Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
Speaker 2: This week on the podcast, yet another extra special guest.
Speaker 2: Steve Lpley is global cohead of bondytfs and investment giant Blackrock.
Speaker 2: He helps to oversee over a trillion dollars in bondytfs.
Speaker 2: He's got a fascinating background at both Bank America, Merrill
Speaker 2: Lynch and since two thousand and nine at BGI and Blackrock.
Speaker 2: I thought this conversation was really fascinating. There are a
Speaker 2: few people in the world of fixed income that understands
Speaker 2: the bond market, the ETF market, what the Fed's doing,
Speaker 2: what is driving both institutional and household investors on the
Speaker 2: fixed income side. I thought this conversation was absolutely fascinating,
Speaker 2: and I think you will also with no further ado,
Speaker 2: my conversation with black Rock's co head of bondi pfs, Steve,
Speaker 2: Steve likely, welcome to Bloomberg.
Speaker 3: Thanks for having me, Berry.
Speaker 2: So what a perfect time to have somebody who specializes
Speaker 2: in fixed income and bonds. We've had all sorts of
Speaker 2: mayhem with tariffs on tariff's off rates up, rates down,
Speaker 2: yields starting to creep higher and hire. But before we
Speaker 2: get into what's going on today, let's talk a little
Speaker 2: bit about you and your background. BS degree in finance
Speaker 2: from University of Miami, NBA from Wharton Finance. Always the career.
Speaker 3: Plan, not quite. So I went to Miami University in Ohio.
Speaker 3: Actually I grew up in a small town in Ohio. Yeah,
Speaker 3: so went there for ultimately ended up in the business school.
Speaker 3: I did start off thinking, you know, as many people
Speaker 3: might that, oh what should I do? Should I be
Speaker 3: a doctor or a lawyer? I decided to try doctor.
Speaker 3: I love biology, Organic chemistry not so much.
Speaker 2: That's the that's the gut course that the reins a
Speaker 2: lot of future docs out.
Speaker 3: Yeah. So I had a good friend who said, hey,
Speaker 3: I'm taking finance. I really like it, Maybe give it
Speaker 3: a shot. I took a finance class, really liked it
Speaker 3: a lot. It's sort of like math with dollar signs
Speaker 3: attached to it. So that's sort of the way I viewed.
Speaker 3: I really enjoyed it, and that was kind of that
Speaker 3: was kind of it. I was hooked.
Speaker 2: So University of Miami in Ohio is gonna scratch out
Speaker 2: my next question, which which is how do you get
Speaker 2: anything done in the Florida Sun in Miami? But Ohio,
Speaker 2: I bet is a little easier study type of regime.
Speaker 3: A little bit. It's still it's a beautiful campus, a
Speaker 3: lot of fun. But but yeah, it's uh, it was.
Speaker 3: It was a good experience.
Speaker 2: So you come out of work and we'll talk a
Speaker 2: little bit about I shares and your previous history at
Speaker 2: Bank America Merrill Lynch. But what was it that drew
Speaker 2: you to fixed income?
Speaker 3: I think a couple of things. One, I really I
Speaker 3: really did enjoy sort of the variety of things in
Speaker 3: fixed income. You know, I mean, you know, equities can
Speaker 3: be complex in their own right, but fixed income you
Speaker 3: can have so many different types of instruments and cash
Speaker 3: flows and structures. And it was just really interesting to
Speaker 3: me to see that variety.
Speaker 2: And what do we have something like thirty five hundred
Speaker 2: individual equities outside of the pink sheets, and how many
Speaker 2: q SIPs are there for fixed income?
Speaker 3: So I did this, I did this exercise on Bloomberg.
Speaker 3: Depending on how you filter, well north of a million,
Speaker 3: right well north, and it's you might even get multiples
Speaker 3: of that depending on how you filter. But yeah, fixed income,
Speaker 3: as you know once you once you issue that a
Speaker 3: company is going to issue debt, you know perpetually, they're
Speaker 3: going to keep issuing newq SIPs over time. So it
Speaker 3: adds up, no doubt.
Speaker 2: So you're at Bank America Merrill Lynch as a senior
Speaker 2: member of the Interest Rate Structuring and Strategic Solutions. Sounds
Speaker 2: very institutional. Tell us a little bit about your time
Speaker 2: at Bank America Merrill Lynch.
Speaker 3: Yes, so I think that group. The idea was to
Speaker 3: work with institutional clients to really help them manage risk, right,
Speaker 3: and so it was about using derivatives in particular in
Speaker 3: a sensible way to come up with hedging strategy. So
Speaker 3: my particular focus was on the mortgage servicing community. They
Speaker 3: had a very very complex asset they still do, it's
Speaker 3: a little bit different now all these years later, but
Speaker 3: they had a tremendous amount of interest rate risk in
Speaker 3: those servicing right assets, right, So my job was to
Speaker 3: work with them to come up with, you know, thoughtful
Speaker 3: ways to hedge that risk. And there are you know,
Speaker 3: some very very vanilla ways to do it, but you know,
Speaker 3: we wanted to really try to be you know, more
Speaker 3: thoughtful and much more tailored. And that was that was
Speaker 3: what I spent a lot of time doing. I really
Speaker 3: enjoyed it.
Speaker 2: When I think of hedging risk on the fixed income side,
Speaker 2: not specific to that era, which was kind of unique,
Speaker 2: I think of interest rate risk, credit risk, the underlying
Speaker 2: security that subsequently gets securitized. Am I warm? Tell me
Speaker 2: if that's about right?
Speaker 3: Okay?
Speaker 2: What else do you consider when you're trying to find
Speaker 2: a way to hedge a fixed income risk?
Speaker 3: Yeah, and so you just nailed almost all of it.
Speaker 3: So depending on what it is. So when you're dealing
Speaker 3: with something like a mortgage servicing, right, that's that lender
Speaker 3: you know, sells the loan off and then somebody retains
Speaker 3: that annuity that can get prepaid. So you go pay
Speaker 3: off your mortgage. I go pay off my mortgage, that
Speaker 3: annuity disappears. There's optionality there. You have to hedge that, right,
Speaker 3: So you have interest rate risk, volatility risk. Things move
Speaker 3: up and down the more likely you are to decide
Speaker 3: if rates fall to prepay. So it's all of that
Speaker 3: good stuff, and then yes, you can have credit risk
Speaker 3: and other types of assets as well.
Speaker 2: You use one of my favorite words, option because every
Speaker 2: time I have a discussion with people who are not
Speaker 2: in the world of finance. And they say, have you
Speaker 2: ever calculated how much it costs to take your boat
Speaker 2: or jet ski out? And figure out what each ride
Speaker 2: costs you? And I'm like, you don't understand optionality. I
Speaker 2: have the ability to do that every single day. Whether
Speaker 2: I choose to exercise that or not, that is still
Speaker 2: a value that would cost somebody something you join a
Speaker 2: boat club or a rental club or whatever. Lay people
Speaker 2: don't get optionality. Tell us how that applies and fixed income.
Speaker 3: Yeah, and you see this in different ways, Barry, So
Speaker 3: I mean not dissimilar. Right. So as an example, again
Speaker 3: going back to the homeowner part, if you have a mortgage,
Speaker 3: you can decide to prepay that. A lot of people don't. Interestingly,
Speaker 3: there are stories that exist, and I'm sure you've heard
Speaker 3: them where people still have ten percent mortgages somewhere get out.
Speaker 2: Is that true?
Speaker 3: There are stories about that, And so if you look
Speaker 3: at statistics, I haven't done this in a while, by
Speaker 3: the way, so hopefully after this law long period of time,
Speaker 3: maybe they've paid them off. But you can find these
Speaker 3: very high coupon mortgages that are still out there, and
Speaker 3: nobody really knows why. They haven't paid them off, but
Speaker 3: it is your right, but you're not forced to pay
Speaker 3: it off. You would think you'd want to if interest
Speaker 3: rates were low enough, but that exists in different ways.
Speaker 3: Just like when companies issue debt, a lot of times
Speaker 3: they'll issue callable debt. So same idea. If interest rates
Speaker 3: fall or credit spreads titan, they can call that debt
Speaker 3: an issue cheaper debt, right, And so that's just sort
Speaker 3: of a basic tenet of how people like to structure
Speaker 3: their liabilities.
Speaker 2: My equity version of that is Blackrock SMP five hundred
Speaker 2: fund is like five BIPs, four BIPs. It's like practically free.
Speaker 2: And sometimes portfolios come into the office and why are
Speaker 2: you paying one hundred basis points for what's effectively an
Speaker 2: SMP five hundred index. Why don't we save you ninety
Speaker 2: five BIPs a year compounded over twenty years. That's a
Speaker 2: lot of money. So the market is kinda sort of
Speaker 2: almost efficient, is I don't know how else to describe it.
Speaker 3: No, I think that's right. I mean, and over time,
Speaker 3: you know, we we've really started to see investors gravitate
Speaker 3: towards this idea of efficiency. And you know, again, you
Speaker 3: you this is a theme that you really really hammer home,
Speaker 3: which is, you know, basic sort of blocking and tackling
Speaker 3: is don't surrender a lot of your return to fees.
Speaker 3: Everybody thinks that's incredibly important. It took a while for
Speaker 3: people to wake up to it, but I do think
Speaker 3: over time people have really started to understand fees matter.
Speaker 3: The strategy matters too, but the fees matter as well.
Speaker 3: And so we have want both. Yeah, you want both.
Speaker 3: You want both.
Speaker 2: So I know we'll get to black rocks starting in nine.
Speaker 2: But how long will you at Bank America for?
Speaker 3: From ninety seven through nine?
Speaker 2: Oh? So you watched the debacle front row row? Did
Speaker 2: you start at Merril? Did you start at Bank America?
Speaker 3: I started at Meryl, Oh you did. So.
Speaker 2: A lot of people slag was John Thune. I thought
Speaker 2: he cut a great deal that worked out really well
Speaker 2: for metal employees and relatively well for Mental shareholders, at
Speaker 2: least compared to you know, Bear Stearns and Lehman and
Speaker 2: so many other companies. He he did a solid and
Speaker 2: it took a while before people recognized it. What was
Speaker 2: your experience like going through that mayhem?
Speaker 3: I mean it was stressful, you know. I was not
Speaker 3: involved with the particular businesses that were under stress, but
Speaker 3: it was stressful for all of us as the headline
Speaker 3: scrolled day after day after day. You know, it was
Speaker 3: a front seat in history, as it turns out. And
Speaker 3: so I think, you know, hopefully a lot of lessons
Speaker 3: have been learned from from you know, that period of time.
Speaker 3: As you know, and I think you've said this many times,
Speaker 3: each crisis looks a little bit different, so hopefully we
Speaker 3: take lessons from the last one, and that starts building
Speaker 3: a knowledge base up over time. So maybe then next
Speaker 3: time we're a little bit better equipped to deal with it.
Speaker 3: But it was, Yes, it was an interesting time.
Speaker 2: Yeah, to say that very Hopefully we take the right lessons.
Speaker 2: Sometimes we drove the wrong lessons. That's a whole nother story.
Speaker 2: So how did you find your way over to black
Speaker 2: Rock in two thousand and nine? I'm assuming that was
Speaker 2: once the dust settled a little bit. Was it late
Speaker 2: past March on nine?
Speaker 3: Yeah, it was.
Speaker 1: It was.
Speaker 3: It was interesting, you know, you you have sort of
Speaker 3: contact and networking with different folks, and I had and
Speaker 3: it was at the time Barclay's Global investors, and I
Speaker 3: did know, I did know a couple of a couple
Speaker 3: of folks over there, and we had just you know,
Speaker 3: had casual conversations. But at one point, and this is
Speaker 3: a former mentor of mine, gentleman named Matt Tucker, reached
Speaker 3: out to me and said, hey, you know, this is
Speaker 3: an interesting opportunity. It's called bondy tfs. It's it's a
Speaker 3: business that that I've really been working hard on over here,
Speaker 3: and I'm looking for a skill set that that sort
Speaker 3: of maps to that. And and you know, I kind
Speaker 3: of think that that your background might be might be
Speaker 3: interesting for this. Oh you know, let's let's talk about it,
Speaker 3: and then you know, sort of the rest is history.
Speaker 3: But I was very very excited about it. And there
Speaker 3: is a funny story to this, which is I discovered
Speaker 3: bond ETFs on my own, sort of accidentally. I was
Speaker 3: trying to buy treasuries and I was very frustrated by
Speaker 3: the commissions I was getting charged on that. A colleague
Speaker 3: actually pointed me to the Aischer's website and showed me
Speaker 3: that bonditfs actually exist and you could simply buy this
Speaker 3: on exchange without actually having to buy physical bonds and
Speaker 3: you know, pay a commission for it.
Speaker 2: So and not only was the commission, you know, next
Speaker 2: to nothing. The spread and the price discovery seemed to
Speaker 2: be a little friendlier to buyers.
Speaker 3: I was really blown away by that, and I could
Speaker 3: not stop, you know, scrolling through that website and fascinated
Speaker 3: by the idea that you could take bonds and put
Speaker 3: them on exchange. Absolutely fascinated by that, and feeling a
Speaker 3: little stupid that I hadn't stumbled on it before, but
Speaker 3: so so the fun part about that was it helped
Speaker 3: a little bit in the interviews to be able to say, yes,
Speaker 3: I'm familiar, and you know, by the way, yes I'm
Speaker 3: actually a customer, albeit at a small scale.
Speaker 2: For those people who are unfamiliar with BGI or Barclay's
Speaker 2: Global investments. Eventually, what I have argued is the single
Speaker 2: greatest acquisition in at least wealth management history. Barclay's Global
Speaker 2: gets brought up by black Rock, and the whole I
Speaker 2: Shares product line gets really supersized with just a much
Speaker 2: savvier group of product developers, marketers, traders, just everything about
Speaker 2: it went next level. How much of that were you
Speaker 2: there to witness? Did you start a BGI started blacks.
Speaker 3: It's funny because people often asked me what was BGI
Speaker 3: like I was there for one month before the actual Yeah.
Speaker 2: Like what I've heard through the grapevine is it was
Speaker 2: a solid shop with a great product, a little sleepy,
Speaker 2: kind of backwater. If you are at Bank America Merrill
Speaker 2: Lynch and you still haven't discovered their bondy TF somebody
Speaker 2: is not doing the marketing job they should.
Speaker 3: Well, it was interesting. They were very much i think
Speaker 3: quantitative and academically oriented, and I think I think a
Speaker 3: little bit of the culture was okay with with being
Speaker 3: you know, somewhat under the radar because it was, you know,
Speaker 3: a very proprietary place, and so that that might be
Speaker 3: might be some of it. But yeah, Blackrock did come
Speaker 3: in and uh, you know they did. That deal was interesting.
Speaker 3: If I don't know if you remember Barry, there were
Speaker 3: there were some discussions about whether, you know, it would
Speaker 3: be some sort of a private deal or what have you,
Speaker 3: and then Blackrock kind of came in and said we'll
Speaker 3: take the whole thing in that that was announced I
Speaker 3: think in June, so I'd only been there a very
Speaker 3: short period of time, and then it closed in the fall,
Speaker 3: and I will never forget you could tell that Blackrock
Speaker 3: was was very efficient at this because the day after
Speaker 3: the merger closed, the signage was up on the building.
Speaker 3: You walked in, all the screen savers that changed overnight.
Speaker 3: You had a nice pad, no pad with the logo
Speaker 3: on it, and you know, nice pens and all that stuff.
Speaker 3: So very very impressive. How they were able to do
Speaker 3: this so cleanly and quickly.
Speaker 2: That's fascinating. And I failed to mention Black Rock is
Speaker 2: a little shop over on the west side of the city.
Speaker 2: Eleven twelve trillion dollars an asset someone in that range,
Speaker 2: how big chunk is fixed income and fixeding? Come ETFs
Speaker 2: at black.
Speaker 3: We just hit one trillion in fixing, Come etf.
Speaker 2: So keep at it. You'll get some aum soon. Keep
Speaker 2: keep plugging away.
Speaker 3: Keep plugging away. Yeah, And you know, the industry is
Speaker 3: now globally the industry is approaching three trillion. We're at
Speaker 3: around two point eight trillion and change. And we think
Speaker 3: that number is going to get to six by the
Speaker 3: end of the decade for the industry. And we hope
Speaker 3: to be obviously a sizable chunk of that. But it's
Speaker 3: been you know, it's been experiencing double digit growth, you know,
Speaker 3: four years and years, and it's just been a very
Speaker 3: you know, fast moving river for us.
Speaker 2: Huh really really quite fascinating. So, Steve, you just mentioned
Speaker 2: you think bond ETFs can reach six trillion dollars by
Speaker 2: twenty thirty, Is that right? What is the key driver
Speaker 2: of that growth that's doubling in less than five years.
Speaker 3: Yeah, And it's a number of things. And we've talked
Speaker 3: about these trends. So I think you have you have
Speaker 3: a series of waves of adoption that happen. And it's
Speaker 3: interesting because where we tend to see the largest uptake
Speaker 3: of bond ETFs is when you have stress markets, and
Speaker 3: so I think this is we have several several test
Speaker 3: cases at this point, so you know, we've had many
Speaker 3: one since the financial crisis. So financial crisis happened, and
Speaker 3: I think that's the first time where I personally started
Speaker 3: getting reverse inquiry from sophisticated investors asking about the bond
Speaker 3: because they noticed that even at the worst of it,
Speaker 3: let's call it September or October of eight, they were
Speaker 3: still trading on exchange very robustly. Other markets not doing
Speaker 3: so well, right, and so that got the attention of
Speaker 3: a lot of investors at that time. Products are probably
Speaker 3: too small for a lot of those investors, but they
Speaker 3: became very intrigued by them. Over the ensuing years, you
Speaker 3: had to you know, you would have occasional blips in
Speaker 3: the markets, whether it was some sort of energy dislocation
Speaker 3: in high yield or what have you. But what we
Speaker 3: noticed was every single time you would have one of
Speaker 3: these stressed markets, you'd see a huge surgeon volumes in
Speaker 3: BONDYTF trading on exchange that would get the attention of
Speaker 3: larger investors. They would start adopting the products. Why because
Speaker 3: when you need to trade something, you were able to
Speaker 3: trade bonditfs even if other things were really struggling to trade.
Speaker 3: And so every single time you'd have one of these
Speaker 3: waves of dislocation and fixed income, you started seeing more
Speaker 3: in more and more investors gravitate to bond ETFs. The
Speaker 3: big one was COVID, so for sure February March twenty twenty,
Speaker 3: you know, even treasuries, high quality investment grade, you know,
Speaker 3: the whole thing, everything was seeing dislocation, right, and so
Speaker 3: that's when we saw probably our largest wave of adoption
Speaker 3: in fixed income ets was during that period of time.
Speaker 3: Same story. You saw things that people would just take
Speaker 3: for granted, suddenly struggling, you know, in terms of bid
Speaker 3: ask and depth of liquidity. But what could you trade?
Speaker 3: You could trade bond ets, you could trade them in size.
Speaker 3: That got at that point a lot of attention because
Speaker 3: now the products has scaled to a level where even
Speaker 3: the largest investors could use them in their portfolios, and
Speaker 3: so that was interesting.
Speaker 2: So you're absolutely preaching to the choir I have heard
Speaker 2: mostly on the equity side, but also on the fixed
Speaker 2: income side. You know, these ETFs, you don't know what
Speaker 2: the underlying is priced at it. They're filled with all
Speaker 2: sorts of stuff. It's really hard to get a print on.
Speaker 2: When it hits the fan, you're not gonna be able
Speaker 2: to get in or out of it. You're gonna have
Speaker 2: giant spreads and no liquidly. That wasn't true in eight
Speaker 2: oh nine, that wasn't true during the flash crash COVID
Speaker 2: and the most recent tariff volatility. Even in twenty two,
Speaker 2: when stocks and bonds were both down double digits for
Speaker 2: the first time in four plus decades, ETFs traded like
Speaker 2: rock stars. Why is this such persistent squabbling? You know,
Speaker 2: you'll say, just wait, is it that people are losing
Speaker 2: business to ETFs. Why is there so much fear and
Speaker 2: concern that for twenty five years have been completely unjustified.
Speaker 3: Yeah, I think it's a little bit of it, might
Speaker 3: be a little bit of the hour grapes a little bit,
Speaker 3: but I think part of it too was after the crisis,
Speaker 3: there was it felt to me like there was this
Speaker 3: search for what's the next thing, right, it's the next
Speaker 3: thing that could go wrong. Not quite sure why that
Speaker 3: focus shifted to ETFs, but it was ets and probably
Speaker 3: a number of other things. But I think the idea
Speaker 3: of a bond ETF in particular drew attention because the
Speaker 3: talk track was, well, you're taking something over the counter
Speaker 3: and you're putting inside this box, and you're putting this
Speaker 3: box on exchange and that might you know, cause some
Speaker 3: some interesting things to happen. And in reality what we've
Speaker 3: seen is just the opposite of those fears buried again.
Speaker 3: Just you know, you pointed out the terraf folatility, same story,
Speaker 3: different verse, right, so you have you know, markets are
Speaker 3: really really stressed. You see a lot of dislocations, volumes
Speaker 3: on exchange once again set new records. I think, you know,
Speaker 3: on the day of the announcements, I think we saw
Speaker 3: close to one hundred billion dollars of bond ETFs train
Speaker 3: on exchange. Wow, way more than the previous record during COVID.
Speaker 3: But the sort of I think skeptic has always said, well,
Speaker 3: you know, we haven't seen a good test yet. We
Speaker 3: haven't seen a good test yet. I think COVID was
Speaker 3: a good test. This was just a reminder, right, And
Speaker 3: so really what happens is, you know, the exchange keeps
Speaker 3: trading even if the underlying doesn't. And unlike you know,
Speaker 3: the fears, you don't see these quote unquote forced redemptions
Speaker 3: or anything like that. Nobody's forced to redeem an ETF.
Speaker 3: It can just trade on exchange. And I think that's
Speaker 3: the elegance of it, and it gets proven time and
Speaker 3: time again.
Speaker 2: So I just want to define some terms you reference
Speaker 2: because in the back of my head, I'm always thinking,
Speaker 2: does my real estate agent mom or my art teacher
Speaker 2: wife know what that means? So when we talk about
Speaker 2: on the exchange, we're talking about anything that's publicly traded
Speaker 2: that you could just log onto your online trading account
Speaker 2: buy or sell instantly. When we talk about over the
Speaker 2: count or OTC, that's one bond desk calling another bond
Speaker 2: desk and saying, hey, do you guys have this twenty
Speaker 2: nineteen you know, Munich California, Muni series whatever, and someone
Speaker 2: has to go locate that. So over the counter means
Speaker 2: two people literally speaking to each other to engage in
Speaker 2: a transaction. Is that Is that a fair description?
Speaker 3: That's exactly right, and so yes, over time, bond trading
Speaker 3: has gotten more efficient. You know, in the underlying market
Speaker 3: you have electronic trading of treasuries and now and now credit.
Speaker 3: But you know, if you've go back twenty years when
Speaker 3: ets were first new, bond ets were first new, it
Speaker 3: was still very much a voice market. It was a
Speaker 3: very much pick up the phone exactly as you described.
Speaker 3: And even today, I think even the most sophisticated institutions
Speaker 3: still believe in the you know, efficiency and the elegance
Speaker 3: of being able to trade a bond etf on exchange.
Speaker 3: You're trading if you if you just step back for
Speaker 3: a second and think about what you're actually doing, you're
Speaker 3: trading hundreds or sometimes thousands of bonds simultaneously at a
Speaker 3: penny bit ask on exchange. You actually still can't do
Speaker 3: that in the underlying market. So you know, it does
Speaker 3: doesn't matter if you're an individual, it doesn't matter if
Speaker 3: you're a large sovereign wealth fund. That's still a very
Speaker 3: impressive feat to be able to do a transaction like that,
Speaker 3: and bonditfs allow you to do that. But I want
Speaker 3: to get back to you know, you would ask what
Speaker 3: are sort of the long term drivers. I think this
Speaker 3: idea of just okay, you can trade these things when
Speaker 3: you need to, that's important. Another one would be when
Speaker 3: we're building portfolios, and we see this both again on
Speaker 3: the wealth and on the institutional side, do we need
Speaker 3: to build portfolios with hundreds or thousands of bonds or
Speaker 3: could we take a low cost bond e TF as
Speaker 3: sort of the core of that portfolio. Could we then
Speaker 3: use individual bonds to sort of flavor that or tilt
Speaker 3: that in different ways, and then maybe add our favorite
Speaker 3: active managers on top of that. Might that be a
Speaker 3: more efficient way to do it than just going out
Speaker 3: and buying, you know, to your point, picking up the
Speaker 3: phone and calling around and putting together hundreds or however
Speaker 3: many bonds which might take days or weeks. And so
Speaker 3: I think there's this growing realization that you know, what
Speaker 3: it's fine to trade in and out when things are volatile,
Speaker 3: but actually might be more efficient to use these things
Speaker 3: long term in a bomb portfolio. So I think that's
Speaker 3: a huge part of the adoption, too, is the recognition
Speaker 3: that this might be a smarter way to build bomb
Speaker 3: portfolios in general.
Speaker 2: On the equity side, I'm fond of telling people, before
Speaker 2: you go chasing alpha, why don't you at least lock
Speaker 2: in beta. And I'm pleased to hear that's a similar
Speaker 2: approach on the fixed income side.
Speaker 3: Very much, very much, And I think it's a and
Speaker 3: this has been a journey because you know you've run
Speaker 3: into this, and I've heard you talk about this on
Speaker 3: your show before. Everybody wants to believe that, you know,
Speaker 3: if I'm buying this security, I have intent, I did
Speaker 3: my homework, it matters a great deal. And that may
Speaker 3: be true for that security, But when you do that
Speaker 3: one hundred times, some of that starts getting canceled out right.
Speaker 3: And so that's when you have to step back and say,
Speaker 3: all right, if I'm looking at my portfolio holistically, I
Speaker 3: want a certain beta, I want a certain tilt, I
Speaker 3: want a certain amount of yield coming from you know,
Speaker 3: one place or another. What's the most efficient the cheapest
Speaker 3: way to do that, and that's I think people are
Speaker 3: slowly recognizing that maybe the ETF actually that has that utility.
Speaker 2: So this is a good time to ask a question
Speaker 2: about active fixed income investing. It seems like it's super challenging.
Speaker 2: On the equity side. We all know the stats. Sixty
Speaker 2: percent of active managers underperform the benchmark in year one.
Speaker 2: By the time you get to five years, it's eighty plus,
Speaker 2: ten years it's ninety plus, and by the time you
Speaker 2: get to twenty one, it's a handful of guys like
Speaker 2: one and Buffin and Peter Lynch. I don't see that
Speaker 2: uphill battle of the same. On the fixed income side,
Speaker 2: it seems like fixed income active does much better than
Speaker 2: fixed income equity. Is that fair or.
Speaker 3: I think there are a few things. So One, we
Speaker 3: think that all investing is active to a degree. Right,
Speaker 3: you're making decisions, So if you're using ETFs, you're making
Speaker 3: sort of these broad beta calls and you're deciding, you know,
Speaker 3: which beta, which sector, what have you. So there's an
Speaker 3: active choice there in how you build that portfolio. But
Speaker 3: to your point, strictly active in fixed income, what does
Speaker 3: that mean? That means that Hey, I'm going out and
Speaker 3: I'm assembling a bond portfolio. I'm going to compare that
Speaker 3: to a benchmark, and I'm going to see if I
Speaker 3: beat it.
Speaker 2: And you guys have the benchmark, the I shares core
Speaker 2: us AG, whereas everybody calls it the AG.
Speaker 3: Yeah, the AG, we have agg we have the universal,
Speaker 3: which is I USB. One of the things that we've
Speaker 3: been vocal about is which benchmark are you looking at?
Speaker 3: Because sometimes you'll see a manager buy a bunch of
Speaker 3: high you bonds in their portfolio, not all, but like
Speaker 3: they'll hold, you know, a large allocation of high old
Speaker 3: bonds benchmark to the aggregate which has none, and say,
Speaker 3: oh look I'm beating the aggregate. Now that's that's fine,
Speaker 3: taking on more risks. They're taking on more risks. Okay,
Speaker 3: that's fine. You may give some of that back every
Speaker 3: call it five years.
Speaker 1: Right.
Speaker 3: What we sort of preach to is, okay, let's get
Speaker 3: benchmarks that look a little bit closer to the risk
Speaker 3: you're taking and see what you're actually adding through security selection. Right,
Speaker 3: So some of it's benchmark misspecification, but fixed income markets
Speaker 3: still are less liquid, they're more fragmented. So yes, there
Speaker 3: are opportunities there, and so you know, people often ask me,
Speaker 3: do you believe in active or quote passive? We call
Speaker 3: passive index because actually even in an index choice yeah, exactly.
Speaker 2: So market cap waiting, that's a choice.
Speaker 3: It's a choice. And so my answer to that is
Speaker 3: we believe in all of the above. We think the
Speaker 3: best portfolios have elements of both of these things. Index
Speaker 3: and quote unquote active together, much better portfolio, much more
Speaker 3: resilient than just sort of suiciding one or the other. Oh,
Speaker 3: I'm all active or I'm all index, right, So we
Speaker 3: think both makes a lot of sense, and that's that's
Speaker 3: how we sort of design our products at give.
Speaker 2: Given the million play plus q SIPs, the million plus
Speaker 2: bonds that are out there, my simple thesis was always,
Speaker 2: if you want to be an active fixed income manager,
Speaker 2: how hard is it to screen out the lowest quality,
Speaker 2: weakest credit, poorest yield relative to risk you have to take?
Speaker 2: And if you're just cutting out the bottom half of that,
Speaker 2: that should do better than whatever the AG is going
Speaker 2: to do or whatever your benchmark is, because as you know, hey,
Speaker 2: this thirty five hundred stocks, not all of which are great.
Speaker 2: A million bonds, there's a lot of room for the
Speaker 2: bottom pick a number decile quartz asle half a lot
Speaker 2: of junk can get mixed up into that. I don't
Speaker 2: mean high yield, I mean lower quality fixed income opportunities.
Speaker 3: Yeah, and this is the trick with fixed income. You
Speaker 3: could see great opportunities, but when you try to act
Speaker 3: on them, it can be really costly to actually implement.
Speaker 3: And that cost or just can you find that bond? Right?
Speaker 3: So you're okay, the search costs the actual transaction costs.
Speaker 2: Wait, there's a search cost for locating a bond. I
Speaker 2: always thought it was kind of built into the transaction costs.
Speaker 2: I didn't realize, Hey, find me this, that's going to
Speaker 2: cost you just to ask that question.
Speaker 3: Well, let's call let's call that the time it takes
Speaker 3: to actually get a hold of it. You're sitting in cash, right,
Speaker 3: and and I've I've heard you say this many times.
Speaker 3: You probably should not be singing in cash very long.
Speaker 3: It's a medium of exchange, right, So that's right, But
Speaker 3: this is the time it takes you to locate that
Speaker 3: particular bond, and then you have to pay the transaction cost,
Speaker 3: you know, the bit ask on top of it. So
Speaker 3: you know, yes, optically, you could see opportunities all over
Speaker 3: the place. The question is are you able to actually
Speaker 3: move on them and implement them at the right at
Speaker 3: the right price. And that's that's where there's a lot
Speaker 3: of skill involved in fixed income, I think.
Speaker 2: And I've heard some clients say, especially institutional clients, listen,
Speaker 2: my cash, my money allocation. I've got that I've hired
Speaker 2: you to do. You're my equity guy, you are my
Speaker 2: fixed income you are my opportunistic distress guy. I don't
Speaker 2: need you to carry cash. And I wonder how that
Speaker 2: impacts people's thoughts of when you start to see one, two, three,
Speaker 2: four percent creeping up as a cash balance. Got to
Speaker 2: put that money to work. There's an opportunity cost of
Speaker 2: just sitting in cash.
Speaker 3: Yeah, yeah, and there is. I think what has happened
Speaker 3: the last couple of years is, you know, money market
Speaker 3: assets are you know, in the trillions.
Speaker 2: Well, now that it's four and a half, that it's.
Speaker 3: A five percent, and so there's been a little bit
Speaker 3: of what I would call, I think apprehension of giving
Speaker 3: up that certain or what people view as certain, you know,
Speaker 3: four and a half to five percent and then moving
Speaker 3: out the trick to that is, you know, if you
Speaker 3: wait too long, the market's going to move past you.
Speaker 2: And we've watched it. You know, it broke below four,
Speaker 2: it went back over five. You're not locking that in,
Speaker 2: you're taking what Look, if you're saving for a house
Speaker 2: or something, six months, it's a year down the road
Speaker 2: and you're afraid of you know, twenty twenty two type year.
Speaker 2: Of course, a money market makes perfect sense. But if
Speaker 2: you're looking out a couple of years, you want a
Speaker 2: product where you can sort of lock in a higher
Speaker 2: yield fair statement.
Speaker 3: Yeah, and you also want to be able to have it.
Speaker 3: So look, cash is great. We launched money market ets.
Speaker 3: Cash plays a role in a portfolio. To your point,
Speaker 3: it shouldn't be a huge part of the portfolio. You
Speaker 3: need to get those assets allocated, you know, on a
Speaker 3: risk basis, so whether it's you know, equities, safe bonds,
Speaker 3: riskier bonds. It's like an orchestra, right, you have your
Speaker 3: string section, your horn section, they all need to play
Speaker 3: together and just sitting on the sidelines that's okay for
Speaker 3: a while, but it's it doesn't make very good music.
Speaker 3: You need to actually have everything you know kind of
Speaker 3: playing its role in the portfolio. And so I long term,
Speaker 3: that is what's going to actually, you know, build your return.
Speaker 2: Right, And I'm spit balling these numbers off the top
Speaker 2: of my head. I have to double check them, but
Speaker 2: I want to say cash is a drag on performance
Speaker 2: four to five years in equity and nine out of
Speaker 2: ten years in fixed income? Am I close there? Bullpark?
Speaker 3: Haven't heard that part in fixed income, But I see
Speaker 3: your point. I mean, you know, if you just sit
Speaker 3: forever in the FED cuts rates, you're going to miss it, right,
Speaker 3: And so that's that's right, that's and you know, and
Speaker 3: I think the consensus right now is, ah, you know,
Speaker 3: maybe they'll cut a couple times this year, maybe a
Speaker 3: couple times next year. Things can move pretty quickly on
Speaker 3: the ground, and you know, it's one of those things
Speaker 3: where you know, yeah, by the time you wake up
Speaker 3: and decide to move, the market may have already moved
Speaker 3: past you. I mean, to your point, we were at
Speaker 3: around four and a half percent almost a year ago,
Speaker 3: and guess where we're sitting at today around four and
Speaker 3: a half percent. But it's been quite a bumpy ride
Speaker 3: up and down, and so who knows where we'll be
Speaker 3: in six months.
Speaker 2: So the question is of if you were sitting in
Speaker 2: money markets for the past year, or you had bought
Speaker 2: some equivalent bond ETF which performed better over the past
Speaker 2: twelve months given all the volatility.
Speaker 3: Well, on a risk adjusted basis, you could say, all right,
Speaker 3: I had less risk in the money market, and I'm
Speaker 3: sort of sitting where I was.
Speaker 2: You know, But if you have high quality dons, how
Speaker 2: much risk.
Speaker 3: Is if you bought sort of last if you think
Speaker 3: about where we were closer to five percent, you know
Speaker 3: you actually ended up locking in pretty good yields. Now,
Speaker 3: the one thing I would say is it's hard to time.
Speaker 3: It's hard to time rates. It might be actually the
Speaker 3: hardest thing to do is to time the top and yields.
Speaker 3: That can be a very very fleeting thing. So it's
Speaker 3: more about get invested, build a durable portfolio. Make sure
Speaker 3: you have risk in the right buckets. You need some
Speaker 3: high quality bonds for ballast, you need some riskier bonds
Speaker 3: for income. Right, that all plays together with the equity
Speaker 3: side and the oult side of your portfolio. All these
Speaker 3: things need to come together. Yes, cash plays a role,
Speaker 3: but you will probably miss out on some very good opportunities.
Speaker 3: We haven't had yields like this in twenty years, right,
Speaker 3: So are you really going to try to hit the
Speaker 3: top when you're seeing yields that are as good as
Speaker 3: they've been in a generation. Yeah, so you can get greedy, right, But.
Speaker 2: Which is kind of funny because it I always laugh
Speaker 2: when I think about someone who's forty forty five years
Speaker 2: old on a stock desk, on a bond desk, have
Speaker 2: not seen seven percent yields in their entire professional career.
Speaker 2: And I recall people's bonds coming up, like the New
Speaker 2: York City geo bonds finally got called seven percent, like
Speaker 2: they were again, I'm getting fifteen percent? What am I
Speaker 2: going to do with seven percent? That was when New
Speaker 2: York City was going to collapse? You can't get fifteen
Speaker 2: percent today. Seven percent treasuries. Hey, that's a good deal.
Speaker 2: No one realized how great a deal it was twenty
Speaker 2: five years ago, but that's just the reality.
Speaker 3: Yeah, And you do have to go back to the
Speaker 3: mid two thousands to see yields at these levels. So
Speaker 3: it's a great opportunity. And you know, rather than saying,
Speaker 3: well I really want to hold on until five percent,
Speaker 3: you know, I mean, you just may miss it. So
Speaker 3: we think it's just a great, great time in fixing.
Speaker 2: Absolutely, And I want to just remind everybody who thinks
Speaker 2: they can time yield. So the FED, collectively, everybody has
Speaker 2: been completely wrong about when the FED was going to
Speaker 2: start cutting, how far they were going to cut, how
Speaker 2: often they would have cut, Like the consensus could not
Speaker 2: possibly have been more wrong for like what three years,
Speaker 2: four years? Here comes the recession, Here comes the Fed cuts,
Speaker 2: Here comes if you're waiting because you think you can
Speaker 2: guess if you're going to be a macro tourist, best
Speaker 2: of luck.
Speaker 3: To you, right, yeah, exactly. It's build a portfolio for
Speaker 3: the long term, you know. And you may say, well
Speaker 3: I could have gotten a higher yield or hey I
Speaker 3: locked in a pretty good yield here. Either way, it's
Speaker 3: about the next ten years. It's not about the next month.
Speaker 2: Huh. Really really interesting. So let's start out talking about
Speaker 2: fixed income today and the obvious spike in bond market
Speaker 2: volatility we've seen this year. Tell us what's going on.
Speaker 3: It's we've covered a couple of these things, but it's
Speaker 3: pick your theme, okay, So let's let's go back a
Speaker 3: few years. We had COVID, we had the policy response
Speaker 3: to that. We then had transitory inflation, which became not
Speaker 3: transitory inflation. We then had the we had the reverse
Speaker 3: policy response, which was too aggressively high grates, the most
Speaker 3: aggressive tightening cycle in forty years. Right, So people were
Speaker 3: used to seeing rates, you know, bumping up against zero.
Speaker 3: I think at one point the tenure yield was you know,
Speaker 3: somewhere in the you know, sixty seventy basis point range
Speaker 3: at the very very very lows. And I think this
Speaker 3: was quite a shock to people who were just sort
Speaker 3: of used to seeing the post crisis, post crisis story
Speaker 3: quantitative easing regime. All of a sudden, you have yields
Speaker 3: moving you know to a two handle, three handle, four handle,
Speaker 3: and then ultimately a five handle something. To your point,
Speaker 3: many investors haven't seen this before, and so it was
Speaker 3: quite a shock to the system. Then we kind of
Speaker 3: hit sort of equilibrium. The economy seems to be doing
Speaker 3: all right. As we talked about, you know, people were
Speaker 3: worried about recession, it hasn't materialized yet. The Fed you know,
Speaker 3: paused for a while, started easing. Then all of a sudden,
Speaker 3: you get new policy initiatives coming in, specifically tariffs, right,
Speaker 3: and so that caused a general rethinking of the way
Speaker 3: the economy is going to move going forward. Will inflation
Speaker 3: come back, won't it? It's just been you know a
Speaker 3: lot of up and downs. And as we were talking,
Speaker 3: if you just look at the trajectory of the tenure yield,
Speaker 3: you know, we just sort of do this large, you know,
Speaker 3: kind of sime wave between you know, call it sort
Speaker 3: of high threes and high fours. And we've been doing
Speaker 3: that now for a few years. So you're just sort
Speaker 3: of stuck in the middle of you know, kind of
Speaker 3: a fore handle. But you get these ups and downs
Speaker 3: depending on what the driver is.
Speaker 2: And just to put some specifics on this, when when
Speaker 2: when we look at the broad economic consensus about tariffs,
Speaker 2: they're generally perceived as inflationary, sort of a giant vat
Speaker 2: tax on consumers. I know a lot of people in
Speaker 2: the administration push back on that characterization. But if you're
Speaker 2: spending more money on tariffs, you have that much less
Speaker 2: money to spend on other things. Therefore it should hurt
Speaker 2: corporate revenues and perhaps be someone inflationary. Is that a
Speaker 2: fair assessment.
Speaker 3: It's it's hard to say, so I think, you know,
Speaker 3: I've heard both arguments. I think, really what inflation is about, right,
Speaker 3: so we whether it's tariffs or something else. You know,
Speaker 3: people often talk about these things is well, that's a
Speaker 3: one time shock versus something that happens repeatedly, over and
Speaker 3: over again. I think some of that's academic Inflation's really
Speaker 3: I almost think it's a mind game or an expectations game.
Speaker 3: The real, I think question is does inflation, you know,
Speaker 3: a higher expectation for inflation somehow get embedded or get
Speaker 3: sort of resurfaced, right as a result of whatever policy initiative.
Speaker 3: And so I think what the Fed's looking at is
Speaker 3: less about a specific thing and more about whether people
Speaker 3: start worrying that inflation will be at X level like,
Speaker 3: which may be above where the FED wants it to be.
Speaker 3: To me, I think that's what they're really focused on,
Speaker 3: is you know, hey, we got things down. We're at
Speaker 3: two point three percent. And by the way, what's interesting
Speaker 3: I actually looked at this. If you go back to
Speaker 3: let's call it ninety five to two thousand and five,
Speaker 3: average inflation was around two and a half not two. Right,
Speaker 3: So if you kind of look at a long, long
Speaker 3: time series on Bloomberg as an example, right now where
Speaker 3: we're sitting isn't too far off where we've been on
Speaker 3: a long, you know, twenty odd thirty odd year journey.
Speaker 3: But I think what the Fed's worried about is will
Speaker 3: any particular action cause people to start worrying that inflation
Speaker 3: will be hiring. As you know, sometimes that can become
Speaker 3: sort of a self fulfilling thing. I think that's kind
Speaker 3: of the concern.
Speaker 2: So I'm going to play devil's advocate on every point
Speaker 2: you said, and I want to hear you pushback. But
Speaker 2: before I get to that, former Vice Chairman of the FED,
Speaker 2: Roger Ferguson, did this accidentally very funny piece about the
Speaker 2: two percent target, and he could not find an academic
Speaker 2: basis for that number, but he traced it back to
Speaker 2: an interview from the Australian, their central bank chief on
Speaker 2: TV in the nineteen eighties, and he mentioned two percent
Speaker 2: as their target. That was the first mention of it.
Speaker 2: I mean, it certainly was a credible target. In the
Speaker 2: post financial crisis, while we were trying to get up
Speaker 2: to two percent, inflation and deflation was the fear. But
Speaker 2: once the Cares Act and the new era of fiscal
Speaker 2: stimulus passed, isn't two percent kind of the wrong target?
Speaker 2: Why doesn't two and a half or three percent make
Speaker 2: sense in an era of fiscal not monetary stimulus.
Speaker 3: I'm gonna I'm gonna say that is above my pay grade.
Speaker 3: But what I will say is, if you look at
Speaker 3: a long, long time series, whether it's two, whether it's
Speaker 3: two and a half, I mean, I think generally right
Speaker 3: now we're sort of in that zip code, right So
Speaker 3: can they get it all the way down to a
Speaker 3: perfect two? I don't know. And do they want to
Speaker 3: or you know, does do you risk going to one
Speaker 3: and a half? I mean, that's that's for them to
Speaker 3: worry about. I do think that we're not too far
Speaker 3: off if you if you were to look at this
Speaker 3: over many, many, many years. The worry is, somehow does
Speaker 3: everything that's happening right now start sending you in the
Speaker 3: other direction again, people worrying about it, Does that start,
Speaker 3: you know, causing you know, specific actions that actually lead
Speaker 3: to it, to it becoming more of a reality. I
Speaker 3: think that's what the Fed's sort of focused on.
Speaker 2: And I think transitory has become a dirty word, but
Speaker 2: we sometimes want stuff right now. I can make the
Speaker 2: case that this bout of fiscally driven inflation was transitory.
Speaker 2: Transitory just took a little longer than everybody expected compared
Speaker 2: to the sort of deep structural inflation we saw in
Speaker 2: the nineteen seventies. This wasn't structural. We passed a joint everybody,
Speaker 2: stay home. Here's two trillion dollars. Takes a little while
Speaker 2: for the pick to work its way through the python.
Speaker 3: Yeah right, that's interesting. I mean, yeah, you had a huge, huge,
Speaker 3: fiscal impulse, you know, very very significant fiscal impulse, and
Speaker 3: sure it could take time for that to work through.
Speaker 3: If you couple that with the idea that you unleashed
Speaker 3: that fiscal impulse at a time when policy was still easy,
Speaker 3: the textbooks would tell you that you probably should expect
Speaker 3: some inflation. But I think, you know, if you look
Speaker 3: at just the way people had sort of entrenched their
Speaker 3: thinking post crisis, they were caught off guard.
Speaker 2: When you were at Wharton, did you have Jeremy Siegel
Speaker 2: as a.
Speaker 3: Profession I did not. I did sit I was a
Speaker 3: little bit I was a little bit disgruntled about that
Speaker 3: work didn't work out scheduling. I did sit on in
Speaker 3: on some of his lectures, just as a guest.
Speaker 2: But yeah, I had him in here two months after
Speaker 2: the first Cares Act was passed, and he was the
Speaker 2: first person I recall saying, Hey, this is economics, one
Speaker 2: on one, two trillion dollars, the largest fiscal stimulus as
Speaker 2: a percentage of GDP since World War Two. We're going
Speaker 2: to see a giant bout of inflation, maybe even double digits.
Speaker 2: And I got emails we love Jeremy, you've had him
Speaker 2: on the past, but he's crazy. We're not going to
Speaker 2: get anywhere near nine ten percent. He doesn't know what
Speaker 2: he's talking about. And it was kind of shocking to
Speaker 2: hear someone stocks for the long run talk about inflation
Speaker 2: and bond yields, and he turned out to pretty pretty
Speaker 2: dead on.
Speaker 3: Yeah again, if you just sort of go back and
Speaker 3: you look at a large fiscal impulse coupled with easy
Speaker 3: monetary policy, that's right out of the textbooks.
Speaker 2: And yet it was so hard another failure of imagination.
Speaker 2: Was so hard to say, no, no, we've had inflation
Speaker 2: two percent for twenty twenty five years. What are you
Speaker 2: talking eight, nine, ten percent. It just seemed that regime
Speaker 2: change was so hard to incorporate because it just seemed
Speaker 2: like such a break from everything we've experienced before.
Speaker 3: And it happened quickly, very very very quickly.
Speaker 2: So so let's talk a little bit about the next
Speaker 2: easing cycle. I'm assuming that six months from now, by
Speaker 2: the time we get into the fall, the worst of
Speaker 2: the tariff is behind us, things will have stabilized. At
Speaker 2: that point, is the Fed starting to think, all right,
Speaker 2: we can unfreeze the housing mark a little bit and
Speaker 2: talk talk about a few more rate cuts this year
Speaker 2: or next, Like what sort of timing should we be
Speaker 2: thinking about.
Speaker 3: That's what the market I've looked at this this morning.
Speaker 3: The market's pricing in a couple cuts by the end
Speaker 3: of the year, pricing in a couple cuts next year.
Speaker 3: And so it looks to me the markets sort of
Speaker 3: settled on this idea that maybe wind up with a
Speaker 3: terminal rate of around you know, three and a quarter,
Speaker 3: three and a half somewhere in that zip code. So
Speaker 3: we'll we'll see. I mean, the cut definitely got pushed
Speaker 3: out to September, right, I think originally, you know, if
Speaker 3: you go back even you know, a few weeks ago,
Speaker 3: we were still thinking sort of you know, mid to
Speaker 3: late summer. But that's that's now pushed into September for sure,
Speaker 3: so we'll see.
Speaker 2: So the big question is everybody's been expecting cuts for
Speaker 2: so long and has been so wrong. Is there anything
Speaker 2: in the data that you look at that suggests maybe
Speaker 2: we're going to get right this time in terms of
Speaker 2: the Wall Street consensus as to when the timing of
Speaker 2: rate cuts might think.
Speaker 3: Well, you just said it. Consensus has a funny way
Speaker 3: of maybe not actually materializing, right. So I think everybody's
Speaker 3: sort of locked in on this, on this path. Now
Speaker 3: it looks like just the way the curve is shaped
Speaker 3: and everything else. Well, we will see the data has
Speaker 3: come in, you know, it depends you can find you
Speaker 3: can find people who have raised growth concerns, but then
Speaker 3: you can also find the resiliency crowd. There's just a
Speaker 3: lot of I think, sort of mixed data right now.
Speaker 3: But overall, you know, the economy seems to be holding
Speaker 3: in pretty well so far.
Speaker 2: Pretty resilient. You know. One of the things I always
Speaker 2: look at are spreads, and they seem to be relatively
Speaker 2: low for all the people running around with their hair
Speaker 2: on fire, they are. What does that tell us of
Speaker 2: the state of the economy and the state of the
Speaker 2: fixed income markets.
Speaker 3: Yeah, I think whether you're looking at investment grade spreads
Speaker 3: or high yield spreads right to spreads to treasuries, they're
Speaker 3: both pretty tight relative to historical, long term, historical averages.
Speaker 3: So yeah, the credit markets are telling you that so
Speaker 3: far they are buying the resiliency story. They think that,
Speaker 3: you know, balance sheets are still in pretty good shape.
Speaker 3: I mean, you've heard the say anecdote before that when
Speaker 3: yields were low, corporations did do you know, very thoughtful
Speaker 3: issuance and they were able to lock in yields and
Speaker 3: really you know, shore up their balance sheets and have
Speaker 3: these strong cash flow profiles. Now, ultimately people will have
Speaker 3: to refinance, and you know that may be at higher yields.
Speaker 3: So we'll see how long that holds. But so far,
Speaker 3: spreads are telling you that the resiliency story is intact.
Speaker 2: So corporate debt issuers refinanced that at lower rates, households
Speaker 2: did it. Everybody did it except Uncle Sam. We'll save
Speaker 2: that for another time. But if you're a buyer of debt,
Speaker 2: how should you be thinking about duration? When do you
Speaker 2: start extending your duration looking to lock in a little
Speaker 2: higher yield on the possibility that we see lower rates
Speaker 2: in the future.
Speaker 3: This this is the debate capital thg right, So I
Speaker 3: think we've been very much in the camp of you know,
Speaker 3: the intermediate part of the curve is pretty attractive. So
Speaker 3: you know, if you're looking inside five to seven, three
Speaker 3: to seven, somewhere in that zip code, you know, whether
Speaker 3: it's in treasuries or or high grade or even even
Speaker 3: high yields in that area. Anyway, that's the maturity profile.
Speaker 3: But if you look at that versus say thirty years,
Speaker 3: I think that, you know, right now, a lot of
Speaker 3: debate going on on the fiscal situation. Moody's actions sort
Speaker 3: of resurface that debate if you look at it term
Speaker 3: premium meaning and you know, again let's define terms. The
Speaker 3: amount that investors want for holding very long term bonds
Speaker 3: has gone up quite a lot over the last several months,
Speaker 3: and I think all of this is sort of playing
Speaker 3: into this idea that, yeah, longer term yields are flirting
Speaker 3: with five percent, could they go higher? They might. There's
Speaker 3: a lot of ambiguity around what our fiscal trajectory is.
Speaker 3: Are we at risk for further deterioration? We are running
Speaker 3: deficits with a growing economy and that is, you know,
Speaker 3: and we're running larger ones than we historically have with
Speaker 3: a with a growing economy. So that's what's caused this
Speaker 3: fear of the long end. Now our longer term bonds
Speaker 3: to be avoided completely. I think there's healthy debate on that.
Speaker 3: I do think that they still hold some shock absorber
Speaker 3: value depending on the situation. So, you know, we like
Speaker 3: we kind of frame this as being positioned, you know,
Speaker 3: overweight in sort of this belly of the curve because
Speaker 3: we think that's a sweet spot. It doesn't mean that
Speaker 3: you should have zero long term minds, you know, it
Speaker 3: could be having some might be a good sort of
Speaker 3: you know, insurance policy in a way.
Speaker 2: So when when yield comes down, bond values go up
Speaker 2: and vice versa. If you're making a bet, what's the
Speaker 2: next two hundred basis points in yield? Is it more
Speaker 2: likely to go higher and more likely to go lower.
Speaker 2: It would take a pretty big screw up to send
Speaker 2: yields up two hundred basis points not a zero possibility,
Speaker 2: but is that kind of the core bet we're more
Speaker 2: likely to see move down then up.
Speaker 3: I think the current view is that long term yields
Speaker 3: could edge higher on this edge higher, edge higher, like
Speaker 3: twenty five to fifty basis point that's been discussing because
Speaker 3: of this idea that depending okay, depending on how the
Speaker 3: tax and spending bills come out and how people score that,
Speaker 3: and what's that going to look like for the deficit,
Speaker 3: et cetera, et cetera. You know, the discussion could be
Speaker 3: could you see further pressure on the very very long end.
Speaker 3: The intermediate part is probably okay. So the real debate
Speaker 3: is are we going to see more of a steepening
Speaker 3: depending on the outcome of the you know, tax and
Speaker 3: spending bills, et cetera, et cetera. That's been the debate. Now,
Speaker 3: if you get an unexpected slow down, you could see
Speaker 3: long term yields come down temporarily. And so to your point,
Speaker 3: you know, do you get two hundred basis points up
Speaker 3: or do you get fifty to one hundred down. It
Speaker 3: all depends on you know, the unexpected by definition, If
Speaker 3: you get a sharp slow down, then nobody saw coming.
Speaker 3: You probably do see longer term yields coming down, and
Speaker 3: I think not a lot of people are expecting.
Speaker 2: That at all, well except everybody for the past five
Speaker 2: years predicting recessions that never showed up. The other question
Speaker 2: that I always like to ask is, hey, what happens
Speaker 2: if we yields don't go appreciably higher or lower? Can
Speaker 2: we just be stuck in a four and a quarter
Speaker 2: to four and three quarter, you know, money market yields
Speaker 2: plus or minus around four and a half percent. What
Speaker 2: does that look like? Can we just stay in that
Speaker 2: range for three, four or five years?
Speaker 3: Sure? Are you likely to? Probably not? History would tell
Speaker 3: us that except for you had this long period, that
Speaker 3: doesn't look really like anything that we wanted in the
Speaker 3: twenty tens, right totally. So unless we go back to
Speaker 3: the twenty tens, probably not. But I think you know
Speaker 3: my earlier point, it's gonna be really hard to call
Speaker 3: like this is the best yield that I want to
Speaker 3: get into. It's more about we're gonna have ups, we're
Speaker 3: gonna have downs, we'll have cycles. It's really about building
Speaker 3: that portfolio out for the long term and getting income.
Speaker 3: So it's the first time in twenty odd years the
Speaker 3: income is back in fixed income. So that's pretty compelling.
Speaker 2: So if someone's fixed then come investor or looking to
Speaker 2: add fixed income as a sort of shock absorber to
Speaker 2: their equity. Portfolios. What segments of the fixed income market
Speaker 2: do you find attractive? Where are the opportunities today?
Speaker 3: We've been seeing flows mostly go into very high quality
Speaker 3: so that being treasuries, that being investment grade. That's where
Speaker 3: you know, the bulk of flows have been moving into.
Speaker 3: And again much of it has been in that sort
Speaker 3: of belly of the curve type of exposure. Now, mathematically,
Speaker 3: as a shock absorber, you're going to get your biggest
Speaker 3: kick from the very long end of the curve. We
Speaker 3: just talked about that, Right, You're taking some risk there.
Speaker 2: So because if it goes the other way, it goes the.
Speaker 3: Other way, it hurts. And so the debate's going to be,
Speaker 3: you know, will it play that role if you get
Speaker 3: a big slowdown, right, if you get a huge risk off,
Speaker 3: will you see long long term yields rally like they
Speaker 3: have in the past in light of some of the
Speaker 3: fiscal concerns. That's the big, big.
Speaker 2: Defence the doll Yeah, that's the debate. And what about
Speaker 2: you know, we always have clients who are looking into
Speaker 2: their retirement. You know, I just want X dollars and
Speaker 2: not worry about taxes. Uh, if you're in a high
Speaker 2: tax state, how are you looking at the muni markets
Speaker 2: these days?
Speaker 3: Yeah, and I think munis have have really you know,
Speaker 3: seen some whipsaw as well. Right, so a lot of
Speaker 3: folks now look look at muni's and see some opportunities there. Again,
Speaker 3: this discussion around tax policy has really really sort of
Speaker 3: caused a lot of volatility. At some point, you just
Speaker 3: have to really make an allocation decision. And if you're
Speaker 3: if you are, you know, in a high tax bracket,
Speaker 3: I mean, unis can be pretty compelling, and they've cheapened
Speaker 3: up a fair amount.
Speaker 2: All right, so I only have you for a limited
Speaker 2: amount of time. Let's jump to my favorite questions that
Speaker 2: I ask all of my guests, starting with what's keeping
Speaker 2: you entertained these days? What are you watching or listening to?
Speaker 3: H Well, so, the funny part about this is it's
Speaker 3: so masters in business, big fan and I we already
Speaker 3: talked about that.
Speaker 2: But no, I also whenever someone says that, I always
Speaker 2: feel like Rodney Dangerfield and Pattie Shack, keep it fair,
Speaker 2: Keep it fair.
Speaker 3: No right now, you know, streaming wise, my wife makes
Speaker 3: this joke. So she and and my my older sons,
Speaker 3: you know, will watch Yellowstone or something like that. I've
Speaker 3: always got my laptop.
Speaker 2: Right.
Speaker 3: It's so she's like, you don't really watch TV with us,
Speaker 3: You pretend to, But I think one of the fun
Speaker 3: things I'm watching, you know, friends and neighbors right now.
Speaker 2: So interesting, it's fun. Are you are you caught up?
Speaker 3: Not caught up?
Speaker 2: Not caught up from so the what whatever? The last
Speaker 2: episode was five really fun twist no spoilers, no spoilers, absolutely,
Speaker 2: but yeah on it not unexpected, but the way they
Speaker 2: execute it was really well done.
Speaker 3: All right, cool, that'll be some good bit. And I
Speaker 3: am still very fond of binge watching Law and Order.
Speaker 3: I will try purposely to hold out because I do
Speaker 3: like binge watching all of the above. Right, So, whether
Speaker 3: it's organized crime or what have you.
Speaker 2: So my wife makes eight o'clock the screens go away,
Speaker 2: you can watch TV. You have to put that away.
Speaker 2: So that means right before I go to bed. Ye,
Speaker 2: last couple of minutes. Let me just try to impose
Speaker 2: that rule.
Speaker 3: It kind of falls apart.
Speaker 2: No, No, she's a strict, stern task master, she who
Speaker 2: must be obeyed. All right, So let's talk about you
Speaker 2: mentioned one of your mentors. Tell us about the folks
Speaker 2: who helped shape your career.
Speaker 3: Yeah, and many of them are are folks who have
Speaker 3: moved on. But I think there are certain people that
Speaker 3: I remember, you know, who really gave good advice. And
Speaker 3: you know, I'll give you a couple of examples. I
Speaker 3: had a boss, one of my first ones out of
Speaker 3: business school, and he basically said, look, I viewed my
Speaker 3: job as teaching you. I want you to listen and learn,
Speaker 3: and then if you work hard, have you My other
Speaker 3: job is to help you create financial security for yourself
Speaker 3: and your family. But you have to do those things
Speaker 3: in order for that to happen. So if you listen
Speaker 3: and you work hard, I'll try to keep up my
Speaker 3: side of it as well. And that always struck me
Speaker 3: and I thought that was a great way to put it.
Speaker 3: You know, he viewed his job as teaching but also
Speaker 3: if I did the right things to help me in
Speaker 3: the long term, and so I thought that was really interesting.
Speaker 3: Another mentor, you know, told me that you can be
Speaker 3: really good at what you do, but you really have
Speaker 3: to get along with people. You really have to be
Speaker 3: able to know where somebody else is coming from. Work
Speaker 3: well with people, because you can be great at what
Speaker 3: you do, but if you're not pleasant to work with.
Speaker 3: It's not going to get you too far at all,
Speaker 3: And so I think that's that's another lesson. I mean,
Speaker 3: you know a lot of times you like to think
Speaker 3: you're right in a certain debate or whatever, but you
Speaker 3: really do have to learn to bridge those gaps or
Speaker 3: it doesn't even matter how good you are what you do.
Speaker 2: Huh. Good, good advice for anyone listening. Let's talk about books.
Speaker 2: What are some of your favorites. What are you reading currently?
Speaker 3: Well, reading How to Think Like a Monk.
Speaker 2: I saw that Amazon was Yeah.
Speaker 3: No, it's pretty cool. I had a friend of mine.
Speaker 3: I'm not sure why he recommended that book to me,
Speaker 3: and there might be a hidden message in there, but
Speaker 3: I think that's pretty cool. Read too much one of
Speaker 3: my you know, I I like history books, and so
Speaker 3: you know, I've read a lot of the ken Burns stuff.
Speaker 3: I think, in particular, the things I've been fascinated with
Speaker 3: the sixties I think really helped shape the world that
Speaker 3: we're living in this So I've been a junkie of
Speaker 3: a lot of that stuff and authors and books ken
Speaker 3: the ken Burns stuff, all. Yeah, I really like that.
Speaker 3: So but but I'll watch any number of documentaries. I
Speaker 3: just think that really was a pivotal time for the
Speaker 3: country and the world, and it kind of has echoes
Speaker 3: and you know, really long shadows. So I always thought
Speaker 3: that was that was really interesting. I like a book
Speaker 3: that really kind of stuck with me over the years.
Speaker 3: It was about you know, I love math, statistics, all
Speaker 3: that stuff. It was a book called Against the Gods
Speaker 3: and it was the story.
Speaker 2: Oh my god, so one of my favorite, one of
Speaker 2: the old time great finance books that most people absolutely
Speaker 2: one should be reading, no doubt about that. So I
Speaker 2: always pick out a handful of books to read over
Speaker 2: the summer. I'm so happy sitting on the beach, waves
Speaker 2: crashing in the background, banging through book after book. What
Speaker 2: just came a couple of days ago was Ron Churnow's
Speaker 2: Mark Twain. Oh wow, and you know Churnout, did Hamilton
Speaker 2: need a bunch of giant books. I'm super excited about that.
Speaker 2: So I'll let you know if that's interesting. I can't
Speaker 2: imagine it's not, given both the author and the subject matter.
Speaker 2: All Right, our final two questions, what sort of advice
Speaker 2: would you give to a recent college grad interested in
Speaker 2: a career in either investing, or specifically fixed income and ETFs.
Speaker 3: Yeah, I think the most important thing is you have
Speaker 3: to be honest with yourself about what you like to do.
Speaker 3: And so I I have met I've met students who
Speaker 3: say they want to get into the markets, and you know,
Speaker 3: when you ask why that is, they have trouble articulating why.
Speaker 3: So I think part of it is you just really
Speaker 3: got to want to do this, because if it's gonna
Speaker 3: be your life's pursuit, you've got to wake up on
Speaker 3: good days and bad days and still want to do
Speaker 3: it right. And there are good days and there are
Speaker 3: very bad days, and you still have to have that
Speaker 3: same sort of love of it. And so if you
Speaker 3: don't love it right, if it's not if you're just saying, well,
Speaker 3: you know, I heard it's a profitable thing. I want
Speaker 3: to you know, I have these certain personal goals, that's
Speaker 3: that's not a good reason to do it. But if
Speaker 3: you really do love the idea of markets and just this,
Speaker 3: you know, really elegant thing where somebody, you know, two
Speaker 3: people on the opposite sides of the planet can somehow
Speaker 3: find a common price. You know, what's the saying a
Speaker 3: trade is an agreement on price, A disagreement on value.
Speaker 3: I always thought that was the coolest thing, right, So
Speaker 3: you know, just this idea that you know the markets
Speaker 3: find a way. I think if you love that, then
Speaker 3: it's the right career for you. But that's the key thing.
Speaker 3: Find what you love and be really really honest with yourself.
Speaker 3: And you know, it's fair to say I don't know yet,
Speaker 3: And that's why you have to feel around a little bit.
Speaker 3: You know, whether you're trying different things. You know, you
Speaker 3: may land on one desk and hate it, rotate to
Speaker 3: another one and love it. It's a process, but you
Speaker 3: got to really be honest with yourself.
Speaker 2: Huh. Really really interesting. And our final question, what do
Speaker 2: you know about the world of fixed income ETFs and
Speaker 2: investing today? You wish you knew back in the nineteen
Speaker 2: nineties when you were first getting started.
Speaker 3: Yeah, I'm gonna admit this to you. I know many
Speaker 3: of your your admonishments about investing, I was. I was
Speaker 3: an original sinner, many of them.
Speaker 2: No one bigger than me. I learned the hard way.
Speaker 3: So I did, in fact do a lot of the
Speaker 3: common mistakes. You know. I chase things. I remember, you know,
Speaker 3: during the original Internet boom buying some really expensive, racy
Speaker 3: mutual funds, which I subsequently rode into the ditch. So
Speaker 3: I think part of it is, you know, the long
Speaker 3: term idea, you know, really really taking like that long
Speaker 3: term view. Now, I did learn not to panic over
Speaker 3: the years, right and not, you know, sort.
Speaker 2: Of useful skill set if you're running a trillion dollars.
Speaker 3: I think, try to try to you know, keep your money,
Speaker 3: you know, don't pay away too much of fees, and
Speaker 3: definitely don't chase the hot hot thing. I think being diversified.
Speaker 3: You look, it may not be fun to talk about
Speaker 3: with your friends, but having a broad, diversified portfolio over time,
Speaker 3: you're gonna be fine. It's it's it's hair raising sometimes,
Speaker 3: but you're gonna be fine over the long term.
Speaker 2: Yeah, very often the cocktail chatter, it's not what makes
Speaker 2: you money. I love the title of Ned Davis's first book,
Speaker 2: do you want to be right? Or do you want
Speaker 2: to make money? And that really sums it up well. Steve,
Speaker 2: this has been really fascinating. Thank you for being so
Speaker 2: generous with your time. We have been speaking with Steve Likely,
Speaker 2: Global cohead of BONDI tf's at black Rock. If you
Speaker 2: enjoy this conversation. Well, check out any of the five
Speaker 2: hundred and thirty we've done over the past eleven years.
Speaker 2: You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever
Speaker 2: you find your favorite podcasts, and be sure and check
Speaker 2: out my new book, How Not to Invest The ideas, numbers,
Speaker 2: and behaviors that destroy wealth and how to avoid them.
Speaker 2: I would be remiss if I did not thank the
Speaker 2: crack team that helps put these conversations together each week.
Speaker 2: John Wasserman is my audio engineer, and A. Luk is
Speaker 2: my producer. Shortan Russo is my researcher. Sage Bauman is
Speaker 2: the head of podcasts at Bloomberg. I'm barr Utltz. You've
Speaker 2: been listening to Masters in Business on Bloomberg Radio.