Brij Khurana, Fixed Income Portfolio Manager, Wellington

Brij Khurana (0:00)

The conventional neo-Keynesian or general equilibrium models that the Fed really relies on, the things that they were targeting with interest rates actually were not highly correlated with interest rates themselves. And the most common thing is investment. And when we think about investment, obviously there's housing investment, which is very correlated with interest rates, but you could argue that's almost an asset price rather than real form of investment. And then what I'm really talking about is non-residential investment, which should be the thing that is very correlated with interest rates, and probably historically it has. But in the last 25, 30 years or so, really since the Internet bubble crashed in 2000 and 2001, investment has been its own cycle.

Dean Curnutt (0:40)

Hello, this is Dean Curnutt, and welcome to The Alpha Exchange, where we explore topics in financial markets associated with managing risk, generating return and the deployment of capital in the alternative investment industry.

My guest today on The Alpha Exchange is Brij Khurana. He is a fixed income portfolio manager at Wellington Management. Brij, it's a pleasure to welcome you to the podcast today.

Brij Khurana (1:09)

Thanks for having me, Dean.

Dean Curnutt (1:11)

I saw your well-written piece in the FT about a month ago that was really linking monetary policy to the wealth effect. Wanted to connect with you and solicit your insights and analysis. It's such an interesting time that we're having this conversation with a significant backup in bond yields, monetary policy and flux. So, tons to talk about. Give us a little bit of a sense of your day-to-day at Wellington. You run an unconstrained go anywhere bond fund. Tell us a little bit more about that.

Brij Khurana (1:43)

It's an interesting time to be a bond portfolio manager for sure. As you mentioned, I run an unconstrained strategy, so it's really go anywhere. We go where the opportunities are. It could be in rates, it could be in credit, it could be in currencies. And historically, 10 years ago, when I first came to Wellington, a lot of my time was actually spent on the credit markets because that is where the opportunities are. And increasingly, my days are focused on G10 rates because that's been the asset that's been extraordinarily dislocated relative to the last few years and even obviously relative to history. And so I know that everyone thinks we're going to go back to the yield environment we were, at least we are back to the levels in the 1990s and early 2000s. But from our standpoint, it has been a significant repricing. The drawdown in fixed income has been one of the worst in history. And so as I said, I'm spending a lot more time on rates markets now than credit.

Dean Curnutt (2:32)

Well, I'm plenty older than you are, but my own start in the career was 1991

And I worked in fixed income research at Nomura. And I got on to the desk and the 10 year yielded at eight and a quarter. Think inflation was 4%. So you had a giant term premium. So who knows? Maybe we just haven't seen the highs yet in yield.

Brij Khurana (2:54)

I was just pulling up the five year real yield today.

And I was just trying to see what is the six months change. And it's been about a hundred basis points over the last six months increase. Actually, I think it's 130, which is one of the highest increases of a six month time horizon. But when I pulled the data back to 1995 or 1996, whenever the five year tip was first issued, the real yield was three and a half percent. It was a good reminder. As high as they look right now today, obviously back in the 90s, they were, as you said, eight percent rates and four percent inflation. So real yields could also certainly be a lot higher.

Dean Curnutt (3:28)

Well, we're going to talk a lot about the here and now, about the US rate environment, the global rate environment. This is not specific to the US, but what's happening here. It's a developed market sovereign phenomenon. And we'll bring in your FT piece. You wrote another piece, which I really wanted to start with, which was entitled, What Have Low Rates Rot? And it's an analysis of the reality that for the past 25 years, many of them have been spent with the policy rates stuck at zero with negative real yields. You make this point, and it certainly resonated a ton with me, which is monetary policy is supposed to be an economic instrument. It's supposed to get to the growth and inflation, but it really does have profound financial market impacts. That's where I really wanted to start, which is when Warsh or Powell or Bernanke has a press conference, the man on the street isn't watching, but you are, I am as well.