Mike Swell on Global Fixed Income Investors (Podcast)

this is a master class in fixed income investing. If you are interested in where to get yield, how to pursue it, what the risks are involved, where there are the best opportunities for fixed income investing, where you're not getting paid to take risk. Uh. I don't even know what else to say. One of the most knowledgeable people I've ever heard in the fixed income space. I would imagine you probably have to know a thing or two if you're gonna run fixed income for Goldman SAX. Uh.

Absolutely must listen a fascinating, fascinating conversation. I learned a ton of stuff, and I consider myself somewhat knowledgeable in the space. I think that I'm going to listen to this episode repeatedly. Uh, just because it was so dense and so filled with really fascinating information. He's had a really intriguing career UM and has really put up some incredible UM insight and and lots of great numbers over the time. Uh G Sam runs a variety of different

mutual funds. There are five or so that uh Swell is either in charge of supervising, or a manager of, or a co manager of. So this isn't just abstract theory. He really is where the rubber meets the road. So, with no further ado, my conversation with Mike Swell, the head of fixed income portfolio management for Goldman Sects they sees Masters in Business with very Rid Holts on Bloomberg Radio.

My extra special guest this week is Mike Swell. He is the head of Global fixed income portfolio Management at Goldman Sachs, where he oversees about seven hundred billion dollars in assets. He's also a managing director at Goldman Sachs Asset Management. Michael Swell, Welcome to Bloomberg Berry. I want to thank you and thank Bloomberg for having me today. So let's talk a little bit about the early days.

You graduated the London School of Economics in do you remember what the yield was on the ten year back then, Uh, it was meaningfully higher than it is today. I I, well, it's it's it's roughly zero today, so it's got to be a lot higher. I would say it was probably in the very high single digits, pushing up on ten percent. I'll go eat to nine percent. So so that was still fairly early and what turned out to be a

very very long bull market. What were those days like, did anyone have any idea about the legs that the bond bull market would have? Well, I was still in college at the time, and so I actually UM was at LC for a year, and then I was at Brandeis University got my bachelor's there. And while I was in London, I kind of got exposed to global markets

to fixed income. I saw a lot of people applying for internships to Wall Street and I said, it sounds pretty good, it sounds competitive, UM and so I then kind of applied to a program to get a master's International finance at Brandeis UM. So I had yet to know exactly what the bond market was until I started my career at Lehman Brothers in UM and Uh, it was a different world. I mean in terms of liquidity

in terms of transparency. Back then, you had to wait until the next day to find out what happened with bond prices. Uh. You had this thing called tear sheets, pink sheets, and that was the way you learned about what was going on with companies and what was going on in terms of pricing in markets. So a very very different world. The bond market wasn't the kind of primary market of liquidity like it is today and something that we talked about for twenty four hours a day.

Back then, probably if you had if you had a finance show like Bloomberg, you probably would have spent ten fifteen minutes on bonds and the rest was all on equities. What about execution? What was it like trying to move any sort of paper around back then versus today? Uh, back then it was obviously it was a phone only market,

so not an electronic market. Now obviously you press a button and you can move billions of dollars of risk, and you can move billion dollars, billions of dollars of risk in multiple different markets with a touch of a button, whether it's the treasury market, the mortgage market, the corporate

credit market, derivative market. But back then it was a phone to phone negotiation and very often while there were some Wall Street players in between, typically what they would do is they would try to find a buyer on the other side. And so what now takes seconds back then could have taken days to move to move risk um just a very very different world, bigger bit offer spreads, and so you didn't see as active trading in the

fixed income markets as you see today. But the other side of that is that there was a lot more a lot more yield, and with less transparency, there was a little more inefficiency, and if you were a very active player, you know, the potential for generating earnings and margins by trading bonds was actually pretty pretty attractive given

how why bit offers spreads were back then. So so, given how much more efficients the bond market has become, we continue to see active bond managers outperformed passive indexes. That's the opposite of what we see on the equity side, where efficiencies have given the passive index er um a huge advantage. Why do active bond managers, uh, why are they still capable of beating the passive indexes when their um equity cohorts can There are a number of different reasons.

There is a lack of homogeneity in the bond market. And so if you think about something as clear as the treasury market, there's on the run treasuries, there's off the run treasuries, there's fourteen year treasuries, there's thirty year treasuries.

They trade at very very different levels. UH. You also have UM a index that is very very UM transparent in terms of what is in the index, and there's a lot of ability to be able to purchase securities that are outside of your index, very different than what's in the equity market. Typically, what's in the equity market and what's in your index is what is your investable universe. Within the bond market, there are many many different sectors

that shit outside of the outside of the universe. The other thing is that given that the indices are very transparent, there's a market segmentation issue that goes on in bonds where UM you have some investors that buy the index, they have to buy the Barkley's agg they have to buy the long corporate index because they're a pension fund. Very very UM significant market segmentation issues that creates inefficiencies. So when there's enormous amount of demand for one type

of asset. Um you can actually buy something that is meaningfully, meaningfully cheaper. So if everybody has to, if everyone has a limitation that they can only buy five year credit or shorter, well, if you buy six year corporate credit in a year, it becomes five year corporate credit. Very often that six year bond will trade very cheap to the five year because there are a lot of investors

they can't buy it. Same thing in the if you think about the credit ratings UM, most investors, particularly in the US, can only buy investment grade corporate credit, and

that's what the index. The index is typically an investment grade credit index, but um when there are opportunities in the double B sector, in the high field sector, you have a lot of investors that are limit it in terms of their guidelines and limited in terms of the amount of capital they could deploy to lower and lower credit related assets, and so as a result, not as

many buyers. So you as an active manager when you see a disparity when there's a three B bond out there that might yield hundred fifty basis points over treasuries, but a to B bond market, so it's a double B bond that might yield three or four hunder basis points over well, the difference in leverage between a double B company a triple B company is pretty limited, so active managers can really take advantage of that. Another area

is UM. The agency mortgage market is a very big part of UM, the global indices, the US, the Bloomberg Index in the US UM and it's a very heterogeneous market. Uh. There are different coupons and different types of securities in that market, so there's a great ability that if you have expertise in terms of understanding pre payment risk, which is the biggest risk that occurs in agency mortgages, you can buy securities that can perform a lot better than

the indusseries. So there are many different reasons why in fixed income ACTA managers have consistently outperformed, and I think that also is an important point when you think about UM E t f s as well. While ets have grown very, very significantly in the in in in the equity market, it's been a little bit slower in the fixed income market. And the reasons that we're talking about right now in that active managers and more consistently beat indices as a reason why it's been slower in fix income.

Quite quite interesting. Let's let's stick a little bit um with your career. For a bit um. You leave Lehman Brothers early nineties, long before they get into trouble and

eventually ends up at Um Freeman, Billings Ramsey's. Is that right? Yeah, It's been a lot of years that Freddie mac um in Washington, d C in in the mortgage market, securitizing mortgages, trading mortgage securities, working very closely with originators, and then transferred that risk to a firm that was getting involved in the in the re market and particularly in the

in the sub prime mortgage market. So those were kind of where the bulk of my my career was prior to getting to Goldman Sacks, right, And you joined Goldman in oh seven to run the Structured Products um group, And if memory serves correctly, mortgages had already peaked and we're rolling over by oh seven. Your charge was to look across the spectrum at opportunistically at fixed income products and alternative portfolios. Is it exaggerating to say it was

fishing the barrel? Or had it not quite gotten that attractive yet? Actually, my timing was the opposite of fish in the barrel. So the mortgage market didn't start rolling over until the end of O seven and mainly in two thousand and eight. And so my my my mandate when I got to Goldman was to actually look at the structured product market from an issue or standpoint. So there was enormous amount of CDO and cello issuance UM. The goal was to look at those markets to become

a manager. Uh. And when when I got there and did a lot of the work, we said, you know what, this is not actually a good investment for investors. They're levering up an asset that has has you know, appreciated massively and there's no return here for investors, and there's risk. And so basically UM in OH seven, the CDO CLO market also at the same time kind of shut down, and I was left with kind of nothing to do,

and so I had to reinvent myself. And and one of the things that's very important for people in this in this industry and in any industry is always be flexible to reinvent yourself. And so the crisis occurred. CDO market CLO markets shut down, but the assets became very distressed and there was a great opportunity to start investing in those areas. So I went from trying to be an issuer in that market to being a distress investor. Let's talk a little bit about the demand for bonds

these days. You recently said you see quote enormous demands US fixed income. Explain So people would think that with rates pushing on zero, with um kind of recovery in the future and two dozen one, two dozen two, that bonds would be completely out of vogue. And you know a lot of concern around eventual inflation in the US and rising rates. I would say to that, forget about it for a number of years. There is an enormous amount of demand for yield. There are there's enormous amount

of savings that exist. There's an enormous amount of market segmentation that exists on a global basis with investors, where investors, a lot of investors do not have the option to go into alternatives or to go into equities. They are fixed income investors. Obviously, retirees conservative can take the volatility of own the equities they need to. They need to generate income to live. You have insurance companies that predominantly invest in in in fixed income, they write policies and

they buy fix income assets. On the the other side of that, there's also a regulatory reason why. Um you find that insurance companies by fixed income assets, same thing with commercial banks, commercial banks by fixed income um so I I think that there's going to be an enormous amount of demand for yield, and you have to some degree look outside the United States when you think about investing. You can't just rely upon what you may think investors might do

in your country. We have very very global fungible markets now, and so the fact that rates are negative in Europe, rates are negative in Japan, that creates an enormous amount of demand for for yield. We think the US market, although we think the yields are very low, it's kind of like the we're kind of the the uh ugly prettiest in an ugly contest to a certain degree, and that are yields at tore across different markets in the

US actually look very attractive to non US investors. So we think the story for the next couple of years is going to be demand for yield because we think rates are going to stay extremely low across the globe and do not fight the Fed. Um that's a very important investment thesis. You're almost always right to not fight the Fed. The FED has been very very clear rates are going to stay lower for an extended period of

time to get average inflation meaningfully higher. Number one and number two, there's been a recognition that the full employment rate is not what you think it is, that there are a lot of people that have been displaced from the job market having come back in a long period of time. You need to keep rates low to incentivize companies to actually try to go in and hire those people and to get people kind of better paying jobs

than where a lot of people are right now. And so I think that the move from the fed uh this year around number one, moving to more of an average inflation target, and secondly, the discussion around what really full employment is is likely to lead the to be very very easy for an extended period of time, which is going to mean low rates and yield is going to commit a significant premium. So let's take a look at that exact issue from the perspective of the average investor.

Where does someone who does not have those restrictions that a public pension fund or a foundation might have where do they go if they're looking for more yield but without taking the sort of crazy risk that got people into trouble in O eight oh nine. So I think there there are a few different places I think UM number one, I think that UM individual investors still benefits

significantly from owning long data municipals. So, as an individual, I would own a good chunk of my uh my six s income allocation in high quality long data municipals. They're trading at very comparable yields to where treasuries are. And obviously taxes are not going down, taxes are likely to be going up UM, and so there's a significant benefit there. UM. And I think we're very confident from a credit standpoint in terms of higher quality investment grademmunities

that you're not talking about a significant credit risk. Secondly, is within the kind of the Bloomberg aggregate world where most fixed income lies in, in kind of the core intermediate fixed income space. There are a lot of things to do to do better than the one percent that exists in treasuries. UM Number one is, uh, there's the there's credit. So we think that the credit market, like the two one is setting up to be a phenomenal

year for credit. Obviously, credit spreads have come back a lot since the COVID shock, but we feel that the combination of low rates as well as fiscal stimulus and recovery post COVID is going to lead to an extremely attractive market for credit. So number one is moving down a little bit in quality and credit um within the unconstrained space, moving a little bit into high yield. And as I mentioned before, we think the double bees offer a very significant yield pick up relative to owning, kind

of triple bes an investment grade. Secondly, as leverage loans um, this is an asset class that's been an outflow um since I've been in the business. Uh, leverage loans are higher quality from a credit standpoint than high yield credit um. They have a feature that works for investors sometimes but not not other times, and so they're floating rate in nature. A lot of investors have bought them because they were

concerned about rising rates. Despite the fact that they're floating rate, and I mentioned the point that rates are likely to stay low for extended period of time. They offer an extremely attractive level of carry four or five without taking, as you mentioned, kind of crazy crazy risk. Second, another point on top of kind of having a little bit more credit exposure in your portfolio and long dated communities is agency mortgages and I kind of view them as

a a way to barbell your portfolio. And this is what we're doing. In our core bond portfolios are traditional Bloomberg aggregate portfolios were barbelling UM double B credit bank loans along with agency mortgages. Agency mortgages either guaranteed or implicit guaranteed from the government. What you're doing effectively is your UM taking a spread for owning pre payment risk. Uh. And our view is that number one is that we

feel that pre payment risk is coming down. But secondly, and this is a really interesting point, is that mortgages offer you a hedge. And one of the topics I know that we're gonna talk today about a little bit is the sixty forty kind of balance and do we still feel the sixty forty makes sense? And then you're getting kind of hedge benefits of being in fixed income.

Agency mortgages are one of the securities where you actually are and the reason for that is that you have a FED that is buying the securities, and so in the event that the US economy go south, um credit spreads potentially widden. You see, the agency mortgages are an the class that the FED is likely to buy and drive down that yield very significantly. So we think it's

a very important policy tool. And so buying on the fringe, buying what the Fed's not buying number one, which is double bees and uh and and bank loans, and pairing that with what the FED is and can buy a lot more of, which is agency mortgages. That's that's quite interesting. I had a pet theory a couple of years ago that there was a shortage of high quality sovereign bonds UM and a number of people in the bond side of things told me, Yeah, there's just insatiable demand for

paper and there isn't that much of it. Is that still the case? Are we seeing enough high quality sovereign paper out there to meet the demand? I I UM, I don't believe that there's a shortage of bonds. There's a shortage of bonds at good prices. So there's that's a that's a that's a you know, it's it sounds kind of silly, but it's it's it's actually an important difference.

You know, the ECB talked a lot about is there a shortage of bonds for them to buy to implement monetary policy and quee uh, And the answer is no, just raise your price. And that's what they've done, and that's why yields in Europe are negative. What they're doing is they're driving sovereign yields down to the point where you are forced to sell them and do something else

with it. What are you doing else with it? You can buy equities, and some people are doing that and rebalancing portfolios and buying equities, and that obviously has a stimulant effect on the economy. And secondly is what they're doing is they're forcing people out on the respectrum within fixed income to buy credit. So to answer your question, I don't think there's a shortage. I think in some

markets there's a shortage, shortage of good prices. But I do feel that this movement to the next best asset class, which is what central banks want people to do, that there's enough yield and enough attractive opportunities. I think that um keeping your money in your own market when the central bank is manipulating the price. I think that that's

something to kind of think about. So you have obviously US rates really low, European rates really low, in Japanese rates really low because the central banks are trying to create um simulus in the economy by keeping rates artificially low. But there are other markets out there that are not as heavily impacted by central bank policy. So one of the things that we're doing in portfolios is not just keeping all of our rate exposure in those markets, but

diversifying into some of the higher yielding markets. And so if you look at UM rates in Australia, rates in Canada, rates in uh in Sweden, you have Norway much steeper yield curves and the ability be able to actually generate yield on the longer end of those curves. The importance of that is around hedge efficacy. At zero, you don't feel like you have a lot of upside if the world goes bad in your bond portfolio. But if you're yielding one, one, one and a half percent you US,

you have a lot more upside. And then lastly, diversifying a little bit into some of the higher quality emerging markets UM. A country like Mexico has meaningfully higher both nominal rates and real rates in the US, and active managers can look at that and say, Okay, what is the risk of investing in Mexico. Do I want to

hold the currency risk or not? But I actually have a real positive real rate And in the event that the U S slows, well, then it's likely that Mexico slows, and you should see kind of a rally and accommodated policy in both countries. More room to rally in a country like Mexico. So getting a little bit more diversified in your sovereign exposure, we think makes a lot of sense.

So over the weekend I read this really interesting piece on Bloomberg China opens its bond market with unknown consequences for the world. So let's let's look at that. What does it mean that China is opening their bond market and what might that mean to global interest rates? So um, you asked, you know the question earlier about the shortage

of high quality bonds. By seeing liberalization in China and expansion of issuance from the Chinese government from high quality Chinese corporates into the global markets, creating more access and more liquidity, clearly is going to be good for investors and savers UH, and it can potentially crowd out some of the investment that's been made in in UM other high quality markets. So if you look at Europe at negative or zero rates, you look at the US at

very low rates, UM, you look at Japan. If you create more liquidity, more access to Chinese sovereign bonds that are right now yielding three and a quarter three and a half percent, that may actually eventually crowd out other investors.

You also look at the Bloomberg Global Aggregate Index. It has a pretty high percentage of China in it, and it's growing, and so as a result, it can actually be a yield enhancer for investors, but on the margin it could have some negative implications to sovereign bond markets where yields are so low. UM. We've actually think that, uh, the liberalization of the Chinese capital markets is is net

not a good thing. It's a good thing for investors. UM. The Chinese bob markets actually pretty attractive at those kind of yields where the central Bank and the event that there is a slowdown globally or slowdown in China, UM, you have China in a very different policy position than the US, Europe and Japan, and so you have a lot of ability for rates to go down in in UH in China, and now that you have more access, we think that's a big positive. We think it's been

such an important UM change in the capital markets. We actually have issued an e t f UM in in UM in the non US market to get people access to the Chinese bomb market because it's very hard for people to get direct exposure. But as they liberalize clearing and custodial issues, UM it's going to become a very important part of the broader capital markets. Mike, let's talk

a little bit about the Federal reserve. I keep reading people saying that the Federal Reserve is, you know, destroying purchasing power, damaging the dollar and driving rates to zero. But I'm compelled to ask the question, how influential is the Federal Reserve in setting longer term interest rates? So on your first question, there's no free lunch when it comes to policy. When it comes to policy, it's all about tradeoffs. It's about what environment are we in and

what risk do I want to protect against? And so when the FED makes a decision to keep rates low for an extended period of time. It does have negative implications. It does hurt savers, uh, it does hurt banks. But they're looking at a crisis situation. The COVID shock was a real, real crisis situation. They were learned that you'd see capital markets completely shut, company's access to that equity financing pretty much gone, and that could lead to a really,

really bad economic scenario. And if we look at those seven o eight financial crisis, the said was a lot slower to act. They were um slower. They acted into a small degree in terms of lowering rates, they acted to a small degree in terms of purchasing assets, and we're still feeling the pain of that as a result of the fact that we did not see a v shape recovery. We saw a very very slow recovery, and it was very, very tough for companies to start spending again,

to start raising capital again. The FED learned their lesson, and so in this COVID shock, they came in really big. They drove rates down to zero, and they bought everything, and they bought more than they ever bought in the past, and they bought different asset classes, including removing the freeze from the credit markets. Very very important. Now. It doesn't come without a cost, but they had to do it,

and we're still in this shock. We still have companies that haven't open, We have companies on the brink of potential bankruptcy. So the need for keeping rates lower keeping capital markets open is it's it's it's a trade off, and so there's no kind of perfect answer, but from my perspective, they've done the right thing. Now. To answer your the second part of your question is the FED in this case and in a crisis situation, they've had

an impact on interest rates across the entire curve. So not only have they UM, you know, their main policy tool is obviously the short term rate, so there they have a lot of control. And typically you would see five year rates, ten year rates, and thirty year rates will be driven by economics supply demand factors. In this case,

the FED has become big across the entire curve. Obviously, when you introduced q E to E UM not only impact short in, but to E is buying and driving yields lower, and so they've had an impact across the entire curve. That's not the long term goal I would expect to see. UH, the supply demand inflation to be the bigger drivers on the long end of curve, and over a long period of time, the set is going to have much more control over the short end and the long end is going to be driven by by

other factors. But in a crisis, the set has done the right thing and has impacted rates across the entire curve. Let's assume that Janet Yellen gets approved by the Senate for Treasury Secretary. What do you think of this combination of Janet Yelling at Treasury and Jerome Powell at the Fed?

What does that mean for fixed income investors? So we were fortunate enough a couple of weeks ago before Cherry Yellen was announced as the potential replacement for for Treasury, we had her in our our daily investment forum, where the equity, fixed income teams and the alternative teams meet every day to discuss markets. We were for enough to have her in and I think based on her history and that conversation that between her and Powell, we have

the dynamic duo. We have people that completely understand um capital markets and the impact that capital markets have on the real economy. We have people that understand how politics work, I think um Joannet Yellen's experience at the FED will has definitely sensitized her to the importance of of of of fiscal policy. She was not in control of fiscal policy.

But right now you have two people that have been at the center of UM major major crises, UM global crisis and US crises that are going to be responsible

for both the monetary and the fiscal side. I view that as the dynamic duo, and so one of the reasons why we're very constructive on kind of the credit markets and voll both equity vall and and and credit valls and rate balls staying relatively low for these couple of years is that with the two of them in office, we think you'll have a really good balance of relatively easy monetary policy as well as enough fiscal stimulus to UM keep the engine going, which we think will be

a very good environment for credit. Now, in the end, fiscal and monetary policy are not going to drive companies profitability. It's going to be the economy, and so the ability for them to be successful in driving the economy. I think that the jury is out on that one, but I don't think we could have done much better than the two of them. So so let's just talk about

fiscal policy for a moment. We saw a huge difference between what happens with the Cares Act and that three trillion dollars stimulus plan back in March of this year versus the sort of very low key fiscal stimulus of oh eight oh nine. UM it was it was much more focused on unfreezing the credit markets and um managing rates than was doing a traditional Keenzie stimulus. Since March of this year, there have been repeated rumors of the

Cares Act too passing. I would have bet anything that before the election everybody involved would want to pass another stimulus, but that would have been a losing bet. It raises the question if if we couldn't get stimulus through pre election, are we going to see any sort of real stimulus in the new Biden administration. So I would have lost the bet as well. There there were too many incentives to UM get a package done prior to the election.

Obviously to three months ago. It didn't happen. UM. It's really a sign not that it wasn't needed, but it was a sign of of of how bad the political environment is in Washington. UM. I think as we go into the new year, I think that the need is very material. UM. Just because we've seen good news on the vaccine, it doesn't mean that the real economy problems go away UM in UM in short order, you still have individuals a lot of people that are out of work,

that are furloughed UH. You still have people that are struggling to make house payments UH. And you know, any sort of significant deterioration and housing credit has its own implications UM. And then you have also a very significant amount of food and security in this country, where people are lining up for hours to get food. That's not where our country needs to be. And so I think that the incentives are likely to be aligned to tast something.

It's likely not to be as big as UM what we thought about UM last year in terms of three billion dollar package, but I think that you're likely to see something obviously higher probability depending on what happens in Georgia if the Democrats do well there, But even if we're in a in a UM senate situation, I think

we're going to see something of this. It's the need is too great, and I think the incentives are too greatly greatly aligned, So not a three trillion dollar package, but something somewhat you know, a trillion trillion, trillion trillion area right, A trillion here, a trillion there, it all, it all adds up eventually. The timing really matters. Like there there are a lot of people in this country that need it. There are a lot of companies that

need the bridge to the other side. And the bridge that was given with the fiscal policy number one is over and so um and again. Back to my point is that good vaccine news in the lab doesn't mean everybody's getting back to work tomorrow. It's going to take one to two years until you know, we really see the world and the the economic engine um purring the way that we did a couple of years back, and so we need a little help to get there. To say the least, let's talk a little bit about what's

been going on in the fixed income market. What do we think of the yield curve these days? Does it still signal anything? What were your thoughts when it inverted not too long before this recession began last year. I kind of love how people in the financial markets looked to the bond people as the smart people and say that bond people not only should know where bond prices are, but should know where equity prices are, where the economy

is going. And so they think that we we are, you know, we really can predict via what we think of thirty year bonds versus what we think of two year bonds. And what I'll tell you is that we're

not that smart. Uh and and and so I think that the historical analysis of yield curves and how they predict um equities and economic growth is has been way overstated, particularly in an environment as we've been discussing on this podcast around massive massive central bank intervention, both from a policy rate perspective as well as from a QWE perspective in terms of buying assets, it's hard to look at the shape of the yield curve as a predictor for

much right now given the amount of number one government intervention. And secondly is you have to keep in mind that there is massive, massive investor segmentation going on in the fixed income markets, where um there are a lot of investors that like pension funds the United States, pension funds the United States by long data fixed income to match against their liabilities no matter what the shape of the yield curve. They were buying them when the curve is flat,

They're buying them when the curve is steep. UM the same thing with corporations that have been sitting on enormous amounts of cash as they've issued a ton of debt and are doing nothing with it because they just want to be able to um bridge across the COVID crisis to when the economy kind of reopens. They're buying very short dated assets and so all the cash is going there.

So I think that it's very hard to look at the yield curve, given give in the environment we're in, both from a market segmentation standpoint as well as from how much policy is having an impact across the entire curve, and really make a significant judgment on on on unworthy the economy is going. I will say one thing, though, is that um I do think that this kind of normalization that's occurred this year and the steepening of the U s Heel curve tells you a little bit about

two things. One is the prospects for additional fiscal policy and enormous amount of government issuance on the long end of the curve, with rates so low, it obviously makes an enormous amount of sense for the federal government to issue debt. Um they're doing that, they're going to do a lot more of it. And secondly, it tells you a little bit about um uh kind of where we

stand from a monetary policy standpoint. Obviously, money has been very easy, big increase in money supply, and so there are some in the marketplace that think that on the long end, you're starting to price in some level of level inflation. I think that's overrated. I think that inflation is going to be maybe a story five to ten years from now, not something that investors, whether it's equity

investors or fixic investors, need to start positioning for. So let's let's stick with the idea of um of how the yield curve has been manipulated, manage, whatever word you you want to use. Did you ever imagine ten fifteen years ago that you would see so many yields gone negative all around the world? And and is that a

realistic possibility of negative rates occurring in the US? So ten fifteen years ago, no, when I was taking economous classes, no, they you know, when the rates were eight nine Uh, they didn't say, well, you know, what does it take for rates to become negative? That wasn't kind of even even discussed. Uh. So the answer is no. But when you think about the environment we're in, you think about economics, uh,

there is some intuition around negative rates. Uh. And now it's kind of the same discussion that we had earlier

around tradeoffs. So it's a trade off. The e c b UM and the Bank of Japan made a decision to sacrifice savers for the benefit of of of industry and corporations to be able to have access to financing, to incentivize savers to move out the respectrum, to buy equities, to make equity financing more attractive, to make deafinancing more more more attractive, to create more jobs, and to get

the economy going. But it's at a at a cost, and it's obvious god a cost on savers and a cost on on on on financial institutions that rely upon shape of a yeel curve and rely upon yield. I think that there is some merit to negative yields. The said doesn't want to make that trade off. They've said that, but I would say that it is a policy outcome that could get there, could get there that either they decide to bring it there or the market brings it there.

Envision a world where UM, you see significant slow down and global growth, equity markets trade off outside the US, and the US is viewed as the safe haven said lowers rates even more, starts to buy more, and the US dollar is viewed as that only thing that's good

and the safe haven currency. You can envision a situation where treasuries, maybe the Fed doesn't bring rates negative, but people decide that to store their wealth, they would rather be in a dollar denominated asset that they have to pay something small than being an asset that has a lot of a lot of risk. And so it's it is a possibility, but from a policy standpoint, the US has so far made a decision to to not to

not go there. Huh. Interesting you mentioned UM the likelihood of some form of fiscal stimulus and the need for further UM treasury issuance. We've been hearing rumors, I don't know, for about ten years of a grand infrastructure build out, which has yet to happen. It seems like a no brainer from the new administration. Any chance we see longer dated bonds with rates this low, a fifty year treasury or even a hundred year US Treasury. I mean, if if if I were at the Treasury, I would issue

a thousand years at these rate levels. I mean, you know, why not, You're you're locking in, you know, financing for extended period of time at a dramatically lower yield. And it's very possible that yields further out on the yield curve are not meaningfully higher than where they are to day. There's still a lot of demand for very long dated cash flows from pension funds that and insurance companies that

are trying to match against match against liabilities. And as people live longer and longer, there's going to be more and more knee need for longer dated, longer dated assets. So um, I could see that To your question on infrastructure, I think it's gonna you know, it's really going to

rely upon, assuming that we have a Republican Senate. It's going to rely upon whether or not the Biden administration is true to its word about working across the aisle number one and number two, if they're going to be successful at doing that. But there's a lot of need for you know, I think right now, the spending that needs to get done needs to be directly in the

pockets of people that have been affected by COVID. But as we look out a couple of years longer term, there needs to be a long term investment plan for this country and a lot of countries, and infrastructure is going to be important. It's just a matter of whether or not the political will there is there to look at an investment that pays off in five, ten, fifteen years, versus the way we look at things right now, which is all about today and tomorrow and how does it

impact my poll numbers. So hopefully we get to the point where we make more rational long term decisions, and I think if we did, I think that infrastructure is likely to be immedially on the table. Quite interesting. Let's let's talk a little bit about duration. Um, you mentioned the yield curve has steepened, but not a whole lot. What what's the difference between the three month and the ten year it's it's I think less than a hundred bits less. I looked, is that sort of duration risk

worth it? Normally in a steeper yield curve, obviously you're getting paid much more uh to lend out for a decade. What what are you thinking in terms of duration? And are we going to continue to see such a relatively modest um yield curve for for the foreseeable future? So you're you're The answer to your question can be very different for UM, who am I or who am I representing as an investor as a fiduciary UM in terms

of how I answer that question. So this kind of um bleeds into the topic of kind of dynamic and do do do bonds at very low yields still offer investors protection against kind of growth and UH and and and risk assets. And I think that at UM eight basis points in that area you still have a meaningful amount of upside. And back to my point earlier, it is possible that rates break the lower bound of zero in the event that you have a significant global global recession.

So I think that UM basis points in terms of owning tenure treasuries, it doesn't feel really good, but it's still when you look at equities and how equities have performed so well, you don't want to just own equities unprotected. And I still think in the rate market, whether it's the US, whether it's the other markets I talked about earlier,

You're still getting some very significant hedge benefit. But when you look out right at the US market at points a hundred basis points on the tenure, is that a great five to ten year investment. Probably not. I would say as an individual, I would much rather own longer data municipals. UM. I think I get a lot of the upside in the event that rates come down and there's a slowdown in the economy and I'm getting on a tax adjusted basis a lot more yield. I uh.

And then and then lastly, as a active investor in fixed income, do I want to be overweight duration or underweight duration? UM? I would say that calling the rate move is a really, really tough one, and I think having an appropriate allocation across fixed income equities and other asset classes is the way we really to think about it. But I will say that I think the FED is going to be on hold for a long period of time.

And as the ten year Treasury trades in the arrange from fifty basis points on hundred fifty basis points, because you get out to a hundred basis points, you probably want to own a little bit more interest rate risk is the Fed's going to be on hold, and I think that inflation, particularly in the US, is going to stay very modest wall below, well below the FETCH target. Interesting, well, a lot of people agree with you. We continue to see record inflows into fixed income ets despite interest rates

as low as they are. What are your thoughts about that? Who who are the buyers of those fixed income ETFs? Is that UM main Street or is that more of an institutional investor? What? What are your thoughts on the activity in that space. So we we talked a little bit earlier about how fixed income ETFs have been a little bit slower to be adopted because of active managers having more success m but this year you're actually seeing more flows into bondy TF and you're seeing in equity

e t F for the first time. So there's no question that e t F are being used much more actively. I would say two main holders investors. Number one is the and you know the word world a lot better than I do. The r I a community the wealth managers in the marketplace that have kind of converted their business model from more of an open ended model to really one that is driven by liquidity and low fees.

Within ETFs, those are I think that the dominant players that you're seeing more model portfolios that include ETFs mainly for the purpose of UM access to different segments of the marketplace. So the good thing about E t F s is that you can carve up and you can have an industrial only or this only or double B only and so on and so on. So there's a lot of ability to be able to carve portfolios in a more customized way, and the fees are are very low.

Secondly is you have UM some institutional players that UM use ETFs as a way to either gain very quick exposure intra day or to UM basically UM UH exercise UM arbitrage in in between kind of the cash underlying securities that exists in E t F and the E t F. I would say that those are the dominant players within the t F market. There's no free lunch

that E t S gives an investor. UM people think that while the liquidity is so much better in E t F S and UH, you know, the liquidity in ETFs on a day when there's very little trading might be a little bit better than the underlyers. But in a risk environment, in a credit risk environment. When there's a risk off or or a lot of risk on liquidity, b t S are only as good as the underlyer.

So I think it really comes down to UM segmentation, the ability be able to specifically target certain parts of the market as a r I A or an investor that's trying to target specific risks, and then secondly to to to get lower fees than what's available in the open ended, open ended space. Now we as an active manager UM, we are obviously have the ability be able to buy bonds, and we try to buy bonds that we think can outperform the index. We've done a good

job of that. We also will use e t F from time to time, but really is a way to get risk on in the market very quickly or in periods of time where E t F liquidity is better than the cash market. And one thing we've seen in the credit markets and the COVID shock is that there

was a lot of transparency that existed in ETFs. The physical bond market was frozen, but et F still traded UM and so as a result, when you didn't see a lot of trading in bonds, you actually saw E t F trade and got a lot of price transparency, and so we'll use that as another source of transfer of risk. And so you're finding that a lot of investors are actually using it for that purpose. Short term trades get exposure and then eventually to work into single

name exposure within the cash market. So let's stay with that for a minute. Back in March, when everything went sideways um and and both inequities and bonds, we did see a fairly substantial dislocation in the bond market and some of the E t F pricing looked wildly out of whack. Was it really the underlying that was the problem. There was no pricing and liquidly so E t F traders were just making their best guests. What what went wrong back then when the n A V s UH

seemed to be not exactly on the money. So I think what happened was was that you had a very very quick move in the cash underliers and then you had a lag in the equity prices of E t F s, causing to some degree some premiums to be very high or discounts to be very wide. That can

happen for a very short period of time. I will say, though, that at that time, particularly the COVID crisis in credit in high yield and investment great credit areas that really froze up, and there was a massive lack of price transparency in the cash market. UM E t F still traded investors are as individuals. They wanted to get out, and so what happened was was they have to UM get to a price that can obviously clear the market. But when you're trading an equity or an e t F,

you have two variables you're thinking about. One is can I then sell that e t F to somebody else? And what price story needs to move it down to be able to bring in an investor. That wasn't the environment because there were only sellers at the time. So what was going on was a estimate by the e t F liquidity providers on what is the right price?

How far down are these cash bonds. Now, I will tell you that the traditional liquidity providers and e t f s aren't fixed income experts to a great degree that they can actually do that. So what happened was players like us jumped in and said, okay, we'll buy that e t F. We'll buy it down three points or five points or whatever, because we have a high

degree of confidence on how to value the underliers. So there was a mismatch for a very short period of time between where equities cleared and what the actual pricing was in the underliers. But it was a reality that people just didn't know what the underwiers were worth. But all told, it sorted itself out pretty quickly, and the fact that there was even any liquidly at all is uh was quite quite a surprise. And exactly players like you are the reason why the e t F prices

eventually came back to where um they were rational. Am I overstating that? Or is that A was absolutely absolutely accurate. And I will say that this level of dislocation that occurred between the cash market and the e t F market, between the cash and the synthetic market and credit was very, very very I think I said that three times concerning to the FED, and this is one of the reasons

why the Fed decided to do something extremely unprecedented. The FED stepped in and said, We're not just going to buy twelve year treasuries because their cheap to tenure treasuries. We're not just going to provide um funding to the money markets. We're not just going to buy agency mortgages to drive down the cost for homeowners and refinancing, but we're actually gonna get into the credit market because the

credit market and particularly the cash market is frozen. So they announced a plan to buy individual bonds, provide direct funding by e TF in the credit market. Uh and and also extend lending and potentially by municipals as well. So very unprecedented action because of these these kind of dislocations that occurred in the lack of transparency, and what did it do. It actually caused that that um, you know, that arbitrage between ets and cash bonds to eventually go away.

Uh And it also you open the capital markets to allow companies to get back to issue debt to be able to bridge themselves past the past economic crisis. Quite fascinating. Before we get to our favorite questions, I have to at least ask you about some of the funds that that your team manages and the four big ones I'm looking at Government income fund, core fixed income fund, bond fund,

and strategic income funds. I know compliance gives you limited things you're allowed to say about them, um, but broadly tell us about the strategic differences between those groups. So UM government income has stated is combination of government securities as well as agency mortgage securities. So super high quality UM a decent amount of duration there, but not a

credit oriented product. UH. Core product UM is a core holding for people, So we we think of sixty allocay and something like a core fund is critical to balance

in a portfolio relative to equity and risk assets. The idea in a core fund investment grade only agency mortgages, treasuries, agency debt, as well as investment grade credit and so our view about it's really important that you have your the chunk of your fixed income allocation in super high quality to avoid situations that we experience like in the oh seven oh shock where people had the sixty allocation, but when they woke up the next day and rates

were down, they figured out that their forty was also down because it had a lot of credit and and and subprime mortgages and things like that in there. So core is by definition core. Then you have our GS bond product, which is more of a it's a Bloomberg aggregate product, white core, but it can do high yield an emerging market debt, so it's intended to be part of your fixed income but have more satellite higher return

type strategies to increase the yield. And then strategic by definition is strategic it can go kind of anywhere, um, and so there it's a library based products, so not it doesn't have five years or seven years of duration potentially like the other products. But it is a cash based product where it's kind of more of an absolute return product where you can go anywhere within the fixed income markets. And so that product is trying to generate a little bit higher levels of return without taking on

the interest Thry risk. I'm glad I I asked about that. I'm sure our listeners are going to be quite interested in that. These are our favorite questions that we ask all of our guests. And since we're talking about COVID in the lockdown, let's let's start right right with that. What are you streaming these days? Give us your favorite

work from home Netflix? Amazon? Videos you're watching? So favorite on the video side, UM, I would say was a recent movie that I think was very elivan as we were kind of in a very critical election for our country, was The Trial of Chicago seven. I'm not sure if

it was Netflix or Amazon Prime. But an amazing movie about the history of the hippie movement and the protest that the hippies um uh and and I went to the Democratic National Convention in Chicago to protest against the Democratic Party the war, um and kind of and then a number of them got arrested. And the reason it was number one of the acting was unbelievable. Sasha Baron Cohn's in it. He plays Abby Hoffman uh and Uh.

Abbie Hoffman actually went to the same college me as Brandis and so I just found that movie to be very telling, and it's it's kind of a um a story about if you think something's going wrong, speak up and do something about it. So I would say from a from a movie perspective and streaming that was that was definitely number one. That is my Netflix Q and I'm looking forward to checking that out. Let. Let's talk about your early mentors who affected um the way you

look at fixed income, who helped guide your career. So UM, I would say that two people very early in my career, Earleman Brothers, had a pretty big impact. And it was less about kind of over the course of a long period of time, but single events that had a real big impact on me. And so one was this gentleman

Mike McKeever, who had a lot of capital markets. I think he ended up running banking at at lehman Um he put me in charge of very early in my career was in the first few months of of recounting what happened in the European markets from an issue and standpoint overnight, so that people when they came in they were speaking their clients about the U S markets had

some context for what happened in Europe. And somebody asked me a question about during the meeting about a European issue where and I kind of hesitated and I kind of gave an answer like, oh, yeah, yeah, that's what happened in a way that Mike McKeever very much neew that I didn't know what I was talking about. And so in the meeting he called me out and said that your answer is correct, and I said, not really, he said, and in the meeting he said, this is

not high school anymore, this is not college. If you're not if you're not sure, you say you're not sure when you get back to someone, But you're talking about people's careers, our client's money at stake, and you can't fake it. And so obviously I was distraught and couldn't believe that somebody tore me to shreds in front of a lot of people. But he was a hundred percent right, and it kind of helped me very early in my career to uh uh take work seriously and that the

facts matter. Quite quite interesting, Let's let's talk about books. What are you some of your favorites and what are you reading currently? Uh? A bunch so um. I kind of have a theme in the books that I read almost all our nonfiction uh and and I would say that the two themes are real A lot of investments and I read a lot about UM income inequality and

historical racism in in our country. And so the few books that I can think of that that really kind of had an impact on me was Devil in the Grove, which is an amazing book about Thurgood Marshall and his plight into the South, particularly into Florida to help um wrongly accused UM black men who were accused of either murders or were put in put in jail for life or actually um actually uh sentenced to death and to

go into these places and defend them. And I think that there's obviously been a lot of books and movies UM since, but this specific story about UM a gentleman in Florida had just a massive impact impact on me. UM. Just Mercy is a very similar book, recent recent movie and and a very similar topic UM. One other on income inequality Hillbilly Elogy, which now there's a movie out UM. I haven't seen the movie yet, but I did read the book and UM kind of thinking about the broader

issues that exist across our country. Why there's a lot of political issues UM, racist racism issues and come inequality issues, very very impactful, impactful book. UM. And then on the investment side, this is going back a while, but David Dreaman's book on Country and Investing UM had had a pretty significant impact on me and and and his book is a lot about UM behavioral behavioral science, behavioral economics,

and you know, not always following the trend. So being a contrying investor most bond investors are, but looking at investing from different lens than everybody else has had had a pretty big impact on me. Huh, quite fascinating. UM. What sort of advice would you give to a recent college grad who was interested in a career on the

fixed income side of the street. Well, I would say, first off, just in terms of people entering the capital markets, financial markets, any any any part of finance, the most important thing is not to worry about what you're doing, and it's more to worry about who you're doing it with and who you're around. And I think in the first five to ten years of your career, don't worry about what you're gonna be when you grow up. That

doesn't really matter. What matters more is that you're around smart people that can teach you and are willing to teach you, and and and you will then figure out what direction you want to take your take your career. So I really think that's important. And on top of that, you want to be in a diverse environment. And the word diversity obviously can mean a lot of different things. It can mean diverse obviously racial backgrounds, gender, but it also you want to be around diverse ideas, and it's

really important. You don't want to be in an environment where everybody thinks the same. The way you learn is by being exposed to things that are very, very diverse. So I think that's most important. Don't worry about what you want to do when you grow up. Be around smart people. You'll figure it out. Good advice. And our final question, what do you know about the world of investing in fixed income today that you wish you knew

thirty years or so ago when you first got started. Well, I first maybe like to answer the question around just investing overall, as giving younger people some advice around investing. I think that the most important thing develop a plan, stick to the plan and don't look at it. And that is true for people who are non investors, but it's also true for people who are investors. We often get scared out of our out of our shorts when we see events occurring, and we'll go to cash because

we think we can be smarter than the market. Don't do that. Develop a plan, develop a diversive pipe diversify plan for your investing, and don't look at it, and stay very consistent in terms of in terms of investing. In terms of the fixed income portion of that UM, I would say probably the same thing goes UM by the same token that I thought that UM rates at eight percent or nine percent when I started my career, looked pretty expensive because rates two years or three years prior,

we're eleven or twelve percent. Don't think that you're smarter than the market. Think about your client, think about the type of portfolio and type of riskers you want to take, and be very thoughtful about asset allocation and diversification. And I think that that is the most important lesson, and I think it's true with regard to an individual and multi asset investing, and I think it's also true as a fixed income investor. Thanks Mike for being so generous

with your time. We have been speaking with Mike Swell, who runs fixed income portfolio management for Goldman Sachs. If you enjoy this conversation, well, be sure and check out any of our almost four hundred other such conversations where we keep the tape rolling and continue discussing all things finance. You can find that at iTunes, Spotify, wherever you regularly get your podcast fixed. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg

dot net. Be sure to give us guest suggestions at that email address. Give us a review on Apple iTunes. You can sign up from my Daily reads at rid Halts dot com. Check out my weekly column on Bloomberg dot com slash Opinion. Follow me on Twitter at rit Halts. I would be remiss if I did not thank the Crack staff that helps put these conversations together each week. Tim Harrow is my audio engineer, Michael Boyle is my producer. Latika Valbrun is my project manager. Michael Batnick is my

head of research. I'm Barry rid Holts. You've been listening into Master's in Business on Bloomberg Radio