Credit Exchange with Lisa Lee

The rise in real yields because of government deficit spending, alongside ongoing huge demands for AI investment, are underpinning the rise in interest rates, says Ashok Bhatia, chief investment officer at Neuberger, an investment management firm with more than $600 billion in AUM.
Speaking with Lisa Lee on the latest episode of Credit Exchange, Bhatia says that real interest rates are the key to understanding the current bond market landscape.
“The bond market’s really relaxed about intermediate term, 5-to-10-year inflation rates. It is just telling you there is not a problem,” he says. “[But] the big change that happened in the bond market is real interest rates. If the 10 -year today is about 4.7%, the market tells you inflation will be about 2.2%. That's a 2.5% real yield. So that’s up from basically zero. [Historically] it’s probably a little bit on the cheap side.”
But he notes that if the real interest rate climbs to 3% or above, that’s when the economy can be in strife.
“At that point, if an economy is growing at 2-2.5%, and you think about the real cost of capital at 4%, you’re upside-down on that,” he says. “And it’s often when financial accidents and problems happen.”
Bhatia contends that for the bond market, it is suddenly starting to feel that a horizon which had previously felt distant, is now “on a horizon that we need to invest on.”
For Bhatia, who is also Neuberger’s global head of fixed income, aggressive rate hiking by the Fed at this point would represent “a policy error”, although a single rate rise would not be the end of the world. “But if the Fed started taking the policy rate up 100 basis points... the market would conclude that is really not necessary. It would also probably start putting real interest rates into more of a danger zone [and] would probably have some repercussions for the dollar.”
Bhatia also discusses dangers on the horizon in the bond market, the ongoing impact of the Iran war, and the distinctive characteristics of working for an employee-owned firm.

“Whenever you have noise, that leads to more selling volume in our market – so volatility for us as secondary investors is a very good thing,” says Michael Schad, head of credit at Coller Capital, a secondaries specialist with $55 billion in AUM, on the latest episode of Credit Exchange with Lisa Lee.
Schad is positive about the overall health of private credit, describing it as a “very attractive and sound” asset class, with its rapid growth coming alongside a more recent maturing of the market.
He notes, though, that a decade is “not a very long time”, as some of the funds can run for that period of time. “Because the asset class was so new, people couldn’t really calibrate what would happen in a more volatile market environment, which we just happened to hit over the last couple of years.”
Schad explains that Coller generally engages in two types of transactions – buying fund positions where the seller is a limited partner (LP secondaries), and transactions where it is a general partner making the sales decision (GP secondaries). The latter have become increasingly popular more recently.
The firm is also a leader in the continuation fund market. Schad notes that the major evolution that has taken place over the last couple of years is that technology developed in the equity secondaries market for continuation funds, has been adopted “on steroids” in the credit secondaries market.
“[The reason] that was so successful... is that the way a continuation fund works in credit is very different to private equity,” he says.
“What you have now in private equity, it is maybe a single asset that gets into a continuation fund. In credit, what you have is actually still very diversified portfolios. So you still have high quality loans in a very, very diversified fashion that a GP brings to a continuation fund.”

“It’s just like nothing we’ve ever seen before,” says Bryan Whalen, CIO of fixed income at $200 billion global asset manager TCW, in reference to AI’s capital spend, equity prices and momentum on the latest edition of Credit Exchange with Lisa Lee. “What we’re looking at here is just everybody on one side of the boat, too much enthusiasm,” he says.
“It just feels like it’s the beginning of the end of the euphoria.”
The AI spending spree has broken the natural feedback loop to slow down borrowing. While the bond market is raising the cost of borrowing, these companies turn around and say, ‘we don’t care,’ Whalen contends.
If the market starts to question the fundamental elements of the AI capital spend, that could lead not just to volatility in the sector, but for the rest of the market. And that would likely lead to an economic recession, reckons Whalen, who oversees $170 billion in AUM.

“One of the predictions I would make is that the private equity industry is in a tectonic, Darwinian moment itself,” says David Golub, co-CEO of Golub Capital, a direct lending specialist with more than $90 billion in AUM.
Speaking on the latest episode of Credit Exchange with Lisa Lee, Golub also sees a ‘Darwinian moment’ for private credit due to higher-than-usual credit stress and lower-than-expected returns.
“The winners thrive, they adapt, and they grow, and the losers, they don’t,” says Golub.
This will all lead to more consolidation in the industry, and a core group of private equity and private credit firms of size unseen before.
David, who along with his brother Lawrence Golub has been in the private credit space virtually since its inception, also speaks about the history of the industry, the recent bout of negative headlines, and trading the illiquid asset.

Lotfi Karoui, multi-asset credit strategist at fixed-income behemoth PIMCO, says the top risk to markets and the economy is the potential unwinding of the AI capex cycle, on the latest episode of Credit Exchange with Lisa Lee.
“Then you’re going to tighten financial conditions,” says Karoui, which is bad news for equities. That will have wealth effects and probably affect the broader economy. The market isn’t blindly rewarding all capex financing announcements, he says. Right now, markets are seeing some indigestion regarding data centre financing – Karoui recommends looking at dollar versus other currency debt to see whether that’s fundamental or technical.
Karoui, who is also co-head of client solutions and analytics at PIMCO, is watching six-month oil futures and diesel prices to gauge whether the resumption of the Iran war is choking up economic activity. We discuss his inflation expectations (moderating), the direction of Federal Reserve monetary policy (on hold), and private credit (seeing some stress). He also finds pockets of fixed income in emerging markets such as Brazil and South Africa compelling.