00:00:05 Speaker A
Treasury yields are slightly higher this morning as investors await the FOMC meeting minutes and any insights into the Fed’s rate path. Meantime, Japanese bonds coming off their weakest auction in nearly a year sparking concerns. Investors have a little appetite, have little appetite for long duration bonds on a global scale. So is that sentiment echoed among ETF investors? I’m going to bring in Matt Collins. He is PGIM’s head of ETFs for this week’s ETF report. Brought to you by Invest go QQQ. Great to see you this morning here. Talk to me, Matt, about the correlation that you’re seeing in terms of bond market action and the sell off that we’ve seen in treasuries coinciding at times with a little bit of a sell off in stocks as well. What is that signaling to you about investor sentiment?
00:01:32 Matt Collins
Thanks for having me. So, I would say generally speaking, if you start in in January, bonds have gone through multiple regimes in just a few months. And put frankly, bonds have not found their footing. And if you use ETF flows to really sort of diagnose where the interest is and where money is is going, you’re just not seeing a ton of money move to longer duration bonds. Most of the allocations in the market are going to ultrashort ETFs and triple A CLO ETFs that have very limited duration, but high quality. And I think that’s a great signal that investors are just not quite there yet. That there’s a firm foothold in where rates are going.
00:02:47 Speaker A
And is that a signal to you that investors are prioritizing income generation amid the market volatility?
00:03:02 Matt Collins
Yes, absolutely. So I think one of the cautionary tales, whether it’s in the equity market or the fixed income market, is income is great, but if the capital risk overwhelms that income, you have a problem, right? It’s not what you expect. And so with short-term rates paying a pretty healthy margin over risk-free, you’re seeing people say, “That’s good enough. I like four or five percent in that allocation. I’ll stick there and not have my capital risk sort of overwhelm the income I’m getting there.”
00:04:12 Speaker A
And my guest host, Steve Sosnick, has a question for you, Matt.
00:04:18 Steve Sosnick
So, Matt, the question then would be, it implies that we would need a steeper yield curve to get people to invest in longer duration paper. Um, that means yields go up, bond prices go down at the long end. How steep do you see the curve needing to be to to re-incentivize people?
00:05:00 Matt Collins
Uh, I think it’s more about the volatility. I think the volatility, go back five years. The bond market has returned negative, the bond broad bond market has returned negative 5%, the equity market has returned 100%. So the income is there, right? Everyone’s watching yields, but the equity market is so outpacing the bond market. I think it’s more about volatility reduction in the bond market and finding that foothold before you see people come back.
00:06:29 Steve Sosnick
So therefore then the one the index to watch would be the move index or something like that to to keep an eye on bond market volatility, if that’s the case. And then if that’s the case, how do you see that spilling it? Do you see that the bond market volatility either ebbing or equity market volatility picking up to sort of match the the volatility that we’re seeing at the long end of the curve, considering that stocks are the ultimate long duration asset?
00:07:23 Matt Collins
So we’re on one of the most epic runs in the equity market that we’ve we’ve seen in in a really, really long time. And the expectation, I think, is that moderates and becomes a little bit more sideways. And if you look at flows, one of the most dominant flow gatherers on the equity side is defined outcome ETFs, where you can put sort of a window frame around your S&P 500 experience on a 12% buffer, as an example, you have no losses if the market is 12% or less down. And then you have upside up to say 16% or so. What we expect is a more sideways, more volatile equity market, and then money starts coming off that side of the table into defined outcome ETFs on the equity side, and then potentially, again, you find your footing and longer duration bonds on the on the fixed income side.
00:09:00 Speaker A
Matt, really appreciate it. Thank you so much.
00:09:05 Matt Collins
Thank you.