ETF Edge - Bonds stealing back headlines from equities 5/18/26

Episode Date: May 18, 2026

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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, 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. Bonds, rates, inflation are stealing headlines back from those Teflon equity. securities, but are ETF investors underprepared for some of the moves that are happening? Here's my conversation with John Dobby, Chief Investment Officer at Astoria Portfolio and Joanne Bianco, senior investment strategist over at bond blocks. Let's set the stage about the rate side of things and how it affects strategy. And Joanne, I'm going to start with you first on this one. How exactly are you viewing the current inflationary threat and is it something that you feel

has legs medium to longer term and that needs to be repositioned for. Yeah, well, hi, thank you very much for having me on the segment. And yes, it's something that definitely could have legs to the extent that we continue to see this ongoing conflict with the U.S. and Iran and the Strait of Hormuz continuing to be closed and the potential for continued energy disruption or energy supply. disruption. So those are things are all inflationary, and it really just does change the picture from what we saw at the beginning of the year in terms of what we saw the outlook would be for rates. And Joanne, what exactly are you seeing in the marketplace right now that would suggest to you

that we could have this kind of medium to longer term impact of the current inflationary environment? I think part of it is probably just that we're not seeing a resolution. We're seeing ongoing negotiations between the U.S. and China and Iran, but we're not actually seeing resolutions. So that is something that, you know, kind of like the longer this goes on, the longer that we see supply disruption and energy, the worse this is for the reacceleration and inflation. And then eventually there's going to be an economic impact of this well, you know, as well. We don't know what we're going to see in terms of the upcoming driving season for consumers with the summer and the sticker shock of higher gas prices and what that does to economic activity. All right, John, all of this is translated into an interesting market narrative that's developed from when before the war started to where we are right now.

Before the war started, there seemed to be at least a little bit of traction for this kind of so-called broadening out trade, the value of cyclical trade that was not so hyper-focused on hyper-scalers and mega-cap technology stocks. Yet since the market lows that we saw around kind of the end of March, it has been off to the races with regard to what has worked pretty much since the great financial crisis, and that is a return to mega-cap tech. Is that something that you see continuing? Have we now reversed course and gone back to the old paradigm of just by, everything mega cap tech? Well, we're coming up a very strong U.S. earnings season. A lot of the hyperscalers, you know, printed very strong results. So I think they're on the margin. So look, we own the hyperscalers.

We think that they're big. They've got moats. They produce good cash flow. You know, you can't ignore them, I'd say. But incrementally on the margin, we are adding to more real assets. And we are, you know, sort of add into like more equally weighted strategies. And I think, you know, if you just look at, like, you know, Joanne talked about the straight of her moots, you know, the oil conflict.

But if you look at 10-year JGBs, there are 20 basis points in the last week. That's a three-sigma move. The U.S. 10-year just crossed, you know, cross-past four point five to four point six. Historically, when stocks, you know, sort of cross 4.5, you know, they've wobbled in the last few years. And, you know, there is, like, negative 80% correlation between the U.S. 10-year and moves in the S&P. So, you know, when we build portfolios for advisors as an OCAO, we want to sort of balance out the risk of owning those hyperskills with real assets. And, you know, we manage a fund PPI, which, you know, we launched it in 2021. Our firm had a view that inflation was going to be structurally higher and

higher for longer. And, you know, since 2021, you know, we've outperformed the S&P 500 by 25%. And that's without leverage or convexity trades. So it tells me that there is, you know, a, a, you know, a dominant dean that real assets are performing well. And then when I look at like all the different asset classes and what's worked well or what's the leader in the last seven years, I see that real assets have led the market. They've been the highest performer in six out of the seven. So I would look past the straight of her moods and just sort of build a portfolio that can provide inflation protection because I don't think we're going to get down at 2% anytime soon. All right. So can I follow up that with you, John? Real assets are a catch-all for all.

different kinds of things, right? All different types of assets kind of fit the bill. Where exactly are you seeing kind of the best opportunities around that real asset story? You mentioned that you manage a fund along those lines, but I mean, are we looking in the precious metal side more than we are looking in, say, the oil and gas side? Are we looking on the real estate side of things versus certain other car? And within real estate, is it more commercial or residential? How exactly does that real asset diversification start to work in your mind? Where are the best opportunities? So good question. And, you know, admittedly, I would say, you know, when I said six out of last seven years, real assets have led, a lot of that has been gold and then, you know, the broad commodity indices. But I think there's going to be a rotation where you'll start to see, you know, the broaden out to other metals besides gold. I mean, we tend to really like, you know, the data center's power play. So that's in like the utilities bucket or the REITs bucket. So if you really are, you know, believe that AI is going to transform, you know, I would.

sort of say look at the second derivative effect of that. So you can just own the hyperscalers or own the beneficiaries of that. And that's what our fund does. It gives you broad-based exposure to energy equities, utility equities, industrial equities, you know, reits. And we do or we do have some gold just because that sort of helps manage our volatility. And Joanne, if I could turn back to you for a moment here, given what we just heard from John with regard to how that real asset story is playing out for his portfolios and his clients. What exactly from a strategist standpoint do you see in the market right now that could suggest maybe that that kind of a trade has legs outside of the fact that we are maybe in this kind of

higher sticky inflationary environment? Is there a reason why you would want to maybe divert more of your resources towards a real asset trade or are you more comfortable with other parts of the market right now? Yeah, that's definitely very good question. But we're, we're We're really focused on the areas that we see the benefit of the resilience in the U.S. economy, you know, kind of like working in the favor of different fixed income asset classes. So what we like the best in terms of what we're recommending to our investors, it starts with our short duration emerging markets fund. that's been, you know, kind of a good area in terms of getting better carry, better yield, better total return potential. It was our best performing fund last year. It's our best performing fund

year to date, and that ticker is XEMD. We also really like other shorter duration sectors. So we still are very constructive on the high yield market. We have, or the high yield market is benefiting from strong fundamentals, the Brazilian economy, a very good earning season that we're just coming off of. Earnings have been impressive for guidance is still stable to strong. So we still like high yield. And there, it's a combination of different funds that we have. We have a sector rotation fund, HYSA.

We also have a double B rated fund, XB, and a single B rated fund, XB. So those are kind of our top picks there. All right. And then finally, I guess one other, the one other area that we really like is we have a private credit CLO fund, PCMM. And that one, the floating rate nature of that, the income that it keeps providing for investors versus its average quality in the single A range and it's throwing off income in the 7% range. that's had very low volatility in all of these different market environments. And so that's another one of our topics. All right.

So what's interesting here is that both of you have alluded to kind of this notion that there is some kind of underlying at least strength for certain key parts of the market overall and maybe the economy, buy or not worth, you know, for extensions purposes. Those are things that I think are being told in different ways through different asset classes. I wonder, John, I'll go to you for this one. Are you seeing any signs that there could be a potential risk event to the markets for valuations or for anything else? You mentioned the strong earnings season that we've seen. But this is also a market that has come really far, really fast since the war lows. Is there any fear that there could be some kind of a precipitous risk-off

scenario given what we know so far? I would watch the tenure. I really think that's a very, sort of like there's a line in the sand. Once you cross, you know, 4.5 percent, you know, historically stocks have wobbled. But that's like on a very short-term basis. I mean, the strength of the U.S. economy, you know, Joanne has alluded to us. I mean, for sure, that is the reason why rate cuts have been priced down and out and why we have rate hikes on the table. You know, a new Fed chairman, you know, always, you know, kind of like signals some short-term volatility. I think we have to get used to kind of what he's thinking about the balance sheet reduction. but for how we build portfolios,

you know, we're sort of long-term in nature and the strength of the U.S. economy, I think, is going to continue. So we like to lean in on that, but, you know, as I said, we like the hyperscalers, right? Like, we think you should own them, but incrementally on the margins start to, like, you know, tilt towards other sectors and themes and asset classes because if the economy is strong, as we're all agreeing on,

you know, lean where you have a margin of safety. So that's some of these other themes that like Joanne has talked about, like EM debt. I mean, our firm, we also like emerging markets, you know, quite a bit. So, you know, we're global in nature, and that is actually helped portfolio construction. I hasn't heard. So, you know, if you have the tailwind of, you know, strong U.S. economy, why do you just want to kind of go all in on like spies and cues is kind of the point? You know, start to diversify away. Now, curious as well, Joanne, from your point of view, one of the big stories that we see, that we

saw kind of play out over the course of the, I guess the market story since the war began, is this notion that even when we saw a weakness in the equity markets overall, we did see some corresponding weakness to pretty much all other risk asset classes, including high yield that you mentioned before. But was it surprising to you that the high yield fixed income market held up relatively better, and markedly so, versus the equity markets, which a lot of people say that they tend to kind of trade more like sometimes, has the high yield story maybe shifted a little bit so that there is always going to be this underlying demand for high yield debt, no matter what kind of market environment we're in? I think it has to do with the fact that

we have the kind of the highest credit quality, high yield market that we've had in its history, over 56% of the market is rated double B. We've had really strong to stable, like leverage statistics and balance sheet metrics is really since the pandemic, companies have focused, management teams have focused on refinancing their debt as opposed to anything that is leveraging or more speculative. So we have a better quality, high yield market. I'm not surprised that it didn't widen that much in spread with the equity market volatility. We're just, We're in an environment right now where we do have like really sound fundamentals for the high yield asset class and it shows. Okay. Now, John, with regard to, you mentioned kind of like the core side of things in your portfolios and then at the edges kind of adding some places that you can find alpha, some outperformance there.

I wonder from your perspective just how long this current market story can last. I had mentioned during the on-air segment that we had at halftime report, that there is this kind of idea that maybe we could see a shifting of portfolio strategies given this kind of more bigger inflationary threat these days. At what point would you then say it's about time to change the way that we approach portfolios yet again? How much of a catalyst needs to happen for you to say, hey, maybe we should think about things differently? The short-term catalyst I would look for is, you know, watch Kevin Warsh and what he's saying, you know, in terms of like balance, tree reduction, watch the 10-year.

You know, if you tend to be more longer-term in nature, I would argue that, you know, spies and cues, which dominate most portfolios, you know, incrementally. I mean, it got very cheap in the sell-off, you know, when we had the Middle East sell-off. And I think we bounce pretty hard off the lows because, I mean, these companies have huge moats, admittedly. What I would just say is that, you know, when commodities trend and they're trending now because of higher inflation, you know, the Middle East conflict, I mean, I've seen periods of my career where commodities will, you know, lead for 10 years or so. So we're sort of like five years into this like inflation cycle. And, you know, I do think that next, you know, two, three years, they can

continue to trend. Also, I'm not making a call on small cap because small cap's been like a very difficult asset class to own. But, you know, if you just look at like sort of equal weight strategies, you know, we run an equal weight fund ROE, which actually has outperformed the S&P by 100 by 600 basis points in a year to date. And we beat on a one three, six month and one year basis. So the point on is like, you know, there are other things that are working besides just spy. And so now you have to kind of do your due diligence and pick and choose and you have to come up with your rationale for it. So we like the barbell approach, you know, on the equity side, you know, we have a fair amount of the hyperscalers. But we are adding towards like, you know, tickers like PPI, broad-based commodities.

We use another broad-based commodity ETF called CERY. You know, we have equal-weight strategies because we think they're beneficial. We own emerging markets. You know, we're big fans of the IEMG. You know, within fixed income, we're very, you know, sort of like spread out. Like we have like very specific bets. We like a lot of the stuff Joanne's talking about too. We like high-eal credit, but we're sort of balancing out our fixemic exposures with like a three duration.

So I think, you know, that's the idea is like, you know, is brought out your portfolio construction. 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. Joanne Bianco, senior investment strategist at Bond Blocks continues with us now. You know, Joanne, this is interesting. I'd like to kind of dive a little bit more in-depth into some of the things that you were talking about during our online show for ETF Edge. And that is to kind of look at the risk spectrum around, I guess, the bond market specifically and how opportunities are now presenting themselves or not. So maybe the first question I have for you will start at the highest level on that side of things within kind of the credit world and the rates world. and that is the risk-free treasury market, specifically the 10-year note yield, which we noted at the time of this particular recording, is north of 4.5%.

It touched around 4.6% as well earlier today. What exactly does that suggest to you about just where the market is headed having a 10-year note yield at 4.5 plus? So what it signals to us is that we really just think that it signals that the geopolitical conflict, conflict and the oil price shocks that we're seeing have rekindled inflation risks and and they've reduced Fed easing expectations and in fact you know now there's more market participants that think that the next likely action for the Fed is going to be raising rates at some point potentially starting later this year so yes we've seen a real big move in the 10 year and 30 year the 10 year is back at its one year high at 4-59 and the 30-year U.S. Treasury is back at a level that we last saw in 2007 at 513 now. And so what this is meant to us in terms of like the kinds of recommendations that we are

making to our investors is we, yes, this has been a really big move in the long end in treasuries. there's just a lot of volatility that investors are subjected to by investing in the long end in U.S. Treasury. So it's, you know, you're calling it the risk-free rate. It's not risk-free. There's a lot of risk associated with this. So we think, you know, we also are seeing elevated yields across the curve. And so the intermediate part of the curve is where with these elevated rates is where we're recommending. to investors to continue to step in at these higher rates because, you know, they don't have

the same level of volatility as the long end, but you also would benefit from their elevated yields and potential total return. Interesting. So that intermediate part of that curve, we're talking kind of in that five to seven year kind of maturity range, right, something along those lines. Okay, so that's good. So now we have the kind of top end, the highest credit worthy opportunity. out there and what you would say is the five, seven year range in terms of maturity for the

treasury or rate side of the equation. Now let's go kind of down the risk spectrum, right, or up the credit risk spectrum, to corporates, whether they be investment grade, which tend to behave a little bit more like treasuries in terms of their price action and yields. And then there's also high yield, which adds on a little bit more of that kind of credit risk side, but then compensate you a little bit more in terms of yield. Where exactly are you seeing some of those opportunities develop within the corporates side of the equation? Is there a favorite part of the market that you guys have, whether it be investment grade or in high yield? Well, we like both investment grade corporates and high yield corporates. We like credit in general right now. We think that

you're, you know, yes, people will talk about spreads being tight, but they're tight for a reason. They're tight because we do have sound fundamental conditions. And we've had, we're coming off like good earnings and good forward guidance for both investment grade and high-yield corporate bond issuers. But in the investment grade market in particular, our favorite area there is triple B corporates. You know, triple B corporates, if you look over pretty much any time period, we looked over like the last year, the last 10 years, the last 20 years, the coupon income advantage that you get from triple B bonds, it means that it outperforms, or it has historically outperformed the U.S. Corporate Index, the U.S. aggregate index, both of those, consistently over all these different time

periods. And it's primarily because, yes, the primary source of return for corporate bonds is the coupon income. And you get elevated coupon income when you have this spread over U.S. treasuries. And we're also in this market environment where the fundamentals for triple B corporates are strong. You have this yield advantage. You also don't have a material increase in default risk of triple B corporates versus the overall U.S. corporate index. They're both, like, very low in terms of their historical default rates, 0.2 percent over the last 30 years. It's negligible. Okay, so that takes us through rates and then high-end, high-quality corporates.

How about the high-yield side of things? When it comes to that kind of junk debt or high-yield debt market, where are you seeing? Which part of that high-yield market is the most attractive to you right now? It definitely depends upon your risk appetite and what kind of risk that you are interested in in high-yield. but the high yield market overall is in better shape than it's been in, you know, in the last five years, in terms of the average credit quality, in terms of earning strength, in terms of fundamentals, in things like leverage statistics, interest coverage statistics, the kinds of focuses that management teams have on refinancing versus being very speculative in terms of M&A transactions or

LBO transactions are not a real big thing for the public high-yield market. So, you know, we have, we have a variety of different strategies that investors can employ in high yield. They could buy rating category. And so, you know, there's, depending upon what your objectives are, you could be investing in the double-bee market through like our X-D double-b, um, et-eat. or down to triple C's with our X triple CETF. And that one, right now, it's the highest yield of anything in fixed income, over 12% yield,

close to 800 basis points over treasuries. And, you know, in a market environment where the capital markets are open for companies to refinance debt, and we expect defaults to continue to be well below the long-term average through the rest of this year, at a minimum. So, you know, there's just, there's a lot of different strategies that people can employ

in high yield. And we think it's really compelling right now. All right. So that takes us through treasuries and investment grade in high yield. I'd like to cap things off with something that you had mentioned earlier on during the online show. And that is some of the exposure that you see some investors maybe opportunistically taking in certain parts of the.

floating rate securities market. And you had mentioned specifically things like private credit, which have been all over the headlines over the course of the last several months because of some of the problems that some of these private credit managers have had with regard to their portfolios and some of the funds that track them. But I guess my question to you is then this. In a world where there have been opportunistic price movements happening in private credit, which are typically many times floating rate oriented, alongside traditional floating rate markets, things like collateralized loan obligations, so-called CLOs, what exactly then stands out in your mind with regard to some of the market developments within private credit and floating

rate securities that may provide some investors an opportunity to kind of capture some of that downside price action and some of those types of assets? Yeah, so the main thing that we've been talking about with our clients, because we do, we have a private credit CLO fund, PCM. We are talking to them about, you know, just looking past the noise in private credit, that, you know, there's a lot of headlines, but we're not really seeing it certainly in the CLO structure translate into anything other than these, the, the, fund is performing exactly like we expect it to perform in terms of the the the all the different tranches of CLOs that are held in our fund PCM continue to just provide income that is attractive for investments investors with low volatility and you know I'm basically unaffected by what's going on in terms of U.S. long dated U.S. treasuries.

you know, no, you know, real interest rate sensitivity because of the floating rate nature. So in a market where you've seen the long end underperform and you're actually seeing negative returns year to date for long-dated U.S. Treasuries, you're seeing, you know, some of our best performance has been by our PCMM ETF because it doesn't have that same volatility and it's just throwing off this attractive income. And lastly, with regard to floating rate securities, you know, those types of fixed income instruments that kind of tend to reset over the course of any kind of time sequence, the kind of payouts that they have and everything else, are there any inherent risks that you think are not as appreciated by investors who may be looking towards things like CLOs that can kind of have variable payouts throughout the course of the life of the asset or other parts of the market with the floating rate securities out there. What exactly do investors need to be aware of to justify the heftier yields that they get against what the potential risks could be?

Well, they have to be aware that, that, you know, because they are, the coupons are reset every three months, that they will have a more variable coupon rate associated with that. But, you know, we're coming off. You know, we're just, we're just through the most recent coupon reset rate for all the CLOs that are in PCMM. And the coupon, the average coupon is, was virtually unchanged to like slightly better because rates are a little higher even in the three months space. So that's just something they have to be aware of, I think. Okay.

All right. Interesting conversation across the entire risk spectrum for credit markets as well. Thank you very so much, Joanne Bianca, for joining us here. We appreciate it. And that does it for ETF Edge the podcast. Thanks very much for listening. Join us again next week or just head over to etfedge.cnvc.com. Over the last few decades, technology has transformed our world in amazing ways. Through it all, Invesco QQQEF has connected investors to the forefront of innovation. Access the future today with InvescoQQQQ. Let's rethink possibility.

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