed with Amazon and
9:42
Speaker 1: trying to come up with ways to kind of curtail
9:44
Speaker 1: its power. But you know, even a lot of people
9:46
Speaker 1: who might disagree with President Trump on a lot of
9:50
Speaker 1: issues do agree with him about curtailing Amazon's power. And
9:56
Speaker 1: you know, I'm wondering how much the shares are accurately
10:00
Speaker 1: pricing in that aspect. And you know, and if that's
10:04
Speaker 1: not on the table, then are they overreacting to President
10:07
Speaker 1: Trump's tweets. It's clearly an overreaction. Look, it's we've been
10:12
Speaker 1: talking about this for a couple of years now that
10:14
Speaker 1: all of these large US tech companies, they're at a
10:18
Speaker 1: point where people are questioning whether they have too much
10:22
Speaker 1: unchecked power on every dimension, right, And Amazon is certainly
10:26
Speaker 1: in that conversation too. And there's been kind of a
10:28
Speaker 1: parlor game in certain circles to talk about Amazon and
10:33
Speaker 1: maybe think about whether different kinds of antitrust laws should
10:38
Speaker 1: be applied. Um to Amazon, which is not a conventional
10:42
Speaker 1: anti trust case by any struct of the imagination, has
10:45
Speaker 1: small market share, it's not hurting, it's not raising consumer
10:48
Speaker 1: prices as far as we can tell in the broader economy.
10:50
Speaker 1: Things like that. Um So, yes, I think what's happening
10:54
Speaker 1: here is it just kind of anxiety and noise that
10:56
Speaker 1: if the president doesn't like a company, maybe that's bad
11:00
Speaker 1: for the company. But you're right, he's certainly not alone
11:03
Speaker 1: in wondering if Amazon is doing harm in certain sectors
11:07
Speaker 1: of the economy. But it's not really clear what could
11:11
Speaker 1: be done at the government level to change that. Um.
11:13
Speaker 1: So we are talking about fang stocks. We dealt with
11:17
Speaker 1: the A. UM I wanna I wanna move out to
11:21
Speaker 1: another A. I think that there are two a's in there.
11:23
Speaker 1: There are fang Okay, So I want to talk about Apple,
11:27
Speaker 1: and you put out a really interesting column about their
11:30
Speaker 1: iPad initiative of trying to get them into schools, and
11:34
Speaker 1: I I had an initial gut reaction to this that
11:38
Speaker 1: I think was somewhat similar to yours, just because my
11:40
Speaker 1: children are in school and they have chromebooks. Um. But
11:44
Speaker 1: but you were saying that Apple needs schools more than
11:48
Speaker 1: they need its iPads. Well, look, it's not a secret
11:53
Speaker 1: that iPad Sales of iPads peaked in and have been
11:58
Speaker 1: declining every year since then. It's clearly a device that
12:02
Speaker 1: is popular in certain circles. Is a lot of people
12:05
Speaker 1: like it, but it is not a world changing device
12:08
Speaker 1: either you know, for technology at large, nor for Apple's
12:11
Speaker 1: bottom line. It's obviously a big business, but in the
12:15
Speaker 1: scale of Apple, not a game changer. So they're trying
12:18
Speaker 1: again as they did when the iPad initially came out,
12:21
Speaker 1: to make a push into U S schools. Where As
12:24
Speaker 1: you said, Google, I mean I said this before. It's
12:27
Speaker 1: really the most undercover tech story of the last five
12:30
Speaker 1: years is what Google has done to sweep into US
12:34
Speaker 1: schools with Chromebooks, with their suite of software, and really
12:37
Speaker 1: to dislodge Apple and Microsoft to some extent too, from
12:42
Speaker 1: school districts um in this way. That's been really interesting
12:44
Speaker 1: to see in Apple's trying again to kind of make
12:47
Speaker 1: a different case, different pitch to school districts to adopt iPads.
12:50
Speaker 1: I my my initial reaction to this was three hundred
12:53
Speaker 1: sticker price sticker. That's huge, and especially compared with the
12:58
Speaker 1: price of Chrome books and frankly fancier and better screens
13:02
Speaker 1: isn't going to cut it. When you're talking about a
13:04
Speaker 1: basic device that students need to just communicate with their teacher,
13:09
Speaker 1: write papers, keep track of their homework and the like.
13:12
Speaker 1: You don't want it to be too distracting. Yeah, it's
13:15
Speaker 1: it's a good point. I mean, look the thing with
13:17
Speaker 1: the iPad, You're right, it's a three hundred device. Apple
13:20
Speaker 1: is also talking about their their digital styluses, which is
13:23
Speaker 1: another ninety dollars or so. And then remember those devices
13:27
Speaker 1: don't come with keyboards, so if you want your kid
13:28
Speaker 1: to have a keyboard, that's more money. But I think
13:31
Speaker 1: they lose things all the time. I mean the stylus.
13:34
Speaker 1: I guarantee you one of children will lose or damage
13:38
Speaker 1: a digital stylus. The interesting thing about chromebooks is not
13:42
Speaker 1: just that they're relatively low cost, they're sort of two
13:46
Speaker 1: and up for schools, but also that you know, Google
13:49
Speaker 1: is kind of thought smartly about the kind of software
13:53
Speaker 1: around those devices, right that you can log into your
13:56
Speaker 1: Gmail or Google Docs account from any device. Um, they
14:00
Speaker 1: have these this piece of software for teachers where teachers
14:03
Speaker 1: can kind of assign homework and see what kids are
14:05
Speaker 1: doing on their screens. And Google very smartly thought about
14:10
Speaker 1: what teachers really need in the classroom and then delivered
14:13
Speaker 1: that to school districts and told school districts over and
14:15
Speaker 1: over again, this will be good for you. Apples trying
14:18
Speaker 1: to make a little bit of a different pitch, which
14:20
Speaker 1: is more about creativity. Right. So okay, if you want
14:23
Speaker 1: your kids to write papers, maybe chromebooks as the way
14:26
Speaker 1: to go. But if you want your kids to make,
14:28
Speaker 1: you know, videos of dissecting frogs and annotate those, um
14:35
Speaker 1: those videos with their digital stylus, is that is something
14:37
Speaker 1: that is in Apple's wheelhouse and is not really in
14:39
Speaker 1: Google's wheelhouse. I will say, as a parent simpler often
14:45
Speaker 1: it's not being the most effect I wonder about school
14:49
Speaker 1: districts kind of feeling the same way as that. But see, yeah,
14:53
Speaker 1: thank you so much, Sharah O. Love having you on.
14:55
Speaker 1: Shory Shia Overday, technology columnist for Bloomberg Gadfly read her
14:59
Speaker 1: call um g a d f go on the Bloomberg
15:03
Speaker 1: as well as on Bloomberg dot com talking about fang.
15:07
Speaker 1: Facebook shares are up nearly three percent, trying to pick
15:11
Speaker 1: up some of the losses from the dreadful weeks that
15:15
Speaker 1: have incurred the company with some pretty big losses. The
15:33
Speaker 1: US is quickly getting further into debt. We have a
15:37
Speaker 1: week after week of record sales of US treasuries. At
15:41
Speaker 1: what point does this matter? Joining me now? Is Jim Nadler,
15:45
Speaker 1: chief executive Officer of Cruel bond rating Agency. UH. They
15:50
Speaker 1: have a report on the United States of America, big
15:53
Speaker 1: American flag on the front, saying that the long term
15:56
Speaker 1: rating of triple A is stable. So jim him, why
16:00
Speaker 1: will it not affect the us is credit worthiness to
16:05
Speaker 1: become much more indebted. Certainly, debt and the deficit matter,
16:10
Speaker 1: and I think that it's important over the long term
16:14
Speaker 1: to keep track of the debt and the deficit. But
16:16
Speaker 1: I think more importantly for the US is the fact
16:19
Speaker 1: that the US mains by far the largest reserve currency
16:22
Speaker 1: of the world. The reason that's important is because the
16:26
Speaker 1: US is able to issue UH. They really have unlimited
16:30
Speaker 1: ability to issue debt at a reasonable UH interest rate.
16:35
Speaker 1: And you saw that when one of our competitors downgraded
16:38
Speaker 1: the United States and the the what happened the next
16:42
Speaker 1: day was the stock market tumbled, but treasuries rallied because
16:46
Speaker 1: in a crisis, everyone buys the US debt, even in
16:50
Speaker 1: a crisis that was sort of started by the fact
16:53
Speaker 1: that the US got downgraded, and so it's counterintuitive. I'm
16:56
Speaker 1: struck by a recent article that I read on Bloomberg. UH.
17:00
Speaker 1: It was talking with and looking at the holdings of
17:04
Speaker 1: a number of central banks around the world, and they
17:07
Speaker 1: were noting that there was an increase in Euro denominated
17:11
Speaker 1: assets at the expense of dollar denominated assets. All of
17:14
Speaker 1: this to say, if the US does become much more
17:18
Speaker 1: in debt, well that threaten the reserve status of the dollar.
17:24
Speaker 1: It could, but I think you still have to look
17:27
Speaker 1: at the u s is ability to defend its markets.
17:30
Speaker 1: The US's ability still were the largest economy in the
17:34
Speaker 1: world where we have a we have a consumer economy,
17:37
Speaker 1: We buy things from around the world, so all that
17:39
Speaker 1: impacts it. And your point is a good one, but
17:41
Speaker 1: the US is more is over sixty of holdings in
17:47
Speaker 1: central banks. The closest to that is and that's the euro.
17:52
Speaker 1: And so while we can talk about the Euro may
17:55
Speaker 1: increase a couple of percentage, it's the US is by
17:58
Speaker 1: far the largest whole holding on the balance sheets of
18:01
Speaker 1: central banks. If you saw that, if you saw another currency,
18:06
Speaker 1: UH coming close in the US and and and buyers,
18:10
Speaker 1: some central bank buyers shutting US, that then I think
18:14
Speaker 1: the the ability of the US to maintain a better
18:19
Speaker 1: balance sheet could become important. But I don't see any
18:23
Speaker 1: factors in the near term causing that to change. What's
18:26
Speaker 1: the tipping point. I mean, what does a deficit have
18:28
Speaker 1: to get to at which point you might start to
18:31
Speaker 1: think that, uh that forward investors might I don't know,
18:35
Speaker 1: have a gut check, have a ha moment saying maybe
18:38
Speaker 1: we don't want these treasuries. You know, I'm not sure.
18:41
Speaker 1: I think as long as we maintain a robust economy,
18:46
Speaker 1: we maintain our status as uh, you know, one of
18:49
Speaker 1: the leading economies and one of the leading democracies in
18:52
Speaker 1: the world. I think that that's going to have more
18:55
Speaker 1: influence than our than our balance sheet. But certainly, you know,
19:00
Speaker 1: certainly the balance sheet matters, and it's going to matter
19:03
Speaker 1: more for taxes and how we spend our money over time,
19:08
Speaker 1: the things that we choose to spend our money on.
19:10
Speaker 1: And so I think that's where you'll see those discussions
19:13
Speaker 1: take place, is over time. You know, how much we
19:17
Speaker 1: spend on defense, how much we spend on domestic on
19:21
Speaker 1: domestic programs. Yeah, um, I know that Cruel looks also
19:26
Speaker 1: at a number of structured products as well as municipal
19:29
Speaker 1: bonds and and some other securities. I'm wondering on the
19:34
Speaker 1: structured products side, there's a bit a lot of questions
19:38
Speaker 1: around auto loans, particularly subprime auto loans. We've seen credit
19:42
Speaker 1: card delinquencies picking up. From your perspective, has there been
19:45
Speaker 1: a material deterioration in the credit worthiness of consumer related credit?
19:50
Speaker 1: And this concerning to you, I think broadly speaking, certainly
19:54
Speaker 1: you can see the numbers we've seen a deterioration in
19:57
Speaker 1: in credit. The question is how big that deterioration has been.
20:01
Speaker 1: And I think when you look at that, you really
20:04
Speaker 1: have to look at the various segments of consumer credit.
20:08
Speaker 1: So we still are seeing even though we're seeing a
20:11
Speaker 1: bit uh more delinquencies in the subprime auto sector, we
20:17
Speaker 1: still see that sector as being robust. And while we
20:20
Speaker 1: talk about delinquencies maybe you know, going up half a
20:24
Speaker 1: percent or something like that, they still in the structured
20:27
Speaker 1: products world have a very large credit enhancement that they
20:33
Speaker 1: would need to break through before it would start to
20:35
Speaker 1: lead to rating deteriorations. These are also short term assets,
20:39
Speaker 1: and so we still are seeing in a lot of
20:43
Speaker 1: the consumer depth, particularly in subprime auto, upgrades on those
20:47
Speaker 1: tranchas as those deals pay off very rapidly, and so
20:50
Speaker 1: a lot of times you'll see a single A or
20:52
Speaker 1: a double A going to triple A because the deal
20:54
Speaker 1: is paying off, and I think it speaks to the
20:57
Speaker 1: UH the amount of credit enhancement that is in those
21:00
Speaker 1: deals to cover for losses. So, yes, we've seen an
21:03
Speaker 1: increase in losses, but I think we've not seen anything
21:06
Speaker 1: that has caused us to rethink the way that we
21:09
Speaker 1: look at credit enhancement in those sectors. So, in other words, people,
21:12
Speaker 1: the amount of money coming in is so much that
21:15
Speaker 1: any losses are immaterial with respect to the upper rated trunches.
21:20
Speaker 1: Jim Nadler, thank you so much for joining me today.
21:22
Speaker 1: Jim Nataler, chief executive officer of Cruel Bond Rating Agency,
21:27
Speaker 1: talking the US and what it would take to shake
21:30
Speaker 1: its status as the reserve currency, and it sounds like
21:34
Speaker 1: a heck of a lot more than what we're facing
21:36
Speaker 1: in the years to come. If you're thinking about donating
21:53
Speaker 1: to a political campaign, how about using bitcoin? This has
21:57
Speaker 1: some regulators hand lawmakers little concerned about the potential for abuse. MICHAELA.
22:05
Speaker 1: Ross joins US now technology reporter for Bloomberg Law. She
22:08
Speaker 1: comes to us from Arlington, Virginia. MICHAELA. Your story on
22:12
Speaker 1: this was fascinating. First, can you just lay out whether
22:16
Speaker 1: bitcoin really is being used as a currency UH to
22:21
Speaker 1: donate to political campaigns. Thanks for having me on. Absolutely.
22:25
Speaker 1: Bitcoin has actually a lot of people don't don't know,
22:27
Speaker 1: but has been donated to campaigns. We were able to
22:30
Speaker 1: trace as far back as two thousand fourteen. Of course,
22:33
Speaker 1: the difference now is we're gearing up for midterm elections,
22:36
Speaker 1: is that the price of bitcoin has skyrocket Back then
22:39
Speaker 1: it was around the four hundred dollar mark and now
22:41
Speaker 1: it's around the eight thousand dollar mark. But um, so
22:44
Speaker 1: there's still a small number of campaigns accepting this. There's
22:47
Speaker 1: a lot of people that are looking into it, testing
22:51
Speaker 1: the waters is this something that we would benefit from.
22:53
Speaker 1: But there's a lot of interests and growing interests. So um,
22:56
Speaker 1: small number of campaigns. But what we're hearing from campaign
23:00
Speaker 1: parency groups UM and some regulators is that they're concerned
23:04
Speaker 1: that the framework is their conditions are there, that this
23:06
Speaker 1: could potentially be abused if there's not some some extra
23:09
Speaker 1: guidance and teeth put into some of these rules. So
23:13
Speaker 1: talking about those concerns, how do bitcoin donations differ from
23:19
Speaker 1: cash donations. Bitcoin donations are actually reported to the Federal
23:24
Speaker 1: Elections Commission as in kind donations, but that's where one
23:27
Speaker 1: of the problems is is that there's a lot of
23:30
Speaker 1: different interpretations on how they should be reported and what
23:33
Speaker 1: needs to be reported by different campaigns, and that stems
23:35
Speaker 1: from a two thousand fourteen advisory opinion given by the FEC,
23:40
Speaker 1: the Federal Elections Commission again um and what campaigns, what
23:43
Speaker 1: the transparency groups are concerned about is a crux a
23:47
Speaker 1: combination of two things that are coming from some legal
23:50
Speaker 1: gray area. And this advisory opinion number one is just
23:53
Speaker 1: how much can campaigns take a bitcoin donations? Because in
23:57
Speaker 1: that advisory opinion it's captain at a hundred a hundred
24:01
Speaker 1: dollars worth of bitcoin you once converted into US dollars. Um. However,
24:06
Speaker 1: that there's a divide on party lines on that, and
24:08
Speaker 1: that's been interpreted differently by different campaigns. So some are
24:11
Speaker 1: taking up to the max of two thousand, seven hundred
24:14
Speaker 1: dollars and so that's more concerning to groups for the
24:17
Speaker 1: potential for fraud. And combine that with the potential for pseudonyms.
24:21
Speaker 1: So bitcoin, uh, you know, has the potential to be
24:25
Speaker 1: used more anonymously. And even though campaigns always collect personal
24:29
Speaker 1: data of their donors, UH, if there was a pseudonym
24:32
Speaker 1: used by a donor, how are we going to be
24:34
Speaker 1: able to track that and once again, how are we
24:36
Speaker 1: going to subpoena that information? Um? And that is where
24:39
Speaker 1: there's also a lack of teeth on that FEC advisory
24:43
Speaker 1: opinion on how the how these campaigns are accepting these
24:46
Speaker 1: donations from what kinds of institutions not obviously not banks
24:50
Speaker 1: that have no your customer laws. I'm wondering what kind
24:53
Speaker 1: of political support there is to sort of close these loopholes. Alright,
25:00
Speaker 1: we don't imagine that some uh, some potential candidates might
25:03
Speaker 1: have mixed feelings on that. Yeah, well, you know, it's
25:06
Speaker 1: it's great to hear what some of these campaigns. We
25:08
Speaker 1: definitely don't want to allege. All the campaigns that we
25:10
Speaker 1: spoke to were very, very um concerned about being compliant.
25:15
Speaker 1: They were actively working to try to comply with the
25:18
Speaker 1: FEC guidance. But what they're saying the benefit of is
25:21
Speaker 1: and what we why we might be seeing more campaigns
25:23
Speaker 1: taking this in the future or committees, is that, um,
25:27
Speaker 1: it sets them apart, you know, it sets them apart
25:30
Speaker 1: from establishment candidates. There's a growing interest in people who
25:33
Speaker 1: are not only interested in cryptocurrencies and bitcoin, but also
25:37
Speaker 1: just the blockchain technology and they want to support it,
25:39
Speaker 1: and how do you do that, Well, you donate to
25:42
Speaker 1: you know the two some of the lawmakers who are
25:44
Speaker 1: considering this and and that are going to be authorizing
25:46
Speaker 1: different regulatory bodies to be regulating this in the future. So, um,
25:51
Speaker 1: those were a couple of reasons. It's also much cheaper, um,
25:54
Speaker 1: compared to a credit card where you're paying you know,
25:56
Speaker 1: abround four percent for a transaction fee for a donation,
25:59
Speaker 1: the campaign saying they're they're paying around one person. So um,
26:03
Speaker 1: it's interest. There's more let's call the bitcoin millionaires in
26:06
Speaker 1: the ecosystem now after the value of the currency as
26:10
Speaker 1: as cryptocurrency has gone up, and so if they want
26:14
Speaker 1: to be supporting more candidates, I think we're going to
26:15
Speaker 1: be seeing more of that as well. Yeah, I mean
26:17
Speaker 1: it sounds pretty cool if a campaign uses a crypto
26:21
Speaker 1: platform like coin base or bit pay to say two
26:24
Speaker 1: younger constituents that you know, if you if you want
26:27
Speaker 1: to do something a little bit uh off the beaten path,
26:30
Speaker 1: check us out there. One question though, quickly here Mikaela.
26:34
Speaker 1: Ahead of the midtermal elections, is there any chance that
26:38
Speaker 1: these rules could get honed or changed in order to
26:42
Speaker 1: tighten up the protections in time for the upcoming elections.
26:46
Speaker 1: That does not look likely. We did speak to a
26:48
Speaker 1: couple of the commissioners at the FEC, and they're not
26:50
Speaker 1: hearing a lot of questions about that. It's going to
26:52
Speaker 1: take a wave of questions about how are we going
26:55
Speaker 1: to do this for them to to take up this
26:57
Speaker 1: room making. They're quite busy. They're quite is for example,
27:01
Speaker 1: looking at social media ads and uh potential for abuse
27:04
Speaker 1: there um to be taking this up. But what we're
27:07
Speaker 1: hearing is that rulemaking could really solve a lot of
27:10
Speaker 1: these problems. Um, just to clarify to campaigns exactly how
27:13
Speaker 1: much they can be taking in exactly how they should
27:16
Speaker 1: be reporting it, because the real problem is that we're
27:18
Speaker 1: lacking the data. When you look at the FBCS database,
27:21
Speaker 1: it's not capturing a lot of these donations. And the
27:24
Speaker 1: reason is partly just because of the way their database
27:27
Speaker 1: has run, and partly because of how it's reported, and
27:29
Speaker 1: partly because of how it campaigns are interpreting their advisory committing. Uh.
27:34
Speaker 1: So it's it's a catch twenty two. We don't really
27:35
Speaker 1: know how much this is going to be growing because
27:37
Speaker 1: we already know just that the database isn't capturing all
27:41
Speaker 1: of it um and until there's more interest by campaigns
27:44
Speaker 1: to be asking that and asking for that clarifications, there's
27:46
Speaker 1: gonna We're going to continue to see different interpretations of
27:49
Speaker 1: how these campaigns, even if once again they're trying to
27:51
Speaker 1: be compliant and for you have to leave it. They're
27:54
Speaker 1: fascinating story. Recommend everyone read it. Technology reporter for Bloomberg Latch.
28:01
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
28:04
Speaker 1: You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
28:08
Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
28:11
Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
28:16
Speaker 1: It's one before the podcast. You can always catch us
28:18
Speaker 1: worldwide on Bloomberg Radio