00:00Joining us now, Amanda Lynam, she's chief credit strategist at Goldman Sachs.
00:04And I just want to bring up the chart here for you, Amanda, because you're expert at this.
00:08At Bloomberg, we have the total return indices that are just absolutely exquisite
00:13off of all the heritage of Lehman and Barclays as well.
00:17And the chart of the week is the Lynam chart here.
00:19And it's a great moderation, the bond market price up forever, forever, forever.
00:25Seven standard deviation move.
00:26And we've come back, but come on, we've flatlined over the last five or six years.
00:31Does that mean bonds are of value?
00:34Or does that mean you're still catching up?
00:36Well, first of all, thank you for having me.
00:37Good afternoon.
00:38If you looked at that chart, Tom, and maybe you started it at year-end 2021,
00:42which is just before the Fed started hiking rates and just before interest rates really
00:45started their trend upward, what you would see is that IG bonds are roughly flat.
00:50However, high-yield bonds are up over 20%.
00:53Leverage loans, floating rate, are up over 30% over that same time frame.
00:57So I think this speaks to the point that we've been emphasizing for a bit and very relevant
01:01for your audience as well, is that there's an opportunity cost to being too defensive
01:05in this market.
01:06Now, to answer your question on do bonds fit in a portfolio, absolutely, but they just
01:10can't be the only part.
01:12And that chart you showed told a great story in terms of what the rise in interest rates
01:18has done to pressure bond total returns.
01:19But at the same time, equities have enjoyed a pretty meaningful upswing.
01:23And so that's the point on diversity.
01:25I've never asked this question.
01:26How long have I been doing this?
01:27It's like seven or eight years.
01:28I've never asked this question.
01:29How much of our 401ks in America are in boring, sleepy, underperforming bonds versus the
01:36high-yield magic you just talked about?
01:38I mean, our investors that are managing a lot of these 401ks on behalf of retirees and
01:44workers typically will employ pretty diversified portfolios.
01:49And then, as you know, there are target date funds that become less risky as you get closer
01:53to retirement.
01:54In general, that's a pretty good way to be invested.
01:57I think there's a difference between saving and investing in this market.
02:01And I think one of the big lessons is that being invested over the long term is really what
02:06is critical.
02:07It's hard to time over the arc of a career for any one rate backdrop or equity market
02:13backdrop.
02:13So staying invested and in a diversified portfolio is key.
02:16Saving and investing.
02:17I like that.
02:18When my son was born, my mother-in-law gave him a bond.
02:22Today, when kids are born, they have access to a Trump account.
02:25Their grandparents can contribute to that.
02:26These Trump accounts only invest in stock funds or ETFs.
02:30That sends a pretty strong signal about the role of bonds in building a portfolio, a person's
02:36financial future, doesn't it?
02:38Well, I think it's one part of an overall plan.
02:40But from my perspective, when we think about the role of a portfolio and where FixDem kicks
02:45in, it's really to provide income later in life that's more regular as opposed to waiting
02:51for an equity dividend.
02:52And then importantly, it's to offset periods of equity market weakness like we see today.
02:57And so while we've had a pretty meaningful uptrend in equities over the past few years,
03:02we've known from cycles that those don't go on in perpetuity.
03:05And so ideally, what you would want to have is some fixed rate exposure across the curve,
03:09some floating rate exposure.
03:11Actually, we've been our portfolio strategy colleagues have been emphasizing the role of
03:14real assets and kind of inflation protection and then typical equities.
03:18And it all fits together.
03:19Goldman Sachs fixed incomes recommending gold?
03:22Our portfolio strategists.
03:23So our portfolio strategists who take a multi-sector view have basically made the point that,
03:27as you alluded to, the 60-40 portfolio isn't as straightforward as it was in the years past.
03:33And so given some of the shifts in the market, that we actually do have to incorporate things
03:37like real assets.
03:38In the stock market, individual investors are just as influential now as institutional investors.
03:43That's really changed over the last few years.
03:44I don't know who the dumb money is anymore versus the smart money.
03:47That line is blurred.
03:48Does that kind of blurring exist in the fixed income and credit world?
03:51Or will this asset class always be the domain of institutions and professionals?
03:56We have a wide range of investors in our market.
03:59I think the really interesting bifurcation that I've seen in corporate credit over the
04:03past couple of years, but definitely recently, has been this bifurcation between investors
04:07who are buying bonds for yield versus investors who are buying bonds for spread and total return.
04:13And that is the key.
04:15And what we have emphasized is if you are allocating to credit right now, you should be buying for
04:19income and yield, not because there's material scope for a total return boost from tighter
04:24spreads, because they're already tight, or from lower rates, because our rate strategists
04:28are expecting rates to be elevated.
04:29Or I want bond exposure to a data center in Ohio.
04:32Here is Amanda Lynam.
04:33She's been burning it up.
04:35Zero Hedge is a 30-page article and led with Amanda Lynam of Goldman Sachs.
04:40So here it is.
04:42A mix of markets will be required.
04:44Our equity research colleagues expect the five hyperscalers to invest a combined zillion
04:49trillion in AI CapEx to now, four years out, it would push hyperscalers' weights well above
04:56the current market conventions.
04:58In our wealth management, are we going to be overwhelmed by this tech CapEx juggernaut?
05:04This is the main debate in the corporate credit market right now.
05:07And just for your listeners, that number is $5.8 trillion that our equity colleagues expect.
05:11It's not a zillion?
05:11It's $5.8 trillion.
05:13And I think what a lot of investors do is they will look at the hyperscalers' balance sheets
05:17and expect that that will largely be financed with debt and that a lot of that will come
05:22through the traditional IG corporate credit market.
05:23The point that we've made is that the bond market has issuer concentration constraints to
05:28a certain degree.
05:29And so the key takeaway there is that we expect a portion of that $5.8 trillion to be funded
05:34with
05:34debt, a portion of which will come through the traditional bond markets.
05:37But we also see scope for the private infrastructure market to play a role.
05:41We see scope for these new project finance JVs to do some of the heavy lifting.
05:45Cash flow from operations from the hyperscalers will contribute.
05:47We're also expecting equity issuance.
05:49Some of the rating agencies have said that.
05:51So we shouldn't be afraid of this tech madness.
05:53I am not concerned about an access to capital constraint.
05:57I just think as we progress through what is a multi-year investment cycle, that there will
06:02be more nuanced conversations around which market I should be accessing and at what price.
06:07That's largely a 2027-2028 event, we think.
06:10I want to take a step back here because you think about the different generations.
06:13And Gen Z right now is graduating from college.
06:15They're joining the workforce.
06:16They're building up savings.
06:17They know about meme stocks.
06:19They know about crypto.
06:19They know about prediction markets.
06:21These are all go big or go home kinds of bets.
06:23Is there anything within the fixed income credit space that responds to that impulse?
06:28Well, we're subject to risk sentiment like other markets are in terms of when there's
06:32a real risk-off tone.
06:33We feel it in our market.
06:34I would say we tend to be a bit more defensive.
06:37We actually put a piece out on this earlier this week.
06:40My colleague Spencer did, which really emphasized that the credit equity beta has diverged in
06:452026 in particular, meaning credit hasn't been participating as much on the upside, but it's also been
06:51more defensive on risk-off tones on the downside.
06:53And I think going back to over the arc of a career and investment cycle, just being invested
06:58is the key point.
06:58OK, I love that we're doing credit beta.
07:00But you're at this weekend at some family event or, you know, friends and Romans and
07:05countrymen, and somebody says, should I buy a five-year CD or a three-year CD?
07:10America's still stuck in that question of personal finance versus a lot of...
07:15If they had any money to put in a CD to begin with.
07:17Well, OK, but the arch question is on duration, how short should I be right now?
07:22So we like being more towards the front and intermediate part of the curve.
07:27At the longer end of the curve, so 30-year bonds, for example, it tends to be a bit more
07:32whippy.
07:33I'll say.
07:33If your question is, do we expect the Fed to be kind of cutting or hiking or holding
07:39pat from here, our economists are expecting the Fed to essentially be on hold through 2026.
07:44I would say the Middle East conflict has been flagged as an upside risk in terms of
07:48inflation, you know, which does provide some risk to that view.
07:52But in general, we're expecting rates to remain on hold.
07:54So staying invested amid an elevated rate environment, you are actually earning some
07:58coupon from there as well.
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