You're listening to Strictly Business Podcast with Lindsay Williams.
Sometimes it seems to me that the world of credit and bonds and money markets and
fixed income are viewed as rather stayed
as an asset class compared to, for example, equities, which seem more
exciting.
Then enter 2025 with Trump, tariffs, the fight for the Fed, inflation versus
growth,
and also central banks diverging policies.
I mean, for example, the ECB and the Bank of England cutting rates,
and the US Federal Reserve staunchly keeping them flat.
With me to make sense of a flurry of fundamentals is Jason Borbersheen,
portfolio manager at 91 in London.
It has been a hell of a year.
In fact, it started at the end of last year, didn't it?
Yeah, hi, Lindsay, absolutely.
I mean, I think one of the things that's quite clear from the last year,
but probably becoming increasingly apparent from the last five, is that fixed
income is probably anything but boring.
that presents risks that obviously also presents opportunities whenever there is
elevated levels of volatility.
The other thing which I think is very clear is the difference between sorts of
fixed income.
So longer dated bonds relative to shorter dated bonds are behaving very differently.
Other countries to one another are also behaving very differently.
You know, you mentioned the actions of the central banks of a couple there.
We're seeing it in the bond markets of those two.
And I think it's very important.
for investors to distinguish between them, ultimately to, I think, navigate these
quite choppy waters.
Yeah, I thought of the other day, actually, in anticipation of this podcast,
and when Lisa Cook, the Fed governor,
got into a bit of trouble in the eyes of Donald Trump, I saw the long end of the US
curve, the 30-year,
the yields rising, the bond market falling, obviously, but the two-year was
rallying with the yield.
falling.
And that trend has been in place also for over a year, I think.
Absolutely.
So this is something I think that investors should really start to pay a bit
more attention to when they refer to fixed income markets.
And as you say, often it's seen as a homogenous lot.
But really, if you think about the starting point for a fixed income or bond
market,
it's what the central bank is doing.
And as you get further and further from that.
So if the bank is setting a one year rate.
That's what you'll see in your bank accounts or your savings accounts in some
format.
You talk then about a two-year bond, the one that's maturing in 2027.
That's going to have quite a close link to it.
So in its price or in its yield, it's going to reflect what the current policy
setting is and how the market then
believes that's going to evolve.
And at all points in time, the market has a view on whether it thinks rates are
going to be more or less than they are currently.
And then as you get further away from that two-year point, you hit five years, ten
and so on, all the way out to, in the cases of some bond markets,
you know, nearly to a hundred years.
There were some sort of quite prudent issuance made in the COVID era.
You are moving further from how influential the central bank is on that
bond's price,
on that bond's yield.
You start to incorporate views on issuance, on fiscal dynamics,
on the financial position of the country who is.
issuing overall, as well as the growth and inflation drivers that will impact the
central
bank's decision on where to move rates.
And I think all of those have become more volatile.
That's made longer dated bonds increase in yields, but also, I think, offer, in a
sense,
a sort of mirage of safety.
We've seen on a number of occasions, those longer dated bonds not provide the kind of
performance you would like in
situations when you need them to, whether that's during
an equity risk-off like 2022 or post the Liberation Day move in which you saw
equity markets fall and bond yields start to
rise, eventually that seemed to trigger some sort of reaction from
Mr Trump and how he was dealing with the tariff issue.
But the shorter end, as you say, has remained, I think, quite solidly linked to
economic fundamentals,
growth and inflation, and how that will impact central banks.
And I think this Lisa Cook episode in which it appears the Federal Reserve is
trying to co-opt
the or be co-opted by the administration has put a downward pressure to an extent
on bond yields but I don't think
it's the only thing driving that short end and there is a lot of I think opportunity
in owning fixed income at
the sort of five-year and below area whereby ultimately
you're navigating some of the quite tricky issues that come from holding cash you
know if you look over the long run at the real
purchasing power of one dollar it will over 100 years now have nearly declined by
85 to 90 percent.
That's a pretty significant erosion in buying power, even if your normal amount
has remained consistent.
If you think then about your lack of participation in that region.
off, let's say, two to five year maturity bonds,
if they move in the way that they've done and shown the ability to more recently,
you're going to have lagged that performance,
you've got an opportunity cost.
And I think finally, if they do that as well, you have this reinvestment risk,
which many have, I think, forgotten,
because we've had high rates for a period of time now.
But if rates were to fall, rates were to move, because growth is weakening
significantly, or perhaps the Federal Reserve is getting pressured,
your ability in a year's time to achieve the level of yield that you can currently
in your bank accounts is going to be significantly impaired.
So there are quite a few reasons, I think,
to start looking beyond just your cash holding or your perceived safety of owning
just
deposits and look into that shorter end of fixed income markets.
Yeah, it's so much noise.
I mean, that was a very good explanation of what's going on.
And I'm just listening to all those fundamentals in addition to the ones that
I put out in my introduction.
And it must be.
Quite exciting, but also quite bewildering when you sit down at your desk every
morning, Jason.
And I've got a question now, and it's two questions in one.
How are you positioned at the Global Diversified Income Fund at 91?
What's your strategy?
And has that strategy materially changed over the last, I don't know, 8 to 12
months?
Sure.
So we've been running mandates that are fixed income based or fixed income centric
for multiple decades, whether they are
preserve mandates for central banks, whether they are for high net worth
individuals or institutions.
So we have, I think, a strong heritage of having a global reach that helps us to, I
think, understand the context.
It is about more than South Africa or the United States or the UK.
It's also about what's happening in Europe or New Zealand or Australia.
You get that sort of mosaic picture and you find opportunities.
I think also having a sort of depth of bench of people who understand, for
example,
non-government markets who are investing in credit markets is very important.
So you are getting, I think, opportunities arise from more esoteric areas of those
rather than just buying
your vanilla or standard corporate bond.
And then finally having a mindset which is focused on protecting capital.
Anyone who's sort of looking at that area of fixed income markets at that shorter
dated region is going to want to preserve capital.
And we then translate that into a process which is something we stick to.
So as you say, things are changing a lot, things look very different, but if you
continue to do the same thing time and time again,
I think you ultimately reap the rewards from that because you're less behaviorally
biased.
So we put the portfolio together from the bottom up.
We're looking for those individual countries or corporates that are
displaying attractive characteristics for us.
We're thinking about that behavior of those securities rather than what they're
called.
That's crucial to your changing point.
that ultimately some government bonds have started to behave more like you'd expect
from an equity.
So you need to be aware that just because something is called a bond, it doesn't
really tell you very much about how it's going to behave in your portfolio.
And the final thing is that we use direct methods of hedging the portfolio during
times of risk to try and protect
capital.
And I think that leads to a good set of outcomes if you're trying to navigate the
risks of purchasing power erosion or
reinvestment risk.
It's a way of solving for that.
One of your colleagues kindly sent me a presentation and one thing that stuck out
was a pie chart.
And the pie was really generously skewed towards nations like Canada, New Zealand,
Australia.
And when we think of markets, we think of the United States and Europe and China and
Japan.
But you've diversified geographically quite, not dramatically, but
significantly.
I think this is something that is perhaps lost on
some investors when they initially look at sort of shorter rated short dated bonds
because you you sort of assume this homogenous behavior
again but really there is a significant divergence between the outlooks for
different economies as
we can clearly see from how the us is shifting the global
geopolitical order and also i think ultimately the financial position of those
economies and this
is something which has started to matter more and more.
So it was most keenly felt, I think, in the tariff episode in April,
where at one point bond yields started to rise at the point when equity markets were
really falling.
It speaks to the behavioural changes that are possible in fixed income, but also it
speaks to why that was occurring.
And if you put up a chart of the financial position of the country involved,
so essentially it's budget and current account.
surplus or deficit.
So essentially, is it selling more than it buys?
Is it collecting more revenue than it spends, etc?
And you plot that against the yield change.
There was a very strong relationship between the two.
And the reason why I think that's interesting is that historically,
sovereign bonds have occupied within investors'
portfolios a very, I think, hallowed position,
which is to say they almost didn't have a sensitivity to their financial variables
or
fundamentals because you knew that there was this sort of social, financial,
political contract when you lent to an issuer.
And if we look back over the last few years, I think the question of that
contract's validity has been more and more at the
forefront of investors' minds.
So go back to the trust episode in 2022, look again at this tariff episode more
recently.
And what you're seeing is that investors are almost treating government bonds like
corporate ones.
They're looking at how indebted that nation is and how well able it is to pay
its debts.
And that is, I think, a big change.
And it's why you then need this sort of geographical diversity.
that you can invest in or blend to borrowers like
Canada or Australia where there's a much better financial position than you're
finding in for example the United States.
And of course the countries that you've mentioned have liquid markets I mean
people might say well
I want to invest in the in the United States because of the liquidity factor
it's not a problem for a fund like yours.
No absolutely I think if you're talking about the debt market of any
government bond of any sort of developed market, government bond debt market,
then we're discussing here markets that turn over hundreds of millions and
billions of dollars per day,
even in the small ones.
So there is ample liquidity for any kind of strategy to trade.
Yes, the US is the most liquid and will remain so, but that doesn't necessarily
convey a sense of being risk-free.
Ultimately, it's about understanding what the upside and downside is for any
position.
Okay, now for a layman like myself, I need to get back to the simple stuff.
The US Federal Reserve, the Lisa Cook episode, the clear dislike for each other
displayed by
Jerome Powell, the chair of the Fed and the president of the United States of
America.
Jerome Powell will be gone quite soon.
And I think most of the Fed, most of the governors.
are up for re-election at the end of February next year.
I think I read that somewhere.
The backdrop to this of course is a weakening US dollar and it's still the
world's reserve currency.
So I don't know, it just seems to me that something's got to give.
First question, are they going to cut rates in September?
So I think they are going to cut rates in September, but I don't think they're
necessarily doing it because they've become an animal
of the the administration.
I think they're doing that because the most recent employment numbers suggest
that the picture at the time when they
last made a policy decision to be on hold was actually much weaker and they have a
dual mandate.
One is to promote maximum employment,
the other is for steady price stability and clearly if you think that unemployment
was higher
and that job growth was lower than the information you had to hand during your
last decision,
you should perhaps then be more willing to reduce rates and I think at the Jackson
Hole meeting, that's what Jerome Powell signalled.
I don't think it was necessarily a sort of political co-option because of all the
political pressure.
I mean, that is clearly there.
I wouldn't say that we have always operated in an environment that's free
from that.
You know, we can go back to the sort of 60s through to 80s and there was clear
pressure and a clear lack of independence.
It does tend to come more with the Republican Party when they're in power, if
you sort of look at measures of
central bank independence and the tax they tend to increase.
The important thing I suppose is that the Federal Reserve continue to make unbiased
decisions and they do so to
protect those that both sides of that mandate.
I think there is a risk through the Lisa Cook episode that that is prejudiced so
the
issue that's coming up is that there's a voting board to essentially recertify
the members of the FOMC.
So there's sort of 12 in total.
There's a vote of seven to certify those.
And with the removal of Lisa Cook and with the introduction of a number of other
Federal Reserve members,
Trump will essentially be able to control that panel if they are voting in alignment
with him,
as the suggestion is.
And that would mean that essentially you sort of get control of the whole.
off the Federal Reserve.
And the concern for the market there is that then rates will be reduced.
um unnecessarily so because inflation doesn't yet appear to have been completely
tamed um and therefore long end of the
bond market is saying well you're going to create me issues so i demand a higher
yield whilst the short end is saying well i'm going to be kept
low by the interest rate setting of the bank which is back to the sort of initial
point about how much interest rates matter for
different maturities i find it quite
extraordinary that the members of the fomc can be under the control of somebody who
clearly wants...
interest rates low for for a couple of reasons we need not discuss those but it's
a scary situation people talk of banana
republics and this is my final point and your comment as well please jason i don't
think america will become a banana republic
but certainly there'll be bondholders around the world looking at this and
saying this
is not for me and start to disinvest yeah i think it's all about it's all about
relative changes isn't it or incremental changes you know, eight years ago, you
might have said, well,
the institutional strength of the US is incredibly high, and I therefore have
complete trust in it.
Then today, you may say, well, I think that's slightly lower, and therefore I'm
going to put slightly less trust in it.
But I think we need to be somewhat careful with the couching of that.
So I can understand why many are concerned that the US will lose its status.
And it clearly has occupied a special one.
And that leads many to think, well, naturally, the dollar must therefore erode
very quickly.
I don't think that things move in straight lines.
And I think that the sort of simple story may not be the best one, particularly if
it's well appreciated.
So I think that could be a structural risk.
It's been called for many times before.
So I still think the dollar and having dollar exposure, particularly from a sort
of emerging market context, can.
work as a safe haven, can work as a store of wealth, if it's then attached to the
sorts of investments we've previously discussed.
And I think then also it's about increments.
So for fixed income, if you're sat at the sort of two-year end of things, two to
five-year end of things,
as we tend to focus on, it is an issue, but it may actually help with capital
gains, obviously,
if rates are reduced and you own a two-year bond.
you might end up ingraining inflation issues, but they may play out over five to
10 years, not over
12 to 24 months during which you're owning that fixed income holding.
And so I think it's about sort of being precise in your implementation of that
view,
rather than sort of taking a sort of wholesale or sweeping conclusion from it.
I did say I'd ask my last question, but I have one final one because I neglected to
bring it up earlier.
and that is emerging markets versus developed markets, EM versus DM.
What is your stance?
So we in this strategy adopt the principle that owning emerging markets in a dollar
denominated fund still
remains a quite volatile proposition.
And I think the way that you sort of square that is that some of the developed
markets are becoming more like emerging.
So we've had this sort of thesis as a house that the developed world is showing
incremental signs,
all of the ones we've actually just pointed to probably, off historical
characteristics that you might have expected from
EM, while some emerging markets actually start to display some pretty orthodox
policy,
both monetary and fiscal decision making.
The other point, I think, is that owning emerging markets in a dollar denominated
strategy, when you remove the currency risk,
and you're buying short dated bonds, can actually be quite compelling, because it
can offer you
A return profile that looks more like what you'd expect from a traditional
short-dated developed bond,
as most of the volatility or fluctuation in price from owning emerging markets
actually comes from currency translation,
not necessarily from the underlying asset.
So I would say in this fund, it's a very small component.
It's a fund that structurally is tending towards what we would view as
traditionally safe assets,
short-dated government and...
corporate bonds within the developed world, it has some flexibility to invest
in the emerging world.
It isn't doing so dramatically at this point and where it is, it's in short
maturity, currency hedged exposure.
But I think for clients who are looking at fixed income more broadly and at longer
dated maturities,
then clearly there's a lot of opportunity there, but it's just not something which
is in this fund.
Jason, thanks so much for your extended time.
Jason Bourbrachine is a portfolio manager at 91 in London.
The views and opinions expressed in these podcasts are those of Lindsay Williams and
various contributors and do not reflect the policy,
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