Howard Moore: 

Hello everyone and welcome. Glad you all could join us. I'm Howard Moore, associate editor of custom content here at Pensions and Investments. Our discussion today is Fixed Income Strategy: Broadening the Menu. Sharing their insights with us, our panel includes:

• Owen Murfin, Investment Officer and Institutional Fixed Income Portfolio Manager at MFS Investment Management.
• Jeff Muller, Co-Head of Fixed Income and Portfolio Manager at Morgan Stanley Investment Management.
• Anthony Kettle, Managing Director and Senior Portfolio Manager with the BlueBay Fixed Income Team at RBC Global Asset Management.
• Nicholas Goek, Senior Director, Head of Fixed Income Tradables and Private Markets at S&P Dow Jones Indices.

We're delighted the four of you could join us. And thank you to the audience for joining us as well. We've had quite a strong response. A note to you: You may type any questions you have into the question box on the left side of your screen, and time permitting, we'll get to them at the end of our discussion.

We have a lot to cover. Today, we'll discuss where we are in a macro and comparative context as it relates to fixed income investing and the implications for institutional allocators. We'll then dive a bit more into appropriate structures and investable opportunities, the current trends in customized allocations that can meet specific portfolio needs, and the type of manager capabilities that are prominent today.

So, let's start by setting the stage with the current macro environment. Nick, starting with you, could you walk us through the current landscape on spreads and yields for key fixed income exposures and offer some context around that?

Nicholas Goek: 

Yes, absolutely. Hey everybody, and great to be talking with you today.

So, just looking at the market through the lens of a few specific fixed income benchmarks, let’s look over the past five years, and this is as of June 12, 2025, so up to the end of last week. If we look at the IBOX Dollar Overall Index, which includes government securities down through agencies and investment-grade corporates, the index actually had a negative annualized return of -4.5%. If we look at the IBOX Dollar Liquid Investment Grade Index, the five-year annualized return was -40 basis points.

Once we go into high yield, the IBOX Dollar Liquid High Yield Index was +5.2%, and the IBOX Dollar Liquid Leverage Loan Index was up 5.6% on an annual basis. Also, looking at the IBOX Dollar Liquid Emerging Markets Sovereigns and Subsovereigns Index—which is a hard currency index just focused on the US dollar—the annualized five-year return was 2.1%.

The key point here is over the last five years, duration was punished. We started the period with the effective federal funds rate around 0%, whereas it ended the period at around 4.33%. The overall index, which has heavy exposure to treasuries and investment-grade corporate bonds (which tend to have greater duration than high yield, for instance), was really punished with the increase in rates. Riskier assets like high yield loans and emerging markets, which have greater duration, were in the red over the five-year period.

If we look just year-to-date, returns have been decently positive this year. The IBOX Dollar Overall Index returned over 3%, investment-grade corporates also 3.4%, and high yield 3.6%. Leverage loans were a bit more muted year-to-date with a 1.6% return, but emerging markets—looking at the IBOX Dollar Liquid Emerging Markets Sovereign and Subsovereign Index—was the leader of this selection of indices, posting a 4.5% return year-to-date.

If we go to the next slide, here on the left, I just want to highlight that while credit risk played a role over the past five years with high yield outperforming investment-grade credit, if you look at the dotted lines on the left side, that represents the 0-to-5-year slices of those universes. In both cases, over the same period, the lower-duration indices outperformed.

For example, while the investment-grade index over five years was basically down -40 basis points annually, the 0-to-5-year segment delivered a positive 2.1% annualized return. Similarly, the high-yield 0-to-5-year segment outperformed the overall high-yield index by about 1%, delivering 6.2% total returns.

On the right-hand side of the slide, we show where yields and spreads are for investment-grade and high-yield credit. The investment-grade index closed with a yield of 5.5%, which is 1.1% greater than the five-year average of 4.4%. High yield has a current yield of 7.2%, which is 60 basis points higher than the five-year average of 6.6%.

So, yields are attractive versus historical levels, while the price of credit is marginally more expensive but still close to historical levels.

Howard Moore: 

Thank you, Nick, for that overview. Jeff, turning to you, what are the key macro issues for fixed income investors today, and how do they tie into your broad outlook on fixed income as you look ahead?

Jeff Muller:

Well, it's a great question, Howard, and, and the real question is where do we begin? I mean, I think everybody on this call will have been thinking about and dealing with a litany of macro questions and issues certainly over the last several months and for most of this year, and notably, obviously we've got elevated geopolitical risks right now and we're seeing that in multiple places around the world. Certainly, questions around economic growth trajectory, the Fed obviously was meeting for the last couple of days. They kept rates on hold, but you know, just lowered their forecasts for growth going forward. We understand that there's implications from tariffs and trade policies as well as tax policies domestically in the US, but also outside the US certainly question marks around inflation dynamics and again at the same time that the Fed lowered their forecast for growth, they increased their forecasts for inflation this year. Clearly there are questions around fiscal policy and ultimately debt. Sustainability is more of an issue in the US than it is for most of Europe, but plenty of issues to grapple with their central bank policy. What is the direction of central bank policy? What is the timing of central bank policy going forward? Plenty of question marks there, whether you're talking the US, Europe, or other parts around the world. And then I think, you know, the bigger picture structural questions around. Uh, the story of US exceptionalism, both from an economic growth context from an asset valuation perspective. What does that mean going forward? Have we seen a cyclical change that's temporary, or are we in the midst of a structural change? And you know, there's plenty of other long term themes that everyone has to think about these days as well, whether it's around deglobalization, demographic trends. Uh, the impact of, of artificial intelligence on on productivity and, and so plenty of things for people to think about. I think the reality is is that this environment, the, the one thing we, we could probably all agree on is it's relatively uncertain, um, and in an environment where things are uncertain, the good thing about fixed income when you look at these asset classes is fixed income can provide a level of certainty for you, particularly when it comes to income generation. Uh, via yields that are available in the asset classes and you know Nick just laid out, uh, where we've been historically, where are we now from a yield perspective on the charts that you see on the slide right now, we just show you a couple of different asset classes US investment grade corporates on the left, US high yield corporates on the right. And to explain this chart, the x axis shows you your starting yield to worst at the end of every month over the last 20 years. So that's what those data points that you see there. The y axis then plots what your subsequent 5 year total return on an annualized basis was from investing at those various month end parts. And I think what you can see here is if you look at US. Investment grade around that 5% yield level. Historically you've earned uh relatively predictable and attractive total returns from investing in that in that area. Very, very similar story in high yield again today, uh, with yields around 7.5%, you can see historically you've earned, uh, typically healthy mid to high single digit returns, and I think the certainty of of income generation in an uncertain world is absolutely something that we spent a lot of time talking to clients about. Uh, and that we see our institutional investors valuing in, in a world where there are plenty of question marks out there.

Howard Moore: 

Thank you, Jeff. Owen, could you share MFS's approach to deep research and how that gives you flexibility?

Owen Murfin: 

Yes, the core of MFS is very much empowering the analysts in our process. Our portfolios adopt a very high percentage of their best-rated ideas. We also use analysts not just for fundamental research but also to incorporate relative value, things like technical and ESG factors, into their thought process when deciding a rating.

Even within an issuer, we could have a different rating depending on the currency issuing, which part of the maturity spectrum, and whether it’s a subordinated or a senior bond. This provides portfolio managers with a plethora of ideas across sovereign and credit markets that help us construct our portfolios.

Howard Moore: 

Thank you, Owen. Anthony, staying with the non-US theme from a macro perspective, why is this a particularly interesting time to be investing in emerging market debt?

Anthony Kettle:

For the emerging markets, we've got 3 key themes that we're looking at right now. Some of the themes that have impacted it in an unexpected way. So, we have obviously quite a lot of geopolitical risk in the world, to put it mildly. And we have differences in trade policy, but we certainly have a more aggressive trade policy coming out of the US which is impacting countries in different ways because it's particularly aggressive towards some regions and some countries and slightly more moderate towards others. But there is a reshaping of the global trade and supply chains now.

Why this is interesting for emerging markets is the way we describe emerging markets is taking about 80 different countries and putting them all into one basket. And if we think about the impact of geopolitical risk and the trade concerns on the broad asset class, it is really difficult to say it's overwhelmingly positive or overwhelmingly negative. Because what it really means is there's simply differentiation within the asset class. Of course, with 80 different countries, there will be winners and there will be losers. At the moment, perhaps Asia stands to lose. Parts of Latin America are actually potentially beneficiaries.

If we think about one of the key anchors that we have in place for the asset class, it is that fundamentals have improved over the last 5 years. Because if you think of the key themes that have impacted EM, for 5 years, it's been:

• COVID, which impacted emerging markets economically in a larger way than it did for developed markets because EM was unable to provide as large a safety net, unable to provide as much fiscal stimulus.
• It was the Chinese deleveraging that took place as a result of the big crash in the property market, which was self-inflicted, but it did result in a very sharp deleveraging. That deleveraging at the asset class level was through quite a few defaults that took place.
• And we had The Russia and Ukraine war, which ultimately impacted emerging markets more than it impacted developed markets because inflation and things like food prices, certain commodities will always impact emerging markets more than it does to developed markets.

And so, the stress that the asset class has been under has led to a quite a high level of defaults. Cumulatively, we have had about 30% of the EM high yield asset class default over the last 5 years. But that has normalized significantly towards the end of last year and this year, where we expect default rates to normalize compared to developed markets. And that speaks to the fundamental strength of the asset class now. And as was mentioned before, in terms of central bank policy, it's very interesting that you have the US with inflation coming down but reasonably sticky. If you look at other parts of the globe, inflation is a bit less sticky. But you have high levels of real interest rates. And so, the dollar weakness that we're seeing is allowing EM central banks a little bit of room here to begin cutting interest rates. And that's a very big help to the growth prospects for emerging markets. It provides a cushion, and it provides cover for emerging markets when you start to see some currency strength coming through. So, I think that's the key theme that we're watching for the rest of this year as well.

Howard Moore:  Thank you, Anthony. So now let's turn to the investment implications for institutional allocators, and Jeff, starting with you here, having shared your macro outlook, what does that suggest for exposures or segments that could present opportunity today? And how should allocators be assessing the comparative opportunity set, uh, both public and private?

Jeff Muller:
Well, it's a great question, Howard, and obviously, you know, with the macro context as we've been discussing here with questions around growth, certainly questions around inflation, central bank policy, and fiscal sustainability, you know, we're in an environment where with inflation expectations being certainly higher than they were before, the expectation and, and frankly, the fiscal situation in the United States, at least being in the situation where it is. Um, you know, the, the, the, the ever decreasing rates over a 30-year period that we saw for a lot of the, uh, a lot of the last 30 years, with the exception of the last couple of years since the pandemic, um, you know, that story feels well and truly over.

In other words, I think the ability to, um, continue to run long and long positions in duration and have that carry and roll work to your advantage is probably less than it is before, which means looking to other parts of the fixed income market is something that we think is important and is going to drive returns. I think at the end of the day, we talked about the high level of uncertainty, and this is the sort of environment where you're going to see asset classes and parts of the market react in different ways at different times because correlation can at times break down, uh, which means there's great opportunities for active management. And I think that's something that can be a big source of alpha when you do hit these uncertain times and you do see market volatility.

So certainly an active approach is important, but if we look at different segments of the market, um, and, and if we, if we feel as a duration may not be the risk factor, uh, that can drive returns as much as before, um, then, you know, really we, we find a couple areas of the market that are quite interesting.

We showed you some charts here on the slide that you can see. On the right-hand side, we show you current spreads versus 10-year averages. So the current is the bar, the 10-year average for each of these subsegments of the market, uh, is in the blue dots. And on the left-hand side, we show you the same for yields. And, you know, Nick did a great job laying out the landscape for spreads and yields and in key parts of the fixed income market in his opening comments.

And his comments were accurate. Spreads are somewhat tight compared to history—not exhaustively tight but certainly tight. But the yield advantage is absolutely there across the fixed income space and in some areas more than others. And so for us, again, the power of that yield, we talked about income generation and what that can actually lead to.

So we think there's great opportunities certainly within that part of the market. Now again, you need to find active managers who understand how to protect on the downside and that can manage and generate alpha through credit cycles because invariably we will have one at some stage. But we absolutely believe that the yields on offer—7.5%, 8.5%, 9%, sometimes double-digit percentages in some parts of that market—there will be healthy returns to come going forward under a variety of full recovery paths.

Outside of that, certainly areas of the securitized space, which we think are very interesting. The agency MBS market, given the supply-demand dynamics, the stepping away by the Fed and certainly commercial banks, has created an opportunity there where we think spreads and yields are wider than they should be. Absolutely taking advantage of that for clients.

And then, you know, I think Anthony laid out the cyclical argument for emerging markets, which, let’s be honest, it's been a tough argument to make over the last several years. It's been a very, very tough environment for emerging markets, but for a lot of the macroeconomic reasons and also the fundamental reasons, in terms of the fundamental health of some of the countries and the opportunities to invest in fixed income instruments there, as well as high real rates and a proactive ability for a lot of these countries to cut rates, I think there are opportunities there as well.

Now again, it requires an active approach. It requires the ability to stomach some level of volatility, but certainly attractive returns.

Moderator (Howard):
Thank you, Jeff. Uh, and, and Owen, uh, as investors reassess their fixed income allocations, what are some of the safe havens to achieve diversification? And could you also share your comparative view of public versus private credit?

Owen Murfin:
Yeah, sure. Well, I'm going to echo some of the sentiment that Jeff just made. And what this slide shows here is again looking at spreads on a sort of 10-year time frame based on observations. And you can see in the height of the tariff concerns after liberation days, you know, spreads were back into quite an interesting level, slightly cheap to medium levels over the last 10 years, but the very strong rally since then.

Despite more macro uncertainty, and less certainty with regards to Fed rate cuts, we still have a situation where spreads are fairly tight, and dispersion between sectors has decreased. But I think the clients still want to have yield advantage. They still want to carry advantage but need to build pretty resilient portfolios here.

And so some of the sectors one would consider would be potentially investment-grade bonds where the technicals remain extremely strong in terms of inflows and the fundamentals are resilient enough to weather any recession. The periphery of Europe remains again an interesting area fundamentally. Countries like Greece have largely done all of their issuances for the year and have had very significant tailwind of upgrades recently.

US structured product, I agree, a short duration, high carry areas like commercial real estate, CLOs, and EM Local does stick out, particularly in areas like India and South America. So here countries like Uruguay, uh, we do like it in our portfolios.

With regards to the debate about public and private, I guess, in my mind, what we haven't seen really yet in the private credit space is really a repricing in the same way that we have in the public debt markets. In 2022, it was a devastatingly bad year for total returns. Compared to like 2008, it was many, many magnitudes worse because duration and credit didn't work that year. And we're still sort of recovering from that shock really, and that's why yields are still very persistent and very high.

So you can still build predominantly investment-grade portfolios and enjoy yields above 5%. And as inflation comes down, that's a very compelling real yield, whereas I don't see necessarily the same adjustment in private debt markets even now that Fed funds rates are much higher than before.

In many ways, the two markets do work hand in hand. I do think the private debt markets have de-risked the public debt markets. I think some of the risk in public high yield has reduced, and certainly banking sector risk is also reduced. So rather than all these loans now being on the balance sheet of a Deutsche Bank or a BNP Paribas, you know, instead they are quite dissipated around the investment community in pension funds around the world.

Moderator (Howard):
Thank you, Owen. Anthony, could you describe RBC Blu-ray's team structure and, and your approach and also your quote extremely active management for emerging markets?

Anthony Kettle :
Yes, so we are all based in London. So for us, doing emerging markets, we find with a global approach that having everyone in the same location is useful in terms of being able to share news flow because there's always a lot of it, um, every day. But it does mean that there's a fair amount of travel that needs to take place as well to due diligence all of the investments.

We are very active because we actually began in the early 2000s as a hedge fund. And then we took on a lot of long-only assets. And so we run hedge funds and alternatives and long-only all on the same platform with the same team. And so that really helps us to take a very active approach and to focus on some of the more concentrated idiosyncratic positions where there is a lot of value, but also to certainly focus on the sort of protecting that beta element and protecting the downside through various sort of hedging structures and portfolio construction.

Moderator (Howard):
Thank you, Anthony. And Nick, what are some capabilities that your team has built to be able to deliver greater precision and uses of index exposures?

Nicholas Goick :
Yes, so I think just in terms of being an index provider, it's important. There are a few different pillars, such as technology, the ability to really calculate, for example, multi-currency indices from different asset classes, and having basically different data sets that aren't standardized with each other able to speak with each other. So data is really important—more important in fixed income than other markets where you have basically bonds that trade often largely OTC, and there's not necessarily a single source of truth.

Having very high-quality pricing and reference data are really pivotal. And then robust governance structures and really distribution and product support where we work with clients. We need to be exceptional in all those areas to compete. So really just kind of leaning into all of those.

So now let's turn to the investment implications for institutional allocators, and Jeff, starting with you here, having shared your macro outlook, what does that suggest for exposures or segments that could present opportunity today? And how should allocators be assessing the comparative opportunity set, uh, both public and private?

Jeff Muller: 

Well, it's a great question, Howard, and obviously, you know, with the macro context as we've been discussing here with questions around growth, certainly questions around inflation, central bank policy, and fiscal sustainability, you know, we're in an environment where with inflation expectations being certainly higher than they were before, the expectation and, and frankly, the fiscal situation in the United States, at least being in the situation where it is. Um, you know, the, the, the, the ever decreasing rates over a 30 year period that we saw for a lot of the, uh, a lot of the last 30 years, with the exception of the last couple of years since the pandemic, um, you know, that story feels well and truly over. In other words, I think the ability to Um, continue to run long and long positions in duration and have that carry and roll work to your advantage is probably less than it is before, which means looking to other parts of the fixed income market is something that that we think is important is going to drive returns. I think at the end of the day we talked about the high level of uncertainty and this is the sort of environment. Where you're going to see asset classes and parts of the market react in different ways at different times because correlation can at times break down, uh, which means there's great opportunities for active management and I think that's that's something that can be a big source of alpha when you do hit these uncertain times and you do see market volatility. So certainly an active approach is important, but if we look at different segments of the market, um, and, and if we, if we feel as a duration may not be the risk factor, uh, that can drive returns as much as before, um, then you know, really we, we find a couple areas of the market that are that are quite interesting and we showed you some charts here on on the slide that you can see. On the right hand side we show you current spreads versus 10 year averages. So the current is the bar, the 10 year average for each of these subsegments of the market, uh, is in the blue dots and on the left hand side we show you the same for yields and you know Nick did a great job laying out the landscape for spreads and yields and in key parts of the fixed income market in his opening comments and. And his comments were accurate. Spreads are, are, are somewhat tight compared to history, not, not exhaustively tight, but certainly tight. But the yield advantage is absolutely there, um, across the fixed income space and in some areas more than others. And so for us, again, the power of that yield, we talked about income generation and what that can actually lead to, uh, so we think there's great opportunities certainly within the. And that's a great part of the market. Now again, you need to find active managers who understand how to protect on the downside and and and that can manage and generate alpha through credit cycles because invariably we will have one at some stage, but we absolutely believe that the yields on offer 7.5, 8.5, 9, uh, sometimes double digit percentages in some parts of that market, um, there will be healthy. Turns to come going forward under a variety of full recovery paths um outside of that, uh, certainly areas of the securitize space which we think are very interesting, the agency MBS market, given the supply demand dynamics, the, the stepping away by the Fed and and certainly commercial banks has created an opportunity there, uh, where we think spreads and yields are wider than they should be. Um, and absolutely taking advantage of that for clients and then you know, I, I think Anthony laid out the cyclical argument for emerging markets which let's be honest, it's been a tough argument to make over the last several years. It's been a very, very tough environment for emerging markets, but for a lot of the macroeconomic reasons and also the fundamental reasons, um, uh, in terms of the fundamental health, uh, of some of the countries and, and the opportunities to invest in fixed income instruments there as well as. A high real rates and a proactive ability for a lot of these countries to cut rates. I think there's opportunities there as well. Now again, it requires an active approach. It requires the ability to stomach some level of volatility, but certainly attractive returns. And I think at the end of the day it's about having a flexible, active approach finding investors and And managers who you can partner with in order to drive those returns in terms of the question around the comparative opportunities set between public and private, I think ultimately it comes down to risk, return, and liquidity and where different institutions and different segments of the institutional market stand in those areas. And one thing I would say is we certainly see those things move around, particularly the yields and the potential returns and And and obviously um certain parts of the private markets, particularly private credit, had garnered and continues to garner plenty of attention, and I think there is absolutely time and a place for private credit, but I think what we're also seeing in the public markets now is with yields where they are, many institutions don't feel the need to significant. give up liquidity for only a small incremental return, and I think that's the dynamic and, and, and the equation that many institutions have to manage. One way to be able to flexibly and dynamically deal with those situations is, is to find once again managers who have capability across the credit spectrum, both public and private, um, and have mandates that can take advantage of the opportunities that arise at different times in those areas.

Howard Moore: 

Thank you, Jeff. Owen, as investors reassess their fixed income allocations, what are some of the safe havens to achieve diversification? And could you also share your comparative view of public versus private credit?

Owen Murfin: 

Yeah, sure. Well, I, I, I'm going to echo some of the sentiment that Jeff just just made and what this slide shows here is again looking at spreads on a sort of 10 year time frame based on observations. And you can see in the height of the tariff concerns after liberation days, you know, spreads were back into quite an interesting level, slightly cheap to medium levels over the last 10 years, but the very strong rally since then. Uh, despite more macro uncertainty, uh, and less certainty with regards to Fed rate cuts, uh, we still have a situation where spreads are fairly tight and dispersion between sectors has decreased. But I think the clients still want to have yield advantage. They still want to carry advantage, but need to build pretty resilient portfolios here. And so some of the sectors one would consider would be potentially investment grade bonds where the technicals remain extremely strong in terms of inflows and the fundamentals are resilient enough to weather any recession. the periphery of Europe remains again an interesting area fundamentally. Countries like Greece have largely done all of their issuances for the year and have had very significant tailwind of upgrades recently. US structured product, I agree, a short duration, high carry areas like commercial real estate, CLOs, and EM Local does stick out, particularly in areas like India and South America. So here countries like Uruguay, uh, we do like it in our portfolios. With regards to the debate about public and private, I guess, in my mind, uh, what we haven't seen really yet in, in private credit space is, is really a repricing in the same way that we have in the public debt markets. In 2022 was a devastatingly bad year for total returns, uh, compared to like 2008, it was many, many magnitudes worse because duration and uh. Credit didn't work that year and we're still sort of recovering from that shock really and that's why yields are still very persistent and very high. So you can still build predominantly investment grade portfolios and enjoy yields above 5%. And as inflation comes down, that's a very compelling real yield, whereas I don't see necessarily the same adjustment in private debt markets even now that Fed funds rates are much higher than before. Uh, in many ways, the two markets do work hand in hand. I do think the private debt markets have de-risked the public debt markets. I think some of the risk in public high yield has reduced, and certainly banking sector risk is also reduced. So rather than all these loans now being on the balance sheet of a Deutsche Bank or A BMP bar, you know, instead they are quite dissipated around the investment community in pension funds around the world. Um, I guess what I'd like to see more from private credit is a more deeper default cycle. I'd like to see a cycle where perhaps money is not just flowing in but also flowing out, which will fall. Maybe more mark to market pressure in loans and more refinancing risk. It would get to I think to really see that, um, and that will be an interesting thing which will prove the resilience. um, but certainly private debt is here to stay, um, but I still think that it's yet to be tested in that type of scenario.

Howard Moore: 

Thank you, Owen. Uh, and Anthony, where are you seeing the opportunities at both local market and hard currency?

Anthony Kettle:

With the backdrop of the default rate having been extremely high, that is more relevant to the credit markets. And we have seen a big cleaning up of fundamentals across the credit market. When we look at other credit asset classes that we've got a similar dynamic that spreads are reasonably tight, but probably more so in the investment grade side as compared to the high yield side. But all levels of yield look attractive to us.

You can see the chart on the left, shows the yellow dots, which are emerging markets. But you can see corporate high yield, for example, is yielding almost 8% with a 3.5 duration. EM sovereigns, which is quite close to being investment grade and has a reasonably long duration, but it does also give you a high level of yield. So, I do think that all in levels of yield in dollars in this asset class are attractive. And when you compare it versus the fundamentals and the fact that leverage has come down quite a bit.

I think at the headline level, you can see why over the last couple of years, there has been some fund flows into the emerging markets sovereign part of the asset class. And I think corporates are beginning to look more interesting as well because they've gone through this cleansing event. Which has been, you know, those 3 big defaults periods, including the Chinese deleveraging event, which really helped to clean up the leverage in the asset class.

If you look around the regions, parts of Latin America are interesting. Generally, we have about 80 different countries that we can look at in the credit world and about 500 different corporates. So, within that, there is a lot of interesting opportunities. But I would say, we have a greater ratio of spread compared to developed markets, and corporates are attractive as you move through the rating categories. So, it's some of the double B, some of the single B type names in the credit world.

But where we've seen probably the biggest sea change has been in the emerging market local side of things. EM Local has not performed very well, if you look at a ten-year look back. But it is when you have the relative growth of the US compared to the rest of the world and in particular, emerging markets, it's the delta in growth. And because you've had this US exceptionalism theme, it's been very difficult for emerging market local because you've had dollar strength. Now with the new tariff regime and Trump, by design, creating some dollar weakness.  In our view, the U.S. administration is looking for a weaker dollar to help balance up some of the trade.

Actually, that's very helpful for emerging market local because what it allows is the chart at the top right where you see real policy rates in emerging markets versus developed markets. Which are at historically pretty high levels. So, you're getting paid quite a lot to be investing in emerging markets in local. But it's almost unsustainably high in some cases. If you think about, you know, Brazil or even Mexico, for example, some of these countries need to begin cutting rates at some point because they have very high levels of real interest rates. And as you see currency strength, it helps on the inflation front and it provides some cover to begin to cut rates. So that's one angle.

But Asia actually, I think is also quite interesting because although you don't pick up levels of carry relative to the U.S., it has been over the past many years has been through the current account surpluses it has been running. It has been an exporter of capital into the US and what you are beginning to see is some of that capital coming back into home markets. And it does make some of the Asian markets reasonably attractive as well. The case in point being what happened in Taiwan that hedge inflow led to a dramatic move, stronger in the currency. We've begun to see that across a few other Asian currencies as well. So relative carry means a bit less, and it's almost the flow of capital or what domestic investors need to do in terms of hedging programs, which is leading to some strength there as well. So, in short, I think credit is reasonably attractive, but actually the big sea change has been around the local markets.

Howard Moore: 

Thank you, Anthony. Nick, given that you're with an index provider that's focused on creating passive strategies, what sort of active utility do you see in tools such as index-based fixed income ETFs?

Nicholas Goek: 
Thanks, Howard for the question and I think to start, often there's a sort of a debate that's framed as an active versus passive debate and being with an index provider we really view it a bit differently. We kind of view uh we see index based tools that can really enable active implementation to a large extent, so really essentially every investment decision is an active decision whether that comes to selecting specific asset allocation across markets and betas down to where you want to be in credit or curve positioning, and when you look within the universe of fixed income ETFs, which has really proliferated to cover various themes and sub slices.

Um, there, there really are tools that can help to express active views through the means of fixed income ETFs. So, and really the last few years, volume activity and fixing ETFs has been picking up and just for instance, the month the month of April was among the greatest trading activity in fixed income ETFs ever, and that's not really being driven by just buy and hold past investors. Uh, it's really active investors who are using these tools that tactically who are driving usage and activity, and the question could be why, why is that the case?

And really what we've seen through various stress periods, um whether it's COVID during March 2020 or even April this year, these tools are kind of understood at this point by investors to be a source of liquidity and transparency into the market during times of stress. So basically, when certain segments of the market dry up. Uh, fixed income ETFs can provide a release valve, uh, uh, a point of liquidity, and just to gauge where pricing is, um, due to the basically these tools being on exchange and having um continuous, continuous pricing.

Um, so yeah, we, we see active managers, active users using these to tactically increase or decrease exposure, um, manage cash flows while maintaining beta concurrent with um sourcing alpha positions, um, and, and just focusing on the liquidity aspect for how these tools can be tactically advantageous.

Here on, on this slide, what this is showing is the bid ask spread cost as a percentage. Um so, so for various different types of a two index-based wrappers, so ETFs and futures, and then also the individual bonds within the specified index. So, if we look at the IBO dollar liquid investment grade index. The bonds within that index um trade with an average 35 basis point bid ask spread. So that's roughly your, your trading cost um in the individual bonds. And these are already amongst some of the more liquid bonds in the universe.

Um and then if you look at the futures linked to this index, uh, which has seen open interest growing to the tune over the past year of greater than 500%. Um, the bias spread cost, um, shrinks to 7 basis points. And then if we look at, uh, uh, the fixed income ETF linked to this this index, which has been around a bit longer, uh, the average bid ask spread and I should say this is for the year 2024, um, cost was one basis point.

High yield, it's, it's a bit tighter across the board, um, in terms of trade efficiency where the bonds, um. Themselves traded with about 16 basis point average bias spread futures then with 6 basis points and then the ETF also roughly 1 basis point. And I think what this highlights is that um these index-based tools offer um network effects by concentrating single points of trading.

Um, also there's an operational alpha aspect where um. Basically through a single trade you can access hundreds or thousands of bonds, but I think what the trade efficiency conveys and just the general liquidity with these with these tools is that the way in which they're used is in a very active dynamic way by the market.

Howard Moore: 
Thank you, Nick. And so building on what you've already shared, uh, let's cover some structures and investable opportunities., Anthony, coming back to emerging markets, what's the best way to approach it as an asset class and what vehicles can investors use to get the targeted exposure they seek also, across this vast opportunity set, are there particular vehicles,  that are more appropriate in specific markets say than versus others?

Look, it's a really interesting one because I think for emerging markets, it's generally recognized that valuations are often reasonably attractive. And there is an inefficiency, you know, even if you look at the fact that there are 80 different countries all put together and called emerging markets, and we try to predict the direction of, of one asset class, which is obviously very difficult, if not impossible. And so, there is a diversification element that you get, you get interesting valuations, but what people have suffered with over time within EM has been that volatility can pick up. And really, what we're looking at is the downside of the asset class can be very painful if you get it wrong. So, you have this inefficiency which allows you to generate alpha out of the asset class. But it's how do you factor in the beta part of the asset class. And that's where people have really suffered. And even if you look at local markets, right now it's a great opportunity. But if you go back, say 5 or 6 years ago, there was less of an opportunity. And the returns looking back have not been great and the beta element has been extremely painful. So, there are lots of different ways that you can approach this asset class, but I would say we would consider basic, based on how investors uh liquidity tolerance actually is. And so, in terms of the traditional benchmark strategies, you've got a daily kind of liquid funds. I think the best way if you are approaching that, what the great thing that it gives investors is the transparency on their asset allocation because they know they're invested in EM hard currency or EM local, for example. But what you want to do there is allow the manager to at least run a decent level of tracking error because the pitfall of an index in emerging markets in the fixed income world is the larger the amount of issuance that comes from a particular country. The larger that country becomes within the index and the more capital it necessarily attracts. And, and if you look at some of the big defaults over the years, even Russia, for example, it was a big issuer of debt. Venezuela, Argentina, all big issues of debt, all became larger in the index, all attracted capital. And so you want to allow for at least active management, even if it's benchmark oriented, and to allow an appropriate level of tracking error.

The unconstrained approach, which is sort of a total return approach to us is pretty interesting, and I would say very appropriate when looking at local markets as well as hard currencies. So traditional benchmark type strategies, I would think are more appropriate in the credit world. I would look at unconstrained type strategies as a one-stop shop in a way for emerging market exposure. But I think, they’re a good way to approach the local part of the asset class because it allows the manager to be able to take risk in FX or rates when there is a very good opportunity. So, over the course of the last 6 months to be very invested in that market. But over the last 5 years, to have been a little more cautious around that market. And really, again, to look at the fact that with 80 different countries, there's always something interesting to invest in, but you don't necessarily want to be invested across all 80, simply because they're part of an index. And I think also a strategy like that, it provides the ability to execute some shorts. So, it's certainly biased long, but the ability to make money or hedge yourself with some short positions which might come through CDS or, or short positions in FX or even paid positions in rates. So, we think that's an interesting way to approach the global emerging market asset class, if you think about local and hard currency. Simply looking at best ideas in a liquid format. We also think that long/short credit is an interesting way to look at the real inefficiencies in the credit market because that it would be a less liquid approach. So, it'd be more like a monthly liquidity type approach. But there is an inherent inefficiency in emerging market credit because it is simply followed by less that managers and there's also a very big local investor base who would look at Credit in a slightly different way. They would look at credit valuations differently and even fundamentals differently. And so being able to be properly long or short within the credit world to us is uh a strategy that has performed very well over time. And finally, moving towards the very end of the liquidity spectrum where you look at lockup type vehicles and private credit, it's been a very competitive world in the developed markets. It's been less well trodden in the emerging markets, and there are concerns that people have because of the emerging market tag. But if you do it well, there are inefficiencies and there is a significant illiquidity premium that you can pick up in that part of the market. So, it really depends on the investor's risk return profile and ability to take liquidity risk. But, that's sort of how we would look at the market overall.

Howard Moore: 

Thank you, Anthony. Owen, could you share a couple of examples of country and credit selection that may be interesting to our US allocator audience?

Owen Murfin:
Yeah, sure. One thing we're always trying to do is point out alpha opportunities that might not be available domestically. And one such example recently has been countries where the path of the central banks seemed far more transparent and easy to predict than maybe the Fed, which are still debating when is the right time to start cutting rates. An example of that, for instance, for us was in South Korea, which is a very open economy, very leveraged economy, very exposed, therefore, to the global trade war, and it also had a domestic political crisis and actually inflation was coming in materially under where the Bank of Korea wanted it to be. The bond market we always thought would benefit as well from index inclusion later this year in some key indices which should support demand for the market. So this is an example of a really uncorrelated market that we can add to global bond markets that has played out in terms of performance and added alpha to portfolios.

Um, also, where I'm based in, in Europe, uh, there are some themes which are quite unique to the European credit markets as well. Uh, a good example of that at the moment is the huge consolidation that we're seeing in European banking. Uh, just, you know, very recently this week we've seen a large French bank called BBC announced that they're looking to acquire a Portuguese bank. There's a lot of domestic consolidation going on in Spain and Italy as well. So holding these types of banks in the right countries at the right part of the capital structure has been a very lucrative form of alpha, which again you gain by thinking more globally in terms of your credit and government allocation.

Howard Moore: 
Thank you, Owen. Um, and Nick, it seems that an index structure can take on almost any metric, say by maturity, rating, region, and so forth. What are some ways that different types of institutions are using this?

Nick Goick:
Yeah, so, so we see um usage across different um institutional user types, retail user types to focus on the institutional side, um, definitely asset allocators using index-based products to uh just get general beta exposures. Um, um, and often in tandem with, um, active strategies, uh, as well, and, and then there's maybe there's specific fixed income ETFs across the fixed income spectrum from, uh, go, corporates, um, uh, uh, securitized uh uh EM loans, um, and, and then with the uh asset managers, really.

Implementation tools, so, so these instruments can be good for liquidity sleeves, um, but also to express views on credit. So there are ratings-specific ETFs, for example, you could use different ETFs to say go on triple B rated corporate bonds, so kind of have a rating tilt expressed. Uh, uh, versus, uh, overall IG or for curve positioning, um, or just hearing what Anthony was saying around long-short strategies, for instance, um, just one use could potentially be to, um, while having alpha positions in a given market. And using an index tool as a as a short, you can really kind of achieve the market neutral while kind of highlighting the the sort of alpha views that way.

So, and, and then with um hedge funds as well, um, one of the, the uses that we we see from from them would be relative value trading across different um index derivatives. Uh, so, so, for example, doing a, a, a basis trade between potentially CDX high yield and uh a high yield TRS or, or ETF, for example. Um. So really the, the ways to use them are, are, are many, but um what we've seen is that in addition to. Um, there being greater kind of niche and specific, um, fixed income ETFs and uh indices and kind of uh flavors that investors can choose from.

There's also And innovative tools, so ETFs, standardized total return swaps, futures now as well, options linked to a number of these instruments, and really that just gives investors more, more tools to work with and and express views.

Howard Moore: 
Thank you, Nick. And Jeff. The emerging markets debt space is pretty large and diverse. How does your fixed income team think about opportunities in this space now?

Jeff Muller:
Well, we think, we think opportunities are plenty. Um, I think, I think going back to Anthony's point, uh, and what I referenced before, I think the beta of emerging markets, that's been a challenge, uh, particularly over the last couple of years, and, and, you know, again, I think there's cyclical reasons why that, um, could be different going forward and why that will be different going forward, but the reality is is that this is an asset class given given the size and the diversity that you talk about.

Uh, where alpha opportunities are ripe, and if you can find managers who've got the resources that the heritage, the skill sets to be able to to find those alpha opportunities, um, there are amazing returns to be found in this particular market. I mean, I think for us it's a, it's a philosophical understanding that if we can work with our institutional clients. Um, to, to help them understand what's important in these areas, um, then, then we can construct portfolios to drive those returns, and it's really based on four key pillars.

I think, I think the first one is what you already said. Look, this is a really vast and differentiated market, right? There's over 120 different emerging and frontier market countries. There's over 700 corporate issuers. If you want to be able to do the work and source ideas from the broadest possible opportunities that you've gotta have the resources to do that and you know we've got. The people around the world representing 20 different nationalities in 30 different languages who go into these markets to assess the opportunities.

I think the second key piece of the philosophical pillar is for investors to remember that we can talk about rates, we can talk about currency, we can talk about credit, but at the end of the day, what influences all of those factors is countries and the direction of travel of structural change in those countries, and we see it time and time again where, where there's structural change for the better. Then we see risk premiums go down and we see structural change for the worse, we see things get worse and, and, and we see that reflected in evaluation.

I think the third thing is a recognition, and this is really again speaking to one of the points that Anthony made around a more opportunistic approach and being able to give a skilled manager the flexibility to take advantage of this is that you really have to pick and choose the risk factors that you believe have value. Take exposure to those, but only take exposure to those. In other words, if you think A rates are interesting in the country, but you don't like the currency or you don't like the credit, then hedge out the credit in the currency and just take the rate risk, vice versa. If you really like the credit but you don't like the currency, you don't like the rates, then hedge out what you don't like. Only get exposure to that risk factor that you believe you are being compensated for.

And I think the final piece is particularly when you get into local markets at the vagaries of trading in local markets, the logistical challenges of doing that, you know, trading, uh, can add a significant amount of value if you've got the right right ability to invest in there clearly, um, it's something that, you know, we, we, we help institutions with on a regular basis access local markets where the logistical challenges. Um, are, are beyond anything you see in, in any other markets. But if you can successfully operate in those markets and you can get access or help open up markets, which we've had a history of doing, uh, then again, fantastic alpha opportunities.

So, so I do think there are cyclical reasons why the beta of EM should be more attractive going forward. Uh, but the alpha opportunities are always there if you can find, uh, the right experienced people to take advantage of them.

Howard Moore: 
Thank you, Jeff. And we have just really a couple of minutes left.

So let's just talk about each of your firm's approaches and, and your teams. Anthony, could you describe RBC BlueBay's team structure and, and your approach and also your quote extremely active management for emerging markets.

Anthony Kettle: 

Yes, so we are based in London. So, for us, doing emerging markets, we find with a global approach that having everyone in the same location is useful in terms of being able to share news flow because there's always a lot of it, every day. But it does mean that there's a fair amount of travel that needs to take place as well to complete due diligence, covering all of the investments. We are very experienced because we actually began in the early 2000s. Originally, as a hedge fund.

And then we took on a lot of long-only assets. So, we run hedge funds and alternatives and long-only all on the same platform with the same team. And so that really helps us to take a very active approach and to focus on some of the more concentrated idiosyncratic positions where there is a lot of value, but also to certainly focus on protecting that beta element and protecting the downside through various sort of hedging structures and portfolio construction.

Howard Moore: 

Thank you, Anthony and Nick, what are some capabilities that your team is built to be able to deliver greater precision and uses of index exposures?

Nick Goick:

Yes, so I think just in terms of being in an index provider, it's important. There's a few different pillars, uh, such as technology, uh, the ability to really calculate, for example, um, multi-currency indices from, from different asset classes and having, um, Basically different data sets that aren't standardized with each other, able to speak with each other, so data is really important, more important in in fixed income than other other markets where you have um basically bonds that trade often largely OTC and there's not necessarily a single source of truth, so having very high quality pricing and and reference data are really pivotal. Um, and then robust governance structures and then really distribution and product support where we work with, with clients and, and really, um, we need to be exceptional in all those, those areas um to, to compete, so, so really just kind of leaning into to to all of those and I think just in terms of precision, um. A lot of that is with mapping in various and unique data sources that seems to be where some of the development is going, whether it's external sort of fundamental information or say external climate data or potentially volumes coming from different sources as unique ways to weigh bonds. Um, but yeah, that's, that's kind of the, the, the focus.

Howard Moore: 

Thanks, Nick, and, and Owen, could you share MFS's approach to deep research and how that gives you flexibility.

Owen Murfin:

Yes, MFS is very much empowering the analysts in our process. Our portfolios adopt a very high percentage of their best rated ideas. Uh, we also use analysts not just for fundamental research, but they also incorporate relative value, things like technical and ESG as well into their thought process when deciding a rating. And even within an issuer, we could have a different rating depending on the currency's issuing which part of the maturity spectrum and whether it's a subordinated or a senior bond. So this provides portfolio managers then with a plethora of ideas across sovereign and credit markets that we help to construct our portfolios.

Howard Moore: 

And Jeff What does the flexibility really mean uh at Morgan Stanley Investment Management?

Jeff Muller:

Well, I think just to put some context around it, I mean, Morgan Stanley Investment Management's fixed income platform is a $210 billion AUM fundamental research-based active fixed income business, and we've got 250 investors that are based across North America, Europe, Asia, and the Middle East. We've got 6 dedicated investment teams, um, focusing with dedicated trading portfolio management and research resources across high yield, floating rate loans. Uh, emerging markets, securitized space, municipal bonds, and then our, our IG and multi-sector capabilities within our broad markets business and, and we, we exist really for, for two reasons. One is to deliver investment excellence for our clients and, and the second reason is to deliver a superior client experience for them and I think that superior client experience really speaks. To to flexibility uh and meeting client needs at the end of the day, every single institution that we do business with is different in some way, shape or form. They have, uh, different objectives, they have different needs, different growth targets, different liquidity requirements, uh, different ESG constraints. Uh, I think for us being flexible first of all means really getting to understand who is it that we're speaking to and doing business with and what does their business look like, um, once we do that it's about understanding how can we shape solutions to meet the needs of those clients and you know again it sounds. Uh, it sounds simple, but, but truly understanding what an institution is looking for starts with with having a great relationship and that open dialogue. And then once you do building solutions to suit those needs. Now those solutions have to be in areas where you have deep fundamental alpha generative capabilities because no one wants to pay for anything other than that, and they shouldn't. Uh, but if you do, I think, I think it means, uh, working with clients, uh, to find those solutions and drive returns so, so ultimately they can reach the outcomes and, and, and fortunately we feel very well placed to do that given our, our history, our heritage and the resources we have at our disposal.

Howard Moore: 

Thank you, Jeff. And many thanks to our panel. I'm afraid we're over time, um, but thank you, Owen Murfin at MFS Investment Management, Jeff Muller at Morgan Stanley Investment Management. Anthony Cattle Kettle, beg your pardon, at RBC Global Asset Management and Nicholas Goick at S&P Dow Jones indices. And thank you also for everyone in the audience for uh for sticking with us, uh. You can gain access to the recording of today's webinar through the registration link. Enjoy your afternoon, everyone.