Market Conversations: A golden age for bonds?

Brian Levitt (00:08):

Welcome. I'm Brian Levitt.

Jodi Phillips (00:16):

And I'm Jodi Phillips. Today we have Matt Brill, Head of North American Investment Grade Credit. So, we're talking bonds today, Brian.

Brian Levitt (00:25):

Are you already hearing it, Jodi? After last year, we're already hearing people call this a golden age for bonds?

Jodi Phillips (00:31):

I have. I have heard that. It's quite a welcome perspective after last year and the rough go that both stocks and bonds experienced together.

Brian Levitt (00:41):

Yeah, I'm sure investors could have done without that selloff last year, and then they're even calling that now the “death of the 60/40,” right? Such hyperbole in our industry.

Jodi Phillips (01:01):

Oh yeah, that was the refrain: “Diversification isn't working.” But that's quieted down so far this year though, right?

Brian Levitt (01:07):

Yeah, I would say the reports of the death are greatly exaggerated of the 60/40 portfolio.

Jodi Phillips (01:13):

A Mark Twain [PJL1] reference, Brian, that's definitely-

Brian Levitt (01:15):

Yeah, we're going literary.

Jodi Phillips (01:16):

-not your usual '80s lyrics. Putting that aside for a minute, all right. I will say though, fun fact, that quote was reportedly a little exaggerated itself.

Brian Levitt (01:27):

No.

Jodi Phillips (01:27):

Yeah. No, no, he actually said “the report of my death was an exaggeration.”

Brian Levitt (01:32):

Oh, so they embellished it?

Jodi Phillips (01:34):

Little bit, little bit.

Brian Levitt (01:35):

Oh, and I fell for it.

Jodi Phillips (01:37):

You did, but that's all right. That's what I'm here for.

Brian Levitt (01:39):

I guess a sucker is born every minute, huh?

Jodi Phillips (01:42):

Okay, so P. T. Barnum[PJL2] , another fun fact, there's no evidence he said that either, Brian.

Brian Levitt (01:47):

Oh God. Jodi, I give up and this is what I get for having an editor as a co-host.

Jodi Phillips (01:53):

That's right, that's right. You're in charge of the numbers, I'm in charge of the words. That's how we split up the two things around here.

Brian Levitt (02:00):

Every quote I say was never said.

Jodi Phillips (02:03):

Nope. Nope, not at all. But all right, all right, back to our topic though. I could do this all day, but tell me why could this be a golden age for bonds, Brian?

Brian Levitt (02:11):

We'll have Matt talk to us about it, but yield for the first time in a long time certainly feels nice. I know my father appreciates it. Maybe even return opportunities, right? Total return opportunities if and when. I'm going to say when interest rates go down, not if and when, but again, we'll ask Matt his opinion on that.

Jodi Phillips (02:31):

Yeah, I mean, it feels like that's already started to happen, right?

Brian Levitt (02:34):

Yeah, well, certainly a bit. I mean, just think of 10-year Treasuries, I know people use that as the benchmark, certainly off their highs, but borrowing costs for corporations are significantly higher than where they were a year ago. I guess that's what happens when you get a lot of policy tightening in a very short period of time, it creates concerns that the economy could roll over.

Jodi Phillips (02:56):

That's right. But as you always like to remind us, Brian, the market leads the economy. So, has the corporate bond market already priced the worst of it?

Brian Levitt (03:04):

Yeah, perhaps. Although, again, well, I keep saying it, this is why Matt's here. I love having him on, because we'll talk to him about so many things. We're going to talk about the Fed, we're going to talk about the path of rates, recession concerns, opportunities in corporate bonds or other parts of the bond market and how to structure a fixed income portfolio. If 60/40's not dead, well, then what does the 40 look like?

Jodi Phillips (03:29):

Excellent question. Yes, that's a ton to go over, so let's not delay anymore. Welcome, Matt. Appreciate you joining us today.

Matt Brill (03:37):

Thanks Jodi, thanks Brian. Good to be here.

Brian Levitt (03:38):

It's good to have you here. What's the bond market telling you? I mean, we've now heard from the Fed we're probably past peak hawkishness. What's the bond market telling you?

Matt Brill (03:55):

Yeah, so I think the first thing the bond market's telling you is that the Fed is going to win this battle versus inflation.

Brian Levitt (04:01):

Yeah, can we stop and celebrate?

Matt Brill (04:06):

It's not done yet, that's the thing, but they're going to win, the Fed is going to win. With that, eventually rates are going to go lower. Whether we go back to the really low rate era that we had for so long is debatable, but this persistent inflation will get stomped out of the economy and the Fed's going to win, and that's what the bond market's telling you.

Brian Levitt (04:30):

Can we call it transitory? Is that back now? Was it always transitory or the Fed having to stomp it out means it wasn't transitory?

Matt Brill (04:37):

I think we don't want to use that word-

Brian Levitt (04:39):

Okay, we're done.

Matt Brill (04:40):

It has a really bad connotation to it. It could be a three-year transitory thing, I don't know, but at the end of the day, the Fed had to act. So, this would not have occurred without the Fed's actions. So if that's the definition of transitory, then it certainly was not transitory, because the Fed had to do something, the fire wasn't going to put itself out, essentially.

(05:02):

They've raised about 450 basis points at this point, and they did that in basically pretty much a year, so one of the fastest hiking cycles that we've seen in recent times. That was needed. I think the Fed got on board a little late, but once they started to really through last summer continue to tell you that they were going higher and higher, we all of a sudden realized, hey, they're not going to stop till they win this.

(05:30):

Even in the comments that you're going to hear from all the Fed members, they're going to tell you they still have more work to do, but that's only because they don't want to declare victory too soon. So we're not saying it's over, but we are going to say that they're going to win.

Brian Levitt (05:43):

So Jodi, Jay Powell's now singing “All I do is win, win, win no matter what.”[PJL3]

Jodi Phillips (05:49):

I would love to see the video feed of that, if that's indeed what's going on. But Matt, are there concerns then that the Fed's going to over-tighten and take it a little bit too far?

Matt Brill (05:59):

Well, that's the new shift or the new focus, in our opinion, is stop looking backwards at the inflation, because that will be solved, now you need to start focusing on whether or not the Fed is going to take it too far and drive us straight into a recession.

(06:26):

But our general view is that the Fed can engineer this soft landing. The runway for the soft landing keeps getting wider and wider, because the labour market is still good. Maybe not as good as it once was before, because you're seeing some layoffs in the financial sector, you're seeing layoffs in the technology world, but the general what I would call the mainstream America economy is still yet to see those layoffs.

(06:49):

So just in general, it feels like the labour market is loosening up a little bit at the same time that inflation is coming down, which gives us the chance that they're not going to put us straight into recession. But if the Fed stays at a high level for too long, then that's the bigger concern. I think if you're just looking at inflation, you're missing the story here, you need to start focusing on the slowing of the overall economy.

Brian Levitt (07:10):

I'll mix the metaphor here and say that the porridge is tasting just about right about now. Maybe I'll go on and say I guess we make hay when the sun shines, right? So, I'm mixing a whole bunch of metaphors here.

(07:25):

So Matt, I'll tell you the biggest question I'm getting from people is, or among the biggest questions is when I look at the yield curve, does it make any sense to move out beyond short rates, or just take the bird in the hand? You're getting four, four and a quarter at the short end of the curve. Why even think about going longer?

Matt Brill (07:48):

Yeah, so we get that question a lot and a lot of people are just in T-Bills rolling them along, and they're saying, "Look, I'm not going to get fired by my client for getting them 4.5%." But I'd argue that you're not really looking forward to their future either, you're not protecting for what we describe as reinvestment risk. That's the term we keep throwing out in 2023 over and over and over is reinvestment risk.

(08:08):

That tells you that yes, you might have a three-month T-Bill or possibly a year-long Treasury, but what is that going to be yielding by the time that comes due? What are you going to be rolling that into at that time? A lot of people say, "Well, I'll take my chances when I get there," but that's not really the way that you're supposed to be thinking about your finances, right? You're supposed to be locking in these yields at these elevated levels for longer and planning ahead.

(08:31):

You mentioned your dad earlier, that your dad's excited to get fixed income. I go back to the '80s and I look at the charts. I was born in the '70s for the record, but I look at the charts-

Brian Levitt (08:41):

Me too.

Matt Brill (08:43):

I look at the charts and you can see that in 1980, Fed Funds, I think it was around 18% and the 30-year Treasury was around 12%. So at that time, you could have bought a front-end T-Bill for 18%, or you could have bought a 30-year Treasury at a very inverted curve. I hear stories all the time of the grandparents back at that time that bought 30-year Treasuries for their kids, or the grandkids, and they locked it in for a long time and they were the geniuses.

(09:09):

I have never heard ever of a grandmother buying a three-month T-Bill at 18% and how smart that grandmother was, 'cause guess what happened? In three months or six months, whenever that T-Bill came due, they had to roll it into something else that yielded a lot less by that time, because Volcker had gotten inflation under control.

(09:26):

So while we're not at those extremes, I certainly point out to people that when you think rates are attractive, if you think 4.5% is attractive, why are you not willing to take it for five years? Why do you only want to get it for three months? As we're seeing already as rates are coming down lower, in a year or six months, we do think yields will be lower than they are today.

Brian Levitt (09:50):

I'm just trying to picture you at three years old trading bonds, but you tell us you're looking at the charts now, you weren't doing it back then?

Matt Brill (09:57):

I had a solid about 40 days actually, that's it, Brian, but it was a very short period of time in the '70s.

Jodi Phillips (10:05):

So Matt, you heard at the top of the show that we don't always have the best of luck accurately remembering famous quotes or being able to quote people word for word, but one thing Brian always likes to reference, and we'll see if I get it right, “get the credit cycle right and all else will take care of itself.” Is that right, Brian? Did I get that-

Brian Levitt (10:25):

Yeah, that sounds right. See, I'm not going to pick nits the way you do and tell you that you got the quote wrong.

Jodi Phillips (10:32):

Well, I appreciate that. So then Matt, given that, where are we in the credit cycle?

Matt Brill (10:38):

So, we're sort of in the early stages of the credit cycle, actually. So, when we think about what happens at the late stages of the credit cycle are that companies do silly things, like they over-lever their balance sheet, they buy back a lot of stock, they might even make a large acquisition that's debt-funded.

(10:55):

Then when you get the fixing or the reset of the economy and you get through the really good times, then you start to have the negative times, they start to say, "Oh, I probably shouldn't have spent my money on that, probably shouldn't have done that," and they really tighten their belts, and that sometimes creates an additional feedback loop of the economy going into recession.

(11:17):

What we're seeing now is that you're at this point where corporations have said, "We just went through this really strange pandemic, we survived it. We do think that the Fed is going to make this economy worse." So, they're simply saying, "We're just going to preserve our balance sheet. We're going to actually do everything possible to prepare for this really bad period of time coming," and they're ready for it.

(11:42):

So, I kind of feel like they can survive this fairly well. If and when we get through this shallow-ish recession or soft landing, then we're going to really start the new era of the credit cycle. So, I sort of feel like we're kind of at the end of the belt tightening, the end of the really bad period of time for earnings. You're going to see earnings fall off here for sure, but I would just say that I don't see corporations doing silly things that they're notorious for doing at the end of the credit cycle.

(12:11):

So it's a weird time for us right now, but the biggest point I'd like to make is that companies are not going to be surprised by a slowing economy, so they're prepared for it. This isn't like the pandemic that came out of nowhere that really could not have been forecasted. Corporations are all hearing that there's going to be a recession coming, and I would say this is the most forecasted recession that we've ever had, so if you're not ready for it as a corporation, you're not doing your job.

Brian Levitt (12:34):

So let's say we go into the shallow, as Lady Gaga [PJL4] might say, right? You said a shallow-ish recession. Has the credit market priced for that? If you're looking at a 5%, 6% in investment grade corporate, 8%, 9% in riskier credit, is that priced for a recession already?

Matt Brill (12:56):

So, we just look at yields it is. So if you look at yields, you're saying that these are elevated yields that are punitive to corporations and you're getting paid to take on risk. Now that being said, Treasuries are also elevated, and so the credit spreads or the premium you have to get paid to buy something other than Treasury are actually not really pricing in a recession, so they're really just kind of in the middle of the pack.

(13:18):

So, you can possibly buy just Treasuries or you can buy corporate bonds that get that additional spread. So we look at credit spreads and they're kind of around 110 to 125 (basis points) depending on which metric you look at, and a recession's more like 150 to 200. So, we're not-

Brian Levitt (13:33):

And that's investment grade?

Matt Brill (13:34):

That's investment grade. If you look at high yield, they're around low 400s, a recession might be 600 or 700. They don't tend to stay there very long, 'cause if you're yielding 700 basis points over Treasuries, you're probably not going to either be in business very long or you're going to need to have the economy rebound quite quickly, and people realize that there's value and they're not going to stay at those levels.

(13:55):

So at the 400 and the 125-ish range that you're at on credit spreads, you're in the middle of the pack, but what it's telling you is that corporations can weather this. I think that's kind of the key point here is that the yields are attractive, technicals are going to continue to be very good, because we feel like there's going to be a lot of money flowing into the asset class.

(14:17):

And fundamentals should not be that poor, because even though they're borrowing at higher rates, most companies aren't borrowing really at all. If they have to borrow, then they're borrowing at higher rates, but they have fixed debt that they have, they borrowed a fixed term. A lot of them borrowed back in 2020 and 2021 at kind of 2%, 3%, and now that rates are 4%, 5%, 6%, they're just saying, pass, no reason to borrow. We'll use our excess cash. We'll maybe slow our dividend payments, things like that in order to not have to borrow at a higher debt level.

Jodi Phillips (14:49):

All right, so Matt, you had mentioned high yield spreads for a little bit, and obviously you're the head of investment grade. Are you willing or able to reach into the high yield bond market?

Matt Brill (14:59):

Yeah, so we do like pockets of the high yield market. I think if you're buying the lower portion of the triple-Cs of the world, you really have to believe that you are going to get a soft landing. If you think anything other than a soft landing, triple-Cs will get hurt. But the double-B portion or the higher portion of the high-yield market still looks pretty attractive, and all the yields there are somewhere between 7% and 8%, which historically looks really good.

(15:23):

I would also point out that despite the slowing economy, we're forecasting that you're going to see at least $50 billion of upgrades out of high-yield into investment grade in the first half of the year, and you might even see a $100 billion total for the full year. So despite the fact that the economy is slowing, there's still going to be more upgrades than downgrades in 2023.

Brian Levitt (15:44):

How does that happen?

Matt Brill (15:44):

Well, the ratings are just sort of behind the curve. So if you look back in COVID, there's a lot of downgrades that hit then, a lot of these companies then really repaired themselves quite quickly, and the rating agencies have said, "Well, we'll wait till COVID's over." All right, well, COVID's pretty much over. They said, "Well, we'll wait till we see what the recession is, really how bad it's going to be." They keep kind of delaying that. At some point they're saying, "Well, the metrics are really, really strong on these companies. We've been waiting for the other shoe to drop and it just hasn't happened, so I guess we're going to have to go ahead and upgrade now."

(16:12):

So, they've been very hesitant and the pendulum swung really far to the downgrade side in 2020, we think it'll come back to the upgrade side this year. So I mentioned $100 billion of upgrades potentially for the year, there's only probably going to be about $15 billion of downgrades out of investment grade to high-yield.

Brian Levitt (16:28):

Wow.

Matt Brill (16:28):

So the ratio is still almost 10 to one despite a slowing economy, and that's because balance sheets are in such good shape. Again, it's all about these companies having predicted the worst. The worst hasn't happened yet, and they're in really good shape in just preparing for this proverbial winter is coming that just isn't really happening.

Brian Levitt (16:47):

Yeah, Game of Thrones, winter is coming[PJL5] , right? It's the most forecasted (recession), as you said. I got to imagine a lot of those chief financial officers were banging their heads against the wall waiting for these upgrades, huh?

Matt Brill (16:59):

Yeah, it's costing them money to not have been upgraded yet anytime they still have to continue to borrow. The area that we found has really been the least recognized by the rate agencies has been the energy space. There's a lot of energy companies that have really completely repaired their balance sheets. If you look at where price of oil is, even though it's off the highs, the energy sector's really just printing money.

(17:24):

Back in 2020, we had WTI go negative for futures for things like that, but even in a more normalized curve, it was still $40 a barrel versus now 70, 80 bucks. Even the service industry, you've got drilling coming back. There's a lot of areas within the energy space that are making a fair amount of money, and they've just continued to pay down debt this whole time too.

(17:48):

So the focus on shareholders has not been there, and I think that's one of the key things is debt holders that we like. We don't like to just make money and pay it all out to the equity market. The equity market has said, "Let's get our balance sheets fixed, particularly in the energy space. Let's get our balance sheets fixed first, and then you can start paying us back after that, because we just don't want to take any chances that you're going to be on the verge of bankruptcy like you were in 2020." So, the focus on cash flow has been to pay down debt and the rating agencies are soon to follow with their upgrades, we believe.

Jodi Phillips (18:20):

Well, let's talk about upgrades. I was planning to ask you about potential default cycle and what that might look like, but I mean, is there anything you're keeping your eye on in regards to that?

Matt Brill (18:30):

Yeah, so the consumer cyclicals are still a challenge. Yeah, you've seen that there's certain portions of the retail spectrum that we would be concerned around. One of the things is that the high-yield market had a issuance down about 80% in 2022 over 2021. The issuance of high-yield market is picking back up this year, meaning that companies are able to borrow. Although it's expensive, they are able to borrow.

(18:54):

With that, we've seen kind of the lower quality names really starting to rally, because investors are saying, "It looks like these companies can actually get access to capital." Versus in 2022, they would've never been able to borrow at all at any price, and now they're able to borrow, and that'll enable them to kick the can down the road a little bit.

(19:14):

So you can borrow to extend out your lifeline, if you will, for another year or two, and the economy turns out to either not have a hard recession, or if it just starts to have a recovery in back half of 2024, you've made it that far. So, we're predicting around 3% in defaults for high-yield this year.

(19:32):

Certainly I would say just in general, there's always a greater risk that it's higher than that, I think that's kind of the way the bond market is. But 3%'s kind of our target for the year, but it could actually be even less if this high-yield market stays open the way that it is now, because it's enabling these companies to kick the can down the road and fight another day.

Brian Levitt (19:50):

When you say consumer cyclicals, is that a lot of the names that we expected to have problems even prior to ever hearing the word COVID? Are these the names that were being disrupted by eCommerce anyway?

Matt Brill (20:04):

Yeah. Yeah, and I think COVID sometimes gave them a lifeline in some instances, whether it was through the government funding or just behavioral patterns that have changed for a brief period of time. But the longer long-term trends for a lot of the retailers, you saw Party City recently, they defaulted, but there's areas like that that just weren't going to make it probably no matter what. They tried to fight it as long as they could and eventually they had to throw in the towel.

Jodi Phillips (20:47):

So, let's look globally for a minute, Matt, if you don't mind. What about the emerging world, how do yields look there? Are they more attractive in those markets?

Matt Brill (20:55):

Yeah, so EM in 2022 got hammered just as hard as the rest of us, if not more, anything China-focused. So, China was specifically the problem child. You saw Evergrande, the real estate company there in China, that was really the first domino to fall, that there was some problems within the property development space within China specifically. Then you also had anything industrial-wise that was impacted by supply chain out of China and through a lot of the emerging markets. Some of them benefited, but a lot of them just were very correlated to China from a risk standpoint.

(21:35):

So, we saw massive outflows of EM in 2022, we saw property developers in China go from par to 15 that were investment grade rated names. Not household names, but very large corporations within China. Some of those have come back and come back 60, 70 points within the last eight weeks, which is just pretty phenomenal.

(21:57):

I would say those are not really things we generally would be investing in, but it's just pretty interesting to watch. But the typical EM bond that often at times is going to benefit from oil prices being higher has still gone materially lower versus where it was a year ago, so we think there's some opportunities there. We prefer to stay with companies in countries that are commodity-rich. I think if you're on the flip side of that, or if you're a commodity buyer rather than a commodity seller, you may have more issues. Then just overall, the rising tide of China does lift all EM boats.

(22:38):

So we buy hard currency, not local currency. EM, generally we're not taking the currency risk, but we just look at the champions in these emerging market countries, and a lot of them were just severely punished last year, and now we're seeing some pretty good opportunities. Again, I'd rather have the commodity aspect of things. Middle East is a great opportunity for us, and then we'd kind of be more some Latin America, that'll benefit from that as well.

Brian Levitt (23:05):

Where else do you look for yield beyond what we've asked you?

Matt Brill (23:08):

So, the housing market in general with non-agency mortgages is a really interesting opportunity. You saw the fear that higher rates were going to ca use just a massive housing market correction, it really hit the non-agency mortgage market. So, the agency mortgage market is guaranteed by Fannie Mae,  the US government essentially at the end of the day, but the non-agency mortgage market, even if you're buying the top of the stack or the highest rated, it's going to be fine from a principal standpoint, but people start questioning how bad is it going to get for the economy? How bad is it going to get for the housing market?

(23:49):

You see the home builders really started getting sold off within the equity market, as well as the debt market. We look at the non-agency mortgage market and we say, well, there's still a housing shortage. It's probably going to have to have some sort of correction just given where mortgage rates are. But all of a sudden you look up and mortgage rates are probably 100 to 150 basis points lower than their peak, and maybe the cost of the housing market isn't as punitive as people might've originally thought.

(24:12):

So, that's one area that we're looking at. It's not as clean, it's not as obvious that it'll be able to rebound here, but I'd say overall, that's one area that tends to lag and still have significant amount of yield. If you believe that rates keep going lower from here, it's going to be nothing but the wind at the back of the housing market.

Jodi Phillips (24:30):

So Matt, kind of at the top of this episode too, we talked about the talk of the 60/40 portfolio, 60/40's dead, that that refrain has clearly eased off a little bit compared to last year. But in your mind, looking at that 40% and looking at how investors might want to think about it, the role of bonds in their portfolio, what's your view of that bond allocation, and what do you think investors ought to be thinking about at this moment?

Matt Brill (25:00):

Well, I think you need to think about, one main thing is why do you want to own fixed income in the first place? I think a lot of people wanted reasonable steady yield and they weren't getting it for the last decade, and so they came up with new ways to buy their ultra conservative funds, or they bought preferreds, or they bought a lot of dividend-producing stocks in order to replicate that.

(25:24):

But more than anything, if you bought fixed income, you probably bought it because you had to, not because you wanted to. Maybe your company forced it upon you and said, "You have to own 40%, figure out the way how," and you got to try to make that puzzle work. Now, what we're finding is that investors are saying, "I don't have to own it, or if I do, I still want to own it anyway, and how do I own more of it?"

(25:48):

The pain last year was really tough, and so why did you buy it? You bought it for yield. Well, yield's got more and then everybody sold. So, then now that things have stabilized and people just have a little bit more time to think with a cooler head, they're looking at yields and they're saying, "I haven't been able to buy bonds with these yields since, call it 2007, maybe for the peak of 2008 when everything really, really kind of fell apart."

(26:16):

So you have to have some credit spreads, but for the most part, you haven't been able to buy it in a normal market since around 2007. This looks pretty attractive, and so they're buying more. The technicals look really good, and we feel like at the end of the day, you should like bonds of this 4% to 5%.

(26:31):

Now, are you going to be able to get back to that 6% that we saw in investment grade bonds very briefly in October? Probably not, but everybody says they want to buy more if they get there, which means you probably don't get a chance. But at the end of the day, we feel like you're getting in stable cash flow, you're going to not have to go through what you went through in 2022, which was really, in our opinion, once in a lifetime correction, which is really, really painful, but the adjustment that happened from it provided a lot of attractive yields.

Brian Levitt (26:56):

It's just a unique pandemic cycle and we're finding our way out of it back to maybe some normal equilibrium. Is that how you're thinking about it?

Matt Brill (27:04):

That's right. You're still arguably being distorted by the Federal Reserve, but in the opposite way. Meaning that the Fed is doing quantitative tightening, they're selling bonds. A normal market where the Fed is not intervening in any capacity, yeah, I think looking at yields at 4.5%, 5% would look attractive. So when we get to that point, we think that people have been really kind of fed up with the Fed-

Brian Levitt (27:31):

Distorting their bond portfolio.

Matt Brill (27:33):

They like that the Fed makes stocks go higher, they don't like it makes their bond yields go lower. But the reason why stocks go higher is because there was no yield in bonds. The whole TINA Market, right?

Brian Levitt (27:41):

Right.

Matt Brill (27:42):

So you had TINA for a number of years: “There Is No Alternative.” But now we're talking about TINA's sister, TARA, which “There Are Reasonable Alternatives.”

Brian Levitt (27:53):

Ooh.

Matt Brill (27:54):

So TINA is no longer around, her sister TARA, her alternate personality, I guess, is back.

Brian Levitt (28:00):

Did you just coin that or you're borrowing that from someone?

Matt Brill (28:02):

I've heard TARA out there.

Brian Levitt (28:04):

Oh.

Matt Brill (28:04):

I've also heard BAAA, three A’s: “Bonds Are An Alternative.” So BAAA or TARA, but I kind of like TARA.

Brian Levitt (28:12):

I like TARA, because-

Jodi Phillips (28:13):

TARA works better.

Matt Brill (28:13):

Yeah.

Brian Levitt (28:15):

I might have to start using that and say it's mine. We all steal from each other anyway, right?

Matt Brill (28:21):

I don't have a patent on it or any kind trademark.

Brian Levitt (28:24):

So Jodi, doesn't having Matt on make you feel so much better?

Jodi Phillips (28:27):

It does.

Brian Levitt (28:27):

Such clarity?

Jodi Phillips (28:29):

It does. I mean, we've run through such a long list pretty quickly, right? Investment grade and high-yield and emerging markets and mortgages. Is there anything that we didn't ask Matt that we should?

Brian Levitt (28:40):

Oh, I've got one.

Jodi Phillips (28:40):

Oh, okay, good.

Brian Levitt (28:40):

I've got, Matt.

Matt Brill (28:40):

Okay.

Brian Levitt (28:43):

Okay, so this debt ceiling thing we're going to have to grapple with at some point-

Matt Brill (28:47):

Yep.

Brian Levitt (28:48):

A little bit different than 2011, because in 2011 the Democrats needed a lot of Republicans to come on board, this time they only need a handful, so maybe we don't go to the 11th hour like we did in 2011. But in 2011, Treasuries rallied as it was happening. It was still viewed as the safe haven asset. Is there anything that could happen or do you have any concern where that would look different? Or would you still envision Treasuries to be the safe haven asset should we have to go to the brink on this?

Matt Brill (29:21):

Yeah, we certainly hope we don't get that far, but if we do, our view is that it would be a positive for Treasuries. Not for credit risk, but for Treasuries. The government can't issue debt during that period of time if there's a supply shortage, there's a flight to quality.

(29:37):

I think a lot of people often say, why are you selling all your Treasuries if the government's going to have a shutdown? You're like, "No, actually, we think you want to do the opposite."

Brian Levitt (29:46):

Right.

Matt Brill (29:46):

So it's completely counterintuitive, but at the end of the day, I think 2011 is kind of the playbook for it, and that's the way we would see it playing out again this time.

Brian Levitt (29:53):

Can we say what if, God forbid, or however you want to put it, they don't do what they need to, do we even let our minds go there? I mean-

Jodi Phillips (30:04):

You don't want to say it out loud, do you, Brian?

Matt Brill (30:07):

Yeah.

Brian Levitt (30:08):

Well, yeah, I mean-

Matt Brill (30:08):

We just hope both sides will have enough sense to not allow that to occur.

Brian Levitt (30:11):

Yeah, yeah, yeah. Yeah, agree.

Matt Brill (30:16):

Too many good things are happening in the economy that we're kind of fighting our way through this inflation problem that we had post-pandemic, and then just to have it disrupted by that would be really unfortunate. So, it's-

Brian Levitt (30:27):

Yeah, let's not shoot ourselves in the foot again. Yeah.

Matt Brill (30:30):

Exactly.

Brian Levitt (30:30):

Agree. Well, Matt, thank you so much for joining us.

Matt Brill (30:33):

Great to be back.

Brian Levitt (30:34):

Incredibly informative, great clarity. Feeling better about the world, Jodi seems to be too.

Jodi Phillips (30:41):

Absolutely, I do. Thank you so much for joining us.

Matt Brill (30:44):

I'm glad we weren't banned after the 2022 performance of bonds, so it's good to be back.

Jodi Phillips (30:50):

No one's ever banned, it always comes back.

Matt Brill (30:53):

We look forward not backwards over here, so thank you all so much.

Brian Levitt (30:57):

Thanks, Matt. Thanks, Matt.

Jodi Phillips (30:57):

Thank you.

 

NA2763011

 

Important Information

 

Some references are U.S. centric and may not apply to Canada.

 

All figures are in U.S. dollars.

 

The opinions expressed are those of the speakers, are based on current market conditions as of February 1, 2023, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

 

Past performance is not a guarantee of future results.

 

Diversification does not guarantee a profit or eliminate the risk of loss.

 

All investing involves risk including risk of loss.

 

Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from Invesco Canada Ltd. The opinions expressed are those of the presenter, are based on current market conditions and are subject to change without notice. 

 

These opinions may differ from those of other Invesco investment professionals.

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations.

 

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. The information and opinions expressed do not constitute investment advice or recommendation, or an offer to buy or sell any individual security

 

Invesco is a registered business name of Invesco Canada Ltd.

 

Invesco® and all associated trademarks are trademarks of Invesco Holding Company Limited, used under license.

© Invesco Canada Ltd., 2022

 

 

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

High yield bonds, also known as junk bonds, involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries.

Businesses in the energy sector may be adversely affected by foreign, federal or state regulations governing energy production, distribution and sale as well as supply-and-demand for energy resources. Short-term volatility in energy prices may cause share price fluctuations.

The 60/40 portfolio referenced throughout the episode refers to the traditional asset allocation of 60% stocks and 40% bonds.

Data on the level of Federal Reserve interest rate increases is from the Federal Reserve as of Dec. 31, 2022.

The references to yields between 4% and 4.25% are based on the 2-year US Treasury rate as of Jan. 31, 2023, sourced from Bloomberg.

Data on the level of the federal funds rate and 30-year Treasury yield in the 1980s sourced from Bloomberg.

The federal funds rate is the rate at which banks lend balances to each other overnight.

References to investment grade corporate yields between 5% and 6% and riskier credit yields between 8% and 9% refer to the yield to worst of the Bloomberg US Corporate Bond Index and Bloomberg US High Yield Corporate Bond Index, respectively. Sourced from Bloomberg as of Jan. 31, 2023.

The Bloomberg US Corporate Bond Index measures the US dollar-denominated, investment grade, fixed-rate, taxable corporate bond market.

The Bloomberg US High Yield Corporate Bond Index measures the US dollar-denominated, high yield, fixed-rate corporate bond market.

Yield to worst is the lowest potential yield an investor can receive on a bond without the issuer actually defaulting.

References to credit spreads for corporate bonds and high yield bonds sourced from Bloomberg as of Jan. 31, 2023.  Based on the option-adjusted spread of the Bloomberg US Corporate Bond Index and the Bloomberg US High Yield Corporate Bond Index, respectively.

Option-adjusted spread is the yield spread which must be added to a benchmark yield curve to discount a security’s payments to match its market price, using a dynamic pricing model that accounts for embedded options.

References to the borrowing costs of corporations are based on interest rates set by the Federal Reserve.

References to forecasts of upgrades and downgrades based on Invesco estimates.

References to the decline in high yield issuance in 2022 from 2021 sourced from Bloomberg. 

References to price movements of Chinese bonds sources from Bloomberg as of Feb. 2, 2023.

References to the level of mortgage rates sourced from Bankrate.com as of Jan. 31, 2023.

A basis point is one hundredth of a percentage point.

WTI stands for West Texas Intermediate. WTI oil prices sourced from Bloomberg as of Jan. 31, 2023.

The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity. The short end of the yield curve refers to bonds with shorter maturity dates. An inverted yield curve is one in which shorter-term bonds have a higher yield than longer-term bonds of the same credit quality.

Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.

Quantitative tightening is a monetary policy used by central banks to normalize balance sheets.

Safe havens are investments that are expected to hold or increase their value in volatile markets.

A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest); ratings are subject to change without notice. NR indicates the debtor was not rated, and should not be interpreted as indicating low quality. If securities are rated differently by the rating agencies, the higher rating is applied. Credit ratings are based largely on the rating agency's investment analysis at the time of rating and the rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition. The rating assigned to a security by a rating agency does not necessarily reflect its assessment of the volatility of a security's market value or of the liquidity of an investment in the security. For more information on the rating methodology, please visit the following NRSRO websites: www.standardandpoors.com and select 'Understanding Ratings' under Rating Resources on the homepage; www.moodys.com and select 'Rating Methodologies' under Research and Ratings on the homepage; www.fitchratings.com and select 'Ratings Definitions' on the homepage.