Everyone Hates Bonds. Why Two Bond Managers Say You're Hating the Wrong Ones

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John Kerschner (0:14)

Unbelievable.

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Matt Zeigler (0:32)

Watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. The bond market changed a little bit. A couple of different regimes, maybe even, and most investors, if we're looking at portfolios, they haven't changed their portfolios much to match. Today's guests, here to explain, break it all down, what means for your fixed income allocation right now. My guests, Janus Henderson's own global head of Securitized Products, CLO, ABS, CMBS, MBS, other miscellaneous loan alphabet soup inevitably, John Kerschner, say hello, John.

John Kerschner (1:09)

Yep, hi everybody, and very happy to be here.

Matt Zeigler (1:13)

We're happy to have you. We also have your partner in crime, head of multi-asset macro investing, hopefully not in crime, macro models, multi-sector strategies, Mike Contopoulos. Mike, welcome to Excess Returns.

Michael Contopoulos (1:25)

Thanks so much. Thanks for having us.

Matt Zeigler (1:27)

All right. You guys wrote a doozy of a report. That's where a big part of this came out of. The time for short duration bonds. And let's be honest, a lot of people hate bonds right now, which feels mean. It just feels cruel because they have a place. They have a home in the portfolio. So it's a declarative title. Let's start with the case in plain English. What's going on right now? Who wants to take this one first?

Michael Contopoulos (1:50)

You know, I'll just I'll jump in really quickly and just hit on something you said, which is a lot of people hate bonds. And I think that's because most investors think about bonds in a very old school sort of way.

You know, they think about, oh, you have this defined coupon and ultimate payment of principal, inherently long duration. And that kind of blew up right in 2022 when you had higher inflation and higher interest rates. And so bonds, I kind of have a dirty, you know, dirty, there's sort of a dirty word, right? And there's a negative connotation to them over the last three, four or five years. But the fact of the matter is what a lot of investors don't realize is that bonds come in many shapes and forms and bonds don't necessarily mean you have to take a lot of interest rate risk. They don't necessarily mean you have to take a lot of credit risk. And some bonds can actually profit in a higher rate environment. So I just wanted to head that off right off the bat because I think reframing what fixed income is, is one of the most important things maybe we could achieve on this call today.

John Kerschner (2:56)

And I'll just add to that if you are invested in a typical core plus or core bond strategy, which I think a lot of your listeners probably are, that index over the last five years, I was just looking it up, is basically been flat to slightly negative for five years. So if you invested five years ago, opened up your portfolio five years later, whatever you invested is going to be about the same, which I get, particularly when people compare to what most equity markets have done is not that fulfilling. But like Mike said, we have, for example, a floating rate AAA CLO ETF, and we can get into what that means.

And that is actually averaged about 5% annualized over those five years. So vastly different return profiles and without going down into credit or investing in something that would be really risky that some might not be comfortable with.

Matt Zeigler (4:07)

And I think all that nuance is incredibly important here. Go ahead, Mike.

Michael Contopoulos (4:11)

Yeah, no, I was just gonna kind of continue along this stream of thought and now obviously interject as you see fit. But with sort of a higher inflation regime, it's going to challenge the way folks think about fixed income. And ultimately, that means, do you believe we're going to be in a higher rate regime or do you not? And that's going to come down to sort of some of the macro, either tailwinds or headwinds to inflation and monetary policy going forward. And what's going to be happening with the budget deficits and things of that nature and how that will affect interest rates not only in the US but globally. And having a view on that is ultimately going to define, do you go back to the old way of thinking about fixed income and bond investing or is there a new paradigm amongst us that you need to maybe consider?