Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan, a senior editor at Bloomberg,
Speaker 1: and i'm Waldonna High Across Acid reporter with Bloomberg. This
Speaker 1: week on the show, Well, let's be frank for a minute.
Speaker 1: For a long time, bonds seemed to be pretty boring
Speaker 1: if your investment portfolio was a meal. Bonds were sort
Speaker 1: of like the vegetable. Yeah, you knew you needed them
Speaker 1: there on the plate, but they weren't very exciting. Rather,
Speaker 1: stocks were the meat and potatoes and dessert crypto. Well,
Speaker 1: maybe that was the Shotton beer you had afterwards, but
Speaker 1: that's all obviously changed after last year's cartage. Bonds of
Speaker 1: all stripes are sporting really attractive yields that look especially
Speaker 1: enticing these days if and when that market focus shifts
Speaker 1: from worries about inflation so worries about economic growth, and
Speaker 1: exchange traded funds especially are reaping the windfalls with hundreds
Speaker 1: of billions of dollars flowing into bond products in the
Speaker 1: last year. You heard it. Bonds are exciting again, and
Speaker 1: we're going to get into it. With the head of
Speaker 1: fixed income at the world's largest asset manager, but filledna First,
Speaker 1: speaking of excited, I was very excited yesterday when I
Speaker 1: came into the office and I noticed you had left
Speaker 1: a book for me on my desk, which I assume
Speaker 1: means I'm finally invited to one of your book clubs.
Speaker 1: And I'm very excited. Oh my gosh, I didn't mean
Speaker 1: it to look that way, but I suppose it looks
Speaker 1: that way like I am giving you I'm offering an invite. Sweet,
Speaker 1: I'm not invited to one of your many book clubs. Okay,
Speaker 1: I suppose you and I have a book club going then,
Speaker 1: because we have a special guest next week, and you
Speaker 1: and I have been tasked with reading his book before
Speaker 1: the podcast. That's why I left it on your desk.
Speaker 1: Oh yeah, Oh, that's not as exciting is one of
Speaker 1: your real, my real book clubs which you're not invited to.
Speaker 1: I'm sorry, I'm wonder about what exactly these books are
Speaker 1: you reading? In these book they're fun books. That's yeah,
Speaker 1: no invite for you. Tell us about the what goes up?
Speaker 1: Book club? Who do we have next week? We have
Speaker 1: Alan Blinder next week and he has a very thorough
Speaker 1: history of monetary and physical policy, so we'll be talking
Speaker 1: to him next week. That is riveting book club material
Speaker 1: right there. But this week's guest is equally exciting. Why
Speaker 1: don't you introduce him? Yeah, I want to bring in
Speaker 1: Steve lap Plea. He's the US head of fixed income
Speaker 1: ETFs at black Rock. Steve, welcome to the show. Thanks
Speaker 1: for having me. You're welcome to join any of my
Speaker 1: many many book clubs that I belong to. The book
Speaker 1: for next week does sound riveeting, so so I'll have
Speaker 1: to check that out. You're well, come on, come on
Speaker 1: into our book club. Then you're very welcome to to
Speaker 1: be part of it. Poor the Chardonnay, I'll bring this
Speaker 1: um see, maybe we can just uh, we can just
Speaker 1: start with So, your US head of fixed income ETFs
Speaker 1: at black Rocks, So tell us about your role. Yeah.
Speaker 1: So I've been with a firm since two thousand and nine,
Speaker 1: and you know, it's been it's been quite a journey.
Speaker 1: When I joined black Rock, bondie tfs that did exist.
Speaker 1: We launched the first set of them in two thousand
Speaker 1: and two, and we recently celebrated the twenty year anniversary
Speaker 1: of those. But it was still, you know, a relatively
Speaker 1: nascent business in terms of where it is today, and
Speaker 1: so you know, we decided to really make it an
Speaker 1: effort at growing that business, and in particular, I'm really
Speaker 1: trying to make the market aware of just how much
Speaker 1: these products could number one, help investors, um that's the
Speaker 1: important part. But also we had a very strong conviction
Speaker 1: that these products were going to change the bond market itself,
Speaker 1: and so I was one of the folks brought in
Speaker 1: to really, you know, start growing this team, and over
Speaker 1: time we build out the bondie TF infrastructure a lot.
Speaker 1: And so my role currently is to oversee that business
Speaker 1: more broadly in terms of, you know, the products that
Speaker 1: we're designing, engaging with clients on their experiences, how we
Speaker 1: can improve the products, working with broker dealers, index providers,
Speaker 1: all of the folks who are very important to the
Speaker 1: ecosystem to make sure everything functions well. Just to overall
Speaker 1: make sure investors are getting the outcomes that they're expecting.
Speaker 1: You know, Steve, I was kind of joking at the
Speaker 1: beginning they're talking about how bonds were boring. Of course
Speaker 1: they are. They've always been very exciting, but clearly in
Speaker 1: that decade of zero interest rate policy or near zero
Speaker 1: interest rate policy. There's just been this massive sea change
Speaker 1: now with higher yields. Every I think investors strategist we
Speaker 1: spoke to recently heading into twenty three was much more
Speaker 1: bullish on bonds. That's kind of reversing a little bit now,
Speaker 1: you know, I'm looking at you know, some of the
Speaker 1: eye shares, uh, you know, big fixed income ETFs, tlt,
Speaker 1: lqd H, the aggregate agg really off to a strong
Speaker 1: year like the stock market, and now kind of back
Speaker 1: to maybe flat flatish on the year, up a little um.
Speaker 1: How do you see the rest of the year shaping out?
Speaker 1: You know, clearly inflation and the FED are the most
Speaker 1: important elements of how bonds will do this year. There
Speaker 1: seems to be a rethink going on about how high
Speaker 1: the Fed will actually hike and when and if inflation
Speaker 1: will actually back normalize back to that two percent area.
Speaker 1: So how are you thinking that you know, how the
Speaker 1: rest of the year will play out in fixed income? Yeah,
Speaker 1: it's it's been a bumpy ride. Last year, as you know,
Speaker 1: was the worst bomb marker we've seen in probably forty years.
Speaker 1: It was. It was incredibly challenging. I think to your point,
Speaker 1: investors have been lulled into you know a bit of well,
Speaker 1: rates are low for long and maybe low forever. That
Speaker 1: changed very, very dramatically last year. I think investors were
Speaker 1: looking forward to this idea that, oh, twenty twenty three,
Speaker 1: where these higher yields, it's great, I'm going to allocate,
Speaker 1: I'm going to fix my forty, so to speak. And
Speaker 1: then all of a sudden we got the slew of
Speaker 1: very positive data, and you know, that made everybody, as
Speaker 1: you said, rethink. It does feel like people rethink this
Speaker 1: and maybe overthink it every week, if not more more
Speaker 1: frequently than that. I'm a little more sanguine on this.
Speaker 1: I think that, you know, there is a limit to
Speaker 1: how high rates can go. So I think that the
Speaker 1: Fed's going to be watching the data closely. You know,
Speaker 1: we've maintained a view that consistently that inflation was probably
Speaker 1: not going to go down in a straight line. We've
Speaker 1: been saying that for quite a while, and I think
Speaker 1: that's just what we're seeing now. There's going to be
Speaker 1: some bumps along the way. We do think that, you know,
Speaker 1: it's possible that they may hike a little bit more
Speaker 1: than what was originally expected, and then they may hold
Speaker 1: rates at that elevated level. If you just look at
Speaker 1: the futures market, I think, you know, the peak rate
Speaker 1: is somewhere around and it's probably you know, it's bumping around,
Speaker 1: you know, day over day, but it's somewhere, you know,
Speaker 1: closer to a five and a half percent terminal rate
Speaker 1: than was before, but not quite there. So I think
Speaker 1: there's going to be You're going to see the market,
Speaker 1: you know, kind of trying to find a level here.
Speaker 1: And I do believe that there's there's a limit to
Speaker 1: this because whether people believe it or not, ultimately these
Speaker 1: hikes will impact the economy. They will take hold. There's
Speaker 1: debate about win that can happen, but it will happen.
Speaker 1: It's happened every single time in the past, so they're
Speaker 1: cognizant of that and they don't want to, you know,
Speaker 1: go too fast and too far. Yeah. See, if do
Speaker 1: you guys have an internal view in terms of what
Speaker 1: else to expect, it sounds like maybe two more twenty
Speaker 1: five basis point hikes that we can expect from the FED.
Speaker 1: We have had this discussion over the last couple of
Speaker 1: weeks of some FED members arguing, even for during the
Speaker 1: last meeting, that they should go with fifty basis points
Speaker 1: that potentially the next to the I think the March
Speaker 1: meeting could be fifty basis points. So do you have
Speaker 1: an internal view on what we can expect. I think
Speaker 1: we're we're still thinking that they probably end up somewhere,
Speaker 1: you know, at five and a quarter or maybe one more.
Speaker 1: But but it's really like, if you look at the
Speaker 1: market that's pretty consistent us, we get, you know, a
Speaker 1: really outsized inflation surprise. Um Like I said, we we've
Speaker 1: been pretty consistent that it's not going to be linear.
Speaker 1: It's there, They're going to be some bumps along the way.
Speaker 1: So I think this is you would like to see
Speaker 1: it go down more consistently. But but this this isn't
Speaker 1: really surprising us all that much. Um So, like I said,
Speaker 1: I think I think the market's basically pricing in, you know,
Speaker 1: around five and a quarter, between five and a quarter,
Speaker 1: five and a half. As a terminal point, you know, Steve,
Speaker 1: as I mentioned of the opening, the spent some eye
Speaker 1: popping flows into into the fixed income ETF space at
Speaker 1: Block black Rock ey Shares and really throughout the industry.
Speaker 1: Where are you seeing most of the flows go into? What?
Speaker 1: What is it? Sort of means you, when you look
Speaker 1: at where the flows are going, is it primarily the
Speaker 1: safety haven? You know that TLT, the Treasury's ETF, that
Speaker 1: sort of thing, where you know, is our interest across
Speaker 1: the whole portfolio? Well, it's It's interesting. If you would
Speaker 1: have told me last January that the large just category
Speaker 1: of inflows would have been treasuries, I would have probably disagreed,
Speaker 1: given the you know, how hawkish everyone was in the
Speaker 1: view that you know, rates were We're going to accelerate
Speaker 1: quite a lot. But as it turns out for US anyway,
Speaker 1: it was you know, we took in over one hundred
Speaker 1: billion in the US one hundred and twenty five billion globally.
Speaker 1: Of that one hundred billion, sixty five billion was in treasuries,
Speaker 1: which was you know again, I think I think most
Speaker 1: people would have been quite surprised that was followed by
Speaker 1: investment grade multisector of municipals UM so Yes, to your point,
Speaker 1: it was all high quality. I do think that was
Speaker 1: a reflection of investors saying, these yields are attractive. I
Speaker 1: can't call the top. I'm not going to try to
Speaker 1: call the top. That's that's pretty tough to get, right,
Speaker 1: so I'm going to start allocating, but you know, I'm
Speaker 1: a little bit worried about where we're going here in
Speaker 1: terms of do we tip into a recession? You know,
Speaker 1: what do we what do we ultimately end up doing
Speaker 1: as far as a land and go. So I'm going
Speaker 1: to buy high quality. The part that helped that out
Speaker 1: the most. If you think about at the front end
Speaker 1: of the yield curve, you know, you have two year
Speaker 1: notes that are now above four and a half percent,
Speaker 1: and so it they didn't have to go down in
Speaker 1: credit to get yield. They were seeing yieldsy haven't seen
Speaker 1: them many many years that that trends persisted this year.
Speaker 1: We're seeing high quality flows this year as well to
Speaker 1: the flows sense to the HyG, the high yield ETF.
Speaker 1: I'm guessing they track closer with risk sentiment in the
Speaker 1: stock market or are you not seeing them there that
Speaker 1: they're more of a risk on type of product. Yeah,
Speaker 1: I agree with that, and particularly HyG has become very
Speaker 1: entrenched in the you know, high yield ecosystem, and so
Speaker 1: it does tend to react very quickly to sentiments. So
Speaker 1: you know, when you have risk on, you'll you know,
Speaker 1: you see equities rally, you'll probably see flows into HyG
Speaker 1: When you have risk off, as you said, you'll probably
Speaker 1: see the opposite, and it does happen to react quickly
Speaker 1: in a large size. I want to ask you more
Speaker 1: about your predictions for what you see for the bond
Speaker 1: ETF space down the line. But but first you mentioned
Speaker 1: the two year note. Um, it's above four and a
Speaker 1: half percent. I'm wondering what you think the bond market
Speaker 1: is telling us right now, given the rise and eels
Speaker 1: that we've seen in recent days. Yeah, I think it
Speaker 1: was this adjustment. The market had started to get to
Speaker 1: a place where, Okay, the end is in sight, all
Speaker 1: is going according to plan, and you know, we can
Speaker 1: even start thinking about a FED pivot. You know, it
Speaker 1: depends on what speaker, what day. But I think, you know,
Speaker 1: the last speech by Powell sort of calmed the market
Speaker 1: down and I think got them to a place where
Speaker 1: it's like, Okay, I can see the light at the
Speaker 1: end of the tunnel. This recent slew of data really
Speaker 1: upended that a bit, where you saw strong employment numbers,
Speaker 1: you know, really really outside the you know, the manufacturing
Speaker 1: indicators PMI et cetera. Were strong, Inflation did not come down,
Speaker 1: you know, as much as as as people had expected
Speaker 1: or hope, and so what you're seeing the market is
Speaker 1: just sort of pricing in, you know, combination of you know,
Speaker 1: maybe an additional hike or you know, higher for longer,
Speaker 1: if you will. And so I think it was just
Speaker 1: that adjustment. We've seen this so remember I think last
Speaker 1: year the peak was somewhere closer to four and a
Speaker 1: half and so we've been on this journey before. We
Speaker 1: may test at some point above four percent again, But
Speaker 1: like I said, I don't think that we're going to
Speaker 1: see yields jumped sharply higher. You may see them grinding
Speaker 1: a little bit higher, but I think we're going to
Speaker 1: be more or less in a range. It might be
Speaker 1: a voliable one as people continue to price in and
Speaker 1: price out what they what the Fed may do. Yeah, Steve,
Speaker 1: you mentioned earlier that notion of you know, bonds being
Speaker 1: that forty percent of the portfolio on a traditional sixty
Speaker 1: forty portfolio. Last year was just one of those bad
Speaker 1: years where that stock and bond correlation reversed. You know,
Speaker 1: typically when you see stocks go up, you would expect
Speaker 1: bonds to fall, yields to go up. As a result
Speaker 1: last year, obviously we saw stocks and bonds fall together
Speaker 1: and sort of eliminate that, you know, hedging aspect of
Speaker 1: a bond in a in a sixty forty portfolio. What
Speaker 1: do you think we need to happen to see happen
Speaker 1: to get that correlation back to what everyone expects it
Speaker 1: to be. I mean, is it a is it a
Speaker 1: narrative shift, is it a sentiment shift? Or is it
Speaker 1: really about the data and inflation normalizing? I mean, do
Speaker 1: we really have to wait for two percent inflation to
Speaker 1: see that old sort of trusted correlation re emerge. So
Speaker 1: it's a combination of some of the things you mentioned.
Speaker 1: So as long as the FED is being very hawkish,
Speaker 1: I think that that sort of perpetuates what you just said.
Speaker 1: So you'll go up, you have risk off, you have
Speaker 1: equity sell offs, how you'll tell us or what have you.
Speaker 1: I think when the market comes to believe that, okay,
Speaker 1: we're we're reaching sort of a you know, a leveling
Speaker 1: off place here. And I do think, you know, we
Speaker 1: may be starting to see that with the olds, you know,
Speaker 1: bumping up closer to four percent, And like I said,
Speaker 1: I'm of the view that we will pounce around in
Speaker 1: this range anyway, But I think investors will start seeing
Speaker 1: that traditional behavior. So as an example, when you don't
Speaker 1: have a hawkish speech in the market, you do tend
Speaker 1: to see the traditional correlation. Where effequities are selling off,
Speaker 1: you'll see yields trend lower. I think it was really
Speaker 1: about getting to that level. I think we're almost there,
Speaker 1: and I think at these levels there's a lot of
Speaker 1: diversification value in yields right now. So you know, you
Speaker 1: need to have a calming down of all the hawkish
Speaker 1: speeches and all that stuff, But I think we're we're
Speaker 1: getting there. The thing that Mike was referencing, I think
Speaker 1: because I wrote it down, I liked what you said.
Speaker 1: You said a lot of people are thinking, I'm going
Speaker 1: to fix the forty part of the sixty forty, and
Speaker 1: I think you guys are saying that advisor sixty forty
Speaker 1: portfolios are under allocated to fixed income by nine percent,
Speaker 1: so and now is a once in a many year
Speaker 1: opportunity to rebalance portfolios. So maybe you can tell us
Speaker 1: more about that. Yeah, it's been interesting. So if you
Speaker 1: think about the last decade, we've had quantity steve easing,
Speaker 1: we've had yields. You know, if you look at where
Speaker 1: the ten year bottomed out, it was fifty basis points,
Speaker 1: which is remarkable. The two year bottomed out somewhere in
Speaker 1: the teens, you know, twelve or fifteen basis points. So
Speaker 1: a lot of investors decided to you know, stay out
Speaker 1: of the market, or you know, they had to take
Speaker 1: on a lot of additional risk to get that yield.
Speaker 1: So whether that was overweighting high yield in that traditional
Speaker 1: part of the portfolio where maybe they would have preferred
Speaker 1: higher quality assets but they had to have the income,
Speaker 1: or things like alternatives and private credit, private equity, you know,
Speaker 1: asset classes of those natures. Now investors are looking at
Speaker 1: this market, the public fixed income markets, and realizing that
Speaker 1: they can quote unquote fix their forty by de risking
Speaker 1: it to varying degrees. So you don't have to be
Speaker 1: you know, the majority in high yield to get a
Speaker 1: certain yield target. You can allocate to the front end
Speaker 1: of the treasury curve and get you know, yields that
Speaker 1: you were you were seeing at some point the hig
Speaker 1: yield markets. So it really is an opportunity to get
Speaker 1: back to what that forty was supposed to do, which
Speaker 1: is diversify your risk assets. And then you think about
Speaker 1: its simple. Okay, I have the SMP five hundred, what
Speaker 1: do I want to hold against it? A very simple,
Speaker 1: you know world would be I'll hold long data treasuries
Speaker 1: against it. Mike for the reason you said, which was,
Speaker 1: I know that if the equity market sells off, probably
Speaker 1: long treasuries will rally. But investors are being a lot
Speaker 1: more intentional than that. They are looking at building out
Speaker 1: that forty in a much more deliberate way. So, yes,
Speaker 1: allocating building blocks to treasuries investment grade, having some bit
Speaker 1: of high yield. And I think what we're advocating is
Speaker 1: to get away from this whole active passive paradigm, which
Speaker 1: we think is really just you know, kind of an
Speaker 1: archaic construct. We think really it's both. And so we're
Speaker 1: encouraging investors to use bondy tfs for that core diversification purpose.
Speaker 1: And why is that Well, because you know what they're
Speaker 1: going to do. You could see what the holdings are.
Speaker 1: They're transparent, you know what the strategy is. Because they're
Speaker 1: following an index. Use that predictability as the diversifying part
Speaker 1: of your portfolio. Okay, whether that's treasuries, investment grade, some
Speaker 1: combination of both, and then you can use an active
Speaker 1: manager to get that extra kick in your forty as well.
Speaker 1: So it's not active versus pass if it's both. And
Speaker 1: obviously you know each investor will have to decide what
Speaker 1: that mix looks like. But we do believe that both
Speaker 1: can play a role in that forty and get you
Speaker 1: to a much more robust place than you were before.
Speaker 1: I've never heard somebody argue that before that it should
Speaker 1: be both. It should be both. Yeah, absolutely, I mean
Speaker 1: it's a great time to do it because you know,
Speaker 1: like like you said, it's the first time in you know,
Speaker 1: ten years, done a dozen years that you've been able
Speaker 1: to get these yields and d risk at the same time,
Speaker 1: which is pretty remarkable, you know, Steve. It's it's interesting
Speaker 1: when I think and correct me if I'm wrong and
Speaker 1: how I'm thinking about this. But what I think of
Speaker 1: sort of the audience or the user base for say
Speaker 1: equity ETFs. I think of maybe a lot of self
Speaker 1: directed retail investors, you know, average sort of fuxing around
Speaker 1: with their retirement or just their you know, personal trading account,
Speaker 1: and you know, you're your big equity ETFs are pretty
Speaker 1: easy to understand for that audience. You know, you buy
Speaker 1: the Russell two thousand, you know, buy all the small
Speaker 1: cap stocks by Chinese, large caps, by you know, whatever
Speaker 1: it is. You know. And again I could be wrong
Speaker 1: about this, but I don't see that cohort of investors
Speaker 1: really knowing what they're doing. Uh. As well with fixed
Speaker 1: income ETFs, and my impression is that the user base
Speaker 1: is different that they're it's more of a professional user base.
Speaker 1: Even active bond fund managers a lot of times will park,
Speaker 1: you know, some some inflows into ETFs until they can
Speaker 1: pick out the bonds they want talk to us about.
Speaker 1: That sort of difference is a might write in that thing.
Speaker 1: You know. It's kind of a different user base between
Speaker 1: the different asset classes and ETFs. Well, actually, yeah, I
Speaker 1: think it's um it's a pretty diversified investor base. It's
Speaker 1: pretty broad, and so we we actually do see direct
Speaker 1: flows into fixed income ets now, they do tend to
Speaker 1: be the ones that people know about. Like agg those
Speaker 1: folks will will know that, Okay, that's the bond market.
Speaker 1: I'm just gonna buy that. I'm not an expert. I
Speaker 1: don't want to you know, try to try to get
Speaker 1: too too smart about it or you know, get too granular.
Speaker 1: I'll just buy the bond marketing. So you'll you'll tend
Speaker 1: to see that with the direct investors, You're right that
Speaker 1: a lot of the you know, if you will, power
Speaker 1: users tend to be these institutional investors, active managers, insurance companies, pensions,
Speaker 1: et cetera. But then there is a very large part
Speaker 1: of the you know, wealth client base, the advisor base
Speaker 1: um that uses bond ets through things like models. Right,
Speaker 1: So models are these recipes for here's how you build
Speaker 1: a portfolio. More and more firms are going that direction
Speaker 1: where instead of saying, hey, you know, buy this set
Speaker 1: of equity ets and then you know, oh for your bonds,
Speaker 1: just go out and you know, build some ladder using
Speaker 1: municipal bonds that you like, they're advocating more for here's
Speaker 1: what your portfolio should look like. On the equity side,
Speaker 1: here's the recipe for that. It's these ETFs. On the
Speaker 1: fixed income side, you can use a combination of these
Speaker 1: ETFs in the model portfolios are a really fast growing business,
Speaker 1: and more and more investors and for that matter of
Speaker 1: advisors like it as well because it allows them to
Speaker 1: free up their time to focus on things like you know,
Speaker 1: tax planning, things like that, and so we're starting to
Speaker 1: see that a lot. So that I think is the
Speaker 1: main you know, growth area, but we're seeing a ton
Speaker 1: of growth in the institutional side as well. To your point,
Speaker 1: And the last thing I would say about it is
Speaker 1: your traditional bond pickers. Some people really love that, right,
Speaker 1: It's it's interesting and fun for them to do it.
Speaker 1: But even they've come to realize that if I am
Speaker 1: I bond ladder person, I can go ahead and do
Speaker 1: that for my client, but to get some diversification around that,
Speaker 1: I can buy something like you know, our eye bonds,
Speaker 1: which is it is a ladder, but you have within
Speaker 1: a given run you can have several hundred ponds. So
Speaker 1: even even the folks who really enjoy laddering as an example,
Speaker 1: are starting to use ETFs alongside of that for for
Speaker 1: liquidity and diversification. So we talked a little bit about
Speaker 1: where you see the flows going. Where you said the
Speaker 1: majority is actually going towards treasuries. Is that also what
Speaker 1: you would recommend how people should be positioning right now? Well,
Speaker 1: I think the investors have to have a view, So
Speaker 1: for investors who are pretty unsure about you know, whether
Speaker 1: we're going to have a recession or when that might happen.
Speaker 1: You know, you can get great yield right in these
Speaker 1: higher quality exposures, whether it's whether it's the front of
Speaker 1: the treasury curve or investment grad or what have you. You
Speaker 1: You don't have to invest in something like high yield. However,
Speaker 1: we do still have investors who are allocating a certain portion. Again,
Speaker 1: think about the model portfolio as the recipe, if you will.
Speaker 1: There's going to be an element in that, and investors
Speaker 1: can make up their minds. If they think that the
Speaker 1: you know, the chance of a recession for example, is
Speaker 1: over stated, then how YO might look attractive right now?
Speaker 1: You know. So if you look at where default rates
Speaker 1: are implied, it's somewhere in the six percent range, which
Speaker 1: isn't super high. I mean a lot of times during
Speaker 1: more some of these bigger selloffs that it's approached double digits.
Speaker 1: But you know, traditionally the realized experience of defaults has
Speaker 1: been around, you know, sort of the high three low
Speaker 1: four percent range. So for investors who have that view
Speaker 1: that well, I either think a recession isn't coming for
Speaker 1: a while or I think it could be a lot
Speaker 1: more shallow than what people are worried about, something like
Speaker 1: how YO could could also look attractive. But we're seeing
Speaker 1: people vote with in terms of flows. We're seeing still
Speaker 1: the majority this year going into the higher quality segments.
Speaker 1: You know, you mentioned that how high rates are at
Speaker 1: that front end of the treasury curve. I mean, every
Speaker 1: time I look at it my eyes, you know, I
Speaker 1: take my glasses off and wipe them off and double
Speaker 1: check that I'm really seeing a three month T bill
Speaker 1: yield at foot nine percent whatever it's. But maybe you
Speaker 1: also need new glasses. I might need new glasses too,
Speaker 1: But I can't help. But wonder if you know, we're
Speaker 1: back into the realm of straordinary measures, you know, to
Speaker 1: to get around the debt ceiling. Is that impacting the
Speaker 1: short end yet? Concerns about the debt ceiling and a
Speaker 1: potential default and if not, will it you know, how
Speaker 1: do how do you see that whole issue playing out
Speaker 1: this year? Um? And what it means for fixed income? Well,
Speaker 1: we've we've seen this movie before right where it has
Speaker 1: happened where we were actually downgraded and everything. But um,
Speaker 1: I don't it's not It's there is a little bit
Speaker 1: of it that's in there if you look at you know,
Speaker 1: for example, credit default swaps. I haven't looked at the
Speaker 1: levels lately, but there was there was sort of some
Speaker 1: of that risk being you know, slightly priced. I think
Speaker 1: as time goes on, that concern could come forward much more,
Speaker 1: you know, as as we had you know, towards the
Speaker 1: summer um, which which is kind of a critical time.
Speaker 1: So I would say it's not dramatically impacting the front
Speaker 1: end yet, could it sure could start creating a lot
Speaker 1: of concern um as we as we start moving towards
Speaker 1: the summer. And then I promised I would ask you
Speaker 1: about your long, long, long term views. And I think
Speaker 1: you guys are seeing are predicting that bond ETF assets
Speaker 1: will go from about one point eight trillion right now
Speaker 1: to five trillion by twenty thirty, and I wanted to
Speaker 1: ask you to speak about that too. You know, this
Speaker 1: is something that we believe is going to happen, and
Speaker 1: I think there are a number of drivers behind that,
Speaker 1: and it before last year we also had that conviction.
Speaker 1: So I think we originally came out with a five
Speaker 1: trillion even before some of the astonishing flows that we
Speaker 1: saw last year, and there are a number of trends
Speaker 1: driving that. You know, I've mentioned a few of them already.
Speaker 1: You know, one would be, you know, this growing institutional adoption.
Speaker 1: So we talked about how you know, before an active
Speaker 1: fixed income manager, as an example, would probably not touch
Speaker 1: one of these products because they viewed it as well,
Speaker 1: that's a passive product, I'm an active manager, I'm a
Speaker 1: bond picker, etc. We have moved has that in our
Speaker 1: view where you have active managers using these products just
Speaker 1: as tools for active management, which is pretty remarkable. And
Speaker 1: so nine of the ten largest active bond managers do
Speaker 1: use I shares fixed income ETFs and they use them
Speaker 1: for active management tools. So that's that's a pretty interesting trend.
Speaker 1: And again we're seeing insurance companies, pensions, all of these
Speaker 1: larger institutional clients really embraced the products. COVID accelerated that
Speaker 1: because liquidity issues you're experiencing in the underlying market. Last
Speaker 1: year was a further accelerant on that trend. Another long
Speaker 1: term trend that we see that's been talked about a
Speaker 1: lot is just this idea of the bond market finally modernizing.
Speaker 1: Some people laugh out loud when you use the term
Speaker 1: modernizing and bond market in the same sentence, because it's
Speaker 1: still not what we would call that modern compared to,
Speaker 1: you know, for example, the equity markets. But we do
Speaker 1: think that the presence of fixed income ETFs and their
Speaker 1: infrastructure has really kicked the bond market into high gear
Speaker 1: in terms of modernizing. So a lot of the things
Speaker 1: that you see today in terms of activity, you know,
Speaker 1: call it portfolio traits, which are large bond basket trades
Speaker 1: that are priced and traded simultaneously. That's not possible without
Speaker 1: bond ETFs because they're the hedge for that and the
Speaker 1: plumbing around that. So the creation redemption mechanism is what
Speaker 1: brings that to life. It allows the dealers to move
Speaker 1: large blocks of bonds to and from the exchange into
Speaker 1: the over the counter market, and so that's a very
Speaker 1: powerful innovation. I think. The other part of that is
Speaker 1: just pricing pricing, something that everyone sort of took for
Speaker 1: granted for many years. It was something that index pricing
Speaker 1: services did not A lot of thought was given to
Speaker 1: a butt. Because of this acceleration of these large block
Speaker 1: traits of bonds in conjunction with ETFs, it's become not
Speaker 1: only important and necessary to be able to price large
Speaker 1: numbers of bonds and price them quickly. So now you
Speaker 1: have things like algorithmic pricing in credit, which is which
Speaker 1: is pretty astonishing. I think further developments will be you know,
Speaker 1: all to all trading. You're seeing the market structure itself change.
Speaker 1: And we think all of these things were really catalyzed
Speaker 1: by bondytfs and just the desire by investors to use
Speaker 1: these products, but also not only directly, but to use
Speaker 1: them as tools for some of the other things we
Speaker 1: just talked about. The way advisors and you know and
Speaker 1: direct investors are using bondyts to build portfolios. We think
Speaker 1: that's only going to accelerate this idea of using transparent
Speaker 1: building blocks for your forty that's going to continue. And
Speaker 1: then lastly, just we'll continue to see innovation in the
Speaker 1: number of offerings, the number and type of bondy TF
Speaker 1: offerings over time. So those are kind of the four
Speaker 1: long term drivers. Like I said, we were already growing
Speaker 1: pretty rapidly double digit growth every single year. I think
Speaker 1: COVID accelerated that, and then the yield spike of last
Speaker 1: year for they're accelerated, so we're pretty confident in that
Speaker 1: five trillion dollar prediction. We're almost we're approaching two trillion today,
Speaker 1: and honestly, if it wouldn't have been for this yield
Speaker 1: chock which caused the values of fixed income assets to
Speaker 1: go down, we probably would have already crossed two trillions.
Speaker 1: Does getting to that five trillion imply a shrinkage in
Speaker 1: AUM in traditional bond mutual funds? You know, that's up
Speaker 1: for debate. We think there will probably be a role
Speaker 1: for different types of rappers, depending on what investors like.
Speaker 1: There's certainly you know, you've seen a migration by certain
Speaker 1: types of investors from mutual funds to ETFs. You've seen
Speaker 1: a lot in equities, the same thing starting to happen
Speaker 1: in the bond market, which explains why you're seeing more
Speaker 1: and more traditional active managers offering ETFs because they know
Speaker 1: that a certain segment of the investor base wants it.
Speaker 1: So I think ourgue is we want to give clients
Speaker 1: the exposure that they want in the wrapper that works
Speaker 1: for them. Some people don't really view the TF as
Speaker 1: something that they need because well, I'm not going to
Speaker 1: trade every day, I'm not going to look at it
Speaker 1: every day. It's not that big of a concern. But
Speaker 1: we talked about these model investors. They very much want
Speaker 1: ETFs as part of that. So I think over time
Speaker 1: there will be some sort of an equilibrium, but I
Speaker 1: think we're still in the midst of a migration. But
Speaker 1: I do think will happen is that you will see investors,
Speaker 1: more and more investors using bond ETFs instead of just
Speaker 1: going out and buying bonds. Right. So, as an example,
Speaker 1: if I'm an active manager, you know, instead of going out,
Speaker 1: I want to start a new strategy. Instead of going
Speaker 1: out and buying hundreds or more bonds. To implement that strategy,
Speaker 1: I may start with a series of bond ETFs and
Speaker 1: then I can put my higher conviction bets into individual
Speaker 1: bonds or other positions. Right, So, recognizing that there's always
Speaker 1: a core of a portfolio that can easily be accomplished
Speaker 1: through a low cost BONDYTF, and then you can add
Speaker 1: value around that. Steve, I'm gonna put you on the
Speaker 1: spot with one final question here before we get to
Speaker 1: the crazy things. I'm looking at the ten year treasury
Speaker 1: yield now three point nine three about if we're in
Speaker 1: a fast word to the end of twenty twenty three,
Speaker 1: and I throw out a numbers, say three point five
Speaker 1: in the ten year. You're taking the over the under
Speaker 1: on that, and show your math. Tell me why I'm
Speaker 1: going to I'm gonna take the over on that, but
Speaker 1: just slightly. If you were, if you would have rephrased
Speaker 1: that differently, where do you think will in? I would
Speaker 1: have said probably three fifty. So I think you'll see
Speaker 1: these bumps along the way where you know, you just
Speaker 1: keep testing. You know, you'll tire because I think people
Speaker 1: are still very nervous about the FED and inflation. But
Speaker 1: that's all going to reconcile, hopefully by December. We'll have
Speaker 1: to call you next year and check on your prediction.
Speaker 1: That'll be interesting. Let's hope that I'm not off by
Speaker 1: an entire handle or something. But I you know, I agree,
Speaker 1: I don't. I don't think we'll see, you know, a
Speaker 1: collapse and yields to anything like what we were used to.
Speaker 1: But I you know, to your point, it is hard
Speaker 1: to see them going, you know, continue this sort of
Speaker 1: march higher throughout the rest of the years. So all right,
Speaker 1: I'll I think I'm with you. I'll take slightly higher too.
Speaker 1: What do you think Phildana, Is this the time where
Speaker 1: I admit I hate the bond market? I hate it?
Speaker 1: Why do you hate the bond market? Oh my gosh,
Speaker 1: because it's so contintuitive, like you have to flip everything
Speaker 1: in your head before you can even think about what's
Speaker 1: going on. You like this, the nice, simple, easy to
Speaker 1: understand Market's like crypto better. Yes, exactly exactly. I was
Speaker 1: gonna say, how do you reconcile that? In my mind?
Speaker 1: It's much more straightforward. I love the crypto market. All right, Well,
Speaker 1: Steve is great, great to get here, your insights here,
Speaker 1: but we can't quite let you go just yet. We've
Speaker 1: got attrition here on this podcast. Uh Thebata tell him
Speaker 1: what it is. We are going to play the craziest
Speaker 1: things you you saw in the market this week. I'll
Speaker 1: go first for once. For once, I'll go I'll go first.
Speaker 1: I was I was hoping to go first. Actually all right,
Speaker 1: well you go first. Well, because I haven't update for
Speaker 1: something that you I don't know, maybe it was like
Speaker 1: five or six episodes ago. Um, I think you made
Speaker 1: me guess on an iPhone, like an original two thousand
Speaker 1: and seven iPhone, how much it was going to go
Speaker 1: for and right, and the final auction took place. I
Speaker 1: don't know if you saw this, Oh, I know it
Speaker 1: missed it thirty thousand dollars. No, it's way more. It
Speaker 1: sold for sixty three thousand dollars. Wow. Yeah, it's like
Speaker 1: a vintage. I have pictures. Can we call it vintage? Yes,
Speaker 1: it's in its box with the with the plastic wrap
Speaker 1: and everything. Yeah, sixty three thousand dollars. If that's vintage,
Speaker 1: I'm a I'm a full on antique at this point. Well,
Speaker 1: I may have one of those. Uh, I may have
Speaker 1: one of those my garage somewhere. Now you have sixty
Speaker 1: three thousand dollars investment, put it up for auction, but
Speaker 1: I have one. I have another crazy thing. Okay, my
Speaker 1: weirdest thing is Starbucks has this new drink. Did you
Speaker 1: see this? No? No, I can't believe it because my
Speaker 1: kids have met make me driving the Starbucks at least
Speaker 1: twice a week. Well, you're gonna be driving them to
Speaker 1: get coffee with olive oil. They're literally just putting olive
Speaker 1: oil into the coffee. And it's I don't know how
Speaker 1: to pronounce it. It's called oliato. Oliato latte with milk
Speaker 1: and olive oil. Is that a thing? Like? Is that
Speaker 1: an old Italian thing to do? I have no idea.
Speaker 1: There's a picture and it's like, you know, like how
Speaker 1: they make the coffee look so beautiful, like all the
Speaker 1: milk is like dripping down, and then there's just olive
Speaker 1: oil next to all the coffees. So yeah, it looks
Speaker 1: like it's literally just olive oil and coffee. I can't
Speaker 1: wait to try it. Anyway, that's my weirdest thing. I
Speaker 1: don't know, Steve, that's a that's a tough one. The top.
Speaker 1: What's the craziest thing you've seen in markets? I don't
Speaker 1: know how that's a market. I guess Starbucks is a
Speaker 1: well all right, fine, fine, yeah, I can't compete with that.
Speaker 1: I would say, um, the craziest thing I've seen, um,
Speaker 1: and it wasn't this week thing. But I just had
Speaker 1: this realization, you know, when we were talking about cash
Speaker 1: in the front end of the curve, you can buy
Speaker 1: a treasury floater, okay, which has almost no duration for
Speaker 1: like I think it's somewhere between four sixty and you know,
Speaker 1: sixty four seventy somewhere around there. It's it's amazing that
Speaker 1: you can get income off of something that has almost
Speaker 1: no duration and it's it's a treasury. So think about,
Speaker 1: you know what you had to do three years ago
Speaker 1: to get that kind of yield um. Either had to
Speaker 1: take on a lot of duration or a lot of
Speaker 1: credit risk. And now you can now you can do
Speaker 1: that with with with treasury floaters. That's pretty pretty amazing,
Speaker 1: That is pretty That is a good one. You know,
Speaker 1: as you were when you were talking about how low
Speaker 1: yields got there for a while, I was, you know,
Speaker 1: flashing back to the whole notion of negative yielding treasuries,
Speaker 1: you know, which the front end did I guess go
Speaker 1: negative for a while there. But you know, we remember,
Speaker 1: you know, it was this big debate if and when
Speaker 1: you know like that with the ten year yield actually
Speaker 1: go negative, life comes at you fast, you know when
Speaker 1: you when you think about how that was the uh
Speaker 1: the craziest things we were talking about a few years ago.
Speaker 1: So it's quite quite a difference. But all right, I'm
Speaker 1: gonna give you mine. Um, Vilda, do you watch the
Speaker 1: w NBA at all Women's National Basketball Association? Okay, well
Speaker 1: you might not be very good at this one, then,
Speaker 1: uh you chose it. I keep an eye on women's basketball.
Speaker 1: You know the dirty secret in the Regan family growing up,
Speaker 1: there were six of us, five boys, one girl. We all,
Speaker 1: you know, fancied ourselves as as who hoop stars. But
Speaker 1: my sister was really the best. She was the only
Speaker 1: one who played college ball. So I've always had a
Speaker 1: soft spot for women's basketball. Diamond Miller at University of Maryland,
Speaker 1: where my daughter goes. Now is google her highlight reel.
Speaker 1: She's something special. There's a very famous recent w NBA player,
Speaker 1: and I'm probably gonna say her name wrong, but I
Speaker 1: believe it's Sabrina in Nescu. Sabrina in Nescum and her
Speaker 1: rookie card. Just sold. Her rookie card for the w
Speaker 1: NBA just sold at auction, highest ever price for a
Speaker 1: w NBA trading card. Give you a few details. Here's
Speaker 1: one of just five copies in existence. It's created as
Speaker 1: a perfect gem mint ten whatever that means. That's good.
Speaker 1: I guess that's that's like a triple A bonds, Steve,
Speaker 1: I guess by third party greater PSA. So I'll take
Speaker 1: their word on it. So it's time to play the
Speaker 1: prices precise as you as you now know fill down
Speaker 1: a highest ever auction sale for a WNBA trading card
Speaker 1: according to CBS Sports. Where I got this story from?
Speaker 1: What do you think it was? I have negative knowledge
Speaker 1: about any of these topics, literally negative, but this was.
Speaker 1: There's only five of them, so it's very unique. This
Speaker 1: is an exceptional player her rookie card. So that's why
Speaker 1: I chose it. I think it's a challenging one. Okay,
Speaker 1: I'm gonna go with forty five thousand dollars. Forty five
Speaker 1: thousand dollars. I like your confidence in that. In that answer,
Speaker 1: it's um feeling very not confident in that, But that's
Speaker 1: my guess. All right, Steve, Prices precise rules are are
Speaker 1: the standard rules you know of that game show of
Speaker 1: a similar name. Yeah, yeah, that shall not be named.
Speaker 1: But you know if you go over, you'll lose, So
Speaker 1: keep that in mind. So can I do the Can
Speaker 1: I do the Prices right thing and just go over
Speaker 1: by a penny? Absolutely? Can? I'll be a little more bold,
Speaker 1: I'll say, Um, I'll do six figures. I'll say one
Speaker 1: hundred grand. Yeah, it's a tough one. I don't know
Speaker 1: what I would have guessed, to be honest, uh, ten thousand,
Speaker 1: eight hundred dollars. Yeah, from one ye, right, I don't know.
Speaker 1: You both went over, so I think and I won.
Speaker 1: I think I'm the real winner here. You have guessed
Speaker 1: I probably would have gone closer to Steve. I think,
Speaker 1: you know, you kind of hype it up. You know,
Speaker 1: it depends how you hype it up. You know, you
Speaker 1: think highest ever price. But at the end of the day,
Speaker 1: you were still talking about eleven grand for a piece
Speaker 1: of cardboard. It's pretty amazing. Um. So I have nagative
Speaker 1: knowledge around card collecting as well. So, but yeah, who
Speaker 1: would have thought sixty three thousand four a quote unquote
Speaker 1: vintage iPhone and eleven thousand four piece of paper? Yeah? Yeah,
Speaker 1: I wonder if you can still use the iPhone? You know,
Speaker 1: I think you wouldn't want to literally wrapped up, Yeah,
Speaker 1: because I guess in ten years you'll sell it for
Speaker 1: double Yeah all right, Steve, go check that garage. I'm
Speaker 1: definitely gonna check that garage anyway. Great to catch up
Speaker 1: with you, Steve. I hope we can have you back
Speaker 1: again somebody. Maybe we'll have you back on the end
Speaker 1: of the year and see how that year end. Yeah,
Speaker 1: that's nice. That could be fun, I know than all right?
Speaker 1: Thank you, Steve, What Goes Up We'll be back next week.
Speaker 1: Until then, you can find us on the Bloomberg Terminal,
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Speaker 1: you can find us on Twitter, follow me at Waldonna Hirich.
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Speaker 1: Wong and our head of podcasts is Sage Baldman. Thanks
Speaker 1: for listening and we'll see you next week.