Talk Your Book: Talking Bonds at the New York Stock Exchange

Episode Summary

Executive Summary: Live from the NYSE, the hosts and JPMorgan’s Kay Hur and Rick Figley discuss why fixed income is compelling again after 2022’s bond rout. They argue higher yields, easing inflation, and likely Fed cuts make core bonds attractive, especially for investors sitting in cash. The conversation also explains duration, convexity, mortgage spreads, securitized credit, and why active management matters in fixed income.

Main Topics: Why bonds are attractive again (Priority: 5/5): The guests argue that bonds have resumed their traditional role as income generators and portfolio diversifiers after the 2022 repricing, with higher starting yields improving expected returns. Fed policy, inflation, and real rates (Priority: 5/5): They explain that inflation has moderated while policy rates remain restrictive, making future Fed cuts likely and creating an opportunity to lock in yields before cash rates fall. Duration, convexity, and mortgage strategy (Priority: 5/5): A detailed technical discussion of mortgage-backed securities, negative convexity, coupon stacks, and how JPMorgan seeks positive convexity and attractive pricing in its bond strategy. Flows into cash, money markets, and fixed income (Priority: 4/5): The team discusses the large cash pile in money market funds and CDs, arguing that a portion will likely rotate into core bonds as reinvestment risk becomes more apparent. Corporate credit and spread dynamics (Priority: 4/5): They note that investment-grade credit spreads have tightened substantially and that passive flows can keep spreads tighter than fundamentals alone would suggest. J-Bond ETF construction and active management (Priority: 4/5): The launch of JPMorgan’s J-Bond ETF is used to explain benchmark composition, sector tilts toward securitized assets, and why active fixed-income management can add value relative to index exposure.

Key Arguments: 2022 was a painful but ultimately healthy repricing for fixed income; higher yields now restore bonds’ diversification and income benefits. The Fed has likely become restrictive in real terms because inflation has fallen while policy rates remain elevated. Investors should focus less on the exact timing of cuts and more on the expected path of yields and reinvestment risk. Money market yields look attractive now, but they will likely decline when the Fed eases, making longer-duration bonds more compelling. Fixed-income flows matter a lot because passive buying can mechanically compress spreads, especially in investment-grade credit. Mortgage spreads are elevated because of Fed and bank demand disappearing, plus volatility; that creates opportunities for active managers who understand convexity. The bond benchmark is not the same as the equity benchmark: it is issuer-weighted by debt outstanding, which can be inefficient and makes active management especially important. Core bond investors can potentially benefit from both yield carry today and price appreciation if rates fall over the next one to two years.

Data Points: Aggregate bond index performance in 2022: down roughly 15% - Kay Hur described the magnitude of the 2022 fixed-income drawdown JPMorgan US fixed income alpha in 2022: down 13 and change versus 15 and change - The team said alpha was strong but could not offset the broad bond market decline Fed funds rate peak: 5.25% to 5.5% - Used to illustrate how restrictive policy became after aggressive hikes Unemployment rate: under 4% for 25 consecutive quarters - Presented as evidence of a strong labor market and soft landing conditions PCE inflation (6-month annualized): 1.9% - Used as the Fed’s preferred inflation measure to show inflation is near/below target Fed inflation target: 2% - Compared with the 1.9% six-month annualized PCE reading Money market fund assets: about $6 trillion - Discussed as a potential source of future rotation into fixed income CD assets: another $2 trillion - Mentioned alongside money market balances as cash-like assets that may eventually move Aggregate index yield at year-end 2022 and 2023: basically the same - Used to show investors could have earned coupons despite market volatility Annual fixed-income outperformance after Fed stops hiking: aggregate index outperforms cash by about 13% over the subsequent two-year period - Cited as a historical pattern supporting bond allocations after hiking cycles Ag index share of investable debt universe: about 50% or slightly less - Explained as the benchmark starting point for high-grade fixed income Agency mortgages in the ag index: around 30% - Used to contrast standard benchmark weights with J-Bond’s securitized tilt Securitized credit in the ag index: about 1.5% - Illustrated how underrepresented securitized credit is in the benchmark J-Bond securitized allocation: minimum securitized plus 20%; targeted around 60% to 65% - Described as the fund’s structural tilt toward securitized assets Agency mortgage spread: about 125 basis points over Treasuries - Current spread level discussed as attractive but with negative convexity considerations Investment-grade corporate spread: about 91 basis points - Current spread level cited as very tight versus recession risk Investment-grade corporate spread a year earlier: around 130 basis points - Used to show the magnitude of spread tightening over the year Mortgage rate example: 30-year mortgage around 6.9% with 10-year Treasury around 4% - Used to show a roughly 3% spread between mortgage rates and Treasury yields

Pivotal Quotes: "bonds are diversifiers and they provide yield" — Kay Hur: Explaining why core fixed income matters again after the 2022 repricing "the next thing that's going to happen in our view is reinvestment risk" — Kay Hur: Arguing that investors sitting in cash should anticipate lower future money-market yields if the Fed cuts "Positive convexity basically means that if rates rally, your bonds are going to rally with them. If rates sell off, your bonds are going to sell off for about the same amount." — Rick Figley: Defining convexity and why it matters in mortgage-backed securities

Implications: For investors, the message is to consider shifting from cash into core bonds before rates fall further. The discussion suggests higher yields, a likely easing cycle, and active sector selection make fixed income more attractive than it has been in years.