00:00And a great story on the Bloomberg terminal, Mohit, about you and your team and really just the decision making you guys had to make back in April, back in March.
00:08And while a lot of people were bailing or at least thinking about bailing on U.S. assets, you stood firm and you've reaped the benefits. Explain why.
00:17Thank you, Romain. Thank you, David, for having me.
00:18Yeah, I think the context is at that time there was plenty of uncertainty and the view was that this tariff-related uncertainty will further add to the challenges that consumers as well as businesses are already experiencing.
00:32On the consumer side, you know, higher costs will lead to lower spending.
00:35On the business's side, the uncertainty around tariffs would likely lead to a slowdown in hiring plans as we go further out in the summer months.
00:44Because if they are paying for the tariffs, they'll have to figure out a way to cut costs and reduce costs elsewhere.
00:51And one of the ways they could do that is to adjust their hiring plans.
00:55So our view was that as we go into later portions of summer and you should start to see a growth slowdown, which would be beneficial to the treasuries and hence the preference for that five to ten year treasuries.
01:05I am curious about what you were talking about with your colleagues there and what you were seeing amongst client behavior and whether those two things were in conflict with each other.
01:18Yeah, I think our discussions with colleagues centered around what are the different scenarios that are possible.
01:24With respect to tariffs, the scenario was around inflation impact.
01:27And then the other aspect of the scenario was the growth impact.
01:31So the internal discussions with colleagues centered a lot around this tradeoff between inflation impact and the growth slowdown impact.
01:38And then what we were hearing from our clients were certainly, you know, concerns around U.S. policy, certainly kind of discussions around how they would think about U.S. assets.
01:49But what we were not getting in the data was any meaningful shifts in the near term.
01:54Certainly over the long term, our view was that, you know, at the margin, foreign investors would likely start to think about shifting towards home or whatever that home bias would be.
02:07But that does not necessarily mean that that would be negative for, you know, foreign holdings of U.S. treasuries.
02:15And then when we looked at the data in April and in May from the Treasury auction data, what we were observing was that the auction participation by foreigners was nearly unchanged and at the level that was pre-April.
02:28So that gave us some confidence on continuing to hold on to the trade and add on to that trade upon weakness.
02:34Our colleague Michael McKenzie doing a great job kind of capturing the drama of the moment as you and your colleagues in London and Newport Beach are going through all of this, meeting more regularly than usual, trying to hammer all of this out.
02:44And I'm curious about how you thought about the uniqueness of the moment and the circumstances that we were in and you were in as investors.
02:51Was there an historical analog that you were thinking about or thinking through or was it really new ground that you were trying to trod?
02:59I think there's always something new in that moment.
03:02I think we had we were penciling in an increase in tariffs.
03:06I think if you recall pre-April 2nd, the tariff rate in the U.S. was closer to 2 percent.
03:11And our view was that we will probably get towards 10 percent in the U.S.
03:16But what was announced on the liberation day was closer to give or take 20 percent if you did the weighted average sum of the tariffs that were announced.
03:25And our view was that we will settle somewhere in that 15 to 18 percent range.
03:28So we were trying to kind of understand a lot of that and with the help of our policy experts.
03:34And then we were trying to figure out I think what was really different was the change in potential change in the foreign investor participation or view.
03:43And at the same time, what it also meant to us was that we don't have to constrain ourselves to the opportunity set that is in the U.S.
03:51Certainly U.S. markets were weakening, but so were other markets.
03:55So what we did was certainly I think, as you mentioned, Michael McKenzie covered it very well on the U.S. side.
04:00But we were able to kind of also look at opportunities that were outside of the U.S.
04:05And those have worked out quite nicely as well this year.
04:08And they continue to look attractive in certain pockets.
04:10You've taken me right where I want to go.
04:12So the income fund returning 10.4 percent.
04:14I wonder how much you're pairing your bets on U.S. debt and what those other countries are where you see opportunity in this moment and going forward.
04:24Yeah. So I think the other countries at the moment.
04:27So what we have done is we have certainly reduced some of our duration exposures in the U.S.
04:32And the reason for that is that when you look at the U.S. market, the U.S. has been the biggest outperformer.
04:37Or U.S. Treasury market has been the biggest outperformer relative to other developed market rates relative to, say, for example, Australia, U.K.
04:46And then Japan rates have gone the other way.
04:48So certainly it has created an opportunity for us to be a little bit more opportunistic elsewhere.
04:56So those opportunities are in Japan, Australia and in U.K.
04:59We can be patient in the sense that we are not saying that the rates necessarily have to go lower from here.
05:05They're starting to look very attractive on those regions.
05:08And then if they continue to weaken further, similar to what the U.S. rates were doing in April and May, we will continue to scale up.
05:15And I think that could be a good trade for 2026.
05:18What's your general outlook right now, Mohit, as we move into 2026 for volatility, taking as the current levels of volatility as the baseline?
05:26I think the volatility is here to stay.
05:31I think, you know, basically what you have is a lot of kind of competing forces at play.
05:37On the one side, you have the positive effect on growth from the upcoming one big, beautiful bill that will go into effect in Q1 through, you know, consumer tax refunds, as well as the CapEx aspect or the corporate CapEx aspect.
05:50On the other side, you have the tariff-related uncertainty, and then you add to it the AI CapEx that is in the works.
05:58Now, again, it can certainly materialize to the degree that is expected, but there are scenarios where it may not materialize.
06:05So all of these create plenty of volatility just if you focus on in the U.S.
06:09And then you add to it all the other countries, which are also going through their own inflation and growth uncertainties.
06:15So this volatility is here to stay, but it also creates very, very exciting opportunities for us in fixed income.
06:22I think our take is that we can construct a very well-diversified, globally-diversified portfolios with a yield of 6% to 7%,
06:30which looks very, very attractive for most investors relative to cash, relative to equities, and relative to other opportunities.
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