1
00:00:11,761 --> 00:00:12,412
Hi everyone.
2
00:00:12,412 --> 00:00:13,997
My name is Dan Cassidy.
3
00:00:13,997 --> 00:00:16,766
Welcome back to UBS trending.
4
00:00:16,766 --> 00:00:18,918
There is a lot on top of mind right now
5
00:00:18,918 --> 00:00:21,137
for fixed income investors.
6
00:00:21,137 --> 00:00:21,955
My colleague
7
00:00:21,955 --> 00:00:25,592
Leslie Falconio, head of taxable fixed income strategy
8
00:00:25,742 --> 00:00:28,978
for the Americas from the UBS chief Investment Office,
9
00:00:29,212 --> 00:00:33,266
and I recently attended the Pimco Advisor Forum in Newport
10
00:00:33,266 --> 00:00:37,070
Beach, California, to hear how the top fixed income mindset
11
00:00:37,070 --> 00:00:40,073
Pimco are thinking about the current environment.
12
00:00:40,173 --> 00:00:42,692
What's ahead, and how to position.
13
00:00:42,692 --> 00:00:45,712
Leslie and I were invited to discuss these topics
14
00:00:45,712 --> 00:00:49,466
with managing director and generalist portfolio manager
15
00:00:49,582 --> 00:00:51,084
at Pimco, Mike.
16
00:00:51,084 --> 00:00:55,188
So we had an insightful and actionable discussion about the fixed
17
00:00:55,188 --> 00:00:59,042
income landscape, and a special thanks to the team at Pimco
18
00:00:59,042 --> 00:01:02,212
for having Leslie and I at their studio with Mike.
19
00:01:02,212 --> 00:01:04,631
It was an enjoyable experience.
20
00:01:04,631 --> 00:01:06,483
Here's the conversation.
21
00:01:06,483 --> 00:01:08,551
Yields are quite attractive in fixed income.
22
00:01:08,551 --> 00:01:11,371
If you take a look at starting yields in U.S.
23
00:01:11,371 --> 00:01:12,655
treasuries of five and a quarter
24
00:01:12,655 --> 00:01:13,339
and ten year notes,
25
00:01:13,339 --> 00:01:16,609
which is a real yield of of almost 3% on the back
26
00:01:16,609 --> 00:01:17,727
end of the yield curve about,
27
00:01:17,727 --> 00:01:20,396
you know, 3.5% or so in real yields.
28
00:01:20,396 --> 00:01:23,249
And you look at, you know, a high quality fixed income portfolio
29
00:01:23,249 --> 00:01:26,252
that could generate yields of six, seven, 8%.
30
00:01:26,569 --> 00:01:28,705
These are very attractive starting points.
31
00:01:28,705 --> 00:01:30,173
And again,
32
00:01:30,173 --> 00:01:30,740
peeling the lens
33
00:01:30,740 --> 00:01:32,342
back a little bit further, if you look at,
34
00:01:32,342 --> 00:01:35,695
you know, kind of starting book yields of again six seven 8%
35
00:01:36,229 --> 00:01:38,748
and 94% correlation of five year forward
36
00:01:38,748 --> 00:01:40,800
returns to those book yields.
37
00:01:40,800 --> 00:01:42,952
That's a pretty high quality return.
38
00:01:42,952 --> 00:01:45,722
That's a pretty high return for a high quality portfolio.
39
00:01:45,722 --> 00:01:49,109
And when we think about portfolio construction more broadly, we'd
40
00:01:49,109 --> 00:01:50,627
say whatever your allocation
41
00:01:50,627 --> 00:01:51,511
was to fixed income
42
00:01:51,511 --> 00:01:54,497
a couple of years ago or three or 4 or 5 years ago,
43
00:01:54,798 --> 00:01:55,582
it should be higher.
44
00:01:55,582 --> 00:01:56,900
I'm not sure how much higher.
45
00:01:56,900 --> 00:01:58,735
Stylistically, we'd say
46
00:01:58,735 --> 00:01:59,969
a decent amount higher, but
47
00:01:59,969 --> 00:02:01,921
but actually, that's not what's taking place.
48
00:02:01,921 --> 00:02:04,941
Folks are, you know, kind of not you know, equities have gone up.
49
00:02:04,941 --> 00:02:07,260
Fixed income is, you know, kind of run in place a little bit.
50
00:02:07,260 --> 00:02:10,730
And so just definitionally focus on more equities
51
00:02:10,730 --> 00:02:11,781
than, than they do.
52
00:02:11,781 --> 00:02:13,199
And they have in the past five years
53
00:02:13,199 --> 00:02:14,367
and we'd say
54
00:02:14,367 --> 00:02:17,086
all else equal, you know in a portfolio construction context,
55
00:02:17,086 --> 00:02:19,439
you should own a little bit more fixed income
56
00:02:19,439 --> 00:02:19,973
than less
57
00:02:19,973 --> 00:02:20,840
especially, you know,
58
00:02:20,840 --> 00:02:23,309
what's taking place in the repricing of yields.
59
00:02:23,309 --> 00:02:26,129
And Leslie, with that top of mind for equity and fixed
60
00:02:26,129 --> 00:02:29,699
income investors alike, coming off the September FOMC meeting,
61
00:02:29,699 --> 00:02:33,536
we did see the fed hike rates by 25 basis points.
62
00:02:33,536 --> 00:02:36,539
CIO did priced at Ed heading into the meeting.
63
00:02:36,539 --> 00:02:39,626
So coming off of that outcome and looking ahead,
64
00:02:39,859 --> 00:02:42,212
what is your outlook for monetary policy
65
00:02:42,212 --> 00:02:45,682
when may we see more hikes and what are the implications
66
00:02:45,682 --> 00:02:48,818
of a hiking environment for fixed income assets?
67
00:02:48,835 --> 00:02:49,552
Yeah, absolutely.
68
00:02:49,552 --> 00:02:50,537
I mean, I just want to just comment
69
00:02:50,537 --> 00:02:51,888
really quickly on something that Mike said
70
00:02:51,888 --> 00:02:53,690
because I think it's really important
71
00:02:53,690 --> 00:02:56,042
people like to look at fixed income over the last five years,
72
00:02:56,042 --> 00:02:57,827
but they didn't realize, like during Covid
73
00:02:57,827 --> 00:02:59,929
tenure, you'll get to like 50 basis points, right?
74
00:02:59,929 --> 00:03:02,815
35 they forget they had to normalize. Right?
75
00:03:02,815 --> 00:03:03,383
And they
76
00:03:03,383 --> 00:03:05,151
they think that it's going to be sort of this trend
77
00:03:05,151 --> 00:03:07,070
and not realizing that the base back then
78
00:03:07,070 --> 00:03:08,154
in yields is very, very low.
79
00:03:08,154 --> 00:03:10,373
And your starting point is much higher now.
80
00:03:10,373 --> 00:03:11,808
So when it comes to like the,
81
00:03:11,808 --> 00:03:16,012
the fed, you know, we did anticipate a hike in September.
82
00:03:16,012 --> 00:03:17,513
Granted we were a little bit late.
83
00:03:17,513 --> 00:03:19,832
So we kind of we mark to market a little bit on that one.
84
00:03:19,832 --> 00:03:21,317
But that was a very common
85
00:03:21,317 --> 00:03:23,303
you know, at first we didn't think they were going to hike.
86
00:03:23,303 --> 00:03:24,470
A couple months back.
87
00:03:24,470 --> 00:03:27,473
We do think that they hike again in December.
88
00:03:27,624 --> 00:03:31,611
But to be honest, our 2027 outlook for the fed is really,
89
00:03:32,845 --> 00:03:33,813
inconclusive.
90
00:03:33,813 --> 00:03:37,817
I'm going to say in a sense that at a minimum, high for longer,
91
00:03:37,951 --> 00:03:39,719
but we still have the potential,
92
00:03:39,719 --> 00:03:40,053
you know,
93
00:03:40,053 --> 00:03:41,604
depending on how things develop
94
00:03:41,604 --> 00:03:44,157
fundamentally that they could possibly cut,
95
00:03:44,157 --> 00:03:47,160
you know, in the back half of 2027.
96
00:03:47,176 --> 00:03:49,646
Now, when we think about how it impacts fixed income,
97
00:03:49,646 --> 00:03:51,447
let's say hypothetically we're wrong.
98
00:03:51,447 --> 00:03:51,781
Right.
99
00:03:51,781 --> 00:03:54,767
And they, you know, hike several more times.
100
00:03:54,984 --> 00:03:56,819
The fixed income market is forward looking.
101
00:03:56,819 --> 00:03:59,455
Likes to speculate it's pricing that it.
102
00:03:59,455 --> 00:04:02,492
So given the fact it's pricing that in really already in
103
00:04:02,759 --> 00:04:05,762
the you know the markets and the forward curve.
104
00:04:05,962 --> 00:04:06,863
You know that's another reason
105
00:04:06,863 --> 00:04:08,665
why we think fixed income will do quite well
106
00:04:08,665 --> 00:04:11,484
because it already has this very hawkish outlook.
107
00:04:11,484 --> 00:04:14,487
But we to Mike's point and I completely agree.
108
00:04:14,821 --> 00:04:17,156
You know the expectation is you know right now
109
00:04:17,156 --> 00:04:18,207
given the starting point
110
00:04:18,207 --> 00:04:20,393
that compounding income is going to be key
111
00:04:20,393 --> 00:04:22,378
in a tailwind to total return.
112
00:04:22,378 --> 00:04:25,048
So we have a very similar view on the fed.
113
00:04:25,048 --> 00:04:25,498
So
114
00:04:26,482 --> 00:04:27,450
we two
115
00:04:27,450 --> 00:04:27,984
had a
116
00:04:27,984 --> 00:04:29,819
view they would go in September
117
00:04:29,819 --> 00:04:32,005
mark to market view that they would go in September.
118
00:04:32,005 --> 00:04:35,642
And more because it didn't necessarily seem like there's
119
00:04:35,642 --> 00:04:39,295
the inflation issue that there was back in 2022 or 2023.
120
00:04:39,295 --> 00:04:40,980
So it didn't seem
121
00:04:40,980 --> 00:04:45,501
as all that necessary from a inflation fighting standpoint.
122
00:04:46,286 --> 00:04:48,538
Having said that, there are some inflationary pockets
123
00:04:48,538 --> 00:04:49,672
which they're trying to deal with.
124
00:04:49,672 --> 00:04:50,657
And so
125
00:04:50,657 --> 00:04:53,693
our base case would be another another hike or two as well.
126
00:04:54,711 --> 00:04:56,813
Simply because usually if they go once history
127
00:04:56,813 --> 00:04:59,816
tells you, maybe they don't go just once.
128
00:04:59,999 --> 00:05:02,402
But then there's to your point, potential inflation
129
00:05:02,402 --> 00:05:03,386
does come down.
130
00:05:03,386 --> 00:05:04,220
In fact,
131
00:05:04,220 --> 00:05:07,940
if nothing happens with oil, it just follows the forward curve.
132
00:05:08,875 --> 00:05:11,027
There's a potential we're looking at headline inflation below
133
00:05:11,027 --> 00:05:14,030
2% sometime, you know, kind of middle of next year.
134
00:05:14,063 --> 00:05:17,216
And we could be very well looking at at cuts again.
135
00:05:17,233 --> 00:05:19,068
And the other thing I'd point out is yes,
136
00:05:19,068 --> 00:05:21,020
we do have four hikes priced in.
137
00:05:21,020 --> 00:05:23,690
And so that's all priced into the curve right now.
138
00:05:23,690 --> 00:05:27,176
Even if we over deliver, even if you get a ten year
139
00:05:27,176 --> 00:05:30,330
note that goes up another 100 basis points in a year.
140
00:05:30,596 --> 00:05:34,517
So given the high quality yield on a portfolio right now,
141
00:05:34,734 --> 00:05:35,902
you can have yields go up
142
00:05:35,902 --> 00:05:37,437
125 basis points
143
00:05:37,437 --> 00:05:38,838
before you start losing money in fixed
144
00:05:38,838 --> 00:05:40,823
income over a one year period of time.
145
00:05:40,823 --> 00:05:41,908
That is super powerful.
146
00:05:41,908 --> 00:05:43,159
And I just think folks need to remember that
147
00:05:43,159 --> 00:05:44,844
2022 was very different.
148
00:05:44,844 --> 00:05:45,778
Lesley's point,
149
00:05:45,778 --> 00:05:48,564
you're they're going to have five years of really low returns
150
00:05:48,564 --> 00:05:51,567
or really or one year of just just really abysmal returns.
151
00:05:51,567 --> 00:05:53,403
The market chose the latter.
152
00:05:53,403 --> 00:05:55,772
And as a result, now we're we're really set up
153
00:05:55,772 --> 00:05:58,758
for some some pretty decent returns in fixed income.
154
00:05:58,758 --> 00:06:00,660
And again, in the portfolio construction context,
155
00:06:00,660 --> 00:06:02,178
I think you're supposed to have more of it.
156
00:06:02,178 --> 00:06:05,598
So just given that we're anticipating additional hikes,
157
00:06:05,598 --> 00:06:08,634
and that's a view shared by both Pimco and the UBS chief
158
00:06:08,634 --> 00:06:09,619
investment office.
159
00:06:09,619 --> 00:06:11,454
Looking at the housing market, Mike,
160
00:06:11,454 --> 00:06:14,991
the 30 year mortgage rate currently hovering around a 7%.
161
00:06:15,291 --> 00:06:16,526
What are the implications
162
00:06:16,526 --> 00:06:19,529
of additional hikes to the US housing market?
163
00:06:19,529 --> 00:06:22,782
Well, good news and bad news is that, you know, you can't
164
00:06:22,832 --> 00:06:24,000
you can't fall off the floor.
165
00:06:24,000 --> 00:06:27,420
So, you know, housing activity has been, has been pretty.
166
00:06:27,737 --> 00:06:30,089
That's been pretty slow for for a couple of years now.
167
00:06:30,089 --> 00:06:31,157
And, you know,
168
00:06:31,157 --> 00:06:32,058
you had this situation
169
00:06:32,058 --> 00:06:35,812
where you had significant home price appreciation during Covid.
170
00:06:36,712 --> 00:06:39,382
And then we had a repricing of yields after, you know,
171
00:06:39,382 --> 00:06:42,385
the fed needed to, to respond to high levels of inflation.
172
00:06:42,652 --> 00:06:45,438
And now so we've had an affordability issue in housing for
173
00:06:45,438 --> 00:06:48,891
for a couple of years now that's taking activity and
174
00:06:49,942 --> 00:06:50,993
to extremely low levels.
175
00:06:50,993 --> 00:06:51,894
So we have,
176
00:06:51,894 --> 00:06:54,080
you know, new and existing home sales
177
00:06:54,080 --> 00:06:55,198
combined of about, you know,
178
00:06:55,198 --> 00:06:58,818
kind of 4 million or 4.2 million over the last few years.
179
00:06:59,452 --> 00:07:03,573
That's a low of 20 or 25 years.
180
00:07:04,440 --> 00:07:07,944
And that's not adjusting for the housing stock or,
181
00:07:07,944 --> 00:07:09,178
you know, kind of population.
182
00:07:09,178 --> 00:07:12,181
So very, very low levels of activity.
183
00:07:12,748 --> 00:07:14,901
And so, you know, from that standpoint, it's,
184
00:07:14,901 --> 00:07:17,904
it's not something you're necessarily going to slow,
185
00:07:17,904 --> 00:07:19,922
you know, so, you know, potential for
186
00:07:19,922 --> 00:07:20,940
maybe a little bit of slowing
187
00:07:20,940 --> 00:07:21,707
of, you know,
188
00:07:21,707 --> 00:07:24,710
kind of nonresidential construction or some other areas.
189
00:07:24,777 --> 00:07:27,947
But residential has not been really the area that has been,
190
00:07:28,915 --> 00:07:30,950
the engine of growth in the economy.
191
00:07:30,950 --> 00:07:32,568
And, at these levels of rates,
192
00:07:32,568 --> 00:07:35,571
it will it will continue to just, you know, kind of stagnate.
193
00:07:35,972 --> 00:07:39,058
Leslie, looking at the ten year Treasury hovering at around
194
00:07:39,058 --> 00:07:40,042
five and a quarter,
195
00:07:40,042 --> 00:07:43,045
there has been talk about maybe five and a half to six.
196
00:07:43,045 --> 00:07:45,715
Where does CIO see the ten year headed?
197
00:07:45,715 --> 00:07:46,199
You know,
198
00:07:47,250 --> 00:07:48,117
look, this past
199
00:07:48,117 --> 00:07:49,735
month, obviously, you know, we
200
00:07:49,735 --> 00:07:51,888
we added a little bit of interest rate risk at 5%.
201
00:07:51,888 --> 00:07:53,389
I'm not really worried about it.
202
00:07:53,389 --> 00:07:54,841
And as we always say, it's not the level
203
00:07:54,841 --> 00:07:56,359
but how quickly you get there.
204
00:07:56,359 --> 00:07:59,846
So it was that velocity that we saw in September was quite large.
205
00:07:59,846 --> 00:08:02,849
I mean our expectation is and we do believe,
206
00:08:02,882 --> 00:08:03,182
you know,
207
00:08:03,182 --> 00:08:04,467
that over the next six months,
208
00:08:04,467 --> 00:08:06,302
interest rates will start to will decline.
209
00:08:06,302 --> 00:08:08,604
We even think by the end of the year they'll be lower,
210
00:08:08,604 --> 00:08:11,691
you know, but it's not so much where the next 25 basis points
211
00:08:11,791 --> 00:08:13,709
really, or even 30 basis points is going to be
212
00:08:13,709 --> 00:08:15,378
because as Mike pointed out before,
213
00:08:15,378 --> 00:08:18,197
you have so much cushion within that compounding income
214
00:08:18,197 --> 00:08:20,750
that you really have a tremendous amount of protection
215
00:08:20,750 --> 00:08:21,801
with within your sectors.
216
00:08:21,801 --> 00:08:23,903
I mean, right now we're staying with the high quality,
217
00:08:23,903 --> 00:08:25,371
but we are looking for,
218
00:08:25,371 --> 00:08:28,374
you know, back to that four and three quarter ish type level.
219
00:08:28,457 --> 00:08:29,692
We can't guarantee it's tomorrow.
220
00:08:29,692 --> 00:08:31,460
I can't guarantee that the next, you know,
221
00:08:31,460 --> 00:08:33,212
trend will be up another 25.
222
00:08:33,212 --> 00:08:34,947
But honestly I'm really not worried about it.
223
00:08:34,947 --> 00:08:37,517
So it's given the levels that we're starting from.
224
00:08:37,517 --> 00:08:39,602
You really just pay attention to that income.
225
00:08:39,602 --> 00:08:41,370
And it's really going to be about the fundamentals.
226
00:08:41,370 --> 00:08:43,105
Really depends on how long
227
00:08:43,105 --> 00:08:43,639
this conflict
228
00:08:43,639 --> 00:08:45,458
lasts, what inflation does
229
00:08:45,458 --> 00:08:47,543
and what the employment, how the employment keeps trending.
230
00:08:47,543 --> 00:08:50,246
It's stable now. We'll see what happens in six months.
231
00:08:50,246 --> 00:08:50,613
Again,
232
00:08:50,613 --> 00:08:52,698
our expectation is the economy starts
233
00:08:52,698 --> 00:08:54,417
to soften a little bit six months from now.
234
00:08:54,417 --> 00:08:57,320
So yields are probably lower for 5475.
235
00:08:57,320 --> 00:08:58,621
Mike, another consideration,
236
00:08:58,621 --> 00:09:00,573
top of mind for fixed income investors.
237
00:09:00,573 --> 00:09:01,073
And Leslie,
238
00:09:01,073 --> 00:09:04,076
you wrote about this in the latest fixed income strategist.
239
00:09:04,410 --> 00:09:06,512
The substantial amount of debt issuance.
240
00:09:06,512 --> 00:09:09,415
How should fixed income investors think about absorbing that?
241
00:09:09,415 --> 00:09:11,150
How are you thinking about that?
242
00:09:11,150 --> 00:09:13,502
Yeah, there's there's there's a lot of opportunities out there.
243
00:09:13,502 --> 00:09:15,721
There's no there's no shortage of of debt
244
00:09:15,721 --> 00:09:17,390
whether it's here in the United States
245
00:09:17,390 --> 00:09:19,375
or other developed markets.
246
00:09:19,375 --> 00:09:22,828
And it's, you know, there's competition for capital and that's
247
00:09:22,828 --> 00:09:26,299
that's led to, to these, these high levels of yields and created
248
00:09:26,782 --> 00:09:29,001
attractive opportunities to, to position
249
00:09:29,001 --> 00:09:30,386
your portfolio and take advantage of.
250
00:09:30,386 --> 00:09:33,389
So, I guess the short answer is, you know,
251
00:09:33,806 --> 00:09:35,875
what used to be an anchor?
252
00:09:35,875 --> 00:09:37,443
Portfolios, meaning other
253
00:09:37,443 --> 00:09:38,728
developed markets, you know,
254
00:09:38,728 --> 00:09:42,081
ten years ago had yields of just a handful of basis points.
255
00:09:42,081 --> 00:09:46,052
We had 18 trillion of negative yielding debt across the globe.
256
00:09:46,052 --> 00:09:49,038
And that was all kind of bringing us yields down.
257
00:09:49,639 --> 00:09:52,708
You have you have global yields that are also attractive.
258
00:09:52,708 --> 00:09:53,609
And that's, you know,
259
00:09:53,609 --> 00:09:56,912
kind of pushing up yields a little bit in in the US as well.
260
00:09:56,912 --> 00:10:00,299
And what we'd say to that is that's part of partly in the price.
261
00:10:00,299 --> 00:10:01,651
And that's and that's some of the reasons
262
00:10:01,651 --> 00:10:03,603
why US yields are where they are.
263
00:10:03,603 --> 00:10:07,857
So we just we're finding opportunities not just here in the US
264
00:10:07,857 --> 00:10:08,391
but globally.
265
00:10:08,391 --> 00:10:10,977
So you know, whether it's in the in the UK,
266
00:10:10,977 --> 00:10:14,480
whether it's in Japan, or Australia, there's other plenty of,
267
00:10:15,231 --> 00:10:18,768
you know, kind of global duration and a diversified way to get,
268
00:10:19,051 --> 00:10:21,470
to get some exposure that we think, that are attractive
269
00:10:21,470 --> 00:10:24,323
and then hopefully deliver consistent returns over time.
270
00:10:24,323 --> 00:10:26,842
What about AI related debt issuance.
271
00:10:26,842 --> 00:10:31,764
So that's been, that's been enormous and will continue to create,
272
00:10:32,965 --> 00:10:34,500
opportunities and portfolios.
273
00:10:34,500 --> 00:10:37,553
We've invested in a couple of, of AI opportunities,
274
00:10:38,387 --> 00:10:40,823
past on many more than we've invested in.
275
00:10:40,823 --> 00:10:41,941
And I think,
276
00:10:41,941 --> 00:10:44,694
you know, as fixed income investors, as equity investors,
277
00:10:44,694 --> 00:10:45,828
like I said this before,
278
00:10:45,828 --> 00:10:46,195
you know,
279
00:10:46,195 --> 00:10:47,663
when you're investing in AI,
280
00:10:47,663 --> 00:10:49,649
if you get three right and seven wrong,
281
00:10:49,649 --> 00:10:50,966
you're you're in the Hall of Fame
282
00:10:50,966 --> 00:10:53,252
and then fixed income, if you get eight right into wrong,
283
00:10:53,252 --> 00:10:54,537
you've got some explaining to do.
284
00:10:54,537 --> 00:10:57,590
And so we're pretty discerning from a fixed income point of view.
285
00:10:57,590 --> 00:10:58,891
And we look at AI.
286
00:10:58,891 --> 00:11:00,242
There are definitely opportunities out there.
287
00:11:00,242 --> 00:11:01,427
We look to take advantage of ones
288
00:11:01,427 --> 00:11:02,011
we can
289
00:11:02,011 --> 00:11:03,713
shape the language, get protections
290
00:11:03,713 --> 00:11:06,716
for our clients and get a proper spread relative to,
291
00:11:07,016 --> 00:11:09,835
you know, some very liquid parts of the fixed income market.
292
00:11:09,835 --> 00:11:10,970
And those do exist.
293
00:11:10,970 --> 00:11:11,821
And when they're out there,
294
00:11:11,821 --> 00:11:13,255
we're definitely putting them in portfolios.
295
00:11:13,255 --> 00:11:16,492
So so again, lots to consider, lots of opportunities.
296
00:11:16,492 --> 00:11:17,610
I think it's great for,
297
00:11:18,594 --> 00:11:19,679
for active managers.
298
00:11:19,679 --> 00:11:20,663
I think it's great for,
299
00:11:20,663 --> 00:11:21,831
you know, fixed income participants
300
00:11:21,831 --> 00:11:22,281
in general
301
00:11:22,281 --> 00:11:23,482
have all these different opportunities
302
00:11:23,482 --> 00:11:24,917
to build a diversified portfolio
303
00:11:24,917 --> 00:11:26,485
to generate that attractive yield.
304
00:11:26,485 --> 00:11:26,819
Okay.
305
00:11:26,819 --> 00:11:29,672
So quite a lot of opportunities out there to be mindful of.
306
00:11:29,672 --> 00:11:31,407
But with opportunity comes risk.
307
00:11:31,407 --> 00:11:34,460
And I do want to end on positioning preferences a bit later
308
00:11:34,460 --> 00:11:35,361
in the conversation.
309
00:11:35,361 --> 00:11:36,445
Before we get there,
310
00:11:36,445 --> 00:11:39,448
let's talk about maybe some risks we haven't highlighted yet.
311
00:11:39,448 --> 00:11:41,217
Leslie, what's top of mind for you?
312
00:11:41,217 --> 00:11:44,220
What should fixed income investors be mindful of right now?
313
00:11:44,453 --> 00:11:44,820
You know,
314
00:11:44,820 --> 00:11:46,589
look there's the
315
00:11:46,589 --> 00:11:47,606
the largest risk right now
316
00:11:47,606 --> 00:11:48,741
is obviously on the inflation
317
00:11:48,741 --> 00:11:50,509
front in terms of in terms of what
318
00:11:50,509 --> 00:11:53,813
the performance could be for fixed income going forward.
319
00:11:53,813 --> 00:11:56,816
I mean, one of the things that you don't want to see is,
320
00:11:56,966 --> 00:11:57,333
a fed
321
00:11:57,333 --> 00:11:59,251
that's hiking in a bear steepening,
322
00:11:59,251 --> 00:12:01,587
right, meaning yields go up and led by that back end.
323
00:12:01,587 --> 00:12:04,140
That's always a little bit of caution.
324
00:12:04,140 --> 00:12:05,608
Because that could be distressing,
325
00:12:05,608 --> 00:12:07,076
particularly if it's inflation driven.
326
00:12:07,076 --> 00:12:08,811
So the risk to fixed income right now
327
00:12:08,811 --> 00:12:12,865
is that inflation continues, you know, on a path that's,
328
00:12:13,099 --> 00:12:13,549
you know,
329
00:12:13,549 --> 00:12:13,849
you know,
330
00:12:13,849 --> 00:12:16,769
everyone is moving higher, not just about the 2% target
331
00:12:16,769 --> 00:12:19,371
but continues to move higher. That is not our call.
332
00:12:19,371 --> 00:12:22,475
We continue to believe that, you know, inflation will
333
00:12:23,309 --> 00:12:25,978
start in this disinflation stereo again.
334
00:12:25,978 --> 00:12:26,729
When either comes
335
00:12:26,729 --> 00:12:29,298
the owners will cover rent or over time
336
00:12:29,298 --> 00:12:30,950
maybe the er productivity.
337
00:12:30,950 --> 00:12:32,001
But right now, given
338
00:12:32,001 --> 00:12:34,053
given the war we're seeing in the Middle East,
339
00:12:34,053 --> 00:12:35,304
there's going to be some bumps in the road.
340
00:12:35,304 --> 00:12:38,908
So this might be more of a 2027 kind of trend down.
341
00:12:39,325 --> 00:12:40,142
But that's that's
342
00:12:40,142 --> 00:12:40,943
one of the
343
00:12:40,943 --> 00:12:42,595
the risks, the other risk is too is
344
00:12:42,595 --> 00:12:44,363
I think that Mike was talking about
345
00:12:44,363 --> 00:12:48,300
is that people not appreciating the value of fixed income
346
00:12:48,601 --> 00:12:52,121
and not appreciating that, particularly at these levels of the
347
00:12:52,138 --> 00:12:53,389
level of yields,
348
00:12:53,389 --> 00:12:56,392
what the diverse of what type of diversifier they truly are.
349
00:12:56,542 --> 00:12:58,611
I know they've been disappointed the past several years.
350
00:12:58,611 --> 00:13:01,680
We know the correlation is broken down, but it's much different
351
00:13:01,680 --> 00:13:02,181
when you're
352
00:13:02,181 --> 00:13:04,400
at the starting levels that you are today
353
00:13:04,400 --> 00:13:06,202
than what you were several years ago.
354
00:13:06,202 --> 00:13:09,538
Again, a special thanks to Pimco for their partnership
355
00:13:09,538 --> 00:13:10,673
and collaboration.
356
00:13:10,673 --> 00:13:13,859
It's always a great opportunity to share, thinking
357
00:13:13,859 --> 00:13:17,246
and hear what's on the minds of our top industry colleagues.
358
00:13:17,513 --> 00:13:21,116
For more information, visit ubs.com/views
359
00:13:21,350 --> 00:13:23,869
UBS trending is on social media.
360
00:13:23,869 --> 00:13:27,807
Follow us on Instagram at UBS trending for content
361
00:13:27,807 --> 00:13:29,909
that you won't find anywhere else.
362
00:13:29,909 --> 00:13:32,962
You can also check out LinkedIn and Facebook for more.
363
00:13:33,212 --> 00:13:36,682
And as always, if you have any questions about your portfolio,
364
00:13:36,866 --> 00:13:40,853
please speak with a financial advisor from UBS Studios
365
00:13:40,853 --> 00:13:41,937
here in New York.
366
00:13:41,937 --> 00:13:44,490
I'm Dan Cassidy. Thank you for joining us.
00:00:11,761 --> 00:00:12,412
Hi everyone.
2
00:00:12,412 --> 00:00:13,997
My name is Dan Cassidy.
3
00:00:13,997 --> 00:00:16,766
Welcome back to UBS trending.
4
00:00:16,766 --> 00:00:18,918
There is a lot on top of mind right now
5
00:00:18,918 --> 00:00:21,137
for fixed income investors.
6
00:00:21,137 --> 00:00:21,955
My colleague
7
00:00:21,955 --> 00:00:25,592
Leslie Falconio, head of taxable fixed income strategy
8
00:00:25,742 --> 00:00:28,978
for the Americas from the UBS chief Investment Office,
9
00:00:29,212 --> 00:00:33,266
and I recently attended the Pimco Advisor Forum in Newport
10
00:00:33,266 --> 00:00:37,070
Beach, California, to hear how the top fixed income mindset
11
00:00:37,070 --> 00:00:40,073
Pimco are thinking about the current environment.
12
00:00:40,173 --> 00:00:42,692
What's ahead, and how to position.
13
00:00:42,692 --> 00:00:45,712
Leslie and I were invited to discuss these topics
14
00:00:45,712 --> 00:00:49,466
with managing director and generalist portfolio manager
15
00:00:49,582 --> 00:00:51,084
at Pimco, Mike.
16
00:00:51,084 --> 00:00:55,188
So we had an insightful and actionable discussion about the fixed
17
00:00:55,188 --> 00:00:59,042
income landscape, and a special thanks to the team at Pimco
18
00:00:59,042 --> 00:01:02,212
for having Leslie and I at their studio with Mike.
19
00:01:02,212 --> 00:01:04,631
It was an enjoyable experience.
20
00:01:04,631 --> 00:01:06,483
Here's the conversation.
21
00:01:06,483 --> 00:01:08,551
Yields are quite attractive in fixed income.
22
00:01:08,551 --> 00:01:11,371
If you take a look at starting yields in U.S.
23
00:01:11,371 --> 00:01:12,655
treasuries of five and a quarter
24
00:01:12,655 --> 00:01:13,339
and ten year notes,
25
00:01:13,339 --> 00:01:16,609
which is a real yield of of almost 3% on the back
26
00:01:16,609 --> 00:01:17,727
end of the yield curve about,
27
00:01:17,727 --> 00:01:20,396
you know, 3.5% or so in real yields.
28
00:01:20,396 --> 00:01:23,249
And you look at, you know, a high quality fixed income portfolio
29
00:01:23,249 --> 00:01:26,252
that could generate yields of six, seven, 8%.
30
00:01:26,569 --> 00:01:28,705
These are very attractive starting points.
31
00:01:28,705 --> 00:01:30,173
And again,
32
00:01:30,173 --> 00:01:30,740
peeling the lens
33
00:01:30,740 --> 00:01:32,342
back a little bit further, if you look at,
34
00:01:32,342 --> 00:01:35,695
you know, kind of starting book yields of again six seven 8%
35
00:01:36,229 --> 00:01:38,748
and 94% correlation of five year forward
36
00:01:38,748 --> 00:01:40,800
returns to those book yields.
37
00:01:40,800 --> 00:01:42,952
That's a pretty high quality return.
38
00:01:42,952 --> 00:01:45,722
That's a pretty high return for a high quality portfolio.
39
00:01:45,722 --> 00:01:49,109
And when we think about portfolio construction more broadly, we'd
40
00:01:49,109 --> 00:01:50,627
say whatever your allocation
41
00:01:50,627 --> 00:01:51,511
was to fixed income
42
00:01:51,511 --> 00:01:54,497
a couple of years ago or three or 4 or 5 years ago,
43
00:01:54,798 --> 00:01:55,582
it should be higher.
44
00:01:55,582 --> 00:01:56,900
I'm not sure how much higher.
45
00:01:56,900 --> 00:01:58,735
Stylistically, we'd say
46
00:01:58,735 --> 00:01:59,969
a decent amount higher, but
47
00:01:59,969 --> 00:02:01,921
but actually, that's not what's taking place.
48
00:02:01,921 --> 00:02:04,941
Folks are, you know, kind of not you know, equities have gone up.
49
00:02:04,941 --> 00:02:07,260
Fixed income is, you know, kind of run in place a little bit.
50
00:02:07,260 --> 00:02:10,730
And so just definitionally focus on more equities
51
00:02:10,730 --> 00:02:11,781
than, than they do.
52
00:02:11,781 --> 00:02:13,199
And they have in the past five years
53
00:02:13,199 --> 00:02:14,367
and we'd say
54
00:02:14,367 --> 00:02:17,086
all else equal, you know in a portfolio construction context,
55
00:02:17,086 --> 00:02:19,439
you should own a little bit more fixed income
56
00:02:19,439 --> 00:02:19,973
than less
57
00:02:19,973 --> 00:02:20,840
especially, you know,
58
00:02:20,840 --> 00:02:23,309
what's taking place in the repricing of yields.
59
00:02:23,309 --> 00:02:26,129
And Leslie, with that top of mind for equity and fixed
60
00:02:26,129 --> 00:02:29,699
income investors alike, coming off the September FOMC meeting,
61
00:02:29,699 --> 00:02:33,536
we did see the fed hike rates by 25 basis points.
62
00:02:33,536 --> 00:02:36,539
CIO did priced at Ed heading into the meeting.
63
00:02:36,539 --> 00:02:39,626
So coming off of that outcome and looking ahead,
64
00:02:39,859 --> 00:02:42,212
what is your outlook for monetary policy
65
00:02:42,212 --> 00:02:45,682
when may we see more hikes and what are the implications
66
00:02:45,682 --> 00:02:48,818
of a hiking environment for fixed income assets?
67
00:02:48,835 --> 00:02:49,552
Yeah, absolutely.
68
00:02:49,552 --> 00:02:50,537
I mean, I just want to just comment
69
00:02:50,537 --> 00:02:51,888
really quickly on something that Mike said
70
00:02:51,888 --> 00:02:53,690
because I think it's really important
71
00:02:53,690 --> 00:02:56,042
people like to look at fixed income over the last five years,
72
00:02:56,042 --> 00:02:57,827
but they didn't realize, like during Covid
73
00:02:57,827 --> 00:02:59,929
tenure, you'll get to like 50 basis points, right?
74
00:02:59,929 --> 00:03:02,815
35 they forget they had to normalize. Right?
75
00:03:02,815 --> 00:03:03,383
And they
76
00:03:03,383 --> 00:03:05,151
they think that it's going to be sort of this trend
77
00:03:05,151 --> 00:03:07,070
and not realizing that the base back then
78
00:03:07,070 --> 00:03:08,154
in yields is very, very low.
79
00:03:08,154 --> 00:03:10,373
And your starting point is much higher now.
80
00:03:10,373 --> 00:03:11,808
So when it comes to like the,
81
00:03:11,808 --> 00:03:16,012
the fed, you know, we did anticipate a hike in September.
82
00:03:16,012 --> 00:03:17,513
Granted we were a little bit late.
83
00:03:17,513 --> 00:03:19,832
So we kind of we mark to market a little bit on that one.
84
00:03:19,832 --> 00:03:21,317
But that was a very common
85
00:03:21,317 --> 00:03:23,303
you know, at first we didn't think they were going to hike.
86
00:03:23,303 --> 00:03:24,470
A couple months back.
87
00:03:24,470 --> 00:03:27,473
We do think that they hike again in December.
88
00:03:27,624 --> 00:03:31,611
But to be honest, our 2027 outlook for the fed is really,
89
00:03:32,845 --> 00:03:33,813
inconclusive.
90
00:03:33,813 --> 00:03:37,817
I'm going to say in a sense that at a minimum, high for longer,
91
00:03:37,951 --> 00:03:39,719
but we still have the potential,
92
00:03:39,719 --> 00:03:40,053
you know,
93
00:03:40,053 --> 00:03:41,604
depending on how things develop
94
00:03:41,604 --> 00:03:44,157
fundamentally that they could possibly cut,
95
00:03:44,157 --> 00:03:47,160
you know, in the back half of 2027.
96
00:03:47,176 --> 00:03:49,646
Now, when we think about how it impacts fixed income,
97
00:03:49,646 --> 00:03:51,447
let's say hypothetically we're wrong.
98
00:03:51,447 --> 00:03:51,781
Right.
99
00:03:51,781 --> 00:03:54,767
And they, you know, hike several more times.
100
00:03:54,984 --> 00:03:56,819
The fixed income market is forward looking.
101
00:03:56,819 --> 00:03:59,455
Likes to speculate it's pricing that it.
102
00:03:59,455 --> 00:04:02,492
So given the fact it's pricing that in really already in
103
00:04:02,759 --> 00:04:05,762
the you know the markets and the forward curve.
104
00:04:05,962 --> 00:04:06,863
You know that's another reason
105
00:04:06,863 --> 00:04:08,665
why we think fixed income will do quite well
106
00:04:08,665 --> 00:04:11,484
because it already has this very hawkish outlook.
107
00:04:11,484 --> 00:04:14,487
But we to Mike's point and I completely agree.
108
00:04:14,821 --> 00:04:17,156
You know the expectation is you know right now
109
00:04:17,156 --> 00:04:18,207
given the starting point
110
00:04:18,207 --> 00:04:20,393
that compounding income is going to be key
111
00:04:20,393 --> 00:04:22,378
in a tailwind to total return.
112
00:04:22,378 --> 00:04:25,048
So we have a very similar view on the fed.
113
00:04:25,048 --> 00:04:25,498
So
114
00:04:26,482 --> 00:04:27,450
we two
115
00:04:27,450 --> 00:04:27,984
had a
116
00:04:27,984 --> 00:04:29,819
view they would go in September
117
00:04:29,819 --> 00:04:32,005
mark to market view that they would go in September.
118
00:04:32,005 --> 00:04:35,642
And more because it didn't necessarily seem like there's
119
00:04:35,642 --> 00:04:39,295
the inflation issue that there was back in 2022 or 2023.
120
00:04:39,295 --> 00:04:40,980
So it didn't seem
121
00:04:40,980 --> 00:04:45,501
as all that necessary from a inflation fighting standpoint.
122
00:04:46,286 --> 00:04:48,538
Having said that, there are some inflationary pockets
123
00:04:48,538 --> 00:04:49,672
which they're trying to deal with.
124
00:04:49,672 --> 00:04:50,657
And so
125
00:04:50,657 --> 00:04:53,693
our base case would be another another hike or two as well.
126
00:04:54,711 --> 00:04:56,813
Simply because usually if they go once history
127
00:04:56,813 --> 00:04:59,816
tells you, maybe they don't go just once.
128
00:04:59,999 --> 00:05:02,402
But then there's to your point, potential inflation
129
00:05:02,402 --> 00:05:03,386
does come down.
130
00:05:03,386 --> 00:05:04,220
In fact,
131
00:05:04,220 --> 00:05:07,940
if nothing happens with oil, it just follows the forward curve.
132
00:05:08,875 --> 00:05:11,027
There's a potential we're looking at headline inflation below
133
00:05:11,027 --> 00:05:14,030
2% sometime, you know, kind of middle of next year.
134
00:05:14,063 --> 00:05:17,216
And we could be very well looking at at cuts again.
135
00:05:17,233 --> 00:05:19,068
And the other thing I'd point out is yes,
136
00:05:19,068 --> 00:05:21,020
we do have four hikes priced in.
137
00:05:21,020 --> 00:05:23,690
And so that's all priced into the curve right now.
138
00:05:23,690 --> 00:05:27,176
Even if we over deliver, even if you get a ten year
139
00:05:27,176 --> 00:05:30,330
note that goes up another 100 basis points in a year.
140
00:05:30,596 --> 00:05:34,517
So given the high quality yield on a portfolio right now,
141
00:05:34,734 --> 00:05:35,902
you can have yields go up
142
00:05:35,902 --> 00:05:37,437
125 basis points
143
00:05:37,437 --> 00:05:38,838
before you start losing money in fixed
144
00:05:38,838 --> 00:05:40,823
income over a one year period of time.
145
00:05:40,823 --> 00:05:41,908
That is super powerful.
146
00:05:41,908 --> 00:05:43,159
And I just think folks need to remember that
147
00:05:43,159 --> 00:05:44,844
2022 was very different.
148
00:05:44,844 --> 00:05:45,778
Lesley's point,
149
00:05:45,778 --> 00:05:48,564
you're they're going to have five years of really low returns
150
00:05:48,564 --> 00:05:51,567
or really or one year of just just really abysmal returns.
151
00:05:51,567 --> 00:05:53,403
The market chose the latter.
152
00:05:53,403 --> 00:05:55,772
And as a result, now we're we're really set up
153
00:05:55,772 --> 00:05:58,758
for some some pretty decent returns in fixed income.
154
00:05:58,758 --> 00:06:00,660
And again, in the portfolio construction context,
155
00:06:00,660 --> 00:06:02,178
I think you're supposed to have more of it.
156
00:06:02,178 --> 00:06:05,598
So just given that we're anticipating additional hikes,
157
00:06:05,598 --> 00:06:08,634
and that's a view shared by both Pimco and the UBS chief
158
00:06:08,634 --> 00:06:09,619
investment office.
159
00:06:09,619 --> 00:06:11,454
Looking at the housing market, Mike,
160
00:06:11,454 --> 00:06:14,991
the 30 year mortgage rate currently hovering around a 7%.
161
00:06:15,291 --> 00:06:16,526
What are the implications
162
00:06:16,526 --> 00:06:19,529
of additional hikes to the US housing market?
163
00:06:19,529 --> 00:06:22,782
Well, good news and bad news is that, you know, you can't
164
00:06:22,832 --> 00:06:24,000
you can't fall off the floor.
165
00:06:24,000 --> 00:06:27,420
So, you know, housing activity has been, has been pretty.
166
00:06:27,737 --> 00:06:30,089
That's been pretty slow for for a couple of years now.
167
00:06:30,089 --> 00:06:31,157
And, you know,
168
00:06:31,157 --> 00:06:32,058
you had this situation
169
00:06:32,058 --> 00:06:35,812
where you had significant home price appreciation during Covid.
170
00:06:36,712 --> 00:06:39,382
And then we had a repricing of yields after, you know,
171
00:06:39,382 --> 00:06:42,385
the fed needed to, to respond to high levels of inflation.
172
00:06:42,652 --> 00:06:45,438
And now so we've had an affordability issue in housing for
173
00:06:45,438 --> 00:06:48,891
for a couple of years now that's taking activity and
174
00:06:49,942 --> 00:06:50,993
to extremely low levels.
175
00:06:50,993 --> 00:06:51,894
So we have,
176
00:06:51,894 --> 00:06:54,080
you know, new and existing home sales
177
00:06:54,080 --> 00:06:55,198
combined of about, you know,
178
00:06:55,198 --> 00:06:58,818
kind of 4 million or 4.2 million over the last few years.
179
00:06:59,452 --> 00:07:03,573
That's a low of 20 or 25 years.
180
00:07:04,440 --> 00:07:07,944
And that's not adjusting for the housing stock or,
181
00:07:07,944 --> 00:07:09,178
you know, kind of population.
182
00:07:09,178 --> 00:07:12,181
So very, very low levels of activity.
183
00:07:12,748 --> 00:07:14,901
And so, you know, from that standpoint, it's,
184
00:07:14,901 --> 00:07:17,904
it's not something you're necessarily going to slow,
185
00:07:17,904 --> 00:07:19,922
you know, so, you know, potential for
186
00:07:19,922 --> 00:07:20,940
maybe a little bit of slowing
187
00:07:20,940 --> 00:07:21,707
of, you know,
188
00:07:21,707 --> 00:07:24,710
kind of nonresidential construction or some other areas.
189
00:07:24,777 --> 00:07:27,947
But residential has not been really the area that has been,
190
00:07:28,915 --> 00:07:30,950
the engine of growth in the economy.
191
00:07:30,950 --> 00:07:32,568
And, at these levels of rates,
192
00:07:32,568 --> 00:07:35,571
it will it will continue to just, you know, kind of stagnate.
193
00:07:35,972 --> 00:07:39,058
Leslie, looking at the ten year Treasury hovering at around
194
00:07:39,058 --> 00:07:40,042
five and a quarter,
195
00:07:40,042 --> 00:07:43,045
there has been talk about maybe five and a half to six.
196
00:07:43,045 --> 00:07:45,715
Where does CIO see the ten year headed?
197
00:07:45,715 --> 00:07:46,199
You know,
198
00:07:47,250 --> 00:07:48,117
look, this past
199
00:07:48,117 --> 00:07:49,735
month, obviously, you know, we
200
00:07:49,735 --> 00:07:51,888
we added a little bit of interest rate risk at 5%.
201
00:07:51,888 --> 00:07:53,389
I'm not really worried about it.
202
00:07:53,389 --> 00:07:54,841
And as we always say, it's not the level
203
00:07:54,841 --> 00:07:56,359
but how quickly you get there.
204
00:07:56,359 --> 00:07:59,846
So it was that velocity that we saw in September was quite large.
205
00:07:59,846 --> 00:08:02,849
I mean our expectation is and we do believe,
206
00:08:02,882 --> 00:08:03,182
you know,
207
00:08:03,182 --> 00:08:04,467
that over the next six months,
208
00:08:04,467 --> 00:08:06,302
interest rates will start to will decline.
209
00:08:06,302 --> 00:08:08,604
We even think by the end of the year they'll be lower,
210
00:08:08,604 --> 00:08:11,691
you know, but it's not so much where the next 25 basis points
211
00:08:11,791 --> 00:08:13,709
really, or even 30 basis points is going to be
212
00:08:13,709 --> 00:08:15,378
because as Mike pointed out before,
213
00:08:15,378 --> 00:08:18,197
you have so much cushion within that compounding income
214
00:08:18,197 --> 00:08:20,750
that you really have a tremendous amount of protection
215
00:08:20,750 --> 00:08:21,801
with within your sectors.
216
00:08:21,801 --> 00:08:23,903
I mean, right now we're staying with the high quality,
217
00:08:23,903 --> 00:08:25,371
but we are looking for,
218
00:08:25,371 --> 00:08:28,374
you know, back to that four and three quarter ish type level.
219
00:08:28,457 --> 00:08:29,692
We can't guarantee it's tomorrow.
220
00:08:29,692 --> 00:08:31,460
I can't guarantee that the next, you know,
221
00:08:31,460 --> 00:08:33,212
trend will be up another 25.
222
00:08:33,212 --> 00:08:34,947
But honestly I'm really not worried about it.
223
00:08:34,947 --> 00:08:37,517
So it's given the levels that we're starting from.
224
00:08:37,517 --> 00:08:39,602
You really just pay attention to that income.
225
00:08:39,602 --> 00:08:41,370
And it's really going to be about the fundamentals.
226
00:08:41,370 --> 00:08:43,105
Really depends on how long
227
00:08:43,105 --> 00:08:43,639
this conflict
228
00:08:43,639 --> 00:08:45,458
lasts, what inflation does
229
00:08:45,458 --> 00:08:47,543
and what the employment, how the employment keeps trending.
230
00:08:47,543 --> 00:08:50,246
It's stable now. We'll see what happens in six months.
231
00:08:50,246 --> 00:08:50,613
Again,
232
00:08:50,613 --> 00:08:52,698
our expectation is the economy starts
233
00:08:52,698 --> 00:08:54,417
to soften a little bit six months from now.
234
00:08:54,417 --> 00:08:57,320
So yields are probably lower for 5475.
235
00:08:57,320 --> 00:08:58,621
Mike, another consideration,
236
00:08:58,621 --> 00:09:00,573
top of mind for fixed income investors.
237
00:09:00,573 --> 00:09:01,073
And Leslie,
238
00:09:01,073 --> 00:09:04,076
you wrote about this in the latest fixed income strategist.
239
00:09:04,410 --> 00:09:06,512
The substantial amount of debt issuance.
240
00:09:06,512 --> 00:09:09,415
How should fixed income investors think about absorbing that?
241
00:09:09,415 --> 00:09:11,150
How are you thinking about that?
242
00:09:11,150 --> 00:09:13,502
Yeah, there's there's there's a lot of opportunities out there.
243
00:09:13,502 --> 00:09:15,721
There's no there's no shortage of of debt
244
00:09:15,721 --> 00:09:17,390
whether it's here in the United States
245
00:09:17,390 --> 00:09:19,375
or other developed markets.
246
00:09:19,375 --> 00:09:22,828
And it's, you know, there's competition for capital and that's
247
00:09:22,828 --> 00:09:26,299
that's led to, to these, these high levels of yields and created
248
00:09:26,782 --> 00:09:29,001
attractive opportunities to, to position
249
00:09:29,001 --> 00:09:30,386
your portfolio and take advantage of.
250
00:09:30,386 --> 00:09:33,389
So, I guess the short answer is, you know,
251
00:09:33,806 --> 00:09:35,875
what used to be an anchor?
252
00:09:35,875 --> 00:09:37,443
Portfolios, meaning other
253
00:09:37,443 --> 00:09:38,728
developed markets, you know,
254
00:09:38,728 --> 00:09:42,081
ten years ago had yields of just a handful of basis points.
255
00:09:42,081 --> 00:09:46,052
We had 18 trillion of negative yielding debt across the globe.
256
00:09:46,052 --> 00:09:49,038
And that was all kind of bringing us yields down.
257
00:09:49,639 --> 00:09:52,708
You have you have global yields that are also attractive.
258
00:09:52,708 --> 00:09:53,609
And that's, you know,
259
00:09:53,609 --> 00:09:56,912
kind of pushing up yields a little bit in in the US as well.
260
00:09:56,912 --> 00:10:00,299
And what we'd say to that is that's part of partly in the price.
261
00:10:00,299 --> 00:10:01,651
And that's and that's some of the reasons
262
00:10:01,651 --> 00:10:03,603
why US yields are where they are.
263
00:10:03,603 --> 00:10:07,857
So we just we're finding opportunities not just here in the US
264
00:10:07,857 --> 00:10:08,391
but globally.
265
00:10:08,391 --> 00:10:10,977
So you know, whether it's in the in the UK,
266
00:10:10,977 --> 00:10:14,480
whether it's in Japan, or Australia, there's other plenty of,
267
00:10:15,231 --> 00:10:18,768
you know, kind of global duration and a diversified way to get,
268
00:10:19,051 --> 00:10:21,470
to get some exposure that we think, that are attractive
269
00:10:21,470 --> 00:10:24,323
and then hopefully deliver consistent returns over time.
270
00:10:24,323 --> 00:10:26,842
What about AI related debt issuance.
271
00:10:26,842 --> 00:10:31,764
So that's been, that's been enormous and will continue to create,
272
00:10:32,965 --> 00:10:34,500
opportunities and portfolios.
273
00:10:34,500 --> 00:10:37,553
We've invested in a couple of, of AI opportunities,
274
00:10:38,387 --> 00:10:40,823
past on many more than we've invested in.
275
00:10:40,823 --> 00:10:41,941
And I think,
276
00:10:41,941 --> 00:10:44,694
you know, as fixed income investors, as equity investors,
277
00:10:44,694 --> 00:10:45,828
like I said this before,
278
00:10:45,828 --> 00:10:46,195
you know,
279
00:10:46,195 --> 00:10:47,663
when you're investing in AI,
280
00:10:47,663 --> 00:10:49,649
if you get three right and seven wrong,
281
00:10:49,649 --> 00:10:50,966
you're you're in the Hall of Fame
282
00:10:50,966 --> 00:10:53,252
and then fixed income, if you get eight right into wrong,
283
00:10:53,252 --> 00:10:54,537
you've got some explaining to do.
284
00:10:54,537 --> 00:10:57,590
And so we're pretty discerning from a fixed income point of view.
285
00:10:57,590 --> 00:10:58,891
And we look at AI.
286
00:10:58,891 --> 00:11:00,242
There are definitely opportunities out there.
287
00:11:00,242 --> 00:11:01,427
We look to take advantage of ones
288
00:11:01,427 --> 00:11:02,011
we can
289
00:11:02,011 --> 00:11:03,713
shape the language, get protections
290
00:11:03,713 --> 00:11:06,716
for our clients and get a proper spread relative to,
291
00:11:07,016 --> 00:11:09,835
you know, some very liquid parts of the fixed income market.
292
00:11:09,835 --> 00:11:10,970
And those do exist.
293
00:11:10,970 --> 00:11:11,821
And when they're out there,
294
00:11:11,821 --> 00:11:13,255
we're definitely putting them in portfolios.
295
00:11:13,255 --> 00:11:16,492
So so again, lots to consider, lots of opportunities.
296
00:11:16,492 --> 00:11:17,610
I think it's great for,
297
00:11:18,594 --> 00:11:19,679
for active managers.
298
00:11:19,679 --> 00:11:20,663
I think it's great for,
299
00:11:20,663 --> 00:11:21,831
you know, fixed income participants
300
00:11:21,831 --> 00:11:22,281
in general
301
00:11:22,281 --> 00:11:23,482
have all these different opportunities
302
00:11:23,482 --> 00:11:24,917
to build a diversified portfolio
303
00:11:24,917 --> 00:11:26,485
to generate that attractive yield.
304
00:11:26,485 --> 00:11:26,819
Okay.
305
00:11:26,819 --> 00:11:29,672
So quite a lot of opportunities out there to be mindful of.
306
00:11:29,672 --> 00:11:31,407
But with opportunity comes risk.
307
00:11:31,407 --> 00:11:34,460
And I do want to end on positioning preferences a bit later
308
00:11:34,460 --> 00:11:35,361
in the conversation.
309
00:11:35,361 --> 00:11:36,445
Before we get there,
310
00:11:36,445 --> 00:11:39,448
let's talk about maybe some risks we haven't highlighted yet.
311
00:11:39,448 --> 00:11:41,217
Leslie, what's top of mind for you?
312
00:11:41,217 --> 00:11:44,220
What should fixed income investors be mindful of right now?
313
00:11:44,453 --> 00:11:44,820
You know,
314
00:11:44,820 --> 00:11:46,589
look there's the
315
00:11:46,589 --> 00:11:47,606
the largest risk right now
316
00:11:47,606 --> 00:11:48,741
is obviously on the inflation
317
00:11:48,741 --> 00:11:50,509
front in terms of in terms of what
318
00:11:50,509 --> 00:11:53,813
the performance could be for fixed income going forward.
319
00:11:53,813 --> 00:11:56,816
I mean, one of the things that you don't want to see is,
320
00:11:56,966 --> 00:11:57,333
a fed
321
00:11:57,333 --> 00:11:59,251
that's hiking in a bear steepening,
322
00:11:59,251 --> 00:12:01,587
right, meaning yields go up and led by that back end.
323
00:12:01,587 --> 00:12:04,140
That's always a little bit of caution.
324
00:12:04,140 --> 00:12:05,608
Because that could be distressing,
325
00:12:05,608 --> 00:12:07,076
particularly if it's inflation driven.
326
00:12:07,076 --> 00:12:08,811
So the risk to fixed income right now
327
00:12:08,811 --> 00:12:12,865
is that inflation continues, you know, on a path that's,
328
00:12:13,099 --> 00:12:13,549
you know,
329
00:12:13,549 --> 00:12:13,849
you know,
330
00:12:13,849 --> 00:12:16,769
everyone is moving higher, not just about the 2% target
331
00:12:16,769 --> 00:12:19,371
but continues to move higher. That is not our call.
332
00:12:19,371 --> 00:12:22,475
We continue to believe that, you know, inflation will
333
00:12:23,309 --> 00:12:25,978
start in this disinflation stereo again.
334
00:12:25,978 --> 00:12:26,729
When either comes
335
00:12:26,729 --> 00:12:29,298
the owners will cover rent or over time
336
00:12:29,298 --> 00:12:30,950
maybe the er productivity.
337
00:12:30,950 --> 00:12:32,001
But right now, given
338
00:12:32,001 --> 00:12:34,053
given the war we're seeing in the Middle East,
339
00:12:34,053 --> 00:12:35,304
there's going to be some bumps in the road.
340
00:12:35,304 --> 00:12:38,908
So this might be more of a 2027 kind of trend down.
341
00:12:39,325 --> 00:12:40,142
But that's that's
342
00:12:40,142 --> 00:12:40,943
one of the
343
00:12:40,943 --> 00:12:42,595
the risks, the other risk is too is
344
00:12:42,595 --> 00:12:44,363
I think that Mike was talking about
345
00:12:44,363 --> 00:12:48,300
is that people not appreciating the value of fixed income
346
00:12:48,601 --> 00:12:52,121
and not appreciating that, particularly at these levels of the
347
00:12:52,138 --> 00:12:53,389
level of yields,
348
00:12:53,389 --> 00:12:56,392
what the diverse of what type of diversifier they truly are.
349
00:12:56,542 --> 00:12:58,611
I know they've been disappointed the past several years.
350
00:12:58,611 --> 00:13:01,680
We know the correlation is broken down, but it's much different
351
00:13:01,680 --> 00:13:02,181
when you're
352
00:13:02,181 --> 00:13:04,400
at the starting levels that you are today
353
00:13:04,400 --> 00:13:06,202
than what you were several years ago.
354
00:13:06,202 --> 00:13:09,538
Again, a special thanks to Pimco for their partnership
355
00:13:09,538 --> 00:13:10,673
and collaboration.
356
00:13:10,673 --> 00:13:13,859
It's always a great opportunity to share, thinking
357
00:13:13,859 --> 00:13:17,246
and hear what's on the minds of our top industry colleagues.
358
00:13:17,513 --> 00:13:21,116
For more information, visit ubs.com/views
359
00:13:21,350 --> 00:13:23,869
UBS trending is on social media.
360
00:13:23,869 --> 00:13:27,807
Follow us on Instagram at UBS trending for content
361
00:13:27,807 --> 00:13:29,909
that you won't find anywhere else.
362
00:13:29,909 --> 00:13:32,962
You can also check out LinkedIn and Facebook for more.
363
00:13:33,212 --> 00:13:36,682
And as always, if you have any questions about your portfolio,
364
00:13:36,866 --> 00:13:40,853
please speak with a financial advisor from UBS Studios
365
00:13:40,853 --> 00:13:41,937
here in New York.
366
00:13:41,937 --> 00:13:44,490
I'm Dan Cassidy. Thank you for joining us.
