How to Identify Winning Opportunities in a Bond Picker's Market
From Zephyr’s Adjusted for Risk podcast, Ryan Nauman interviews Jim Jessup, income strategist at Virtus ETF Solutions, about ETF innovation and today’s fixed income environment. Jessup explains Virtus’s product-development approach: focus on commercially viable ETFs where managers can add alpha rather than chasing trends, and notes some highly specific ETFs may close or the industry may consolidate. On fixed income, he says despite macro and geopolitical noise and a new Fed chair (Warsh), market conditions look relatively normal: prices near par, default rates below but moving toward historical averages, and strong demand shown by oversubscribed new issues. He argues this is a “bond picker’s market” favoring active management, discusses private credit as a growing but varied space with both risks and liquidity benefits, and highlights the surge in AI-related investment-grade issuance as hyperscaler capex increasingly financed by debt.
Learn more about Zephyr here.
Learn more about Virtus Investment Partners here.
00:00 Podcast Kickoff
01:14 Meet Jim Jessup
03:12 ETF Boom Explained
04:05 Product Innovation Filter
06:52 Will ETFs Consolidate
08:22 Fixed Income Snapshot
10:36 Fed Chair And Signals
15:12 Defaults And Debt Wall
19:37 Private Credit Debate
25:14 Cash Yields And Risk
28:11 AI Driven Debt Wave
30:07 Where To Learn More
Connect with Ryan Nauman:
Transcript
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:Ryan Nauman Market Strategist Zephyr:
Welcome everyone to Zephyr's
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:Adjusted for Risk podcast
from the shores of Lake Tahoe.
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:I am Ryan Nauman, the market
strategist here at Zephyr.
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:Fixed income has come under a lot of
fire recently as a lot of strategists
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:have become very bearish on bonds,
and there are reasons to be bearish.
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:There's inflation, a new Fed chair,
elevated interest rates, and maybe
8
:even the biggest elephant in the
room is the health of private credit.
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:I have on the perfect guest to shed
some light on these topics and what
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:it all means for financial advisors
as they build investment portfolios.
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:first, this episode is sponsored
by the award-winning Zephyr, which
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:helps investment professionals
make more informed investment
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:decisions on behalf of their clients.
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:All right, enough from me.
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:I've already talked enough.
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:Let's go ahead and bring
on the star of the show.
17
:I am honored and very excited
to welcome Jim Jessup.
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:Jim is the income strategist
at Virtus ETF Solutions.
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:Jim, thank you so much
for coming on the show.
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:It's an honor to have you on.
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:Really excited about this conversation.
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:We had a great prep call last week.
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:Lot of fun.
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:I'm sure this conversation's
gonna be a lot of fun.
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:Can you please tell us a little bit more
about yourself and Virtus ETF Solutions?
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:James Jessup Income Strategist Virtus ETF Solutions:
Sure.
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:And first off, thanks
for having me on, Ryan.
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:I appreciate it.
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:And yes, it was great to catch up and
get to know you a little bit in front
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:of this in front of this opportunity.
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:So Virdis ETF Solutions, we
are part of Virdis Investment
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:Partners, publicly traded company.
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:Assets under management north of
150 billion, and the ETF business,
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:as has been the case in the
industry has grown significantly
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:over the last couple of years.
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:I've had the good fortune of being
with Virdis for 15 years now.
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:Most of that was actually
not spent in the ETF group.
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:I moved over here into this opportunity
about three and a half years ago.
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:Prior to that, I was actually mostly
in oversight and product development.
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:I moved over to here.
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:One of our tenants at Virdis is we
really do wanna meet our clients
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:where they are, and what I mean
by that is to be agnostic, really
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:around how they access our managers.
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:We have a wonderful mutual fund
business, but as I think we all
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:know, the ETF business, the SMA
business is coming along quickly.
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:Part of my responsibilities moving over
here was to bring some of our managers
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:who've had great success on the mutual
fund side, make them available on the
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:ETF side, and as well as get to make some
other innovative and creative things.
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:The ETF industry is a part of the
market that continuously is innovating.
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:Good, bad, or indifferent sometimes
but we do get an opportunity to try
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:to do some other things as well.
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:So my responsibilities
include product development.
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:I no longer have any
oversight responsibilities.
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:I get to go out in the field
a little bit, and occasionally
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:I get to do things like this.
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:So it's a fun role.
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:I'm fortunate to have it.
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:Ryan: Jim, that's fantastic, and
I'm really glad you brought that up.
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:Before we get into the fixed income
talk, let's talk a little bit about ETFs.
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:It's exploding.
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:That…
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:What is it, Jim?
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:There's more ETFs out there than there are
public equities, publicly traded equities.
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:The issuance of active ETFs, it's huge.
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:And then, like you said, all this
innovation, whether you like it or
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:not, I'm on the fence, there's some
of these new products I don't…
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:can't understand them.
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:How does a financial advisor
sit in front of their clients
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:and try to explain to them?
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:Anyways, how does Vertus and yourself
keep up with all these hot trends and
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:new innovation within the ETF space?
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:Keep up with it all, but also shift
through the noise and find out, okay,
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:what products really power do we like,
but also kinda stay on cutting edge?
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:James Jessup: Yeah, it's--
You have to walk the line.
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:As you're doing product development,
of course, you think about viability
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:from a financial standpoint.
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:Is this, I like to think of
portfolios or sectors as levers.
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:Is this a lever that an allocator
or an advisor would actually need to
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:pull or want to pull or be beneficial?
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:Yes, if you spend your mornings going
through filings of new ETFs you'll find
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:some innovative and exciting things.
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:But when you think about it from our
standpoint, yes, we wanna make sure
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:things are commercially viable, but
also, we wanna make sure we're bringing
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:forth something that we actually
think we have an opportunity to add
85
:alpha in, something where we have a
manager who is genuinely good at it.
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:So yes, of course, you have to be
aware of flows, and if there's a
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:space that is garnering a tremendous
amount of interest, that's great.
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:But let's also take a look and say,
"Do we have a manager who actually does
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:something well here and in a manner that's
maybe not as widely available that we can
90
:actually bring some benefit to the market
and some benefit to the shareholder?"
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:So that's really a core tenet.
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:I think a lot of and friends who are
in similar places, I think you have
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:to think about, what is my manager
exceptional at, and how do I deliver that?
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:And sometimes, I'll give a specific
example, sometimes you have a manager
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:who's really strong in an area like,
say, multi-sector fixed income,
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:which is a, an example for us.
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:And you look and you say,
"Wow, they really…"
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:If you break that down into pieces,
they do a couple of things really well.
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:One of them for us was securitized.
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:So we're like, okay, it makes sense
to bring forth a broadly diversified
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:securitized product that, that's a
place that a lot of allocators don't
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:have an easy way to get exposure to.
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:So now all of a sudden, in a single place,
you can get not just mortgages, but you
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:can get everything else, whether it's
subprime auto debt, credit card, franchise
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:receivables, et cetera, et cetera.
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:And so those are-- philosophically,
that's what you always wanna do.
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:Now, the point in the exercise of
course, is to be commercially viable,
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:but you don't wanna necessarily just
chase a hot dot, especially if you're
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:not equipped in that product lineup.
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:Ryan: Yeah, and I love, like you said
y- expand on what you're really good at
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:versus just what did Wayne Gretzky say?
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:Go to where the puck is going, right?
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:But also, not just doing it just to
do it and, a gap that you're really
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:good at, I think is important.
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:Because like you said, there's
a lot of noise out there.
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:You could be going down every rabbit
hole out there with the ETF space,
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:James Jessup: and the reality of
it is that's, that can quickly
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:turn into a fool's errand in
that, oh, everyone is launching X.
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:All right I'm gonna go…
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:by the time you bring it to market and
the time you get some marketing behind
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:it and some sales support, we may
well have moved on to the next thing.
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:Whereas if you focus on durable,
sustainable things, again, I don't think,
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:particularly in my corner of the world,
the debt markets, they're gonna be around.
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:If not, we're all in trouble.
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:So you can build things that hopefully
have a five, 10, 15-year opportunity
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:Ryan: Yeah, and real quickly,
last question here too, Jim.
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:There's a lot of new, like you said, new
ETF companies, new ETF products coming up.
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:easy to launch a new product when
markets keep hitting new highs.
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:They're resilient.
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:We've had this great run.
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:you feel a little bit concerned that
maybe some of these players might this,
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:the space might shrink a little bit if
we have a pullback, maybe an extended,
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:James Jessup: that there's…
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:Yeah I think maybe.
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:There, there will be some.
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:I'm not gonna pick on any of my
peers, but, you have some ETFs
137
:that are extremely specific to an
extremely specific event, and some of
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:those, will those go by the wayside?
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:Probably.
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:That's the nature of things.
141
:And to be fair, having spent as
much time as I have in product
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:development, a lot of things don't work.
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:We m- we make a lot of meals no one eats.
144
:That's the nature of launching products
is some things are going to go away.
145
:Now, from an ETF issuer consolidation
standpoint, I think that's a
146
:bigger question, and I'm gonna
give you a very firm I don't know.
147
:From a standpoint of I think the
ETF growth continues, but will
148
:there continue to be cons- some
consolidation in the industry?
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:Probably.
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:But that's one of the great things
about ETFs is that if you can innovate
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:and you can deliver real value,
chances are you're gonna survive.
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:Chances are you're gonna be able to
continue to operate in those space.
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:Now, will there be some
tickers that go away?
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:Sure.
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:Absolutely
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:Ryan: For sure.
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:Great.
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:Thank you for that insight.
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:Wanted to pick your brain
on that real quick, Jim.
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:So now let's switch to fixed income.
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:Income, y- your specialty,
you're an expert in this space.
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:So let's just what's
your state of the market?
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:We've got a new Fed chair, like I said,
we've got current mar- macro uncertainty.
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:We got this ballooning federal debt.
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:A lot of noise out there.
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:What's your take on the
current fixed income market?
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:James Jessup: Yeah it's an
interesting moment, right?
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:We have a brand-new Fed chair.
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:We have a Fed chair who is probably
going to feel more political pressure
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:than their predecessors, so he's going
to have a little bit d- more dynamic
171
:of a relationship in all likelihood
than some of his predecessors.
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:But when you look at the market
itself and you pull back there
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:is absolutely a tremendous amount
of noise, global uncertainty.
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:The Strait of Hormuz is open, closed.
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:It may open and close two more
times while we're recording this.
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:But with all of that said you can
listen to all that noise and you
177
:can think about that, but then if
you pull back and you actually look
178
:at the state of the market, there's
some things to be encouraged about.
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:One of them is when you look
at average price, and now I'm
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:gonna make a general statement.
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:Can you go find things on either
side of the, of two standard
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:deviation of what I'm gonna say?
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:Sure.
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:But generally speaking, the
market's around par, maybe
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:a little bit of a discount.
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:Market's hanging around 98, 99, the
bigger parts of the market that most
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:retail advisors are gonna be focused on,
whether that's IG, high yield, bank loans.
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:Even international, which is
becoming a bigger and bigger part
189
:of of a retail market's place.
190
:So if we think about it from that
standpoint, that looks pretty
191
:normal, and we'll talk a little
bit more about defaults, I think,
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:later in this conversation.
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:But when you look at default
rates, those have returned.
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:They're below historical averages
from the global financial
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:crisis on, but they're in line.
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:So okay, so that feels pretty normal, too.
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:And then when we look at issuance
and subscription, and you can pick
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:the asset class on domestic debt
New issues are oversubscribed.
199
:Whether it's whether it's in securitized,
whether it's an IG issuance, you're
200
:seeing, seeing double subscription,
triple, quadruple subscription
201
:on new issuance is not unusual.
202
:So if you think about it from a
fundamental standpoint, that means
203
:there's real demand for debt.
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:There's real demand for
income-generating instruments.
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:So that's a positive.
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:And to talk a little bit about the new Fed
Chair Warsh he's interesting in that we
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:now have two Fed chairs in a row who are
not PhDs in economics, they're lawyers.
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:So if you think about the responsibility
of that role I find it very c- interesting
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:that they're b- that are now two in a
row are legal scholars, Harvard-trained.
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:Warsh is also immensely qualified.
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:He's already been in the
committee once, so six to 11,
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:and he resigned on principle.
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:He resigned over the purchase of
treasuries in:
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:was $200 billion purchase of treasuries,
and he thought that was a bridge too far.
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:And he's an insider.
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:He comes from Morgan Stanley
as a deal-maker in MMA, which
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:means he's going to have a…
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:Hopefully, he's going to have
a very positive and, access and
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:information trade within Wall Street.
220
:So all those things are encouraging.
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:Now, with all of that said, I think a
lo- a lot of us market participants are
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:hoping that the Fed remains independent.
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:Ryan: Yeah
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:James Jessup: you don't have
to go that far back in history.
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:If you go back to '71 under Nixon, his
Fed chair was not necessarily thought
226
:of as the most independent person
in front of the '72 election cycle.
227
:So we sometimes take for granted
that the Fed has been so independent
228
:for so long but that's not a rule.
229
:And so hopefully we do see that
continuation 'cause them being a
230
:honest broker independent of any kind
of political exercise, the market has
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:done tremendously over the last 30
years, obviously with some pain points.
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:We do hope to see that kind of continue.
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:Certainly, some of the political choices
have been unconventional for some seats.
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:That's not the case here.
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:This is someone who's eminently
qualified to do the job and hopefully
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:does it as well as his predecessors.
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:Ryan: I agree, Jim.
238
:And, there might be a little differences
in Warsh might vi- you know, he can be…
239
:He doesn't want inflation,
but he doesn't also like the
240
:inflated balance sheet, right?
241
:That might
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:James Jessup: Yeah
243
:Ryan: what the White House wants,
and stuff like that, 'cause those
244
:are gonna raise interest rates.
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:So some things there.
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:But do you think also the power
of the chairperson's kind of
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:been diluted a little bit really?
248
:Obviously what they say is very powerful
for markets and their statements,
249
:they've got a committee, right?
250
:That committee, the FOMC, they've
got a lot of sway in this too.
251
:So do you think over the years,
they've kinda diluted some of this
252
:power outside of those statements?
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:James Jessup: I think that's fair,
and I also think it's interesting that
254
:Powell is staying on, which is unusual.
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:As a, y- of course he has the
right to do that as a chair, he
256
:can, his term can put him there.
257
:But you brought up an, you brought up
an interesting point in that one of the
258
:things that was talked about most in the
media is how Warsh is gonna communicate.
259
:Not even necessarily what
he's going to do, but how are,
260
:how is he gonna communicate?
261
:Al- Alan Greenspan passed
away yesterday at a, at 100.
262
:We should all be so lucky.
263
:But those of us who were
around when he was Fed chair,
264
:it was a very different time.
265
:If you remember poor Maria Bartiromo
on the front yard, and he would come
266
:out and the big bag it was a rate,
and the small bag it was a cut.
267
:We really didn't know what was
going to happen going into meetings.
268
:And the, I think the market has
benefited from how transparent the
269
:Fed has gotten over the years, and the
thought is Warsh gonna continue that?
270
:Are we still going to get a dot plot?
271
:Are we are the press conferences…
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:I read one thing where, the press
conferences are going to be shorter
273
:and maybe not as transparent.
274
:Time will tell.
275
:People can…
276
:It's like any time an e- elected
official or some, someone goes into
277
:a new chair and they're gonna change
the world, and then they get in the
278
:chair and they realize there's a lot of
institutional baggage that comes with it.
279
:So I think we'll see.
280
:But it bears watching, and the other
thing is for those of us that watch the
281
:Fed futures on the Bloomberg terminal,
we're now at, for the 7/29 meeting a
282
:likelihood of 35, 36% for a rate hike
there, which means one in three market
283
:participants thinks that's gonna happen.
284
:And those charts have been
absolutely all over the place.
285
:If you chart those over…
286
:It's fun.
287
:If you chart them over three to six
months, it's, we're going, we're,
288
:d- you know and you feel like those
things are written in pen, but they're
289
:not, they're written in pencil.
290
:They're gonna be, we're absolutely
going into a rising rate environment,
291
:and two months later something happens
and we have great certainty that
292
:it's a declining rate environment.
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:Ryan: Yep.
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:Yeah, what are we gonna do if
they get rid of the dot plots?
295
:That graph?
296
:What are we
297
:James Jessup: I,
298
:Ryan: with our time?
299
:James Jessup: I think we're going
to I think we're all gonna be
300
:collectively reading Fed minutes
even closer at that point.
301
:I think that's gonna that's
what we're gonna be reduced to.
302
:Ryan: I can't wait.
303
:I can't
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:James Jessup: Yeah.
305
:Yeah.
306
:So
307
:Ryan: you brought up default rates.
308
:So let's touch on that real quick.
309
:So many companies borrowed,
maybe refinanced, during the…
310
:after the great financial crisis when
interest rates were zero, money was free.
311
:Now we've got this, debt wall
coming up, higher interest rates.
312
:Has that impacted…
313
:You said default rate still remains
somewhat lower than average.
314
:Do you think that'll change or, do you
think this higher for longer interest
315
:rates have put much stress on companies
and what's the impact on defaults?
316
:James Jessup: Yeah, it's…
317
:Default rates are an interesting
one because you think a you think
318
:if defaults are rising, that
may be a sign of trouble, right?
319
:It just in intrinsically you
think, "Oh, okay we're seeing more
320
:defaults, that means companies
are starting to run on a rope.
321
:They can't refinance."
322
:Like a lot of things, I think you have to
also look at this as a post-COVID world.
323
:So if we go back to COVID, not that any
of us want to but if you go back to the
324
:COVID era and think about it, we, in a
way, def- we outlawed defaults, right?
325
:We printed so much money,
everyone got money.
326
:Default rates went to essentially
zero because everyone was getting,
327
:whether it was a PPE loan or I…
328
:I've put a lot of those acronyms out
of my head like the rest of us c-
329
:'cause of PTSD of Co- the COVID era.
330
:But essentially default rates
went essentially to zero, right?
331
:That's not a normal marketplace.
332
:That's not capitalism.
333
:If you are a bad company, if
you're a legacy company, if you're
334
:over-leveraged, you should default, right?
335
:We've worked through a lot of that
now, and to put some numbers around
336
:that, historical default rates, and I'm
gonna use US bank loans and high yield,
337
:they're histo- historically, post global
financial crisis, they sit right at 3%.
338
:It's like 2.9
339
:for high yield, 3.2
340
:for loans, so call it 3.
341
:We're at about 2% in high yield and 2.6
342
:for loans.
343
:So could those climb to historical
averages if you're a believer
344
:in reversion of the mean?
345
:Sure.
346
:Could they go on the other side of that?
347
:Sure.
348
:Because if you think about it, historical
averages, you're going to go up or down.
349
:Now, do we think there's a massive,
the, I g- I, again, I'm fortunate
350
:I get to sit with our CIOs.
351
:Do they see a massive default wall coming?
352
:No.
353
:Do, may we see some move up
towards historical averages?
354
:Sure.
355
:And that's, I think that's the
street's collective as well.
356
:I think that's how people are
thinking about things, is that
357
:the default rates where they
are, it feels a lot more normal.
358
:It feels very strange if you're sitting
and you're doing high yield and nothing's
359
:going wrong from a default standpoint.
360
:To be back at those historical averages
to what I was referencing earlier,
361
:bonds sitting around par, default rates
sitting around historical averages.
362
:Tremendous amount of noise,
but there's some things in the
363
:market that do feel normal.
364
:Ryan: Yeah, it's interesting too, and
just, and we'll talk about this, but
365
:we've all this uncertainty and all
this noise in markets, but we haven't
366
:seen like much volatility in yields.
367
:Especially, the spreads have remained
relatively tight and then, high yield
368
:yields, it's not like they're fluctuating
and showing is- you know, distress.
369
:Like you said, with defaults, you're
not really seeing the distress there
370
:either with the increase in defaults.
371
:So do you think, earnings good?
372
:So do you think maybe that's why
we're in a market fixed income
373
:isn't showing signs of distress?
374
:James Jessup: Yeah, the term that I've the
term that I like that I've heard a number
375
:of our credit folks use is this is a bond
picker's market, which is interesting
376
:from a standpoint of it's not, "Hey,
we've gotta avoid this massive default
377
:wall," or, "We've got to avoid X, Y, Z
sector because they're gonna be going
378
:through, the Amazon effect," or whatever
it is, and it's gonna be devastating
379
:to this one corner of the market.
380
:Now, those things they don't have
the courtesy to let us know when
381
:they're gonna happen, so it may
well be right around the corner.
382
:But generally speaking, when you look
at the bond market, it comes down
383
:to, it comes down to credit anal- an-
analysis, being in the right place,
384
:avoiding the defaults but also finding
things that, you feel maybe a little bit
385
:better about than the rating agencies do
386
:Ryan: I'm glad you brought that up.
387
:I'm a firm believer, there are spaces
in the equity side that you can get away
388
:with being passive, large core maybe.
389
:Fixed income, believer that you need to
take an active approach because, like
390
:you said, bond pickers, especially in
this market a lot of opportunities,
391
:even though people are bearish, I
think there are a lot of opportunities.
392
:of those places that, some
people might take a…
393
:find opportunities in is private credit.
394
:There's so much concern about it.
395
:lot of headline risk, I think, there.
396
:It's one of those most polarizing topics
in fixed income is private credit.
397
:Do you think-- is this a systematic
issue with private credit?
398
:Or is it like you just said, there's
gonna be pockets of distress, there's
399
:gonna be pockets where, maybe this isn't,
there aren't very many opportunities.
400
:I-is it systematic or, are
we making too much out of it?
401
:James Jessup: Yeah I'm gonna jump back to
one comment you made earlier, and I would
402
:say the market would agree with you from
a standpoint of active and fixed income.
403
:If you look at ETF issuance in fix-
active fixed income over the last couple
404
:of years, it has moved up meaningfully.
405
:Still a very small percentage
of the market, but that kind
406
:of continues to increase.
407
:And I think part of that is fixed income
benchmarks when you think about them,
408
:when you think about an equity benchmark.
409
:If I'm a mid-cap benchmark, it means
I define between here and here, right?
410
:This is my market capitalization,
and every year, whatever it
411
:is, if I got bigger, I go here,
if I get smaller, I go there.
412
:If you look at our kind of most commonly
followed index in the aggregate, the,
413
:it represents who went to the window
so if you look at that pre '07, it
414
:was much more corporates, whereas now
it's much more government debt-focused
415
:because that's who's been going to the
window, that's who's been issuing debt.
416
:So I think even just rudimentary at its
most basic, that's a good argument for
417
:active fixed income, 'cause you don't
necessarily always wanna be loaning money
418
:to the people who are asking to be…
419
:have money loaned to them nonstop.
420
:So going on to private credit, I would
agree with a lot of your sentiment from a
421
:standpoint of there is some headline risk.
422
:There are some things that can…
423
:that probably will go wrong.
424
:I think that's inevitable in an asset
class or a sector that grows this quickly.
425
:But what I would also say is this:
it's gotten very large, and it also
426
:depends who's measuring, right?
427
:So the Moody's number
is around 2 trillion.
428
:Apollo thinks about addressable market,
and it's like 40 trillion, which again,
429
:these numbers start to feel not real.
430
:You start to, you start to
feel like you're talking, Dr.
431
:Evil numbers that they get so big.
432
:But when you have numbers
that large, the…
433
:of course, there will be
parts of it that go wrong.
434
:But I think private credit now has
to be thought of and talked about.
435
:You've got to go a little bit
deeper from a standpoint of what
436
:kind of private credit issuer
are you talking about, right?
437
:Saying private credit is starting
to feel like saying bonds.
438
:"Hey, what's the bond market doing?"
439
:What's happening with my EM debt
manager couldn't be more different
440
:than what's happening with
two-year Treasuries in some cases.
441
:I think you could start to
say that about private credit.
442
:If you're doing private credit, that is…
443
:I think a private credit manager that
is doing, based on, hard assets that
444
:are, office space in some, office
space in Florida or those sorts
445
:of things, versus private credit
of a currently non-profitable tech
446
:company that is, a hope and a dream.
447
:Those are two very different
people that I'm loaning money to.
448
:Now, to be fair, there's a place for both.
449
:It's just I always think that particularly
in fixed income, because it's thought
450
:of as the ballast against equities,
it comes down to really defining what
451
:expected risk is and really being very
clear to the allocator or to the financial
452
:advisor, "This is what you can expect.
453
:This is where it will go wrong."
454
:Because everything goes
wrong at some point.
455
:If someone says, "This always
works," we both know that means run.
456
:So I think that's, I think that's
the thing with private credit is
457
:it's an interesting space because
it's gotten so big so quick.
458
:But I think if you start talking
about will it go wrong, you've got
459
:to start diving into the parts.
460
:The other thing I will say, and
I don't think private credit
461
:gets credit for this, is…
462
:That was not intentional.
463
:Private credit doesn't get credit
for being a liquidity provider.
464
:They are a meaningful
market participant now.
465
:They will take bank loan issuers
private, and they will all of a
466
:sudden take a deal out at par.
467
:That's a phone call that most
loan managers like getting.
468
:"Hey, you're at 96, 97.
469
:We're taking you out."
470
:You're going to get par and now,
yeah, you got reinvestment risk.
471
:But generally speaking,
that's not a bad thing.
472
:L- a loan manager is generally
pretty happy to pick up three points
473
:on a single issuance instantly.
474
:And it's also, last point I'll
make on this it also gives
475
:corporations an opportunity to
access funds two different ways.
476
:And there are times where private
credit will be appropriate if they need
477
:something quickly or all of the things
that go along with that, or maybe that
478
:the access to the other markets, it's
just gonna be too cumbersome from them
479
:that they can go to this other place.
480
:So it is growing fast, but I
do think there's a place for it
481
:Ryan: Yeah, Jim I completely agree.
482
:And I'm glad you brought that up, the
important role that they play just
483
:in the financial markets in general.
484
:During-- After financial crisis, it wasn't
for private credit, where would we be?
485
:A lot of corporations, they wouldn't
have been able to access credit.
486
:They wouldn't have been able to
access money because banks stopped,
487
:lending to these companies.
488
:So they do.
489
:I'm really glad you brought that up
of the important role that they play.
490
:And interesting, right now on equity
side, we've had this huge run up
491
:and now private credit, investors,
we often forget about risk, right?
492
:When we're-- You know,
everything's going shooting to
493
:the moon, everything's going…
494
:We don't need to worry about risk.
495
:Do you think that's a problem here too?
496
:We ignore risks sometimes, and
we're seeing the importance
497
:of illiquidity or liquidity
498
:James Jessup: Yeah.
499
:Ryan: everything's
500
:James Jessup: Yeah.
501
:Yeah, I would say this.
502
:I spend my time in the
fixed income market.
503
:I really I don't really do anything
do very little with equities.
504
:I would say from spending time in
the field and I, have some teams that
505
:I talk to regularly, I think on the
fixed income side, people actually
506
:got a pretty good handle on things.
507
:I think the biggest problem that
they're facing, and I know we're
508
:gonna talk about cash here in a
little bit, but I think a lot…
509
:The biggest thing people are facing is
how to deploy, how to get back into the
510
:marketplace, because when cash is sitting
at five, that's pretty great, right?
511
:But when that first number is a
three now I start thinking about, de-
512
:deterioration of buying power because of
inflation and, that's a bad trade, right?
513
:My inflation is rising and my
compensation for having cash sitting in
514
:money markets is going the other way.
515
:Suddenly that starts to erode on
buying power and total returns,
516
:and suddenly the credit markets
get a little bit more interesting.
517
:But I have found it, I have found
it that on the fixed income side I
518
:don't run into very many, fortunately,
that I would consider reckless.
519
:People generally have a good
understanding of kind of what
520
:they're allocating to, and I will…
521
:I would like to think we as a firm
do a good job explaining, 'cause
522
:we do have some stuff that's
more aggressive than our peers.
523
:That's a big part of our business, and
we always wanna be really transparent
524
:on that, that, that income can…
525
:Y- yield can be thought of as an, a
lot of things, part of total return.
526
:I think you can also hold yield
out as a measurement of risk.
527
:If you tell me something has a yield
of 8 or 9 or 10% and money markets are
528
:yielding 4, okay, so if I'm getting
double the risk-free rate, there has
529
:to be some risk associated with that.
530
:That's just how the world works.
531
:Ryan: I, I'm glad you brought that
up too about being transparent.
532
:I think m- part of this issue
with private credit is, maybe
533
:there's no transparency there.
534
:People don't really understand the risks.
535
:So I'm glad that what you guys are
doing at Virtus is you're being,
536
:open, upfront to know the risks,
so then you're not getting that
537
:phone call, "What's happening here?"
538
:James Jessup: Yeah.
539
:Yeah.
540
:I think it's-- and I think that
in an age where information
541
:is essentially free, right?
542
:We have, your free stock app on your
phone is probably better data than
543
:was available to a financial advisor
in the '90s in their office, right?
544
:So if information is essentially free,
then it comes down to communication,
545
:transparency understanding what
the portfolio is and being as
546
:transparent as possible to give an
understanding of why something was
547
:done or why something is being held.
548
:I think that's where-- I think
that's the responsibility of
549
:the industry now to the advisory
community 'cause an advisor can…
550
:They can know everything that's in
the portfolio instantly, and they
551
:can probably, using their favorite
AI tool or agent, as long as their
552
:compliance group has approved it, of
course, they can determine whatever
553
:they would like out of that portfolio.
554
:The responsibility of the people working
with it is to give the thought process
555
:why and what's behind it and what
to expect in a type of environment.
556
:Ryan: That's a perfect segue.
557
:I wanted to talk to you
about AI and technology.
558
:had a huge AI issuance,
hyperscalers, you name it.
559
:All these companies are
investing in AI infrastructure.
560
:A huge surge in debt issuances
because of the investment in AI.
561
:How does this surge rank in,
on a historical perspective?
562
:And any thoughts there
on the AI debt issuance?
563
:James Jessup: Yeah, the pr- I'm
gonna focus this on in-investment
564
:grade because I think the numbers
are interesting and compelling.
565
:2024, and we did a one-pager
on this that's out there, so if
566
:anyone wants to see the chart.
567
:Cap ex spending has gone up exponentially.
568
:But what's interesting is the Cap
ex has gone up, but then the debt
569
:issuance went right behind it.
570
:So for a long time, this was done
off of cash, off of balance sheets,
571
:and then it became debt issuance.
572
:Addressable market in IG in
:
573
:about two percent hyperscalers.
574
:2025, it was seven.
575
:This year it'll be more than that.
576
:So it's conceivable that it ends
up being 10% of the IG marketplace,
577
:which is an awfully big number.
578
:And when you think about it from that
standpoint, if you're gonna equate it
579
:historically the one that I heard on
AI that, that stuck with me was this is
580
:the advent of us building highways in
the '50s or building out the railroads.
581
:That's the s-scale that it starts to feel
at, that it's just this absolutely massive
582
:part and important part of the marketplace
that if you're going to be a manager,
583
:you're going to be participating in.
584
:It's at that point you start have to
be thoughtful about where you are in
585
:terms of issuance, which ones that
you hold, and all of those things.
586
:But it's massive.
587
:It's a massive part of the marketplace,
and I've had our IG manager comment
588
:that his market doesn't really open
for a month or a quarter until a
589
:hyperscaler does some sort of issuance.
590
:So it is a huge part of the market,
and that's likely to continue.
591
:Where can our audience get more
information about Virtus ETF solution?
592
:Sure.
593
:So virtus.com
594
:will be the easiest place.
595
:Then within there, they can
click into the ETF portion.
