ETF Edge - “Generational opportunity” in bonds? 10/5/26

Episode Date: October 5, 2026

The spike in U.S. Treasury yields gets all the attention. But there is real change afoot in other areas of the bond market.  Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

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 Brennan Gomez. U.S. Treasuries at record highs are stealing the headlines, but there are big shifts also happening in other areas of the credit markets. Here's my conversation with Priya Mizra, portfolio manager at JPMorgan Asset Management, along with J.P. Morgan Asset Management, along with Joanna Gallegos, Bonblock's co-founder and CEO. Thank you both for joining me today.

So let's get started broadly with U.S. Treasuries, right? As those have been the current headline grabber, Priya, I want to start the conversation with you because you first, you say that it's the last leg of the move was overdone. Why do you say this? So I think some of the rise in rates was sort of for good reasons. The economy is extremely resilient. The Fed has started to raise rates.

There's an oil price shock. so inflation is a little above target. The last leg of the move, so the last two weeks, there has not been a fundamental catalyst. In fact, I would argue all the economic data over the last two weeks has been actually slightly on the weaker side. Inflation came in a little bit softer. We had the jobs report.

That was not weak, but it was not strong. We're not seeing signs of overheating or demand-led inflation. Even Fed officials have come out and said, maybe one or two more rate hikes. The market's pricing in three more rate hikes. So I would argue this last debate is sort of position, capitulation, you know, technical factors, there's negative convexity in mortgages. I think people are hedging the rate move, and that's why the move looks a little overdone.

So, you know, we're now thinking duration, which is we've not been in duration for a while, starts to make sense to own a little, take some duration risk because that last 25, 30 basis points seems a bit overdone. And Joanna, I mean, how do you feel about Treasury yields hovering around those all-time highs and perhaps some of what Priya just said. Yeah, it depends on where you look. Obviously, the duration trade has been very difficult to call over the last three or four years.

So we tend to have people focus less on duration and more on income and looking at appropriate spread opportunities across credit. So in particular, you know, if you can still trade more precisely in this market now, we would suggest something in the investment grade triple B space. versus kind of coming all the way into treasury duration to look for that attractive entry point, we say go into more of the corporate credit side in this environment and keep duration as short as you can.

And we think that's the right way to start considering this market as an entry point. So if I can add to Joanna there, I would completely agree. We like credit risk as well. But as the AI CAPEX build out is being financed, a lot of that issuance is now out the curve as well. So we're seeing 10-year credit by some of the best companies out there. So, you know, I think it makes sense. We certainly like credit risk. But at some point, you take a little bit of duration along with that credit risk,

and you can buy 10-year hyperscaler debt or 30-year hyperscaler debt, start to just because the curve is now steep and the spread curve is also steep. So you're picking up income, but you've also got that potential for capital gain if interest rates stop rising. Well, speaking of rates, I mean, while we're at it, What are your expectations, Priya? Let's start with you for the Fed's path going forward. I think there's at least one or two more rate hikes.

I don't think a lot more, very different from 2022, because at that point there was demand-led inflation in the system, and they had to hike a lot to really slow things down. Now, when we look at where inflation's coming from, it's coming from tariffs that's leaving the data over the next few months. Oil prices, if oil prices stay here, they actually fall, it's good, but even if they stay around here, it starts to leave the year-over-year inflation numbers. So I think another hike in October looks a little hard.

We haven't had data that should justify an October hike, but maybe one in December and perhaps one more more than in the year. So they just take the insurance cuts that they put in last year. They take that out. But that's it. And the markets are more than priced for it. So I think rate hikes are less, you know, should mean less for the long end of the curve. Joanna, similar expectations or a different take?

No, I think we, I think, as I mentioned, you know, we think that, you should be paying attention and duration and being able to trade into it within these markets. We recommend, you know, staying away from duration and going more shorter, looking at all the positive things you're seeing in the economy and how, you know, while it's really a rate story that you're seeing some of these changes, you're not seeing broad pressure in corporate credit problems. yet. You may see some spots, but that's where you want to really consider getting some corporate debt into your portfolio and taking advantage of, you know, these yields are historically attractive because of the base rates being so high, but they're also incredibly stable because in credit, you know, the fundamentals of these corporations are so strong and the economy continues to grow. And so we really think that's being lost in the narrative around treasury rates. You sort of bring up that corporate credit as well.

And Priya, I want to ask you about this because you mentioned that while spreads look tight on a historical basis, there is a greater dispersion building under the surface. I mean, for you, what are the clear signs of that? Sure. So if you look within the high-eel space, it's very clear. Triple C spreads are almost a thousand over, which typically over treasuries, it typically happens in a recession. And then you look at double B, single B, and they look, you know, fifth percentile in terms of the historical. metrics. So they look really tight. What's happening, I think lower rated companies, companies that might have more debt. You know, when interest rates rise, it's the levered

companies that start to struggle. So we're noticing that dispersion. Now the good news, back to Joanna's point, you can actually take credit risk in the highest quality companies and still get six and a half percent. So you actually don't have to go down in credit, but we're seeing it in high yield. We're even seeing it in investment grade. I mean, investment grade spreads five wider on the year, but you look at the techs sector and they are about 25 wider on the year. So now we can start to say, oh, here's where we can pick up. So I think this is the time for active management. It's very hard to say, I like all bonds because you just start looking under the hood.

Mortgages have been getting crushed because they are very interest rate sensitive. So we start to find opportunities across asset classes. And that dispersion, I think we have not lived in a dispersion world for a while because interest rates were low. now with base rates where they are, I think you're starting to see opportunities and, you know, we can see where we're getting the best risk adjusted returns. I think we've touched on some things, but Joanna, coming back to you, I mean, you mentioned advising clients to focus on income over duration. You've brought that up today already and corporate credit. I mean, what levels are you still looking at as well when you're making these advisements? Yeah, just to put a little color on

what Priya just said. So the dispersion and being able to trade precisely across credit, rating as she just mentioned in quality. So just to put it some numbers against that. So the triple Bs, which is sort of the last credit rating and investment grade, you're getting about 6.2% for that space. If you move over just into double Bs, which is the highest quality rung of high yield, you know, double Bs are at 7%, single Bs are at 8%. And backed up by some of the strength in the fundamentals across the economy, that's that's a real real. space to consider, especially since in triple B's, you could trade that with short duration. We have a product called triple Bs, and it allows you just to precisely grab these opportunities.

So DePriah's point, at Bon Blocks, we designed our entire product set for these markets, so you can trade that dispersion she's talking about. And, you know, we look at it every day. You can even look at our triple C product. You can watch those spreads develop, and you can think about possibly when they get to a high enough level. they may also be a good entry point. So just to put the numbers on it so you can see it, shine a light on it,

I think that's the real hope and opportunity that we're really pushing investors to start taking a look at. It's great to highlight to the bomb blocks products. I mean, pretty specifically with the funds that you're managing, how are you adjusting your allocations right now when it comes to everything that we're talking about today? Sure.

So the ETF that I work on, JCPB, it's Core Plus, so it's multi-sector, it's got, credit, it's got duration, it's got mortgages. And so what we're doing is we are looking under the hood, bond by bond, subsector by subsector to see where is the opportunity? Exactly to Joanna's point, we've actually been increasing some of the double B single B exposure because there has been a widening in high yield spreads. I think it's just being dragged along with general spread widening in the triple C. So we've been adding some high quality high yield. We like some investment grade. And now we've started in the last

few days to increase some duration as well, thinking we may be nearing the end of that rate move. So I think having diversified sources of alpha in a portfolio just allows you to position for, it's a resilient economy, but every time the bond market speaks, I think other markets need to start to pay attention at some point does something break. And we just saw what happened with Europe. You know, is the housing market next to drop? So I think to be very thoughtful about sizing of these positions and to have this diversified sense. set of alphas or set of risk factors in a portfolio we think makes sense. Yeah, which of the, I mean, there are so many macro factors at play when you're making

these types of decisions. And you sort of listed some of them in terms of different industries and factors, but like if I'm trying to figure out the long-term strategy play here, Priya, what, what am I focusing in on the most? I think it's income. So fixed income is giving you that income. It's giving you real income. Like one thing we should note, this rise in rates has all been a real rate led move, not inflation. So where fixed income becomes a little scary back to 2022, we all have PTSD from there, was because that was inflation-led,

and the Fed had to raise a lot of rates. So I think having a macro view, is this a real rate-led move? Am I picking up real return? And then to look at what part of the economy might be susceptible or vulnerable to this and making sure that we stay away from those sectors. So some lower end consumer ABS, subprime auto, that's the sector that, you know, hard to know at what rate level does that sector struggle. But we might be getting close to that. So trying to reduce our exposure there and increase our exposure to the AI trade where I think the price sensitivity of those issuers is much less.

And they have barely any turn of leverage. I mean, they're not even one turn of leverage, you know, a lot of the AI companies. So increasing our credit risk in those sectors, reducing maybe the consumer housing, unless, you know, there's a lot of baby being thrown out of the bathwater along with the bathwater, then you can say, okay, there's too much cheapening in one sector and that's when we can step in. So I think you want to be looking bond by bond and sort of sector by sector to see where the macro, and you have to do the bottom up as well to make sure that companies are not over-levered. Joanne and I would just be curious to sort of get your take as well.

I mean, outside of the ones that you've mentioned already, which other bond block suite of products, Are you most recommending clients specifically focus on now? Yeah. So again, the theme that Priya and I are hitting on is that it's really in the investor's best interest to start looking at the income that's back in fixed income. It can offset the volatility in your portfolio. And also to think about how you want to compose that income in your portfolio. So another area we look at is asking people to pay attention to the duration risk, of course, being low. and thinking about what you're getting for that yield.

So when you can play with these ratings, you can play with duration. We really like our private credit ETF as well. It yields near 7%. It has a lot of diversification because it uses CLOs, but you're getting an incredible amount of yield for very, very low volatility. And investors really like that space because that's what they're doing in the Treasury space,

as what they're doing in the credit space. They're trying to reduce down certain factors of risk without forsaking other things like yield and potential return. And I want to note just one thing about bonds in general. This month was one of the first months were fixed income flows in ETFs surpass equity flows in ETFs. So just to really put it in there for bonds are back and bonds are really important, I think that investor sentiment of reallocating back into or increasing their allocations, updating their allocations, and their bond portfolios across core products and core plus products. And also all of these different points of differentiating we're talking about is starting to show on the flows quite a bit. That's a great point. If I can jump in, the fact that there have been all these inflows coming in.

You know, so much is being talked about supply, government supply, global government supply, with defense, with energy security, AI supply. There's a demand site that's actually meeting this supply. And that's why, yes, interest rates have gone out, but credit spreads have been remarkably well-behaved. I think it's because investors are looking at these level of yields and saying maybe we do get diversification and income from fixed income and they're sort of piling into bonds. But the other point I would make is active. And I think Joanna and I are both talking about that, the need to be active with your fixed income allocation. Because you want to be careful about duration. If you're just in an index product, you might have more duration than you want or you need or you know that you have.

and to be careful about which sectors are you buying and not just taking index level risk, because it's the highest, most debted companies that will be the largest weight in the index. And you may not want the most exposure to the most debted governments or companies. So I think just being active in fixed income is another trend that we're noticing.

I mean, definitely hand-selecting, right, that exposure. I mean, while we have you both, more of an ETF industry question, which I think we're kind of picking out a little bit. but Joanne, I'll start with you. I mean, we've seen a massive amount of product innovation on the equity side of things. I mean, can we expect more bond-related products in the near future?

Absolutely, because I think there's an insatiable need for income. And so you're seeing development across fixed income in many ways from many providers that can be really important to investors to have a lot of choice. You're going to see things in more granular cuts like we do here at bond blocks. you're going to see things that are going to deliver you an outcome in income, maybe by use of derivatives. But the most important thing is, you know, for years and years and years, I think the fixed income space in ETFs, one of the premises of why bond blocks exists today was underdeveloped. And we're seeing new heights in the AUM for fixed income ETFs overall.

The projections for fixed income growth into 2030 are actually in the way we look at the market And then when we've analyzed it, you're kind of on a faster clip if you were to make all things equal than equities themselves. So we're going to see many, many people and many, many products come to market, many issuers and many products come to market to help people make sense of the new dynamics in the market, the more precision and information that people have in order to construct their portfolio or even just respond to volatility, which has been so interesting. over the last four or five years. It definitely has been. And it's certainly of late. Priya, final word to you on that?

Sure, I would completely concur. I think people have been underinvested in fixed income for 25 years because there was very little income. And you had this massive bull run in the equity market and sort of rates weren't doing anything. And now you look at portfolios. Number one, there's a lot of equity exposure. So you may want to start to build some balance.

And there's a huge AI exposure. And what fixed income gives you is this diversified set of returns. It's not just an AI trade or a tech trade. You have the treasury trade. You have credit outside of AI. And so I think as investors say, we need to rebalance and maybe reduce some of our equity concentration in the equity portfolio in AI. We can start to look at things.

And that's where I think being thoughtful about is this for income? Do I need diversification? At what point does something break and I want liquidity? I think fixed income can also provide you. If you're in public fixed income, it's of a highly liquid asset class that's likely to be, if you don't take duration,

risk likely to be pretty safe. I think there's a fixed income fund for everyone, and I think that the industry starting waking up and sort of developing that. That does it for ETF Edge, the podcast. Thanks for listening. Join us again next week or head to etfedge.c.c.com.