Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is Mike Swell. He's the head of fixed
Speaker 1: income portfolio management at g SAM. That's Goldman Sachs Asset
Speaker 1: Management Group. They run over seven hundred billion dollars just
Speaker 1: on fixed income side. And man, let me tell you,
Speaker 1: this is a master class in fixed income investing. If
Speaker 1: you are interested in where to get yield, how to
Speaker 1: pursue it, what the risks are involved, where there are
Speaker 1: the best opportunities for fixed income investing, where you're not
Speaker 1: getting paid to take risk. Uh. I don't even know
Speaker 1: what else to say. One of the most knowledgeable people
Speaker 1: I've ever heard in the fixed income space. I would
Speaker 1: imagine you probably have to know a thing or two
Speaker 1: if you're gonna run fixed income for Goldman SAX. Uh.
Speaker 1: Absolutely must listen a fascinating, fascinating conversation. I learned a
Speaker 1: ton of stuff, and I consider myself somewhat knowledgeable in
Speaker 1: the space. I think that I'm going to listen to
Speaker 1: this episode repeatedly. Uh, just because it was so dense
Speaker 1: and so filled with really fascinating information. He's had a
Speaker 1: really intriguing career UM and has really put up some
Speaker 1: incredible UM insight and and lots of great numbers over
Speaker 1: the time. Uh G Sam runs a variety of different
Speaker 1: mutual funds. There are five or so that uh Swell
Speaker 1: is either in charge of supervising, or a manager of,
Speaker 1: or a co manager of. So this isn't just abstract theory.
Speaker 1: He really is where the rubber meets the road. So,
Speaker 1: with no further ado, my conversation with Mike Swell, the
Speaker 1: head of fixed income portfolio management for Goldman Sects they
Speaker 1: sees Masters in Business with very Rid Holts on Bloomberg Radio.
Speaker 1: My extra special guest this week is Mike Swell. He
Speaker 1: is the head of Global fixed income portfolio Management at
Speaker 1: Goldman Sachs, where he oversees about seven hundred billion dollars
Speaker 1: in assets. He's also a managing director at Goldman Sachs
Speaker 1: Asset Management. Michael Swell, Welcome to Bloomberg Berry. I want
Speaker 1: to thank you and thank Bloomberg for having me today.
Speaker 1: So let's talk a little bit about the early days.
Speaker 1: You graduated the London School of Economics in do you
Speaker 1: remember what the yield was on the ten year back then, Uh,
Speaker 1: it was meaningfully higher than it is today. I I, well,
Speaker 1: it's it's it's roughly zero today, so it's got to
Speaker 1: be a lot higher. I would say it was probably
Speaker 1: in the very high single digits, pushing up on ten percent.
Speaker 1: I'll go eat to nine percent. So so that was
Speaker 1: still fairly early and what turned out to be a
Speaker 1: very very long bull market. What were those days like,
Speaker 1: did anyone have any idea about the legs that the
Speaker 1: bond bull market would have? Well, I was still in
Speaker 1: college at the time, and so I actually UM was
Speaker 1: at LC for a year, and then I was at
Speaker 1: Brandeis University got my bachelor's there. And while I was
Speaker 1: in London, I kind of got exposed to global markets
Speaker 1: to fixed income. I saw a lot of people applying
Speaker 1: for internships to Wall Street and I said, it sounds
Speaker 1: pretty good, it sounds competitive, UM and so I then
Speaker 1: kind of applied to a program to get a master's
Speaker 1: International finance at Brandeis UM. So I had yet to
Speaker 1: know exactly what the bond market was until I started
Speaker 1: my career at Lehman Brothers in UM and Uh, it
Speaker 1: was a different world. I mean in terms of liquidity
Speaker 1: in terms of transparency. Back then, you had to wait
Speaker 1: until the next day to find out what happened with
Speaker 1: bond prices. Uh. You had this thing called tear sheets,
Speaker 1: pink sheets, and that was the way you learned about
Speaker 1: what was going on with companies and what was going
Speaker 1: on in terms of pricing in markets. So a very
Speaker 1: very different world. The bond market wasn't the kind of
Speaker 1: primary market of liquidity like it is today and something
Speaker 1: that we talked about for twenty four hours a day.
Speaker 1: Back then, probably if you had if you had a
Speaker 1: finance show like Bloomberg, you probably would have spent ten
Speaker 1: fifteen minutes on bonds and the rest was all on equities.
Speaker 1: What about execution? What was it like trying to move
Speaker 1: any sort of paper around back then versus today? Uh,
Speaker 1: back then it was obviously it was a phone only market,
Speaker 1: so not an electronic market. Now obviously you press a
Speaker 1: button and you can move billions of dollars of risk,
Speaker 1: and you can move billion dollars, billions of dollars of
Speaker 1: risk in multiple different markets with a touch of a button,
Speaker 1: whether it's the treasury market, the mortgage market, the corporate
Speaker 1: credit market, derivative market. But back then it was a
Speaker 1: phone to phone negotiation and very often while there were
Speaker 1: some Wall Street players in between, typically what they would
Speaker 1: do is they would try to find a buyer on
Speaker 1: the other side. And so what now takes seconds back
Speaker 1: then could have taken days to move to move risk
Speaker 1: um just a very very different world, bigger bit offer spreads,
Speaker 1: and so you didn't see as active trading in the
Speaker 1: fixed income markets as you see today. But the other
Speaker 1: side of that is that there was a lot more
Speaker 1: a lot more yield, and with less transparency, there was
Speaker 1: a little more inefficiency, and if you were a very
Speaker 1: active player, you know, the potential for generating earnings and
Speaker 1: margins by trading bonds was actually pretty pretty attractive given
Speaker 1: how why bit offers spreads were back then. So so,
Speaker 1: given how much more efficients the bond market has become,
Speaker 1: we continue to see active bond managers outperformed passive indexes.
Speaker 1: That's the opposite of what we see on the equity side,
Speaker 1: where efficiencies have given the passive index er um a
Speaker 1: huge advantage. Why do active bond managers, uh, why are
Speaker 1: they still capable of beating the passive indexes when their
Speaker 1: um equity cohorts can There are a number of different reasons.
Speaker 1: There is a lack of homogeneity in the bond market.
Speaker 1: And so if you think about something as clear as
Speaker 1: the treasury market, there's on the run treasuries, there's off
Speaker 1: the run treasuries, there's fourteen year treasuries, there's thirty year treasuries.
Speaker 1: They trade at very very different levels. UH. You also
Speaker 1: have UM a index that is very very UM transparent
Speaker 1: in terms of what is in the index, and there's
Speaker 1: a lot of ability to be able to purchase securities
Speaker 1: that are outside of your index, very different than what's
Speaker 1: in the equity market. Typically, what's in the equity market
Speaker 1: and what's in your index is what is your investable universe.
Speaker 1: Within the bond market, there are many many different sectors
Speaker 1: that shit outside of the outside of the universe. The
Speaker 1: other thing is that given that the indices are very transparent,
Speaker 1: there's a market segmentation issue that goes on in bonds
Speaker 1: where UM you have some investors that buy the index,
Speaker 1: they have to buy the Barkley's agg they have to
Speaker 1: buy the long corporate index because they're a pension fund.
Speaker 1: Very very UM significant market segmentation issues that creates inefficiencies.
Speaker 1: So when there's enormous amount of demand for one type
Speaker 1: of asset. Um you can actually buy something that is meaningfully,
Speaker 1: meaningfully cheaper. So if everybody has to, if everyone has
Speaker 1: a limitation that they can only buy five year credit
Speaker 1: or shorter, well, if you buy six year corporate credit
Speaker 1: in a year, it becomes five year corporate credit. Very
Speaker 1: often that six year bond will trade very cheap to
Speaker 1: the five year because there are a lot of investors
Speaker 1: they can't buy it. Same thing in the if you
Speaker 1: think about the credit ratings UM, most investors, particularly in
Speaker 1: the US, can only buy investment grade corporate credit, and
Speaker 1: that's what the index. The index is typically an investment
Speaker 1: grade credit index, but um when there are opportunities in
Speaker 1: the double B sector, in the high field sector, you
Speaker 1: have a lot of investors that are limit it in
Speaker 1: terms of their guidelines and limited in terms of the
Speaker 1: amount of capital they could deploy to lower and lower
Speaker 1: credit related assets, and so as a result, not as
Speaker 1: many buyers. So you as an active manager when you
Speaker 1: see a disparity when there's a three B bond out
Speaker 1: there that might yield hundred fifty basis points over treasuries,
Speaker 1: but a to B bond market, so it's a double
Speaker 1: B bond that might yield three or four hunder basis
Speaker 1: points over well, the difference in leverage between a double
Speaker 1: B company a triple B company is pretty limited, so
Speaker 1: active managers can really take advantage of that. Another area
Speaker 1: is UM. The agency mortgage market is a very big
Speaker 1: part of UM, the global indices, the US, the Bloomberg
Speaker 1: Index in the US UM and it's a very heterogeneous market. Uh.
Speaker 1: There are different coupons and different types of securities in
Speaker 1: that market, so there's a great ability that if you
Speaker 1: have expertise in terms of understanding pre payment risk, which
Speaker 1: is the biggest risk that occurs in agency mortgages, you
Speaker 1: can buy securities that can perform a lot better than
Speaker 1: the indusseries. So there are many different reasons why in
Speaker 1: fixed income ACTA managers have consistently outperformed, and I think
Speaker 1: that also is an important point when you think about
Speaker 1: UM E t f s as well. While ets have
Speaker 1: grown very, very significantly in the in in in the
Speaker 1: equity market, it's been a little bit slower in the
Speaker 1: fixed income market. And the reasons that we're talking about
Speaker 1: right now in that active managers and more consistently beat
Speaker 1: indices as a reason why it's been slower in fix income.
Speaker 1: Quite quite interesting. Let's let's stick a little bit um
Speaker 1: with your career. For a bit um. You leave Lehman
Speaker 1: Brothers early nineties, long before they get into trouble and
Speaker 1: eventually ends up at Um Freeman, Billings Ramsey's. Is that right? Yeah,
Speaker 1: It's been a lot of years that Freddie mac um
Speaker 1: in Washington, d C in in the mortgage market, securitizing mortgages,
Speaker 1: trading mortgage securities, working very closely with originators, and then
Speaker 1: transferred that risk to a firm that was getting involved
Speaker 1: in the in the re market and particularly in the
Speaker 1: in the sub prime mortgage market. So those were kind
Speaker 1: of where the bulk of my my career was prior
Speaker 1: to getting to Goldman Sacks, right, And you joined Goldman
Speaker 1: in oh seven to run the Structured Products um group,
Speaker 1: And if memory serves correctly, mortgages had already peaked and
Speaker 1: we're rolling over by oh seven. Your charge was to
Speaker 1: look across the spectrum at opportunistically at fixed income products
Speaker 1: and alternative portfolios. Is it exaggerating to say it was
Speaker 1: fishing the barrel? Or had it not quite gotten that
Speaker 1: attractive yet? Actually, my timing was the opposite of fish
Speaker 1: in the barrel. So the mortgage market didn't start rolling
Speaker 1: over until the end of O seven and mainly in
Speaker 1: two thousand and eight. And so my my my mandate
Speaker 1: when I got to Goldman was to actually look at
Speaker 1: the structured product market from an issue or standpoint. So
Speaker 1: there was enormous amount of CDO and cello issuance UM.
Speaker 1: The goal was to look at those markets to become
Speaker 1: a manager. Uh. And when when I got there and
Speaker 1: did a lot of the work, we said, you know what,
Speaker 1: this is not actually a good investment for investors. They're
Speaker 1: levering up an asset that has has you know, appreciated
Speaker 1: massively and there's no return here for investors, and there's risk.
Speaker 1: And so basically UM in OH seven, the CDO CLO
Speaker 1: market also at the same time kind of shut down,
Speaker 1: and I was left with kind of nothing to do,
Speaker 1: and so I had to reinvent myself. And and one
Speaker 1: of the things that's very important for people in this
Speaker 1: in this industry and in any industry is always be
Speaker 1: flexible to reinvent yourself. And so the crisis occurred. CDO
Speaker 1: market CLO markets shut down, but the assets became very
Speaker 1: distressed and there was a great opportunity to start investing
Speaker 1: in those areas. So I went from trying to be
Speaker 1: an issuer in that market to being a distress investor.
Speaker 1: Let's talk a little bit about the demand for bonds
Speaker 1: these days. You recently said you see quote enormous demands
Speaker 1: US fixed income. Explain So people would think that with
Speaker 1: rates pushing on zero, with um kind of recovery in
Speaker 1: the future and two dozen one, two dozen two, that
Speaker 1: bonds would be completely out of vogue. And you know
Speaker 1: a lot of concern around eventual inflation in the US
Speaker 1: and rising rates. I would say to that, forget about
Speaker 1: it for a number of years. There is an enormous
Speaker 1: amount of demand for yield. There are there's enormous amount
Speaker 1: of savings that exist. There's an enormous amount of market
Speaker 1: segmentation that exists on a global basis with investors, where investors,
Speaker 1: a lot of investors do not have the option to
Speaker 1: go into alternatives or to go into equities. They are
Speaker 1: fixed income investors. Obviously, retirees conservative can take the volatility
Speaker 1: of own the equities they need to. They need to
Speaker 1: generate income to live. You have insurance companies that predominantly
Speaker 1: invest in in in fixed income, they write policies and
Speaker 1: they buy fix income assets. On the the other side of that,
Speaker 1: there's also a regulatory reason why. Um you find that
Speaker 1: insurance companies by fixed income assets, same thing with commercial banks,
Speaker 1: commercial banks by fixed income um so I I think
Speaker 1: that there's going to be an enormous amount of demand
Speaker 1: for yield, and you have to some degree look outside
Speaker 1: the United States when you think about investing. You can't
Speaker 1: just rely upon what you may think investors might do
Speaker 1: in your country. We have very very global fungible markets now,
Speaker 1: and so the fact that rates are negative in Europe,
Speaker 1: rates are negative in Japan, that creates an enormous amount
Speaker 1: of demand for for yield. We think the US market,
Speaker 1: although we think the yields are very low, it's kind
Speaker 1: of like the we're kind of the the uh ugly
Speaker 1: prettiest in an ugly contest to a certain degree, and
Speaker 1: that are yields at tore across different markets in the
Speaker 1: US actually look very attractive to non US investors. So
Speaker 1: we think the story for the next couple of years
Speaker 1: is going to be demand for yield because we think
Speaker 1: rates are going to stay extremely low across the globe
Speaker 1: and do not fight the Fed. Um that's a very
Speaker 1: important investment thesis. You're almost always right to not fight
Speaker 1: the Fed. The FED has been very very clear rates
Speaker 1: are going to stay lower for an extended period of
Speaker 1: time to get average inflation meaningfully higher. Number one and
Speaker 1: number two, there's been a recognition that the full employment
Speaker 1: rate is not what you think it is, that there
Speaker 1: are a lot of people that have been displaced from
Speaker 1: the job market having come back in a long period
Speaker 1: of time. You need to keep rates low to incentivize
Speaker 1: companies to actually try to go in and hire those
Speaker 1: people and to get people kind of better paying jobs
Speaker 1: than where a lot of people are right now. And
Speaker 1: so I think that the move from the fed uh
Speaker 1: this year around number one, moving to more of an
Speaker 1: average inflation target, and secondly, the discussion around what really
Speaker 1: full employment is is likely to lead the to be
Speaker 1: very very easy for an extended period of time, which
Speaker 1: is going to mean low rates and yield is going
Speaker 1: to commit a significant premium. So let's take a look
Speaker 1: at that exact issue from the perspective of the average investor.
Speaker 1: Where does someone who does not have those restrictions that
Speaker 1: a public pension fund or a foundation might have where
Speaker 1: do they go if they're looking for more yield but
Speaker 1: without taking the sort of crazy risk that got people
Speaker 1: into trouble in O eight oh nine. So I think
Speaker 1: there there are a few different places I think UM
Speaker 1: number one, I think that UM individual investors still benefits
Speaker 1: significantly from owning long data municipals. So, as an individual,
Speaker 1: I would own a good chunk of my uh my
Speaker 1: six s income allocation in high quality long data municipals.
Speaker 1: They're trading at very comparable yields to where treasuries are.
Speaker 1: And obviously taxes are not going down, taxes are likely
Speaker 1: to be going up UM, and so there's a significant
Speaker 1: benefit there. UM. And I think we're very confident from
Speaker 1: a credit standpoint in terms of higher quality investment grademmunities
Speaker 1: that you're not talking about a significant credit risk. Secondly,
Speaker 1: is within the kind of the Bloomberg aggregate world where
Speaker 1: most fixed income lies in, in kind of the core
Speaker 1: intermediate fixed income space. There are a lot of things
Speaker 1: to do to do better than the one percent that
Speaker 1: exists in treasuries. UM Number one is, uh, there's the
Speaker 1: there's credit. So we think that the credit market, like
Speaker 1: the two one is setting up to be a phenomenal
Speaker 1: year for credit. Obviously, credit spreads have come back a
Speaker 1: lot since the COVID shock, but we feel that the
Speaker 1: combination of low rates as well as fiscal stimulus and
Speaker 1: recovery post COVID is going to lead to an extremely
Speaker 1: attractive market for credit. So number one is moving down
Speaker 1: a little bit in quality and credit um within the
Speaker 1: unconstrained space, moving a little bit into high yield. And
Speaker 1: as I mentioned before, we think the double bees offer
Speaker 1: a very significant yield pick up relative to owning, kind
Speaker 1: of triple bes an investment grade. Secondly, as leverage loans um,
Speaker 1: this is an asset class that's been an outflow um
Speaker 1: since I've been in the business. Uh, leverage loans are
Speaker 1: higher quality from a credit standpoint than high yield credit um.
Speaker 1: They have a feature that works for investors sometimes but
Speaker 1: not not other times, and so they're floating rate in nature.
Speaker 1: A lot of investors have bought them because they were
Speaker 1: concerned about rising rates. Despite the fact that they're floating rate,
Speaker 1: and I mentioned the point that rates are likely to
Speaker 1: stay low for extended period of time. They offer an
Speaker 1: extremely attractive level of carry four or five without taking,
Speaker 1: as you mentioned, kind of crazy crazy risk. Second, another
Speaker 1: point on top of kind of having a little bit
Speaker 1: more credit exposure in your portfolio and long dated communities
Speaker 1: is agency mortgages and I kind of view them as
Speaker 1: a a way to barbell your portfolio. And this is
Speaker 1: what we're doing. In our core bond portfolios are traditional
Speaker 1: Bloomberg aggregate portfolios were barbelling UM double B credit bank
Speaker 1: loans along with agency mortgages. Agency mortgages either guaranteed or
Speaker 1: implicit guaranteed from the government. What you're doing effectively is
Speaker 1: your UM taking a spread for owning pre payment risk. Uh.
Speaker 1: And our view is that number one is that we
Speaker 1: feel that pre payment risk is coming down. But secondly,
Speaker 1: and this is a really interesting point, is that mortgages
Speaker 1: offer you a hedge. And one of the topics I
Speaker 1: know that we're gonna talk today about a little bit
Speaker 1: is the sixty forty kind of balance and do we
Speaker 1: still feel the sixty forty makes sense? And then you're
Speaker 1: getting kind of hedge benefits of being in fixed income.
Speaker 1: Agency mortgages are one of the securities where you actually
Speaker 1: are and the reason for that is that you have
Speaker 1: a FED that is buying the securities, and so in
Speaker 1: the event that the US economy go south, um credit
Speaker 1: spreads potentially widden. You see, the agency mortgages are an
Speaker 1: the class that the FED is likely to buy and
Speaker 1: drive down that yield very significantly. So we think it's
Speaker 1: a very important policy tool. And so buying on the fringe,
Speaker 1: buying what the Fed's not buying number one, which is
Speaker 1: double bees and uh and and bank loans, and pairing
Speaker 1: that with what the FED is and can buy a
Speaker 1: lot more of, which is agency mortgages. That's that's quite interesting.
Speaker 1: I had a pet theory a couple of years ago
Speaker 1: that there was a shortage of high quality sovereign bonds
Speaker 1: UM and a number of people in the bond side
Speaker 1: of things told me, Yeah, there's just insatiable demand for
Speaker 1: paper and there isn't that much of it. Is that
Speaker 1: still the case? Are we seeing enough high quality sovereign
Speaker 1: paper out there to meet the demand? I I UM,
Speaker 1: I don't believe that there's a shortage of bonds. There's
Speaker 1: a shortage of bonds at good prices. So there's that's
Speaker 1: a that's a that's a you know, it's it sounds
Speaker 1: kind of silly, but it's it's it's actually an important difference.
Speaker 1: You know, the ECB talked a lot about is there
Speaker 1: a shortage of bonds for them to buy to implement
Speaker 1: monetary policy and quee uh, And the answer is no,
Speaker 1: just raise your price. And that's what they've done, and
Speaker 1: that's why yields in Europe are negative. What they're doing
Speaker 1: is they're driving sovereign yields down to the point where
Speaker 1: you are forced to sell them and do something else
Speaker 1: with it. What are you doing else with it? You
Speaker 1: can buy equities, and some people are doing that and
Speaker 1: rebalancing portfolios and buying equities, and that obviously has a
Speaker 1: stimulant effect on the economy. And secondly is what they're
Speaker 1: doing is they're forcing people out on the respectrum within
Speaker 1: fixed income to buy credit. So to answer your question,
Speaker 1: I don't think there's a shortage. I think in some
Speaker 1: markets there's a shortage, shortage of good prices. But I
Speaker 1: do feel that this movement to the next best asset class,
Speaker 1: which is what central banks want people to do, that
Speaker 1: there's enough yield and enough attractive opportunities. I think that
Speaker 1: um keeping your money in your own market when the
Speaker 1: central bank is manipulating the price. I think that that's
Speaker 1: something to kind of think about. So you have obviously
Speaker 1: US rates really low, European rates really low, in Japanese
Speaker 1: rates really low because the central banks are trying to
Speaker 1: create um simulus in the economy by keeping rates artificially low.
Speaker 1: But there are other markets out there that are not
Speaker 1: as heavily impacted by central bank policy. So one of
Speaker 1: the things that we're doing in portfolios is not just
Speaker 1: keeping all of our rate exposure in those markets, but
Speaker 1: diversifying into some of the higher yielding markets. And so
Speaker 1: if you look at UM rates in Australia, rates in Canada,
Speaker 1: rates in uh in Sweden, you have Norway much steeper
Speaker 1: yield curves and the ability be able to actually generate
Speaker 1: yield on the longer end of those curves. The importance
Speaker 1: of that is around hedge efficacy. At zero, you don't
Speaker 1: feel like you have a lot of upside if the
Speaker 1: world goes bad in your bond portfolio. But if you're
Speaker 1: yielding one, one, one and a half percent you US,
Speaker 1: you have a lot more upside. And then lastly, diversifying
Speaker 1: a little bit into some of the higher quality emerging
Speaker 1: markets UM. A country like Mexico has meaningfully higher both
Speaker 1: nominal rates and real rates in the US, and active
Speaker 1: managers can look at that and say, Okay, what is
Speaker 1: the risk of investing in Mexico. Do I want to
Speaker 1: hold the currency risk or not? But I actually have
Speaker 1: a real positive real rate And in the event that
Speaker 1: the U S slows, well, then it's likely that Mexico slows,
Speaker 1: and you should see kind of a rally and accommodated
Speaker 1: policy in both countries. More room to rally in a
Speaker 1: country like Mexico. So getting a little bit more diversified
Speaker 1: in your sovereign exposure, we think makes a lot of sense.
Speaker 1: So over the weekend I read this really interesting piece
Speaker 1: on Bloomberg China opens its bond market with unknown consequences
Speaker 1: for the world. So let's let's look at that. What
Speaker 1: does it mean that China is opening their bond market
Speaker 1: and what might that mean to global interest rates? So um,
Speaker 1: you asked, you know the question earlier about the shortage
Speaker 1: of high quality bonds. By seeing liberalization in China and
Speaker 1: expansion of issuance from the Chinese government from high quality
Speaker 1: Chinese corporates into the global markets, creating more access and
Speaker 1: more liquidity, clearly is going to be good for investors
Speaker 1: and savers UH, and it can potentially crowd out some
Speaker 1: of the investment that's been made in in UM other
Speaker 1: high quality markets. So if you look at Europe at
Speaker 1: negative or zero rates, you look at the US at
Speaker 1: very low rates, UM, you look at Japan. If you
Speaker 1: create more liquidity, more access to Chinese sovereign bonds that
Speaker 1: are right now yielding three and a quarter three and
Speaker 1: a half percent, that may actually eventually crowd out other investors.
Speaker 1: You also look at the Bloomberg Global Aggregate Index. It
Speaker 1: has a pretty high percentage of China in it, and
Speaker 1: it's growing, and so as a result, it can actually
Speaker 1: be a yield enhancer for investors, but on the margin
Speaker 1: it could have some negative implications to sovereign bond markets
Speaker 1: where yields are so low. UM. We've actually think that, uh,
Speaker 1: the liberalization of the Chinese capital markets is is net
Speaker 1: not a good thing. It's a good thing for investors. UM.
Speaker 1: The Chinese bob markets actually pretty attractive at those kind
Speaker 1: of yields where the central Bank and the event that
Speaker 1: there is a slowdown globally or slowdown in China, UM,
Speaker 1: you have China in a very different policy position than
Speaker 1: the US, Europe and Japan, and so you have a
Speaker 1: lot of ability for rates to go down in in
Speaker 1: UH in China, and now that you have more access,
Speaker 1: we think that's a big positive. We think it's been
Speaker 1: such an important UM change in the capital markets. We
Speaker 1: actually have issued an e t f UM in in
Speaker 1: UM in the non US market to get people access
Speaker 1: to the Chinese bomb market because it's very hard for
Speaker 1: people to get direct exposure. But as they liberalize clearing
Speaker 1: and custodial issues, UM it's going to become a very
Speaker 1: important part of the broader capital markets. Mike, let's talk
Speaker 1: a little bit about the Federal reserve. I keep reading
Speaker 1: people saying that the Federal Reserve is, you know, destroying
Speaker 1: purchasing power, damaging the dollar and driving rates to zero.
Speaker 1: But I'm compelled to ask the question, how influential is
Speaker 1: the Federal Reserve in setting longer term interest rates? So
Speaker 1: on your first question, there's no free lunch when it
Speaker 1: comes to policy. When it comes to policy, it's all
Speaker 1: about tradeoffs. It's about what environment are we in and
Speaker 1: what risk do I want to protect against? And so
Speaker 1: when the FED makes a decision to keep rates low
Speaker 1: for an extended period of time. It does have negative implications.
Speaker 1: It does hurt savers, uh, it does hurt banks. But
Speaker 1: they're looking at a crisis situation. The COVID shock was
Speaker 1: a real, real crisis situation. They were learned that you'd
Speaker 1: see capital markets completely shut, company's access to that equity
Speaker 1: financing pretty much gone, and that could lead to a really,
Speaker 1: really bad economic scenario. And if we look at those
Speaker 1: seven o eight financial crisis, the said was a lot
Speaker 1: slower to act. They were um slower. They acted into
Speaker 1: a small degree in terms of lowering rates, they acted
Speaker 1: to a small degree in terms of purchasing assets, and
Speaker 1: we're still feeling the pain of that as a result
Speaker 1: of the fact that we did not see a v
Speaker 1: shape recovery. We saw a very very slow recovery, and
Speaker 1: it was very, very tough for companies to start spending again,
Speaker 1: to start raising capital again. The FED learned their lesson,
Speaker 1: and so in this COVID shock, they came in really big.
Speaker 1: They drove rates down to zero, and they bought everything,
Speaker 1: and they bought more than they ever bought in the past,
Speaker 1: and they bought different asset classes, including removing the freeze
Speaker 1: from the credit markets. Very very important. Now. It doesn't
Speaker 1: come without a cost, but they had to do it,
Speaker 1: and we're still in this shock. We still have companies
Speaker 1: that haven't open, We have companies on the brink of
Speaker 1: potential bankruptcy. So the need for keeping rates lower keeping
Speaker 1: capital markets open is it's it's it's a trade off,
Speaker 1: and so there's no kind of perfect answer, but from
Speaker 1: my perspective, they've done the right thing. Now. To answer
Speaker 1: your the second part of your question is the FED
Speaker 1: in this case and in a crisis situation, they've had
Speaker 1: an impact on interest rates across the entire curve. So
Speaker 1: not only have they UM, you know, their main policy
Speaker 1: tool is obviously the short term rate, so there they
Speaker 1: have a lot of control. And typically you would see
Speaker 1: five year rates, ten year rates, and thirty year rates
Speaker 1: will be driven by economics supply demand factors. In this case,
Speaker 1: the FED has become big across the entire curve. Obviously,
Speaker 1: when you introduced q E to E UM not only
Speaker 1: impact short in, but to E is buying and driving
Speaker 1: yields lower, and so they've had an impact across the
Speaker 1: entire curve. That's not the long term goal I would
Speaker 1: expect to see. UH, the supply demand inflation to be
Speaker 1: the bigger drivers on the long end of curve, and
Speaker 1: over a long period of time, the set is going
Speaker 1: to have much more control over the short end and
Speaker 1: the long end is going to be driven by by
Speaker 1: other factors. But in a crisis, the set has done
Speaker 1: the right thing and has impacted rates across the entire curve.
Speaker 1: Let's assume that Janet Yellen gets approved by the Senate
Speaker 1: for Treasury Secretary. What do you think of this combination
Speaker 1: of Janet Yelling at Treasury and Jerome Powell at the Fed?
Speaker 1: What does that mean for fixed income investors? So we
Speaker 1: were fortunate enough a couple of weeks ago before Cherry
Speaker 1: Yellen was announced as the potential replacement for for Treasury,
Speaker 1: we had her in our our daily investment forum, where
Speaker 1: the equity, fixed income teams and the alternative teams meet
Speaker 1: every day to discuss markets. We were for enough to
Speaker 1: have her in and I think based on her history
Speaker 1: and that conversation that between her and Powell, we have
Speaker 1: the dynamic duo. We have people that completely understand um
Speaker 1: capital markets and the impact that capital markets have on
Speaker 1: the real economy. We have people that understand how politics work,
Speaker 1: I think um Joannet Yellen's experience at the FED will
Speaker 1: has definitely sensitized her to the importance of of of
Speaker 1: of fiscal policy. She was not in control of fiscal policy.
Speaker 1: But right now you have two people that have been
Speaker 1: at the center of UM major major crises, UM global
Speaker 1: crisis and US crises that are going to be responsible
Speaker 1: for both the monetary and the fiscal side. I view
Speaker 1: that as the dynamic duo, and so one of the
Speaker 1: reasons why we're very constructive on kind of the credit
Speaker 1: markets and voll both equity vall and and and credit
Speaker 1: valls and rate balls staying relatively low for these couple
Speaker 1: of years is that with the two of them in office,
Speaker 1: we think you'll have a really good balance of relatively
Speaker 1: easy monetary policy as well as enough fiscal stimulus to
Speaker 1: UM keep the engine going, which we think will be
Speaker 1: a very good environment for credit. Now, in the end,
Speaker 1: fiscal and monetary policy are not going to drive companies profitability.
Speaker 1: It's going to be the economy, and so the ability
Speaker 1: for them to be successful in driving the economy. I
Speaker 1: think that the jury is out on that one, but
Speaker 1: I don't think we could have done much better than
Speaker 1: the two of them. So so let's just talk about
Speaker 1: fiscal policy for a moment. We saw a huge difference
Speaker 1: between what happens with the Cares Act and that three
Speaker 1: trillion dollars stimulus plan back in March of this year
Speaker 1: versus the sort of very low key fiscal stimulus of
Speaker 1: oh eight oh nine. UM it was it was much
Speaker 1: more focused on unfreezing the credit markets and um managing
Speaker 1: rates than was doing a traditional Keenzie stimulus. Since March
Speaker 1: of this year, there have been repeated rumors of the
Speaker 1: Cares Act too passing. I would have bet anything that
Speaker 1: before the election everybody involved would want to pass another stimulus,
Speaker 1: but that would have been a losing bet. It raises
Speaker 1: the question if if we couldn't get stimulus through pre election,
Speaker 1: are we going to see any sort of real stimulus
Speaker 1: in the new Biden administration. So I would have lost
Speaker 1: the bet as well. There there were too many incentives
Speaker 1: to UM get a package done prior to the election.
Speaker 1: Obviously to three months ago. It didn't happen. UM. It's
Speaker 1: really a sign not that it wasn't needed, but it
Speaker 1: was a sign of of of how bad the political
Speaker 1: environment is in Washington. UM. I think as we go
Speaker 1: into the new year, I think that the need is
Speaker 1: very material. UM. Just because we've seen good news on
Speaker 1: the vaccine, it doesn't mean that the real economy problems
Speaker 1: go away UM in UM in short order, you still
Speaker 1: have individuals a lot of people that are out of work,
Speaker 1: that are furloughed UH. You still have people that are
Speaker 1: struggling to make house payments UH. And you know, any
Speaker 1: sort of significant deterioration and housing credit has its own
Speaker 1: implications UM. And then you have also a very significant
Speaker 1: amount of food and security in this country, where people
Speaker 1: are lining up for hours to get food. That's not
Speaker 1: where our country needs to be. And so I think
Speaker 1: that the incentives are likely to be aligned to tast something.
Speaker 1: It's likely not to be as big as UM what
Speaker 1: we thought about UM last year in terms of three
Speaker 1: billion dollar package, but I think that you're likely to
Speaker 1: see something obviously higher probability depending on what happens in
Speaker 1: Georgia if the Democrats do well there, But even if
Speaker 1: we're in a in a UM senate situation, I think
Speaker 1: we're going to see something of this. It's the need
Speaker 1: is too great, and I think the incentives are too
Speaker 1: greatly greatly aligned, So not a three trillion dollar package,
Speaker 1: but something somewhat you know, a trillion trillion, trillion trillion
Speaker 1: area right, A trillion here, a trillion there, it all,
Speaker 1: it all adds up eventually. The timing really matters. Like
Speaker 1: there there are a lot of people in this country
Speaker 1: that need it. There are a lot of companies that
Speaker 1: need the bridge to the other side. And the bridge
Speaker 1: that was given with the fiscal policy number one is
Speaker 1: over and so um and again. Back to my point
Speaker 1: is that good vaccine news in the lab doesn't mean
Speaker 1: everybody's getting back to work tomorrow. It's going to take
Speaker 1: one to two years until you know, we really see
Speaker 1: the world and the the economic engine um purring the
Speaker 1: way that we did a couple of years back, and
Speaker 1: so we need a little help to get there. To
Speaker 1: say the least, let's talk a little bit about what's
Speaker 1: been going on in the fixed income market. What do
Speaker 1: we think of the yield curve these days? Does it
Speaker 1: still signal anything? What were your thoughts when it inverted
Speaker 1: not too long before this recession began last year. I
Speaker 1: kind of love how people in the financial markets looked
Speaker 1: to the bond people as the smart people and say
Speaker 1: that bond people not only should know where bond prices are,
Speaker 1: but should know where equity prices are, where the economy
Speaker 1: is going. And so they think that we we are,
Speaker 1: you know, we really can predict via what we think
Speaker 1: of thirty year bonds versus what we think of two
Speaker 1: year bonds. And what I'll tell you is that we're
Speaker 1: not that smart. Uh and and and so I think
Speaker 1: that the historical analysis of yield curves and how they
Speaker 1: predict um equities and economic growth is has been way overstated,
Speaker 1: particularly in an environment as we've been discussing on this
Speaker 1: podcast around massive massive central bank intervention, both from a
Speaker 1: policy rate perspective as well as from a QWE perspective
Speaker 1: in terms of buying assets, it's hard to look at
Speaker 1: the shape of the yield curve as a predictor for
Speaker 1: much right now given the amount of number one government intervention.
Speaker 1: And secondly is you have to keep in mind that
Speaker 1: there is massive, massive investor segmentation going on in the
Speaker 1: fixed income markets, where um there are a lot of
Speaker 1: investors that like pension funds the United States, pension funds
Speaker 1: the United States by long data fixed income to match
Speaker 1: against their liabilities no matter what the shape of the
Speaker 1: yield curve. They were buying them when the curve is flat,
Speaker 1: They're buying them when the curve is steep. UM the
Speaker 1: same thing with corporations that have been sitting on enormous
Speaker 1: amounts of cash as they've issued a ton of debt
Speaker 1: and are doing nothing with it because they just want
Speaker 1: to be able to um bridge across the COVID crisis
Speaker 1: to when the economy kind of reopens. They're buying very
Speaker 1: short dated assets and so all the cash is going there.
Speaker 1: So I think that it's very hard to look at
Speaker 1: the yield curve, given give in the environment we're in,
Speaker 1: both from a market segmentation standpoint as well as from
Speaker 1: how much policy is having an impact across the entire curve,
Speaker 1: and really make a significant judgment on on on unworthy
Speaker 1: the economy is going. I will say one thing, though,
Speaker 1: is that um I do think that this kind of
Speaker 1: normalization that's occurred this year and the steepening of the
Speaker 1: U s Heel curve tells you a little bit about
Speaker 1: two things. One is the prospects for additional fiscal policy
Speaker 1: and enormous amount of government issuance on the long end
Speaker 1: of the curve, with rates so low, it obviously makes
Speaker 1: an enormous amount of sense for the federal government to
Speaker 1: issue debt. Um they're doing that, they're going to do
Speaker 1: a lot more of it. And secondly, it tells you
Speaker 1: a little bit about um uh kind of where we
Speaker 1: stand from a monetary policy standpoint. Obviously, money has been
Speaker 1: very easy, big increase in money supply, and so there
Speaker 1: are some in the marketplace that think that on the
Speaker 1: long end, you're starting to price in some level of
Speaker 1: level inflation. I think that's overrated. I think that inflation
Speaker 1: is going to be maybe a story five to ten
Speaker 1: years from now, not something that investors, whether it's equity
Speaker 1: investors or fixic investors, need to start positioning for. So
Speaker 1: let's let's stick with the idea of um of how
Speaker 1: the yield curve has been manipulated, manage, whatever word you
Speaker 1: you want to use. Did you ever imagine ten fifteen
Speaker 1: years ago that you would see so many yields gone
Speaker 1: negative all around the world? And and is that a
Speaker 1: realistic possibility of negative rates occurring in the US? So
Speaker 1: ten fifteen years ago, no, when I was taking economous classes, no,
Speaker 1: they you know, when the rates were eight nine Uh,
Speaker 1: they didn't say, well, you know, what does it take
Speaker 1: for rates to become negative? That wasn't kind of even
Speaker 1: even discussed. Uh. So the answer is no. But when
Speaker 1: you think about the environment we're in, you think about economics, uh,
Speaker 1: there is some intuition around negative rates. Uh. And now
Speaker 1: it's kind of the same discussion that we had earlier
Speaker 1: around tradeoffs. So it's a trade off. The e c
Speaker 1: b UM and the Bank of Japan made a decision
Speaker 1: to sacrifice savers for the benefit of of of industry
Speaker 1: and corporations to be able to have access to financing,
Speaker 1: to incentivize savers to move out the respectrum, to buy equities,
Speaker 1: to make equity financing more attractive, to make deafinancing more
Speaker 1: more more attractive, to create more jobs, and to get
Speaker 1: the economy going. But it's at a at a cost,
Speaker 1: and it's obvious god a cost on savers and a
Speaker 1: cost on on on on financial institutions that rely upon
Speaker 1: shape of a yeel curve and rely upon yield. I
Speaker 1: think that there is some merit to negative yields. The
Speaker 1: said doesn't want to make that trade off. They've said that,
Speaker 1: but I would say that it is a policy outcome
Speaker 1: that could get there, could get there that either they
Speaker 1: decide to bring it there or the market brings it there.
Speaker 1: Envision a world where UM, you see significant slow down
Speaker 1: and global growth, equity markets trade off outside the US,
Speaker 1: and the US is viewed as the safe haven said
Speaker 1: lowers rates even more, starts to buy more, and the
Speaker 1: US dollar is viewed as that only thing that's good
Speaker 1: and the safe haven currency. You can envision a situation
Speaker 1: where treasuries, maybe the Fed doesn't bring rates negative, but
Speaker 1: people decide that to store their wealth, they would rather
Speaker 1: be in a dollar denominated asset that they have to
Speaker 1: pay something small than being an asset that has a
Speaker 1: lot of a lot of risk. And so it's it
Speaker 1: is a possibility, but from a policy standpoint, the US
Speaker 1: has so far made a decision to to not to
Speaker 1: not go there. Huh. Interesting you mentioned UM the likelihood
Speaker 1: of some form of fiscal stimulus and the need for
Speaker 1: further UM treasury issuance. We've been hearing rumors, I don't know,
Speaker 1: for about ten years of a grand infrastructure build out,
Speaker 1: which has yet to happen. It seems like a no
Speaker 1: brainer from the new administration. Any chance we see longer
Speaker 1: dated bonds with rates this low, a fifty year treasury
Speaker 1: or even a hundred year US Treasury. I mean, if
Speaker 1: if if I were at the Treasury, I would issue
Speaker 1: a thousand years at these rate levels. I mean, you know,
Speaker 1: why not, You're you're locking in, you know, financing for
Speaker 1: extended period of time at a dramatically lower yield. And
Speaker 1: it's very possible that yields further out on the yield
Speaker 1: curve are not meaningfully higher than where they are to day.
Speaker 1: There's still a lot of demand for very long dated
Speaker 1: cash flows from pension funds that and insurance companies that
Speaker 1: are trying to match against match against liabilities. And as
Speaker 1: people live longer and longer, there's going to be more
Speaker 1: and more knee need for longer dated, longer dated assets.
Speaker 1: So um, I could see that To your question on infrastructure,
Speaker 1: I think it's gonna you know, it's really going to
Speaker 1: rely upon, assuming that we have a Republican Senate. It's
Speaker 1: going to rely upon whether or not the Biden administration
Speaker 1: is true to its word about working across the aisle
Speaker 1: number one and number two, if they're going to be
Speaker 1: successful at doing that. But there's a lot of need
Speaker 1: for you know, I think right now, the spending that
Speaker 1: needs to get done needs to be directly in the
Speaker 1: pockets of people that have been affected by COVID. But
Speaker 1: as we look out a couple of years longer term,
Speaker 1: there needs to be a long term investment plan for
Speaker 1: this country and a lot of countries, and infrastructure is
Speaker 1: going to be important. It's just a matter of whether
Speaker 1: or not the political will there is there to look
Speaker 1: at an investment that pays off in five, ten, fifteen years,
Speaker 1: versus the way we look at things right now, which
Speaker 1: is all about today and tomorrow and how does it
Speaker 1: impact my poll numbers. So hopefully we get to the
Speaker 1: point where we make more rational long term decisions, and
Speaker 1: I think if we did, I think that infrastructure is
Speaker 1: likely to be immedially on the table. Quite interesting. Let's
Speaker 1: let's talk a little bit about duration. Um, you mentioned
Speaker 1: the yield curve has steepened, but not a whole lot.
Speaker 1: What what's the difference between the three month and the
Speaker 1: ten year it's it's I think less than a hundred
Speaker 1: bits less. I looked, is that sort of duration risk
Speaker 1: worth it? Normally in a steeper yield curve, obviously you're
Speaker 1: getting paid much more uh to lend out for a decade.
Speaker 1: What what are you thinking in terms of duration? And
Speaker 1: are we going to continue to see such a relatively
Speaker 1: modest um yield curve for for the foreseeable future? So
Speaker 1: you're you're The answer to your question can be very
Speaker 1: different for UM, who am I or who am I
Speaker 1: representing as an investor as a fiduciary UM in terms
Speaker 1: of how I answer that question. So this kind of
Speaker 1: um bleeds into the topic of kind of dynamic and
Speaker 1: do do do bonds at very low yields still offer
Speaker 1: investors protection against kind of growth and UH and and
Speaker 1: and risk assets. And I think that at UM eight
Speaker 1: basis points in that area you still have a meaningful
Speaker 1: amount of upside. And back to my point earlier, it
Speaker 1: is possible that rates break the lower bound of zero
Speaker 1: in the event that you have a significant global global recession.
Speaker 1: So I think that UM basis points in terms of
Speaker 1: owning tenure treasuries, it doesn't feel really good, but it's
Speaker 1: still when you look at equities and how equities have
Speaker 1: performed so well, you don't want to just own equities unprotected.
Speaker 1: And I still think in the rate market, whether it's
Speaker 1: the US, whether it's the other markets I talked about earlier,
Speaker 1: You're still getting some very significant hedge benefit. But when
Speaker 1: you look out right at the US market at points
Speaker 1: a hundred basis points on the tenure, is that a
Speaker 1: great five to ten year investment. Probably not. I would
Speaker 1: say as an individual, I would much rather own longer
Speaker 1: data municipals. UM. I think I get a lot of
Speaker 1: the upside in the event that rates come down and
Speaker 1: there's a slowdown in the economy and I'm getting on
Speaker 1: a tax adjusted basis a lot more yield. I uh.
Speaker 1: And then and then lastly, as a active investor in
Speaker 1: fixed income, do I want to be overweight duration or
Speaker 1: underweight duration? UM? I would say that calling the rate
Speaker 1: move is a really, really tough one, and I think
Speaker 1: having an appropriate allocation across fixed income equities and other
Speaker 1: asset classes is the way we really to think about it.
Speaker 1: But I will say that I think the FED is
Speaker 1: going to be on hold for a long period of time.
Speaker 1: And as the ten year Treasury trades in the arrange
Speaker 1: from fifty basis points on hundred fifty basis points, because
Speaker 1: you get out to a hundred basis points, you probably
Speaker 1: want to own a little bit more interest rate risk
Speaker 1: is the Fed's going to be on hold, and I
Speaker 1: think that inflation, particularly in the US, is going to
Speaker 1: stay very modest wall below, well below the FETCH target. Interesting, well,
Speaker 1: a lot of people agree with you. We continue to
Speaker 1: see record inflows into fixed income ets despite interest rates
Speaker 1: as low as they are. What are your thoughts about that?
Speaker 1: Who who are the buyers of those fixed income ETFs?
Speaker 1: Is that UM main Street or is that more of
Speaker 1: an institutional investor? What? What are your thoughts on the
Speaker 1: activity in that space. So we we talked a little
Speaker 1: bit earlier about how fixed income ETFs have been a
Speaker 1: little bit slower to be adopted because of active managers
Speaker 1: having more success m but this year you're actually seeing
Speaker 1: more flows into bondy TF and you're seeing in equity
Speaker 1: e t F for the first time. So there's no
Speaker 1: question that e t F are being used much more actively.
Speaker 1: I would say two main holders investors. Number one is
Speaker 1: the and you know the word world a lot better
Speaker 1: than I do. The r I a community the wealth
Speaker 1: managers in the marketplace that have kind of converted their
Speaker 1: business model from more of an open ended model to
Speaker 1: really one that is driven by liquidity and low fees.
Speaker 1: Within ETFs, those are I think that the dominant players
Speaker 1: that you're seeing more model portfolios that include ETFs mainly
Speaker 1: for the purpose of UM access to different segments of
Speaker 1: the marketplace. So the good thing about E t F
Speaker 1: s is that you can carve up and you can
Speaker 1: have an industrial only or this only or double B
Speaker 1: only and so on and so on. So there's a
Speaker 1: lot of ability to be able to carve portfolios in
Speaker 1: a more customized way, and the fees are are very low.
Speaker 1: Secondly is you have UM some institutional players that UM
Speaker 1: use ETFs as a way to either gain very quick
Speaker 1: exposure intra day or to UM basically UM UH exercise
Speaker 1: UM arbitrage in in between kind of the cash underlying
Speaker 1: securities that exists in E t F and the E
Speaker 1: t F. I would say that those are the dominant
Speaker 1: players within the t F market. There's no free lunch
Speaker 1: that E t S gives an investor. UM people think
Speaker 1: that while the liquidity is so much better in E
Speaker 1: t F S and UH, you know, the liquidity in
Speaker 1: ETFs on a day when there's very little trading might
Speaker 1: be a little bit better than the underlyers. But in
Speaker 1: a risk environment, in a credit risk environment. When there's
Speaker 1: a risk off or or a lot of risk on liquidity,
Speaker 1: b t S are only as good as the underlyer.
Speaker 1: So I think it really comes down to UM segmentation,
Speaker 1: the ability be able to specifically target certain parts of
Speaker 1: the market as a r I A or an investor
Speaker 1: that's trying to target specific risks, and then secondly to
Speaker 1: to to get lower fees than what's available in the
Speaker 1: open ended, open ended space. Now we as an active
Speaker 1: manager UM, we are obviously have the ability be able
Speaker 1: to buy bonds, and we try to buy bonds that
Speaker 1: we think can outperform the index. We've done a good
Speaker 1: job of that. We also will use e t F
Speaker 1: from time to time, but really is a way to
Speaker 1: get risk on in the market very quickly or in
Speaker 1: periods of time where E t F liquidity is better
Speaker 1: than the cash market. And one thing we've seen in
Speaker 1: the credit markets and the COVID shock is that there
Speaker 1: was a lot of transparency that existed in ETFs. The
Speaker 1: physical bond market was frozen, but et F still traded
Speaker 1: UM and so as a result, when you didn't see
Speaker 1: a lot of trading in bonds, you actually saw E
Speaker 1: t F trade and got a lot of price transparency,
Speaker 1: and so we'll use that as another source of transfer
Speaker 1: of risk. And so you're finding that a lot of
Speaker 1: investors are actually using it for that purpose. Short term
Speaker 1: trades get exposure and then eventually to work into single
Speaker 1: name exposure within the cash market. So let's stay with
Speaker 1: that for a minute. Back in March, when everything went
Speaker 1: sideways um and and both inequities and bonds, we did
Speaker 1: see a fairly substantial dislocation in the bond market and
Speaker 1: some of the E t F pricing looked wildly out
Speaker 1: of whack. Was it really the underlying that was the problem.
Speaker 1: There was no pricing and liquidly so E t F
Speaker 1: traders were just making their best guests. What what went
Speaker 1: wrong back then when the n A V s UH
Speaker 1: seemed to be not exactly on the money. So I
Speaker 1: think what happened was was that you had a very
Speaker 1: very quick move in the cash underliers and then you
Speaker 1: had a lag in the equity prices of E t
Speaker 1: F s, causing to some degree some premiums to be
Speaker 1: very high or discounts to be very wide. That can
Speaker 1: happen for a very short period of time. I will say, though,
Speaker 1: that at that time, particularly the COVID crisis in credit
Speaker 1: in high yield and investment great credit areas that really
Speaker 1: froze up, and there was a massive lack of price
Speaker 1: transparency in the cash market. UM E t F still
Speaker 1: traded investors are as individuals. They wanted to get out,
Speaker 1: and so what happened was was they have to UM
Speaker 1: get to a price that can obviously clear the market.
Speaker 1: But when you're trading an equity or an e t F,
Speaker 1: you have two variables you're thinking about. One is can
Speaker 1: I then sell that e t F to somebody else?
Speaker 1: And what price story needs to move it down to
Speaker 1: be able to bring in an investor. That wasn't the
Speaker 1: environment because there were only sellers at the time. So
Speaker 1: what was going on was a estimate by the e
Speaker 1: t F liquidity providers on what is the right price?
Speaker 1: How far down are these cash bonds. Now, I will
Speaker 1: tell you that the traditional liquidity providers and e t
Speaker 1: f s aren't fixed income experts to a great degree
Speaker 1: that they can actually do that. So what happened was
Speaker 1: players like us jumped in and said, okay, we'll buy
Speaker 1: that e t F. We'll buy it down three points
Speaker 1: or five points or whatever, because we have a high
Speaker 1: degree of confidence on how to value the underliers. So
Speaker 1: there was a mismatch for a very short period of
Speaker 1: time between where equities cleared and what the actual pricing
Speaker 1: was in the underliers. But it was a reality that
Speaker 1: people just didn't know what the underwiers were worth. But
Speaker 1: all told, it sorted itself out pretty quickly, and the
Speaker 1: fact that there was even any liquidly at all is
Speaker 1: uh was quite quite a surprise. And exactly players like
Speaker 1: you are the reason why the e t F prices
Speaker 1: eventually came back to where um they were rational. Am
Speaker 1: I overstating that? Or is that A was absolutely absolutely accurate.
Speaker 1: And I will say that this level of dislocation that
Speaker 1: occurred between the cash market and the e t F market,
Speaker 1: between the cash and the synthetic market and credit was very,
Speaker 1: very very I think I said that three times concerning
Speaker 1: to the FED, and this is one of the reasons
Speaker 1: why the Fed decided to do something extremely unprecedented. The
Speaker 1: FED stepped in and said, We're not just going to
Speaker 1: buy twelve year treasuries because their cheap to tenure treasuries.
Speaker 1: We're not just going to provide um funding to the
Speaker 1: money markets. We're not just going to buy agency mortgages
Speaker 1: to drive down the cost for homeowners and refinancing, but
Speaker 1: we're actually gonna get into the credit market because the
Speaker 1: credit market and particularly the cash market is frozen. So
Speaker 1: they announced a plan to buy individual bonds, provide direct
Speaker 1: funding by e TF in the credit market. Uh and
Speaker 1: and also extend lending and potentially by municipals as well.
Speaker 1: So very unprecedented action because of these these kind of
Speaker 1: dislocations that occurred in the lack of transparency, and what
Speaker 1: did it do. It actually caused that that um, you know,
Speaker 1: that arbitrage between ets and cash bonds to eventually go away.
Speaker 1: Uh And it also you open the capital markets to
Speaker 1: allow companies to get back to issue debt to be
Speaker 1: able to bridge themselves past the past economic crisis. Quite fascinating.
Speaker 1: Before we get to our favorite questions, I have to
Speaker 1: at least ask you about some of the funds that
Speaker 1: that your team manages and the four big ones I'm
Speaker 1: looking at Government income fund, core fixed income fund, bond fund,
Speaker 1: and strategic income funds. I know compliance gives you limited
Speaker 1: things you're allowed to say about them, um, but broadly
Speaker 1: tell us about the strategic differences between those groups. So
Speaker 1: UM government income has stated is combination of government securities
Speaker 1: as well as agency mortgage securities. So super high quality
Speaker 1: UM a decent amount of duration there, but not a
Speaker 1: credit oriented product. UH. Core product UM is a core
Speaker 1: holding for people, So we we think of sixty allocay
Speaker 1: and something like a core fund is critical to balance
Speaker 1: in a portfolio relative to equity and risk assets. The
Speaker 1: idea in a core fund investment grade only agency mortgages, treasuries,
Speaker 1: agency debt, as well as investment grade credit and so
Speaker 1: our view about it's really important that you have your
Speaker 1: the chunk of your fixed income allocation in super high
Speaker 1: quality to avoid situations that we experience like in the
Speaker 1: oh seven oh shock where people had the sixty allocation,
Speaker 1: but when they woke up the next day and rates
Speaker 1: were down, they figured out that their forty was also
Speaker 1: down because it had a lot of credit and and
Speaker 1: and subprime mortgages and things like that in there. So
Speaker 1: core is by definition core. Then you have our GS
Speaker 1: bond product, which is more of a it's a Bloomberg
Speaker 1: aggregate product, white core, but it can do high yield
Speaker 1: an emerging market debt, so it's intended to be part
Speaker 1: of your fixed income but have more satellite higher return
Speaker 1: type strategies to increase the yield. And then strategic by
Speaker 1: definition is strategic it can go kind of anywhere, um,
Speaker 1: and so there it's a library based products, so not
Speaker 1: it doesn't have five years or seven years of duration
Speaker 1: potentially like the other products. But it is a cash
Speaker 1: based product where it's kind of more of an absolute
Speaker 1: return product where you can go anywhere within the fixed
Speaker 1: income markets. And so that product is trying to generate
Speaker 1: a little bit higher levels of return without taking on
Speaker 1: the interest Thry risk. I'm glad I I asked about that.
Speaker 1: I'm sure our listeners are going to be quite interested
Speaker 1: in that. These are our favorite questions that we ask
Speaker 1: all of our guests. And since we're talking about COVID
Speaker 1: in the lockdown, let's let's start right right with that.
Speaker 1: What are you streaming these days? Give us your favorite
Speaker 1: work from home Netflix? Amazon? Videos you're watching? So favorite
Speaker 1: on the video side, UM, I would say was a
Speaker 1: recent movie that I think was very elivan as we
Speaker 1: were kind of in a very critical election for our country,
Speaker 1: was The Trial of Chicago seven. I'm not sure if
Speaker 1: it was Netflix or Amazon Prime. But an amazing movie
Speaker 1: about the history of the hippie movement and the protest
Speaker 1: that the hippies um uh and and I went to
Speaker 1: the Democratic National Convention in Chicago to protest against the
Speaker 1: Democratic Party the war, um and kind of and then
Speaker 1: a number of them got arrested. And the reason it
Speaker 1: was number one of the acting was unbelievable. Sasha Baron
Speaker 1: Cohn's in it. He plays Abby Hoffman uh and Uh.
Speaker 1: Abbie Hoffman actually went to the same college me as
Speaker 1: Brandis and so I just found that movie to be
Speaker 1: very telling, and it's it's kind of a um a
Speaker 1: story about if you think something's going wrong, speak up
Speaker 1: and do something about it. So I would say from
Speaker 1: a from a movie perspective and streaming that was that
Speaker 1: was definitely number one. That is my Netflix Q and
Speaker 1: I'm looking forward to checking that out. Let. Let's talk
Speaker 1: about your early mentors who affected um the way you
Speaker 1: look at fixed income, who helped guide your career. So UM,
Speaker 1: I would say that two people very early in my career,
Speaker 1: Earleman Brothers, had a pretty big impact. And it was
Speaker 1: less about kind of over the course of a long
Speaker 1: period of time, but single events that had a real
Speaker 1: big impact on me. And so one was this gentleman
Speaker 1: Mike McKeever, who had a lot of capital markets. I
Speaker 1: think he ended up running banking at at lehman Um
Speaker 1: he put me in charge of very early in my
Speaker 1: career was in the first few months of of recounting
Speaker 1: what happened in the European markets from an issue and
Speaker 1: standpoint overnight, so that people when they came in they
Speaker 1: were speaking their clients about the U S markets had
Speaker 1: some context for what happened in Europe. And somebody asked
Speaker 1: me a question about during the meeting about a European
Speaker 1: issue where and I kind of hesitated and I kind
Speaker 1: of gave an answer like, oh, yeah, yeah, that's what
Speaker 1: happened in a way that Mike McKeever very much neew
Speaker 1: that I didn't know what I was talking about. And
Speaker 1: so in the meeting he called me out and said
Speaker 1: that your answer is correct, and I said, not really,
Speaker 1: he said, and in the meeting he said, this is
Speaker 1: not high school anymore, this is not college. If you're
Speaker 1: not if you're not sure, you say you're not sure
Speaker 1: when you get back to someone, But you're talking about
Speaker 1: people's careers, our client's money at stake, and you can't
Speaker 1: fake it. And so obviously I was distraught and couldn't
Speaker 1: believe that somebody tore me to shreds in front of
Speaker 1: a lot of people. But he was a hundred percent right,
Speaker 1: and it kind of helped me very early in my
Speaker 1: career to uh uh take work seriously and that the
Speaker 1: facts matter. Quite quite interesting, Let's let's talk about books.
Speaker 1: What are you some of your favorites and what are
Speaker 1: you reading currently? Uh? A bunch so um. I kind
Speaker 1: of have a theme in the books that I read
Speaker 1: almost all our nonfiction uh and and I would say
Speaker 1: that the two themes are real A lot of investments
Speaker 1: and I read a lot about UM income inequality and
Speaker 1: historical racism in in our country. And so the few
Speaker 1: books that I can think of that that really kind
Speaker 1: of had an impact on me was Devil in the Grove,
Speaker 1: which is an amazing book about Thurgood Marshall and his
Speaker 1: plight into the South, particularly into Florida to help um
Speaker 1: wrongly accused UM black men who were accused of either
Speaker 1: murders or were put in put in jail for life
Speaker 1: or actually um actually uh sentenced to death and to
Speaker 1: go into these places and defend them. And I think
Speaker 1: that there's obviously been a lot of books and movies
Speaker 1: UM since, but this specific story about UM a gentleman
Speaker 1: in Florida had just a massive impact impact on me. UM.
Speaker 1: Just Mercy is a very similar book, recent recent movie
Speaker 1: and and a very similar topic UM. One other on
Speaker 1: income inequality Hillbilly Elogy, which now there's a movie out UM.
Speaker 1: I haven't seen the movie yet, but I did read
Speaker 1: the book and UM kind of thinking about the broader
Speaker 1: issues that exist across our country. Why there's a lot
Speaker 1: of political issues UM, racist racism issues and come inequality issues,
Speaker 1: very very impactful, impactful book. UM. And then on the
Speaker 1: investment side, this is going back a while, but David
Speaker 1: Dreaman's book on Country and Investing UM had had a
Speaker 1: pretty significant impact on me and and and his book
Speaker 1: is a lot about UM behavioral behavioral science, behavioral economics,
Speaker 1: and you know, not always following the trend. So being
Speaker 1: a contrying investor most bond investors are, but looking at
Speaker 1: investing from different lens than everybody else has had had
Speaker 1: a pretty big impact on me. Huh, quite fascinating. UM.
Speaker 1: What sort of advice would you give to a recent
Speaker 1: college grad who was interested in a career on the
Speaker 1: fixed income side of the street. Well, I would say,
Speaker 1: first off, just in terms of people entering the capital markets,
Speaker 1: financial markets, any any any part of finance, the most
Speaker 1: important thing is not to worry about what you're doing,
Speaker 1: and it's more to worry about who you're doing it
Speaker 1: with and who you're around. And I think in the
Speaker 1: first five to ten years of your career, don't worry
Speaker 1: about what you're gonna be when you grow up. That
Speaker 1: doesn't really matter. What matters more is that you're around
Speaker 1: smart people that can teach you and are willing to
Speaker 1: teach you, and and and you will then figure out
Speaker 1: what direction you want to take your take your career.
Speaker 1: So I really think that's important. And on top of that,
Speaker 1: you want to be in a diverse environment. And the
Speaker 1: word diversity obviously can mean a lot of different things.
Speaker 1: It can mean diverse obviously racial backgrounds, gender, but it
Speaker 1: also you want to be around diverse ideas, and it's
Speaker 1: really important. You don't want to be in an environment
Speaker 1: where everybody thinks the same. The way you learn is
Speaker 1: by being exposed to things that are very, very diverse.
Speaker 1: So I think that's most important. Don't worry about what
Speaker 1: you want to do when you grow up. Be around
Speaker 1: smart people. You'll figure it out. Good advice. And our
Speaker 1: final question, what do you know about the world of
Speaker 1: investing in fixed income today that you wish you knew
Speaker 1: thirty years or so ago when you first got started. Well,
Speaker 1: I first maybe like to answer the question around just
Speaker 1: investing overall, as giving younger people some advice around investing.
Speaker 1: I think that the most important thing develop a plan,
Speaker 1: stick to the plan and don't look at it. And
Speaker 1: that is true for people who are non investors, but
Speaker 1: it's also true for people who are investors. We often
Speaker 1: get scared out of our out of our shorts when
Speaker 1: we see events occurring, and we'll go to cash because
Speaker 1: we think we can be smarter than the market. Don't
Speaker 1: do that. Develop a plan, develop a diversive pipe diversify
Speaker 1: plan for your investing, and don't look at it, and
Speaker 1: stay very consistent in terms of in terms of investing.
Speaker 1: In terms of the fixed income portion of that UM,
Speaker 1: I would say probably the same thing goes UM by
Speaker 1: the same token that I thought that UM rates at
Speaker 1: eight percent or nine percent when I started my career,
Speaker 1: looked pretty expensive because rates two years or three years prior,
Speaker 1: we're eleven or twelve percent. Don't think that you're smarter
Speaker 1: than the market. Think about your client, think about the
Speaker 1: type of portfolio and type of riskers you want to take,
Speaker 1: and be very thoughtful about asset allocation and diversification. And
Speaker 1: I think that that is the most important lesson, and
Speaker 1: I think it's true with regard to an individual and
Speaker 1: multi asset investing, and I think it's also true as
Speaker 1: a fixed income investor. Thanks Mike for being so generous
Speaker 1: with your time. We have been speaking with Mike Swell,
Speaker 1: who runs fixed income portfolio management for Goldman Sachs. If
Speaker 1: you enjoy this conversation, well, be sure and check out
Speaker 1: any of our almost four hundred other such conversations where
Speaker 1: we keep the tape rolling and continue discussing all things finance.
Speaker 1: You can find that at iTunes, Spotify, wherever you regularly
Speaker 1: get your podcast fixed. We love your comments, feedback and
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Speaker 1: You can sign up from my Daily reads at rid
Speaker 1: Halts dot com. Check out my weekly column on Bloomberg
Speaker 1: dot com slash Opinion. Follow me on Twitter at rit Halts.
Speaker 1: I would be remiss if I did not thank the
Speaker 1: Crack staff that helps put these conversations together each week.
Speaker 1: Tim Harrow is my audio engineer, Michael Boyle is my producer.
Speaker 1: Latika Valbrun is my project manager. Michael Batnick is my
Speaker 1: head of research. I'm Barry rid Holts. You've been listening
Speaker 1: into Master's in Business on Bloomberg Radio