JP Morgan’s Jake Pollack shares his outlook on credit markets amid the backdrop of heightened market volatility and geopolitical risks.
The head of North America credit trading and global financing also dives into the growing private credit space, where he sees emerging risks, and looks at the relationships of banks and private lenders through both a competitive and collaborative lens.
Transcript
Jo Gallagher Credit spreads rolled back in April, and some are concerned that valuations are a bit stretched. What is your take on this, and what is your outlook for credit markets?
Jake Pollack Yeah, I mean, I understand the concern, right? If you look year to date, we’re kind of at the tighter end of the range. I think spreads kind of bottomed out at about the high 290s, and the widest in early April was about 474. So we’re at like 344-ish in high yield, at least, which is a pretty decent proxy for where we are. So certainly tighter, but you have to remember, GPs deliver all in yield to their clients, right? So the all-in yield includes the risk-free component and ends the spread, and you know when you look at it on that basis, all-in yields in high yield at least are about kind of 740ish, and that’s not that bad if you think about it right. So if you tell your LPs you know I’m going to give you 740 with a default rate that’s quite low. Right default rates in high-yield right now are running at about 1.3 percent. That’s a pretty good value proposition. If you look at it from that lens, the likely direction is a bit tighter. Obviously, there are risks on the horizon. You know, you could have geopolitics. We could have tariff noise pick up again and all that stuff. But that’s not the base case. I think the base case is actually tighter from here.
Jo Gallagher What are your thoughts on the raise of private credit and some of the emerging risks in that space?
Jake Pollack Yeah, I mean, private credit has emerged as an alternative. Let’s focus on sub-investment grade, right? It’s about a five-and-a-half trillion dollar market. Private credit is about, call it 1.7 of it, and leverage loans in high yield are also about 1.7, 1.8. So it’s almost like a third, a third a third. To date, right now, the obligors tend to be middle market and then large corporate borrowers, and they tend to first lien senior secured loans. Where often it’s owned by an equity sponsor that’s put a very large equity check in. The private credit market is actually reasonably well structured today. We don’t see any sort of large systemic risk in the existing private credit universe kind of on the horizon. Now I will say, if you hear a lot of the private-credit managers talking about the expansion opportunities. Some are talking about it’s a $40 trillion addressable market. Well, I can tell you, if a market grows from 1.7 trillion to 40 trillion, There will be some additional risks that come about, especially when you think about the definition, like what is it, right? For example, a super thin tranche of something, a very junior super thin tranche that’s levered. That is a lot riskier than a first lane senior secured term loan. So I think we have to be mindful of when and if the space expands, what it expands into, and what are the risks of that kind of, you know, new product.
Jo Gallagher And what is JP Morgan’s relationship like with private creditors? Are you friends, are you foes?
Jake Pollack It’s a good question. I think, look, direct lenders obviously are lending money JP Morgan and has lent money for, you know, hundreds of years. So there’s going to be some overlap, and there’s some areas where there’s competition. What we see is actually there’s far more areas of partnership. You know, for example, we provide back leverage to direct lenders. We do CLOs for direct lenders. We do exotics and solutions for direct lenders, rate swaps, etc. So there are a lot of areas where there’s actually a lot complementary activity. And if you take a step back. Many direct lenders are actually, you know, units of multi-strategy asset managers. Asset managers that we do a lot of public markets trading with, and what we find is that when we do financing for a direct lender. That often leads to a lot of things with other parts of that same firm. It can be secondary trading, again, I mentioned exotics. It can things on swap, et cetera. So the flywheel is actually pretty robust, and it creates a lot more areas of partnership than competition, but it’s certainly, you know, more complex these days. And we’re kind of leaning into that complexity.
Jo Gallagher So you recently assumed the additional responsibilities of head of North America for credit trading. What are your top priorities for that seat?
Jake Pollack One big priority for me is connecting the dots, right, between our different business units within North America credit trading and kind of have them work even better together. Sort of historically, one business would sit on Venus and another would be on Mars and you sort of wouldn’t have the integration. Like for example, we’ve got a large loan TRS business where we’re providing loan economics to investors on SWAP. We do very little of that in bonds, right? IG bonds and high yield bonds. We see an enormous opportunity there. There’s a $13 trillion market between IG and high yields. There’s a lot of trading that we can do on SWAP. So, you know, kind of putting those two businesses together is a big priority. You know, I mentioned earlier the linkage between financing and trading, right? We want to build, you now, more trading with our counterparties by providing more financing to them. And vice versa, we want to build more financing. By providing more trading. IG and high yield are two very fertile grounds for doing so. Another big priority is leaning into the client franchise. We have a fantastic client franchise, we have some fantastic relationships. I think we can accelerate them and do even more, again, to link areas of the franchise that previously were less linked. So it’s actually a very exciting time.
Jo Gallagher I’d like to thank Jake for his insight, and of course, you for watching. To catch your other shows, including Trailer TV This Week every Monday at 6.45 am UK time, go to tradertv.net.
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