Hello and welcome. My name is Mindy Gudmundson, Institutional Portfolio Manager with the Blue Bay US fixed income team with RBC Global Asset Management. I'd like to thank you for joining us today for US fixed income perspectives inside the markets. We hope you find today's discussion to be insightful, as I interview our head of U.S. fixed income, who will share his thoughts on the current state of fixed income market, including how our actively managed portfolios are navigating today's volatile market, where we are finding relative value and much more.

Today, I'm pleased to be joined by Andrzej Skiba, head of US fixed income, and Senior Portfolio Manager with RBC. Andrzej, thanks so much for joining me today.

It's a pleasure to spend this time with you, Mindy, and with the listeners. Okay, so it goes without saying that the bond markets thus far in 2025 have been rather turbulent, in large part induced by the tariff announcements.  April was especially volatile. And while markets have stabilized a bit since then, there's still a great deal of macro and policy uncertainty.

In an environment like we've seen in recent months. How does the team stress test portfolios for multiple rate and credit paths?

There are a number of ways that we do that. The first one, and probably the most important one, is the fact that we have a culture within the Blue Bay fixed income team here at RBC Global Asset Management of, having a dialog or with each other.  So, everyone within the team is welcome to share opinions, as major events in the macro or credit space are happening. We're very much inviting, different perspectives and, allow each other to challenge notions that are represented within our portfolio. So, I think that is the first and key point to stress that, the higher the uncertainty, the more volatility we see, the more we engage with each other within the team.  And we have seen multiple times when we have adjusted our portfolio positioning as a result of those conversations, between analyst portfolio managers and other team members.

Here at RBC, the other thing worth mentioning is the cooperation we have with our risk teams. So, our risk teams are running, a lot of stress test analysis, for example. Looking at portfolios and, assessing what will be an impact of a massive spike, spike in interest rates or, a big increase in the oil price to our portfolios. When they're running their multivariate models, that give specific outputs indicating, positive or negative performance for our strategies as a result of these stress tests. It's not really about getting the exact number right, but it's more about, illuminating whether we have a blind spot as a team, whether as portfolio managers, for example, we expect a positive reaction for our portfolios, within a specific stress test. And, the risk team's model is indicating a negative outcome. And that is a call to arms for everyone to try to reconcile. Where could we have a blind spot, within, our portfolios. So, I think that's a really important, additional, tool we have at our disposal when, stressing portfolios and challenging, whether our base case assumptions are correct, across the strategies that we manage.

And when we come to these conclusions, when we come to a point where a team, wants to adjust, our positioning, we have a lot of tools at our disposal to do that in a nimble way. But also, fast. And in these volatile markets, having an ability to adjust portfolios fast, makes a lot of a difference.

So, we can use a number of tools for example, across the derivative space, we're not using particularly complex derivatives, but still across our strategies, whether we're talking about interest rate derivatives or, credit derivatives, we can change the risk profile of our portfolio within a matter of minutes. Those markets are very liquid. And given the size of our strategies, you can make a large difference to the risk profile of your portfolios, in a very short space of time.

The other, aspect that's been very helpful to us, in recent quarters has been the increase in the volumes, within the portfolio trade market by portfolio trading. What I mean is that if we choose to, reduce exposure or increase exposure, to credit across our strategies, that often involves transacting in, 5,150 line items to effect such repositioning.

In the past, you used to do these transactions one by one. These days, however, for about the last two years, we've seen an increase in so-called portfolio trading where we submit through electronic means a large portfolio of bonds, either purchases, sales or both sides, of the trade, to, investment banks and, our market partners are competing for that business that ensures, good levels of execution. But not just that. Also, change in the profile of our portfolios. In the past, if you wanted to transact across hundreds of line items and, trades that often exceed $1 billion, that could take days, if not weeks, for some strategies now, you can affect a major portfolio change in half an hour, because that is how long it normally takes to, complete these portfolio traits.

So, if you're a manager that is already looking after hundreds and hundreds of billions within a particular strategy, those portfolio trades will not make a huge difference. However, given that we sized our strategies in such a way to allow us to be nimble and change positions in a forceful way, you can imagine that a 500 million or 1 billion portfolio trade can lead to a very quick, meaningful shift in risk within, our portfolios.  So, we've seen that, alongside derivatives as very useful tools and meaningfully adjusting, the level of risk we're running within a portfolios. And shifting between overweight and underweight stands, within the markets.

You mentioned the word nimble a couple of times. And I think that's that's interesting. And you expanded a bit on portfolio trading, but can you talk a little bit about other ways you might have changed management of the portfolios in, a time where these, you know, Trump tariffs or other announcements can really swing the markets very quickly?

Absolutely. In recent months, since the arrival of the Trump administration, one of the comments that were here, most often from our clients and peers within the market is that the levels of uncertainty, have gone, so high that people are really struggling to deal with that on a daily basis. But as far as we're concerned, that is not, enough to then sit back, watch the markets and do nothing about your portfolios.

High levels of uncertainty, in our opinion, also, bring a ton of opportunities for investors to capitalize on increase dislocation and dispersion within our asset class. And we've seen in recent weeks, especially since tariff announcements in early April of this year, that market tends to adopt a herd mentality when it comes to headlines, hitting the tapes.

So, a couple of weeks ago, a clear consensus within the market was anticipating a recession on your doorstep. That view is changing, as we speak right now. But, back at the time, it was a pretty universal view that a recession is inevitable and imminent, within the US. And as far as we're concerned, there were two learnings from the past Trump administration that we wanted to apply this time around, something that has served us well and we hope will continue to serve us well over the years to come.

The first one is that rather than focusing on the end state, of the policy debate, we should actually separate, that from the marginal changes that we're seeing on the policy front by that, I can give you an example, if you, thinking about the level of tariffs, if I told you six months ago that the market will have to contend with average 10 or 15% tariffs, as a result of a trade escalation, that would be seen as a very negative, development for market participants.

However, if I told you first that, that level will be 50% and then, in a number of weeks, I switch that expectation down to 15%. Then the market first, having had that initial shock of dealing with the more egregious headline, actually will find quite a bit of comfort, about hearing about the 15% outcome. So as far as we're concerned, it's really important to look at marginal changes on the policy front, whether that's to do with trade policy, whether that's to do with what's happening in Congress regarding the budget, or any other, developments within macro and credit and, that is a very useful tool, in our opinion, to, avoid being anchored in one particular view and failing to take advantage of evolving market conditions as the probabilities for different outcomes evolve and uncertainty moves up and down, something that we can respond to. The other thing, and it's easier said than done, is, suggesting to our colleagues within the team to separate emotions, from facts, you know, clearly, we live in a pretty polarized, political sphere.

And, emotions are running quite high when it comes to this administration with both sides of the argument, pushing to, you know, pushing, very, emotionally charged arguments, within, this debate. And our job is to try to avoid being sucked into those emotional arguments and actually focus on what is the real, tangible impact of each policy, each announcement as they roll out, for the economy, for the markets and our portfolios.

And, you know, having that separation in between the emotional response and one that is focused on what our clients hired us to do, which is steer their portfolios through this volatility. If something, of a useful reminder across the team and again, something that helped us to, take advantage of dislocations as they arose in recent weeks.

A lot of sense, and I know it can be difficult to separate the, the emotional from, the reality. But, when you look at, how that has, occurred in the last couple of months, can you talk a little bit about how your active positioning has allowed you to take advantage of some of those dislocations in the market?

Yes. I can give you a couple of examples. I mentioned, in an answer to one of your previous questions, how market probability of a US recession has skyrocketed, following the initial, tariff announcements. And what we have seen, was that a lot of credits that you can, deemed to be growth sensitive have aggressively sold off as a result of these announcements and that increased recession probability, something that is perfectly logical.

However, often what we find is that babies thrown out with the bathwater. So you have specific issuers that might be less impacted by tariffs, that might have, credit profiles that actually stronger than their peers, that have been equally punished, as those issuers that actually deserve to see widening and spreads and decline in prices of their bonds.

And, having an ability to separate between those issuers that deservedly, saw their valuations hit and those that, that follow to where we felt that was inappropriate and actually, it presents us with an opportunity to buy bonds at much more attractive valuations for issuers that we see as resilient, or something that we affected, in our portfolios, particularly across our high yield strategies.

Another example was within the energy space where, we have seen face to do with economic growth coupled with more aggressive action from OPEC. In terms of disciplining, some of OPEC plus members, who are producing above the, agreed quotas by, OPEC, increasing production across the board, putting pressure on spot prices and trying to enforce discipline over the months to come.

As you can imagine, that has led to an aggressive selloff within the energy sector. But again, we have noticed that companies have been much more focused compared to energy crisis of the past on cash flow generation, on keeping leverage low and being much better prepared for an environment where prices decline. And in this environment, again, we have seen indiscriminate price selling, across the sector where some of the issuers where leverage, is less than two times their annual profits, which is quite low, by historical standards, have seen spreads widen 100 to 203 hundred basis points in a space of, few weeks.

We came to the conclusion that that is, way too aggressive for punishment for these companies that even at current prices, are generating positive cash flow and added to a number of, US producers, within the space, taking advantage of the dislocation. And again, as the market, has come in more recent times to a conclusion that maybe recession risk is not, a foregone conclusion, we have seen better performance, across this space.

So whether we're looking at the credit space or we're looking at securitized space, volatility always brings an increase in dispersion and more dislocations, materializing. And that for an active manager, for our investment teams is a call to arms, to take advantage of that and help generate alpha for our clients.

I know it can be difficult to to generalize because we manage a variety of portfolios across, the fixed income platform. But could you discuss a little bit about how portfolios are currently tilted across, credit duration and sectors? As we head into the next few months?

Absolutely. So the way we're looking at the markets right now, implies that this is a time to be under constructive side in terms of our positioning. We do believe that the levels of uncertainty are diminishing. We're not out of the woods. Things can still break. And can go wrong, and we need to be prepared for that. And I could mention in a second some scenarios that would warrant aggressive, reduction in risk across our strategies. But it's, right now across our portfolios were reflecting, marginal improvements in, the economic outlook and diminishing uncertainty.

And t on the policy front, this means that, from a credit perspective, when we started the year more with a neutral positioning across a lot of our strategies when we wanted to be careful, and anticipate the volatility that could be associated with tariff announcements. Now that the valuations have reset to more attractive levels and we see more pockets of value across our investment universe, we want to move to an overweight, position within our asset class.

Looking at our historical exposure ranges, I would not, suggest that we're moving to maximum overweight stance, given that uncertainty is still elevated, but somewhere between that maximum and neutral level, somewhere around the midpoint of that range is where we steering portfolios when it comes to credit risk. Right now, when it comes to interest rate risk, we are not running actually a lot of directional risk right now.

We feel much more comfortable expressing her views across our strategies. For quite some time, we have been highlighting to our clients, the, appeal of curve steepening trades within, the US, where you go long risk, front end of the curve. So, for example, two year treasuries and you are underweight at 30 a point, on the curve.

And we do see a potential for curves, curves steepening further from here. In a variety of scenarios, if growth fears, pick up again, then we would expect the market to start pricing in, more rate cuts on the horizon. And that would benefit the front end of the curve. So the two year, treasuries, would see yields come down at the same time if the market is particularly concerned about the deficit dynamic and is worried about the pressure on longer maturity Treasury bonds as the market demands more compensation to absorb very heavy issuance, now the deficits are elevated.

Then the 30-year point would underperform in that scenario. So in either of those cases, we see strong merit for curve steepening traits, across our strategies. That's again something we've highlighted before and something we're happy to continue, sticking with as the environment evolves over, the coming months, I mentioned, some scenarios where we would need to adjust these kind of base case assumptions.

And I would mention three, the first one would be on the trade front. If we have seen a dramatic breakdown of negotiation, between the US and key trade partners, we've recently made progress in conversations, for example, with China. But, there's still a risk that as we traverse through the summer, that, some of those agreements break down or, do not reach a successful conclusion.

So, if we see any meaningful breakdown in the talks, on that front and escalation, renewed escalation, when it comes to tariffs, that clearly would be seen as a negative, for the markets and definitely something would want to reflect in our portfolios. The other element is to do with the outlook for the budget.

So, we strongly believe that it's important for this administration and Congress, to be able to push through the budget, through the reconciliation process, over the course of, the summer, if it takes much longer, if there is a stalemate and it takes much longer for reconciliation to be, successful and for the budget to be passed that, will lead to a prolonged period of uncertainty and something that will that we believe, impact not just consumers, but also businesses where it will be difficult to make investment decisions whether to do it CapEx or M&A, where you don't even know what your, taxation outlook is.

And, all the aspects of budget that are important from individual sector, or issuer, perspective. So clarity on the budget front relatively soon is important. And if that takes months and months, to to become clear, that is another negative that would negatively impact growth. And risk asset valuations in our opinion. And the last aspect is to do with the labor market.

So for us labor market has been so resilient compared to many other geographies. And that was one of the key reasons why we've been talking about us. Exceptionalism theme. For quite some time now, US companies have decided after Covid to keep employment levels high and avoid mass layoffs. So now, even while facing an economic slowdown and we do not, I would not challenge that thesis.

We absolutely see a slowdown ahead. It will be interesting to see whether companies go back to traditional ways and, increase aggressively the level of layoffs that has not happened so far, that has been supportive for US growth and is, helping to, put a cap on how much weakness we can see, within the economy, if this were to change, if we were to see a meaningful pickup in aggregate lay of data in the US, that could be another reason to turn much more cautious and see, a heightened risk of recession on the horizon.

But in absence of any of those three factors materializing, we would expect, slower but positive growth in the US over the course of this year. And markets are gradually coming to terms, coming to peace with, the new architecture, when it comes to trade and also, the budget, outlook. So, moderate, overweight and credit, roughly neutral positioning on the right front, but with a bias towards curve trades, especially the steepness.

And assuming that recession is not our base case scenario. But to answer your last point of your question, given that uncertainties elevated, still having a preference for sectors that are more defensive, less growth sensitive, and can perform well for the issues that can perform well, irrespective of the underlying, economic environment. We think the markets will continue, to seek those higher quality defensive assets as we traverse through this year.

I think I could ask you questions all day, Andre, but unfortunately, we're coming up on time. Thank you so much for sharing your insights today. I think it was, really interesting discussion. And thank you to our audience for joining us today. Have a great day.