Animal Spirits Podcast - Talk Your Book: Interest Rates Go Kablooey

Episode Date: April 21, 2025

On this two-part episode of Animal Spirits: Talk Your Book, Michael Batnick and Ben Carlson speak with Jason Greenblath of American Century Investments about short duration fixed income, remaining active during recessions, inflationary spikes and fixed income. Then, at the 21:30 mark, the guys speak with Christian Hoffmann of Thornburg Investment Management to discuss opportunities in global credit markets, recession risk, heightened volatility, the Fed and inflation, and much more! Find complete show notes on our blogs: Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by our friends at NASDAQ. Go to AmericanCentury.com and Thornburg.com for more information on the funds discussed on today's episode. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridtholt's wealth management. This podcast is for informational purposes. and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. On today's show, we talked to Jason Greenblath. Jason is a VP in Senior Portfolio Management. Director of Corporate Credit Research for American Century Investments. We talked all about the changing landscape of fixed income, how it's much harder than it was in the past, and how to think about short-duration fixed income, which is something that people have learned the benefits of this decade, I feel like. Yeah. We also spoke with Christian Hoffman. Christian is the head of fixed income and a portfolio manager for Thornburg investment

management. So this, we recorded this on Wednesday after Powell's 19th presser of the last four weeks. He's been, he's been front and center, which I guess is appropriate given the state of uncertainty. And he effectively said, uh, not on us. They are. not going to step in. My take was he quoted Ferris Bueller. So he's kind of feeling himself a little bit, I feel like, kind of saying, like, listen, I didn't do this. But a lot of people pay attention to the stock market,

and rightfully so. It's been very volatile. Well, the bond market, too. So on Monday... No, but I'm saying the bond market is a little more getting more interesting, and a lot of people don't pay as much attention to it. So on Monday, when we spoke to Jason, remember Sunday night, Sunday Night Scaries?

the tenure was as high as 4.6%. Right. Now, recording Wednesday, it's down to under 4.3%. So wild gyrations in the fixed income market. Pretty unsettling. So both of these talks with Jason and Christian, we cover fixed income from all different angles, the opportunities, the risks,

what it means for the economy, all this stuff. So first, we're going to start with our talk with Jason from American Century Investments. Jason, welcome to the show. Great to be here. Thanks for having me. So last week, we saw a historic amount of volatility and an increase in U.S. interest rates, particularly at, I guess, the belly to the farther end of the curve.

I'm talking about the tenure. I forget the exact numbers, but it was really historic. And all the while, we've got the short end holding tight, giving investors a nice return. Are you seeing investor appetite for fixed income remain on the short end or what exactly? are you seeing out there? I think the desire does remain on the short end. And the reason for that is that, you know, as you alluded to, there's an anchor. Investors are thinking about should I be moving out of cash? Should I go into fixed income? And if you're going into fixed income, what point in the curve do you go? Well, if you go further out, you're probably taking a view

on growth of the economy. You're taking a view on will the Fed not only be cutting rates, but are we heading into a recession? As you step out from cash into short duration, you step out from cash to short duration, I think what investors are thinking about is, should I be locking in higher yields today? And the answer in our minds is yes, we should be locking in higher yields. We think they're very attractive here. This is way to oversimplified, but it sure feels like for 20, 30 years there, fixed income was pretty simple for most investors. Rates were falling. And so whatever you invested in, the starting rates were pretty high. The yields were pretty high. And then as yields fell, you got the price impact as well. And that all, that situation totally blew up in the 2010s

as we went through the zero percent interest rate regime. And then it seemed like, of course, no one wanted the own short duration assets. And now it seems like this decade, it's totally flipped again. And in the, you know, 2021, 2022 period, when rates were rising and inflation was rising, people thought, oh, that's right. There was a reason for these assets. The short duration tends to do better in that type of environment. I'm just curious what you're seeing from fixed income investors who probably have to be a little more thoughtful in how they put together a portfolio of assets now than they've had to in the past.

Yeah, I think that's a really great point. And I think, you know, as you alluded to over that, you know, time horizon of not just the last decade and a half, but the last two, three decades, the market has evolved, right? I think what has evolved is you've had investment-grade corporates triple in size in terms of the size of the market. If you go back 20 years ago, technology really didn't exist in the investment-grade space. You've had new sectors that have emerged. We had asset-backed and securitized that were problematic in the 2000s before the financial crisis.

They went through their own flushing and went into new structures. Today, I think the market is an environment where, one, you have new structures. structures, new participants, both on the issuer side, but also the participant side. Even five years ago, 10 years ago, there may have been two, 300 investors going into new issues. Now, it's 800. So you've seen that the depth and the breadth of the market really expand. And I think to the point on the short end of the curve, I think there's just, there's a lot of uncertainties that are currently going on on a global basis. What's happening with inflation? Are we going up or are we trending down? Well, it seemed like we were trending down pre tariffs. Now we're talking

about tariffs. And we're also on top of that talking about globalization, maybe coming back on shore, de-globalization. Maybe that puts more inflation into the system over the next handful of years. And I think because of those reasons, because of the depth, the breadth and uncertainty around inflation trends, front end of the curve is, again, I think, the place for investors to be thinking about and anchored in their portfolios. So, Jason, at American Century, you manage a suite of fixed income ETFs across the curve. I just want to clarify one thing, because you mentioned that like the idea of locking in, locking in some yield on the short end, isn't that typically talked about at the long end because at the short end

you're only getting that for whatever we're talking about like one to three months for example if the Fed were to cut well then you're not locking it in you're just getting the annualized yield for the next couple of months right so let me let me clarify and put some numbers behind locking it in and what point on the curve I think when you when you talk about cash as an investment well cash could be in money markets could be in commercial paper that maybe matures in a day, a week, a month. T bills, T bills could be anywhere from one month out to three, six months. I'm not talking about that point in the curve when I say lock it in. I'm thinking more short duration, fixed income. And we talk about that part of

the interest rate curve. We're talking really two, three, four years out in maturity. I don't think you have to go all the way out seven, ten, 30 years, right? Because we have an entire maturity profile to pick and choose from. I'm thinking more between that two and four year part of the curve that we think is really a sweet spot. Got it. So at that point of the curve, you have a product, the ticker is SDSI. What's the case to be made for investing in something like that over, say, an index equivalent? Sure. So I think there's two things. One is what we just talked about interest rate risk, the duration of the fund, which is currently around two and a half years. So you're getting that type of interest rate risk without having large swings.

So if you think about just for a moment, the bond math, if interest rates go up 100 basis points, you'll lose 2.5%. If they come down 100 basis points, you'll make 2.5%. That's just the interest rate impact. But I think the other way to think about it is if you compare this strategy, SDSI versus peers versus the index, you're earning an extra 100 to 125 basis points over that passive universe. So basically, it more than covers our fees, right, as active managers. You're also picking up incremental carry. And I think the other real interesting component is it's not just carry and earning five and a half or six percent in yield. You're also getting the active management, active management from security selection from a bottoms up perspective and then also

asset allocation. Should we be more unsecurized? Are there securitized subsectors that are appealing today. How about in corporates? I think, you know, there's a lot of talk in corporate credit. Is corporate credit going to have higher or lower default rates here and in high yield? Are there parts of high yield that are attractive or not? And I think that's really where we can sift through the broader universe of credit sectors, construct a portfolio that doesn't have a lot of interest rate risk, again, two and a half years, and then also having an array of credit risk that offers compelling yield above the passives. You talked about the fact that the markets have evolved so much over the years.

Most people, I guess, retail investors would think of short-term investments like this. It's just T-bills. What is your universe that you invest in in this space and what kind of short-duration assets are you looking at? Sure. Sure. I think that's a great point is what does the universe look like? The universe is comprised in our minds of investment-grade corporates. Again, five years and shorter.

high yield corporates, short duration high yield, that can range from double bees down to triple Cs, although we're focused today more on double Bs and some select single Bs, could include bank loans. Bank loans currently are really a minimal component of the portfolio. And as you move away from corporates, there's securitized sectors and subsectors. It could be mortgage-backed securities to more esoteric parts of the securitized market like rail cars, data centers, et cetera. The last component is emerging markets, both sovereigns and corporates.

So we think about those credit sectors in five years and shorter. There's really a whole lot of security selection and asset allocation to be had in our universe. Let me ask you a two-parter. In the high-yield space specifically, are you seeing less opportunities as companies go the private credit route? And then number two, again, within that space, not assuming, these are lower quality companies. Do you have to do an added layer of risk mitigation analysis as you start to think about what impact the tariffs might have on these companies? So sorry for the two-parter. It's private credit and it's credit quality.

I think those are great points to dive into. So I think just taking the first point first, first question, first, let's frame the overall size of the market. 1.3 trillion in U.S. high yield, 1.3 trillion in U.S. high yield bank loans. So combined, we're talking about an asset class of just shy of $3 trillion. The size of that market has not grown or shrunk all that much. Maybe it's decreased a little bit through some rising stars as we exited the pandemic. But I think what we're seeing is, and you're sort of alluding to it, is that deals are being reconstituted, restructured in securitized or in private credit.

There are deals like data centers or fiber, for example, that maybe traditionally is in high yield that's being done in special purpose entities that are away from the public markets. Are we finding opportunities in a $3 trillion asset class? Absolutely. I think when we look at the second part of your question, which I think is really critical and what we're laser focused on in short duration is our credit work, making sure that we get paid back par or 100 cents on the dollar at maturity. That is really what we're focused on is the credit quality, the borrowers that we're investing in

because my point before about earning 100 to 125 basis points extra in carry, well, that can quickly erode if we're wrong. So I think it's important as active managers that we have a team of experts who do that extra layer of due diligence on the credit work. And I think we take it even a step further. We're not only engaging with borrowers and underwriters as many do in the active fixed income world, we're engaging with them to actually help refinance their upcoming capital structures to basically incentivize the borrowers, hey, take us out, take us out at par, we'll help you extend maturities, extend that runway. If you think about the asset class broadly, this year, next year, there are no major maturity walls. That's typically what happens,

you know, and gets investors into a problem or, you know, default cycle is hitting maturity walls. This year and next year, 25, 26 are not big maturity wall years for high yield. So I think if we can pick our spots, not go too far out into the future, go out to 2006, work with borrowers this year so that those liabilities do not become current. I mean, that's a real easy way to lose your job as a treasurer or a CFO. It's to let an obligation become current and then ultimately default your business. We're working with high-quality borrowers to sure that that does not happen. So Michael and I always talk about the fact that anytime there's an asset class,

someone is talking about the easiest risk to ask someone is just like, well, what happens if there's a recession, which is obvious? There's a lot of asset classes that have some risk of a recession. In the short duration space, call it one to three years or whatever, how much risk is there actually of some sort of credit event from a slowing economy? Is there less risk in this end of the curve than there is in sort of intermediate term or longer term duration fixed income assets? I'd argue that potentially there's more risk if you don't have your eye on the ball in

terms of the credit quality of who and what you're investing in. What I mean by that is, is owning triple Cs here, one, they typically have a much higher probability of default, right? One in five chance of default, whereas you don't have that same type of probability in double Bs. Doesn't mean that double Bs can't deteriorate. certainly can. Shorten to the curve, you have to be really careful because as your prices start moving closer to par, your risk is potentially 100 cents on the dollar. So you could actually

twist this around and say, where is the biggest risk? Well, it could be in price appreciation. It could be price deterioration if you're not careful on credit quality. It's not to say that when companies default, you get zero. There's typically some recovery. we're trying to do is really avoid a bankruptcy. And I think you have to think about it from a bottoms up perspective. Does this company have the wherewithal financially to pay off their obligations coupled with a top-down perspective? Are we going into recession? What happens to some of these companies in terms of their cash flows? Are they cyclical? Do they come down during times of recession? What did they look like during the financial crisis? What did they look

like during the downturn in 2015 and 16 in oil. We do have past periods you can sort of home in on by sector to stress test borrowers. And I think that's really what the key is, is stress testing your cash flows for the downside. Do these companies exist? Can they pay off their obligations or generate cash flow to service all of their obligations? Jason, I know we've spent the bulk of this conversation thus far talking about the short end of the curve. If these tariffs stick, and we are in a slowing economy, and on the one hand, it's like a push pull of, well, higher prices, higher inflation, but if the slowdown swamps higher prices, then ultimately you would expect lower rates in a slower economy. Is there an opportunity that you might have to live through some volatility as we've seen, but is there an opportunity for people that are of the view that the economy is going to be weaker, six months, 12 months from now, let me lock in these, I don't say artificially, let me lock in these high rates today to get ahead of that. Yes. And I think the opportunity there is what happens with the Federal Reserve. I think we go back a

couple of weeks ago. And I know a lot of people are cringe when they say this word, transitory. Jerome Powell used this in the end of November 2021 and said, we were no longer in a, yeah, we're not in a transitory environment anymore. Right. And that's when we went off, you know, to the races and raising rates. He used it again during his last speech. So I think we we have to just pick that word with a grain of salt and ask ourselves, okay, are tariffs inflationary? Well, okay, there's a one-time readjustment in price, but to me and to those who consume, that's inflationary. After we get through that point, does inflation continue to rise or is it controlled? I think really the Fed needs to think about what are they trying to control.

Is it bringing down rates and lock-in rates today, as I mentioned earlier, because the economy is starting to not only slow, go into recession, unemployment's rising, or are they thinking about the other part of their mandate and thinking about taming inflation? So I think it's very questionable of what the next six, 12 months look like in terms of inflation, the reset from higher, you know, from tariffs, for example, higher prices. and how the Fed plays the economy's hand. Right now, there's three or four rate cuts being priced in. Let's see what happens as we get to the middle of this year,

towards the end of this year with inflation, the impact from tariffs. And also, who knows? I mean, we had on Saturday this past weekend, exemptions from technology. And we had this following day, another maybe walk back from that. We seem to be in this like one step forward, two steps backwards environment. And it makes it very difficult to say there's going to be three

or four rate cuts this year. There may be one. We just don't know yet because we're not quite sure what the next zero to 90 days look like in terms of tariffs. One more question for me on your process. Do you become more active in an environment like this where it is so hard to navigate and it seems like there is this back and forth between what comes next? In short, yes. We do become more active. We look back over the last two weeks. I mean, this is really as uncomfortable as it is to see prices, whether it's in treasuries or corporates or securitized moving at three, five, ten points at a clip. It's actually a great opportunity. That's when we start to see dislocations, particularly in the front end of the curve. The word dislocation, let me explain what that

means in our minds. It means that you see indistorminate selling and what do investors do in fixed income on portfolios, they sell front-end bonds because they have to fund outflows. Well, guess what? Last week, there was one of the largest outflows on record. What was sold, the front end? What does that do for us? So short duration is the ATM. That's right, which is great, because then we can go out and find opportunities, the cusips, the bonds that we really like, and buy them on sale. So it's also another way of saying it's a good idea to have some dry powder and be ready for the volatility that we've seen over the last few weeks, but probably what we'll see in the coming few weeks and maybe a few months as well. Jason, for listeners or advisors who are listening

that want to learn more about American Century and your suite of fixed income ETFs, where do we send them? You can certainly send them my way. I think we have some great professionals who can assist as well. We can certainly start with AmericanCentury.com, our website. There's some great information on there that we publish in our fixed income section. But we can certainly, you know, field calls beyond that with your local wholesaler. And they will get your questions directly to me. Awesome. Thanks very much, Jason.

Thank you, guys. Okay, thank you to Jason. Remember, go to AmericanCentury.com to learn more about all their funds. And now here is our talk with Christian Hoffman from Thornburg Investment Management. Christian, welcome to the show. Thank you. Happy to be here. So today we're going to be talking about opportunities in global credit markets, inflation, interest rates, bonds.

I already said that. All right. For our listeners who are not familiar with Thornburg, I have to be honest, I was looking at your mutual funds. And the size impressed me. A lot of assets in there. Maybe just a quick intro on the company. Sure. We're based in Santa Fe, New Mexico.

go. We've been doing this for 43 years. We have roughly 47 billion under management. And I've been here 13 of those 43 years. So a historic week in the bond markets last week, we're recording on April 16th. The last week was a historic week in the bond market. The 10-year rose, I forget the numbers, a lot. The highest in a decade, 30-year went up highest since like the 80s, I think, or some outrageous activity. And interestingly, You also similarly saw wild action in rates overseas and some of the differential and spreads between what our government bonds trade at versus the comparable maturity in other countries. The gap is narrowing, which is fairly concerning.

So what's your take? Is this a basis trade blow up? Is it inflation? Is it margin calls? Is it people raising cash? What is happening inside of the bond market? How are we supposed to make sense of it? I think it's all of the above.

and parsing out the contributing factors will become much clear over time, but when you're living right through it, you know, it's fairly unclear. You know, obviously the historically inverse correlation between equities and fixed income broke down in 2022 and stayed broken for several years. And really in this last sell-off, you saw that historic relationship really come back into focus where, you know, you saw flight to quality and people buying treasuries as you saw a lot of equity turmoil and money flowing out of that asset class. So money flowing out of U.S. equities, flowing into international equities, and also chasing safety in U.S. Treasuries. That started to change, I want to say, on April 4th. It was Friday right around midday,

where you continue to see equity volatility, I think, swinging from positive to negative territory, but bonds just lost a bid and started to sell off. And really from that point on, the correlation's been much weirder and more broken. colleague on the desk to say you know treasuries again today doing their own thing um not some of that exactly some of that is some of that is unwind um you know some of that is again i think money money shifting around you know i think there's also some industry relationships where you know gold has certainly caught a bid and i think that internationally the safe haven of u.s treasuries has been called into question i think with you know with very good reason so there's some of that going

on. There's a conspiracy theory that maybe China or China with other actors maybe has been dumping treasuries to do some behind the scenes negotiation or threatening. I think that's very possible, although I haven't seen a lot of evidence to suggest that's true. You could also have something like China selling to support the currency, which I think is less troublesome, but look has the same outcome in terms of what you're seeing in the markets. So it's really all the above, and it's certainly a fascinating time to be investing. Michael and I talk a lot about how most of the bond stuff really just comes down to positioning, which is kind of obvious.

But people always like to look at the yields to figure out what does this mean about what the bond market is saying about inflation? What does it say about growth? And I think the really scary thing this time and why this has perked up a lot of ears is because the dollar was falling while rates were rising. Does that make it more concerning? to you that those two safe havens are going in seemingly the wrong direction. I think as a U.S. citizen and someone who manages primarily U.S. money and someone who primarily

owns U.S. dollars, it is concerning. Also, I think calling into question some of our historically, you know, very strong relationships with, you know, international trading and diplomatic partners. Like, I think these things are all concerning, not just us, but really the global world order. And, you know, when Howard Lutton, it goes on TV, and you see markets go down, you know, 300, 600,000 basis points, that's concerning to me. Look, Trump 2.0 is quite a bit different than Trump 1.0. But, you know, some of the cool heads that we had from that, you know, that administration, you know, the Gary Cohen's, the Steve Mnuchins, you know, I think we're missing those folks in the room. You know, to me, Howard Lutnik is not Lloyd Blankfein.

He's the guy that plays Louise Blankfein in the Showtime movie. And I think we're all feeling that right now. Yeah, well said. Okay. So your biggest bond fund, the Thornburg Strategic Income Fund. So we could talk about what else is under the hood. I don't know if it's just bonds, but it's primarily U.S. dollar denominated bonds.

So, but it is global. So how are you all thinking about positioning? Is this the type of thing where from your strategy, you say, listen, this is so unpredictable. We're not going to make changes based on threats. or bluffs or whatever. We're just going to do what we do. Or are there things that you have to do given the state of uncertainty? Yeah, that's kind of become the flagship product for the team. It's about, you know, 10 billion under management. It's the product that allows us to paint with a broader brush. So we can do long duration, short duration, you know, high quality, low

quality. And again, you know, if you ask our team to paint, you know, a good picture using only the color green, you know, I think we could do a pretty good job. But if you give us, you know, all the colors on the on the palette, you know, we can do do more interesting things. You know, historically troubled markets, volatile markets is really, you know, where our team has, you know, done, you know, exceptionally well. I think we particularly made our name for ourselves in 2020, in 2022, which I think we're not kind to, you know, frankly, most of our competitors. And, you know, I would say we did an exceptional job of protecting on the downside while still doing a very, good job of participating in the upside. And you saw that I used slightly different language for those two things. You know, we are never going to be, you know, the most risk on manager with,

you know, risk turned up to 11. So in a, you know, rip-roaring market, again, we're probably not going to be the number one. I would also say that the dispersion between, you know, the number one and the number 10 in a rip-roaring market is actually very low. And really in fixed income, where you really drive a significant wedge between you and your competitors is when things go wrong, right? Because generally, at the end of the day, you're going to get par if you're doing your investing right in your fixed income. You don't have returns that can, you know, go to the moon like you have inequities. So really, it's the amount of mistakes that you make that's going to drive returns, and the amount of mistakes that anyone makes are going to be amplified in a bad market,

you know, where things are going wrong. So again, people have talked way too much for my taste, about the Magnificent 7, you know, over the past years. Like, we don't have a concept like that in fixed income. Really, it's the, it's the Maleficent 7. It's your seven worst ideas that are going to dictate returns, you know, in your fund. So back in early 2020s, the thing they do to really save face was go short duration. Do you think that it's a little easier this time? Because back then, yields were so low. You just got your face ripped off from much of any move if you had any duration on. Is it a little easier to navigate this period in bonds because yields are actually higher? Like, there's a bigger margin of safety around than there was back then.

So certainly that potential to have that inverse relationship, well, tested in recent weeks, as I mentioned before, the ability to have that income ballast certainly is more helpful than when we were living in a zero interest rate world. And the fact that you have actually, you know, positive real yields, you know, as opposed to negative real yields for a period of time, you know, is also something different. Look, we've positioned our fund broadly to be, you know, a bit longer in duration than we normally would. And that's because real yields are as attractive as they've been since, call it 2007, 2008.

That's been paired at a time when credit spreads were are as unattractive as they've been since 2007, 2008. So we've actually been fairly underweight credit. Not to say we don't have any, but we've been light relative to our history. And I would tell you that, you know, on January 2nd, Second, that wasn't a particularly popular position. People would say, well, are you, you know, betting on a recession? You know, everything feels good. We're never going to predict what's going to happen, you know, over the next month or two months or three months. What we do have a pretty good track record in is seeing when we're paid to take risk and when we're not really dialing back that risk. So that's something you can actually do with a lot more skill as opposed to, again, predicting what, you know, Trump might tweet tomorrow. So if we, if we, if we we take risk when we're paid for it, generally that should work over time. It sounds like you're more, you're more reactive, which I think is what people should want

in a fixed income manager. This idea that you're, that you get paid to see the future is probably, not probably is wrong. So I guess like unlike equities, with fixed income, you have a pretty good sense of, of the risk management, the risk reward scenario. It's, it's much more defined with arithmetic and algebra than equities are. So are we now at the place. where spreads are, I don't know if blown out is too strong a description probably is, but certainly they're more attractive than they were coming into the year. Is now the time to play offense or is it too early because there's just so much uncertainty we haven't even begun to see the effects of the tabs. We don't even know what the tafts are going to be.

We have no idea what the future holds. I mean, always, but especially today. So where are you on spreads today and how you should position yourself in the portfolio? Yeah, and I like to, I like to talk about high yield spreads because I think they're a pretty good proxy and they tend to move more than investment grade and some other things that you might look at. But broadly, you can extrapolate what's happening in that market and, you know, see through and see similar trends, you know, and other fixed income markets. So we got as tight as 252 credit spreads and high yield going back to last November. And we blew out to 450 just a week or so ago. So spreads almost doubled, which is a tremendous move.

Now, how attractive is $4.50, and we're not even at $450. I think this morning we're at 404. So how attractive is that relative to history? That's kind of average to, you know, slightly worse than average relative to history. That said, if you were starting in a defensive position like we were, that leaves really ample dry powder to start adding risk. So I think the answer to your question is, again, the bigger question is how did you start going into this risk off environment? And hopefully you're starting from a defensive position where you can go on the offense and start leaning into risk as it becomes more attractive. Like we have often bought the bottom in any one asset class, but we certainly didn't only buy the bottom.

You know, we started buying at 80 cents and we did our last buy at 56 cents. And look, each one felt great and then it felt terrible, you know, after you saw another leg down, you know, in the marketplace. So look, this is not, you know, it's not screaming cheap. in terms of relative value. I think to your point, mean reversion does tend to work in fixed income as well, right? Because there tends to be absolute bookends in terms of what re-yields, spreads, inflation, you know, all those things can do. Also, in volatile markets, we tend to find people that have gotten over their skis and need to de-risk. And that's when we are often able to, you know, backbid on pieces of paper and actually add positions to the portfolio, you know, at very attractive levels. So we've been adding triple Bs. We've been adding double Bs thematically. There's also some structured product on the front end that I think people are selling because it's not down a ton in points, but they have to price it pretty attractively to get anyone's

attention. So pretty high IRAs on those front end pieces of paper, even though they're smaller cash on cash total return opportunities. But those are the kind of things that we've been doing. I like the way that you prefaced your investment process, mostly because of confirmation bias, because it's how we think about it, in terms of risk reward, right? You're not looking to predict a recession because you're going out long duration. You're doing it because of either credit quality or, I guess, real yields.

How do you balance that in your process? You said the tight credit spreads with the higher real yields and understanding where to go in terms of the quality spectrum? Yeah, I think that's something unique to our process. So we have a very nimble team where we're able to compare the opportunities and structured product and investment grade and EM and high yield. Look, I worked at Lehman Brothers for a while. You know, a lot of asset managers are set up, you know, more like that,

which I would liken more to an aircraft carrier where there's maybe 4,000 people and everyone has a very discrete task, right? Maybe they're just looking at GM and Ford all day long, but they're not talking to someone on the rates floor. They're not talking to the strategists because they live in a box, right? And maybe that analyst is the best analyst on. on the street and maybe they figure out that, you know, GM is attractive to Ford today. So I'm going to overweight GM and underweight Ford.

Like what you're losing, that idea of losing the forest for the trees, like GM and Ford could be the two best investments in the world and you wouldn't want to underweight either of them. You'd want to load the bottom, both of them. And they might be uninteresting for a decade. There might be better relative value opportunities. So maybe you don't want to own either. And that's really what our team is set up to try to arbitrage and generate alpha, you know, from that systematic approach to fixed income. Are there any other interesting opportunities that you guys are looking at outside, you know, boring treasuries or corporates?

Maybe CLOs or anything like that? Let's touch on CLOs for a second because I think that's an interesting topic that people don't talk a lot about but are starting to talk more about. and I think there's a decent chance. We'll talk a lot more about in coming days. So I saw a good chart from Barclays the other day, which shows the quantum of notional ETF CLO paper and ETF levered loan paper. And I know we're getting a little bit into nerdy fixed income territory,

but a CLO is a synthetic structure and the underlying assets are levered loans. the notional amount of the CLO ETFs is now greater than the levered loan notional amount, which is pretty fascinating to me because one, you know, is a derivative of the other. My understanding is a lot of people are hiding out in that vehicle really is a cash surrogate or cash proxy, and it's something that strategists tend to like over time because it's cheap for the rating, which is frankly a saying that we hate on our team. And in theory, it's, you know, floating, so you're not taking duration risk.

But really, I think there's a question on if people were hanging out there and a lot of money starts to move out of that asset class into whatever else, you know, what are the knock on effects, you know, for what is probably a bit less liquid and more off the run relative to other fixed income. And then what are the knock on effects and follow through to the underlying assets, which, of course, you know, are levered loans, which in and of themselves are somewhat of a. ring-fenced asset and that they're mostly held by CLOs. So it's one of these things. I'm sorry to cut in, but both myself and Ben were doing the Zach Galefenakis Giff with the math. And this is, the CLOs are tough enough to unpack. So what you just said, it's like, wait a minute, the derivative is bigger than the derivative of itself?

The screw, the monkey was churning in my brain as well when you said that. Is that just because it's easier to get in and out of or the, uh, the, the, uh, the bar. Orwand, or why is that? Yeah, and is that a bad thing or is that, or is there potentially like, because on the surface it's like, holy shit, blow up bad, bad, bad, but is it, is it not bad? Or is it gray? I don't think it's bad and I'm not going to do, you know, my best Warren Buffett impersonation and say, oh, you just have to say, do you just tell the team like, hey, I worked at Lehman, guys. I worked at Lehman.

I got it. That's also a great dinner party conversation starter too, right? Like, by the way, I worked at Lehman. You can slide that in there. It's nothing bad. But I think when you have a ton of money flow into a less liquid asset class and that feels fine and good, you know, until it doesn't, you know, when things change and all of a sudden that, it's much easier for, you know, the dollars to flow into that asset class than to flow out rapidly. And you're starting to see that and maybe it's fine. But if we see, you know, a lot more dollars flow, the asset category, you know, I feel like underlying CLOs will probably blow out.

and, you know, actually could be a potentially interesting investment. And that could lead to some, I think, volatility and, you know, pricing break towns in the underlying levered loom market. But there's nothing wrong per se about that size or the derivative being larger than the underlying. Okay. Powell gave a presser today and was talking about the state of the economy. And there's some questions about the likelihood of of tariffs being inflationary, but then leading to slower growth, therefore ultimately being disinflationary. How were you thinking about inflation and the prospect for higher prices, higher rates in the short term with potentially falling rates in the aftermath as we digest

the price increases? I think that's absolutely the right framework, right? That the inflationary concerns should probably be far less than the deflationary negative economic implications and concerns, which is frankly kind of what the market got wrong, right? Immediately the market said, oh, inflation, air, inflation, inflation. They didn't think, hey, this actually has knock-on effects, which could actually hurt the overall, if not U.S., then certainly global economy, which has a much stronger, you know, deflationary tendency. Also, tariffs are something that you can change in reverse, while as sentiment and business confidence, you know, are much harder to reverse. So even if we put all the tariff noise, you know, back in the time

machine, you know, and send it away, um, unless you can erase people's memory, like there is already damage that has been done, right? Like you can't, you can't put the genie back in the bottle, you know, at this point. Uh, in terms of, sorry to, sorry to cut you off, but I tend to agree on the stagflation thing. It almost seems you'd have to really thread a needle, um, to make that happen. It's happened in the past from like oil price shocks. We've seen now oil is getting crushed right now. So that I think the stagflation, it's almost getting too cute, isn't it? Like, if this is going to hurt the economy, you would think inflation is going to fall. Yeah, I think I think that's a good base case, even if the opposite is true, you know,

in the short term, in terms of, and it's funny. Look, you know, usually when I do things like this, probably the first thing people would want to talk about, you know, is the Fed and central banks and Powell. And that's really taking a back burner as markets are, you know, now driven much more by Twitter and political rhetoric, you know, and I think in rightly so. But there's two, two big things. I think I would point out both on Powell today and the Fed. You know, one is that I don't think that Powell is really enthusiastic about riding to the rescue and what I think he views as, you know, some disastrous and unnecessary, you know, own goals in terms of this, you know, tariff and trade, trade war rhetoric.

He made that clear today. Yeah, that was the biggest message to me, right? So when we unload a bond position that we're not particularly fond of, you know, when the trade is done, you say yours. And I kind of feel like that's what Powell did today. You know, it's like, hey, you're making a mess. You know, yours. Like, I do not want to, I do not want people to muddy what they see is the, you know, true and present danger and what's going on here. And, you know, this administration, yours. Like, I'm not going to muddy the water. here, you know, and try to bail you out. Let's say they did want to do that. Let's say Powell's gone. Let's say let's say Lutnik's in there, you know, someone else, kind of half joking, but someone else is in there and they do want to come to the rescue. So let me ask you this. Everyone thought that jacking interest rates, you know, 500 basis points was going to crush consumer demand and crush the global economy. And it did not. And why didn't it? Again, we probably don't have enough

time for that, but a lot of it is because you had a decade of zero interest rate policy, and you have high-yield companies with two and three-and-four-handle coupon debt, and consumers with two and three, four-and-four-handle coupon mortgages. So they really didn't care too much that, you know, mortgages went to, you know, six or seven or eight percent because no one's actually paying that. So let's take what we learned from that example and flip it, right? like people are used to central banks coming to the rescue, if jacking rates 500 basis points didn't crush the economy, what makes you think that cutting them 200 or even 300 basis points is going to save the economy? If that long and variable lag didn't work going one way,

I'm pretty sure it's not going to work in the way that you hope and intend in the other way either. Yeah, I think that's right. I would also just point out on the stagulation concerns that Ben mentioned, pretty sure that there was an energy crisis in the middle of all of that. And if anything, we've got the opposite situation today. I don't know where crude is today, but it's going in the wrong direction. Way to end the show on a high note, guys. So, Christian, whether it's DIYers at home or advisors that are listening to us, what wrapper can they access your products in? Are these mutual funds only or are they ETFs as well? Throughout Thornburg, every strategy is available in the mutual fund wrapper.

We have many strategies and use at strappers as well, and we have four ETFs, which are fairly new. And for our team, we have a core strategy and a multi-sector strategy. The tickers are TPLS and TMB. And the core that matches the mutual fund that you've been running for decades at this point? The core is a relatively new strategy, and that's a mirror fund. And TMB is related, but is unique in its own way. And that sits in the multi-sector category. remind us where we can send people to learn more about your insights and your funds and because

yeah i mean for you as a fixed income managers has to be even though there's a lot going on it has to be a fascinating way time to manage money in yeah i think your your stress level goes up but it's also you know much much more interesting um you know folks should definitely check out our website you know thornberg dot com uh we have you know social media presence as well you know look all our funds are very transparent and have good disclosure So it's pretty easy to see, you know, what's, what's going on in terms of the funds themselves and with our thought process. And, yeah, I appreciate you having me on the program to get. Thanks for coming here. That was excellent.

No, thank you so much. Thank you. All right. Thank you to Christian. Remember, check out Thornburg.com to learn more. And thank you to our friends at NASDAQ for making both of these talks happen. Email us, Animal Spirits at the compound news.com, and we'll see you next time. Thank you.