บทถอดความฉบับเต็มของ Quality Over Quantity: Credit Markets in a Volatile Week

if you exclude food and energy, the core was 3.1%. Now both of these numbers have gone up a little bit and remain sticky. The key that they have not gone down and the other key is that again, this is January's number folks. So again, these are stale data and we'll have to continue to read through this as we get updated data likely to get caught up in the month of April on both of these. And by some point in time, we'll have updated estimates from the conflict in Iran as it flows through into inflation. More importantly, we'll talk about what this might mean for the Federal Open Market Committee meeting next week with regard to Fed funds rate and the possibility of inflation continuing to remain even more sticky as we go throughout the remainder of the year. And the third update for you today also came out today at 8:30 in a stable basis, meaning that it was over a month ago that we should have gotten this update. But again, because of the government shutdown, we didn't have it earlier. And that is the second estimate for real gross domestic product for the United States economy. And essentially the number for the fourth quarter of 2025 was cut in half. The advance estimate that we got a month ago was at a 1.4% quarterly rate for the last quarter of 2025. The second estimate that came down today was only a 0.7% increase for the fourth quarter of 2025. Most of the major contributing factors for the calculation of GDP went down from the advance estimate to the second estimate, including a decline in consumer spending, a decline in investment, and a bigger decline in government spending. Again, that was the big decline from the first estimate, where we had the government shutdown in the fourth quarter, and it got revised downward even more. So we will talk with our team what that means in terms of overall economic growth as we head into 2026. Again, some of these numbers a little bit stale because they're only Q4 from 2025. In addition, as I said earlier, we've got the Federal Open Market Committee coming up next week with a policy on the interest rates, likely zero chance of a cut. And we'll begin to talk about our panel with what that means later on in the year. So let's begin our conversation with George to give us a recap on his thoughts on progress or other developments with the Iran conflict and what's going on with oil, as we'll cascade that into Steve's conversation. So George, what are your thoughts on Iran and also some of the economic data that came out today? George Mateyo [00:05:25] So Brian, I think the big turn of events this week probably got everybody whipsawed at the beginning of the week when we kind of thought that things were really escalating in a negative way. And then things reversed course after the president's remarks that maybe the war won't be coming to an end, maybe, maybe not. And then I think people kind of get a little bit fatigued with that very quickly. Energy prices then spiked again. And now this morning, they're

starting to flooded back a little bit further, and we see stocks generally higher. So all things said, I think it's just a time of tremendous uncertainty. I don't remember a time in my career where I've seen the price of oil fluctuates about $35, $40 a barrel in the course of just a few hours. But that's kind of what we got. That's really difficult, probably, for a lot of people to think about what that means for their lives, for their businesses. Just think about that for a second in terms of planning a major organization that's dependent upon energy for shipping things and making things. And if you see that much fluctuation in one of your key raw material ingredients, How do you plan a business with that type of volatility? I just can't fathom that. So I think it's fair to say that we are in a time of just tremendous uncertainty. We've talked about this before. Of course, there's a lot of focus on just how long this conflict might last. So duration of this conflict is probably what matters most in terms of the broader, longer-term economic impact. And if we see this spillover, no pun intended, if we see this spillover for a few more weeks and in a few months, then, yeah, I think we have to start thinking about economic risks on a more sustained basis. If, however, this turns to be somewhat short-lived, and we could see a lot of scenarios that could take place, things might actually kind of normalize and stabilize here in the next few weeks or so. So frankly, there's just so much uncertainty. It's hard to get your head around what might happen next. But I do think it's going to have some impact on consumers. We've seen a couple of companies this week talk about the fact that this could actually maybe dense spending a little bit. It's not surprising to see consumers, it would not be surprising, I should say, to see consumers retrench a little bit. You know, they kind of see this every day. I mean, it's something we kind of feel all the time when we just drive past the gas station, even if we don't refill. So there's going to probably be some impact on consumer spending. They might have to dip into savings a little bit. The offset, though, of course, is that tax refunds are coming out in the next few, literally days and weeks, and that might provide some refuge to some people. But I think, nonetheless, there probably will be some impact on the consumer if this continues to persist. Nobody really knows, again, how long this conflict will last. And no one really knows what the outcome will ultimately be. I do think it's probably fair to say that the markets anticipate this to be somewhat of a shorter-term event in the sense that I think if you look at the near-term, kind of one-month forward expectations for inflation, They've obviously picked up. And there's certainly, you're kind of seeing that in the bond market, where the bond market is now repricing and kind of taking away rate cuts from the Fed. But if you look at a longer-term window in terms

of inflation expectations beyond, say, 12 months, there really isn't that much of impact. In other words, the market, I think, again, is anticipating this might be somewhat short-lived. And then, Steve, in terms of the stock market, we've also talked about this, I think, in the past few weeks, that typically you start to see pressure in the first two months or so of a conflict like this. But then typically six, 12 months later, markets tend to move on. So while there's tremendous uncertainty, and we just don't know how this will end, ultimately this will end. And I think the market's somewhat kind of holding its hat on to that right now. But Steve, I'm not sure if you've seen any other comments from companies, how they're processing this, or anything that we should be noting from the overall stock market performance thus far. Steve Hoedt [00:09:06] I haven't seen anybody really make any comments, George, about changing behavior of any kind. I think basically, if you didn't have hedges on coming into this, you're you're certainly not going to be doing it now when you look at the volatility in the energy markets, it's and we we feels like over the last five, six years, we've used the word unprecedented way too many times. But I mean, I've I've been around for a while and I've never seen anything like the volatility that we've had in the last two weeks in the energy markets. So I think when you look at the impact on things like the dollar and gold, you know, I'm I'm I'm actually a little bit surprised that we haven't seen more of a bid to gold in this, given that, you know, you typically do have a bit of a a run, the quote unquote safety here. And we really haven't seen that this time. I wonder if some of that's a function of the run that we had in the in the yellow metal up to this stock market. It's funny, but I think the stock market was looking for an excuse to sell off a bit. We've been in this trading range for the better part of the last five to six months, haven't made a ton of progress to the upside. Obviously, trend is still favorable, but we got to a point where we either needed to make some progress to the upside or we were going to test the other side, in my view. And quite honestly, the price action to the downside has not been all that severe in reaction to the impact from the conflict in the Middle East. In the past, you would have expected a much sharper sell-off than what we've seen, so it suggests to me that this this too shall pass kind of thing. The market is seeing through this. I don't know whether it's the whole taco thing about Trump always chickens out or what. George Mateyo [00:11:07] I'm sorry to interrupt you, but how much do you think, Steve, is that just a function of the fact that we as a nation now are producing more energy than we were, say, in the last- Steve Hoedt [00:11:16] I think it shouldn't be lost on people that were a net energy exporter, right? So when we get into a situation like this, 40 or 50 years ago, if we had a problem with the oil flowing through the Strait of Hormuz, it would have been a disaster for the United States. But now with the U.S. being a net energy exporter, it's not. It's actually cash flow positive to the U.S. when this kind of a shock happens. Now, obviously we don't want to see it, but... At the end of the day, it's not a disaster for the US economy like it was 40 years ago. Think back to back when we were in college, George, when we were all talking about Gulf War I, right? And that was a major reason why that war occurred was to keep the free flow of oil through the Strait of Hormuz at market prices. And the reaction of the market is completely different today to what we saw back then. Brian Pietrangelo [00:12:09] Well, Steve, how much more? How much more, given George's comment and your comment, is about communication? So the supply disruption, and then we talk about the strategic petroleum reserve with 172 million barrels, and then the price goes up and down. Steve Hoedt [00:12:26] Yeah, look, I think that the communication stuff is not, it shouldn't be lost on anybody. I think that the biggest issue from a global energy markets perspective with all this is the problem that the countries that are dependent on natural gas that comes out through the Strait of Hormuz, much more so than crude oil. Like you can find crude oil from other places if you absolutely have to. So for example, the Chinese I saw yesterday have shut down exports of refined products to Australia. Okay, so the Australians are going to have a problem because they're not going to get refined product from China, but China isn't going to have a problem. And the Chinese have been buying, obviously, their crude from the Iranians, right? So the global markets will find a way to balance. There'll be people who will have to pay a lot more for what they need. The issue with the gas, though, is that there's no-- gas either gets someplace via liquefied natural gas, as we talked about last week, which gets put on ships and then shipped around the world, or it comes through pipelines. And if you don't have the pipeline infrastructure in place, then it has to come by a ship. And if the ships are not coming out of Qatar, then there is no gas. And that's the problem that you see in Europe right now with the Europeans not having enough gas as we start to think about the next three to six months. And that's really the kind of the global pain point from an economic perspective, much more so than oil, I think. And by the way, there actually has been crude oil getting through the strait. It's Iranian shipments from Kharg Island. They have been letting those out. So my understanding is there actually has been a trickle of oil out of the strait. It's not completely closed, but it's Iranian oil that's getting out. So that hasn't been 100% shut off. And that oil is obviously going to China and other places that have relationships with them. So oil will flow. It has

to flow! George Mateyo [00:14:34] So in terms of things flowing, I guess, Rajeev, to kind of get you into the conversation too, it seems like the credit markets are still flowing fairly freely in the sense that we are still seeing deals get done, get priced, and there's still demand for credit overall. Is that a fair assessment in your view? And also, as you think about next week, of course, we've got the Fed meeting for the first time since this conflict broke out. How do you think they're processing recent events? Rajeev Sharma [00:14:58] Well, I think next week's meeting of the Fed is going to be a little more important than many had thought. You know, nobody thinks the Fed's going to cut rates next week. They won't cut rates next week. But we do get the summary of economic projections next week, and we get the dot plots next week. And that's going to be very important because if, you know, right now, the latest dot plots that we had from the last time they released those, the Fed is thinking about one rate cut for 2026. If they stick with that, I think the markets will be happy. If they move to two, I think the markets will rally. But if they decide to come out with a dot plot that says zero rate cuts for 2026, we're going to see a repricing of the bond market. And we've already seen some of that repricing. We've seen bond yields move higher across the curve. I mean, we ended February where 10-year yields were below 4%. And now we're at this point where they are well above 4%, 4.25. And I think that move continues. In fact, we've seen a flattening of the yield curve, where you see twos, tens curves, a differential between a two-year treasury note and a 10-year treasury note now stands about 50 basis points. Just a few weeks ago, we were close to 70 basis points. So the curve is flattened. And what that means is front-end yields have moved higher. And that's all about Fed policy. If the market starts believing that the Fed is not going to cut rates, those front-end yields will continue to gradually move higher. Last year's trade was the steeper trade. Everybody was believing that we're going to have fed rate cuts. The front end of the yield curve will continue to move lower. The back end of the yield curve will stay higher because of fiscal deficits and other issues about the economy. Now we're seeing the front end move higher. The curve is flattening, and that has become the pain trade for the bond market. Many people are offsides on this trade because many people thought, we're going to have two rate cuts this year at least, and you've seen the front end reflect that. Now we're seeing the front end move higher. It's a flattening of the yield curve, and many investors are offsides on that trade. That being said, you know, you would think in this kind of conflict environment that we're in, generally, treasuries become a safety haven asset. We have not seen that. I think people are actually viewing corporate bonds as a safety haven, especially high quality corporate bonds. You see a lot of new deals that came to market. Almost $100 billion in new deals have come to market this month alone. And that number is going to continue to escalate, maybe not next week because of the Fed, but I do think that we could end up with this month being around $200 billion at least of new issuance for the corporate bond market. And investors are going for these high-quality names. They like the higher quality nature, the strong balance sheets of these names that are coming to market. And they don't even have to pay a lot to play in these deals. Because of the uncertainty that's in the market right now, these deals are coming with really nice concessions on them, and they're getting done very well. So I think the bond market continues to look at opportunities right now. We have seen spread widening, but again, we have been at historical tights. But if you're playing for high quality, this is the time to continue to be in that trade. Steve Hoedt [00:18:09] Rajeev, we've seen the spread back up for like BB relative to BBB spreads. We attacked the highs we saw last October earlier this week before seeing credit improve a little bit over the last couple of sessions. Are you starting to get concerned by what you're seeing in some of the more speculative parts of the credit markets right now, or are you OK with the price action? Rajeev Sharma [00:18:34] I think the price actually makes a lot of sense because some of the speculative parts of the market, they have really, really grinded tighter over the last several months, even last year. I think now investors are getting wary about it. If they're going to be playing in the credit markets, they'd like to be up in quality trades. We have been strong advocates for high quality, and I think that's paid off. I think now the market's repricing itself, that if you are in that part of the market, are you really getting paid for being in the lower rung of credit ratings? And I think now investors are kind of shunning away from that. And it makes a lot of sense. You want to get more defensive right now. Steve Hoedt [00:19:12] What would cause you to become concerned? Rajeev Sharma [00:19:15] Some kind of contagion, default rates picking up. We haven't really seen that happen, but you will start to see it if rates remain higher. And they have been quite high right now. So you'll see some of the lower rated credits come to market because they have to for operating expenses, they'll start borrowing money at higher rates. And that could cause an increase in defaults in high-yield market. I think that could have some contagion effects. But really, unless you see defaults start to pick up, I'm not concerned as much for the high-quality names. Brian Pietrangelo [00:19:47] So, Speaking of credit, let's talk about another area of the credit markets, which is the private credit markets, which are getting some press recently. And it's not necessarily a credit

risk issue per se, but more of a liquidity issue per se. So, George, why don't you give our listeners a little bit of an overview and then pivot back to Rajeev in terms of what happens in the private credit market these days. George Mateyo [00:20:05] Well, there's a lot to unpack there, Brian. And you can kind of go back to 15, almost 20 years ago now when the great financial crisis first took hold back in 2007, 8, 9 or so. And the aftermath of that led to a lot of banks, frankly, being forced to sit on the sidelines, for lack of a better term. They had to actually have higher capital in their balance sheets to try and prevent another crisis. We're always kind of fighting the last war with these things. But from that, a lot of companies emerged to try and provide new capital to companies who needed it. And that kind of gave rise to what we call private credit. It's still credit, but it was actually done on more of a discretionary and kind of a private basis. These loans don't trade on exchanges. These contracts and these transactions take place in private, I guess, just to kind of keep the name simple. And so I think it's fair to say that we also had an environment where interest rates were very, very low and investors were looking for yield. So some of these private credit funds raised a ton of money pretty quickly. And now we're kind of seeing maybe some of that kind of come unwind a little bit. I think as you pointed out, and Rudy mentioned, we don't see this as a real credit event. We've talked about more of a liquidity event. And you really just kind of have to understand that if you're investing in private credit, you really understand that these loans, essentially, they don't trade every day, so they're intentionally illiquid in the sense that they really kind of are meant to be designed for a longer-term holding period than just a few hours or a few days or a few weeks. So we are going to see probably some more issues of this because we saw a few credit issues come under some pressure. Again, just to underscore what you said, we don't see this as a credit event, but certainly some forced liquidity is prompting some funds to raise more capital, to try and overcome the liquidity wall, so to speak, and actually overcome the narrative around liquidity as being an issue. And I think to some extent that might be some babies being thrown in the bathwater, some indiscriminate selling. So I think from this, I think those people who are probably a bit more opportunistic that are willing to actually give up a little liquidity for a portion of their portfolio might actually see some benefits here and probably some interesting returns going forward in this space. That's my take on it, Rajeev. Anything that you want to add? Rajeev Sharma [00:22:16] Yeah, well, I agree with you, George. I think some of the themes that are in the private credit market right now Amongst them, you could talk about liquidity, you could talk about valuations, you could talk about how the banks are maybe retrenching right now. But the biggest headline risk right now is liquidity, and that's putting some pressure on this. And we came from an area where private credit was unstoppable growth. And now we are starting to feel like we're in an area where we're maybe late cycle stress test right now. And I think that's going to enforce some of the the flows that we see coming into private credit. That being said, I think a lot of investors right now, they want to know what they're getting involved in. They want to know that private credit, even with the yields being where they are, they want to realize exactly what they're investing in and what the liquidity is, can they get in and out of this. Banks are tightening their stance towards private credit lenders. I think some of the larger banks are reassessing collateral, reducing leverage to the sector. So every time you see these headlines, I think, again, it pushes investors to really reevaluate whether they want to be in the private sector or public sector. And when they are evaluating that, how much are you really getting paid to be in the private credit domain? I think high-quality credit still remains pretty attractive with blue chimp names. Brian Pietrangelo [00:23:36] Well, thank you for the conversation today, George, Steve, and Rajeev. We appreciate your perspectives. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information. 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