Marathon Asset Management Chairman & CEO Bruce Richards Talks Treasuries, Fed, Software Stocks
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Bloomberg Audio Studios. Podcasts, radio, news. Joining us now, Bruce Richards, founder and CEO of Marathon Asset Management. His firm specializes in public and private credit markets with over $23 billion in assets. It's interesting, Matt,

reminds me in the morning I look at the 10-year the first thing I do every morning I were only at around 4.4 percent the market has been digesting this we don't need to be in any state of alarm or anything like that but a lot of people are really bell ringing about the deficit how do you feel about the long I'm not a state of alarm either the long bond is of concern but start with there's three things guaranteed in this country death taxes and deficits

And the deficits are becoming front of mind for everybody. And when you have the big beautiful bill, which will probably add to deficit pro-growth, and so, you know, Besson and the theory is that we'll grow out of this. And Jamie Dimon even said it just a minute ago that we'll grow out of this. The truth of the matter is we're running 7% of GDP in terms of deficits. And 7% equals about $2 trillion that we're adding to debt each year.

And when you have a tariff policy that leads to a weaker dollar and maybe some indigestion by foreigners in owning our treasuries, and they own 30% of the treasuries, it becomes that much more alarming. Because there's 10 trillion of treasuries at the current pace of what we need to roll off and refinance, as well as the new debt that we add, given the deficits, 10 trillion of treasuries in the next year to sell.

And so while there's a big bid for the front end treasuries, when you get out longer along the curve, the 30-year treasuries, it becomes a little more difficult to digest because it has some pretty big price risk. The duration for the 30-year treasury is 18, which means 18 years, which means...

that if you raise rates 100 base points, the price falls 18%. So it's a pretty big price decline. So you have these macro funds, hedge funds that are starting to short the long end, knowing that the Fed's not buying treasuries and knowing that foreigners will be more reluctant to buy long-end treasuries, and yet you have so many treasuries for sale. And so I can't tell you. I think rates are a really tough thing to call. We try not to make a rate call, but...

But earlier this century, pre-GFC, long bonds were up around 6%. Could we go to 6%? Yes. And when we do, it becomes much more difficult to fund our government because of the higher interest charges. Right. We had a great story, I think, yesterday that...

Double Line and TCW and PIMCO, they're all in a buyer's strike. So even American companies are not buying our long-dated treasuries. Some of them are even shorting long-dated treasuries. Obviously, the foreigners right now feel a little bit offended by what's going on in trade, so they could stay out as well.

As a result, maybe Treasury moves issuance to the front end of the curve. Does that solve things? It does, but it'll just put pressure on the front end. And the bottom line is inflation's really well behaved at 2.1%. You'd think Treasuries would be doing better on that basis.

But the Fed knows that later this year when tariffs really start to kick in, that we might see a higher inflation. I think the 5% or 7% doomsdayers are kind of off their reservation in making those calls. We think more like 2.1% PCE number becomes a 2.8% to 3.2% range, and that's reasonable, a 1% increase from here.

uh... kind of tops and with that the federal want to see how inflation factors through and before making moves of the feds on hold for an extended period time

despite what the ECB is doing and the Bank of England is doing and the Bank of Canada is doing, which is the ease rates, the Fed will keep rates where they are now. The real issue, I think, is the knock-on effect. When you have higher rates, whether it's the front end or the long end, and when you have higher rates, those are crowding out. And so whether it's municipalities that have to pay a higher rate, whether it's companies that have to pay a higher rate, whether it's homeowners that have to pay a higher rate and get crowded out because they can't afford to buy it

that home or the real estate markets, commercial real estate that is dealing with higher cap rates, there's, you know, this crowding out effect that, you know, impacts markets and impacts the consumer. I want to double down on those risks because I want to be very clear about this. When we talk to big credit funds, private credit funds, the hire for longer environment has also meant higher yields, hence that golden opportunity. We get it. But I wanted

I want to talk about the cracks, because to your point, if we do see long-end rates remain higher, what cracks? Where exactly will that pain be? Because we're also equally hearing about people starting to want to dive into rescue financings. Are they worth it? So it is a great time to invest. And as a lender, we're making returns that equity markets don't.

which they were making and we're making these really high rates return with really low level volatility. So where equity markets, the public equity markets have 16 vol in the private credit markets I can speak for

us at Marathon, our volatility in our private credit lending books are like 4 to 6 percent. It's really low relative to the rate of return that we're making. So the risk-reward is phenomenal to your point that you're making. There are some cracks. The number one crack is the consumer. And so the consumer

If you look at the high-yield market, look at every sector across the high-yield market, the high-yield market is doing well. It's yielding 7.5%. Nice spread of 350 off. It's doing great. But there's one sector that's underperforming and negative on the year, and that's consumer discretionary.

type retailers and that sort. And so we've been avoiding that because we've understood that the consumer would be weak in this type of marketplace and consuming less because of the higher inflation that we've traditionally seen and now higher rates. So there's one sector that's really causing me to take a lot of pause and it's software.

That's interesting. We talked to Gargi Chowdhury from BlackRock earlier and she loves software, right? Especially because of AI. You have to love software because of AI. And when you have AI first software companies, and that's what Google's becoming, that's what Microsoft is today, that's where Salesforce is moving towards and Snowflake and Adobe, and these big incoming companies that will see enterprise value even soar further from here given AI. It's hugely positive. Do

Do you know, Matt, that there are 5,000 companies owned by private equity? 5,000 that are software companies.

5,000 software companies owned by private equity. Owned by private equity. And not all those companies will make the AI adjustment. And there will be creative destruction that comes their way, which will make them much more valuable because they'll make that adjustment. And so when you look in their data room of how they've performed, the PE sponsors, how their software firms have performed, you'll see companies which have much higher multiples because of AI. The exact point that she was making that you were making.

right but then you'll have a bigger cohort of companies they'll have that

blockbuster moment video. Think about Marc Andreessen. Marc Andreessen making this comment 15 years ago that AI will eat the world and AI has done a lot for the economy, done a lot for the equity markets and wealth creation. Now his new saying is AI will eat software. And so what software companies will make it through? Now think about being a lender, Sonali. Right. This is a private credit blockbuster moment? So because...

because our loans are capped at par. We don't have the upside of equity, but we have the downside if there's a default. Marathon manages to never having a default, let alone a loss. And so we're avoiding software companies. I think private credit has somewhere between 20 to 30% of their book in software-related companies.

And I think that when you make a private investment, that you have no real exit, and it's a five to seven year loan, you can't sit here today and tell me that this company, it's a software company, a traditional software company, can make that switch to be an AI software first company. And so I think they have all the downside.

with none of the upside other than getting your coupon, your cash flow on par. So I think those spreads need to be a couple hundred basis points wider. I think that the debt-to-ebit ratio that they're lending at, which has been very, very high because the ARR, because the recurring revenue, needs to be considerably lower. In fact, we're taking a much greater degree of credit

position as it relates to these software companies in the private credit markets by saying time out, we're going to wait and see for a period of time how it settles in and which companies can make the transition and which companies can't. But I think the default rate will go from one-third of the marketplace that you see in software relative to the market to three times the default rates of the traditional marketplace. So I think it's a great place to invest as private equity and as equity

But it's not such an intelligent place to invest if your private credit capped at par on these software companies. Switch to Verizon Business and get more from your internet without paying more for your internet. Get LTE Business Internet starting at $39 a month when paired with select business mobile plans. That's unlimited data.

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