Credit: the signals markets can’t ignore

0:00Welcome back to The Barclays Brief. It's Patrick here. So ahead of next week's Milken Institute Global Conference, Ronnie had a chance to sit down with Drew Mogavero, who runs our global credit trading business. And with markets seeing significant volatility in recent months, it was a timely moment to explore what credit markets are really signaling and how those signals can matter well beyond credit itself. Let's get into the conversation. Drew, it's so nice to have you here on The Brief for the first time. Yeah, thanks for having me. I'm excited. As they say, long-time listener, first-time caller.

0:34You now run the storied Lehman Barclays Global Credit Franchise. It's a business we're incredibly proud of as a firm, and many of your predecessors are visible in CIO roles at major clients and have had incredible careers in the industry. How do you think about being the steward of that business now, and what defines our approach? I mean, I've been blessed to have worked with so many great people, including so many great leaders over the last 27 years. And I'd say the most common denominator of all of them is intellectual curiosity and willingness to go deep in understanding a credit. Our calling card, we've always been a research-driven franchise.

1:07That's what the clients rely upon us for is that content and deep analysis. So that's the first thing that always comes to mind. A second is just trying to be consistent in your approach, consistent, especially around that credit knowledge and making sure that you're there for clients in all different markets and forms of liquidity. And finally, I would say innovating. The markets have changed a lot over the years. We've written extensively about it around the equitification of credit, the growth of private credit, all of that. Those are innovations that continue to change the market rapidly and trying to be on the forefront of that is something we're really proud of.

1:40So I'm constantly reminded about the importance of credit markets in assessing macro, volatility, what it means for the equity markets, what it means for particular sectors. Can we talk a little bit about what makes up these credit markets across the sort of sector-wise single name opportunity set, and then just the broader macro credit spread and signal that it sends. I think every day being able to look at the generic credit indices, whether it's in derivative format or ETF or cash format, and seeing how those are behaving in terms of people needing to add risk, hedge risk, that's very important to be able to ascertain the health of the credit markets.

2:16But then, you know, you go down into the real indices that you kind of watch every single day as far as the levels, taking the U.S. as a barometer. Obviously, there's indices in Europe and Asia as well. But in the U.S. IG market, that's a$7 trillion market. So being that that's very deep and very liquid, increasingly so these days, watching those spread movements is super important. If that's holding steady, probably means the markets are in a good spot. High yield, as in down the credit spectrum with more beta, that's a$1.5 trillion market. That's also been pretty resilient over the years, especially at the double-e parts of that market, watching that one and making sure that things aren't falling out of bed, that's pretty important.

2:52And increasingly, it maybe gets a little bit less headlines, but the loan market, especially with concerns out there around private credit, watching the$1.5 trillion broadly syndicated loan market for price volatility and price action is really, really important and something that I'm constantly keeping a close eye on. So look, it's been incredible to watch the credit markets and use the signal from the credit markets through the two most recent market events, market events that upended a lot of markets and equities and commodities and other places. At what point, I think you were pretty early to say like we're near the bottom or we're near the worst of this.

3:24What was it about the markets that you operate in that gave you that comfort? I mean, a couple of things. It does feel like we're in somewhat of a K-shaped credit market where the higher quality parts of the market, the demand is very, very strong for those. It's anchored by higher yields, but also by higher credit quality. Good EBITDA growth, good revenue growth, good credit metrics around leverage and interest coverage. So when there's volatility and you see our clients coming in to deploy risk and want to add to those parts of the market, especially at higher yields, that's a very strong signal, even more so when it's in the high yield market, because I like to say all bull markets are based on beta and all bear markets, people try to run away from beta.

4:00So if people aren't running away from beta in the high yield market, that's a good sign. The other thing I would say, you know, the loan market, like that one can be a little bit less liquid. So if that starts to get one coincided in the wrong direction. That's not a great sign. And the opposite obviously applies. And then finally, I would say those index markets that we mentioned, ETFs, hedges, and CDX product, you start to see those things stop working as a hedge and you start to see smart people come in to go the other way and add risk. And I would say all of those factors, whether it was in Liberation Day, during this recent volatility, if anything, the market's getting conditioned to try to move earlier and earlier so that they don't miss it.

4:36And when you see that in those quality parts of the market, that's a good sign that things are going to be Yeah, right. Sometimes in equities, we pre-buy the dip way too early. We've all been there. Yeah. So let's take that one step further. How important are the health of the credit and financing markets for the overall economy in your eyes? Credit is the lifeblood of the economy, right? We've seen examples of whether it was telecom in early 01. Obviously, the GFC was a whole new ball of wax. The energy crisis, even in the mid-2010s, the regional banks and a couple of other years back. When those things start to crack, if it's isolated to idiosyncratic, the market will find a way.

5:16The market will find a level and manage through it. And we see that historically. But when that starts to affect the broader economy, usually you see it in rates, when rates go lower and there's a real risk-off move because people are worried that an idiosyncratic sector might become more systemic. That's very important. That's usually when you see central banks or whatever tend to step in and help things out. I think everyone recognizes that you got to avoid those moments where an idiosyncratic can become systemic and the credit markets are pretty good at on their own finding those levels and getting to the right spot to heal itself.

5:46So we live in a pretty interesting moment. What are some of your favorite situations in credit markets right now? You know, I have the privilege just running the business. You get to see and talk to a lot of really smart analysts and traders in across, you know, a dozen plus different sectors. And so you can read what and talk to them and see what's happening. And I would say stuff in the chemical sector right now is very interesting. A lot of that is due to the price volatility we've seen in underlying commodities and the geopolitical situation. Obviously data centers and what's going on there, we don't have to tell anybody about the importance of AI, but the growth in that market is absolutely massive.

6:20You're seeing new deals that feels like come every other day in sizes that haven't been seen before, whether it's a high-ill company or an IG hyperscaler. There's a ton of opportunities from debt being issued and clearly a ton of demand for it also. So that's interesting. I think something sleepy is like, you know, the home builder sector where how we think about housing and how we access housing and, you know, that could be changing and evolving as demographics evolve. There's no shortage of stuff idiosyncratic across, you know, a dozen plus sectors to be looking at, especially at that bottom K of the credit market.

6:53So that's where we personally are finding the most of our opportunities as opposed to the trickier parts about trying to, you know, call the market. And so when you put all that in a blender, all of those current dynamics swirling around credit, how does that inform your view on other asset classes like equities? I mean, very much so. I think like we've seen this in the times of volatility is when that upper part of the K, those things I talked about before, whether it's the IG market, the higher quality part of high yield, the liquid CDX or ETF markets, when we see our largest and most sophisticated clients come in to buy backups, you know, that's probably a good sign for equities.

7:29And then on the rate side, we're talking to Dan Orlando and the rates team all the time, because when we see this yield-based demand for that upper part of the K in credit, probably means there's probably going to be some demand for the underlying rate instruments too. And that can give you some comfort that there's a bit of underlying potential for stability and it ultimately usually a snapback. It's been incredibly helpful for us to have that dialogue with you and your team. Likewise. I'll tell you, I'm rooting for the volatility to die down a little bit because it's been an exhausting year, but inevitably when it comes back, it'd be perfect to bring you back on the show to let you talk a little bit about what you're seeing and feeling in your market and how it might inform other markets.

8:04I'd be happy to do that. I'd say it's one of those things you're happy when you get it, but you don't want to see it too often. Exactly. But it's great to have you, Drew. Thank you so much for making the time. Thanks, Ronnie. Okay. So there's a lot to take in there and I guess we'll see what happens with volatility over the next few weeks. But what really stands out for me from this conversation is just how powerful a signal credit markets can be in periods of stress and how resilient demand for higher quality credit may suggest things are stabilizing sooner than many expect. Thanks a lot for listening to The Barclays Brief.

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