ETF Edge - Warsh tips off bond rethink 6/22/26

Episode Date: June 22, 2026

New Fed Chair Warsh said a lot by not saying much in his first meeting. But that has sparked a range of new conversations around fixed income ETFs. Have a listen. 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.

Now, with Kevin Warsh taking the helm at the Federal Reserve, the tide is changing pretty quickly. So how should bond investors set their course? Here's my conversation with Steve Laplie, the head of U.S. I shares fixed income strategy at BlackRock, alongside George Borey, the chief investment strategist for fixed income at all spring global investments. Gentlemen, thank you very much for being here, both of you guys. George, I'm going to start with you in this conversation here. The macro picture that's being set up right now is full of different variables, not the least

of which is a war that's still. going on but hopefully coming to a close soon in the Middle East. How exactly does all of this set up for a new Fed chairman in Kevin Warsh and what exactly do we have to consider and the markets have to consider for that rate trajectory going forward? So I think, Dom, there's sort of two aspects here. There's the backward looking view, which is conventional. It's looking at where oil prices have been, where the inflation pressures are today. And the more traditional or or at least the older regime kind of response function of the Fed.

And as we see the market price up rate hikes, the expectation of tighter monetary policy coming soon, would really, in our opinion, is looking through the old lens. The new lens, which Chairman Warsh tried to kind of establish last week, it has some meaningful changes coming down the pipe. But the most significant one, at least right now, is really the lack of forward guidance. And so when we think about markets right now,

the Fed is still very much anchored and tethered to data. And so the data is not great. We know that. And he really wanted to establish credibility. I think Gwarsh was very clear about maintaining the Fed's inflation fighting credentials. And I think it worked. We think it worked. Now the question is how quickly they will need.

need to move as it relates to the data. The data could start to get better pretty quickly. Oil prices are down, 30% from the highs, and falling. As you said, we're potentially on the cusp of a true agreement with Iran, and growth showing some signs of moderation. So the Fed might be in a better position to just sit tight for a while, but that uncertainty premium is exactly what war seems to have wanted and now it's in the market. It's interesting as well, Steve, to those points, one of the interesting points about that is,

you know, George had mentioned a little bit about the getting better aspect of some of the data with regard to inflation, it sounds like, based upon what he was saying. One of the other cases that's being made right now for the markets is that it's not just the inflation slash Iran slash oil story, but that even the U.S. economy, has remained remarkably resilient, given some of the headwinds that we've seen. So it's actually an economic growth or resilience story outside of inflation. That's also something to be considered. How much does that, in your mind, Steve, play into the overall story around why fixed income investing is as complex as it is right now?

Yeah, I think that's right. And if you look at where real yields have risen, I mean, that real yields do reflect a growth story. reflect the boom we're seeing an AI, the productivity boom. But it's interesting, that feeds into the labor market. And I think that's what makes this really tricky. So if you look at the recent labor data, 90% of the growth has come from areas like health care, government services, and leisure. The rest of the underlying components are somewhat soft, and they haven't really been growing. And so I think this is quite a dilemma where you had an inflation spike. because of energy prices. That may be abating, right? And the real trick is, you know, how much

do you, how much weight do you put on that near-term inflation concern versus a softening labor market? Or if you want to put it a different way, a labor market that's very, very concentrated, because break-even inflation, the inflation rate that's implied by Treasury yields has plummeted the last several weeks in both the short end and the long end. So it is a very, very complex complex calculation at this point. Steve, what exactly does that mean in terms of how investors, traders, portfolio managers, investors on the retail side and the institutional side, have to look at the balance of data that's being presented to the Fed

and for policy decisions going forward? What exactly is the complexity with regard to what the Fed has to navigate, and specifically Kevin Warsh as the newly minted Federal Reserve Chairman in terms of what they've got to focus a little bit more on? So we're waiting to get a lot more detail on what this is going to look like, this transition from forward guidance to, you know, more robust data sources, big data, if you will, et et cetera, et cetera. I do think it means that they will be looking at multiple inputs.

I do think they recognize that the Fed funds rate is a tool, but it's not the only tool. So they'll be looking at things like the balance sheet, other tools that they have at their disposal. But I think you're going to see more nuance than just simply looking at what was the latest headline print and what that implies for the very, very near term. I think you're going to see more nuance and more, you know, really trying to understand the trajectory of some of these numbers. Again, if you look at the market, I mean, this could be chicken and egg, but you've seen real rates rise quite a bit, but at the same time implied inflation has fallen very, very sharply.

So the market's sniffing out something here. I also think, you know, with respect to investing on. opportunities with break-evens where they are. It could mean that if you are still worried about inflation, it is not a bad time to buy things like short-dated tips, as an example. Overall, investors are sort of looking past this volatility and realizing that no matter what, yields are at a level where income is very, very attractive relative to what it has been. Okay, this is good, George, because the opportunities that are being presented right now for a lot of folks out there run the full gamut from taxable to tax-free, from corporate investment grade to

high yield, even floating rate securities are becoming a little bit more in focus right now. From an opportunity standpoint, I guess it's the best way to put it. What exactly do you then gravitate a little bit towards? Where do you find the relative value in that kind of spectrum of different types of fixed income assets? Yeah, I mean, as Steve mentioned, you know, yield is your friend. And as a bond investor, real yield is your very good friend. And so, you know, just sort of incremental duration extensions work pretty nice.

You know, the very front end of the curve is now very steep, as the market is now pricing in, you know, sort of multiple rate hikes from the Fed. You know, you don't have to move very far out the curve to start to see a very material increase in yields. And so that like liquidity enhancement that you see in the front end of the curve, pretty attractive. You know, where you need to be a little bit careful, credit. spreads are very tight, very tight. But for good reason. Corporate America is very profitable. It's not evenly distributed, but core cash flow is pretty robust across the universe. And that goes pretty deep into the economy. And so the backdrop of modest inflation is a meaningful

tailwind to credit worthiness. And we believe we're in a, we're a bit of a super cycle for credit more broadly. And so tight spreads are likely to stick with us. So, you know, we're having to, happy to take the extra income. We're just not going to be very aggressive as we really go after it. And then the last bit is really the difference between, say, a taxable bond and tax exempt. Because in the world of tax exempt, munies, you know, there actually is quite a bit of value, especially if you start to tax adjust those yields and look at them on a like-for-like comparison versus traditional taxable bonds. You get more yield, you get less credit risk, and you have very strong kind of technical underpinnings for a wide range of municipal

issuers. And so that mix works pretty well. So maximum income, incremental duration extension. You do not need to be a hero in this market. And you can try and get that sort of two, three, 400 basis points of real yield that's going to work for you over time. Interesting, Steve. Are you seeing something similar to that with regard to your analysis of the market right now, are there certain areas or pockets of opportunity that are starting to really kind of, maybe not scream, but at least raise their hand in terms of getting some attention? I agree with Georgia. And I think the flows actually tell this story. So if you look at flows this year, in the U.S., Bonnet-TF flows are up a shocking 60-odd percent relative to last year.

Last year was a record. Where are those flows going? They are going to treasuries. That That is a big part of it. But after that, they're going into multi-sector exposures like multi-sector income. So I think the income story is very robust, and I think it's enduring because rates will continue to move around. And I do agree, real yields are definitely an opportunity. And so a lot of the flows that we've been seeing have been in broad multi-sector funds, but also in things like BINC, which is multi-sector income, emphasis on.

income per unit of duration. And so I think that idea of getting a little bit more duration, but really still focusing on an income, that's sort of the sweet spot. So Steve makes some great points. I think the other aspect to think about, you know, we're sitting here in the U.S., many of our clients, many bond investors, very U.S.-centric. It's a big world out there. You know, the global bond market is massive. and diversifying both your duration, your credit risk, and even your security selection can do quite a bit of good things for your portfolio. Number one, again, it just diversifies that risk.

We talk a lot about the Fed, talk a lot about treasuries, but having maybe some global government bonds in your portfolio, kind of plus add to the core to sort of diversify. So you get extra yield, but you're not taking extra risk. You're taking a different type of risk. looking at international markets. We're looking at different central banks who are moving at a different pace than what we're seeing here in the U.S. or the country has different inflation dynamics. And then the last I would just emphasize on that, you know, emerging markets have had a great

run. There's still a pretty favorable tailwind behind the emerging economies. And so incremental allocations to these markets can have a really nice benefit to the portfolios and that those flows that Steve mentioned, you know, if you go from the core into the plus categories, diversify internationally. You create a really robust bond portfolio that should work for you through time. George, can I follow up on that? When you talk about the add-ons, right? The core and then the add-ons to try to find that extra bit of outperformance,

that extra bit of juice, if you will, to portfolio returns. You mentioned international. So are there specific areas within international that are the more attractive ones to you? Is it developed market economies? Is it emerging market economies? Is it certain economies more exposed to things like the AI trade? I think of places like Taiwan, South Korea. I think about other jurisdictions around the world

where maybe they're a little bit more insulated from the effects of what's happening with Iran in the Middle East. How exactly do you then look for those opportunities in those global markets? Yeah. You brought up about 10 different ways to sort of position a bond portfolio. You know, in the here and now, you know, bond markets, markets everywhere have rushed to price inflation. So places like the UK, certainly across Europe, even places like Australia, where we've seen a material run-up in central bank tightening expectations.

Now, some of that's been delivered on already. The ECB raised rates just a few weeks ago. The expectation is they will do a bit more. But unless the Fed is going to validate those moves, they're going to have to move at a slower pace than perhaps what's priced in. So, you know, front end, you know, two, two, three, four, five year, short to intermediate duration, global government developed market bonds, not a bad spot to be, especially for those central banks that are really tethered to inflation. Like, they have one objective, not like the Fed, who has two. So they're really looking at the market through an inflation lens. If they're going to move aggressively, that will help bond investors. And so adding that international duration,

kind of mixing it with some U.S. duration. Now we're playing different rate cycles, and that works really, really nicely. Steve, you had mentioned before this notion of some of the flows that you're seeing on your side of things. I mean, the I shares franchise and everything else garners billions of dollars in assets, and you have a good bird's eye view of kind of how things are developing with regard to how that money is flowing to. We talked about the tightening credit spreads out there as being not a bad thing. I mean, you don't get as much return or yield, but it also doesn't signify that there's any kind of anticipation of a massive credit downside event anytime soon.

And that's the reason why we have those tighter spreads. Amidst that tighter spread environment, are there places that you are seeing where investors are moving money towards to maybe take advantage of a better credit perceived situation and then balancing that with the less yield that they get? Yeah, I think overall, and agreed, you know, credit spreads are quite tight. I mean, if you look at investment grade, we're in the low 70s, high yields and something like the 260s. If you look at a time series, that's relatively

snug over a long period. But what we've seen flow-wise, we have actually seen investors continue to allocate to investment grade. Now, what I think of that as is more of just an overall quality posturing. So, you know, the larger flows are treasuries, investment-grade credit, and, you know, multi-sector, that's more of a quality. I would almost call it somewhat defensive. You do see mixed flows in high yield, but not significant. I think where we see increasing interest, though, and George kind of alluded to this, is outside of the U.S. So for example, for quite a while in a number of our income strategies, we've been looking at things like European investment grade and high yield, which, you know, so yes, you're still looking at credit markets, but you're

looking outside the border and you know those have proven to be quite attractive over time so we are starting to see more and more interest in in areas like that as well. Steve also on that side of things there was a point at which the entire news cycle I shouldn't say the entire large parts of the news cycle tied to the fixed income markets were focused on one thing in particular and that was the angst that we were seeing in the private credit markets. We have not really focused on just a lot on private credit over the last few weeks as part of the news cycle. There have been other things that have been overriding it. But is private credit still an issue with regard to how we view the bigger picture story around rates, fixed income, credit quality, possible defaults down the

line? Or do you think that we've moved a little bit more beyond that? I mean, I think if you have to step back more broadly, I think fundamentally the public and private credit markets are are relatively sound. So I think it's more, yes, you will find idiosyncratic stories in, you know, situations where, or issuers, you know, may be under more stress than others. But I think overall, the health of the credit markets remain fairly strong, both public and private. So I think it's more of, you know, investors really deciding where they want to be in terms of the quality spectrum, as well as sectors. What do you think? Yeah, that's exactly right. And I think that's, I think, you know, there's been a lot of concern about private credit more broadly.

But it really just simply comes down to where do you want to be in the credit quality spectrum? You know, sort of a private, you know, sort of loan tends to be, you know, have a bit more leverage. It's going to be a lower rated quality issuer on average, not all, but on average. So when you look at sort of the current default statistics, you know, you can see that defaults are running at about 6% in private credit. They're running at about 4% in loans, and they're running at about 2% in high yield, and zero in IG.

So it's sort of pick your spot. The credit cycle is still favorable, but you need to know what you're getting yourself into. And I think that's where people are trying to make a like-for-like comparison. You know, private credit is not high-yield. Like there's some commonalities in that the yields are higher and the leverage is higher. We're talking about two very different points in the credit. rating spectrum, if you will, from a quality perspective.

So, you know, there is a super cycle, but the cycle's advanced, it's mature, it's showing signs of maturity. We're seeing pressure points as certain sectors have kind of run into the AI challenges, and then you sort of see how different portfolios are constructed, so there's different levels of concentration in different parts of the market. So these are the kind of factors, these are the nuances that really matter for, for for bond investors. And I want to close out the program today by just asking the both of you folks, and I'll

start with you, George, first on this. What exactly is the thing or two that maybe bond investors need to be the most conscientious of or risks to be aware of over the course of the coming balance of the year period, given what we know and don't know right now? Yeah, well, for any bond investor, you know, these are not stocks. We're not going to grow our way out of the problem. So we're either going to lose money because inflation erodes it away or we have credit problems and somebody doesn't pay us back.

That latter one looks to be generally okay at this point. So it really does come down to inflation, the conversations around Worse, what's the response, what's the reaction function of the Fed, will they be raising rates fast and furious or are they going to be able to sit tight? The data over the next six to eight weeks will matter quite a bit. if we're continuing to see an acceleration of inflation and inflation pressures, well, then the Fed will be very much in play and bond yields will go up. And Steve, that same question to you, from your perspective,

there have to be things, I guess, issues or concerns that are going to be more front of mind for you in the coming months. What exactly are the bigger risks in your mind for the fixed income story for the balance of this year? I think it's almost the risk of not acting. And so I do think we are all wondering how the Warsh Fed will evolve, what information we're going to get, what will they do? Oftentimes markets move much more quickly. And so what's an interesting trade to me is more on the longer end of the curve, right? So if you think about, you know, how much market implied inflation has come down, how quickly

things could change with the Iran conflict, whatever resolution that looks like, you could get some significant movements more in the back end of the curve because I think everyone is very, very much focused on the front end and will there be a hike or two, et cetera, et cetera. The confidence that the Warsh Fed may install may actually be beneficial further out the curve. So I think that's kind of interesting. We talked a bit at the beginning about moving out a bit on the duration spectrum. And I do think that makes sense not to put all your eggs in one basket at the front end of the curve to try to start moving out because things could change pretty quickly. And I think that is the risk. All right. A lot of stuff to focus on for sure here

for bond investors vis-à-vis the ETF markets. 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. Steve Lately, the head of U.S. I shares fixed income strategy at Black Rock continues with us now. Steve, it was a conversation that I could have gone for another half hour hour on with regard to all of the kind of risk reward elements in the fixed income markets, all of the considerations that strategists and portfolio managers are focused on. I would like to take this opportunity to kind of pick your brain and get your expertise on a certain part of the fixed income market vis-a-vis ETFs that's getting more attention these days. And it's something

that Black Rock and the I-Share's product is doing more robustly these days, and that is to target portfolios with more targeted dates of maturity for their fixed income assets. Can you take us through a little bit about the I-Bonds product over at BlackRock and why that product has come into existence? Yeah, so this is a really interesting story, and it's actually a long one, Dom. You have to go back to 2010, which is when we originally launched this product. And the idea was a pretty simple one, which investors were used to mutual funds, you know, and having bomb mutual funds, etc.

ETSs were fairly new in the fixed income space. But what we had heard from some advisors was something along the lines of, you know, I really like the idea of a bomb maturing. And, you know, I would really, you know, just prefer to, to be able to have something that I know is going to mature, I want to watch it mature, I want the cash in my account, et cetera, et cetera. And so that dissuades me from using fund products for fixed income. And so it kind of got us thinking, well, you know, why couldn't you have a fund that actually

matures? And so, you know, that sort of led to the creation of what we call iBonds, which is literally a bond ETF that does mature. And the concept's fairly simple. and it actually gives investors a lot of diversification benefit relative to trying to build their own kind of maturing portfolio. So it's really simple. It is simply a portfolio of bonds, all of which mature in the same year. So that could be in one year, it could be in three years, five years, et cetera.

They literally all mature in the same year, whether it's treasuries, investment grade, municipalities, tips, high yield. They roll down the curve. When that final bond matures, everything's in cash, you'll hit your sort of delisting date, the fund delists, and then the cash goes into the investor's account. And that's it. And so it really does sort of feel that, hey, I want to see something mature with, it's really hard to diversify with individual bonds. So it's like a hybrid-esque approach, right? So you have the benefits and potentially drawbacks of having single issuer type. instruments that you hold and then you get the principal payment back again and then you have to

kind of try to figure out what you're going to do with it. There comes in the enter reinvestment risk and everything else that goes along with getting a cash windfall at the end of a period. And then you take that and then you layer on the portfolio side of things. From a product perspective, how robust are these offerings now when you say that they're portfolios that have all these different kinds of assets that have a target maturity date all in the same year? Does that mean I'm only thematically investing in, say, municipalities with that kind of characteristic in treasuries? Or is there like a more diversified portfolio approach for having multiple fixed income type assets that all mature around the same year? Yeah, so we built the suite out over time.

We now in the U.S. have over 50 of these totaling over $40 billion in assets. and they span treasuries, tips, investment grade, high-yield municipalities. And so investors are able to build, and, you know, laddering is something I haven't mentioned yet, but that's also one of the use cases is, you know, simply having a year mature, or, you know, having a portfolio mature each year out to, say, five years as an example. You can do that in municipalities, you can do it in corporates or treasuries. But laddering is a concept that's been around for a long, long time. advisors and end investors like it a lot because it gives them a degree of control.

And so now what you're able to do is you're able to build ladders across different sectors. And we have tools on the IShares website, a laddering tool that helps you do that. But it's a really interesting thing because now you can actually build a pretty diversified portfolio. An individual year may have hundreds of bonds maturing, for example, in corporates. And so that's really, really powerful compared to trying to do that on your own within individual bonds. Now, that also means the investment advisors and certainly some of the retail-oriented investors that may or may not use these types of products have to become a little bit more versed in risk management, maturity management, and that sort of thing. What exactly, from your perspective,

is being done from the issuer side of things, from companies like BlackRock, to help prepare certain types of traders or investors for this type of product to be used in the way. that it should be used. And that's often a conversation on the investor education front, which is this will mature, you know, in two months. Here's the next rung, right, if you wanted to reload as an example. Or, you know, we just launched a new rung in this sector. And so, you know, it gives advisors and investors, you know, a lot of flexibility in what they

do with those proceeds. Now, I think what you might be getting at is also, Some investors may not necessarily be comfortable, you know, having to constantly make that decision over and over again. And so we did launch a suite of products that self-reinvest. So when the rung actually matures, it then goes out into the next, you know, into the longest rung of the latter that's just been added. And so it just rinse and repeat over and over. By the way, you know what's really interesting about that concept is that you do that long enough over time. it kind of gets you back to a traditional index fund in a way.

They're not that dissimilar. So it's a bit of a journey, and investors often start with these very discrete, holding discrete years, and eventually they get comfortable with laddering and then maybe ultimately that leads to comfort with just traditional index products as well. But we kind of try to provide that journey

so investors can sort of pick and choose what they want to do. It's akin to almost, it's not a perfect example, but it's kind of like creating your own target date funds, so to speak, right, in terms of some of these fixed income products. You can use treasuries that have a target date of a certain date. You can have corporate investment grade, high yield, and municipalities that all kind of target a certain type of thing in outcome in terms of date. One final question, maybe before we let you go on this, if you take a look at the way that these products have been rolled out and the assets that have been garnered,

how exactly, I guess maybe what do you glean from it? Are our investors embracing this type of choose your own adventure, I control my own destiny type situation, or do you feel as though there is still a movement to be in some of these more perpetual fixed income, ETFs, and mutual funds where they don't necessarily have to stay on top of it as much as they do for an eye bonds type product? Well, it's interesting. Before we had, you know, the sort of pandemic inflation and then the policy response, which led to yields normalizing, as we like to call it, because you kind of look back over a long horizon. We're sort of back where we were in the early 2000s.

But before that, they were growing, but not as quickly. I think when you had that surge in yields in response to the tightening cycles that happened around the globe, that's when you really started seeing interest in these products because it sort of alerted people to two things. One, yield was back. This was a great way to play it. And two, it kind of rekindled that whole discussion around,

well, I don't know where yields are going. I'm a little bit worried about holding an open-ended, you know, perpetual product because what if yields keep rising and rising? This idea of laddering allows me to be in the driver's seat, and you know what, if rates keep going up, I can just simply let that longest rung go all the way down and mature, and then I get my cash, and I don't have to worry about it so much, and I can sort of hold and wait and see what things will do.

So I think that idea of yields were surging, and I really want to be in control was what reignited it. Now, by far, the largest amount of flows are in the traditional open-end index products, for sure. But these continue to grow year over year. And so I do think they are not the tool, but they're part of a very robust toolkit that exists now. They serve a great purpose for laddering and to your point. I think that's a really good use case. You know, choose your own adventure with a specific year in mind, a target date in mind.

But then also people hold the traditional index products and active products alongside of them as well. So it's just a nice tool to have. Gotcha. So interesting for sure, because you do have the ability to have these options out there for portfolio construction. But as you point out, education is key here, not just for the traders and investors using it, but for the investment advisors who are kind of guiding some of that process as well. Steve, I thank you so much for this conversation. Please come back and see us again soon. That's Steve Laipley, the head of U.S.I shares fixed.

Income Strategy over at BlackRock, and that does it for the ETF Edge podcast. Thanks for listening. Join us again next week or just head over to etfedge.cc.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. There are risks when investing in ETFs, including possible loss of money. ETF risks are similar to those of stocks. Investments in the tech sector are subject to greater risk and more volatility than more diversified investments.

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