WEBVTT - BlackRock on 'Fixing' the 40 in 60/40 0:00:13.800 --> 0:00:16.960 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.040 --> 0:00:20.000 My name is Mike Reagan, a senior editor at Bloomberg, 0:00:20.120 --> 0:00:24.319 and i'm Waldonna High Across Acid reporter with Bloomberg. This 0:00:24.400 --> 0:00:26.960 week on the show, Well, let's be frank for a minute. 0:00:27.080 --> 0:00:30.960 For a long time, bonds seemed to be pretty boring 0:00:31.640 --> 0:00:34.280 if your investment portfolio was a meal. Bonds were sort 0:00:34.280 --> 0:00:36.919 of like the vegetable. Yeah, you knew you needed them 0:00:36.960 --> 0:00:39.880 there on the plate, but they weren't very exciting. Rather, 0:00:40.000 --> 0:00:43.160 stocks were the meat and potatoes and dessert crypto. Well, 0:00:43.440 --> 0:00:46.159 maybe that was the Shotton beer you had afterwards, but 0:00:46.800 --> 0:00:50.519 that's all obviously changed after last year's cartage. Bonds of 0:00:50.560 --> 0:00:54.560 all stripes are sporting really attractive yields that look especially 0:00:54.680 --> 0:00:58.320 enticing these days if and when that market focus shifts 0:00:58.320 --> 0:01:02.600 from worries about inflation so worries about economic growth, and 0:01:02.720 --> 0:01:06.400 exchange traded funds especially are reaping the windfalls with hundreds 0:01:06.400 --> 0:01:09.640 of billions of dollars flowing into bond products in the 0:01:09.720 --> 0:01:12.959 last year. You heard it. Bonds are exciting again, and 0:01:13.000 --> 0:01:14.480 we're going to get into it. With the head of 0:01:14.520 --> 0:01:19.600 fixed income at the world's largest asset manager, but filledna First, 0:01:19.720 --> 0:01:23.720 speaking of excited, I was very excited yesterday when I 0:01:23.760 --> 0:01:26.680 came into the office and I noticed you had left 0:01:26.680 --> 0:01:30.520 a book for me on my desk, which I assume 0:01:30.600 --> 0:01:33.520 means I'm finally invited to one of your book clubs. 0:01:33.600 --> 0:01:35.800 And I'm very excited. Oh my gosh, I didn't mean 0:01:35.840 --> 0:01:38.479 it to look that way, but I suppose it looks 0:01:38.520 --> 0:01:42.039 that way like I am giving you I'm offering an invite. Sweet, 0:01:42.080 --> 0:01:44.479 I'm not invited to one of your many book clubs. Okay, 0:01:44.520 --> 0:01:46.880 I suppose you and I have a book club going then, 0:01:47.000 --> 0:01:50.480 because we have a special guest next week, and you 0:01:50.520 --> 0:01:53.919 and I have been tasked with reading his book before 0:01:53.960 --> 0:01:57.280 the podcast. That's why I left it on your desk. 0:01:57.720 --> 0:02:00.760 Oh yeah, Oh, that's not as exciting is one of 0:02:00.800 --> 0:02:03.760 your real, my real book clubs which you're not invited to. 0:02:03.840 --> 0:02:08.600 I'm sorry, I'm wonder about what exactly these books are 0:02:08.600 --> 0:02:11.960 you reading? In these book they're fun books. That's yeah, 0:02:12.160 --> 0:02:14.960 no invite for you. Tell us about the what goes up? 0:02:15.120 --> 0:02:16.920 Book club? Who do we have next week? We have 0:02:17.000 --> 0:02:22.000 Alan Blinder next week and he has a very thorough 0:02:22.080 --> 0:02:26.320 history of monetary and physical policy, so we'll be talking 0:02:26.360 --> 0:02:30.040 to him next week. That is riveting book club material 0:02:30.160 --> 0:02:32.600 right there. But this week's guest is equally exciting. Why 0:02:32.600 --> 0:02:34.560 don't you introduce him? Yeah, I want to bring in 0:02:34.600 --> 0:02:37.640 Steve lap Plea. He's the US head of fixed income 0:02:37.680 --> 0:02:41.120 ETFs at black Rock. Steve, welcome to the show. Thanks 0:02:41.120 --> 0:02:44.200 for having me. You're welcome to join any of my 0:02:44.400 --> 0:02:48.560 many many book clubs that I belong to. The book 0:02:48.560 --> 0:02:50.680 for next week does sound riveeting, so so I'll have 0:02:50.720 --> 0:02:52.840 to check that out. You're well, come on, come on 0:02:52.880 --> 0:02:56.120 into our book club. Then you're very welcome to to 0:02:56.200 --> 0:02:59.840 be part of it. Poor the Chardonnay, I'll bring this 0:03:00.960 --> 0:03:03.800 um see, maybe we can just uh, we can just 0:03:03.960 --> 0:03:06.639 start with So, your US head of fixed income ETFs 0:03:06.639 --> 0:03:10.240 at black Rocks, So tell us about your role. Yeah. 0:03:10.280 --> 0:03:12.960 So I've been with a firm since two thousand and nine, 0:03:13.000 --> 0:03:15.440 and you know, it's been it's been quite a journey. 0:03:15.760 --> 0:03:19.200 When I joined black Rock, bondie tfs that did exist. 0:03:19.680 --> 0:03:22.200 We launched the first set of them in two thousand 0:03:22.200 --> 0:03:25.320 and two, and we recently celebrated the twenty year anniversary 0:03:25.360 --> 0:03:27.639 of those. But it was still, you know, a relatively 0:03:28.040 --> 0:03:30.440 nascent business in terms of where it is today, and 0:03:30.480 --> 0:03:33.840 so you know, we decided to really make it an 0:03:33.840 --> 0:03:37.640 effort at growing that business, and in particular, I'm really 0:03:37.640 --> 0:03:40.880 trying to make the market aware of just how much 0:03:40.920 --> 0:03:44.480 these products could number one, help investors, um that's the 0:03:44.480 --> 0:03:47.240 important part. But also we had a very strong conviction 0:03:47.280 --> 0:03:49.560 that these products were going to change the bond market itself, 0:03:49.960 --> 0:03:53.080 and so I was one of the folks brought in 0:03:53.120 --> 0:03:55.520 to really, you know, start growing this team, and over 0:03:55.640 --> 0:04:00.360 time we build out the bondie TF infrastructure a lot. 0:04:00.720 --> 0:04:03.880 And so my role currently is to oversee that business 0:04:03.920 --> 0:04:06.800 more broadly in terms of, you know, the products that 0:04:06.840 --> 0:04:10.360 we're designing, engaging with clients on their experiences, how we 0:04:10.360 --> 0:04:14.320 can improve the products, working with broker dealers, index providers, 0:04:14.440 --> 0:04:17.039 all of the folks who are very important to the 0:04:17.080 --> 0:04:20.360 ecosystem to make sure everything functions well. Just to overall 0:04:20.440 --> 0:04:23.800 make sure investors are getting the outcomes that they're expecting. 0:04:24.240 --> 0:04:25.960 You know, Steve, I was kind of joking at the 0:04:25.960 --> 0:04:28.320 beginning they're talking about how bonds were boring. Of course 0:04:28.360 --> 0:04:30.760 they are. They've always been very exciting, but clearly in 0:04:31.400 --> 0:04:34.719 that decade of zero interest rate policy or near zero 0:04:34.760 --> 0:04:37.760 interest rate policy. There's just been this massive sea change 0:04:37.800 --> 0:04:42.440 now with higher yields. Every I think investors strategist we 0:04:42.520 --> 0:04:46.600 spoke to recently heading into twenty three was much more 0:04:46.600 --> 0:04:51.240 bullish on bonds. That's kind of reversing a little bit now, 0:04:51.279 --> 0:04:52.719 you know, I'm looking at you know, some of the 0:04:52.720 --> 0:04:56.720 eye shares, uh, you know, big fixed income ETFs, tlt, 0:04:57.680 --> 0:05:02.440 lqd H, the aggregate agg really off to a strong 0:05:02.520 --> 0:05:04.960 year like the stock market, and now kind of back 0:05:05.000 --> 0:05:07.840 to maybe flat flatish on the year, up a little um. 0:05:08.600 --> 0:05:10.680 How do you see the rest of the year shaping out? 0:05:10.800 --> 0:05:13.920 You know, clearly inflation and the FED are the most 0:05:13.960 --> 0:05:18.680 important elements of how bonds will do this year. There 0:05:18.680 --> 0:05:23.279 seems to be a rethink going on about how high 0:05:23.279 --> 0:05:25.919 the Fed will actually hike and when and if inflation 0:05:25.920 --> 0:05:31.080 will actually back normalize back to that two percent area. 0:05:30.920 --> 0:05:33.080 So how are you thinking that you know, how the 0:05:33.120 --> 0:05:36.279 rest of the year will play out in fixed income? Yeah, 0:05:36.360 --> 0:05:39.400 it's it's been a bumpy ride. Last year, as you know, 0:05:39.680 --> 0:05:42.240 was the worst bomb marker we've seen in probably forty years. 0:05:42.440 --> 0:05:45.480 It was. It was incredibly challenging. I think to your point, 0:05:45.560 --> 0:05:49.520 investors have been lulled into you know a bit of well, 0:05:49.600 --> 0:05:52.240 rates are low for long and maybe low forever. That 0:05:52.440 --> 0:05:55.760 changed very, very dramatically last year. I think investors were 0:05:55.800 --> 0:05:59.040 looking forward to this idea that, oh, twenty twenty three, 0:05:59.040 --> 0:06:01.080 where these higher yields, it's great, I'm going to allocate, 0:06:01.440 --> 0:06:03.919 I'm going to fix my forty, so to speak. And 0:06:03.960 --> 0:06:05.400 then all of a sudden we got the slew of 0:06:05.560 --> 0:06:08.520 very positive data, and you know, that made everybody, as 0:06:08.520 --> 0:06:11.000 you said, rethink. It does feel like people rethink this 0:06:11.040 --> 0:06:14.520 and maybe overthink it every week, if not more more 0:06:14.560 --> 0:06:17.159 frequently than that. I'm a little more sanguine on this. 0:06:17.240 --> 0:06:19.839 I think that, you know, there is a limit to 0:06:20.400 --> 0:06:23.520 how high rates can go. So I think that the 0:06:23.560 --> 0:06:25.839 Fed's going to be watching the data closely. You know, 0:06:25.960 --> 0:06:29.960 we've maintained a view that consistently that inflation was probably 0:06:30.040 --> 0:06:32.760 not going to go down in a straight line. We've 0:06:32.800 --> 0:06:34.479 been saying that for quite a while, and I think 0:06:34.480 --> 0:06:36.159 that's just what we're seeing now. There's going to be 0:06:36.160 --> 0:06:39.080 some bumps along the way. We do think that, you know, 0:06:39.120 --> 0:06:41.920 it's possible that they may hike a little bit more 0:06:42.000 --> 0:06:45.599 than what was originally expected, and then they may hold 0:06:45.680 --> 0:06:48.120 rates at that elevated level. If you just look at 0:06:48.120 --> 0:06:50.599 the futures market, I think, you know, the peak rate 0:06:50.680 --> 0:06:54.240 is somewhere around and it's probably you know, it's bumping around, 0:06:54.279 --> 0:06:56.640 you know, day over day, but it's somewhere, you know, 0:06:56.720 --> 0:06:59.840 closer to a five and a half percent terminal rate 0:06:59.839 --> 0:07:02.320 than was before, but not quite there. So I think 0:07:02.320 --> 0:07:04.440 there's going to be You're going to see the market, 0:07:04.480 --> 0:07:06.880 you know, kind of trying to find a level here. 0:07:07.160 --> 0:07:09.960 And I do believe that there's there's a limit to 0:07:10.000 --> 0:07:13.400 this because whether people believe it or not, ultimately these 0:07:13.480 --> 0:07:16.600 hikes will impact the economy. They will take hold. There's 0:07:16.640 --> 0:07:18.720 debate about win that can happen, but it will happen. 0:07:18.760 --> 0:07:21.360 It's happened every single time in the past, so they're 0:07:21.520 --> 0:07:23.480 cognizant of that and they don't want to, you know, 0:07:23.520 --> 0:07:25.720 go too fast and too far. Yeah. See, if do 0:07:25.760 --> 0:07:27.920 you guys have an internal view in terms of what 0:07:28.040 --> 0:07:31.600 else to expect, it sounds like maybe two more twenty 0:07:31.600 --> 0:07:34.640 five basis point hikes that we can expect from the FED. 0:07:34.720 --> 0:07:37.160 We have had this discussion over the last couple of 0:07:37.160 --> 0:07:40.280 weeks of some FED members arguing, even for during the 0:07:40.320 --> 0:07:42.720 last meeting, that they should go with fifty basis points 0:07:42.720 --> 0:07:45.360 that potentially the next to the I think the March 0:07:45.400 --> 0:07:47.360 meeting could be fifty basis points. So do you have 0:07:47.400 --> 0:07:50.160 an internal view on what we can expect. I think 0:07:50.240 --> 0:07:53.960 we're we're still thinking that they probably end up somewhere, 0:07:54.200 --> 0:07:56.440 you know, at five and a quarter or maybe one more. 0:07:56.520 --> 0:07:58.160 But but it's really like, if you look at the 0:07:58.240 --> 0:08:01.720 market that's pretty consistent us, we get, you know, a 0:08:01.960 --> 0:08:05.800 really outsized inflation surprise. Um Like I said, we we've 0:08:05.840 --> 0:08:09.239 been pretty consistent that it's not going to be linear. 0:08:09.400 --> 0:08:11.320 It's there, They're going to be some bumps along the way. 0:08:11.360 --> 0:08:14.080 So I think this is you would like to see 0:08:14.080 --> 0:08:16.720 it go down more consistently. But but this this isn't 0:08:16.760 --> 0:08:19.760 really surprising us all that much. Um So, like I said, 0:08:19.800 --> 0:08:22.640 I think I think the market's basically pricing in, you know, 0:08:22.680 --> 0:08:24.640 around five and a quarter, between five and a quarter, 0:08:24.720 --> 0:08:27.760 five and a half. As a terminal point, you know, Steve, 0:08:28.200 --> 0:08:31.040 as I mentioned of the opening, the spent some eye 0:08:31.040 --> 0:08:35.160 popping flows into into the fixed income ETF space at 0:08:35.240 --> 0:08:39.120 Block black Rock ey Shares and really throughout the industry. 0:08:39.520 --> 0:08:42.240 Where are you seeing most of the flows go into? What? 0:08:42.400 --> 0:08:45.120 What is it? Sort of means you, when you look 0:08:45.120 --> 0:08:47.640 at where the flows are going, is it primarily the 0:08:47.840 --> 0:08:51.040 safety haven? You know that TLT, the Treasury's ETF, that 0:08:51.120 --> 0:08:53.640 sort of thing, where you know, is our interest across 0:08:53.720 --> 0:08:56.840 the whole portfolio? Well, it's It's interesting. If you would 0:08:56.880 --> 0:09:01.199 have told me last January that the large just category 0:09:01.240 --> 0:09:04.760 of inflows would have been treasuries, I would have probably disagreed, 0:09:04.800 --> 0:09:07.960 given the you know, how hawkish everyone was in the 0:09:08.040 --> 0:09:10.480 view that you know, rates were We're going to accelerate 0:09:10.960 --> 0:09:13.000 quite a lot. But as it turns out for US anyway, 0:09:13.040 --> 0:09:15.160 it was you know, we took in over one hundred 0:09:15.160 --> 0:09:18.000 billion in the US one hundred and twenty five billion globally. 0:09:18.360 --> 0:09:21.640 Of that one hundred billion, sixty five billion was in treasuries, 0:09:21.679 --> 0:09:23.679 which was you know again, I think I think most 0:09:23.720 --> 0:09:26.679 people would have been quite surprised that was followed by 0:09:26.720 --> 0:09:30.600 investment grade multisector of municipals UM so Yes, to your point, 0:09:30.600 --> 0:09:33.280 it was all high quality. I do think that was 0:09:33.320 --> 0:09:37.960 a reflection of investors saying, these yields are attractive. I 0:09:38.000 --> 0:09:40.240 can't call the top. I'm not going to try to 0:09:40.280 --> 0:09:42.880 call the top. That's that's pretty tough to get, right, 0:09:43.200 --> 0:09:46.640 so I'm going to start allocating, but you know, I'm 0:09:46.679 --> 0:09:49.520 a little bit worried about where we're going here in 0:09:49.640 --> 0:09:52.360 terms of do we tip into a recession? You know, 0:09:52.400 --> 0:09:55.199 what do we what do we ultimately end up doing 0:09:55.240 --> 0:09:56.640 as far as a land and go. So I'm going 0:09:56.640 --> 0:09:59.080 to buy high quality. The part that helped that out 0:09:59.080 --> 0:10:00.600 the most. If you think about at the front end 0:10:00.600 --> 0:10:02.760 of the yield curve, you know, you have two year 0:10:02.800 --> 0:10:04.880 notes that are now above four and a half percent, 0:10:04.960 --> 0:10:08.080 and so it they didn't have to go down in 0:10:08.160 --> 0:10:11.520 credit to get yield. They were seeing yieldsy haven't seen 0:10:11.559 --> 0:10:14.559 them many many years that that trends persisted this year. 0:10:14.600 --> 0:10:17.920 We're seeing high quality flows this year as well to 0:10:18.000 --> 0:10:20.880 the flows sense to the HyG, the high yield ETF. 0:10:21.200 --> 0:10:24.679 I'm guessing they track closer with risk sentiment in the 0:10:24.720 --> 0:10:26.680 stock market or are you not seeing them there that 0:10:26.960 --> 0:10:29.559 they're more of a risk on type of product. Yeah, 0:10:29.600 --> 0:10:33.960 I agree with that, and particularly HyG has become very 0:10:34.160 --> 0:10:37.760 entrenched in the you know, high yield ecosystem, and so 0:10:37.800 --> 0:10:40.560 it does tend to react very quickly to sentiments. So 0:10:40.920 --> 0:10:42.960 you know, when you have risk on, you'll you know, 0:10:43.000 --> 0:10:45.840 you see equities rally, you'll probably see flows into HyG 0:10:45.960 --> 0:10:47.880 When you have risk off, as you said, you'll probably 0:10:47.880 --> 0:10:50.360 see the opposite, and it does happen to react quickly 0:10:50.360 --> 0:10:52.559 in a large size. I want to ask you more 0:10:52.559 --> 0:10:55.480 about your predictions for what you see for the bond 0:10:55.559 --> 0:10:58.280 ETF space down the line. But but first you mentioned 0:10:58.280 --> 0:11:00.679 the two year note. Um, it's above four and a 0:11:00.679 --> 0:11:03.280 half percent. I'm wondering what you think the bond market 0:11:03.360 --> 0:11:05.679 is telling us right now, given the rise and eels 0:11:05.679 --> 0:11:08.720 that we've seen in recent days. Yeah, I think it 0:11:09.000 --> 0:11:13.200 was this adjustment. The market had started to get to 0:11:13.280 --> 0:11:17.320 a place where, Okay, the end is in sight, all 0:11:17.440 --> 0:11:20.080 is going according to plan, and you know, we can 0:11:20.160 --> 0:11:22.360 even start thinking about a FED pivot. You know, it 0:11:22.440 --> 0:11:26.040 depends on what speaker, what day. But I think, you know, 0:11:26.120 --> 0:11:29.800 the last speech by Powell sort of calmed the market 0:11:29.800 --> 0:11:31.360 down and I think got them to a place where 0:11:31.360 --> 0:11:32.599 it's like, Okay, I can see the light at the 0:11:32.679 --> 0:11:36.560 end of the tunnel. This recent slew of data really 0:11:36.720 --> 0:11:40.000 upended that a bit, where you saw strong employment numbers, 0:11:40.040 --> 0:11:43.920 you know, really really outside the you know, the manufacturing 0:11:43.920 --> 0:11:47.760 indicators PMI et cetera. Were strong, Inflation did not come down, 0:11:48.200 --> 0:11:51.120 you know, as much as as as people had expected 0:11:51.200 --> 0:11:54.120 or hope, and so what you're seeing the market is 0:11:54.160 --> 0:11:57.560 just sort of pricing in, you know, combination of you know, 0:11:57.600 --> 0:12:01.120 maybe an additional hike or you know, higher for longer, 0:12:01.120 --> 0:12:02.720 if you will. And so I think it was just 0:12:02.800 --> 0:12:05.959 that adjustment. We've seen this so remember I think last 0:12:06.040 --> 0:12:08.400 year the peak was somewhere closer to four and a 0:12:08.440 --> 0:12:11.720 half and so we've been on this journey before. We 0:12:11.760 --> 0:12:14.839 may test at some point above four percent again, But 0:12:15.160 --> 0:12:17.560 like I said, I don't think that we're going to 0:12:17.559 --> 0:12:21.280 see yields jumped sharply higher. You may see them grinding 0:12:21.280 --> 0:12:23.000 a little bit higher, but I think we're going to 0:12:23.040 --> 0:12:24.560 be more or less in a range. It might be 0:12:24.559 --> 0:12:26.800 a voliable one as people continue to price in and 0:12:26.840 --> 0:12:35.960 price out what they what the Fed may do. Yeah, Steve, 0:12:36.000 --> 0:12:38.680 you mentioned earlier that notion of you know, bonds being 0:12:38.760 --> 0:12:42.000 that forty percent of the portfolio on a traditional sixty 0:12:42.120 --> 0:12:46.160 forty portfolio. Last year was just one of those bad 0:12:46.240 --> 0:12:50.400 years where that stock and bond correlation reversed. You know, 0:12:51.000 --> 0:12:53.920 typically when you see stocks go up, you would expect 0:12:54.200 --> 0:12:57.439 bonds to fall, yields to go up. As a result 0:12:57.840 --> 0:13:01.400 last year, obviously we saw stocks and bonds fall together 0:13:01.920 --> 0:13:05.480 and sort of eliminate that, you know, hedging aspect of 0:13:05.760 --> 0:13:08.920 a bond in a in a sixty forty portfolio. What 0:13:09.000 --> 0:13:13.080 do you think we need to happen to see happen 0:13:13.280 --> 0:13:17.360 to get that correlation back to what everyone expects it 0:13:17.440 --> 0:13:19.240 to be. I mean, is it a is it a 0:13:19.360 --> 0:13:23.040 narrative shift, is it a sentiment shift? Or is it 0:13:23.080 --> 0:13:25.600 really about the data and inflation normalizing? I mean, do 0:13:25.640 --> 0:13:27.640 we really have to wait for two percent inflation to 0:13:27.679 --> 0:13:31.480 see that old sort of trusted correlation re emerge. So 0:13:31.520 --> 0:13:33.920 it's a combination of some of the things you mentioned. 0:13:33.920 --> 0:13:37.400 So as long as the FED is being very hawkish, 0:13:37.480 --> 0:13:40.760 I think that that sort of perpetuates what you just said. 0:13:40.800 --> 0:13:43.640 So you'll go up, you have risk off, you have 0:13:43.640 --> 0:13:46.080 equity sell offs, how you'll tell us or what have you. 0:13:46.520 --> 0:13:48.600 I think when the market comes to believe that, okay, 0:13:49.040 --> 0:13:52.240 we're we're reaching sort of a you know, a leveling 0:13:52.280 --> 0:13:54.880 off place here. And I do think, you know, we 0:13:54.960 --> 0:13:57.480 may be starting to see that with the olds, you know, 0:13:57.600 --> 0:13:59.720 bumping up closer to four percent, And like I said, 0:13:59.720 --> 0:14:02.680 I'm of the view that we will pounce around in 0:14:02.720 --> 0:14:06.840 this range anyway, But I think investors will start seeing 0:14:06.880 --> 0:14:10.040 that traditional behavior. So as an example, when you don't 0:14:10.080 --> 0:14:12.680 have a hawkish speech in the market, you do tend 0:14:12.679 --> 0:14:15.720 to see the traditional correlation. Where effequities are selling off, 0:14:15.760 --> 0:14:18.720 you'll see yields trend lower. I think it was really 0:14:18.720 --> 0:14:20.960 about getting to that level. I think we're almost there, 0:14:21.000 --> 0:14:23.120 and I think at these levels there's a lot of 0:14:23.200 --> 0:14:27.400 diversification value in yields right now. So you know, you 0:14:27.480 --> 0:14:29.680 need to have a calming down of all the hawkish 0:14:29.960 --> 0:14:32.200 speeches and all that stuff, But I think we're we're 0:14:32.240 --> 0:14:35.680 getting there. The thing that Mike was referencing, I think 0:14:35.760 --> 0:14:37.320 because I wrote it down, I liked what you said. 0:14:37.480 --> 0:14:39.520 You said a lot of people are thinking, I'm going 0:14:39.560 --> 0:14:42.720 to fix the forty part of the sixty forty, and 0:14:42.840 --> 0:14:46.040 I think you guys are saying that advisor sixty forty 0:14:46.040 --> 0:14:49.280 portfolios are under allocated to fixed income by nine percent, 0:14:49.480 --> 0:14:52.320 so and now is a once in a many year 0:14:52.320 --> 0:14:54.920 opportunity to rebalance portfolios. So maybe you can tell us 0:14:54.960 --> 0:14:57.760 more about that. Yeah, it's been interesting. So if you 0:14:57.800 --> 0:15:00.680 think about the last decade, we've had quantity steve easing, 0:15:01.240 --> 0:15:04.040 we've had yields. You know, if you look at where 0:15:04.080 --> 0:15:06.640 the ten year bottomed out, it was fifty basis points, 0:15:07.320 --> 0:15:09.720 which is remarkable. The two year bottomed out somewhere in 0:15:09.760 --> 0:15:12.240 the teens, you know, twelve or fifteen basis points. So 0:15:12.680 --> 0:15:16.200 a lot of investors decided to you know, stay out 0:15:16.200 --> 0:15:18.200 of the market, or you know, they had to take 0:15:18.200 --> 0:15:20.280 on a lot of additional risk to get that yield. 0:15:20.320 --> 0:15:23.520 So whether that was overweighting high yield in that traditional 0:15:23.560 --> 0:15:25.800 part of the portfolio where maybe they would have preferred 0:15:26.080 --> 0:15:28.440 higher quality assets but they had to have the income, 0:15:28.880 --> 0:15:33.040 or things like alternatives and private credit, private equity, you know, 0:15:33.120 --> 0:15:37.040 asset classes of those natures. Now investors are looking at 0:15:37.080 --> 0:15:40.440 this market, the public fixed income markets, and realizing that 0:15:40.480 --> 0:15:43.960 they can quote unquote fix their forty by de risking 0:15:44.000 --> 0:15:46.960 it to varying degrees. So you don't have to be 0:15:47.760 --> 0:15:49.520 you know, the majority in high yield to get a 0:15:49.520 --> 0:15:51.560 certain yield target. You can allocate to the front end 0:15:51.600 --> 0:15:54.560 of the treasury curve and get you know, yields that 0:15:54.640 --> 0:15:56.160 you were you were seeing at some point the hig 0:15:56.200 --> 0:15:59.720 yield markets. So it really is an opportunity to get 0:15:59.720 --> 0:16:02.640 back to what that forty was supposed to do, which 0:16:02.760 --> 0:16:05.760 is diversify your risk assets. And then you think about 0:16:05.760 --> 0:16:08.440 its simple. Okay, I have the SMP five hundred, what 0:16:08.480 --> 0:16:11.200 do I want to hold against it? A very simple, 0:16:11.360 --> 0:16:13.720 you know world would be I'll hold long data treasuries 0:16:13.760 --> 0:16:16.360 against it. Mike for the reason you said, which was, 0:16:16.640 --> 0:16:19.400 I know that if the equity market sells off, probably 0:16:19.440 --> 0:16:22.240 long treasuries will rally. But investors are being a lot 0:16:22.240 --> 0:16:25.640 more intentional than that. They are looking at building out 0:16:25.680 --> 0:16:29.720 that forty in a much more deliberate way. So, yes, 0:16:29.760 --> 0:16:33.320 allocating building blocks to treasuries investment grade, having some bit 0:16:33.360 --> 0:16:36.600 of high yield. And I think what we're advocating is 0:16:36.640 --> 0:16:40.000 to get away from this whole active passive paradigm, which 0:16:40.000 --> 0:16:41.840 we think is really just you know, kind of an 0:16:41.920 --> 0:16:45.640 archaic construct. We think really it's both. And so we're 0:16:45.720 --> 0:16:51.520 encouraging investors to use bondy tfs for that core diversification purpose. 0:16:51.760 --> 0:16:54.080 And why is that Well, because you know what they're 0:16:54.120 --> 0:16:55.920 going to do. You could see what the holdings are. 0:16:55.920 --> 0:16:58.600 They're transparent, you know what the strategy is. Because they're 0:16:58.600 --> 0:17:02.880 following an index. Use that predictability as the diversifying part 0:17:02.880 --> 0:17:06.320 of your portfolio. Okay, whether that's treasuries, investment grade, some 0:17:06.359 --> 0:17:09.320 combination of both, and then you can use an active 0:17:09.359 --> 0:17:13.000 manager to get that extra kick in your forty as well. 0:17:13.080 --> 0:17:16.919 So it's not active versus pass if it's both. And 0:17:17.040 --> 0:17:19.280 obviously you know each investor will have to decide what 0:17:19.320 --> 0:17:21.520 that mix looks like. But we do believe that both 0:17:21.560 --> 0:17:23.439 can play a role in that forty and get you 0:17:23.480 --> 0:17:26.200 to a much more robust place than you were before. 0:17:27.000 --> 0:17:30.119 I've never heard somebody argue that before that it should 0:17:30.119 --> 0:17:33.280 be both. It should be both. Yeah, absolutely, I mean 0:17:33.320 --> 0:17:35.040 it's a great time to do it because you know, 0:17:35.200 --> 0:17:37.359 like like you said, it's the first time in you know, 0:17:37.440 --> 0:17:39.800 ten years, done a dozen years that you've been able 0:17:39.800 --> 0:17:42.200 to get these yields and d risk at the same time, 0:17:42.200 --> 0:17:45.600 which is pretty remarkable, you know, Steve. It's it's interesting 0:17:45.600 --> 0:17:47.600 when I think and correct me if I'm wrong and 0:17:47.640 --> 0:17:50.040 how I'm thinking about this. But what I think of 0:17:50.119 --> 0:17:53.280 sort of the audience or the user base for say 0:17:53.359 --> 0:17:56.560 equity ETFs. I think of maybe a lot of self 0:17:56.600 --> 0:18:02.399 directed retail investors, you know, average sort of fuxing around 0:18:02.440 --> 0:18:06.200 with their retirement or just their you know, personal trading account, 0:18:06.640 --> 0:18:11.480 and you know, you're your big equity ETFs are pretty 0:18:11.520 --> 0:18:14.560 easy to understand for that audience. You know, you buy 0:18:14.760 --> 0:18:17.800 the Russell two thousand, you know, buy all the small 0:18:17.800 --> 0:18:21.560 cap stocks by Chinese, large caps, by you know, whatever 0:18:21.600 --> 0:18:23.800 it is. You know. And again I could be wrong 0:18:23.840 --> 0:18:27.440 about this, but I don't see that cohort of investors 0:18:27.480 --> 0:18:31.480 really knowing what they're doing. Uh. As well with fixed 0:18:31.520 --> 0:18:35.359 income ETFs, and my impression is that the user base 0:18:35.520 --> 0:18:39.320 is different that they're it's more of a professional user base. 0:18:39.560 --> 0:18:43.640 Even active bond fund managers a lot of times will park, 0:18:44.520 --> 0:18:47.800 you know, some some inflows into ETFs until they can 0:18:47.800 --> 0:18:50.359 pick out the bonds they want talk to us about. 0:18:50.400 --> 0:18:52.719 That sort of difference is a might write in that thing. 0:18:52.840 --> 0:18:56.120 You know. It's kind of a different user base between 0:18:56.840 --> 0:18:59.800 the different asset classes and ETFs. Well, actually, yeah, I 0:18:59.840 --> 0:19:03.440 think it's um it's a pretty diversified investor base. It's 0:19:03.440 --> 0:19:06.640 pretty broad, and so we we actually do see direct 0:19:07.040 --> 0:19:09.760 flows into fixed income ets now, they do tend to 0:19:09.800 --> 0:19:13.720 be the ones that people know about. Like agg those 0:19:13.720 --> 0:19:16.400 folks will will know that, Okay, that's the bond market. 0:19:16.440 --> 0:19:18.159 I'm just gonna buy that. I'm not an expert. I 0:19:18.160 --> 0:19:20.360 don't want to you know, try to try to get 0:19:20.400 --> 0:19:23.240 too too smart about it or you know, get too granular. 0:19:23.280 --> 0:19:25.440 I'll just buy the bond marketing. So you'll you'll tend 0:19:25.440 --> 0:19:28.080 to see that with the direct investors, You're right that 0:19:28.240 --> 0:19:30.720 a lot of the you know, if you will, power 0:19:30.840 --> 0:19:36.000 users tend to be these institutional investors, active managers, insurance companies, pensions, 0:19:36.000 --> 0:19:38.680 et cetera. But then there is a very large part 0:19:38.760 --> 0:19:42.600 of the you know, wealth client base, the advisor base 0:19:42.840 --> 0:19:45.920 um that uses bond ets through things like models. Right, 0:19:45.960 --> 0:19:48.960 So models are these recipes for here's how you build 0:19:48.960 --> 0:19:52.800 a portfolio. More and more firms are going that direction 0:19:52.880 --> 0:19:56.440 where instead of saying, hey, you know, buy this set 0:19:56.440 --> 0:19:59.000 of equity ets and then you know, oh for your bonds, 0:19:59.080 --> 0:20:01.399 just go out and you know, build some ladder using 0:20:01.600 --> 0:20:06.000 municipal bonds that you like, they're advocating more for here's 0:20:06.040 --> 0:20:08.800 what your portfolio should look like. On the equity side, 0:20:09.040 --> 0:20:11.560 here's the recipe for that. It's these ETFs. On the 0:20:11.640 --> 0:20:14.200 fixed income side, you can use a combination of these 0:20:14.240 --> 0:20:19.040 ETFs in the model portfolios are a really fast growing business, 0:20:19.040 --> 0:20:21.080 and more and more investors and for that matter of 0:20:21.119 --> 0:20:24.439 advisors like it as well because it allows them to 0:20:24.560 --> 0:20:27.040 free up their time to focus on things like you know, 0:20:27.119 --> 0:20:29.199 tax planning, things like that, and so we're starting to 0:20:29.240 --> 0:20:32.120 see that a lot. So that I think is the 0:20:32.160 --> 0:20:35.280 main you know, growth area, but we're seeing a ton 0:20:35.320 --> 0:20:37.800 of growth in the institutional side as well. To your point, 0:20:38.119 --> 0:20:40.480 And the last thing I would say about it is 0:20:40.920 --> 0:20:44.280 your traditional bond pickers. Some people really love that, right, 0:20:44.800 --> 0:20:47.000 It's it's interesting and fun for them to do it. 0:20:47.280 --> 0:20:49.880 But even they've come to realize that if I am 0:20:49.880 --> 0:20:52.320 I bond ladder person, I can go ahead and do 0:20:52.359 --> 0:20:54.919