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Speaker 1: Joining our conversation now as Rick Reader, CIO of Global

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Speaker 1: Fixed Income at Blackrock, and you're getting into the ETF

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Speaker 1: game yourself as well, Rick, So we do want to

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Speaker 1: talk about that. But let me first ask you about

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Speaker 1: the overriding trend that Eric was just outlining. We don't

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Speaker 1: have this avalanche into fixed income ETFs that we've been

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Speaker 1: seeing for pretty much the entire year so far.

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Speaker 2: Why do you think that is? So? I think that's

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Speaker 2: a couple of things. Well, the primary one being the

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Speaker 2: Treasury is issuing about two hundred was a two hundred

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Speaker 2: and ninety nine billion bills a week gross, about seventy

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Speaker 2: billion net at five and a half percent. So you

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Speaker 2: think about it, You functionally can sit in cash at

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Speaker 2: five and a half, you know, or you go to

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Speaker 2: the long end of the yield curve and get less

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Speaker 2: than four, and you've got to take you very long

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Speaker 2: interest rate, very long duration, very long interest rate sensitivity.

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Speaker 2: I mean, these cash levels are pretty high, and some

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Speaker 2: people say, gosh, I'll take that. We'll talk about you know,

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Speaker 2: can you get yielded fixed income? You can? But boy,

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Speaker 2: you know, if you carry at five and a half,

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Speaker 2: or you build a portfolio today, that gets you some

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Speaker 2: income and then go in. You know, there's a good

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Speaker 2: chunk of the equity market that's below the average multiple.

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Speaker 2: So you know, if you're filling out your investment portfolio

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Speaker 2: card today and you say, gosh, what am I going

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Speaker 2: to do? By gosh, I'll carry high and then I'll

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Speaker 2: buy some equities that I have some upside and that

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Speaker 2: that works pretty well.

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Speaker 3: And I do love that you talk about equities even

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Speaker 3: as a bond guy. But I want to stick to

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Speaker 3: the bonds right now, because if you look at the

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Speaker 3: bond market in ETF's broken down by maturity, I call

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Speaker 3: my eye that for the past two months, you've seen

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Speaker 3: a lot of money come out of short duration fund

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Speaker 3: so those in maturing in a year to three years.

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Speaker 3: But then you take a look at ultrashort and it's

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Speaker 3: still holding on to all of those assets that it's

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Speaker 3: taken in so far this year. What is it about

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Speaker 3: the short space that people are getting out of right now?

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Speaker 2: So so first of all, I say, you know, you've

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Speaker 2: got an inverted curve and today functionally sitting in asher

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Speaker 2: cash Like I know, I think I said it on

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Speaker 2: the show we did the other day that you can

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Speaker 2: own commercial paper, that six month, nine month commercial paper

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Speaker 2: and clip over six yield, which is pretty incredible as

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Speaker 2: you think about. If you're a gosh, I could do that,

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Speaker 2: maybe all own parts of the high yield market and

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Speaker 2: get parts of VM and get higher numbers eight, nine, ten,

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Speaker 2: and so to sit in some of with an inverted curve,

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Speaker 2: to sit in some of these areas that are not

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Speaker 2: paying you a lot doesn't make It doesn't make a

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Speaker 2: lot of sense. So I'm sure there's some of that

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Speaker 2: dynamic of play today. I want to excite. I mean,

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Speaker 2: you look at so I got well.

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Speaker 1: Rick, I want to you mentioned the inverted curve, and

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Speaker 1: I've just been kind of obsessing over this for the

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Speaker 1: last few hours, and of course this year we've all

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Speaker 1: been watching that. Now. The reason I've been thinking about

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Speaker 1: it ed Yardanny thinks he has an explanation for the

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Speaker 1: incredible inversion we've seen. I mean, three months, ten year

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Speaker 1: over one hundred basis point one hundred fifty basis points right.

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Speaker 1: And everyone's saying, does that mean a recessions coming or

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Speaker 1: what is it signaling? Because the economy, the real economy

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Speaker 1: data that we have looks very good. So Denny says,

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Speaker 1: maybe the inversion of the yield curve just means that

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Speaker 1: inflation is coming down at a rapid pace and not

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Speaker 1: necessarily flagging a recession as it has the last you know,

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Speaker 1: seven times. What's your take on that debate.

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Speaker 2: So, I think the inversion of the yield curve is

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Speaker 2: a good indicator of recession, but it's been wrong. I

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Speaker 2: think it's like it predicted nine and the last three recessions.

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Speaker 2: I don't think it's a great I don't think it

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Speaker 2: is a great indicator. And you think about what's happening today.

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Speaker 2: You used to have an economy that was very interest

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Speaker 2: rate sensitive. The economy today is not interestrate sensitive. The

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Speaker 2: companies that borrow for capex, or the companies that spend

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Speaker 2: on capex that you think about the big tech companies

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Speaker 2: are spending on AI or the Google's, Microsoft, the apples,

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Speaker 2: they don't really borrow, They use free cash flow. People

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Speaker 2: have already locked in their mortgages at three three and

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Speaker 2: a half, so you don't have interstrate sensitivity there. The

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Speaker 2: economy is just not And you think about all the

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Speaker 2: hiring in the economy, healthcare, education, these are not intrasensitive dynamics.

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Speaker 2: So what happens is the fed lifts the front end

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Speaker 2: of the yield curve up, and you don't create that

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Speaker 2: much of an impact. But like you say, inflation is

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Speaker 2: coming down, so you create this inversion and an economy

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Speaker 2: that's actually resistant to or less sensitive to interest rate hikes,

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Speaker 2: and so it's not I would argue, it's not a

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Speaker 2: good indicator at all.

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Speaker 4: Speaking of indicators, I read an interview with you from

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Speaker 4: a couple of weeks ago. You talked about you'd pay

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Speaker 4: a lot less attention to surveys where it's people's opinions

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Speaker 4: about what's going to happen. You'd much rather read earnings reports,

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Speaker 4: and so we have a lot of earnings coming up.

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Speaker 4: I'm just curious what you're looking for in the next

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Speaker 4: couple of weeks there.

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Speaker 2: Yeah, I mean, by the way, I find some of

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Speaker 2: these surveys that where they poll five hundred people, they're

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Speaker 2: similar to election polls, like people talk about what they

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Speaker 2: feel like and then actually they could be in a

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Speaker 2: bad mood, but they keep spending. So I don't find

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Speaker 2: these surveys terribly robust. And then it's just swings like

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Speaker 2: everything else with son of me. What am I looking for?

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Speaker 2: I'm looking for top line I'm looking for what are

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Speaker 2: revenues on a top line basis in economy that's operating

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Speaker 2: pretty well. But I'm also looking at there's real dispersion

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Speaker 2: in some of these companies today. See you look at

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Speaker 2: some of the retailers, appare electronics, furniture that have been

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Speaker 2: struggling a bit, but gosh you then you look at travel,

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Speaker 2: It's operating really really well, the airlines, the cruise lines,

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Speaker 2: the hotels. So I'm looking at dispersion. And then quite frankly,

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Speaker 2: you know, one of the things that around you know,

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Speaker 2: tech drives so much today is ham what's happening with search,

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Speaker 2: what's happening with advertising spend? And those are going to

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Speaker 2: be those are going to be pretty pretty important numbers

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Speaker 2: to look at today. But I'm pretty keyed in on

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Speaker 2: a top line revenue and our company is able to

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Speaker 2: keep their margins at a reasonably stable level given some

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Speaker 2: of the input costs have gone up.

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Speaker 3: Well, Rick, it's going to be a really interesting week

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Speaker 3: for you because I believe we have one hundred and

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Speaker 3: sixty five companies in the S and P five hundred

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Speaker 3: reporting this week. We don't have too much time with

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Speaker 3: you before the break. You're sticking with us. But before

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Speaker 3: we go to commercial, I do want to ask about

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Speaker 3: your thoughts on high yield credit because it's not lost

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Speaker 3: on me that junk has been really performing well this year.

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Speaker 3: Then you take a look at the flows. You've had

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Speaker 3: nearly six billion dollars leave from junk ets, whereas fixed

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Speaker 3: and comeutfs overall have taken in over one hundred billion dollars.

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Speaker 3: Why does no one want to buy into this junk rally?

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Speaker 2: So a couple of things. One, I mean, you can

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Speaker 2: get yield in a bunch of other places we talked about,

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Speaker 2: were talked about some of the quality yields you can

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Speaker 2: get that are that are pretty attractive today. And you know,

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Speaker 2: quite frankly, part of HW yield today, if you're doing

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Speaker 2: it in a passive way, half the index trades are

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Speaker 2: tighter than three hundred spread and half trades above eight hundred.

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Speaker 2: So you're getting a lot of tight stuff and you're

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Speaker 2: getting a lot of what I argue, companies that are

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Speaker 2: under some stress. Part of why you know we're doing

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Speaker 2: this in our ETF is being selective around the names

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Speaker 2: that are actually paying you for the risk. That makes

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Speaker 2: a lot of sense. And then the other side of

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Speaker 2: it is, if you're using beta in your portfolio, equities

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Speaker 2: are doing a whole lot for you in terms of

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Speaker 2: using that beta bucket. If you can get income in

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Speaker 2: other ways, in safer ways, then you know that's what

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Speaker 2: you're saying. If you fill out your investment portfolio card

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Speaker 2: a lot of safe carry and then get the beta

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Speaker 2: that's really working for is has made a ton of rick.

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Speaker 1: It doesn't feel like you're being paid to take credit

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Speaker 1: risk here, You're just buying the yield curve. What do

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Speaker 1: you think about that?

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Speaker 2: That idea? So, I mean, listen, I mean part of

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Speaker 2: the argument against SI yield this year has been the

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Speaker 2: spreads not interesting at all, and but you can create

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Speaker 2: I mean, there are a bunch of parts of the

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Speaker 2: fixed income market that actually you are getting paid for

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Speaker 2: their parts. By the way, European high yield, if you're

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Speaker 2: a dollar investor, you swap it back to dollars and

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Speaker 2: you get paid well into the nines forgetting that. That

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Speaker 2: strikes me as fair. We talked about parts of em

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Speaker 2: where you're taking risk in Mexico, sovereign risk in Mexico

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Speaker 2: that you're getting paid to double digits local rates and

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Speaker 2: the securitization market is really interesting COLO market. You buy

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Speaker 2: triple A colos not taking a lot of credit risk.

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Speaker 2: The no needgencyy mortgage market is interesting today for the

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Speaker 2: same reason. I mean, the residential mortgage market's in good shape.

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Speaker 2: So listen, if you said, you know, what do you

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Speaker 2: think of high yield to high grade spreads if you're

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Speaker 2: just buying that current spread. Yeah, I mean it's a

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Speaker 2: fair argument. It's not that not certainly relative to history.

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Speaker 2: It's not that cheap. Most of the yield you're getting

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Speaker 2: is coming through the risk free rate and uh and

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Speaker 2: you know that's part of the idea of like you

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Speaker 2: can you can hide in parts of the front end

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Speaker 2: of the yeal curve and get a lot of carry.

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Speaker 2: Well specifically by the way, I mean, now, I was

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Speaker 2: youI to say one thing on the ETF we're running

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Speaker 2: a deray. You know you can create a seven. You know,

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Speaker 2: the yeal we're running is about a seven with an

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Speaker 2: interest where the duration or interestight sensitivity that's about two.

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Speaker 2: And so that that's pretty appealing today an environment where

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Speaker 2: where you know, do you want to take a lot

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Speaker 2: of a lot of rate risk out the curve?

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Speaker 3: Well, Rick, you mentioned Mexico, And I want to talk

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Speaker 3: international because I'm looking at the ETF bink right now

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Speaker 3: and I see that twenty two percent of the fun

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Speaker 3: is in non US credit. So when you think about

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Speaker 3: really the global fixed income market right now, where is

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Speaker 3: most of the opportunity are you going to find that

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Speaker 3: in US bonds? Or how much are you looking to

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Speaker 3: overseas relative to where you usually killed?

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Speaker 2: So I mean less in the US is always I mean,

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Speaker 2: and fixed income, it's pretty hard not to have the

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Speaker 2: US as a core part of your portfolio, particularly when

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Speaker 2: you've got these yields. I mean, for you, you know,

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Speaker 2: the front of the yelkurve. Real rates are over three

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Speaker 2: hundred base once. The average I think over the last

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Speaker 2: ten years is negative fifty, negative sixty. So it's pretty

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Speaker 2: hard not to have a core part of your portfolio

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Speaker 2: the US. But European credit you're being ig investment grade credit,

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Speaker 2: European high yield swap back to dollars. You can buy

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Speaker 2: a lot of reasonable companies without going far out the

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Speaker 2: yield curve. I had an awful lot of yield, particular

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Speaker 2: as a dollar investor. And then the other one being

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Speaker 2: we've talked about Mexico, Brazil, the rates market in Brazil Colombia,

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Speaker 2: there are you know, you're getting paid a local rates

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Speaker 2: as long as you're willing to take some currency risk

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Speaker 2: in a it's pretty they're pretty darn attractive and on

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Speaker 2: the currencies have actually not only not hurt you from

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Speaker 2: a hedging boy, they've actually been a real help. As

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Speaker 2: you know, you've got money flowing into Mexico as a

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Speaker 2: big winner in the deglobalization dynamic, same currency in Brazil

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Speaker 2: doing really well and just real quick.

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Speaker 4: This ETF is interesting to me because it does take

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Speaker 4: a lot of risk relative to other acts fixed income

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Speaker 4: ets which typically benchmark against the agg. Your benchmarked against

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Speaker 4: the universal, which is actually a little harder to beat

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Speaker 4: my opinion. How far out there are you purposely going?

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Speaker 4: Are you trying to add a lot of active share?

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Speaker 4: So this is a compliment to say the ag exposure

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Speaker 4: that a lot of people.

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Speaker 2: Have one hundred percent. I mean, you know, the idea

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Speaker 2: around us is to create there's a lot of investment

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Speaker 2: that goes into HyG into the traditional passive JNK traditional

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Speaker 2: passive fixed income et soich by the way, are great

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Speaker 2: ways to get exposure into those what we're trying to

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Speaker 2: do is create a more yield, but be really active

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Speaker 2: around getting where your exposure is coming from, being tactical

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Speaker 2: about you know, when it makes sense stone agency mortgages

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Speaker 2: versus owning emerging markets, et cetera. So the idea of

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Speaker 2: being we can we hold a higher yield and then

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Speaker 2: be aggressive about moving it around to where we think

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Speaker 2: the best opportunity presents itself. You know, there are times

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Speaker 2: of the new issue market presents opportunity. Now in the

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Speaker 2: securitization markets, you know as well. Chronicle banks are selling assets.

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Speaker 2: There's some assets that are that are that are trading

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Speaker 2: at are very reasonable levels.

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Speaker 3: All right, Rick, we got to leave it there, but

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Speaker 3: come back soon.

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Speaker 2: This was great.

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Speaker 3: That is Rick Reader of black Rock talking about b

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Speaker 3: I n C