ETF Edge - Bonds: Hedging early-warning signs? 7/27/26

Episode Date: July 27, 2026

The bond market has a confluence of headwinds converging this week. But, within the turbulence, clear skies can be found. Here’s your flight path.   Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The EETF 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, exchange, traded funds, you're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis, and breaking down what it all means for investors.

I'm your host, Dominic Chu, with the Fed, earnings, artificial intelligence, and geopolitics, amongst others, all swirling together this week, are investors starting to get nervous about their bond holdings? Here's my conversation with Noah Wise, senior portfolio manager of the Plus Fixed Income Team at All Spring Global Investments, along with Christian Magoon, the CEO at Amplify ETS.

Let's talk a little bit about this bond market right now, and maybe perhaps I'll start with you, Noah, on this. Because you are a fixed income portfolio manager, I wonder what exactly the current price action has told you about where the fixed income market stands vis-a-vis some of those bigger, broader catalyst that I just spoke of, like corporate earnings season, like big tech, and of course the geopolitical tensions and war in the Middle East. Absolutely. Thank you for having me. Dom, appreciate the opportunity. In the fixed-income market, we see yields that are attractive. And I think sometimes investors just don't need to over. you have yields that are 5, 5.5% for high quality bonds. And you can get into the 7, 7.5% going into high yield. These are attractive yields that we expect to generate mid-single-digit types of returns here. So really, you know, don't look at gift horse in the mouth. This is what

fixed income is really supposed to be able to provide. We've seen that over the last couple of years, fixed income doing what it's supposed to do. And we think that this is an opportunity. Now, the opportunity, no doubt is there, but the question becomes Christian, are people looking for other opportunities that are even better? In other words, the rise in rates that we've seen overall, because of some of the bigger factors at play, have led to a buying opportunity. Bond prices are depressed across many parts of the credit and rate spectrum, but it has the possibility to perhaps go even lower in terms of those prices and yields even higher. How exactly do you approach investing in fixed income, given the uncertainty around

what the rates picture looks like in the coming months. Yeah, Dom, so at Amplify, you know, we think there's maybe two ways to take a look at it via our product line. One is to look at bond ETFs that automatically write covered calls on a weekly basis on either investment rate bonds or potentially high-yield bonds, even treasury bonds. So we have a suite of ETFs that target various distribution rates and essentially go out each week can write option income as well as collect interest income to have targeted distribution rates on investment grade corporates of say 12%, that's our LQDM product or on TLT U.S. Treasuries that has a target distribution rate of 12%. So that's one way using options in your bond portfolio, which many

investors are familiar with from equity covered call strategies. This is just moving it into the bond area. The other area is just simply kind of hiding out in overnight rates. We have a sulfur rate ETF that has overnight duration with about a 3.6 percent yield. So that's maybe the, I don't want to say the chicken out way, but the way to just kind of stay neutral a little bit, given some of this rate uncertainty. I guess some investors, perhaps Christian, would just call it straight up diversification, right? And maybe not the chicken way out or anything. Noah, from your perspective, from a portfolio manager's perspective, how exactly does that resonate with you? I mean, what exactly are you looking at in terms of opportunities that have presented themselves in this market?

You mentioned a couple of them out there, but, you know, there are a lot of alternatives out there right now with regard to straight up fixed income investing, whether it be with some kind of a derivatives, options kicker for income, or other types of structures to find outcomes. How exactly then do investors and portfolio managers look at how to construct that kind of a portfolio? Absolutely. So really, I think you hit the nail on the head here. It's about diversification. And fixed income is providing a lot of opportunities in a lot of different places. So one thing that we do like is the front end of the yield curve.

You see a market that's pricing in a couple of hikes for the Fed here over the next couple of years. That type of yield north of 4% with relatively low risk is, in our view, pretty attractive, and a lot of the downside is already priced in. From a sector standpoint, we like credit on the U.S. side more than we like in Europe, where credit spreads are tight. So there's opportunities within U.S. credit with strong macro fundamentals and really very, very strong earnings picture, as you alluded to earlier. Mortgage-backed securities are relatively attractive on a spread over the Treasury basis.

So there's opportunities there as well. And then getting globally diversified interest rate exposure. What's happening in the U.S. is a bit different than what's happening in Western Europe is different than what's happening in emerging markets. And so you can blend some of these opportunities. You want to be selective where you're getting compensated at an attractive yield for the risks you're taking. But we do seek global opportunities as well. Noah, could I just follow up on that?

What exactly fundamentally are you looking at as to determine how you pick those certain sectors individual companies, industries, parts of the market, whether they be global in nature or here domestically U.S. How exactly fundamentally do you approach that selection process? What exactly are the biggest factors that you are looking for from that fundamental perspective to help you figure out where the relative value is? Yeah, so certainly on the macro side, we think the fundamentals are more favorable in the U.S. and that's part of the reason why we like credit, whether that's U.S. investment grade or U.S. high yield, more than we like. like European credit at this time. It's supported by this AI investment cycle that we're seeing

here. There's also less of a negative from the war in Iran and what that means for energy prices because of the U.S.'s stance as a net energy exporter. So from that perspective, we do like the fundamentals here in U.S., corporate America, more than in Europe. If you're looking at places like emerging markets, well, there are a lot of energy exporters. There is. well and in some of these places and particularly in Latin America where you can find yields that are at double double digits and so there's a lot of opportunities I think even with the challenges and risks that we see geopolitically that that you can still generate pretty attractive yield and an income in a really again diversified manner. Christian you mentioned some of the ways that you

are getting income on top of income with regard to some of the products that you and other people offer as well from your standpoint as a person who who runs in each complex. Is there anything that you are seeing from a flows perspective, from an investor, advisor, demand perspective that maybe gives you an idea of where you think this market is headed? Is it something where we can look at ETF and fund flows to kind of guide us through where exactly investors are key in most of their attention to these days? Yeah, it's a good question. We definitely see some behavioral trends in these flows. and we've definitely had more interest in kind of this hedged fixed income exposure that, you know,

takes traditional bonds and rights covered calls. So I think there's some nervousness about what rate increases could mean as well as some of the geopolitical issues alongside a new Fed share. So I think hedging fixed income has been a little bit more in vogue this year than we saw it last year because of some of the developments. We've also seen an uptick in kind of our cash-like flows into the Sofer rate product. And again, that may mean that people are just trying to maybe sit on the fence or just be a little bit more liquid. Could mean that, you know, they're kind of building up dry powder for, you know, buy-the-dip opportunities and equities, maybe even in bonds. I do think some of the flows that we've seen in equity income products have been byproducts of maybe not as much interest in the bonds. space over the last maybe 36 months. However, that's, uh, has seen a little bit of an uptick.

Last thing I'd say, Dom, is we just seem like there's more interest in higher quality investment grade than high yield. It just seems like you're not really getting that, uh, extra reward for the risk you're taking in the high yield market. So we definitely have seen a preference inflows towards the investment grade side of the equation. You know, it's interesting that you bring that up, Christian. No, I wonder what, what your perspective is on this because we have seen some more relative weakness with regard to that high yield junk bond side of the equation on the fixed income side, certainly over the last couple of months relative to investment grade. There are those out there who believe, I guess, that the

high yield junk bond markets behave a little bit more akin to equity markets than they do to traditional rates or high grade investment grade type funds. I wonder if this is one of those situations where the high yield market and the stock market are signaling something broader about the macro environment, Noah, that maybe there is a little bit of risk aversion that's now being, I guess, creeping into the marketplace overall. We have started to see high yield spreads leak a little wider, but I think it is important to provide that longer-term perspective that we are still at historically very, very low levels of credit spreads.

And so we do think that does signal strength in the corporate credit market and U.S. corporate credit market in particular. I think that's probably the biggest signal to take is that credit spreads do still historically remain very, very low. But, you know, there is, I think, for a good reason, some more flows into the investment grade side of the market. And that is a really important technical that I think Christian was, talking about these yield levels have brought buyers in. I think, you know, fixed income investors

were yield starved for, you know, 10, 15 years almost. And I think these yields in these mid-single digits, again, you have 7 and a half percent type of level, 7 percent in high yield, is pretty attractive and is bringing investors into the market still today. Interesting, because we are seeing a little bit more of the question that's asked a lot, think investment advisors these days is at what level our yields attractive enough from a risk-free basis to say, hey, you know what? The prices have fallen enough for me to capture some of that, both in that and, of course, other parts of the credit spectrum as well. The other big issue, of course, facing the markets and traders and investors this week, outside of geopolitics and earnings season,

is a Fed meeting where interest rates are expected to at least maybe hold steady for the time being. But that uncertainty around just what the future looks like, especially given the fact that We're in a new regime with a new Fed chair and Kevin Warsh. All of those things may be adding to this idea that people maybe want to sit on the fence for a little while longer. But Christian, from your standpoint, the great Fed spectations, I guess, we'll call it, coming about this week and into the latter part of this year. What exactly is your outlook for what you think the Fed needs to do and what it ultimately has to do in order to get things right with regard to the macro economy, not just here in the United States,

but broadly around the world? Yeah, so I think we would look at one rate cut being fairly likely, or sorry, one rate raise being fairly likely this year. I think the markets are pricing that in. You know, as we get out this month, I think we're looking at around a 30% probability next month, maybe an 80% probability. You know, last FMC meeting, we saw about half the participants there being concerned about inflation. And when you look at inflation, whether that's energy and I guess we'll have to really, the latest tweet to see where oil prices are going or some of the underlying inflation that's starting to creep up in areas like AI and memory. We think that that probably is kind of a freebie

for the Fed to raise rates at least once because the market's expecting it, gives them a chance to maybe cool down things a little bit, and then see where that takes them into 2027. So we don't see a lot of rate increases, maybe just one this year. And we think that the market can take that given kind of the strong GDP growth we've had, some of the efficiencies from AI. And, you know, we're probably hopeful that there's a resolution here in the Middle East. It seems like given today's news or the over the weekend's news that we're getting closer to a resolution, although that didn't seem like the case on Thursday. So we'll see what happens. But we're, you know, generally constructive because of the fairly strong economic backdrop here. And we think that this could be still an operational.

time, given where yields are, to have participation in the fixed income market. We also think that focusing on higher quality, as well as potentially hedging that with some options, makes a lot of sense here because there still is a lot of uncertainty. Noah, what does a bond manager look at with regard to what the Fed will or will not do, will or will not say, can or cannot say about the markets overall? I guess Kevin Warsh is the new chairman of the Fed. He is not nearly as, I guess, outgoing with regard to some of the views that his predecessor, you know, has been in the past. Is there something that you would maybe look to from the Fed, from Kevin Warsh as the chair in some of these upcoming press events and news conferences

tied to rate decisions or otherwise that would give you a little bit of pause with regard to how you structure your portfolios and your client assets? Yeah, so there's a number of things that we're certainly looking at here. I think this is going to be a really pivotal meeting that we have coming up, although we completely agree with Christian that the most likely outcome is a hold in this meeting. But the next meeting is a little bit more up in the air. And I think that the signaling will probably come in this meeting. Yeah, the path to avoiding a rate hike this year is certainly narrow, but it's not entirely closed off. It does depend heavily on the headlines and ultimately what transpires in the Middle East. But that path is getting narrower given what we've

seen so far in July and the impact on energy prices. When we look at what is likely to come out of the next Fed meeting, we think the focus here is going to be two full. One is the characterization of the recent CPI data that we had through the end of June. That data was, was very, very favorable. It did suggest that underlying inflationary trends were under control. That is a big, big positive. Since then, we've obviously had much higher energy prices so far in July, and that makes the Fed's decision more challenging, which leads to the second thing that we're going to be focusing on, which is, is there going to be a dissent? And we think that is quite possible that we do see a potential dissent in this meeting, even though it may end up quite likely

being a hold. And that I think is going to be very interesting to see how the market handles that. All right. And then, Christian, from your standpoint, as you watch the comments post-fed rate decision or indecision, I guess, maybe this time around, what exactly will stand out to you? What are you going to be looking for and listening for? Yeah, I agree with Noah. I think it's the signaling that potentially creeps into this statement. And I want to see kind of what percentage of participants in the FOMC meeting are concerned about inflation. Again, it was about 50% last time. Is that growing?

How are they viewing, you know, current data, whether it pertains to energy prices or some ancillary inflation numbers? Yes, CPI seem to be moderating a little bit, but there's some areas that are white-hot right now in terms of inflation surrounding AI-related initiatives. components and that seems to only be getting to be louder given kind of the focus of the entire market on AI infrastructure buildout and the need for those supplies and materials. So comments around those areas as well as maybe some editorial comments on what's going on with the Middle East at some point, you know, they may not want to just take for granted what the latest tweet

is and they may want to put, I think, a line in the sand. And I'll be interested to see if there's any language that kind of speaks towards that energy-related inflation. And Noah, what exactly in your mind is going to be the thing that's going to be the most daunting for the Fed and the policymakers at the Federal Reserve in the coming five to six months here as we approach to the end of the year? What exactly does the Fed have to do and have to get right by the time this year? into the first quarter of next year comes around? I think the Fed is really kind of boxed itself into a corner and is certainly in a difficult position. There are two things that are driving this. One is inflation has been running above target for five

years. So they're coming into this current period in a very challenged situation. And then the second piece is they have very little to know control over the, the current issues and you know talking about whether it's you know dram pricing or it's the price of of oil these are things that the Fed does not control and so they are in a very very difficult position over the next couple of quarters and how they really handle the fact that they've been running above target on their inflation mandate and the primary factors that are keeping inflation high right now are not really directly under their control all right and then Christian One last question to you before we go.

You mentioned artificial intelligence. It is certainly one of the big kind of macro factors at play for all parts of the market right now. It's been, I guess, focused on a lot more from the fixed income side because of the amount of issuance coming from some of these larger AI players, infrastructure providers, chip companies. We talk about names like Oracle, Nvidia, and others who are raising money in those debt markets. Do you feel as though the AI trade, vis-a-vis the debt markets, is something that we have to be careful about. And what exactly would you be on the watch for with regard to potential either signs of tailwinds or stress? Yeah, I think you're right there, Dom. You know, this is becoming a larger percentage of debt.

And if you look at kind of where the debt market is going when it comes to AI, it's growing massively. And I think we need to look at who is guaranteeing. this debt, how is it rated? Are there any circular relationships here that could introduce contagion? We certainly saw Invidia talk about, you know, backing Open AI, I believe, on a project over the weekend. And I think there needs to be some matrix type analysis on who's behind this debt and who's behind not only the financing, but maybe the demand for this new construction, whether it's data centers, infrastructure, buying of chips. This is not only just a U.S. issue, it's also going global.

We've seen a lot of the announcements from many of the Korean companies, whether that's Samsung or SK. Hynix, including the Korean government over the weekend. So this is becoming a bigger issue. And I don't necessarily think it's something that is bad. It could actually be something that's good. And it introduced a very high growth area of the debt market. but definitely a larger segment that may distinguish itself in terms of its behavior and relationships relative to the classic corporate debt offering. So definitely something to keep an eye on.

All right, Christian Magoon over at Amplify ETFs. Thank you. Also, Noah Wise at Allspring Global. Thank you very much for the conversation. Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand EPS with our Markets 102 portion of the podcast. Noah Wise, Senior Portfolio Manager plus fixed income team at All Spring Global Investments continues with us now. Noah, I'd like to pick up this conversation kind of along the lines of where we kind of hit a lot of this stuff in the online show. And that is portfolio construction in this day and age, given everything around us right now from a portfolio manager's perspective. You run a bond ETF that is a core plus, which implies that there is a bulk of holdings that are considered. quote unquote core, and then other things that you do on the edge is to add value to it.

What exactly does your job entail with regard to how you determine what goes into core and then what goes into the plus around it? The way that we put together our core plus strategy, we do have a very important and heavy emphasis on the core component because we want our fixed income fund to perform like a fixed income return stream. And that means we will always allocate at least 65%. Currently, it's a little bit over 80% in those core kind of Bloomberg aggregate index types of sectors like treasuries, high quality investment grade corporate bonds and securitized assets. But that also means we have the flexibility to invest more broadly as well, either in global government bonds, emerging markets,

high yield corporate bonds, credit in Europe, whether that's investment grade or high yield. So really that comes down to potential to generate more attractive yield income, but also diversification. And that ultimately allows us to achieve the outcomes that we are looking to achieve in our strategy, which is an attractive return, but at a really risk-efficient manner, again, with a high correlation to the index. Is there a reason why Noek just out of curiosity, you mentioned before that the core side of things could be around maybe 65% or so. That core kind of Bloomberg aggregate, if you will, kind of exposure is up to like the 80% level you just mentioned. Is there a reason why there's so much more of an emphasis on that core side of things

given what we know right now, what the market environment is right now, given where prices are right now, is it because of a safety issue or because you are now starting to see more relative value in the drop in prices from that core side of things that have now pushed interest rates higher as we've seen on the treasury curve it is both so we have seen u.s treasury yields move markedly higher so far this year and with that it's brought yields higher and things like u.s investment great corporates and and a lot of the securitized assets as well that's particularly true for some of the shorter maturity securitized assets things that are in in the asset back security space.

So we see higher yields in some of the higher quality parts of the portfolio at the same time that we're seeing credit spreads at historically very low levels. So that relative value is also very, very important here because investors in our view are not getting compensated adequately to be taking excessive risk down the capital structure into lower quality companies at this point in the cycle. So really it comes down to yields are very, very attractive.

Investors are getting compensated for their patients, and it's not the time to reach for yield because investors aren't getting compensated to do so. All right, that begs the question, Noah. What makes it so that investors should be chasing some of those higher risk-adjusted returns and yields? What exactly would get you off the sidelines and allocate a little bit more away

from the core side of the portfolio into some of the extremities where you could find some more perhaps relative value, not just on the yield side of things, but potential capital appreciation as well. Yeah, the biggest thing is valuations. And when we're talking about valuations and some of these spread sectors, it's really credit spreads. So if we get to see significantly higher credit spreads, then that would entice us to allocate more to these kind of lower quality corporate credit sectors, for example. But there are some components of the non-benchmark or plus part of the portfolio where we are seeing more attractive value. Some opportunities in Western Europe, some opportunities in Asia, some select opportunities in Latin American government bonds as well,

where we've seen those yields move even higher in part because of what we've seen in the Middle East and the impact in energy prices. And so some of these areas, places like France or places like the UK, Australia. Yields have actually moved, particularly on a currency hedged basis. A lot of these yields are higher than what we're even seeing in the U.S. Some of these countries and some of these markets are very high quality. They're not going down in the risk spectrum, but we are able to generate higher hedged yields and improved diversification as well.

So we do think there are some opportunities in those plus sectors. All right. And then one final question before we let you go. We've talked a lot, not just here on the online show for ETF Edge, but just in the market more broadly. This idea that AI CAPEX and funding has now kind of become a huge influence on many asset classes. Many people think exclusively in what it does to the equities market, to the tech sector and to chip stocks and to hyperscalers. But they're also using a large amount of debt right now. to help finance some of those capital expenditures plans in the future. I wonder from a bond manager's perspective, just how closely do you have to pay attention to AI-related headlines because they might drive some of the dynamics in the bond market, specifically for companies that are now investment-grade or high yield, but in a very kind of credit-worthy side of the high-yield spectrum,

issuing debt to pay for a lot of stuff they want to do in the future? We are hyper-focused on this part of the market. One of the things that's been keeping credit spreads tight is this incredibly strong technical. There's an enormous amount of demand for fixed income of just about every flavor. More recently, we are seeing incredible supply, particularly from the hyperscalers, but other AI-related trades, data centers and ABS and, parts of the high yield market where that is actually starting to alter that supply demand technical with supply starting to outweigh some of that demand and put a little bit of upward pressure

on spreads in this part of the market. So that's something that we're focused on very, very intently. And we think it's an area as equity investors should also be focused on because of the amount of debt that is needed to fund the CAVX over the next couple of years. So fixed income investors really focusing on the risk performance in the equity market. If we see equity markets start to really wobble, then that is going to call into question that the growth potential here. And then that's going to make us question, you know, how much of this supply do we in the fixed income markets want to be able to fund?

So it is really back and forth, but for an equity investor, I think they really need to be focused on the supply that we're seeing in fixed income as well. Sure, that supply demand dynamic for bonds because of AI is going to be something a lot of bond managers, I'm sure, going to be paying close attention to. Noah Wise at Allspring. Thank you so much for the conversation. We appreciate it. Damic, thank you for having me. All right, that does it for the ETF Edge podcast. Thanks for listening. Join us again next week or just head over to etfedge.c.c.com.

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