00:00 Speaker A
The other thing that I think is really interesting is that even if the Fed cuts, it doesn’t automatically mean that rates are all going to go down. And especially across the the yield curve, right? On the longer end. And I know something that you’re watching, and I also noticed it, by the way, this morning in Apollo’s uh Torsten Slok, his top risks for next year. One of them is is supply of of Treasuries and bonds out there. So talk me through how you’re thinking about that, too.
00:30 Collin
That’s great. He’s great. He must be reading our outlook. I’m I’m flattered that we that we share the same view. But that’s a big concern. We have two key concerns that we’re not really worried that that long-term yields are going to surge higher from here, but that they can stay around the 4% area with upside to maybe 4 and a half percent. One is inflation, it’s just too sticky, too high. And we think investors, knowing that we have this supply issues, might just demand higher yields even as the Fed cuts. Because as let’s say the Fed cuts to that 3% area in a 3% inflationary environment, we’re getting very close to negative real rates. So we think inflation, but those supply issues. Deficits aren’t going away anytime soon. We’ve already seen our debt continue to rise this year. There doesn’t appe to be appear to be an end in sight, but it’s not just with Treasuries. We’re seeing a lot of corporate bond issuance, specifically with investment grade issuers with the AI build out. We’re even seeing a lot of municipal bond issuance, which is not something we’ve seen for years. They’ve kind of held held steady. 2025 was a big year, we’re expecting another big year next year. So we have a lot of issuance and you need to find buyers for that debt. So again, not concerned. I don’t want to be, you know, uh too concerned or or scare anyone that we’re going to see a 5, 6, 7% 10-year Treasury, but we think that should limit the downside with potential, you know, bumps up maybe to four and a half percent or so.
01:46 Speaker A
Well, and that also means that all these people who are waiting for mortgage rates to go down to come into the housing market, maybe they’re not going to come down that much.
02:00 Collin
Yeah, I hate to be the bearer of bad news. I mean, maybe a little bit. Now, one thing, it’s it’s not just the the direction of Treasury yields, 10-year Treasury yields matters, but also spread.
02:11 Speaker A
Mhm.
02:12 Collin
Now the spread is still a little bit high. So maybe we can see them come down a little bit even if the 10-year Treasury yield kind of holds around 4%. But with our outlook for it to kind of hold steady here, we’re not expecting to see mortgage rates, you know, significantly fall lower.
02:34 Speaker A
Gotcha. Okay, so let’s talk about strategy for fixed income investors for next year. And I was looking, I thought it was really interesting what happened this year in terms of what did well, emerging market debt did the best. Um, what happens next year? Where should people be looking?
02:47 Collin
Uh it’s it’s a very, uh, bond boring outlook, but we like high quality and intermediate-term maturities. We always want to look at what’s our interest rate view, what’s our credit risk view. So on interest rate risk, intermediate term maturities, we think that’s just a nice balance. If you’re focusing too much on short-term investments, you have reinvestment risk. Even though we only expect two or three rate cuts, that still is, you know, lower yields, lower income as those rate cuts materialize. On the long end, maybe we’re wrong and yields do rise a little bit higher, if our outlook doesn’t come to fruition. And you know, that’s always a bad outcome. A lot of individual investors don’t fully grasp the volatility of long-term bonds. You know, Treasuries are are considered safe, but if you have a long-term bond, you can see large price swings. So we like kind of the belly of the curve as a nice balance there. And for credit quality, a lot of that comes down to just valuations. What are we being paid as investors to take a little bit more risk? And you’re just not being too paid too well in the riskier parts of the market. So, you know, high quality investment grade uh investments like corporates, municipal bonds, mortgage back securities could be an opportunity, but but we’re not suggesting investors take too much risk.
04:06 Speaker A
Collin, I’m really curious. We have seen an explosion in recent years in bond ETFs, fixed income ETFs of all different kinds, but especially actively managed fixed income ETFs. Um, traditionally, the fixed income market has not been a place where retail investors have actively played that much, right? Um, is that changing with those ETFs or is it still mostly institutional, um, investors who are investing in those?
04:36 Collin
No, we’re seeing we’re seeing individual investors go to ETFs and there’s pros and cons to to every approach to bond investing. I think a benefit of ETFs is that it opens it up for investors who might not have the the largest dollar amount to invest. That’s always been something that that prohibits investors. You know, $1,000 par values, but a lot of times you want to buy more than that for liquidity purposes. So it’s really hard to build a diversified portfolio at a low cost. And ETFs can can offer that. A tricky thing with ETFs though is that there’s no, well for most ETFs, no defined maturity date. So you kind of lose that predictable value at maturity. But but they can be a good way to get a nice diversified portfolio with a steady income stream.
05:22 Speaker A
Gotcha.