1 T R A N S C R I P T Bond investing beyond yield: A deeper dive Presenters: Richard Carter & Danielle Fox RICHARD CARTER: Thank you, and welcome, everybody. We are very pleased to have you here today, and we’re going to present our webinar on fixed income, or Beyond Yield, and I’m thrilled to be joined today by my colleague Danielle Fox. My name is Richard Carter, I work as the product manager lead for fixed income individual securities in our Personal Investing Division, which is responsible for largely what you see on the website, Fidelity.com, in the Fixed Income area, bonds and CDs, our offering and the trading experience. And our team works very closely with Danielle and her team on communicating this message out to our colleagues in the field, and also to clients. So, Danielle, why don’t you say a few words? DANIELLE FOX: Great, well, thanks so much, everyone, for making the time today, whether it’s morning or afternoon, we appreciate it. As Richard mentioned, my name is Danielle Fox, I’m coming to you from Boston, Massachusetts, where I have the privilege of supporting the 10 local investor centers in Massachusetts, coaching clients on fixed income strategy and demonstrating how our fixed income platform works, and I’ve been fortunate enough to work
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Transcript
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T R A N S C R I P T
Bond investing beyond yield: A deeper dive
Presenters: Richard Carter & Danielle Fox
RICHARD CARTER: Thank you, and welcome, everybody. We are very pleased to
have you here today, and we’re going to present our webinar on fixed income,
or Beyond Yield, and I’m thrilled to be joined today by my colleague Danielle
Fox. My name is Richard Carter, I work as the product manager lead for fixed
income individual securities in our Personal Investing Division, which is
responsible for largely what you see on the website, Fidelity.com, in the Fixed
Income area, bonds and CDs, our offering and the trading experience. And
our team works very closely with Danielle and her team on communicating this
message out to our colleagues in the field, and also to clients. So, Danielle,
why don’t you say a few words?
DANIELLE FOX: Great, well, thanks so much, everyone, for making the time today,
whether it’s morning or afternoon, we appreciate it. As Richard mentioned,
my name is Danielle Fox, I’m coming to you from Boston, Massachusetts,
where I have the privilege of supporting the 10 local investor centers in
Massachusetts, coaching clients on fixed income strategy and demonstrating
how our fixed income platform works, and I’ve been fortunate enough to work
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at Fidelity for 23 years come next month. So, Richard, I’ll turn it back to you
and get started.
RICHARD CARTER: Terrific, okay, I’ll try and keep up with that. So, let’s move on, you
know, you’ve seen the last slide, we’re now thinking about the purpose of
these webinars. We hope to educate folks and to enlighten you about the
bond market as well as the resources we have available at Fidelity to help you
day-to-day, week-to-week, you know, in managing your bond portfolio. Next
slide, please, Danielle. You know, what we look at here today is trying to
answer some of the questions we get from our clients. You know, bond
market is fairly complex to many people. It’s not a homogenous single market,
as we’ll hear today, there’s many different types of bonds and bond markets
within the market itself. We’ve got complications from the rate cycle, credit
risk, all of these actions, actions of politicians, actions of the individual
securities themselves, that come to bear on the yield, on the return that you
might get, and so what we’re trying to do is to give you an update on that
today. Very interesting times we’re living in. As well as towards the end here,
talking about some of the strategies you can deploy hopefully to see you
through all kinds of weather, if you like, in terms of the economy. So,
specifically for today, we’ll start off on the top there with some of the
macroeconomic trends. Again, as I said, it’s been a very interesting year, year
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and a half, and you know, we’ll just recap that and see what those implications
are for the bond market. Then we’ll move on to this section, that Danielle will
lead us through, which is what we call the three dimensions of bond investing,
so I’ll leave that as it is, but to think of it, we’re going to be trying to sort of
thinking about three key areas to look at as you invest in bonds, and again,
that’ll be a nice all-weather approach to take. Then we’ll do a deeper dive into
the corporate and muni markets, always of interest. These are two areas in
particular where research can do you in good stead, and the differences
between each type of bond can be quite marked, so it’s worth taking an
approach there that does dive deeper than, say, if you were investing in
treasury bonds and so on.
And finally, as I said, what we’ll look at somewhat are the tools and strategies
to equip you to manage your bond portfolio. So, let’s start now with these
macro trends. We’ll start off with some of the key drivers we’ve seen in the last
year, as I said, a quick recap. Then we’ll take a look at some of the key
variables that we pay attention to, and looking at it since ’07, where we saw
sort of the peak of the last cycle, and that declined with the Great Financial
Crisis, I’m sure many of you remember, and see the parallels between then
and now. We’ll look specifically at treasury yields and how they’re performed,
and where we might see them going next, and then study some of the
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different total return analysis on different markets in reaction to this wave
motion of easing and tightening of policy and of monetary positions. So, let’s
start now. You know, key market drivers, in a summary fashion here, of the last
year. So, we’re saying here number one, we are now in the process of a global
economic rebound, right? Coming out of that recession, that lockdown
period. We see here that GDP contracted 3.5% last year, but really that masks
how volatile it was. You know, if you recall in Q2 last year, the economy
contracted by 31% only to rebound in Q3 last year by an equally staggering
33%. So, amidst all that volatility, some really big numbers actually, you know,
we come out this year, things looking fairly positive. I mean, it’s all relative of
course, right, but I think, you know, the world, as you can see here, 6% GDP
growth in Q1, and we think that the year is on track, all being well and not
seeing another return to those lockdown conditions, growth has come
through. Now, some of that growth has been led by manufacturing. You can
see here the statistics in the latest showing purchasing managers index saw
very strong, at 61 reading.
And now the service sector [inaudible] has come through as well.
Unemployment, another key measure of success, right? Still by historical
standards, not too good, 5.8%, there’s still work to do, of course. But think
about where we were last year, you know, our postwar high, post-World War II
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high of 14.7% unemployment, we’ve certainly improved a lot since then. And
again, the US leading the way as the world generally is sort of catching up a
few months behind. Now, how we managed to do that was largely thanks to
the intervention by monetary policy, and more interestingly, perhaps, seeing
fiscal policy coming as well, uniquely this time around. So, I think we’ve seen,
everyone’s probably familiar with the fed cutting the fed funds rate, and yet is
still purchasing over $120 billion target of treasury and mortgage-backed
securities each month, so giving the low rate support and the quantitative
easing balance sheet support of the federal reserve.
At the same time, we’re seeing the fed talk about their willingness to let the
economy run hotter than perhaps otherwise they might have been in the past,
and seeing the 2% inflation rate now as an average target rather than an upper
limit, and at the same time also, particularly with Secretary Yellen’s
appointment, allowing room and prompting the room for fiscal policy, for
spending by government to come in and also add to demand and not just be
reliant on monetary policy, which as many of you know, I’m sure, with the rates
being so low, is almost running out of room to aid that type of support. So,
fiscal policy in the form of either, you know, tax benefits, tax cuts, or more
interestingly, perhaps, spending, in infrastructure spending as well as the
unemployment spending we’ve seen in the past year. Now, of course I know
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inflation has been the key topic of the day, it seems, and this notion of will it
be transitory. So, we’ve seen a lot of impulse to inflation from oil prices now,
we’ve seen a huge swing there, if you remember again about a year ago, oil
prices went negative in crude oil for a few weeks, and now they’re really
strongly in an uptrend, West Texas Intermediate over $70 a barrel. And in
other areas, too, we’ve seen supply chain constraints and even a tightness in
the labor market despite the still fairly high unemployment rate. We saw in Q1
that reflected in the treasury market with ten-year yield spiking to 1.75%, but
interestingly since then, we’ve been on a slow decline, and now we’re at 1.5%,
and thereabouts.
And so, we’ll see in the next few months, I think, it’ll be very interesting, how
this plays out, whether yields will respond to ever-stronger inflation, or will
things actually -- is the bond market giving us a hint that the economy might
actually be calming down, and in fact, we may see that inflation being
transitory after all, so lot of open questions there still, I have to say, but you
know, again, it’s very interesting to think about how the bond market reflects
these economic realities as they emerge. So, next slide, Danielle, thank you.
So, if we had to distill it down, you know, there’s so many things to keep an
eye on, of course, right, and as this data comes out, but some of the key
metrics we look at are on this slide, and we take this timeframe here to
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compare what we’ve just been through in the last year with where we were
after the last recession of ’08, ’09, and starting at the top, the green line is the
unemployment rate, and you can see how what an incredible and unfortunate
spike, of course, for those affected, last year was. We really peaked, as I said,
about almost 15% unemployment, that’s using the left axis. However, you can
see it’s also improved a lot more sharply than last time around, with the
recession of ’08, so hopefully we can keep that downward trajectory as people
return to jobs. The similar line there to look at is the dark green line, that’s the
private payrolls. So again, it’s incredible to think of the volatility that
happened a year ago, where industry was basically shut down overnight, and
that is something more severe than we’ve ever seen, and yet as authorities
stepped in with support, we saw, you know, companies rehire very quickly in
certain sectors. Other sectors still have hiring to go, but you can see how the
payroll number did bounce back pretty rapidly. Again, though, we got to keep
an eye on the light-green line. And then, looking at other metrics to see
whether the unemployment rate can continue improving and what constraints
might be, the dark blue line shows the inflation rate, CPI, see how that has
sparked up at a lot higher rate than it was in ’09 when we came out of that
recession. In fact, the CPI didn’t actually recover, you can see, until 2011, and
even then, very stable for the rest of the expansion at around that 2% level.
So, this’ll be interesting, we’ve now, you know, kind of broken some new
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ground here with the 5% sprint we saw last month. And finally, the two-year
treasury yield, that is also very sensitive to these inflation metrics. So -- thank
you, Danielle, sorry. So, the next slide, if you will. So now as we look to the
bond market, remember that there’s not just one rate number to look at.
There’s multiple rates. And so we see here the key ones to familiarize yourself
with, the light blue being the fed funds rate, that’s the rate that the federal
reserve guides us to, the light green being that two-year treasury again, and
the 10-year yield being the long-term 10-year yield, and I think the key
takeaway here is through the last four recessions and rate hiking cycles, we see
how there’s been this long-term trend with the longer-term yields, downward
trend, and yet the shorter-term interest rates have oscillated, being cut during
the recessionary times, and slowly picking back up again in yield terms when
the recovery takes hold. So, what’s very interesting right now is if you look to
the far right of the chart is that we did see this spike up in the longer-term
market rates, but notice how it’s still within the trend line down. At the same
time, we’ve really not yet seen a meaningful response in the two-year
treasuries, so, you know, look for the market there I think to respond to
whether it believes inflation is more enduring, and whether it believes that the
recovery is also more enduring. Next slide, Danielle, please. And so finally, as
I want to just wrap up this little section here, you know, a lot of data on this
slide, so forgive us, but we wanted to compare how different asset classes
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have done, particularly with bonds in mind, in quantity easing cycles and fed
rate hike cycles. So, of course, where we are now is in the left-hand side of the
page still in the easing cycle of QE4. We’ve so nicknamed it that just for ease
of comparison, but it’s that far-right column on the left, and you can see the
fed actually started cutting rates and easing economic conditions even before
COVID. We’ve marked that to remember the fed cut rates first actually in the
fall of ’19. So, we had quite a long period now that the fed had been easy with
their rates and the conditions, and you can see how treasury bonds have
responded fairly comfortably. But notice to the right how even in hiking
cycles, the treasury bonds have actually done fairly well, and Danielle will
expand on that in a few minutes, but what we see there sometimes in easing
cycles is the flight to safety, and people can move to treasuries. At the same
time, in hiking cycles, too, you know, it’s often sometimes the case that the
treasury market moves in anticipation of the fed moving to tighten and actually
push yields out as much as they can, and in fact what might happen
sometimes is longer rates might actually decline as the fed increases short-
term rates, so in fact, historical precedent here, the future might be different,
but we’ve seen an ability to have a reasonable, although somewhat modest
returns from treasuries, throughout these last decade plus. Looking down to
some of the more eye-popping numbers you can see here, large cap stocks,
here we’ve seen an amazing performance there, of course, both in easing
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cycles, that’s more natural, but again, even in the hiking cycles. And then
finally, looking at high-yield bonds, and Danielle will cover this a bit more, too,
that we see some of the more risky areas of the bond market naturally
performing well on the left when the federal reserve have been easing,
struggling a little bit more in the hiking cycle, but again, still having the
potential to, you know, be an area of stability, and even with hikes, can still
produce return through their high returns. So, a mixed picture, I think, and
don’t make it so black and white, I think is the message from this slide. So, I’ll
send it out to Danielle to take us through this next session on the three
dimensions of bond investing.
DANIELLE FOX: Great, thanks so much, Richard. And just as we take a look at the
three dimensions we’ll be covering, we’ll first talk a little bit about the yield
curve and what that means, and what the market might be trying to tell us. All
bonds are not created equal, so we’ll talk about the risk-return tradeoff, and
then within a type of bonds, how there’s no free lunch, and that yields can
range around a benchmark. So, let’s dive into it. So, there’s three types of