Animal Spirits Podcast - Talk Your Book: What's Going on in the Bond Market?

Episode Date: January 29, 2024

On this episode of Talk Your Book, Michael Batnick and Ben Carlson are joined by Alex Morris, CIO of F/m Investments to discuss: 2024 rate cut possibilities, the difficulty of forecasting, and why everyone got 2023 so wrong, utilizing spreads as a forecasting tool, why solving for corporate duration can be a useful risk management tool, 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 Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   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. Wealthcast Media, 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. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your book is brought to you by FM Investments. Go to FMInvest.com to learn more about their treasury series of ETS, where you can pick a certain maturity. And also, they're brand new corporate bond ETFs. That's FMInvest.com. 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 Ridholt's wealth management. This podcast is for

informational purposes only 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. Michael, I've made the case that the bond market has been more interesting and exciting than the stock market for the past two to three years. Is that fair? With the movement in rates and there's more interest in the bond market. How does that sound? If I'm judging by our inbox of people asking questions, bond market questions or yield questions are at all-time highs. Bonds are back. Yes, because there's some yield. And I think people are having to be more thoughtful.

More thoughtful about their bond allocation. And what do I, how about this? And people now know, if I'm getting more yield, that means there's more risk. because if you had a long maturity or long duration in 2022, you got smoked. So I think people now understand that. Like, oh, okay, if rates rise, I can get killed. And I'm just adding a little bit more yield. So I think it's interesting. And there's now way more ETFs available that you can go, I want to target this specific duration, credit quality, geography, whatever it is, especially in the bond land that you

couldn't really do before. No, you can get surgical now. It's pretty incredible. When I was in the institutional world, I remember it was you had bonds, which was the ag, or bond plus, right? Yeah, or ladders. But it was like ag plus. And now there's so many different variations you can do, which is a win for investors. absolutely. And one of the people who's been sort of shepherding us in this direction that we've had them on, I don't know, five or six times now, Alex Morris from FM Investments, and they've continued to build out their suite of products there with the benchmark series of treasury bonds at every single maturity. And the new thing they're doing now, which I think

he said, are we breaking news here, kind of? Anyway, where the first one's talking about it is their corporate bonds. So they now have two and three and ten-year corporate bond ETF. Sounds like other ones are coming, and we talk about that space where you're getting a little bit of higher yield for maybe some higher risk. So here's our talk with Alex Morris from FM Investments about their new corporate bond ETFs. We're joined today by Alex Morris. Alex is the chief investment officer at FM Investments. Alex, welcome back. Thanks having me back. All right, we're going to talk about bonds today. The 10-year treasury today, it's January 17th, stands at 4.1 percent, and it's gone It's traveled a lot and also got nowhere.

We've round-tripped a lot of the big move that we made over the last 12 months or so. So the 10-year sits at 401. You have the two-year still way above at 4-3. I want to talk to you about like expectations, what the market is pricing in, why there's still so much of an inversion. So I guess to narrow it in, what is the market pricing in terms of rate cuts for 2024? So you guys thought we'd start with an easy one. I thought that was the whole plan. here. I just go right into it. I think that the first problem is put aside what number of rate

cuts are or how big in the magnitude of each of those cuts. The bond market is doing something that's a little unique, at least in our investing experience, which is it's taking a cue from the equity markets book and pricing in a heck of a lot of enthusiasm and aspirations. And that's kind of rare for the bond market. The bond market is the cynical, less attractive cousin to the equity markets and, you know, say what you will about folks on desks, I defend, you know, to the deathy, better-looking bond traders out there. But I think that what you're seeing is this weird, you know, sort of melding of how do you price in expectations that for once are non-zero? So if you looked at Fed futures bets, which I think are a great thing to look at because they're

always wrong. Like they have a 100% hit rate of being wrong. And if you looked at them, you know, December 31st, they were pricing in six rate cuts. If you look at them December 4th, all of a sudden, it was five. And then after the Fed came out and in sort of repeated what's a pretty good cadence of a bunch of noise in the market from individual governors, then some signal that follows two or three big articles that come out was very clear. Higher for longer, although the economy shows elements of getting to where it to be, you should not expect rate cuts until the second half of the year. And they made that very clear. And I think that the treasuries are now, starting to actually price out some of that optimism and price in, you know, the actual messaging, which is rate cuts start July-ish and you should expect to see three to four-ish, you know, maybe more conservative, and that three or four will depend upon size. And I think there's an aspiration amongst bond traders that those cuts will be 75 basis points and this will be a quick ride down. My suspicion is the Fed has other fish to fry and that we're going to see, you know, 25s

and 50s and little tests to make sure they don't break anything. So this is why I asked that question because I sort of agree with you in the sense that even if we do get six rate cuts, so right now Fed funds are at 5 to 5 and a quarter, the 10 year, as I mentioned, it's already down to 4.1. It got as low as 3.8. So where would Fed funds rates need to settle at? Like, do we not expect a term premium to come back? Do we not expect a complete uninversion such that the 10 years should be training higher?

than the two-year. And with a 10-year already down to 4-1, again, it was down to 3-8, but has bounced pretty dramatically since then. It does sound like you think the market is getting ahead of itself, the bond market, that is. I think the bottom market has gotten ahead of itself, right, in general. Now that it is, it's already there. And that if you look at the term premium, we're not going to see it in 2024. And it's simply because the shorter of the curve is so attached to the Fed funds rate, unless there's a big dislocation between those two, and I hope there's not. I think there will be cohesion. Fed funds will come down, the shortening the curve will come down, and that'll be two and shorter. We'll start to

follow. Allow me to stand up for the bond market real quick here. And I think the bond market has been off sides a lot, but if we have three scenarios, one of them is growth stays high, The other one is growth is kind of anemic, and then the third one is growth slows quite a bit, and we have a recession or something. Isn't two out of those three scenarios, the Fed does lower rates quicker than people think, or faster than, so isn't the probability actually that they do lower rates faster than people are assuming? I guess the question is, what are they assuming, right? If you look at Fed Fund futures, you know, folks are siding more with the UBSs of the world who thought we'd be sitting back at 250 by the end of the year. And that feels like a pretty abrupt, you know, drive to get down there. And the thing will be interesting is we look at the Fed hitting its 2% target.

We look at the core numbers that came out that were, you know, 3-9 headlines of the 3-4, right? We forget that it's not deflation that's happening. It's just disinflation. Like, we're still running things at a pretty high level of inflation. And it's not like we hit two and the Fed says, great news. Rates go back to zero. If they did that, inflation would spike back up. And I think that's the part that folks are forgetting.

we're tackling this from the other way around this time, right? In the last decade, decade and a half, we were, you know, playing with things to kind of keep things at full employment, keep things as high as 2%, right? Not doing the opposite, which is trying to take things off of the high of 9 or 10 and trying to bring them down. And the Fed has no, no direct incentive, I'd argue, to cut rates other than their political, perhaps motives, to cut rates faster. Because if you can keep rates at, say, three, and I'm not saying that number is right, let's just assume for a moment, short rates are three, and inflation stays where you want and unemployment stays where you want, there's not a really good reason to cut them to zero

other than political motivations. And I think the Fed is going to be like really sensitive about that. Yeah, I agree. That's the best case here. And I think the zero percent thing, unless we had a calamity, that's off the table. And I think getting back to a three is actually good news if we could do it and sort of thread the needle. The other one I was looking at today is it's been 15 months since we had an inversion. So the three-month went above the 10-year, if that's how I want to describe or use for an inversion. Some people use the 210. I'm using the three-month and 10-year. If it's been 15 months, and let's say the Fed does slowly but surely stair-step approach bring short rates down, and the 10-year stays where it is, or it goes

up a little bit this year, whatever, and that three-month goes below the 10. Can we just forget the yield curve inversion as a signal this time around? If it uninverts? I think so. I mean, because it's, I don't know, it's been so long since it's happening. I know people always say it happens on a lag, give it 12 to 18 months or something. But is this the one time where the yield curve inversion really didn't tell us much of anything? Ben, you got to give it 75 months. Come on.

But it seems like this time it didn't really tell us anything. Yeah, we've got to give it a year and then it's two. And then you've got to give it decades. And it's, you know, you've got to give it three empires past. Everything is a lag, yes. Yeah, exactly. I think the answer here is it probably doesn't. It's because we jacked up.

the curve, right? The goal here was to destroy something more so than created, right? Normally, we're stimulating the economy. Well, this time we did that something very different. We literally just printed money and mailed it to your mailbox, right? The stimulation happened in a much more direct-to-consumer approach than historically the Fed has operated. Like, they didn't count on a pandemic. They certainly didn't count on a response of trillions of dollars going out in the mail. And so the stimulatory effect happened X from the Fed. And now the Fed is dealing with that, you know, the outcomes of all of that, you know, capital printing that happened. So I think this time, this inversion doesn't really have the same meaning.

And, you know, if the 10-year was trading it two and all of a sudden the uninversion happened as a sudden and unexpected crash of the short end, I'd argue, okay, that tells you something. But we're now talking about controlling when the front end comes down. and thinking about July versus August sort of time frame. So I don't know that an uninversion in an orderly manner is a harbinger of recession or the same uninversion that we would be talking about in 94, maybe 94's probably the closest example, but certainly not in GFC in 2008 and not in some of the other crises that, you know, appear in the treasury curve over time. We've been talking a lot about treasuries.

It's the benchmark rate. It's the risk for rate. It's what everything prices off of, mortgages, credit cards. corporate bonds. On the corporate side, one of the things that's surprising to me anyway is how little stress there's been in corporate America. And there's good reasons for this. Companies did a lot of good work refinancing their debt in 2021 when interest rates were effectively at zero. And so they were good there. But there's been very little in the way of blowouts. And what I mean by that is the difference in spreads that investors are demanding

between corporate bonds and rest of the treasuries. And even right now, the spread is, I'm looking at the ISBFA, U.S. Corporate Index, Option Adjustance spread, which is, again, just spreads between corporates and treasuries. It's 1%, which is about as tight as it could, about as tight as it's ever been, say, for 2021. So talk about what you're seeing on the corporate side of the equation. So you're right. You're seeing corporates that might actually be priced to perfection, right, which is kind of an odd thing to say given the Treasury curb inversion discussion we just had.

But the corporate world has done the thing that we've been demanding of it for decades, which is a certain amount of fiscal prudence. They did appropriately refinance their debt. They haven't taken on extraordinarily high levels of current debt. And, you know, most of the big names that we think of, right, when we think of stocks today, tend to be tech companies that 25 years ago needed that next debt issuance to make payroll on alternate Fridays. And that's not true anymore, right? Those companies are massively profitable. They're great generators and curators of capital. They've done a good job in creating

an atmosphere where it makes sense. I think last time we were talking about this, we talked a little bit about the phenomenon of not having zombie companies in the U.S., at least not in the same way you do in Europe. And banks and lenders and the bond market in general has done a good job of a eliminating business models that just require constant debt loading to continue to grow. So as a result, what's left? And, you know, when you look at those indices, they're kind of built a little wacky, right? Most of those indices are market cap-weighted. So you tend to see the more debt you issue, the greater you appear in those indices, which

means there's about two- But it's still, but it's still a good proxy for risk-applicity. Absolutely. And you're going to see a lot of it, particularly in the finance space, which is a good proxy because those loans get refinanced quickly. And there's a lot of turnover in that space, right? that's the direct lending market, essentially. And as a result, I think, you know, you're seeing that corporate world is pretty stable. And we're saying that the government is, that they're much more stable than folks historically have asked them to be.

And that's even true. If you were to edge up into the high-yield market, those spreads are not as wide as one might otherwise expect. So when you say price for perfection, that's what you mean, the spreads. The spread level is where we're at now. That's your price to perfection indicator. That's the metric I would use. You know, are you there? And you look at the stability of this versus news articles that come out versus shocks in the market.

And this spread hasn't moved a tremendous amount. And it certainly hasn't gone back to some of the historical levels that it can blow out to when something goes wrong. Like there just hasn't been a route in the IG market. There's no perfect forward-looking indicator that if you just knew one thing, it would tell you what happens one month from now, six months. That doesn't exist. But I've said this in the past, correct me if you feel differently, that if I could just look at one thing to determine the health of markets today at a single point in time, I would use bond spreads.

I think that's pretty fair. You know, it's hard as a PM to say that there's only ever one, but bond spreads are a pretty good broad indicator of how folks are feeling about a lot of things all mashed up into one. It's hard to ascribe direct motive to it, but it's a pretty good overall indicator of health. And I think that's telling you, you just mentioned that, yeah, bonds are priced for perfection. And certainly the market is pricing in a soft landing and rate cuts. And if we don't see one or two of those things, the market will have to re-rate and it will probably do so pretty

quickly as it usually does. I think so. I mean, I've been pro soft landing for a long time. And this is kind of like weird, almost fetish in the market to like find reasons why it can't happen, which feels more like forecasters trying to prove themselves right than it is. is an honest appraisal of what's going on in the market. We've done a good job of encouraging companies and all market participants to behave well and build better companies. And we've worked hard through policy and practice in the financial and real economy to build resiliency.

And it's worked. And to some extent, I wonder if some folks are looking for ghosts where they don't exist. It isn't to say that we couldn't screw this up. There's a lot of things that could go wrong. And plenty of books and articles written on that every day. But this is one where I wonder if the best case scenario isn't actually, or a pretty good case scenario, isn't the most likely. And some of it is just wanting to will that to be the case.

And some of it is we're relying on years of good work and learning from past crises. And we're still going to make mistakes. And new and hiccups will happen. We're going to step on banana skins. But it seems like we've done a pretty good job of addressing some of the old ones. And we have some companies that are pretty healthy. And the consumers who are getting back to their old ways, if you look at credit card debt, you know, loan delinquencies on cars. Some of the things are starting to

creep back in, but none of them have spiked to new historic levels or in a way where I think the alarm bells are going off. And the bond market is showing you that. The equity market is showing you that. If you look at the number of forecasts, just to tell you that NDX would be up 50% last year, it was zero, right? And sure enough, it did. And folks seem to be upset that the equity market might have another good year in 2024 as if that was a bad thing. Like, we're all in this, we buy stocks to go up. Like, that's the one thing they're designed to do. So I kind of question, like, why are folks going out of their way? I made money, but I would have rather been right. Yeah, I'd rather be right and broke. Come on. Like, that's just this statement we don't

make around here. So I question why folks are looking for all these opportunities other than for the forecast and historical models to be right. I appreciate it's hard to dissociate yourself from the data in a very data-intensive world and objectively so and objectively good for being so. But that said, this time, I think these other metrics have sound rationale for why they look the way they look. It's a consistent rationale together. It's just not a historical one that we've seen before. You know, it's not that this time is different because I wanted to be. This time just actually is different. Michael has his Desert Island signal as the yield spreads. Is there any world in which we could see? Not a signal. Not a signal. It's indicator.

Indicator. Sorry, indicator. So Desert Island, I'm going to take this one indicator. Is there any world where spreads don't blow out, even if we do have an economic slowdown. So let me paint the scenario here. So I think one of the reasons we didn't go into a recession like everyone thought we would in 2023 is because consumers had repaired their balance sheets for 10 years following the GFC and then supercharged their balance sheets for 18 to 24 months during the pandemic. And I think that a lot of that is the reason that we're coming in for a soft landing potentially. did enough corporations refinance at lower interest rate debts and now we're earning a ton of money on their T-bills to the point where maybe spreads don't blow out as much as people would think historically,

or do you think that's the kind of scenario or if the economy slows, those spreads have to blow out just because people have the flight to safety? It's hard to really say, and here's why. One, if things get bad, the spread should blow out and that should be the indicator and should blow out because folks are looking at the indicator saying this is too tight. This needs to go other way, right? So it's like metrics managing behavior there. But the question is, if that were to happen, where would the T bill be?

So the spread is relative to Treasury. So if the treasuries were to keep coming in, right? And the Fed just kept on that path, then yes, it would have to start to really, really move. But if corporate rates ticked up 200 basis points and short rates ticked up 200 basis points, the spread would be the same, right? It just would be the whole story got elevated. And that's where, you know, I get a little. I didn't get a crystal ball when I left trading in PM school, so it's hard, hard to tell.

But I think it would be interesting to see if that were to happen, would the treasuries follow suit? And what would be happening in the treasury market? Because the Treasury, as we said, I think they will stay connected to the Fed Fund rates. That doesn't mean they always will, though. There's always that possibility that there is some breakage. You know, it's not going to be in the 30 or the 60 or the 90, but it could be in the one year, the two, the three, the five, right? As you go further out on the curve, where you may see some dislocation. between the two. And that's the big unknown. And I think that's the indicator and the risk that

folks aren't really spending a lot of time thinking or talking about because it's been so historically accurate. But we've changed the historical inputs now. Like we're doing this a different way. And if that stays tight, then I think, you know, you will see that blow out. If that can disconnect, you might see less of it. That said, you know, I think we should remember that when we look at the spreads day and folks have done well, we still, when we buy IG debt, we're looking at what are increasingly higher coupons, and that's not such a bad thing, right? And it's not so high that these companies can't stabilize it. They can't. You know, maybe some of the diviner rates come down a little bit, maybe not. Maybe some of the reinvestment and stock repurchases will come down,

but we haven't seen signs of that yet. But their profitability has tended to go up. And they've been able, will be able to absorb rates from, say, going from 100 to 150 basis points to two, three, 400 basis points on the two to three year, you know, IG spread. And it's going to be fine. And that it's not going to actually meaningfully impact those companies' ability to repay or to seek new capital in the market. So as really that spread to get back that point. If the treasuries stay in lockstep, there's no reason for the spread to go. The treasuries do what we expect them to do, then that spread will inherently need to blow out some. All right, Alex, this series is called Talk Your Book. So it's about time we talk your book.

Last week, there was big news in the ETF world. Of course, I'm talking about the Bitcoin ETF, the spot Bitcoin ETF that finally started trading. But there was also some innovation in the bond market, your corner of the market. Talk about what you all are launching and some of the innovation that you're bringing to a kind of sleepy, boring market. Yeah, I was expecting to say that Z2, Z train, Z10 came out. Oh, yeah, and then some people did some things with Bitcoin, you know, but he also died with us. But yeah, here in the sleeping on the bottom market, you know, we've talked a bunch on this show about the U.S. benchmark series, which is duration, you know, very specific duration control by investing in

treasuries. We can do that by buying single treasuries. Can't do that in the IG space, but we wanted to give folks that second access where you could have that same duration control and exposure to the market. So when we talk about that spread, that spread is versus the two-year market. That's a very narrow ban. And you can't just easily buy it today, a credit ETF that does that. So we decided it was time to take what we didn't benchmark, but move it up to IG. And that meant rethinking some of the way credit indices were built. So if you think at U2, U2 buys the two-year on the run treasury, that is the benchmark, that's what we see on the yield curve, that's what you want.

When you look at those spreads, they're versus two years, which is usually a year and a half to two and a half years of actual credit, right? None of the other stuff that you'd see in the ag. So we built an ETF that does just that. So if you were to buy and sell U2 and Z2 in the right proportions or go the right way, you would be betting on the spread widening or contracting, which, is something that historically you haven't been able to do outside of being a large institutional investor. If you want access to the two-year credit market, three-year credit market, the 10-year credit

market, you can now get that directly. And you're going to get a much more current experience of what's going on in the market. And the way we deliver that to you is by, one, buying things that are in that narrow duration ban, but also we worked with ICE to build an index that is equally weighted. So you are really toning down that two-thirds of your exposure that really sits in bank fin and toning up what is like a real state of the market because buying more bank fin just gives you more bank fin doesn't actually tell you more of what's going on in the whole wholeness of the you actually created your own index for this you didn't use something that was already created yeah so we looked at all the the ETFs are out there and said well that didn't work

we looked at all the indices are out there and so that didn't work so we called up ice who is provides indices for the benchmark series and said this is our problem this is what we're trying to solve this is what we do in the SMA book we have today you know for a few hundred clients. We want to put that in. And since we don't get to decide what's in the index, otherwise it wouldn't be a fair index, we went out, we worked with ICE to figure out, what are the rules? And here's the sort of mechanical process that we go through to help design the core of the portfolios. And then we can add some, you know, the last mile on our own. But ICE was able to reconstruct that. And the first big step was doing something that doesn't exist

in the bond world. We just equally weighted it. We usually hear about that in the equity world, right, the equal weighted SPX will outperform the market cap weighted SPX. But there's a simple principle kind of works in the bond world as well. So we equal weighted it by issuer because we think folks actually want to own, you know, a more diverse set of issuers, not just more stuff from the same issuer and just ramp it up. And it turns out that gives you a more current coupon. I don't want to get too far off of what you guys are doing, but that's just an interesting point. I wonder why there isn't like an equal weighted ag index.

Have you looked at that? So if we look at the ag in general, right, the ag is astronomical, and it's got so many different items in it, you know, between mortgages and agencies and high yield and investment grade, it would be hard to choose the equal weighting measure given they all kind of have their own underlying differences in different bases, right? But the question, I guess, would argue within each of those sectors, why is no one done an equal weighted version or an issuer weighted version, which is what we do is equal issue rated version? And I think the answer is, bonds are sleepy, as you said, it's this corner, it's this massive but sleepy corner. There's never been a need for real innovation there. You either bought an actively managed mutual fund and you hope you like the manager or you bought AGG. And there was very little room or interest to do anything in between. Rates were zero. It was hard to do, right? It seemed like you needed $10 billion to make this thing worthwhile. And it turns out all of those things weren't inherently true. At least they're not true today. And we had some some success in innovating with benchmark. So we tried to apply that same logic of how do we take the products that we want to offer and not make them good informational indicators, but make them good investments. And the trick for us was this. So what is the investment case for these products? And I'm not asking you to advocate for why the two years better than the tenure or anything

like that. But why would an investor want to target a specific duration for corporate bonds? What's the case? So it's the same argument as you'd see in the, in the, yield curve itself. You want a certain duration has a certain risk that gets carried along with it, has a certain volatility implication as things start to move, has a certain spread to treasuries. You want to target that because you like the attractance of that and it fits in with your overall asset allocation and mentality. This is where you're positioning your investors. You like what a bond manager is doing, but you watch them getting too short. You know, you're not getting enough return out of that. And I get up that total return component of it. So this will allow you to correct for

that. Or you can just make very simply the bet, I like this part of the credit curve. I like this spot on the yield curve. And I can now directly put that into my client's portfolios. And many folks do this today. They just have to cycle through hundreds of bonds a year and do a lot of that trading on their own. And it's hard. And indeed, we do this for lots of institutional accounts, lots of retail SMA accounts. We recognize that we're spending a lot of time generating a lot of transactions, but we could do that heavy lifting in one place. And now we could deliver folks that same level of precision, the same level of mandate control, but without having to recreate the wheel inside every account every time. And I assume these, since this is investment grade,

would these be mostly S&P 500 like companies that are in their portfolio? Are there any, would there be any surprises, or is that pretty much what you'd expect, those larger, bigger corporations that are more name brand? Yeah, it's larger, bigger. It's probably going to go outside of just pure SPX, you know, and into more of the Russell 1000 space, because you'll see more of them. But they tend to be relatively concentrated, you know, versus some of the other portfolios to see. They'll hold a few hundred names, not a few thousand. And that's because we're doing that equal-weighted by issuer, not by issuance. And there wouldn't be any real surprises there. I think the surprise for some folks would be, as you go further out the curve,

to realize that most corporations issue debt, you know, inside of 10 years. There's not a lot of stuff that sits outside 10, 20, 30, right? It's just, there are some, but ask yourself, what did Apple look like 30 years ago? It was a very different company. IBM and GE were very different companies 30 years ago, and if you did that 30 years before then, that would have been very different. So there's a lot more concentration there. The other thing that I think is really important to talk about when you think about this is if you bought through your debt three years ago, those rates were 1%. Right. And if you now saw what the spreads were today, you're going to get a better yield. But it's good to remember that yield and coupon are not the same thing. And by staying

in this much tighter. Talk about that more because I think people, people conflate the two very frequently. So talk about why they're not the same thing. So yield is a total return you should expect to get an investment. If you bought a bond today and you held it until it returned your money at some time in the future. And along the way, you get these periodic interest payments that we call coupons, right, but the literal clipping the coupon concept. But if I bought a debt that's say it was five-year debt issued three years ago, it's going to have a very low coupon, but the cost to buy that bond today would just be less than the money that they would return to me. And that price is what gets reset daily. And that's what generates its yield. So when you see

yields went up, it's because the price of the bonds went down. But the income that you'd expect to receive is fixed. That's the coupon rate, the interest rate, that was issued when the bond was issued. So if you looked at, say, a three-year bond today and it's all right, great, you just recently issued, it's going to pay me four and a half percent a year. That's the, or six percent a year. Great. I know exactly to expect of the next three years. That same thing if we went backwards in time three years would have 1%, but its price would just be depressed now. So I'm going to get my 1% for three years. And then all of a sudden, I'm going to get all of that other stuff to make me whole to that 3% number on the last day that I hold the bond. And

the last day the bond is issued right before it matures. And that's what's what folks tend to forget. Particularly when you're talking about investments that are three, five years old or long, most folks don't stay in the same investment for five years. They're not going to hold all of those bonds long enough to see all those yields. And yes, they will reprice along the way, but when you bought it and you thought to yourself, I locked in a 4% yield. Like when we're talking, Josh was talking about, you take every 10-year bond over 5%. And his answer is right. He intends to hold those for 5% for 10 years, right? That's a great total return. But most folks practically don't hold their investments that long. And when it sits inside

of asset allocation, it's going to be rebalanced. It should be rebalanced. balance. So we want to focus on what is that coupon rate because that's the net income that folks are seeing in their portfolios and what they expect for the fixed income market. And that's what we hope to deliver in this much more current view. How closely do corporate rates track the treasure yield curve? Because I would imagine that the corporate yield curve doesn't invert, can invert? Can it? Why would it? It can. I mean, it certainly can invert, right? You're just betting on two things. One, that short term, these companies need funding and they can't get it anywhere else.

And the corporate market, the investment-grade debt market isn't a charity, right? If it can get more, it can. And companies might just elect to say, hey, look, I'm a better company than my competitors. You're willing to give me money over a 10-year time frame, and you're just not willing to do that somewhere else, right? So you can see those inversions, and they do happen, and they don't have the same historical meaning as some of the more famous yield curve examples do, but they can't happen. That said, I don't know that I would do this, that folks should look at it exactly that way.

I should say, okay, as that spread is tight or where it is today, this is what I expect, here's the coupon I'm going to get, and I know I'm getting that to your exposure. And if things change, I can very quickly now sell out of that and buy a different part of the credit curve. I can buy into the treasury curve, or I can opt out and go to the equity markets, or somewhere else. And I think that's the sort of the big level of control that you haven't had. You tended to buy a pretty wide index, right?

One to five years, three to seven years. And the amount of issuances have really pushed out where that average ended up. And our view was that this wasn't precise enough. And folks could be disappointed. You could see all this great news over the last three months about elements of the bond market, but you own an ETF or you own an index or strategy that has 90% of its stuff still in these ideas from the last two, three years. So you're only getting 10% of what you expected. And, you know, that level of precision just hadn't been available. And our goal is to

continue to make that available. So investors can decide what, you know, how to position themselves for the right outcome. So I would imagine that the natural buyers or interested parties for something like this or the people that understand the benchmark series story with treasuries. Who do you expect to be the buyers of this? You know, we hope it's as broad a base as the treasury buyers has been. We know there's a number of folks in the institutional space who are doing elements of this, and it's just wrote work, right, who will be excited to not have to do all of that. And they can now take some percentage, maybe all of it, and invest in these products. And they between, say, Z2 and U2, ZTray and U3, Z10 and U10, can give themselves the pairing

they want in, you know, corporate and treasury space. We also see a lot of folks in the advisory market who work with SMAs and anyone who's work with a sub five or $10 million SMA will know your bane is someone calling up and saying, I need a little bit of cash flow. Well, I own 500 bonds, so I can sell 500 sets of odd lots, or I can change my diversification. And you're not going to like either of those outcomes from a return basis or a spread that you incurred basis. So this gives anyone in that space an opportunity to have sudden and fast liquidity in this space. And so we think that will be natural buyer set.

And then folks who understand what we're doing, the credit curve or have a view of credit, in general, whether they be retail investors, advisors, institutions who just look at some of the other industry and say, you know, I spend a bunch of time trying to pair two or three of these things together to try to get an aggregate view I like. Now I can just zone in and put my finger on it today. And we've watched three of them. We're not done. We'll continue to build out the rest of the credit curve and time. We'd like to see the first three get some traction and see folks adopt, you know, those. And if they do, then we're committed to building out the remainder of the credit occur, give folks the same level of diversification that you can get from the benchmark series.

One more for me on setting expectations. So I think the biggest difference between corporate bonds and treasury bonds and the reason that there is a spread is because there's a little more risk there. You don't, you know, you get higher yield for higher risk. So the one piece is default, which is what, infinitesimal at investment grade level, I would imagine. It's pretty small. It's a rounding rate best. Yeah. But the other thing is, if there's a financial crisis, these corporate bonds tend to be maybe a little more volatile, possibly have a little bit of bigger drawdown. Now, that wasn't really the case in 2022 when all bonds sold off because rates rose. But in a 2008 scenario or even a 2020, you could see a pretty decent drawdown if you're

further out on the duration curves. Maybe you could just talk about that difference between the credit market and the treasury market. Sure. I mean, you should expect to see, historically, because of that spread, a bigger, you know, motion that would happen, particularly amplified by more duration. And the credit spread could go bigger. It's at a, relatively tame level today. And those things could push out. And given the way that we're managing the portfolio and the way the indices are structured, you'll watch those bonds move from one fund down the other as they age out. And you'll see a much more current dividend from the ETFs that looks like what the current coupon rates you're seeing in the market just because we have

to buy in those narrow ranges. So you'll see also a very different response. Whereas a commingled fund that might own things from two to, you know, three to seven years might have, you know, this sort of really unexplainable impact because it was, you know, so diversified across the world and it might actually amplified, whereas here you'd say, oh, well, looks like credit three years and out is where things really got in trouble. But the short end of credit stayed good. And that's where I really wanted to be. Why would I want to be in a fund that, you know, took 20% of its credit capital there and 80% in the other stuff that didn't work? This will give you that level of control. But you will see some action happen. If you see a 2008 like crisis

or rates come down or stay where they are, you know, you would expect investment-grade debt to start to yield more. And that's okay. Like that's the natural order of things is the market reprises. What is the likelihood that company X is around tomorrow versus the U.S. government? And, you know, that's okay. That's just the nature of the beast. Multiply that by your duration factor and that's the risk you're going to take. Should that happen and you think things are going to be okay five years down the road, then you're going to want to pile into those markets as they stabilize. Yields come down, spreads come down, and you profit twice from that trade. Alex, you make the boring fun. Thank you, as always, for coming on. If people want to learn more about this series,

where do we send them? FMETFs.com. That's got everything you want to know and probably some more than you want to know, too. All right. Thanks, Alex. We'll see you next time. Thanks, boys. Thank you. okay thanks to Alex remember check out fminvest.com to learn more email us personal emails personal responses animal spirits at the compound news.com see you next time