Fixed Income Conversation Corner with Jeffrey Sherman (DoubleLine) and Leslie Falconio (UBS CIO)
Lead — The desk anticipates that shifting monetary policy and trade uncertainties will create distinct opportunities within fixed income markets, particularly for U.S. investors seeking yield. Per the full note source, Jeffrey Sherman from DoubleLine emphasized the need for cautious navigation in the current environment as policy impacts start to emerge more clearly. Significant shifts since the U.S. election underscore a complex economic backdrop that could reshape investment strategies. In this context, recent U.S. economic data will be crucial to monitor for indications of changing trends in fixed income.
What the desk is arguing
The desk believes that evolving monetary policies and trade-related uncertainties are pivotal for fixed income investors, presenting both risks and opportunities. Per the full note source, Sherman illustrated this by highlighting how the initial post-election optimism has dissipated, representing a pivotal moment for assessing investment strategies.
As of now, the implications of potential central bank policy shifts should be closely evaluated. Recent communications from the U.S. Federal Reserve suggest a more data-driven approach, crucially signaling that inflation and growth metrics will guide future moves.
Where it sits in our coverage
The consensus target for the USD to EUR exchange rate sits at 1.075, with a range measured between 1.04 and 1.12. Specific notable firm targets include: - jpmorgan: 1.10 (Mar 26) - bofa: 1.04 (Mar 26)
The desk's view aligns with jpmorgan's target, indicating a belief in upward movement but is notably at the higher end of the spread established by our coverage.
How other firms see it
Firms such as jpmorgan present a bullish stance on the outlook for fixed income, mirroring the desk's cautious optimism. Conversely, bofa maintains a more conservative view, suggesting a bearish sentiment around fixed income markets.
The trajectory of future U.S. monetary policy will critically impact key pairings such as USD/EUR and trade-sensitive currencies as these developments unfold similarly.
01Rising trade uncertainties are prompting a reevaluation of fixed income strategies.
02Recent comments from the Fed stress data dependence in the current economic climate.
03Shifts in policy may create both headwinds and tailwinds for U.S. investors.
04Strong divergence in opinions among major financial firms underscores market complexity.
Market implications
Expect volatility in fixed income markets as upcoming U.S. economic indicators could create potential shift signals around the Fed's policy trajectory. The outcome of these indicators will significantly influence market sentiment and position adjustments leading into the summer months.
Risks to this view
A reversal of this outlook could materialize if inflation remains stubbornly high or economic data indicate stronger growth than anticipated, prompting the Fed to adopt a more aggressive stance than currently projected.
ubs
Hi everyone, Dan Cassidy here. Welcome back to the Fixed Income Conversation Corner podcast series here on the UBS Market Moves podcast channel. Joining us as always, glad to welcome back Leslie Falconeo, Head of Taxable Fixed Income Strategy for the Americas with the UBS Chief Investment Office.
A very fortunate to welcome back to UBS studios, joining me here in our 1285 podcast studio in New York, Jeffrey Sherman, the Deputy Chief Investment Officer with DoubleLine Capital. So Jeff, Leslie, I know you have plenty to cover today with our clients. So Leslie, let me pass it over to you to lead today's conversation.
Welcome back. Yeah, thank you. And thank you, Jeff.
I mean, this is really a perfect timing to have you and to share your thoughts, you know, over at DoubleLine. I've done this podcast before and I think it's really, it's going to be really well received. So thank you so much for joining.
I do want to start off, Jeff, with just, let's just, let's just sort of take a step back for a moment as we enter, you know, the fifth month of the year, we know that we entered 2025, which is a lot of U.S. exceptionalism, the expectation of, you know, the policy administrative policies will be a great tailwind for businesses and consumers and, you know, and everyone expecting that, you know, the U.S. would dominate, performance would dominate for that matter in both fixed income and the equity market. How do you, so how do you reflect on that now that we've seen what we've seen over the past four months? Yeah, it reminds me of that movie with Barat, right, where he goes not, you know, and screams it at you, right, because it's the antithesis of everything you laid out is what's transpiring thus far.
And I think what you saw was that there's this massive tailwind post-election that really kind of started to recede around Inauguration Day when the policies became, I think, what the market would say were extreme, right? The trade policy is paramount here. There doesn't seem to be a lot of relief.
There's a lot of headline risk and there's a lot of noise out there. And I think right now what you've seen after April is a little bit of fatigue in the markets to the headlines. And so there was the visceral reaction on Liberation Day.
And since then, we're trying to get a footing. But for all the deals that have been made thus far, we still have a unilateral tariff out there right now. So we're in a worse position on trading right now.
You saw that kind of through the GDP numbers where, you know, the front-loading came into the marketplace with all the imports. We saw inventory builds for that. And over the next month or two, we're going to work that down.
And so bringing this back to a market context and something tradable is go back to where we were at the beginning of the year. That fervor, that exceptionalism that you referred to was reflected in valuation. We had equity market valuation pretty high by almost every single metric you use.
We had spreads extremely tight across most credit product. And then we got the headlines. And so it's not surprising to see that kind of quick sell-off and reaction.
But even with the sell-off we're seeing, where we see spreads today, spreads are still tighter than average. And so what I posit to the client is, okay, if you're going to have an average experience, it should be an average environment. And I think in today's environment, there's a heightened uncertainty, and it's coming from the administration, and they're not really backing down.
And so what that connotes to me is risk premium, meaning that I want to pay less for something. It means I want to have better value. It means I want to get more yield for the risk I'm taking out there today.
So I think that is really where the clients need to focus today, is that you need to be good enough in today's market. This is not a risk-seeking market, but it's one where if you can underwrite credit, you can get some stability in the portfolio, and you can get cash flow that you can understand, it can withstand some of these policies, I think that's where clients want to be positioned. We can get into details on that, but that's kind of my broad view of the overall administration and how it's leaking to the economy today.
So if we think about fixed income as a whole and how, say, tariff announcements and these implementations might impact fixed income, obviously it's not as direct as it does the equity market. On the fixed income side, it might be more of a second-order effect in terms of potential demand destruction going down the line or slowing growth. How do you see that in terms of just overall fixed income, how these sort of possible – even though we don't know sort of like the duration or exactly what the impact is going to be, we still have the 90-day mark to look towards, how do you think this is going to impact fixed income in terms of just tariff and implementation?
Yeah, I think you're spot on when you say it has a much bigger magnitude on the equity market because at the end of the day, it's going to affect profit margins, and so when you're underwriting credit here and you think about the fixed income, it's like can you pay me back? If I'm going to lend you money, that's what we're looking for, and so we don't need massive amount of margins, we need interest coverage on that, but you also need to be insulated from some of these policies, and so I want to say that you want to avoid companies that are like the Art Vanderlay from Seinfeld, the importer-exporter, that's going to be a highly susceptible business, and we also have to think about the other type of tariffs that are coming that are more secular in nature. There's still the idea, the autos are kind of on pause now, but there's still an overhang there.
There's pharma that we're talking about as well, so there's certain parts of the market you have to be very sensitive to because they're known unknowns, and so from a rate standpoint, when you think about investing along the curve today, well, the question is like are we going to get some inflation from the tariffs? Obviously, there's going to be some price changes that are going to go up in the things that are targeted, but also is that going to harm growth, and this is the biggest unknown right now, and why I say that is because there aren't substitute effects for a lot of things we import, right? The stuff we get from China, we get it from China because that's where it comes from.
We don't manufacture that or we don't create that in this country, so it's not like you can substitute to the good. If you want to consume it, it's going to be more expensive. That's fine.
That's what it is, but ultimately, we don't know how the consumer is going to play out here. Are they going to shift to just buy other things? Are they going to try to focus on experiences?
Are we going to – what's the travel season? Are we going to go on holidays and vacations, or are we going to save money, right? Maybe we'll be a little more austere because of uncertainty, and this is the big wild card there.
So, when it comes back to the fixed income market, what we want to do is we don't want to be significant risk seekers here. We don't want to be stretching for yield. What we want to do is have things that are less sensitive to kind of these whims of the market right now.
You want to be shorter in kind of the tenor or the maturity of your credit bonds. You want to have less sensitivity to some of these spread movements right now, and I think if you can cobble this all together with – you can do it on the low duration front. You can put together a portfolio that has in the low fives today.
You can do it in a core portfolio where you take a little bit more interest rate risk. You get into like the five and a half kind of range. That's a good number today, right?
If you think about that, if I can throw off something like 45 basis points a month, right, that pays some bills, and so I think that's where you want to be thinking through this right now when you're underwriting credit. You want to make sure that can this business withstand the next couple of years, and if so are you being compensated for that risk, and even with these kind of spread widening we've seen, again, spreads are below average, and so that doesn't get me excited to want to add risk today, but I have to own some still because we get paid for it, right? You get paid.
If you're picking up 100 basis points or 150 relative to the index, there is some spread out there, but you don't want to be picking up the stuff that's 400 and 500 over in today's market because the market knows that there's a lot of sensitivity there. Right. Jeff, because I tell you, this has been our sort of point of view as well.
We've guided, as we enter the year, investors to stay away from the back end of the yield curve, right? We've preferred that five years and end type one of them because we felt the yield curve was going to normalize and we felt that the yield curve would steepen and the back end would feel pressure, regardless if you're a bullish or bearish on REITs, we were a bit more on the bullish side, but now that seems, if I look at today, I feel like not that it's an overcrowded trade, but it's actually very popular because now everyone's focusing on, I mean, we know that the fixed income market is forward-looking, the Fed is backward-looking, but now we have the realization, as we have Secretary Bessing constantly say, we're talking about tariffs right now, but the narrative's going to shift, there's going to be tax cuts and deregulation, and then there's always that lingering concern of the bond vigilante deficits that might actually impact that back end if, in fact, tax cuts are made policy beyond the extension. How do you view that all together and how do you look at this concern that we've seen recently during the volatility of April of the treasury market being the safe haven?
That's the big question. There was a week in April where I think the entire curve sold off more than 50 to 60 basis points, and that was the narrative that was on every headline, people are selling US treasuries, no one wants to own it. When I step back and I look back and you take that window from one week and you take it to like four weeks, we're right back where we started.
It was kind of a round-trip type of thing, and so I think this narrative will continue to catch hold of wanting to not lend to the US at least at the scale we're doing. By the way, the latest budget we saw is just as bad as the deficits we've been running, so there's no improvement there, and as you said, I think the ulterior motive is trying to get to the incremental tax cut. What we're trying to think about is avoiding that back-end as well, so that's been something we've talked about for the last couple of years.
How we end up doing that, if you're thinking about a traditional bond portfolio, we own credit that's shorter, like you said, that five years and in. A lot of our stuff is three years and in, and a lot of it's in securitized, so it pays a lot of cash flow, so those bonds shorten, but we own the belly of the curve. We own it through corporate credit, so investment-grade bonds, and we own it through agency mortgages.
By the way, agency mortgages pay you more coupon than IG does today because of some of that volatility we talked about, and that's how those bonds get priced. There is a lot of value that sits there in the belly of the curve that can work for you in a kind of uncertain world, but because I have such short credit, or the maturity and the duration short, I need to own a little bit more. What we've been focusing on, Leslie, is the seven to ten part of the curve.
I do love the two years still, but it doesn't give me enough impact in the portfolio because it has less duration or interest rate sensitivity. If these policies continue, I think we're definitely going to get economic weakness. Further to that, to me, the telltale sign is the labor market.
Are we going to keep people employed? That's the sign of things slowing down, but I'm very skeptical of the long bond, as you point out, and will it work in the safe haven status? I say that it probably works as a trade, but I think if we're really slowing down and we're going to have to stimulate on the fiscal side, whether that comes through tax cuts, it comes through some sort of other fiscal stimulus, that's deficit negative, and that's going to be bad for the back end.
By the way, with all this trade war, now what's been on the table lately is that we can't do tit-for-tat tariffs because you don't export enough to us, so maybe we won't own as many of your treasuries. That story is playing out meaningfully right now. I think that it could have another effect, which a lot of people haven't talked about, but that's just divestment in the U.S.
We've had the exceptionalism. This has been the place to invest. We've had the hottest stock market on the globe, and people over-own the U.S. today, even foreigners, and so maybe that's something else that comes into questioning the U.S. right now.
So I pull this together, and this is what makes me very nervous about today's market because after what we saw in April, the S&P was down 12 basis points in April. It was like nothing even really happened, and spreads were still a little bit wider, but I think what we see now is the uncertainty. I think we've seen the nervousness of the market, and if there is something that starts to deteriorate, and remember, confidence is eroding meaningfully.
This is at the consumer level. This is at the CFO or CEO level when you look at those surveys, and so the soft data is signaling on a forward-looking basis that things are going to be weaker. As we talk about things, I want to shift really quick because we have the Fed meeting tomorrow, and everyone's talked about or tried to talk about the Fed put, and we know that even going into Friday's employment number, I think the market was pricing it close to 105 basis points for 2025.
Now, it's back down to about 75, and although our outlook is that they do three cuts this year starting in September, just to avoid that September 2024 debacle where they cut the market says re-acceleration of inflation and yields go up, but do you think, what is your outlook, sort of like a monetary policy, do you believe in that Fed put, or do you think that they're really going to not try to move? We all know the market is more than likely going to be reactive, not proactive, but do you think that they're going to take too much time to ensure not to sort of concern the market of a re-acceleration of inflation and then actually have those back-end yields move higher? What's your outlook on the Fed?
I think if you were to ask me what Jay Powell's stance is, let's say coming into 2025, I would have said that I don't think Jay cuts again in his tenure, and obviously it's about 12 months from now. So I think that the path of least resistance is no cuts, and obviously President Trump bullies Powell, he called him too late Powell or whatever, it wasn't a good nickname, it didn't stick very well. But I think that that's right, because what Powell doesn't want to do is reignite things.
And think about what happened post-election, right? The animal spirits were loose, markets were rallying, credit was loose, there was all this activity, people were talking about CapEx, and it grinded to a halt here. And so if you unleash those spirits, you can get that inflation.
And by the way, Leslie, they still haven't hit their goal, right? And I think that's what Jay really wants on his resume, is to say he battled the inflation dragon, he slayed it, and he got it to 2%. So I don't think he wants to cut.
I think that he will have to cut at some point because of this weakness. And I think the telltale sign will be the labor market. And as you said, the market kind of unpriced a couple of those cuts post-NFP last week.
But also, the bond market's been very wrong about the path of interest rates. When you look at the rate cuts, the bond market has wanted way more rate cuts, way more quickly than the Fed has delivered. And so why would that change?
It's the same chairperson, it's the same kind of consensus. And so to my thinking, I think the baseline's zero. But I think if they do cut, I think it is three to four, and it's quick.
But I do think, I would agree with you, if it's going to happen, it's later in the year because we have to see the impact of these policies. And the question still is out there, are we going to implement them? We have these baseline tariffs, things are going to go up.
But I guess on the positive side, people will think there's less inflation right now because petrol prices are down, because oil trade down to like 55 yesterday, but we're like 57 bucks a barrel. So I think all these things have to be taken in consideration. And I don't know how to forecast what the consumer's going to do right now because some of the data we're going to still see this month was front-loading, getting ahead of the tariffs.
And so I think that the data that the Fed's going to need is after the summer as well. And right now you have base effects that are going to push inflation up in the short term. So all in all, I can get to the three or four cuts this year.
I think it has to be towards more of the back end, given the setup I laid out. But I could also see there being no cuts this year. So I think you have to play kind of both sides there.
So if we don't have any cuts this year, just out of curiosity, do you think the fixed income market, sometimes the way to get yields down is for the Fed not to cut, right? Because then the market, they price it at a higher probability of recession and not being proactive. Say hypothetically, you describe there's no cuts.
Assuming that you don't have tremendous growth and the market's completely off with their forecasting of a lower growth in the second half of the year, do you think no cuts would actually push interest rates lower? Yes, I do. For exactly the weakness that you talk about there.
And I think that you can easily see this. Let's just say Trump walked back almost all these tariffs, right? He gets the big, beautiful deal, best deal in the world.
And all of a sudden, the tariffs seemingly evaporate. Why would the Fed cut? Now, the problem is that you're going to destroy confidence along the way.
And remember, that's the whole system. If we feel good, we spend money. As long as we have a job, we make money, we feel good, we spend it.
That's how the economy turns over and we get velocity. So I think if you get to this point where we walk all this stuff back, I don't see the Fed cutting. But the question is, is that did we do too much to confidence to kind of slow some of that spending down?
And also, I don't think the tariffs completely evaporate. Trump is very adamant about trade policy. He's adamant about this.
He believes he's absolutely correct on this and he's going to push this to some level. And so I think when you think about the Fed cuts out there, I think that's why the curve could potentially steepen as well because the front end comes down, but the back end says, hey, there's still kind of this inflation side out there. There's expectations of it.
Like CPI still probably prints in the high twos to low threes this year absent some kind of shock to the system. And so the bond market's going to still want some premium. So I think that's why I like the shape of the curve as a trade more than the direction outright of interest rates because I think it is very problematic right now because the policies are so divergent.
And again, we don't have a really good roadmap in a historical context to kind of frame the current environment. And so I think that's why, again, from an investor standpoint, I think you need to own some of the rates. I think you want to own high quality credit.
I think you want to make sure that you have enough liquidity in the portfolio to be able to trade it too because I think at some point this year, maybe it is over the summer when the data starts to really slow. There may be some wobbliness in spreads as well, and I think you're going to want to try to start nibbling on that as well. So I don't know if that answers your question completely, Leslie, but it's kind of how I'm thinking.
No, it actually does. And it actually goes very well into what I want to ask because when you talked about your positioning with the special grade corporates and agency MBS, that's very much in sync in terms of our positioning as well. I have to say, as you and I both know, the volatility that we're seeing is not helping agency MBS in terms of spread compression.
No. But how do you think about that because we have the same, we do have a very similar type of layout in terms of our recommendation, but we've been a little disappointed about the agency MBS, given the fact they're close to 160 for a coupon, and again, we can be competitive IG corporates. There's no question, I think the agency MBS is the better allocation, but we're not seeing that satisfaction quite yet.
So how do you see that going forward and what are your thoughts on just fixed income spreads? Yeah, I mean, look, as an investor, I like wide spreads and I don't need them to compress, right? So if I'm picking that up, I'm happy to pick that up and I know it's essentially a volatility premium.
I'm comfortable with that. I'm not selling away some risk. There is a little risk to that if rates rally a lot because of the nature of the mortgages, you're going to get a lot of that money back.
So the reason you're getting some of that spread too is because of that profile out there. You're going to get your financing wave. You're going to get your money back.
That's not a bad thing. It's just you're no longer going to earn that yield. There's ways of managing that.
You can buy some very seasoned paper in the agency market where they have very low coupons. They have like threes, three and a half. Those are not refiable really, right?
In a market that's a 6% mortgage rate. So those aren't susceptible to that. So you can balance these risks out.
Now you don't get as much spread for that one, but you still get something like 80 over. So when it comes back to mortgage basis is what you're talking about, why haven't you got the compression? It's because there's noise in the market, one.
Secondly, we've lost a lot of buyers. Back in 2021, the largest buyers were the Fed and banks because there was so much liquidity in the system. The banks had all this money from all the deposits.
They put it in mortgages. Well, they're full. They're full on that risk.
They own too much of it. And now if you do it, you have to hedge it and it's expensive. So you don't have this natural proclivity of a new buyer entering the market.
Asset managers like ourselves, we're long the trade. Now can we own a lot more? Of course we could.
But I actually don't think we get meaningful compression in agency mortgages until rate vol settles down. And I don't think that's this year, but I'm happy to clip that incremental coupon, especially on something that is backed by the government. And I do think that at the end of the day, the mortgage basis makes a lot of sense.
So I wanted to ask you too with that, because I know you spent a lot of time also on CNBS, right, on the CNBS side, or neutral CNBS right now in terms of our allocation, but I am curious of what your thoughts are on the CNBS side. I mean, we see these headlines coming across, you know, office delinquencies are the highest ever, you know, whether or not, you know, the Fed cut will actually help some of these, I would say, sort of refining this, if you will, in terms of the CNBS side. What's your thoughts on CNBS overall?
We're somewhat a little more neutral on it. We liked it in like 23 and 24. When we got some of that spread compression, that was also something we sold down a little bit of.
But what we've been taking our risk is in the diversified pools. So we're not buying single asset. We're not going out and buying office property or lending to that office property.
We're buying pools of things. And so those pools are reflective of what the market will clear. And so they have limited office exposure.
There's a lot of supply today in multifamily housing, right? So think apartment type buildings, those type of things. There's also the industrial side, right?
There's the data warehouses and stuff. I know that there's been noise about that with the AI trade, but like 97% of the data warehouses that are in CNBS deals actually are cloud services. So think of, you know, the Oracle systems or Amazon or Microsoft Azure, things like that.
So there are kind of like these crown jewels inside of that market. But the problem is office. The office problem is going to linger for the next few years.
And you talked about rate cuts saving that market. You're going to need meaningful rate cuts there. The cap rates are too low, barring rates are too high.
And again, it's just not the way the economy is shaping. So unfortunately, I think that that lingers. It's going to be a big overhang in the CNBS market for years to come.
And you're going to have to have transactions clear. And when you see them clear, probably one of the worst markets in the country is where we are, where we sit in Los Angeles. The office, the vacancy rates are some of the highest in the country.
But then you juxtapose that against something like Century City, which is like six miles away and the vacancy rate is like low single digits. So and it's going for like pristine prices. So it's really regionally dependent and it's dependent on essentially what that economy is.
Essentially the return to work side. So from a CNBS standpoint, spreads also got a little tight there. They do trade wider to most credit products out there today.
I think they should. But also that means what you can do is you can buy things like AAA rated, short paper. We run an ETF on that one as well.
It's a low duration CNBS fund. And when you look at those kind of profiles, I mean you can default all of the office space, you can default all the retail, and you can have zero recoveries on them. And these bonds don't get touched.
They have significant structural protection. So there's things you can do in that space that are still interesting. I mean if you can buy AAAs at like $190 over today, that's kind of an interesting profile on a bond that probably has a life of a year.
That sounds pretty good to me today in this market and it has protection. Now it has spread risk. It's going to have some volatility because of the headline.
But when you look at the collateral underneath it, it shouldn't have that volatility. It actually is too cheap. So again, there's pockets we like, Leslie.
But that one is very much security selection dependent. And don't be fooled by some of the investment grade ratings there because those BBB tranches definitely have meaningful default risk today, especially in some of those more sensitive deals to office. Yeah, we agree.
We're actually more than the CNBS had last year. We went neutral. I mean, the agency CNBS has done very well, but we're definitely keeping a neutral stance on that sector as well.
So I agree with you 100%. I do want to ask you, though, when we think about going forward, particularly with all this headline, I always like to ask people what they think pockets of vulnerability might be or even those that might create opportunity because all these headlines, you know, is Japan going to sell all their treasuries, are treasuries no longer safe haven, is the dollar going to collapse? All these kinds of things.
Or is, you know, the bond vigilante is going to come out and take us to a five and a half or a 5.75, 10-year treasury yield? So or are spreads, you know, are we going to have a repeat of the 2022 scenario where the inflation part of rising interest rates is just going to have those equity fixed incomes start to underperform? Like, how do you sort of see these pockets of vulnerability given the, as you mentioned, heightened uncertainty?
And besides just the consistent sort of narrative that we have to hear, which shifts very, very quickly from the administration? I think the bigger risk right now, Leslie, is the credit spread side of the equation. And I think that's the case because we've been living, you know, on a very strong consumer.
We've had consumption that's been driving GDP for the last three or four years. Contrary to what the narrative was in the election, it was a good economy. Yes, prices were high.
Prices will not go down because we don't pursue deflation. So no one's going to solve that problem. So I think as you look at the vulnerability, I think it's going to ultimately come down to the consumer.
And we've seen this with delinquencies. You see this on essentially all product out there, whether it's, you're starting to see the uptick in delinquency on student loan, not the demanding repayment all of a sudden. You see it actually in housing as well.
You see it in credit cards. You see it in autos. The delinquency rates are kind of at new local highs.
But I could tell you that story for the last year and a half. And so the question becomes is that does that finally start to erode? And that's where I keep coming back to the confidence side.
If you don't have a lot of confidence in your job, the stability of it, you're going to pull back a little bit and be a little more austere. And so that's where I think credit spread vulnerability is a greater risk right now. I think the inflation that comes from the tariff, let's just say it was primarily passed through to the consumer, I think it's negligible over the next year or so.
You're going to see pockets where there will be inflation. Think about the tariffs that they hit on appliances back in 2018, right? And Besant came out and said, well, we did tariff policy and it didn't hit inflation.
Well, he's right on the broad basket. But when you look at those appliances, they went up 30, 40%, right? And US producers just raised their prices too.
They didn't go after market share. They went after profitability. So I bring that all back to say, I don't think we have the animal spirits here to really stoke the inflation right now.
In fact, I think it's the opposite. I think we had the animal spirits post-election. It's been eroded now, and I think it takes a while to really build that back up.
So I think a tax cut or something that comes through the incremental, not just the extension of the TJCA, the one that's expiring at the end of the year, that will get extended because of the Republicans controlling Congress. The question is, if you do the tax cut, where does it go? And if you give it to, let's say, the consumer, it doesn't have a high multiplier.
The highest multiplier of a tax cut goes to corporate America, right? And so that's where we'd have to be focused to try to stoke these animal spirits. So I think they're going to be hard-pressed to do it.
I know they want to do it, but we're going to have to see if they can coalesce and get together. So bringing that all back, I think the risk isn't as much in rates right now as it is in spreads, if I have to nail it down, and I think it's going to be more consumer-linked right now. Because corporate America, investment-grade bonds in the corporate bond market, they're pretty pristine in general.
They have high cash balances. They've got great interest coverage. And so at the end of the day, they're going to make it through the cycle.
But also, I think when you see this nervousness, it just commands risk for you, and that's what I keep coming back to is, if there's heightened uncertainty, I need to be paid more for risks that I'm taking, and if that's not the case, I don't need to be taking them. And so that is the way we've been positioned. We've talked about the up-in-quality trade for almost two years now.
It's been a great place to be. It still is. We withstood the volatility in April, and we didn't really trade much in April.
We didn't try to really take advantage of anything, because it seems like there's more of this to come. And maybe it's headline-driven. Maybe it's actually we walked some of these policies back.
But the problem we have right now, I mean, I sit in Los Angeles, the port traffic is down massively. Those are great jobs, by the way. I read every four containers that come in, that's one person employed.
We have traffic down like 45% year-over-year right now. So yes, there was the front-loading a couple months ago. But this has knock-on effects, right?
That's what we're talking about, shelves being empty in a few weeks in some instances. And so I just think, as you look through that, that just ripples through the psyche. Think about it when we have natural disasters, and you go to the store, and you see the shelves bare, right?
It weighs on you. And that's the problem, is that I think we're destroying this confidence now. And that, to me, is reflected in that ultimate consumer, which leads to corporate spreads.
So just to wrap this up into your takeaway and final positioning, if I'm an investor and I could get 401 on a one-year bill, one-year term, how should I be positioned right now, given the uncertainty? And what are your final thoughts in terms of where to be, just to wrap things up? Yeah.
Look, I think it's going to be a decent fixed-income market. And if you're right on the rate cuts on that side, I think you definitely will have a positive year in fixed income. The cash flow is still good as an intermediate bondholder, as I talked about, like a 5.5% rate.
It's better than 4%, right? You're taking a little bit of risk there. But ultimately, this could be a trader's market, too.
If things happen and all of a sudden you lock in that bill, but then when you go to roll it, you maybe have a 2.5% rate, right? And so you've got to think about what is your goal here. And so people who have uncertainty right now, we hold some bills in our portfolios right now.
We have a little bit of elevated cash in our portfolios because we think spreads have more room to widen at this point. So what I think about is that if you're worried about it, you shouldn't be buying a high-yield bond fund. If you're worried about what's going on in the bond market, you shouldn't be going and taking the below-investment-grade risk.
And if you're really concerned about the long-standing nature of the safe haven of treasuries, you just want to own shorter-duration assets or less interest rate sensitivity. I know you run the taxable fixed income. That's what we have to think about, is opportunity cost.
And that part of the curve, on the front end, it doesn't have a lot of volatility. If you look year-to-date, we're kind of neck-and-neck with owning the two-year treasury, which has pickup, by the way, to cash right now. At the end of it, I think what you want to do is just you're going to have to be nimble at some point.
So if you have uncertainty, I think you shouldn't be worried about your bond portfolio as much as you should be worried about your equity portfolio because we've retraced since the April 2nd highs. We got back to those levels again, or not April 2nd, but at least at the end of the first quarter. So we got back there, but spreads haven't done that.
The dollar has not retraced. The dollar is the one that's still ... the dollar and the rates were very highly correlated. They were moving in the same direction.
It decoupled at this tariff talk. So when you start to look at it, there's things that aren't all cohesive right now. And so to me, the dollar devaluation, they don't want that in the long term.
Right now, they probably do want a little bit of it to help offset some of this tariff cost. But I think as you think through kind of positioning as a fixed income investor, you want to play it down the fairway right now. And you want to be liquid.
You want to have the ability to be nimble later. And again, with the uncertainty, I do think that we're going to have more volatility in spreads. I think there will be some very good entry points in certain assets.
And April was just a sign. Remember back in 2007 when Bear Stearns went down. We had an event like this.
We had a bad month. It recovered real quick. Things were off to the races again.
But that was just the signs of the cracks in the system. And so again, I'm not equating this to 2008 and saying we're going to have that kind of debacle. But if we pursue this trade policy, it's hard to see how we get positive growth this year.
And so from a fixed income standpoint, I think that's why you've got to own some of it too. Well, I can't thank you enough for really taking and spending time. This has been such a great conversation and it's very important for our advisors and our clients.
With that said, Dan, I'm going to turn it back to you now. Thank you. Yeah.
Leslie, Jeff, very generous with your time today. Thank you for covering a lot of timely ground with our clients, our listeners. The conversation will continue at some point though.
Jeffrey Sherman, Leslie Falconeo, thank you for joining us today. Thanks for having me. Thanks very much.
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