WEBVTT - Dan Ivascyn Is Excited About a New Era in Fixed Income 0:00:02.720 --> 0:00:16.720 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:18.680 --> 0:00:22.160 Hello and welcome to another episode of The Odd Laws podcast. 0:00:22.200 --> 0:00:24.520 I'm joll Wisenthal and I'm Tracy Alloway. 0:00:24.800 --> 0:00:27.639 Tracy, you know, we've been doing this podcast for ten. 0:00:27.640 --> 0:00:30.640 Years, I am aware. Yeah, no, a whole decade. 0:00:30.320 --> 0:00:33.400 And we've been doing episodes about big picture things and 0:00:33.440 --> 0:00:36.120 things that have changed and what's different now in twenty 0:00:36.159 --> 0:00:39.000 twenty five or twenty fifteen when we started. And some 0:00:39.040 --> 0:00:40.800 things are the same, some things that are different, etcetera. 0:00:40.920 --> 0:00:43.279 But I think, and we've mentioned this before, I think 0:00:43.320 --> 0:00:46.560 the one thing that could not be more different here's 0:00:46.600 --> 0:00:49.080 the raids environment. We were right in the middle of, 0:00:49.120 --> 0:00:51.920 like the zerp decade or the Zerp era, maybe in 0:00:51.960 --> 0:00:55.040 twenty fifteen. Maybe at that point, the FED had tried 0:00:55.080 --> 0:00:57.560 to hike one time already and then the market sort 0:00:57.560 --> 0:00:59.560 of slapped it down and said, oh no, no, no, 0:00:59.560 --> 0:01:01.960 no more, We're not ready for more rate hikes, et cetera. 0:01:02.520 --> 0:01:05.480 The raid environment could not be more different than when 0:01:05.520 --> 0:01:06.800 we first started this podcast. 0:01:06.959 --> 0:01:09.839 Absolutely. Can I say one thing about the anniversary, Yeah, 0:01:10.040 --> 0:01:14.040 so we started the podcast in November twenty fifteen. Yeah, 0:01:14.440 --> 0:01:16.440 we were going to celebrate for the month of November, 0:01:16.480 --> 0:01:18.640 but we're now in December, So are we going to 0:01:18.640 --> 0:01:20.240 make this a two month celebration. 0:01:20.640 --> 0:01:23.200 Well, you know, we're having our ten year anniversary party 0:01:23.200 --> 0:01:25.800 in December, so I think it's allowed. Well's just believing, 0:01:26.440 --> 0:01:29.559 you know, it's allowed to bleed the ten years into 0:01:29.720 --> 0:01:33.960 both months, given that we're formally celebrating in December. I 0:01:34.000 --> 0:01:38.360 think this is how I'm rationalizing this framing for this conversation. 0:01:38.560 --> 0:01:41.200 Since yes, we're no longer we're technically no longer an 0:01:41.200 --> 0:01:42.240 anniversary month. 0:01:42.319 --> 0:01:44.480 I guess it's our party and we can celebrate as 0:01:44.520 --> 0:01:47.040 long as we want however we want. But you're absolutely 0:01:47.080 --> 0:01:49.600 right about the rates environment, and you know you could 0:01:49.600 --> 0:01:51.000 see that if you go back and look at some 0:01:51.040 --> 0:01:53.440 of the old episodes. The other thing that strikes me 0:01:53.640 --> 0:01:56.480 looking back at the old podcast episodes is how many 0:01:56.480 --> 0:02:00.240 of them were about shadow banking, which of course nowadays 0:02:00.440 --> 0:02:04.960 recall private credit. And that's another thing that's changed enormously. 0:02:05.040 --> 0:02:08.160 So the private credit market now basically rivals the public 0:02:08.200 --> 0:02:10.600 credit market in terms of size, and there's obviously a 0:02:10.639 --> 0:02:14.320 lot of concern about what that means. The outlooks lots 0:02:14.320 --> 0:02:15.520 of differences. 0:02:15.160 --> 0:02:18.799 Lots of differences. Yeah, completely dramatic and setting aside the 0:02:18.840 --> 0:02:22.560 big picture questions, there are also some small picture questions, 0:02:22.639 --> 0:02:23.400 maybe how you put. 0:02:23.240 --> 0:02:24.160 It, immediate questions. 0:02:24.280 --> 0:02:26.680 At the time we were recording this, it looks like 0:02:26.800 --> 0:02:29.440 the December meeting is basically a lock that there's going 0:02:29.520 --> 0:02:31.639 to be a cut. But up until recently there was 0:02:31.680 --> 0:02:32.960 a lot of market uncertainty. 0:02:33.000 --> 0:02:34.760 If we recorded this two weeks ago, it would have 0:02:34.760 --> 0:02:35.360 looked very different. 0:02:35.400 --> 0:02:37.480 It would looked very different, and you know what happens 0:02:37.520 --> 0:02:41.800 after December highly uncertain on many dimensions the follow through 0:02:41.919 --> 0:02:45.560 for the rate cutting cycle. There have been increases in 0:02:45.639 --> 0:02:48.959 various credit concerns of various source. We've had a few 0:02:49.000 --> 0:02:51.920 small blow ups, but you know, nothing that big. But 0:02:52.000 --> 0:02:55.600 like what Jamie Diamond called the cockroaches, we mentioned it 0:02:55.680 --> 0:02:58.639 on the show that suddenly people are talking about credit 0:02:58.639 --> 0:03:02.400 default swaps uncertain high tech companies, which is very unusual. 0:03:02.440 --> 0:03:05.440 But there's that's what Star Wars meme. I haven't heard 0:03:05.480 --> 0:03:07.320 that word in a long time, that's right. 0:03:08.000 --> 0:03:10.000 But with the AI build out and how much that's 0:03:10.000 --> 0:03:13.400 getting financed by various forms of credit, suddenly people are 0:03:13.440 --> 0:03:16.280 talking about the fact that big tech companies are credits, 0:03:16.400 --> 0:03:18.320 which we don't really think about very much. And so 0:03:18.680 --> 0:03:20.600 there are some big picture of things, but also some 0:03:20.639 --> 0:03:24.440 things happening right here and right now that weren't further 0:03:24.560 --> 0:03:27.360 understanding and further explanation from the people who really understand 0:03:27.400 --> 0:03:30.440 them absolutely well. I'm very excited to say we really 0:03:30.480 --> 0:03:32.799 do have the perfect guests, someone who we've had on 0:03:32.840 --> 0:03:35.400 the show before, but someone we love speaking to. We 0:03:35.480 --> 0:03:37.640 are going to be speaking with Dan Ivison. He is 0:03:37.680 --> 0:03:41.480 the CIO over at PIMCO, which of course everybody should 0:03:41.480 --> 0:03:44.040 know about. So Dan, thank you so much for coming 0:03:44.080 --> 0:03:45.400 back on the Outlaws podcast. 0:03:45.640 --> 0:03:48.160 Thanks for having me, and congratulations on the big ten 0:03:48.200 --> 0:03:51.600 year anniversary. It's an honor to be invited back during 0:03:51.600 --> 0:03:53.360 this series of podcasts. 0:03:53.600 --> 0:03:54.240 Thank you so much. 0:03:54.360 --> 0:03:57.520 Yeah, very kind of you to say, let's start small picture. 0:03:57.760 --> 0:04:00.400 I think this episode will be out before the meeting. 0:04:00.760 --> 0:04:02.320 The market is saying it's going to be a lock. 0:04:02.600 --> 0:04:05.560 They're definitely going to cut rates. But beyond that, when 0:04:05.600 --> 0:04:07.680 you look into twenty twenty six, there's sort of two 0:04:07.720 --> 0:04:10.640 different questions. There's the ongoing uncertainty about who is going 0:04:10.680 --> 0:04:13.760 to be the next FED chair, and then there's just 0:04:13.920 --> 0:04:18.200 the questions about how much appetite this existing committee has 0:04:18.400 --> 0:04:21.320 to continue a rate cutting cycle, So I'd love to 0:04:21.320 --> 0:04:24.159 get you know, what are you thinking about for the 0:04:24.360 --> 0:04:27.760 twenty twenty six and what we could be expecting. 0:04:28.320 --> 0:04:30.279 Sure, so you know, we do think the Fed's likely 0:04:30.320 --> 0:04:33.320 to cut rates at the upcoming meeting. We also think 0:04:33.320 --> 0:04:35.160 that this is a FED that would like to get 0:04:35.279 --> 0:04:39.520 rates a bit lower into twenty twenty six. The challenge, 0:04:39.520 --> 0:04:41.480 of course, is that we expect to see a little 0:04:41.480 --> 0:04:44.400 bit of reacceleration in the economy during the first half 0:04:44.440 --> 0:04:47.520 of the year, and we also expect inflation to remain 0:04:47.880 --> 0:04:51.279 comfortably above the central bank targets. So you know, we 0:04:51.360 --> 0:04:53.440 believe this FED when they say they're going to continue 0:04:53.480 --> 0:04:56.000 to focus on the data, we do think the data is. 0:04:56.000 --> 0:04:57.560 Going to be a bit confusing. 0:04:58.200 --> 0:05:01.800 The general view you know today at PIMCU, with significant uncertainty, 0:05:02.080 --> 0:05:04.960 is that they probably do get rates down another half 0:05:04.960 --> 0:05:07.680 of percent or so next year, which is close to 0:05:07.720 --> 0:05:11.200 what's being priced into the market today. But again, if 0:05:11.240 --> 0:05:15.280 you see meaningful reacceleration in the growth data, and more importantly, 0:05:15.920 --> 0:05:19.880 if you see even a modest up ticket inflation, this FED, 0:05:20.040 --> 0:05:22.320 you know, even with a new chair, will will likely 0:05:22.680 --> 0:05:24.800 be willing to remain on hold and then I think 0:05:24.800 --> 0:05:26.919 the other point, and this came up with one of 0:05:26.960 --> 0:05:30.720 your recent guests, is that there's the front end policy 0:05:30.839 --> 0:05:34.120 rate and then there's the reaction out in longer maturities. 0:05:34.520 --> 0:05:36.680 We do think there's a chance if this FED cuts 0:05:36.680 --> 0:05:42.360 aggressively into strengthening data higher inflation, you may actually get 0:05:42.520 --> 0:05:44.880 a selloff in the long end of the curve. So 0:05:45.360 --> 0:05:47.320 that could be a bit self defeating, and I think 0:05:47.760 --> 0:05:50.160 something that will be a topic into next year if 0:05:50.200 --> 0:05:52.400 we do get that reacceleration that we expect. 0:05:52.640 --> 0:05:54.280 There's a lot you said there that I want to 0:05:54.320 --> 0:05:56.680 follow up on just in that one answer, but just 0:05:56.880 --> 0:05:59.560 very quickly, what is the idea, the gist behind why 0:05:59.600 --> 0:06:01.400 you expect dead Q on reacceleration. 0:06:02.080 --> 0:06:06.160 Yeah, A lot of it's you know, related to significant momentum, 0:06:06.240 --> 0:06:08.640 you know, in terms of capital investment, you know, associated 0:06:08.640 --> 0:06:13.640 with AI as well as the delayed positive growth impact. 0:06:13.360 --> 0:06:15.960 Of the so called Big Beautiful Bill. 0:06:16.320 --> 0:06:20.359 A lot of the corporate tax extensions happened retroactively for 0:06:20.400 --> 0:06:22.840 the consumer of the household in many instances, you're going 0:06:22.839 --> 0:06:25.279 to begin to see the direct impact in terms of 0:06:25.320 --> 0:06:29.680 positive refunds coming into the new year. So again, you know, 0:06:29.760 --> 0:06:31.960 plenty of uncertainty, you know, a lot of cross currents 0:06:31.960 --> 0:06:34.239 in this economy, but we do think there's the chance 0:06:34.279 --> 0:06:37.839 that you'll get some moderate reacceleration in the first half 0:06:37.880 --> 0:06:40.200 of the year. You know, we're looking at a growth environment, 0:06:40.279 --> 0:06:42.040 you know, for next year in the United States at 0:06:42.120 --> 0:06:44.279 least somewhere in the one and a half to two 0:06:44.279 --> 0:06:47.600 percent type range. So again that's an environment we're from 0:06:47.600 --> 0:06:51.240 a traditional tailor rule perspective. We don't think that the 0:06:51.240 --> 0:06:53.560 FED needs to cut a lot more from here, although 0:06:53.720 --> 0:06:55.520 you know, we do think that this FED, particularly with 0:06:55.640 --> 0:06:58.040 new membership and a new chair, would like to get 0:06:58.120 --> 0:06:58.679 rates lower. 0:06:59.040 --> 0:07:01.920 Since you mentioned the new chair, this is more of 0:07:02.120 --> 0:07:06.800 a long term, thoughtful question. But obviously, for the majority 0:07:07.000 --> 0:07:09.520 of your career as a bond manager, I don't think 0:07:09.560 --> 0:07:13.360 FED independence has really been much of a concern, right. 0:07:13.440 --> 0:07:16.200 We certainly haven't seen the degree of headlines that we 0:07:16.240 --> 0:07:19.560 are seeing lately with Kevin Hassett emerging as the front 0:07:19.600 --> 0:07:22.880 runner for the new FED chair position. How do you 0:07:23.080 --> 0:07:26.560 as a bond manager view that particular issue and do 0:07:26.600 --> 0:07:30.040 you have to start handicapping the way you invest because 0:07:30.080 --> 0:07:30.200 of this? 0:07:31.600 --> 0:07:33.120 I think to a degree, I think if you go 0:07:33.200 --> 0:07:36.360 back several decades, you know, you can question the concept 0:07:36.360 --> 0:07:38.880 of FED independence a little bit, and I think even 0:07:39.400 --> 0:07:43.560 from the perspective of this fed's expanded mandate in recent years, 0:07:43.960 --> 0:07:46.920 what the market's really focused on is independence related to 0:07:46.960 --> 0:07:49.440 the setting of policy rates, which you know, of course 0:07:49.480 --> 0:07:53.000 have a direct impact. So from that perspective, we are 0:07:53.120 --> 0:07:57.160 monitoring the situation like other investors. We do think less 0:07:57.160 --> 0:08:01.840 independent FED has implications, particularly in longer maturities, where you 0:08:01.920 --> 0:08:04.520 may need a bit more risk premium when you're dealing 0:08:04.560 --> 0:08:08.640 with uncertainty around FED independence. But generally speaking, when we 0:08:08.720 --> 0:08:11.320 think about you know, who's being considered for the FED role, 0:08:11.560 --> 0:08:14.360 including Kevin Hasseert, you know, we do think that there'll 0:08:14.400 --> 0:08:17.960 be a general spirit of independence there. We still think, 0:08:18.080 --> 0:08:20.560 you know, the chair is one vote, so to speak, 0:08:20.560 --> 0:08:23.480 and we have a committee that will continue to focus 0:08:23.560 --> 0:08:27.440 on the dual mandate. So yes, it's a consideration, it's 0:08:27.480 --> 0:08:30.679 an input into our decisions. It's not a major concern. 0:08:30.920 --> 0:08:32.679 We do think that you know, the group that's being 0:08:32.679 --> 0:08:36.520 considered are you know, certainly highly qualified and will likely 0:08:36.640 --> 0:08:40.760 you know, continue to take a sufficiently independent view regarding 0:08:40.800 --> 0:08:41.760 monetary policy. 0:08:42.000 --> 0:08:43.840 Let me ask you kind of the same question, but 0:08:43.880 --> 0:08:48.480 with a slightly different framing. It's December twenty twenty five 0:08:48.720 --> 0:08:52.360 right now, so we've had like over four years now, 0:08:52.640 --> 0:08:55.120 I think over four years now of the FED missing 0:08:55.360 --> 0:08:58.600 on its inflation on the two on getting inflation durably 0:08:59.000 --> 0:09:02.240 back to two And if the FED is going to 0:09:02.280 --> 0:09:04.240 continue cutting as it looks like it's going to do 0:09:04.320 --> 0:09:08.520 in December, that signals a further willingness to ease policy 0:09:08.720 --> 0:09:13.520 even with inflation over its ostensible target setting. Aside the 0:09:13.760 --> 0:09:18.960 strict question of independence, do you think the FED, regardless 0:09:19.120 --> 0:09:22.600 even the current composition and the likely composition going to 0:09:22.640 --> 0:09:26.080 be forward, is just not going to take two percent 0:09:26.280 --> 0:09:29.760 seriously as perhaps it might have in the past. 0:09:30.240 --> 0:09:33.120 Yes, that's a great question, and I think that in 0:09:33.160 --> 0:09:36.880 a general sense the two percent target matters, but not 0:09:36.960 --> 0:09:39.720 so much the current inflation rate. You're absolutely right. We've 0:09:39.720 --> 0:09:42.920 been operating, you know, and living with an inflation rate 0:09:43.559 --> 0:09:46.160 meaningfully above their target for quite some time. But when 0:09:46.160 --> 0:09:48.760 you look at inflationary expectations, and I think when you 0:09:48.800 --> 0:09:51.400 talk to central bankers you know here in the United 0:09:51.400 --> 0:09:55.480 States as well as outside this country, the inflationary expectations 0:09:55.520 --> 0:09:58.160 piece is what's critically important. So when you look at 0:09:58.240 --> 0:10:02.000 longer term break even inflation rate, they've continued to be 0:10:02.240 --> 0:10:04.320 very very well behaved. You saw a bit of an 0:10:04.400 --> 0:10:07.120 uptick at the upbreak of the war in Ukraine, and 0:10:07.160 --> 0:10:10.280 then you saw an uptick around the tariff announcements earlier 0:10:10.280 --> 0:10:12.320 this year. But when you look at a ten year 0:10:12.640 --> 0:10:16.000 tip break even rate, just to use one of several proxies, 0:10:16.040 --> 0:10:19.320 no one measure is perfect, you're down around two and 0:10:19.480 --> 0:10:22.880 quarter percent on CPI inflation. So to the extent that 0:10:23.400 --> 0:10:27.680 inflationary expectations remain well contained, we do think that the 0:10:27.760 --> 0:10:30.840 central banks willing to look through some of the more 0:10:31.040 --> 0:10:34.120 higher frequency data to the extent that you see those 0:10:34.160 --> 0:10:37.760 longer term expectations become unanchored. We do think that's a 0:10:37.840 --> 0:10:41.920 risk for a FED that's too aggressive in cutting rates here. 0:10:42.400 --> 0:10:44.520 We do think that the mindset will change, not only 0:10:44.559 --> 0:10:46.720 the mindset of the Fed, but we think the market 0:10:46.720 --> 0:10:50.440 reaction could be counterproductive, not only in terms of higher 0:10:50.520 --> 0:10:53.040 long term interest rates, but an impact on risk assets 0:10:53.080 --> 0:10:55.800 as well. So you know, the markets have let the 0:10:55.840 --> 0:11:00.640 Fed get away with running fairly accommodated policy into a 0:11:00.679 --> 0:11:03.760 three percent type inflation world. Because again, there are a 0:11:03.760 --> 0:11:06.480 lot of other forces at work that very well could 0:11:06.559 --> 0:11:09.520 be disinflationary over the long term, and there still is 0:11:09.640 --> 0:11:12.920 significant confidence in global central banks and being able to 0:11:13.640 --> 0:11:17.160 generally keep inflation close to the target on a longer 0:11:17.240 --> 0:11:19.880 term basis. So you know, again, so far, so good, 0:11:19.920 --> 0:11:21.319 but you know, this is all going to be a 0:11:21.400 --> 0:11:24.120 key source of uncertainty, you know, into twenty six and beyond. 0:11:24.480 --> 0:11:27.520 I feel like uncertainty is constantly the keyword on our 0:11:27.559 --> 0:11:32.160 podcast nowadays, since longer dated expectations and yields keeps coming up. 0:11:32.200 --> 0:11:34.760 In this conversation, I got to ask, do you believe 0:11:34.760 --> 0:11:38.119 in the term premium or rather, is the term premium 0:11:38.160 --> 0:11:41.000 a useful concept to you as a big bond investor? 0:11:41.480 --> 0:11:43.680 It is, and you know, when we look at you know, 0:11:43.679 --> 0:11:45.680 where we're going to invest, you know, we like to 0:11:45.679 --> 0:11:48.760 get paid for, you know, taking more risk. We do, 0:11:49.120 --> 0:11:51.800 you know, see an elevated term premium certainly relative to 0:11:51.840 --> 0:11:54.800 where we were five or ten years ago, and that's 0:11:54.920 --> 0:11:59.760 made longer maturity investments a bit more attractive. With that said, 0:12:00.000 --> 0:12:02.560 there's lots of reasons why the term premium should be higher. 0:12:02.840 --> 0:12:06.200 Inflation is one of them. Global debt levels, US debt 0:12:06.240 --> 0:12:09.679 and deficit levels are another. We probably live in a 0:12:09.720 --> 0:12:13.040 world today given what's going on in terms of focusing 0:12:13.080 --> 0:12:16.680 on tariffs and bringing back supply chains, you know, to 0:12:16.920 --> 0:12:20.960 domestic markets, the need for you know, higher risk premium. 0:12:21.080 --> 0:12:23.400 So you know, as a firm today, we we like 0:12:23.520 --> 0:12:26.960 longer maturity bonds more, but we're still you know, tend 0:12:26.960 --> 0:12:30.000 to keep our positions concentrated in shorter maturities, and we 0:12:30.040 --> 0:12:32.920 would expect over the next few years a little bit 0:12:32.920 --> 0:12:36.720 of additional underperformance in the very very long end of 0:12:36.760 --> 0:12:39.880 the yield curve. So we do think it's important. It's 0:12:39.920 --> 0:12:42.719 interesting people focus a lot on the deficit situation in 0:12:42.760 --> 0:12:45.880 the United States. As an investor, you don't want to 0:12:45.960 --> 0:12:49.360 lend to a perfect high quality credit you get paid 0:12:49.360 --> 0:12:51.520 so much to do so. So in some sense, we want, 0:12:52.000 --> 0:12:55.040 you know, just enough fiscal irresponsibility where we and our 0:12:55.400 --> 0:12:58.200 end investors get paid more to lend, but not so 0:12:58.280 --> 0:13:00.560 much where it becomes a concern in term the overall 0:13:00.640 --> 0:13:03.080 viability of the system. So we think we're in the 0:13:03.120 --> 0:13:06.440 midst of that type of market environment today, but things 0:13:06.480 --> 0:13:08.160 can go a bit too far if we don't get 0:13:08.480 --> 0:13:11.200 the deficit or the inflation situation under control. Over the 0:13:11.240 --> 0:13:26.599 next couple of a few years. 0:13:29.520 --> 0:13:32.920 Can you talk about the role of bonds in a portfolio? Again, 0:13:33.120 --> 0:13:37.479 this is something that in twenty fifteen, bonds fit beautifully 0:13:37.559 --> 0:13:41.160 into a diversified portfolio because they were paying something, but 0:13:41.240 --> 0:13:43.959 also they had that nice and verse correlation and so 0:13:44.120 --> 0:13:47.760 you got that natural hedge, et cetera. We haven't had 0:13:47.880 --> 0:13:51.720 that very like that beautiful inverse correlation between risk assets 0:13:51.760 --> 0:13:54.760 and bonds for a long time, which undermines one of 0:13:54.800 --> 0:13:58.440 the cases for the diversified investor of having like a 0:13:58.440 --> 0:14:01.960 big slug of perhaps longer duration assets. How do you 0:14:01.960 --> 0:14:04.199 think in twenty twenty five, how do you sell the 0:14:04.240 --> 0:14:10.120 case that diversified investors should still keep some allocation to 0:14:10.280 --> 0:14:11.480 duration or fixed income. 0:14:11.920 --> 0:14:14.280 Yeah, so it's interesting. I know this is a ten 0:14:14.320 --> 0:14:17.040 year anniversary show, so you know, went back it looked 0:14:17.040 --> 0:14:19.960 at the performance of bonds versus other things, you know, 0:14:20.000 --> 0:14:23.560 over the last ten years, and the divergence in performance 0:14:23.560 --> 0:14:27.080 over the last decade has been remarkable and it explains 0:14:27.080 --> 0:14:28.640 a lot. If you look at the S and P 0:14:28.760 --> 0:14:31.600 five hundred over the last ten years, in absolute terms, 0:14:31.600 --> 0:14:34.400 you generated a return of about fifteen percent a year 0:14:34.920 --> 0:14:37.560 adjusted for inflation. I think it's up close to twelve 0:14:37.600 --> 0:14:40.640 percent or so I'm rounding a little bit. When you'll 0:14:40.640 --> 0:14:43.360 get the performance of you know, the Bloomberg aggregate index 0:14:43.400 --> 0:14:46.400 over that ten year period, the return annually has been 0:14:46.440 --> 0:14:50.520 below two percent in absolute terms. When you subtract inflation, 0:14:50.760 --> 0:14:54.760 you ended up with negative returns in bonds for ten years. 0:14:54.880 --> 0:14:57.280 So not only has the correlation broken down, but you 0:14:57.280 --> 0:15:00.600 didn't make any money in owning bonds. When you look 0:15:00.600 --> 0:15:04.200 at the starting valuations today under any type of reasonable 0:15:04.280 --> 0:15:07.640 longer term valuation framework, none of which have to mean 0:15:07.680 --> 0:15:10.400 revert quickly, but you know, you look at a you know, 0:15:10.400 --> 0:15:14.240 a Schiller pe type arrangement or equity risk premium type argument. 0:15:14.760 --> 0:15:17.520 You don't need a great correlation on bonds versus equities. 0:15:17.760 --> 0:15:20.720 What the relative valuations would suggest is that there's a 0:15:20.760 --> 0:15:23.800 good chance that bonds outperform stocks over the next five 0:15:23.880 --> 0:15:26.760 or ten years, or at least have returns on a 0:15:26.840 --> 0:15:31.000 risk adjusted basis very very close to stocks. So you 0:15:31.040 --> 0:15:33.520 don't have to rest on a correlation argument. You know, 0:15:33.560 --> 0:15:35.640 you don't have to focus on well bonds do well 0:15:35.720 --> 0:15:39.160 during periods where people are losing their jobs or you know, 0:15:39.240 --> 0:15:41.800 income growth is negative. You can just from a pure 0:15:41.880 --> 0:15:47.320 valuation perspective, find the acid class quite attractive absolute and relative. 0:15:47.640 --> 0:15:51.280 I think the second point around correlations is that correlations 0:15:51.320 --> 0:15:54.520 between stocks and bonds will tend to break down when 0:15:54.600 --> 0:15:58.400 inflation is the primary risk factor. Today, yes, inflation is 0:15:58.400 --> 0:16:01.200 above central bank targets, but there's a lot of uncertainty 0:16:01.600 --> 0:16:05.400 on the economic side. You do have this complex economy 0:16:05.440 --> 0:16:09.000 where tremendous value you know within the tech sector, tremendous 0:16:09.000 --> 0:16:13.880 capital and investment, yet lower income households are feeling considerable pain. 0:16:14.560 --> 0:16:18.240 If AI is very very successful at increasing productivity, that 0:16:18.280 --> 0:16:21.560 could mean significant job loss across key segments of the economy. 0:16:21.720 --> 0:16:24.000 So the bottom line is that risks are more balanced. 0:16:24.600 --> 0:16:26.960 We don't think correlations are going to ever come back 0:16:27.000 --> 0:16:30.160 to the really, really neat clean levels you know a 0:16:30.200 --> 0:16:33.000 decade or so ago, when inflation simply wasn't a problem 0:16:33.040 --> 0:16:36.120 at all, you know, across the global economy. But we 0:16:36.200 --> 0:16:38.920 have seen correlations improve a bit, and we would expecting 0:16:38.960 --> 0:16:42.760 to go forward basis correlations to improve further. I think 0:16:42.800 --> 0:16:45.400 it's important again to look at a global opportunity set. 0:16:45.880 --> 0:16:49.080 I think that the correlation arguments are stronger in areas 0:16:49.080 --> 0:16:52.680 of the world that have the best fiscal position. But 0:16:52.800 --> 0:16:54.600 in general, you know, not only do we think that 0:16:54.640 --> 0:16:57.440 the valuations are quite attractive, you know, we do think 0:16:57.440 --> 0:16:59.960 the correlations will be a bit better certainly that we experience. 0:17:00.000 --> 0:17:01.640 It's coming out of the culture tray. 0:17:01.720 --> 0:17:04.320 Twenty fifteen, bonds were an easy sell. It turns out 0:17:04.320 --> 0:17:07.240 they weren't the best investment. Twenty twenty five maybe a 0:17:07.320 --> 0:17:09.919 harder cell, but the math says that now is actually 0:17:09.920 --> 0:17:12.240 the time to expand your exposure. 0:17:12.280 --> 0:17:13.840 Well, I guess in ten years when we do the 0:17:13.840 --> 0:17:17.840 twenty year anniversary, we will be able to judge. But Dan, 0:17:18.640 --> 0:17:21.240 you know, since we're talking about why people should buy bonds, 0:17:21.280 --> 0:17:24.119 one of the surprising things that happened this year was 0:17:24.520 --> 0:17:28.360 we had the big tariff drama and we saw markets 0:17:28.359 --> 0:17:31.600 go down, We saw a bond yield spike. Everyone was 0:17:31.640 --> 0:17:34.199 talking about the sell America trade. So this idea that 0:17:34.240 --> 0:17:36.639 you didn't want to hold onto US assets because of 0:17:36.680 --> 0:17:41.879 all that policy uncertainty. And now you know, in December 0:17:42.080 --> 0:17:45.359 twenty twenty five, yields have come down quite a lot, 0:17:45.400 --> 0:17:48.639 although I have to say the dollar is still fairly weak. 0:17:49.280 --> 0:17:53.760 You were always kind of resistant to the sell America idea, 0:17:53.760 --> 0:17:56.520 and you pushed back on it. What did you see 0:17:56.680 --> 0:17:59.080 that perhaps others didn't. 0:17:59.760 --> 0:17:59.879 Well. 0:18:00.080 --> 0:18:03.240 Again, I think a lot has to do with starting valuations. 0:18:03.480 --> 0:18:07.720 After a significant period of underperformance across the US fixed 0:18:07.720 --> 0:18:10.359 income or global fixed income, you ended up with a 0:18:10.359 --> 0:18:14.280 decent valuation cushion. So I think that's always important in markets. Yes, 0:18:14.400 --> 0:18:17.040 there was news that in a narrow sense was negative 0:18:17.240 --> 0:18:20.719 for bonds and negative for US bonds or US assets 0:18:20.760 --> 0:18:24.399 in particular. You started with a decent yield cushion. You know, 0:18:24.440 --> 0:18:27.879 we began the year, you know, with yields ten year treasuries, 0:18:27.920 --> 0:18:30.639 you know, up near five percent. A five percent yield 0:18:30.640 --> 0:18:33.320 even in a three percent inflation worlds not that bad. 0:18:33.880 --> 0:18:36.280 I think the second point, though, you know, we weren't 0:18:36.400 --> 0:18:39.280 overly convicted in just owning the United States. And I 0:18:39.280 --> 0:18:40.520 think if I could, you know, you're part of the 0:18:40.560 --> 0:18:43.920 most important thing I can say today is that global 0:18:43.960 --> 0:18:47.359 bond investing is back. For so many years, capitalists poured 0:18:47.359 --> 0:18:49.920 into the US markets. It's poured into the US markets 0:18:49.920 --> 0:18:52.840 focusing on private credit, you know, which has grown you know, 0:18:52.880 --> 0:18:55.920 the most here in this country. But very very quietly, 0:18:56.200 --> 0:19:00.920 you've seen underperformance across the global fixed thing come opportunities 0:19:00.960 --> 0:19:04.399 set where today even you know, from a US dollar 0:19:04.880 --> 0:19:10.080 based investors perspective, there's great yield, great sources of diversification. 0:19:10.440 --> 0:19:13.960 So it's not that we were, you know, insistent on 0:19:14.119 --> 0:19:17.960 just owning US assets. In fact, we've gradually diversified into 0:19:18.000 --> 0:19:20.320 other areas of the market. We just thought that there 0:19:20.400 --> 0:19:23.520 was good value and good yield in the US, a 0:19:23.560 --> 0:19:27.080 sufficient cushion, and then by extending into these other markets, 0:19:27.240 --> 0:19:30.240 a great way to generate incremental return by good old 0:19:30.240 --> 0:19:33.040 fashioned relative value trading in markets today that are less 0:19:33.040 --> 0:19:35.720 correlated than they were during those years coming out of 0:19:35.760 --> 0:19:39.240 the global financial crisis and where you just have a 0:19:39.280 --> 0:19:42.720 really really exciting time to troll dual fashion training across 0:19:42.840 --> 0:19:45.640 yield curves, across markets and avoid what. 0:19:45.760 --> 0:19:49.720 Changed because it seemed like, you know, it felt like 0:19:50.480 --> 0:19:53.160 international investing across any acid class was like a real 0:19:53.200 --> 0:19:54.679 suckers thing. It's like, oh, this is going to be 0:19:54.680 --> 0:19:57.720 the year that we're going to diversify internationally. You didn't 0:19:57.720 --> 0:20:01.720 get paid at all for it. Flipped such that actually 0:20:01.720 --> 0:20:04.600 both stocks too, because international equity markets have done very 0:20:04.640 --> 0:20:07.320 well and have outperformed the US. It's kind of surprising 0:20:07.320 --> 0:20:11.480 in many respects. But what switched such that now there's 0:20:11.520 --> 0:20:13.600 been real opportunities to make money. 0:20:13.600 --> 0:20:17.080 Looking abroad, Yeah, well again, valuations have improved. You know, 0:20:17.240 --> 0:20:19.680 we talked about, you know, the real poor performance of 0:20:19.720 --> 0:20:22.439 the US bond market over the last decade. As we 0:20:22.480 --> 0:20:26.359 all know, yields were outright negative in many areas of 0:20:26.400 --> 0:20:28.520 the world, So we talked about low yields. You subtract 0:20:28.520 --> 0:20:30.720 that low inflation rate, you end up with a negative number, 0:20:31.280 --> 0:20:35.240 and big portions of the global fixed income opportunity set 0:20:35.440 --> 0:20:38.280 you'd have to subtract anything you started with a negative number. 0:20:38.480 --> 0:20:41.360 So a lot of this has just been the repricing 0:20:41.400 --> 0:20:44.119 of markets that started not only at low levels, but 0:20:44.280 --> 0:20:47.760 negative yield levels. Then the second piece relates to policy 0:20:48.040 --> 0:20:50.359 coming out of the global financial crisis. Not only were 0:20:50.440 --> 0:20:54.399 yields low, but you've had such incredible policy activism where 0:20:54.440 --> 0:20:57.399 on any signs of economic weakness you had a massive 0:20:57.400 --> 0:21:02.240 fiscal response, a massive monetary paul response COVID, you know, 0:21:02.280 --> 0:21:05.040