ETF Edge - Adjusting what you think you know about bonds, now 5/27/25

Episode Date: May 27, 2025

Bonds are generally known for their stability. But, like the equity markets, bonds are experiencing outsized volatility of late. However, new tools allow investors to engage bond opportunities like never before. Our experts help you rethink your allocations. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things exchanged traded funds, you're in the right place. Every week, we're bringing you compelling interviews, thoughtful market analysis,

and then breaking down what it all means for you, the investors out there. I'm your host, Dominic Chu. Continued trade and Fed Uncertainty is pushing and pulling, everything in the bond market right now. So where is the best opportunity amid the volatility? Here is my conversation with Joanna Gallegos, the co-founder and C.O.O. of bond blocks along with Todd Sone, technical strategist over at Stratica Security. Joanna, I'd like to start off with your assessment of the recent volatility that we've been seeing on the Treasury slash rates market.

Yeah, so I think the volatility that's been in view and been talked about probably since early April has been on the long end. So even if you just look at the Treasury, the 20-year Treasury year to date, it's gone from negative to positive returns five times. So it's really experienced a tremendous amount of volatility that everybody's been watching. One of those turnarounds was over seven and a half percent within I think a week. So if you're looking at the long end of the Treasury market, lots of volatility, lots of concern about what it means for the economy, if you're looking at other segments,

of the curve and you're looking towards the shorter the middle end, it's looking more traditional. It's looking less volatility with stable yields. It's been very supportive in portfolios this year. Across the curve, now, as we've gotten through April, you know, returns are up. So, you know, if you had your treasury exposure, you've gone on a big, big ride since April, but things have calmed down. What exactly, Joanna, has been driving the volatility, especially on that long end side compared to the seemingly relatively stable part of the shorter term of the curve. It's supposed to be volatile in times of uncertainty. It's supposed to reflect the longer-term view of where the economy is going. And if you can't see past three months through

maybe a tariff change or you're not sure exactly what the playing field is, it will be volatile. It's actually functioning as it's supposed to. It's an important barometer to show where uncertainty is in the market. Now risk aversion factor, Todd, has also some something that we're paying close attention to from a technician standpoint what do you make of the recent kind of activity that we've been seeing both from a price slash yield perspective and then what have you been watching for and what have you been seeing when it comes to some of the money that's been flowing into or out of certain parts of the etf market with specifically targeting the bond side of things yeah it's a great question i i think the important stat to keep in mind here

This pairs along with what Joanna just said about volatility is that we're nine months into the cutting cycle since the first cut from the Federal Reserve and both long duration treasuries and both and long duration corporate bonds are down since September 18th. That's extremely rare. I can only count one other time that's happened. It was during the financial crisis for what that's worth. And so long duration doesn't work. I think it makes much more sense to stay down the curve. And in terms of flows, I think throughout this year and really since the April 8th low, you have seen. mass amounts of money go to Treasury bill,

ETFs and more shorter duration too, so going out two to three years on the curve. So flows remain very much on that less volatile side. There's been a pinch of money going to long duration, but I think if Fed investors have finally acknowledged that it remains a very volatile market that's just not working anymore. So they're comfortable staying in that cash-like vehicles there, and I think that's fine for now until there's much more clarity

on the long end whenever that might occur. If there is Todd lack of clarity, and it's kind of the general construct we've been working in, right? It's very headline driven. It's very White House trade negotiation, Treasury Department, USTR-driven flow activity with regard to news. Does that make you feel as though that that kind of rates side of things, the Treasury side of things,

is range-bound until there is a fundamental breakthrough in terms of the economy and or trade talks? Yeah, I think that's the right call, right? the right call is no call on anything seven years and above on the yield curve, right? It's just there's just nothing there for us from, you know, if I were to put on my technician hat, it's just a sideways, huge volatile range. And that's just not something I think I want to sit through or many investors want to sit through now.

You can get opportunistic if you'd like, if you feel the economy might be deteriorating. Of course, that's when it makes sense to add some of those longer duration instruments. But for now, you're still getting the same, similar type of yield and far less volatility down the curve. And I think that's just a hard proposition to want to argue against going forward. All right. So you and Joanna both agree on this. Joanna, let's turn back to you. Where exactly are you seeing some of the greatest, at least opportunities with regard to the fixed income side of things? We've talked about things about treasuries. We've talked about maybe not as much about corporate credit, investment grade or high yield, other types of fixed income instruments.

Where exactly this? Where do things lie? Where do things kind of? of shake out with regard to where the opportunities are given what we've seen. Yeah, we're focusing our clients, we're focusing our message on corporate credit. And the reason for that is that you can actually see a balance sheet. You can see the strength in the balance sheet. We believe in the American corporate balance sheet because the fundamentals have been strong actually through 2023, 2024, and we enter 2025 from a strong position. So they are set up to weather this storm.

And on the debt side, you know, if you're into investment grade at the very least, investment grade, at the very least, you're picking up yield away from the Treasury curve. But if you stay short on the corporate credit side, you're also not exposing yourself to undue interest rate risk, which is actually something we didn't talk about, which is really throwing the long end of the Treasury curve around. It just has more interest rate risk because it has more duration. So if you take duration out of the corporate exposure as well in credit, you're really picking up some attractive yields at close to 6%. So, you know, it's something you should consider. given, you know, investment grade rarely, if never, defaults.

We like triple B. We like the triple B space because you get a yield increase from going out to triple B. It's still investment grade, and it's a place that you'll be picking up more yield. Now, also, Joanna, the idea of trying to pick up more yield is something that is mainly, not mainly, but very often geared towards people who have an income tilt towards their investment. investments. They want to see that kind of periodic paycheck, so to speak, coming in. With an income standpoint in mind, how exactly then do you go about constructing, whether you're a retail investment advisor, a registered investment advisor representative, any kind of a trader who wants to put their products into yield instruments, how do you shape a portfolio

based upon that, given what we know in the ETF market right now? I think it's the income. if we interchange yield for income, like that's what's really important about fixed income right now. Yield, sorry, income is back in fixed income. And so for any investor, sophisticated RAA, that's trying to offset the volatility in their clients, you know, equity portfolio, if they haven't looked at how income is serving that portfolio, they should. And so that's why we recommend, you know, looking at these credit spaces because of the resiliency and their balance sheets, because of the resiliency of these corporations to be able to pay their debt. you should be reaching for not only investment grade credit,

but also high yield credit, because the income is very compelling, especially in places like double B, which is a first rung in high yield. You're getting an immense amount of relative value from going from triple V to double B, an increase of another 100 basis points up to 7%. And so if you believe that you can see the cash in a balance sheet,

and you know that that interest rate, that there's interest cut, coverage for that corporation, that's uncertainty that you don't have to work about. You can look inside. Now, Todd, it's the income-oriented investor is also one that's looking towards the bond market side of things, but also balancing it out with what's happening with equities. I mean, we talk about the traditional 60-40 stock bond allocation and what exactly that's done for investors over the last few decades.

Do you feel as though there are places right now on the equity income side of things that you are seeing more activity or heat in yourself from a strategist standpoint. Yeah, I think what's super interesting since the market low and even just income aside is that there's just a total skepticism of what has gone on over the last month that I have to the equity rally has seen flows really cool down high level from it from the broader ETF universe. And then when you break it down by sector, there's been outflows from cyclicals such as financials, industrials, discretionary materials, and outflows from small caps and even lever funds. So the type of stuff that you typically see is going very risk on coming off of lows hasn't

been there. As opposed, and for income, I struggle because you used to have utilities and staples be the bond proxies during the QE era. And that has disappeared with the return of bond yields, right, of return of a rate high cycle. So I think the ability to buy something like consumer staples. for yield has really deteriorated. There's not much of a reason to own a lot of these consumer staples names anymore unless they're part of saying AI theme like a Walmart or a Costco. But so other than that, I don't know if you're going to get much income flows to the equity

side of the equation. It's all going to go to these short duration bond ETFs for now. And then I also could just go back to this idea of the skepticism. I like that from the equity perspective overall. Okay, Joanna, if you were to construct a portfolio, for income generation focused on bonds, what exactly then do you do from a structural standpoint? How do you allocate? How do you systematically approach things? Do you make kind of one-off investments? Is it more about kind of like that 401K approach, which is like every couple weeks or week or so, just put more money in and keep buying? How exactly then do you treat this income tilt in the market, given what we know about the ETFs, mutual funds and everything else?

Well, I think most portfolios, they're allocated to something that looks like a 60-40 portfolio. And so what is your 40? So normally the 40 is an aggregate exposure. And that index was built in the 1980s. And probably some of the ETFs are using today have been built 20 years ago. So what we are saying is that if you're using, if you look at just like the space of an ag, you should be leaning into these income opportunities in corporates, which include high yield and investment rate, as I mentioned. Like go and reach for the triple B yield.

Go and reach for a double B yield or even we advocate a triple C yield because, you know, at 10% to Todd's point, like finding that income can be harder. Also, go into other asset classes like emerging market debt. And as well, you're looking for diversification into a really powerful tool in private credit. Private credit in the way it's accessible today, it wasn't available to investors 10 years ago, five years ago. And now it's available in an ETF, and PCM is our ETF. What you're looking at is you're looking at a portfolio that has less than three months of duration, which is really low interest rate risk, and it's yielding, from a yield to maturity standpoint, over 8%.

That's a compelling solution to what we were just talking about. A lot of people like to be short, and they want to be, but they also want the income. So to have high income and low interest rate risk focused on, you know, high-quiry quality CLOs, like that's sort of a winning trade as well. So I would lean into what you already have, which is you have corporate exposure, you have treasury exposure, add, you know, higher yielding corporates,

and then as well, like make sure you're looking at something like private credit, which is really diversifying, non-correlated, and has high income. All right, Todd, one more question to you. If you, from a strategy standpoint, you have your technician hat, your strategist's hat on, if I asked you what your favorite

part of the market was, no matter what the asset class is, what is it right now? Listen, it's hard to argue against short duration, fixed income. But how about international equities? I mean, I know we haven't talked about that at all here. This has been more of the focus on the bond side of the equation, but international equities are contributing to portfolios again in a way that they have not done in over a decade. Last year, it was Japanese equities working and this year it's European equities working. So to the extent that in the 40 part of the equation, you're getting income again in the 60 part of the equity equation you're now getting international again too so this is great for investor portfolios you don't have to be loaded up on large cap growth anymore as you did during

the QE area that's a meaningful change that I think everyone needs to be aware of all right not just mag seven all right joanna you get the last word if you had one big fear in your in your world what exactly would you be on the lookout for what exactly would give you a moment of pause about how things are developing in this market structurally, fundamentally, or anything else? Well, I think my fear is people haven't really re-engaged with how the bond market's working for them. I think that there is a lot of focus on that long-term rate and the volatility, and what people are missing is my fear is that they're not diversifying their portfolio with bonds today. We really, really have an equity addiction to concentrated broad-based indexes now that, you know,

or over-weighted certain tech names that really move that index is quite a bit. People get used to and they've appreciated these double-digit 20% returns that they've seen in equities. And every time we have about a volatility, they forget about, well, when are you going to add that income to your portfolio? When are you going to add more fixed income? Because these markets, these volatile reactive markets are the time for fixed income to add more bonds to your portfolio in the ways that we were describing. If you don't do that, you don't take a look now.

you know you'll have that feeling whenever the next bout is three months a week. I'm not sure. So in this time of uncertainty, you have to accept that the uncertainty is going to continue and the volatility is going to continue. So my biggest fear is people don't actually take action in their portfolios with more bond exposures that are precise and can really, really do work for you. Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand ETFs with our Markets 102 portion.

of the podcast. Todd's own technical strategist over strategic securities continues now with us for this portion of the program. Todd, thanks for taking the extra time to be with us here for the ETF Edge podcast. Let's talk about exactly what's happening that you are seeing in the ETF market that has caught your interest specifically when it comes to the dynamic of the bond market and maybe vis-a-vis the equity markets. Yeah, it's a great question. We started 2025 on the equity side of the equation with very aggressive attitudes. If you looked at flows, they were doing about $3 billion per day into equity ETFs.

That is historically extreme. And that was coming off of back-to-back 25% years. Now we had a correction February to April. And since the correction low back in April 8th, equity ETFs are only averaging about 1.4 billion per day. So we've been cut in half despite a really good recovery. Now on the bond side of the equation, it's great that you're getting income up and down the scale of the duration.

scale. But from a flow's perspective, it's interesting to me that since that April 8th low, when you look at categories, you've been led by Treasury Bill ETFs and a little bit short duration ETFs as well. So add that altogether. And it's a little bit of skepticism, I think, towards the equity rally. And that's what the flows are telling us going forward. And I think that's a very supportive data point compared to where we were four months ago. What exactly are those flows showing you now then? Are there certain places within the fixed income side of things or other asset classes with regard to ETF representation at the expense of the equities or stock side of the equation. Yeah, I think it's mostly just hiding out in

ultra short duration, right? Nobody wants to take super duration risk because there's just been too much volatility there. The performance has been awful. There's been no call for the long end of the curve, right? We've had yields start to percolate here again, 30 year olds at 5%. So the flows are just telling us, folks want to hang out. on the short end of the curve and they're just very skeptical of what to do with their U.S. equities. I mean, you have outflows from cyclical sectors in small caps. It's almost like they're throwing in the towel right now.

Perhaps it's headline driven, right? We live at 24-7 news cycle and it's been extremely volatile-upon-the-headline basis for much of the last five to six months too. Now, if that is the case and there is such strong demand for that kind of shorter-term side of the yield curve, T-bills, although we have to maybe the one in two years, side of things. If you look at that kind of historically speaking with how that acts, that's going to keep yields relatively stable, if not even a hair lower on the low end or the short end of the yield curve versus more selling volatility on the long end of the yield curve, pushing yields higher. It seems like it's a steepening type situation, but maybe not the kind that you want to see.

Yeah, I guess that's the tricky part, right? We have the yield curve inversion, which usually is a recession indicator. That did not work. Now you have the coming out of that, the steepening of that, which is also consistent with the recession environment. It just hasn't been happening yet. It looked like we had a little bit of an earthquake there in April, but so far that has not been the case. And a lot of the rules I think were used to, whether it was pre-QE or during QE, have not translated to what they typically result to. So we're in a little bit of a different environment.

But if you're an advisor, it's just hard to argue with getting four, four and a quarter down the curve without any sort of volatility. You can relax with that portion of the yield curve. If there's one thing I would point out, it's that I wonder if we're entering a little bit different corner of the credit cycle. Right. And so high yield worked. CLOs worked great until we had this little earthquake back in April. And now you're starting to see some disparity in terms of high yield, right? high yield and financials, high-ield industrial is so strong, but high-old energy has started to lag a little bit.

So I think things are going to get a little bit trickier in terms of credit going forward as opposed to, say, the last year or two. And because you are a strategist and a technician, you have all these different hats on. Oftentimes what traders, strategists, analysts, you know, technicians look for are, you know, notable convergences or divergences happening in the markets that you watch. I wonder from the fixed income standpoint, is there anything out there that you are seeing with regard to what's happening outside of the rates market, specifically in credit, that is leading you to believe that things are either maybe trending better or worse? I had one trader tell me the other day, you know, listen, there's not a lot of risk being priced in for a recession. If you look at the high yield market, it's still holding up relatively well. I wonder what's caught your attention on that front. Yeah, yeah. So it definitely goes back to the idea that maybe high yield sector returns aren't as as together, glued together as they were since the hiking cycle started. Maybe you start to see a little bit more disparity at the sector level. But I've been pretty amazed at how much spreads have recovered since the April correction. I mean, high yield is back to say 300 basis points. That's really tight historically. And so I'm okay with that. That's actually a bull market characteristic for risk assets, these tight spreads. But how long can it? last again before you start to see them wide and out. And that's the really hard question I grapple with.

I don't have a great answer for that. But I think it's something all investors need to keep in mind is how much of a good thing can it last before something, some events, some catalyst happens that starts to deteriorate the economy even more. So far it's okay. And equity seem to be responding to. You have risk assets working, risk relationships working discretion over staples for what that's worth, high beta over low beta.

So there's no tells there yet. But, you know, I think longer term, how much of a good thing can something last is a fair question. We went from a bear market to a bull market in under three months time. If you kind of look at the way things are shaped up, right, since the beginning of April 2nd with that so-called Liberation Day announcement on tariffs. If you look at that and look at, say, just what's happening with the equity markets, there has been a massive recovery in certain parts of it, especially for things like the S&P 500 or for larger mega-cap technology type names. Is there something that you are watching for that might cause you a little bit more angst or worry that we might be due for either another move lower or a retest of the recent lows that we've seen post-liberation day? Is there something specifically that you think would be one of those tea leaves to keep a close eye on?

Yeah, I go back to the idea that it's the third year of this cycle. I still use the word bull market as much as April felt like a bear market. But year three is often very inconsistent, very sloppy, almost a trader's market rather than an investing type of market. The returns historically from 1950 all the way through 2023 are very wide dispersion, whereas years one and two of bull markets, they're coming out of major corrections, recessionary environments. They're very much a linear return higher. So I look at this as a reset year. So I wouldn't be surprised if you saw volatility pick up during the summer, especially. especially if we get earnings.

I think we have Nvidia coming up this week, if that disappoints. So I think just keep in mind, it's still that inconsistent year, a reset year following two really, really strong years historically for stocks. All right. Some interesting perspective for sure.

Todd Sonat Sartigas, thank you so much for joining us on ETF Edge the podcast. We'll see you next time around, Todd. Thanks a lot. I'll see you. All right. Thanks for watching the ETF Edge podcast

and listening to it. Thanks for listening again for us. and you can join us next week, or just head over to cnbc.com slash et fetef edge. We'll see you next week. How does InvescoQQQ-Q-Rethink Possibility? By rethinking access to innovation and the NASDAQ 100, let's rethink possibility. Investorbiters, Inc.