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

Episode Summary

Executive Summary: The guests argue that the bond market has entered a new regime of structurally higher inflation and rates, making old-school benchmarked bond investing less effective. They recommend rethinking fixed income around safety, income, and insurance using shorter-duration, floating-rate, and securitized products—especially AAA CLOs and agency mortgages—rather than relying on the aggregate bond index or heavy Treasury/corporate exposure.

Main Topics: Why bonds are being “reframed” after 2022 (Priority: 5/5): The speakers argue that investors’ negative bond experience came from a long-duration mindset that was badly hurt by the 2022 rate shock. They stress that bonds are not one monolith and can be structured to reduce rate risk and, in some cases, benefit from higher rates. Secular and cyclical forces pushing rates higher (Priority: 5/5): Mike lays out a thesis that deglobalization, labor constraints, lower productive capacity, and persistent fiscal stimulus are creating a higher-inflation regime, while defense spending, budget deficits, and still-easy monetary conditions add cyclical pressure on yields. Why the Bloomberg Agg is a poor default (Priority: 5/5): John criticizes the aggregate bond index for embedding too much duration and too much Treasury exposure, while offering too little yield. He argues investors often overpay for a portfolio that no longer matches their objectives. Securitized products as the core alternative (Priority: 5/5): The discussion centers on AAA CLOs, agency MBS, ABS, and other securitized sectors as better building blocks for fixed income, because they offer shorter duration, better technicals, and attractive risk-adjusted income. ETF structure, liquidity, and tactical portfolio management (Priority: 4/5): The guests emphasize that fixed-income ETFs have democratized access to institutional-quality strategies and provide real liquidity and price discovery, especially during stress periods, enabling tactical allocation shifts. Issuance trends and technicals (Priority: 4/5): They note rising Treasury issuance, huge AI-related corporate borrowing, and growing securitized supply, but argue that securitized markets still have better supply-demand dynamics and less interest-rate exposure than corporates or Treasuries. A new 60/40 framework (Priority: 4/5): For a 60/40 investor, they recommend a more customized fixed-income sleeve built around safety, income, and insurance rather than a passive core bond fund, with options like CLOs, mortgages, munis, EM debt, and select credit.

Key Arguments: The traditional bond-market playbook worked for decades because rates mostly fell from 1980 to 2020, but that regime has changed. Higher structural inflation from deglobalization, labor scarcity, and underinvestment in productive capacity likely keeps yields higher over the medium term. The government bond market faces fiscal pressure, while corporates offer thin spreads that do not adequately compensate for duration, credit, and liquidity risk. The Bloomberg Aggregate carries too much duration risk for too little yield, so it can produce negative returns even when yields are only modestly higher. AAA CLOs and agency mortgages provide a way to own high-quality fixed income without heavy duration exposure. Fixed-income ETFs have made formerly institutional products accessible, liquid, and usable for retail and advisors. Investors should think in terms of portfolio functions—safety, income, insurance—rather than legacy labels like “core bond” or “aggregate.” AI-related buildout is inflationary through capex, energy demand, labor shortages, and wealth effects, making it a headwind for disinflation and a support for higher rates. Securitized products have favorable technicals because issuance is often amortizing and shorter-dated, unlike longer-tenor corporate debt. A customized bond portfolio can be more efficient and cheaper than a core-plus/aggregate fund, especially when disaggregating Treasuries, mortgages, and credit. Fixed income should not be abandoned; it should be reallocated toward structures that fit the current rate and inflation environment.

Data Points: Bloomberg Aggregate duration: about 6 years - Used to illustrate how sensitive core bond portfolios are to rate increases. Bloomberg Aggregate yield: about 5% - Compared against its duration to show a poor risk-reward trade-off. Potential price impact of a 100 bp rate rise: about -6% - John explains that a 6-year duration portfolio would lose roughly 6% if rates rise 1%. Core bond index performance over 5 years: basically flat to slightly negative - Cited to show why many investors have been disappointed with traditional bond allocations. AAA CLO ETF annualized return over 5 years: about 5% annualized - Presented as an alternative to core bond funds with better outcomes. AAA CLO ETF size: almost $31 billion - Current scale of Janus Henderson’s AAA CLO ETF. All CLO ETFs combined: over $55 billion - Shows growth in the ETF category and retail adoption. Retail share of CLO ETF assets: at least half - Indicates retail access to a historically institutional market. AAA CLO market size globally: $1.4 trillion - Describes the depth of the underlying securitized market. Corporate bond market size: about $3 trillion (high yield/leverage credit) - Used to compare market scale across fixed-income sectors. Private credit market size: about $2 trillion - Referenced as another large fixed-income adjacent market. EM debt market size: $30 trillion - Used to highlight the breadth of alternatives beyond U.S. core bonds. Securitized products market excluding agency MBS: $5 trillion - Illustrates the opportunity set beyond agency mortgages. Treasury debt level: $40 trillion - John references rising Treasury issuance needs tied to federal debt. AI/data center IG corporate issuance: about $400 billion - Projected issuance tied to hyperscaler capex. ABS market issuance tied to data centers: about $30 billion this year - Shown as a small share of a roughly $1 trillion market. CLO gross issuance this year: about $700 billion - But much of it is refinancing rather than net new risk. CLO net issuance this year: less than $100 billion - Supports the argument that net supply is not overwhelming. Agency MBS performance last year: roughly 8% - Cited as one of the best-performing fixed-income sectors. Multi-sector income fund yield to worst: north of 7% - Example of a customized fixed-income portfolio with strong income. Multi-sector income fund duration: a little less than 4 years - Shows how to get higher yield with less rate sensitivity than the Agg. Agency mortgage-backed ETF fee: 21 bps - Used to argue that building a disaggregated bond portfolio can be cheaper than buying a core-plus fund. Typical aggregate fund fee: 30-60 bps - John argues many ag funds are expensive relative to what they hold. AI inflation estimate: 50-60 bps - Mike and John suggest AI buildout adds measurable inflation pressure. Monetary policy transmission channel: credit spreads at all-time tights - Mike argues the Fed is too easy because spreads are not wide enough. Historical falling-rate era: rates fell about 65-67% of the time from 1980-2020 - Used to explain why long-duration bond investing used to work well.

Pivotal Quotes: "“bonds come in many shapes and forms”" — John Kirshner: Explaining that fixed income does not have to mean high duration or high credit risk. "“the transmission mechanism of monetary policy is through credit spreads”" — Mike Kantopoulos: Arguing that current credit spreads imply the Fed is too easy. "“three different reasons: income, insurance and safety”" — John Kirshner: His framework for rebuilding a fixed-income portfolio outside the aggregate bond index.

Implications: Listeners should expect a more selective fixed-income environment: less passive core bond exposure, more emphasis on securitized and floating-rate structures, and greater portfolio customization. The message for the industry is that bond innovation and ETF access are reshaping fixed income for a higher-rate, higher-inflation world.