00:00 Speaker A

No, you say investors should be nimble and diversified when playing the bond market. Walk us through what that looks like within bonds.

00:11 Speaker B

Now we’ve seen quite a few examples already this year and why that can help in investors. Obviously, large moves in markets broadly, but, but even more notable is the moves relative within these markets. I’ll give a couple of examples in the first quarter and into March, we saw a lot of pressure on European governments to increase defense spending, increase fiscal support for their economies. We saw a big increase in yields in European government bonds and a rally in US government bonds. We saw the opposite in corporate credit, where European credit markets ended up rallying and dramatically outperforming US corporate markets. So that kind of dislocation, a big significant shift in these markets and that type of volatility creates opportunities. In our case, we were able to shift capital out of European corporates, take advantage of that big rally that we saw, and then reallocate that capital into US corporate bonds, which had underperformed and valuations had improved materially.

02:49 Speaker A

Yeah, and so, no, when people hear the word diversification, investors hear diversification, especially within the bond market, that might sound to some like, yeah, just buy multiple and buy all the duration that you can get. But if there is a way to think about that more clearly within diversification within bonds, what would that be?

03:33 Speaker B

Yeah, so we think it’s really important that it’s not just buying, let’s say, more duration, it is getting different types of duration. And so that may mean getting some interest rate exposure outside of the US. We think that there are opportunities to do so. The inflation dynamics, for example, in the US are increasingly diverging from what we’re seeing in other developed markets because of tariffs. It’s going to have an inflationary impact, potential upper pressure on US interest rates, more of a deflationary impact for those more export-oriented economies, think about a Germany, for example, where that’s going to lead to probably lower growth, lower inflation, and possibly lower interest rates. And so I think it’s more of kind of where do you get your interest rate exposure, where do you get that duration, but then also along the curve. One thing we would point to is even within the US and US interest rate exposure, you’re usually getting a higher compensation for taking longer-term interest rate risk. Think 10-year bonds, think 30-year bonds, the difference, the incremental income yield that investors get for taking that longer-term risk is usually about 1 percentage point more in 30-year bonds than it is in 5-year bonds. We’re getting a little bit less than that today. And we think that that’s going to increase. We think all this uncertainty, all this volatility, that should lead to investors saying they want more of a premium for taking that risk rather than less. And that means higher interest rates in the longer end of the curve, probably stable to maybe even lower interest rates at the front end of the curve. So it’s not so much about taking more duration or less duration, it’s kind of where you’re taking that duration exposure.