3 Bond Myths Dispelled

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Text on screen: Kimberley Stafford, Global Head of Product Strategy

Kim Stafford: Why are starting yields such an important indicator of future returns in fixed income?

Marc Seidner: Look, this is fixed income. It's simple. Your starting yield ends up being the starting point for your return. And, there's a couple – there's a few interesting myths or, sort of, narratives in financial markets these days.

Text on screen: Marc P. Seidner, CIO Non-traditional Strategies

The first is that there's no return and there's no alpha opportunity in public fixed income markets. Well, that's just definitively not true. The alpha opportunities on top of traditional benchmarks or on top of cash are also incredibly interesting.

The second myth that I think we should bust is this idea that stock bond correlations are forever changed because of the poor debt and deficit dynamics. And again, it's a narrative. It's a story. It might be true. And you have to think about that from a scenario perspective. But it is not the base case.

Text on screen: Bonds have outperformed equities in 8 out of the last 9 recessions

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I mean, bonds have outperformed stocks and have provided a diversification benefit in eight of the last nine recessions. The market is pricing over the secular horizon for short-term interest rates not to go below 3.5%.

I don't know a lot, but I do know one thing. In the next recession, short-term interest rates, and I think Rich would agree with this, are going well below 3.5%. And that's the basis for the benefit of diversification for fixed income and for fixed income to play that typical role of an anchor to windward a port in a storm.

Kim Stafford: Marc, we talked about larger deficits. With larger deficits, investors demand higher yields and therefore higher compensation to lend over longer periods of time. Why is it so critically important to actively position across the yield curve in this environment?

Marc Seidner: So this is a super important secular theme. Term premia is simply a concept that says, if I'm going to lend money to someone for a longer period of time, I should get a higher potential return. I should ask for more yield, for more risk compensation.

Now the nuance is but we don't want to go out too far because there you should be requiring even a higher term premium than we're getting today. And so the sweet spot really is in call it three, four, five, six, seven-year maturities. Right?

Text on screen: Three to seven-year maturities offer compelling yields with little interest rate risk

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Maybe out to ten years, but probably in that three to seven-year maturity spectrum which is offering again compelling yields for not a lot of interest rate risk.

As I say often, the beauty of a two-year bond is in two years you get your money back and you can decide what you want to do with it. The problem with a 30-year bond is in two years, you've got to wait another 28 years. 28 years is a long time. So that, sort of, speaks to the term premia, the need for extra risk premia, a steeper yield curve in a world of challenging debt and deficit dynamics.

Kim Stafford: Let's turn to credit markets, Marc. Credit markets offer abundant opportunities, but there are risks, especially in this volatile market that we're forecasting. This requires careful sector and asset selection and a very value-driven approach to selecting credits. So talk about your views on credit. What are the risks that you see in some opportunities?

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Marc Seidner: Credit analysis takes a lot of hard work. But when default rates have been low, it's easy to confuse brains with a bull market, I suppose, is that the phrase. And so we worry about that complacency. But the starting point of valuation just isn't that attractive.

So in a world of concern about the beta narrowness of spreads, the alpha opportunities can certainly make up for it as they are abundant.

Kim Stafford: Okay, great. So a lot of opportunities in public credit. What about what about private credit, your views there?

Marc Seidner: Yeah. You know, here's another myth. Right? The myth that private credit offers this incredible starting point of yield advantage. I mean, look, let's be honest, when you don't mark to market, there's certainly an information ratio advantage, no doubt about it.

FULL PAGE GRAPHIC TITLE – Public and Private Markets, Pivot to opportunities with compensation for illiquidity. The subtitle is Private corporate direct lending spreads versus public leveraged loans (single-B). The chart shows a green line measuring the JPM LevLoan Single-B Spread. The left-hand scale is labeled Credit Spread (SOFR + bps) from 2020 to April 2025. The blue line and shaded areas show the credit spread from 2020 to 2021 was between 500 and 600, rising to between 600 and 750 from 2022 to 2023 with fluctuations in between, then falling to around 650 from late 2022 to 2024, then falling further to around 550-560 range from 2024 to April 2025. Footnotes at the bottom of the chart read: As of 30 April 2025. Source: Lincoln International, JPM, PIMCO. For illustrative proposes only.

But we just don't find the yield advantage to be that compelling. There's just – as the adage goes, there's too much money chasing too few good ideas. If you're going to lend money in illiquid markets, you better well get paid a pretty attractive risk premia.

And that just doesn't – the spread just doesn't look all that compelling to us for locking money away for three, five, seven, ten years.

Kim Stafford: Okay. What do you like in credit?

Marc Seidner: We just love the idea in a world that seems overly complacent in corporate credit, to focus much more on asset-based finance. And in a world where corporate leverage seems quite high, consumer leverage seems quite low. And that to us, sort of, sets the parameters of what we think is an attractive opportunity set. And that's a world where it is the lenders, not the borrowers, that are setting terms. And that to us is incredibly important, in a more uncertain, fragmented era.

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Disclosure

Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Private credit involves an investment in non-publicly traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss.

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