MASTERCLASS: Fixed Income - December 2019

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  • 01 hr 03 mins 32 secs
2019 has been an unprecedented year for bond markets. Three fixed income experts offer analysis on the tremendous returns for fixed income, the yield curve inversion, and the Fed's rate trajectory. The panelists also take a closer look at the tax benefits of municipal bonds, the growing green bond space, and areas where investors are finding yield in a low yield environment.

The three expert panelists are:

  • Steve Lowe, Head of Fixed Income at Thrivent Asset Management
  • Brian Luke, Global Head of Fixed Income at S&P Dow Jones Indices
  • George Rusnak, Co-Head of Global Fixed Income Strategy at Wells Fargo Investment Institute



Jenna Dagenhart: Welcome to Asset TV. This is your Fixed Income Masterclass. 2019 has been quite an exciting and unprecedented year for bond investors to see the least. They've seen some pretty healthy returns. They yield curve inverted, and the fed cut interest rates three times, lowering the cost of borrowing by a total of 75 basis points. Here to break it all down, we have our three expert panelists: Steve Lowe, Head of Fixed Income at Thrivent Asset Management; Brian Luke, Global Head of Fixed Income at S&P Dow Jones Indices; and George Rusnak, Co-Head of Global Fixed Income Strategy at Wells Fargo Investment Institute.

Gentleman, thank you so much for joining us on Asset TV.

Brian Luke: It's nice to be here.

George Rusnak: Thanks for having us.

Steve Lowe: My pleasure.

Jenna Dagenhart: So big picture, Brian, I want to start with you. How would you summarize the fixed income environment this year?

Brian Luke: Well, everywhere you look globally and, in the US, everything is green on the year end. I mean, you look at US treasuries, they're up posting around 7% returns. You can get a little bit better with tips at around a little more at 7-8% returns. These are strong levels that we're seeing. You move into credit, and we're getting even better performance. Now nothing like the stock market where we're rip roaring above 20% in the S&P 500 at 40% in technology. But 7% on treasuries, 10-11% on corporates. It's been a very good year. In fact, when you go back to the global financial crisis and performance since then, we're having one of the best returns in the US aggregate index.

Jenna Dagenhart: Yeah, especially for bonds. I mean, it's hard to compare them to equities, but especially stroking up for bonds.

Brian Luke: Right. And that's the thing that all around the world, I mean, calculate indices all across the globe, you're seeing year to date year over year returns being very strong. Yields now are low. They've come off their bottom. But people are still getting attracted to that long term, more secure investment approach. And they're reaping the benefits of staying in there when a year ago, people a little bit more cautious toward fixed income.

Jenna Dagenhart: Steve, going to move down the line. What are your general thoughts this year?

Steve Lowe: Pretty much the same. It's been a great year for fixed income. A lot of it's been driven by rates. If you decompose, like you're talking about credit, much of that is rates. I mean, investment grade corporates are up 12-13%. The majority of that is just rates and credit spreads have tightened a little bit. But this year has been marked by kind of a relentless drive for yield and push for yield. There's a lack of yield in the world. You can look at Europe and their negative rates, which half of the sovereign market there is negative within the Eurozone. Half of the credit market there is negative. So, all this is driving this push for yield, and that affects the US market a lot, particularly corporates. A very strong demand for corporates.

Jenna Dagenhart: Certainly. And we'll talk more in greater length later in the program about these low rates and negative rates abroad. But first, George, I want to get your take. What stands out to you the most looking back at 2019?

George Rusnak: So I think one of the big things is clients have had great performance within fixed income. But I think the thing that stands out the most is that I'm not sure how much they've appreciated that. And I think right now they don't know perspective. So right now, they don't realize that sort of 10 years gone from roughly 3.25 this time last year, down to 170, 175. And I think that they expect to get sort of the same types of levels of yields when they don't realize the reason that they've gotten that great return is because rates have come down so dramatically. So, what I see is just a tremendous appetite for more yield without just even appreciation for the risk that they have to take to duplicate that kind of yield. I think that's the big disconnect that we're seeing within the marketplace. There's always a demand for yield, but I think there's a complete lack of appreciation of the risk that you have to take in order to get that.

Jenna Dagenhart: Yeah, tremendous appetite, tremendous out performance. Do you want to talk a little bit at greater length about that tremendous out performance, Brian?

Brian Luke: Yeah. I mean, if you want to pull for the risk on strategy in fixed income, you've seen credit do well. However, you're starting to see investment grade outperform high yield. On a year to date basis, we've seen investment rate pull away. So, break that down further, the triple C portion is starting to tear away from the rest of the high yield market. You see the triple C OAS starting to wide in relative to the double B portion. You're not seeing that in triple B's. When we look at the S&P triple B corporate bond index, that is actually holding in fairly well relative to the investment grade side. However, that component has grown substantially in size as corporates continue to issue more and more debt. We're seeing I think the US is something to $11-13 trillion in debt outstanding. Majority of that is in lower rated credit.

Steve Lowe: Yeah. You talk about triple C's, that is concerning. The tail of it is underperforming. And you see the same thing within leveraged loans. Lower quality leveraged loans are outperforming, and investors are not chasing that. They're shunning it.

Brian Luke: That bid between the higher quality of the high yield is staying firm, but the bid for the lower quality is starting to tail off.

Steve Lowe: Double B's actually are quite rich right now.

Brian Luke: Right.

George Rusnak: It's just an interesting dynamic that you're pointing out. In sort of high yield, you're seeing that bifurcation of the upper and of credit quality doing well in high yield and the lower end doing poorly. There's sort of that split. But you're not seeing the same split in the investment grade space. From our perspective, that's kind of one of the reasons why that triple B space is done so well. Is there a large risk of them moving into high yield? Maybe. But the reality is take your gains at this point maybe right. You've seen some pretty large compression. In fact, single A to triple B spreads have compressed by roughly 50 basis points this year. You've seen a 15% return in triple B's this year. So, 4% in excess of high yield, that that gain a little bit and move up in credit quality. Get a little bit more defensive here, which is a hard message to speak when people are trying to get more and more yield. And it goes back to my first statement of people just not appreciating the risk that they're going to have to take if they really want to duplicate those yields.

Steve Lowe: To your point, there's been much made of the risk atrophies for going into high yield. Part of it is just the growth. The triple B universe is up 50% of investment grade corporate credit. It used to be 30%, and it dwarfs the size of the high yield market. It's twice as big, five times as big as the double B section. But if you look at it, triple B leverages kind of plateaued. Whereas the part that's levering up are the A credits. So there's signs that there's some stabilization that's taken on, and also if you look at the individual companies there, they have a lot of options. There's a Verizon, AT&T, Kraft-Heinz. They can cut off dividends. They can cut of CapX. Yeah; we feel comfortable in that section.

George Rusnak: I agree with that. I think that the idea that these are very large firms and financially flexible. And they've kind of taken advantage of the idea they're still investment grade and they can be more flexible as time goes on. My point is simply that you've gotten a lot of appreciation on that part of the market. Are you going to continue to get that appreciation, and I don't think you're necessarily going to get there. So why not move up in credit quality? But I agree, I don't think there's necessarily a risk of extreme fallen angels causing a problem in the high yield market.

Jenna Dagenhart: Great. Moving on to where to find yield in a low yield environment. Steve, what would you say for that?

Steve Lowe: Well, it's difficult if you look at places to get yield. If you want to get more than 5% yield, you pretty much have to take credit risk. Investment grade market is somewhere around 3%. So, to get 5%, you need to go to high yield, which is kind of 6%-ish or so, or below six, or you need to go into leveraged loans. You need to go in the emerging markets. So, it's kind of two basic ways you can get yield. One I stake duration risk. There used to be that credit curve is possibly sloping. That's gone. The credit curve is flat. So, you're pushing to risk your assets, and you can supplement. There are areas of the market, smaller than we use, like preferred stocks around 6%. And some of our more aggressive funds, we will use higher yielding areas like close- end funds. We'll do a little bit. You can get 8-9% there. MLP, asset bad reeks. But it's hard. I mean, the S&P 500 yields more than 10 year treasury on a dividend yield basis. So, you have to be creative on where you get yield.

Jenna Dagenhart: Yeah. A lot of people pouring into those high dividend stocks too. So, George, where are you finding opportunities in this low yield environment?

George Rusnak: Yeah. So, it's really challenging where do you find yield. I think you made some good points. Honestly, we like preferreds as well. We think it's a little bit of a hybrid. But still think that if you're looking at fundamentals, they actually have pretty strong fundamentals. You're going to have to focus obviously in the financial sector. You're going to grab on more duration. But they've been a great performer. We think they'll continue to be a good performer and some really good returns off of that. Emerging market stats is something that we're neutral on right now, but we do think there's pockets of opportunity. And I think then it becomes more of relative yield perspective. So, one of the areas that we kind of like from a sector basis is actually mortgage backs. We think that they've kind of been an under performer in this marketplace, but if you look at sort of mortgage backed spread versus corporates, it's actually tightened to 10 year lows at this point. We think there's some pretty good opportunities to move up in credit, grab some yield there, gain a relatively speaking yield, not like preferred or merging market. But also, not that credit risk and some good opportunities there.

We actually have also moved a little bit further into the yield curve to the intermediate part of the yield curve. So, we've become favorable there. And again, with the 10-year moving up to almost 2%, we just think the risk right now of yields backing up significantly are pretty low. You're going to have to see significant growth or inflation from there. And that's kind of not part of our base case. I don't even think it's part of the fed's base case. So, from our perspective, grab some yield while you can. That's tightened a little bit since then, but we still think there's some pretty good opportunity there.

Jenna Dagenhart: Where in that curve are you, Steve?

Steve Lowe: Intermediate part of the curve overall. I don't think it paid to take a lot of duration risk right now. And there is a lot of duration risk in the market. If you look at the investment grade corporates, it used to be kind of a 6-ish, now it's an 8. So, there's a lot embedded duration. So, I think generally intermediate to stay sharp.

Jenna Dagenhart: A lot of different areas within fixed income where investors can go. Infrastructure is one of them. Brian, do you want to talk to us a little bit about some of the advantages of infrastructure?

Brian Luke: Yeah. I think when you talk about the longer duration assets and the reach for yield, one of the big pain points is the insurers. They're always constantly buying fixed income securities. So rather than just chase along the actual yield or be concerned about the book value yield, they're looking for different types of corporate bonds where they can buy, that give them a regulatory benefit.

We see this particularly in Europe where solvency is encouraging from a capital accuracy framework to be able to invest in infrastructure. We see that here where there's a dire need for infrastructure investment in the United States as well as Europe. So, we've constructed indices that track and build and cater towards those types of investors so that they can actually look at the type of infrastructure investments from a pure play basis or that actually have that overlay to understand where they can get that additional regime or regulatory regime benefit. So, it's not just about the chasing of the yield or not just about the longer duration because they have to be there. It's more about how they can benefit from an optimization perspective and a regulatory framework that's coming on for them.

Jenna Dagenhart: Any thoughts on green field, brown field?

Brian Luke: So that's another area. I look at all of these extra filters, if people are not going to be satisfied with 1.7% on the 10-year treasury and just clipping that coupon and rolling it down, they're starting to look to the fixed income market to get different areas of other penetration. So, I mentioned insurers. When you talk about asset owners, they're starting to look at it from a top down perspective. What is their portfolio looking to do, and what does the social responsible impacts of that? So, in the fixed income world, that's green and that's the green bonds. So, our index actually attracts about half a trillion in green bond issuance that's out in the market. We have a lot of interest from that, not just from the asset owner perspective but on the retail side. There's been ETFs that have been issued that just target that area. So, people are not starting to change their mindset from just what's my yield on my fixed income sleeve doing, to what else can it do because we are in this low or sometimes negative yielding environment.

Jenna Dagenhart: Am I helping the actual environment in the process? We’ve seen a rise in green bonds, the bank for international settlement, making new green bonds for central banks. Any thoughts on that?

Brian Luke: Yeah. There's a tremendous amount of interest, particularly in Europe, a lot more issuance going on there. It's still a small market. Half a trillion is not a lot relative to the overall market. But you're starting to see traditionally a sovereign or super- national issuer, now you're starting to see corporates enter that market, securitize product, asset back securities, other areas like agencies. So, it's starting to kind of fill in like a traditional broad based index. And that's where I think the real interest is coming and the spreads around those bonds that used to be a little bit tighter, now they're offering comparable yields in that market. So, I think a year ago some were able to find enough investment in greens and green bonds, or they were thinking they were too tight. Now you're starting to see a lot more options there. So, it's looking much more like a broad based market in an index that we track.

George Rusnak: We agree on that. I think one of the things is when you're in such a low interest rate environment, you're always looking for points of differentiation, and the idea of having your money kind of work for you in an active approach is something that we've been doing as well. We have a team called a Social Impact Investing Team which does separately managed accounts in green bonds. It's growth has gone kind of off the charts because people's interest in I'm not really enamored with the yield, but I would like to have some more meaning around kind of how I'm investing. So that's kind of really taken off. It's really one of the areas that we see potentially growing from here as well. So, it's something that's worked out well.

We've kind of taken a little bit more of... Because people's definition of green is a little bit different, and so we've taken a little bit more of a structured approach and customized kind of off of that. That actually works pretty well for us.

Brian Luke: Actually, today just S&P Global just announced that they're going to... They've made an acquisition to the BECO SAM Enterprise. They're buying the SAM portion, which does the environmental, sustainable analysis of that. It's a big commitment that we're making in ESG overall. Not just from the next perspective but across the board.

Jenna Dagenhart: What's at the core of that commitment? What's driving that?

Brian Luke: Well, when you look at, again, some of the overarching themes of investors and what they're demanding, they're demanding essential data and intelligence and understanding it. I think you hit the nail on the head, there's a lot of different viewpoints. In fact, some people analyze one green portfolio to another, and you get negative correlation. So, the fact that you can have an independent objective analysis cultivated around a theme like that is important, and there are many facets, many depths of measurements for that.

Jenna Dagenhart: Negative correlation always a positive too. Would you mind elaborating a little bit more on some of the regulatory benefits that you mentioned earlier?

Brian Luke: Well, there's no shortage of benefits. I think it comes down to the ultimate investor and what they want to do. When you look at some of the regulatory framework that insurers are looking at, they've got to modify their portfolio. They can't take the amount of risk that somebody that's a traditional active manager. If you're looking for an individual investor, they want to have tax advantage yield. So, there's all different types of tax and consequential points that aren't just about the overall yields and overall returns. I mean, it's great to have solid returns in 2019. I think you pointed out some concerns about 2020. I don't have an opinion on that, but I think that's a fact that you look at low yields, they go up, and you're going to lose money.

Jenna Dagenhart: Any other thoughts on areas to different sectors, durations, particular areas where you're finding opportunities within fixed incomes? Steve, any final thoughts on that?

Steve Lowe: Well, I think you mentioned emerging markets, I think that looks interesting right now. There's a lot of I do some idiosyncratic risk there, but overall it looks attractive. Attractive yields about even with high yield right now. And the other area I think it's a little bit early is leverage loans. They've sold off. Traditionally leverage yields are below high yield because you're secured, you're in a higher part of the capital structures. There should be less risk. But right now, you see leverage loans yield higher than high yield right now, which is I think it's a little early because there's some credit issues within the space. But I think there's an opportunity down the road.

Brian Luke: I think it was kind of a bit of a double head, right? You had yields coming down, loans are floating right by nature. So you're going to have a lot more plus to spread. Our loan index tracks that. And when we look at the outflows, there was a lot of outflows but relative risk.

Steve Lowe: You've had a year of outflows. I think there was one week that was positive, and mutual funds have lost 35% of their assets in leveraged loans, mostly through outflows. So, the technicals have been bad. What would help the market most is higher rates.

Brian Luke: Right. And we started to see some flows coming back into those ETF products that are tracking a loan space. Since rates have bottomed out, but I think with that risk on sentiment, you'd expect better historical performance. And I guess now you think it's attractive at this point. When I look at it, I compare that to a high yield index or something like that. Because the floating rate nature, they haven't been able to stand up to those with that performance this year.

Steve Lowe: Absolutely. They definitely gotten the tail winds from lower rates.

Jenna Dagenhart: Any diversification benefits for emerging markets that you'd like to point out, or?

Steve Lowe: Driven different than the corporate market. Most of the corporate market is... Corporate rates when you're in emerging markets, you think of sovereign risk. And it's also individual countries. So, it tends to move as a group often, but there's always opportunity within there because there's a lot of idiosyncratic risk. Look at Argentina this year, those bonds blew up spectacularly. Cut in half in a day on unexpected election result. But there's a lot of areas that are more attractive. You just have to pick your countries well and do your research.

Jenna Dagenhart: I remember covering emerging market bonds in 2014, which was quite a year for Argentina if you remember.

Steve Lowe: And they're back again.

Jenna Dagenhart: Yes. Round two. Before we move on from different areas, I do want to touch on munis and some of the tax benefits there. Brian, why don't you kick us off?

Brian Luke: Yeah. Sure. I think overall when investors are trying to find out what they're looking for in their portfolio and whether it's from a high net worth or family office or even on an institutional basis, the tax exempt yield that you're going to gain from a municipal bond is going to be a higher overall level yield than you're going to get in the sovereign or treasury market. So, the indices that we track that focus on that are the Muni National Index, it's a broad based index. Large issuers, at least a minimum of 100 million in terms of the overall deal size. You see a lot of those issues provide that stable income. They provide tax equivalent or tax exempt benefit when you see that. That's one way to get to broad based exposure to it. Another is if they're trying to match up and line up the overall risk to your time horizon. There's a series of municipal bond basically target date indices that we launched that are covering a different year, and that actually can roll down, similar to a ladder portfolio. But when you put that into an investment vehicle like an ETF, you get the diversification benefit and liquidity benefit from investing those.

So, we see a lot of different applications across that in the municipal bond space. We think that's something that is very, very relevant to investors, particularly those that are seeking income and can take advantage of the tax exempt nature of municipal bonds, particularly in this lower rate environment.

Steve Lowe: I agree.

George Rusnak: Go ahead. Sorry.

Steve Lowe: No, just on a tax equivalent basis, munis are attractive, particularly with the changes in the tax code and the ability not to deduct state and local taxes as you could before. There's been very strong demand for munis too. The influence has been very strong all year. They've gotten a little rich from evaluation perspective. But they're still interactive asset.

George Rusnak: I think you hit the nail on the head. Exactly where I was going to go is that if you look at munis, late 2017 with the new tax code, everybody thought there was going to be not as much demand for munis. And in fact, the idea of cutting back deductions, cutting back the idea of being able to refund munis with treasury debt, that cut down the issuance, also cut down potentially the demand. But the reality is demand actually picked up. So, you've seen 45 weeks of straight inflows into munis. You've seen tremendous demand pick up, and now you're seeing supply pick up as we kind of get back. And actually, what's that led to on a muni market is price discovery. So instead of tremendous demand, oversupply eating the marketplace and causing a drop off in munis. It's actually led to more liquidity in the idea I know now where munis can be priced properly. So better trading and actually increasing liquidity. So, from our perspective, I think it's set up pretty well.

Is it reached to historical on sort of a yield spread versus munis versus treasuries? A little bit, yeah it is. I would say that that's probably not as important as it's been historically because you don't have as much crossover coming in. I think one of the unique areas also is sort of this taxable muni markets. What you seen actually is taxable munis being issued to... Again, taxable munis are just the idea that your state and local tax exempt, but you're actually federally taxable. And those have been issued to refund a lot of municipals. And what you've seen is a pick-up of that, and we think of pick-up of that next year to the tune of about 30 billion. Small marketplace. But it's going to be get bigger over time. And the important thing is if you look at it from a taxable buyer's perspective, you can buy a taxable muni in sort of the 10 year era. Now you get diversification. You get a little bit less volatility associated with it. And you get almost 20 basis points in the 10-year part of the curve. So, you're seeing some really good opportunities there. We think that's going to be picking up.

But the tax exempt market we think is still a good opportunity in any backup that you might see because of the new issuance that's coming out here. We think it's a good opportunity to get a little bit longer for longer term investors.

Jenna Dagenhart: George, I'm glad you brought up 2017 and the tax code. Well, here we are in 2019, and there's been a demand supply imbalance.

George Rusnak: Yeah, within munis it's been crazy, right? So, like I said, you've seen 45 weeks of straight inflows, and the other thing with that is yes, issuance has picked up here recently. But the reality is there's so many muni bonds that are actually maturing or being called and rolling off that's actually causing a negative supply within the muni market this year again. And next year it'll probably turn a little bit positive. So, they'll be net positive supply. But the majority of that is actually going to be taxable munis, which is not what traditional muni buyers buy. So therefore, you're still going to see constrained supply within the marketplace and still a struggle to find the right munis for your particular portfolios. So, we think that's going to continue unfortunately. I know a lot of people are struggling with finding the amount of munis for their purchase. I think that struggle unfortunately is going to continue into next year.

Jenna Dagenhart: We mentioned how with green bonds, that's a differentiator, and this low yield environment, same thing. Maybe with munis and taxes, is that a differentiator, would you say?

Brian Luke: Yeah, absolutely. If you're able to pick up the similar yield but you actually save. If your effective tax rate is 30-35%, you're going to pick up a few extra 50 base points depending where you are, what you're buying. So, you mentioned green, there's a lot of municipal green project bonds that are out there. There's an index we track that just focuses on that portion of the market. The green market is starting to grow in size in the municipal side. There's over 2500 or so particular municipalities that have issued within the green space alone. So, it's definitely picking up traction. And if you can get that double bang, whether it's social perspective and the tax equivalent basis, you're going to definitely feel a lot more comfortable with that yield as opposed to just plugging away at US treasuries.

Jenna Dagenhart: Socially responsible and tax benefits.

Brian Luke: Yeah. That's a great way to go. I think if you wanted to look at infrastructure and how that is building out on a taxable side. I agree. There's a lot of issuance that's there. In terms of the sizable ones, at least 100 billion in that on the taxable side that's out there in the market. So, it's a decent and impressive chunk of the market that most people don't really look at and realize.

George Rusnak: Yeah. I think it's not necessarily... It's getting bigger, let's put it that way. But it's not necessarily big in liquid, and I think that's one of the things with wise that's maybe a little bit overlooked. But I think it will be getting bigger over time. Typically, longer dated type of assets too, which makes them a little bit less liquid. But again, I think over time you're going to see that taxable muni marketplace grow. Again, I think it's more of an opportunity for the taxable side of this point. You may start seeing some municipal investors getting involved, but I think they're going to be mostly gravitating towards the traditional muni space.

Jenna Dagenhart: I'm eager to talk about the fed. I'm sure all of you are. We talked about low rates. But we haven't gone deep on that yet. So, I want to discuss that. So, the Fed has cut interest rates three times this year. We're in a very different place than we were in 2018 to say the least. Steve, what are your thoughts on the fed's cuts as well as the fed signaling a pause?

Steve Lowe: Sure. I think you made a good point. There's been a significant kind of pivot in the fed over the last year. I mean, you go back to fourth quarter last year, they were raising rates. Raised in December, which caused the market to riot and then kind of pivoted and paused. And then have done three cuts since. So there's been a pretty significant change in their outlook for the future of rates. I don't think the fed is going to hike or cut any time soon. They have been pretty clear on that that they're on hold for the foreseeable future, and the threshold for hiking is significantly higher inflation persistently, higher inflation at or above their 2% target, which hasn't happened. In fact, since they adopted the target in 2012, it's only been higher about 10% of the time. So, I think inflation stays muted, and then the threshold to cut would be a pretty material pick-up in growth.

But if you send out into next year, it looks like there's basically a bimodal distribution. So, either the economy slows and there is a recession, which isn't our base case. But the fed's going to cut zero right away. They're going to it absolutely. The alternative to that is kind of the reason that they cut rates, which is insurance cuts. And then growth picks up, gets a little higher, and then they may end up raising eventually.

Jenna Dagenhart: And with those insurance cuts, they cited muted inflation as well as global developments, but honing in on inflation, the question a lot of people are asking is inflation dead? What would you say to that?

Steve Lowe: I don't think it's dead, but it's near death. Yeah, there's a lot of inflation pressure in the world right now for a variety of reasons. And Europe has struggled to get inflation going. They haven't been able to do that. Japan has struggled with inflation going, and they haven't been doing that. So I think we stay in a muted inflation environment, and one of the impacts of that actually is that it helps central banks be more accommodative, more dovish because it allows them to cut rates low and have a very accommodative policy and not worry about inflation take off because that's a main fear of being overly accommodative. The other fear of that is asset bubbles.

George Rusnak: That's a good point. The asset bubble point because I think the idea of the fed being... If we were sitting in this chair last year at this time, we were looking at them raising rates at year end and potentially even raising rates into next year. That's obviously reverse course dramatically. The fact that they're lowering rates in this environment, I think some people question whether their dual mandate suggests that they should be or not. But the reality is they've been sort of trying to get ahead of it and trying to orchestrate sort of this soft landing. And from that perspective, they've done a pretty good job of that, and they've done a really good job of conditioning the markets. The first time they cut, there was a little bit of pushback from the markets about how many times they would cut and what that would look like.

Jenna Dagenhart: Mid-adjustment. Some middle adjustment.

George Rusnak: Some cycle adjustment, exactly. So if you noticed, obviously Chairman Powell now come out with very scripted notes and how to read through this and not going off script. And I think the market likes that. It's a little bit clearer communication is becoming more comfortable with the idea hey, this is a mid-cycle adjustment whether you call it or not that. And they're not getting ahead of the fed and kind of forcing the fed's hand, which is actually a healthy thing from that perspective. It sets us up for this softer landing and kind of good longer term growth. Albeit, not at very robust levels like 3% plus, probably just sub 2% growth rates. But that's not a bad thing overall. But from an inflation perspective, then what does that mean? That probably means a little sub 2% GDP inflation as well. We just don't see that necessarily as dead but sort of dormant for now is probably a good way to put it.

Brian Luke: People look at the bond market, and why is the fed cutting. Well, they're taking the signals from the bond market. I mean, earlier on, 2th and 10th were inverted. The yield curve was inverted. That's a big for coming of a potential recession. It's not always right that the yield curve and the yield curve inverts recession is coming. But they take notice on that. They're taking signals from the bond market, which is exactly why all market participants should be focusing on what the overall yield levels are doing. I think when you see that inversion and then the response mechanism from the fed, that's what they're hyper-focused on.

Now they've cut rates. Now we're no longer inverted. We're still fairly flat. I think that that's a lot of interest in what they're going to do next. They still have room for that. But it's that inversion and then coming out that a lot of investors that we hear from say whether that is the actual signal. So, I don't know what the signal is or what that really means. But you can see where the feds taking their cues from the bond market. They're looking at that.

George Rusnak: I think that's a really good point. As the fed being, like I was arguing a little bit before, proactive in their approach because the data didn't necessarily support them to cut rates. Your point I think is well taken, which is actually they're reacting to what the market's talking to them about, which I think is a very valid argument. Quite frankly, they've argued the idea that it's more important for them to get out ahead of issues then try to catch up later on because history tells us that's not as effective. So I would agree. You can't argue looking back. They've actually orchestrated it fairly well at this point.

Steve Lowe: The first time in quite a while you see market expectations pretty much in line with the fed. You go back a couple months ago, and the market was still kind four, five cuts into the future. And now there's maybe one through the next year. So, they've done a good job of kind of aligning with the market.

George Rusnak: I agree.

Jenna Dagenhart: So George, you made a good point about the mid cycle adjustments spooking markets. We'll fast forward to where we are and the fed signaling the pause. As you mentioned, Steve, market seems to be okay with that.

Steve Lowe: Yeah. I think markets have bought into that actually. If you look at them in the curve was inverted, which you had mentioned, and now it has steepened significantly. It's not incredibly steep, but that's a powerful signal. See equity markets, cyclicals have come on, values. These are all kind of a reflationary trade. So as now the market is buying into the scenario that this is a pause, an insurance cut, and it will help reflate the economy. And that is if you look back to the mid-90s is kind of the analogy that most people have. That's exactly what the fed did. They cut aggressively. The economy could stabilize and did better, and that's kind of the template for today.

Jenna Dagenhart: And you mentioned you don't think that we're going to get a hike, no reverse course there with the hike.

Steve Lowe: It would take significantly stronger inflation before the fed is going to hike. As I mentioned, consistently since they adopted the inflation target, inflation on their shot, and if they're going to be credible and keep their credibility, they need inflation to be at two or above two over time and average two over the long run. And one of the keys to that is raising inflation expectations. You can look at inflation expectations are still quite depressed. You look at the tips markets and surveys. Inflation expectations are depressed, and they need to raise those up.

George Rusnak: I agree. Five-year tip break evens around 152, 162, in that area. And then I think the important thing is, and you made this point, is that yes, they've kind of stabilized the economy. But we're stabilized at sort of this lower rate. I think that people are kind of looking for that next increasingly growth rate, and we don't see necessarily a catalyst for that. So that's one of the other reasons that we don't necessarily see the fed is going to be raising rates anytime soon. They're kind of stuck in this wait and see mode and evaluating data. And more likely potentially leaning towards cutting if things go worse. Things go better, growth grows dramatically or inflation, then they could raise them. But I don't know if that's part of our base case.

Steve Lowe: It would be awfully hard for them to raise in a world where there's still 11-12 trillion in negative yielding debt. The ECB is-

George Rusnak: Globally speaking, yeah.

Steve Lowe: ... negative 50 basis points, and they're expected to go to negative 60 basis points. So, I mean, the point is we're in a low yield environment globally. And it's hard to get too out of sync with that.

George Rusnak: Correct.

Brian Luke: Adding on to the low yield environment, we had an all-time low in the 30-year. We're seeing negative rates across Europe. We're seeing a negative mortgage issued in Denmark. You can get basically borrow money to buy a house, negative. This is unprecedented times that we've lived in throughout this time. And we've had unprecedented returns. Stock market's at an all-time high. So, you see these tremendous amount of assets pushing down on the long end of the yield curve and pushing investments there. People reaching out for a yield, buying risk. You see the stock market doing all-time highs. These are the types of signals that we're seeing. At the same time, you're also looking at some other economic weakness that we would look at as well.

We talked a little bit about the growing portion of the triple B market. We talked a little bit about the falling out of the bottom of the higher yielding portion. So, these are cognizant risks that we can measure through our indices or measure through the market that I think investment professionals need to take a harder look at. Much like the fed looked at the inversion and the signal it took, and they acted on that. What about the other risk markets? What are they telling us as a future idea? I think that's the overall theme that we carry out of this summer where we see all of these records in terms of low yields, in terms of negative yields, in terms of issuance, and the response mechanism from central bankers across the globe. It wasn't just the Fed that was cutting. We saw cuts all across the globe. I mean, it was like dominoes falling everywhere. So, this is not a phenomenon that is central to the United States. This is a phenomenon that's gone across all over the globe. So, as investors start thinking about negative yields or buying, they start looking at other areas of investing and how they can actually access the safer part, which is what fixed income investors force us to be looking at. There's a lot of interesting dynamics that all I can say is it's unprecedented. So, we live in unprecedented times.

Steve Lowe: Oh, completely unprecedented. We've never had this happen before, and there's no playbook. The amount of central bank intervention in the fixed income markets is significant, and one of the problems with that I think is signal versus noise. I mean, markets are... You'll have central banks depress rates, which normally would be a sign of slow economic growth, which we have. But it's been difficult at times to pick up signals in markets that are manipulated by central banks. I mean, you have even the ECB in Europe buying corporate bonds. In Japan, the DOJ actually buys equities. So, it's really, as you said, it's an unprecedented time.

Jenna Dagenhart: Something we'll be seeing in the textbooks in years to come.

Brian Luke: Hopefully. Hopefully a one-time phenomenon.

George Rusnak: Just wondering if we're starting to get some pushback on negative yields right now. I think you saw negative yields go... Was it $17 trillion? Now it's standing debt. We already got to all-time highs. But you're seeing that come back a little bit. Not necessarily that you're seeing corresponding growth and inflation pick up. But just some questioning over the validity of it, the success of it to some extent. Because if you think about it, what they're trying to do is stimulate growth and inflation. If you track whether it's European or Japan, any area that's actually in negative rates, they haven't seen pick-up in growth and inflation. They've actually seen stabilization, maybe a little bit down even. So, I'm not sure if it's been successful.

And the second thing is it does have knock on effects to the rest of the marketplace. More specifically to financial institutions, banks that can't pass on negative rates. Not that you should feel sorry for banks. But you're also hearing them now pick up the dialogue of they might have to actually raise cost to clients to offset some of those fees. The idea of the impact to longer term assets, whether it's in insurance companies, defined benefit plans. And then the actual impact into individuals themselves as they save for retirement. So, there's some negative challenges to negative rates.

Again, relatively speaking, the US is looking great. Nobody's happy with the 170 tenure. But again, look at the negative 35 basis point tenure on German bonds, relatively speaking, it's really good. I just wonder if right now you're starting to see some pushback from politicians in the idea of should we continue on this path as pointed out from negative 40 base points to negative 50. Does negative 60 work? What point do we start saying this is not working out? So, I think you're going to start potentially seeing a little bit more pushback on that. And you're seeing obviously as Draghi moves to Lagarde, Draghi's last comments were really heavily focused on the idea of needing fiscal stimulus to start spearing thing. Question is that going to have follow through? I think that's something that's yet to be determined. I think that's going to be a long way away unfortunately.

Steve Lowe: I think you make a very good point about negative rates. I mean, I don't think they've worked. The idea of it is to spur economic activity and get people to borrow. But particularly when one of the reasons you borrow is you think rates are cheap now, and they won't be in the future. Well, the rates are staying low on the ECBs but been very clear about that. And it hasn't really seen borrowing at all. As you mentioned, it harms banks. It harms the transmission of monetary policy. I think the fed just released some minutes from their October meeting, and there wasn't a single participant that talked about economic rates. There wasn't a single participant that thought negative rates were appropriate or attractive in the United States.

George Rusnak: And you've seen even pushback in Sweden now. Sweden is actually going to go from negative 25 basis points to zero at the end of the year. They've kind of been pushing back on that. And to your point earlier is the idea of if you're telling me negative 50 basis points on the short end of the curve, and you're telling me I'm going buy throughout the curve and that's your lower limit. That pushes all rates negative. So, it actually kind of created this environment, right? So, it's easier to create the environment than to move out of it. So, you're going to start seeing them trying to move out of this I think right now.

Jenna Dagenhart: Domino effect that you mentioned.

Brian Luke: Yeah. I think we have to look at ourselves though as fixed income professionals and start to say, "Well, why are we all worried about this? Our portfolios are doing better than... In some cases, better than any year than global financial crisis." The fixed income indexes are calculated, those are doing better.

So, whether you're going to get a 2% or 1% or whatever you’re comfortable with, you got to look at that vehicle as ultimately it's capital preservation. If the stocks turn down and things are negative, investors may look to the bond market regardless of yield. Now that's the component that they'll have to be faced with at that point. When you look at the market today, I think that's what we look at from a target date investing, from a retirement perspective, from something we're looking at. An allocation between stocks and bonds. You got to have that natural balance because regardless of the overall outlook, there's a certain position that has to be held.

George Rusnak: Completely agree. I mean, given where we are in the business cycle, we're pretty late in the business cycle right now. So, if you're thinking about potential future downturn, next year, next two years, next three years, you want to have some fixed income in your portfolio, regardless of rates. You kind of need some balance to your portfolio, and that will... We think if you get sort of this potential recession oncoming or dip in the economy, that will do well. So, you need that balance in your portfolio. I agree with that.

Steve Lowe: Treasuries have worked great as a hedge recently for risk. 30 year treasury's up 20%-some this year.

George Rusnak: Right.

Jenna Dagenhart: Yeah. It's hard to talk about the possibility of a recession without going back to our conversation about the yield curve. For many people, yield curve inverted, well there we go, which isn't always the case. We don't always see a recession after a yield curve inversion. But it is a bit of a warning sign. Steve, do you want to pick that up?

Steve Lowe: Sure. I think it is concerning. I think you have to look at why the yield curve inverts one of the reasons. I mean, typically it inverts because you're expecting lower growth in the future or you think the fed is too restrictive. So longer rates fall, and short rates stay up. And you're right, it has been a good recession signal, not always. There have been false positives. The other reason the yield curve could invert is because of the demand for safe assets that push down longer term treasuries. There's some debate or argument over this right now. There are negative term premiums, which is essentially non-growth, non-inflation factors in rates. And this huge quality yielding data and quantitative easing and muted inflation have depressed term premiums, which is kind of a risk premium embedded with it.

So, if the curve inverts because of that, it's not as reliable a signal of a recession. I think nevertheless the market pays attention to inversions and that can become self-fulfilling. So, it does matter, and you do need to pay attention to it.

Jenna Dagenhart: We're not alone. The yield curve inversion isn't unique to the US. We saw it globally as well.

Steve Lowe: Yes, that's right. It isn't actually always predictive globally as well as it is in the US. The inversion has a stronger signal in the US.

Jenna Dagenhart: The two tenure.

Steve Lowe: The two tenure, actually three month tenure is the most predictive.

Jenna Dagenhart: Mm-hmm (affirmative).

George Rusnak: That's what we look at as well. The three month to tenure, even the one tenure. The way I look at the yield curve though is it's almost like a thermometer for the economy. It's the idea you have a normally sloped yield curve, with short rates and low and longer, it's higher, to healthy economy. As things get a little over heated, you get short rates coming up. Sort of a flatter yield curve, that sort of getting a cold sort of economy. And then when you invert, that's sort of a sick economy. And that's sort of what we faced a little bit with the three month tenure and the one year tenure going back to May of this year and through August.

Brian Luke: [crosstalk 00:45:57] for five months.

George Rusnak: Yeah. So, it was quite a period of time. I mean, the way we look at it statistically speaking is it is statistically significant, and it has been historically. Our analysis shows if you get either 25 basis point inversion or four weeks or more, that's when it becomes a little bit more statistically significant. Both of those happened in the three month and the one year versus tenure. Didn't happen that much for two versus 10. It almost happened for a couple days. But it's something to be wary of. I think that as much as it's flattened out now, which is a good sign for the economy, let's keep in mind this has been explained away by some pretty smart people. You have Greenspan that explained it away in 1998. You had it explained away in Bernanke in 2006 right before recessions with global supply. So, let's just keep an eye on that because it is I think, like I said, a barometer of health for the economy and it shows a little bit of challenge.

The other thing you have to keep in mind is the timeline associated with that. It's just very varied. It could be as low as six to eight months to as much as 24 months. So, our base case is not that you're going to see a recession next year. But honestly after that, you could potentially see a recession in the next year and a half to two years, and that's something that again is proceeded by the inversion of the yield curve. Albeit much more ahead of what you would think trading.

Steve Lowe: You're absolutely right. It's hard market timing device.

George Rusnak: Yeah.

Steve Lowe: Because it is so variable for that. If you look at equity terms in particular, the last... They did quite well after inversion. For about a year or so, and then they don't do so well.

George Rusnak: Exactly.

Brian Luke: So you're bringing up 1998, 2006, and then 2019. So, we had some pretty good years, then we had some pretty bad years. You mentioned, Steve, the yield curve doesn't always predict a recession. It's interesting. We look back and saw that if you overlay a consumer confidence year over year declining and you overlap a contraction and a PMI ISM numbers, then it actually does predict recessions. And we hit that either in recession or within recession within nine months. So of course, these are economic games we can look back in history and time and doesn't explain what's going to happen quite forward. But it does add to the statistical significance.

Steve Lowe: Sure. I think bottom line, it is concerning. You have to pay attention.

Brian Luke: That's right. At the end of it, I think there's still a role for fixed income portfolios out there. And what's also I think is interesting is how all investors can access this market now. This is not a pure play institution move because people can buy certain targeted mutual funds or ETFs that are focused on just a basket of long duration bonds or long treasury bonds or short treasury bonds, or you can buy a long short ETF. All these different mechanisms for every investor to actually have that access to it.

Jenna Dagenhart: Yes. I'm going to hit on ETFs and their growth in a moment. But before we get there, I do want to go back to this conversation about the yield curve and the Fed. As we said, you can't always predict the timing, but a recession is inevitable at some point in the future. We don't know when. And so, when this happens, do you think, Steve, that the Fed has the ammunition to respond. What do you think the Fed's playbook will be?

Steve Lowe: We talked about it earlier, I don't think it'll be negative rates. Well, the Fed will cut to 00 bond right away. They'll do it quickly if they think a recession is coming. They will also give forward guidance out several years, so they don't expect to raise rates. That is actually a pretty powerful tool. And they'll restart quantitative easing. They will buy assets, most likely treasuries. Last time they did treasuries and mortgages with the idea of depressing kind of the long end of the curve. There's an outside chance they would follow what Japan has done, which is yield curve control where they target a specific rate. Japan targeted zero on a tenure. And as long as the market believes that they're going to defend that, they're actually going to end up buying less JJPs, which is Japanese government debt. But that's questionable if they do that.

So, they'll stick to kind of the traditional playbook that they had in the past. I don't think the fed will take rates negative. You could say the market takes rates negative in the short end for a little bit because it'll be such... If it's a deep recession, it'll be such a demand for safety that it could drive down the short end of the curve negative two years.

George Rusnak: I agree with a lot of what you're saying. I think that the Fed is really reticent to looking negative rates. Although the market could potentially push them there, depending upon how deep the recession is. They'll move in a quantitative easing, and anything else that they can do beyond going to negative rates at this point. I think they'll ramp up pressure on the fiscal side, and quite frankly, although there might not be much galvanization around any topics right now from a fiscal policy perspective. I think if you get into a recession, there could be some appetite for that. Certainly, you haven't seen an appetite for saving. It's more been spending, and I think if you're asking them to spend on something, they'll probably be some consistency around that. And you'll probably could see some fiscal stimulus, even though we're already running trillion dollar deficits at this point.

I think that's your next scenario. When you go into a recession, if it is going to move to zero rates, it's going to move to quantitative easing, and they're going to ramp up dialogue around fiscal stimulus, the need for that to kind of get us out of that.

Steve Lowe: Which you pointed out is exactly what you're seeing in Europe. [crosstalk 00:51:28] was practically begging for fiscal stimulus.

George Rusnak: But there you have a little more fragmented economies and areas that can do it and that can't. Sort of are a little bit more reticent or hesitant to do it from a historical perspective.

Steve Lowe: [crosstalk 00:51:42]

George Rusnak: Exactly. And they can, right? They can afford some. But they've been holding off on that. And they're holding off until you get a deep recession. At that point, like we talked about before, maybe it's too late. You want to try and do it preemptively if you can.

Jenna Dagenhart: Speaking of Draghi, recently handing over the reins to Christine Lagarde. Does anyone have any thoughts on that and what it means?

Steve Lowe: I don't think you'll see a significant change in the short term for it. I think she's pretty much in line with Draghi. There's a lot made of kind of fractured ECB in the Germans and the Danes felt that Draghi kind of front ran them sometimes, announcing rate cuts. And they've been a really reticent to support that. But I think Lagarde will be pretty solid, very solid in getting the ECB more of the same. I think longer term, she wants to reform the way it works. They don't actually regularly vote on rate decisions like the Fed does. It's kind of the president calls for a vote. So, she wants to open it up a little bit more, and I think that will be positive and maybe blunt some of the criticism from the more fiscally conservative, the more conservative aspects within Europe.

Jenna Dagenhart: Going back to your comment, Brian, about ETFs, we're seeing trillions of dollars globally in ETFs. What would you say the role of ETFs is for fixed income investors?

Brian Luke: Well, I think it's a growing role. It's growing and I think it's surpassed one trillion in overall assets. I think that there's a large amount still to go with that. That's still a very small fraction of the overall bond market. I think you see a lot of benefits to that access to the market through diversification but also through a liquidity in that area. I see a number of growing products out there within the fixed income ETF world. So there's kind of an ETF for that, there's an index for that. The passive world is certainly taking advantage of that. And I think those costs are being passed down to investors, and that's a hyper critical component when you look at low rates. How much are you charged by your bond manager, and what's the rate they're offering when overall yields are low? So I think passive management, it's offering a lower cost basis is gaining momentum. I think the access to that market is opening up for small, medium, and institutional investors to take advantage of that.

This is born out from the flows that we see. Fixed income ETF flows are surpassing all flows in terms of equity flows that we've seen for the first time. That's a big move. When you look at the overall aspect of fixed income and how an investor views it in their portfolio, to be able to access it the same way they access a stock, trading on an exchange, being able to buy and sell, that's something that's very attractive to them. And I think that's sticking to the investors and the overall community.

Jenna Dagenhart: And that holding it until maturity.

Steve Lowe: I think it's been a very attractive intermit for institutional investors too in addition to retail because one ETFs provide liquidity. You can use it as liquidity. You can lose exposure fast rather than buying individual bonds, and there's been a lot made of kind of declining liquidity in the bond market. Deal balance sheets have shrunk significantly. But ETFs have kind of filled that void to a certain extent because you can create and redeem with them. In other words, you can give them bonds and get ETF shares back or give them ETF shares and get bonds back. And that's been a significant enhancement to liquidity.

Brian Luke: Right. In terms of previous crises. A look back in fourth quarter of last year, liquidity and ETFs actually picked up for fixed income and improved that. So, you can see that replacement, the natural replacement of the dealer balance sheets occurring in that marketplace. And as you mentioned, institutional investors to have instant access, a full diversified portfolio, they don't have to leg in. They don't have to worry about getting in and saying, "Okay. I've got to move hundreds of millions of dollars. How do I access that through the institutional corporate bond market?" I can just buy this.

Steve Lowe: Exactly. You get $500 million. You buy ETFs, and then figure it out as you go along or as you can buy bonds.

Brian Luke: Right. Right. So, I think a lot of investors are recognizing the benefits of that. I think there's still early days in terms of what they're going to be able to see in the future of that. But if you judge it from the equity market and the passive and equity ETF market, you see that's really kind of shows I think where we may be going.

Steve Lowe: One concern with the ETFs always when you provide equity in an asset class like bank loans, which there's a mismatch there. So, the concern is that in a crisis type of environment, a severe downturn, and you get redemptions, there's a kind of that's a liability mismatch there. And it could push prices down because as an investor, you expect to be able to sell the ETF and get your money back right away. And it could force selling it in somewhat e-liquid markets like leverage loans that could have an impact.

Brian Luke: Yeah. I mean, I think we have to take a step back to see where some of these markets were. The leverage loan market was a club deal with just the big banks. This wasn't a product that investors were able to access at all. And even when institutional buyers were there, it was trade by appointment only. The fact that you can actually get exposure to this market, which is now over a trillion dollars. It's nearly the size of a high yield market. But most people are saying, "No, this is not a market that I'm familiar with or comfortable with." Well, you have a liquid ETF there. You have institution money that's able to buy that through the mutual fund marketplace. This is a new area. It's just a matter of understanding there are some components that make it different and make it a little bit different than say buying and selling stocks.

Steve Lowe: Sure. No, absolutely. It's been a great addition. And adding liquidity to the market... The other interesting in ETFs I think is they're generally all passive now. The FCC has approved kind of active management structures. It's called non-transparent ETFs. I think over time you're going to see a lot of actively managed ETFs instead of ETFs just based off of indices and passive. I think that'll be a growth area in the years to come.

George Rusnak: I agree with that. I think you're going to see some factor exposure type of funds, and I just think the exposure to market class is the liquidity, the diversification, all those things are huge benefits to ETFs and continue to probably lead that part of the industry growing and expanding. Sort of in the municipal world where you might not have been able to access as much and just the idea of not liking this negative supply, here you go. Here's an opportunity or a way to get exposure. I do share your same concern around liquidity within some of the lower credit areas, whether it's high yield or leveraged loans. I think there might be some challenges potentially over there just because it's such a smaller marketplace and kind of going back to where you were before, which is a great point. Relatively speaking to where you were 5-10 years ago. You get access. But the challenge is potentially what happens when everybody wants to push the button one way or the other, and what happens when there's challenges ahead and somebody potentially... Again, looking at more like equity like exposure within fixed income wants to get out because it's a risk off behavior. That then becomes a challenge not only for ETF structures, just for the market itself is what I'm saying.

Steve Lowe: Absolutely.

Jenna Dagenhart: You make a good point too with expense ratios right now and every basis point counts.

Brian Luke: Yeah. Absolutely I think you see a lot of strategies. A lot of people are always seeking alpha, right? They're always trying to pull for the next 10 basis points of excess return. We are building broad based assets or broad based indices that are kind of focused on segments of the market that tailored for it. There are areas where they grow into types of strategies that build and take a high yield, low vol strategy that we've built in an index portfolio that can be executed. But I think overall most investors are looking for that broad based exposure. And then if they want to add on other exposures in another area, they can do that. By doing that, they can lower their overall fees and overall costs. I think that's been born out in the equity market.

You're seeing a lot more factor based, strategy type equity ETFs that are really kind of looking at the next segment of the market. How we can get beta like exposure or factor based exposure, low vol is an area that's been very, very popular this year. It's done very well. That's replicated through an index and then out there in the market through an ETF. So there's lots of different ways where you're starting to open your eyes to see how you can really access the market, different areas of how you can look at it. It's definitely changing. In 2019, they're going to have this many points of the market. But then in 2024, it might be a whole different world that we look at.

Jenna Dagenhart: Yeah. I mean, as we've talked about, it's been a pretty unprecedented year. It would've been hard to predict that we'd be here last year. So I'm going to pose a very difficult question to you. Where do you think we'll be? What's your outlook, George, in the next say 5-10 years?

George Rusnak: 5-10 years. Wow. So, I would say I'm probably bitter at one year right now, and then maybe can extrapolate. But I would just say that we believe we're later in the business cycle. We do think that rates because of where global rates are, are kind of in this lower bound range, and probably looking lower our 10-year forecast is probably around 1.25, 1.75 next year. So actually a little bit lower than where we are currently. 30-year coming down, probably equally. We generally believe there's probably going to be a flatter yield curve, which is why we moved a little bit up in duration and a little bit out to the intermediate part of the yield curve. We still think it's a good point right now to be a little bit more cautionary over the credit space and feel that year and a half to kind of play sector opportunities in some of the more unique opportunities that are coming on. That's sort of the way the global atmosphere is set up right now.

So, unless something changes dramatically from that perspective, we kind of feel that rates are going to be sort of in this steady slow grind down from here.

Jenna Dagenhart: Any other final thoughts on where we're headed in the fixed income world and where we've been?

Brian Luke: Right. I think we've talked a lot about what are we going to do in this low yield environment. We have to stop and think about having double digit returns in corporate bonds. How often do you get to see that? It's one of the best returns across the treasury, aggregate, corporate markets that we've seen since the global financial crisis. So, we're getting definitely strong returns. But fixed income is more about capital preservation. So, if stocks turn around, investors are going to want to think about other investments, such as fixed income.

Steve Lowe: Yeah. I agree. We're in a low rate environment, what George said. And we're going to continue to be in a low rate environment. Looking out over the next year, I think typically treasury rates are within 100 basis points, 125 basis point rage. So, I would frame it maybe 150 to two and a half with more of a risk to the downside. The economy's slow.

Jenna Dagenhart: Well, thank you so much for all of your insights. It's been a very wonderful panel. Thank you so much.

Steve Lowe: Thank you.

Brian Luke: Thank you.

George Rusnak: Thank you.

Jenna Dagenhart: And thank you for watching. I was joined by Steven Lowe, Head of Fixed Income at Thrivent Asset Management; Brian Luke, Global Head of Fixed Income at S&P Dow Jones Indices; and George Rusnak, Co-Head of Global Fixed Income strategy at Wells Fargo Investment Institute. From our studio in New York, I'm Jenna Dagenhart with Asset TV.

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