Hello everyone, and welcome back to the Institutional Beat podcast, where we discuss interesting and relevant topics for institutional investors. My name is Jeff Roberts. I'm an institutional portfolio manager on the PH&N Institutional team, and I'm also your host for today's episode. Now, for all our listeners, I think our topic today really needs no introduction. It's been almost impossible to ignore the news that we've seen over the past month, since Donald Trump announced his sweeping tariffs on nearly all global trading partners.

And to say the days that followed that announcement were tumultuous would be quite an understatement. We saw equity markets tumble, especially in the U.S. In bond markets, we saw treasuries whipsaw with the ten-year yield seeing its highest weekly rise in almost a quarter of a century. And we saw plenty of volatility in other assets as well, albeit not quite as dramatic as equities and treasuries.

But here we are, barely a month later and many financial assets have recovered back to levels near to where this all began. Now, I think it's probably left a lot of us scratching our heads. So here to try to make sense of all of this is our guest today, Mark Dowding. Mark is the managing director and chief investment officer of the BlueBay Fixed Income team within RBC Global Asset Management (UK) Limited. For those who aren't familiar, Mark’s team, BlueBay, are RBC Global Asset Management's global fixed income and credit specialists, and they oversee about one quarter of all of our assets under management here at RBC GAM.

And Mark has built quite a reputation in financial circles for his observations into the global economy and markets, all while insightfully tying it back to global fixed income, which is where he is ultimately focused in his day to day. And that's exactly what I'm asking you to do today, Mark: to try to help us understand what's going on out there and to ultimately help us understand what it means for our fixed income portfolio specifically.

So welcome, Mark. Thanks very much for joining us today.

Well, great to be on, Jeff. Thanks for the invitation. 

So as I've just alluded to, it's been just over a month since Donald Trump's Liberation Day announcement in Washington, DC. And, Mark, not so coincidentally, you have just returned from a visit to that very same city. So, following your trip out to Washington, what are your thoughts on the global economy? And maybe looking back, did you learn anything specific while you were there that's shaping your outlook for the rest of the year?

Yeah. Well, I guess in answer to that, I think the summary would be to say that I feel that we're in a pretty bumpy period in terms of the global economy, and in terms of what's happening in the U.S. And a lot of that feeds back, of course, to what we're seeing in terms of the U.S. policy agenda.

I think, one of the things are that, said sort of more generally, are that following what seemed to be a bit of a Trump pivot in the middle of April – where obviously we saw a pause on the additional tariffs for 90 days, and then we saw some comments around replacing the Fed chair, which, obviously we're rode back upon relatively quickly – there has been sort of this question of whether this pivot means the worst is now behind us. And I guess in part, this explains some of the market price action and the fact that the assets have recovered. And so, I travelled to Washington last week, wanting to sort of test that thesis that was embedded in markets.

And I think I would sort of come back and actually reflect the fact that I feel that from what I'm seeing, from what I'm hearing, I kind of wonder whether markets have moved back into more of a complacent position. Certainly, I get a sense that what we've seen out of Trump, during the course of the past month, was more of a temporary retreat, certainly not a surrender in the face of market pressure.

And if anything, the fact that markets have recovered since, in some respects is actually emboldening the administration to continue to move forward with some of their plans. Where you do really get a clear sense that there's a deep-seated idea to effect change in terms of the U.S. economy in ways that perhaps many financial market participants haven't fully grasped to this particular point.

So, I think that this bumpy period that lays ahead of us could well see ongoing volatility in global financial asset prices in the weeks and months that lay ahead of us.

Ok, great. And if we're trying to tie this back to fixed income markets or maybe narrowing in, you know, on the bond market, could you take us back over the past month and summarize how global fixed income markets reacted to these Liberation Day tariff announcements and the subsequent volatility, and maybe share what you learned from that period?

Yeah, so I think if you cast your mind back to early April, I think initially, a number of market participants were actually shocked at the fact that the administration was carrying through on its threat to deliver tariffs. But moreover, the quantum of those tariffs and the way in which this was communicated with very elevated tariff rates on many important trading partners, really quickly ignited a real concern that this would create a very major economic dislocation, and potentially, see the U.S. economy head towards a recession.

Now, of course, earlier in the year, the U.S. economy has had a reasonable amount of economic momentum. And you might have thought perhaps that if Donald Trump, if all he’d have done the day after Inauguration Day, if he’d have spent all of his time in Mar-a-Lago playing golf, I'd like to think the economy was probably on track to grow sort of two and a half this year.

But, of course, we are seeing this sort of agenda of change. And these concerns that tariffs would lead to very major disruption prompted recession fears, which initially saw bond yields move materially lower on the idea that, with stock markets correcting effectively, this is the way correlations will normally work.

But that particular market move then quickly gave way to more of a concern that actually what we are really seeing here was more of a stagflationary threat, because as much as, yes, tariffs are impacting growth, they're also a factor that's going to be pushing up prices. And from that point of view, this idea of a negative supply shock – a shock that simultaneously pushes up inflation and pushes down growth – actually was something which ended up causing quite a sell-off in the Treasury market, and so having initially fallen, Treasury yields gave up early gains and we saw quite a steepening of the yield curve as longer-dated securities came under pressure.

And as the sell off gained momentum, it sort of gave way to a bit of a moment where we were seeing a bit of a “sell the U.S.” narrative kicking in to financial markets. Effectively, we saw the policy credibility of the U.S. administration called into question, and I think it actually was this behaviour of the bond market that actually saw the administration relent and announce a pause.

I think in this regard, policymakers were probably more sensitive to what was happening in the bond market than the equity market, per se. But in many respects, it was this market price action that actually prompted a bit of a pivot. But, of course, in the days since, markets have recovered, credit spreads, which push wider have sort of retraced some of their earlier weakness, yields have stabilized. And as mentioned, I feel that there's maybe a narrative that exists within DC at the moment that, look, financial markets will always do their thing, there'll always be periods of volatility, but the fact that you've actually come back to a level now, which was actually sort of no different to where we were at the end of March, perhaps it means that the administration can go back on the front foot.

So there would be a concern here, about what may lay directly ahead of us. And it'll be interesting to see if that actually prompts renewed concern in the bond market once more. I think the one other thing to cover here in all of this is, what's happening at the Fed, right? Let's not forget what's happening in terms of monetary policy.

And we're making this recording directly ahead of an FOMC meeting, which I can confidently predict will amount to next to nothing when Jay Powell releases the statement later today (May 7, 2025), but, on monetary policy, we would be voicing the thought that the Fed is in a bit of a difficult situation.

It is feeling a pressure from the White House. But the truth of the matter is, it's very difficult for the Fed to be looking at cutting interest rates at a time when inflation is moving the wrong way against it. Moreover, just in the very short term, and this is an interesting thing I sort of picked up from DC, in the short term, it seems that businesses are basically telling their customers that they want to carry on with business as usual.

They're trying to pacify and calm folks down. They're not actually rushing through with price rises in the wake of tariff adjustments just yet, in the hope that they can run down their inventories. And by the time they need to restock, that  the tariff news may be better than it is today. But, inasmuch that is that means that the economic news isn't that bad at the moment, and financial markets haven't been that bad at the moment, that may actually be suggesting to some within the administration that they don't need to worry about the tariff hit that much. And therein there could be more of a risk of more of an economic dislocation. I think in about a month or six weeks’ time from now.

So these are some of the factors that we're dealing with in terms of the Treasury market. I guess I can go on to cover the price action in credit markets in a few moments. But back to you, Jeff.

So this step back on tariffs seems maybe more temporary to you than a sign of things to come. And it sounds like based on your visit to DC, that you're even more convinced now that the administration will forge ahead once again on this, which might rattle markets a little bit. And then if we're tying this back to fixed income markets specifically, could you take us back over the past month and summarize how global bond markets reacted to these Liberation Day tariff announcements, and subsequently, the volatility that we saw on the back of that and maybe share just what you have learned specifically from that period of time.

Yeah. So look, I think that in terms of treasuries, I think if interest rates are going sideways, bond yields kind of go sideways. There is a risk that we end up with a yield curve steepening and longer-dated assets actually moving to slightly higher yields over time. So, the backdrop for treasuries may look okay, but I don't think it looks particularly exciting. When it comes to credit markets, here I'd say that the outlook in terms of the U.S. market in terms of credit is that ultimately credit does okay if you can avoid a recession. And now my assessment would be that because we've come from a very strong starting point in the economy where growth would have been two and a half or three, when there hasn't been a big build-up of excessive leverage in the economy or a big bubble in the housing market, when you don't see overblown balance sheet leverage on the part of consumers or businesses, the fact that you had a fairly healthy condition to begin with, means that in my mind that, although you've got this negative economic shock, you're likely to see the economy grow between, say, half a percent and 1% this year. Absent anything additional occurring that makes the outlook even worse. And if you're in that sort of world where it's low growth but not an outright recession, I think you're in a backdrop where it may be sort of a tougher environment for equity markets, because earnings may be more challenged.

But in terms of credit markets, although there may be some issuers in certain sectors that start seeing more stress, and there may be some credit impairment into the highly levered names, broadly speaking, in terms of credit, effectively credit spreads hang in okay. And credit probably does better than equities from that point of view. And if I was to highlight more of a concerning credit, it would actually be where the leverage is the highest.

And this of course would be in areas like, private markets and direct lending more than it would be even in high yield bonds. So, I think that credit can do okay in the here and now for the time being. But within credit markets, obviously different sectors will be doing different things, different issues will be doing different things.

I think it's a landscape of volatility, which, certainly offers opportunity for active asset managers. And also, I would say we're looking at a market backdrop where global performance may be quite divergent to what we see in terms of the U.S. credit market. We're dealing with very different economic cycles overseas. And so, from that perspective, I think you may well see sort of clearer opportunities away from the U.S. market. For example, in European banks we like the coco debt, we think European banks are in decent shape.

Europe is easing fiscal policy. And that's going to help growth be cushioned quite a lot. The U.S. doesn't have room to ease its fiscal policy. And so European banks certainly look better than U.S. regional banks, for example, in my mind. And I say this to highlight the fact that there will be particular sectors in global credit markets that you can actually point to and say that's cheap, there's value there. These are the assets you want to be buying and owning and looking to add on any weakness, whereas other sectors may be at the areas that you want to be more inclined to avoid.

Great, great. What you said there, I think, is very important that if we see a soft growth environment, but maybe not an outright recession, that credit markets have the potential to really perform well relative to other asset classes. And I think you've touched on another really important point there. The advantage of having a global scope for your investment universe.

It just allows you to move to different regions instead of being tied into one place. And in a world where things might look more attractive versus other regions and it sounds like to you in your mind, moving beyond U.S. borders is a place where you're looking for a lot of value within your portfolios. And so next I'd like to come back just to touch on that a little bit and unpack it a bit more, just to think about what types of strategies at BlueBay you might be more enthusiastic about.

But before we get there, I just want to think about the other risks that are on your mind when we're thinking about the rest of the year. I know it's hard to really look past this tariff war since it's gathering so much of the news. But in your mind, Mark, are there other significant potential risks to the economy and to markets that that you and your team are really focused on right now?

Well, I think the other big issue, frankly, in the U.S., and something we're likely to hear a lot more about in DC is around the budget, and around the state of the U.S. deficit. I think that this is clearly an area of concern, bearing in mind that normally, at this point of an economic cycle, you'd expect the U.S. economy to be running a budget surplus, right.

And rather than seeing that, we're seeing a deficit of 6.5% of GDP. And if you go into a recession, I'm not saying we're going into a recession, but typically in a recession, that ratio would worsen by four percentage points. And so, you can see that there's even a risk that we're heading towards a double-digit deficit in the U.S., which I think would be truly concerning.

So, these fears about the budget, around debt sustainability, I think, is something that will certainly be attracting bond market attention, and, for all of the noise around Elon Musk and DOGE, it seems like, the DOGE efforts are more likely to add to the deficit than cut the deficit. Ironically, he fired a load of tax collectors from the IRS, and so it seems like tax collection is suffering as a result. And just shows you how some of what has been handled in terms the administration has been pretty ham fisted in terms of execution. So, of course, there are worries there. There are going to be worries relating to geopolitics. I think that we're just living in very turbulent times, aren’t we, but I could go on and on and almost make it feel like the sky is falling.

But I don't want to depress folks too much, but I would say that in the middle of all of this, don't lose sight of the fact that, in volatility that there's also going to be opportunity.

Absolutely. And as an active manager, there seems to be just a little bit more opportunity to add value when times are a little bit volatile. One further question on risks, Mark, it's a question that we've been hearing from a lot of our clients, and it's specifically what's been going on with the Treasury Fed chair Jay Powell, and specifically Donald Trump and the U.S. administration's efforts to, let's say, influence or place pressure on the Fed's interest rate decisions.

Do you do you maybe have some observations and some views specifically on what's going on there?

So, I think it's really unlikely that, Trump will fire Powell. In a way, it's better to keep him, and routinely abuse him and blame him for all the problems that we now face than it is to actually remove him. Moreover, I don't think U.S. markets would like it if you end up messing with Powell in that way.

And so that said, I think the focus will go towards, who will be the next Fed chair, here for the time being. I think Kevin Warsh would be the front runner that you'd be looking at. But certainly, when we get back after the recess in September, expect to hear more noise around the next Fed chair coming to the fore. But otherwise for Powell himself, everything that I get from the Fed is that Powell is now sort of more focused on legacy.

He doesn't want to be the modern day Arthur Burns, the guy who lost control of inflation twice on his watch. So, although we're in this situation where growth is slowing down, I think he'll be keen to ensure that we don't see inflation run away. He'll also want to make sure that the Fed is able to maintain and demonstrate its independence.

And in that way, Trump trying to call for lower interest rates actually makes it more difficult for the Fed to cut. Not that I think they want to cut at the moment, but, in a way, you can kind of see here that the actions, the words of Trump can end up being pretty counterproductive.

Yeah, I guess it's always great to have a scapegoat to place some blame on. And as an ice hockey fan here in Canada, I won't say who I support, but whether it's ownership, management, or underperforming players, you need that scapegoat.

And it looks like the U.S. administration might have one in Jay Powell for the next several months anyways. And so, if I can tie it back to the strategies that you and your team manage, you've alluded to the fact that that active management is a great space or a great lever for you in markets like this.

If we're just thinking about your outlook, as you mentioned, it might be a volatile, uncertain period of time here. Are there any particular strategy types at BlueBay that you think are particularly well-suited for this environment that you think we're going to go through?

Well, I think the first observation I'd offer is, I feel that in many quarters of the world, that investors I speak to have ended up over-allocating to dollar assets and U.S. securities, in a way, if you look at the U.S. share of global benchmarks, obviously, it’s risen and risen over the course of recent years on the back of U.S. outperformance.

But, in many respects, we've dealt with a narrative that we refer to as TINA – There Is No Alternative – has almost been the way in which people have spoken in terms of asset allocation, when it's come to buying U.S. stocks, buying the Mag Seven, et al. And so, I think the first thing that I would observe as a more general point is I think that now is a good time to be thinking about sort of asset allocation on a more global basis, not in a purely U.S.-centric basis.

I know a lot of this call has been about the U.S., we can't help ourselves at the time being, but a lot of the great things in the world, today, I think, sit outside the United States. Otherwise speaking to fixed income strategies, which I think are interesting and relevant in here, I do think that our multi-asset credit strategy is an interesting strategy to reflect on, this is investing in our sort of best ideas across different parts of the credit market globally.

And so, as an actively managed strategy, clearly we are in a position to steer those investments towards the parts of the credit market that we think offer the best risk-adjusted returns. So that's a space that I would offer as an area of interest. Otherwise, I think the other thing that I've been sort of saying to investors is looking for strategies that offer a degree of non-correlation; hedge fund-like strategies that are not so contingent on underlying market beater returns.

I think sometimes as investors, we think about owning bonds and we think about owning equities. And obviously that bond-equity asset allocation works when there is an inverse correlation, which is what you see in a world which is governed just by shocks to economic growth. But when you have shocks to inflation, you can have periods where bonds and equities go down together.

And so therefore you're kind of needing to look for more non-correlated outcomes. And here, having strategies that can invest more on an absolute return basis I think are appealing. I'd be highlighting a European event-driven credit strategy, partly because this is a strategy that's investing in sort of the European mid-market opportunities in companies, which we think are good companies.

But where some of these entities have carried too much debt on their balance sheet, partly because of COVID and what have you, have needed to restructure their debt. And, as a result, we've seen a period of dislocation in markets, and this is a particular space where – because Europe has been through a bit of a struggling period for growth for a couple of years – there's actually quite an abundance of opportunities in the European mid-market in this particular space.

And I think it's a particularly interesting part the market to be investing in, and one that should be able to yield some really interesting ideas and some really attractive, potential return opportunities. So these would be two areas that I particularly like, when I think about our space, but look, it's an uncertain world, these are uncertain times. But, against that backdrop, I think being active and being nimble, being open minded and not too dogmatic, all of these are things that we need to keep in mind as we try and plot our course through these troubled waters.

Perfect, perfect. So, yeah, maybe either be in a dynamic and go-anywhere type of strategy, or on the other hand, be in something that's a little bit more focused, but more on the uncorrelated side – that makes a lot of sense. And so thank you very much for sharing your expertise with us and walking us through not only your views on the economy and on fixed income in particular, but also kind of sharing those insights into the strategy types that that you think on your shelf are the most interesting to you at this time.

So, Mark, it's always a pleasure. And we really, really appreciate your time. And also thank you to all of our listeners out there as well. We trust that you found this conversation useful and hope that you can join us again next time.

Thanks, bye.