BlackRock's Global Co-Head of iShares Fixed Income ETFs Stephen Laipply

Barry speaks with Stephen Laipply, global co-head of iShares Fixed Income ETFs at BlackRock, for a conversation about uncertainty in markets, the impact of the Trump administration's tariff and trade policies, the Fed's rate path this year, what's driving institutional and household investors from the fixed income perspective and more. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  At KKR, we've spent 50 years understanding what matters to our clients and companies. From pioneering private equity to investing across credit, real assets, insurance and sports, KKR has built the experience to navigate complexity, the judgment to recognize opportunity, and the conviction to create lasting value. Because when people and institutions are counting on us, understanding what matters isn't just important, it's everything. KKR, understanding what matters. Visit kkr.com/whatmatters.

• 0:31Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs, and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 1:13Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 1:54Barry Ritholtz?

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• 2:36Barry Ritholtz?

  This is Masters in Business with Barry Ritholtz on Bloomberg Radio. This week on the podcast, yet another extra special guest. Steve Leipley is Global Co-Head of Bond ETFs and investment giant BlackRock. He helps to oversee over a trillion dollars in bond ETFs. He's got a fascinating background at both Bank of America Merrill Lynch and since 2009 at BGI and BlackRock. I thought this conversation was really fascinating. There are few people in the world of fixed income that understands the bond market, the

• 3:16Barry Ritholtz?

  ETF market, what the Fed's doing, what is driving both institutional and household investors on the fixed income side. I thought this conversation was absolutely fascinating, and I think you will also. With no further ado, my conversation with BlackRock's Co-Head of Bond ETFs, Steve Leipley. Steve Leipley, welcome to Bloomberg.

• 3:40Speaker 04

  Thanks for having me, Barry.

• 3:42Barry Ritholtz?

  So what a perfect time to have somebody who specializes in fixed income and bonds. We've had all sorts of mayhem with tariffs on, tariffs off, rates up, rates down, yields starting to creep higher and higher. But before we get into what's going on today, let's talk a little bit about you and your background. BS degree in finance from University of Miami, MBA from Wharton. Finance always the career plan?

• 4:10Speaker 04

  Uh, not quite. So I went to Miami University in Ohio, actually. I grew up in a small town in Ohio. Yeah, so I went there for, ultimately ended up in the business school. I did start off thinking, you know, as many people might that, oh, what should I do? Should I be a doctor or a lawyer? I decided to try doctor. I love biology, organic chemistry, not so much.

• 4:32Barry Ritholtz?

  That's the, that's the gut course that screens a lot of doc, future docs out.

• 4:36Speaker 04

  Yeah, so I had a good friend who said, hey, I'm taking finance. I really like it, maybe give it a shot. I took a finance class, really liked it a lot. It's sort of like math with dollar signs attached to it. So that's sort of the way I viewed it. I really enjoyed it and that was kinda, that was kinda it. I was hooked.

• 4:54Barry Ritholtz?

  So, University of Miami in Ohio is gonna scratch out my next question, which, which is, how do you get anything done in the Florida sun in Miami? But Ohio, I bet, is a little easier study type of regime.

• 5:08Speaker 04

  A little bit. It's still, it's a beautiful campus, a lot of fun, but, but yeah, it's, it was, it was a good experience.

• 5:14Barry Ritholtz?

  So, so you come out of Wharton. We'll talk a little bit about iShares and your previous history at Bank of America Merrill Lynch. But what was it that drew you to fixed income?

• 5:25Speaker 04

  Uh, I think a couple of things. One, I really, I really did enjoy sort of the, the variety of things in fixed income. You know, I mean, you know, equities can be complex in their own right, but fixed income, you can have so many different types of instruments and cash flows and structures. And it was just really interesting to me to see that variety.

• 5:47Barry Ritholtz?

  And what do we have, something like 3,500 individual equities outside of the pink sheets? And how many Qsips are there for fixed income?

• 5:55Speaker 04

  So I did this, I did this exercise on Bloomberg. Depending on how you filter, well north of a million.

• 6:02Barry Ritholtz?

  Right.

• 6:03Speaker 04

  Uh, well north and it's, you, you might even get multiples of that depending on how you filter. But yeah, fixed income, as you know, once you, once you issue that, a company's gonna- Issue debt, you know, perpetually, they're going to keep issuing new Qsips over time.

• 6:17Barry Ritholtz?

  Right.

• 6:18Speaker 04

  So it adds up.

• 6:19Barry Ritholtz?

  No doubt. So you're at Bank America Merrill Lynch as a senior member of the Interest Rate Structuring and Strategic Solutions. Sounds very institutional. Tell us a little bit about your time at Bank America Merrill Lynch.

• 6:34Speaker 04

  Yeah, so I think that group, the idea was to work with institutional clients to really help them manage risk, right? And so it was about using derivatives in particular in a sensible way to come up with hedging strategies. So my particular focus was on the mortgage servicing community. They had a very, very complex asset. They still do. It's a little bit different now, all these years later, but they had a tremendous amount of interest rate risk in those servicing right assets, right? So my job was to work with them to come up with, you know, thoughtful ways to hedge that risk. And there were, you know, some very, very vanilla ways to do it, but, you

• 7:18Speaker 04

  know, we wanted to really try to be, you know, more thoughtful and much more tailored. And that was, that was what I spent a lot of time doing. I really enjoyed it.

• 7:25Barry Ritholtz?

  When I think of hedging risk on the fixed income side, not specific to that era, which was kind of unique, I think of interest rate risk, credit risk, the underlying security that subsequently gets securitized. Am I warm? Tell me if.

• 7:42Speaker 04

  That's about right.

• 7:43Barry Ritholtz?

  Okay, what else do you consider when you're trying to find a way to hedge a fixed income risk?

• 7:49Speaker 04

  Yeah, and so you just, you just nailed almost all of it. So depending on what it is, so when you're dealing with something like a mortgage servicing, right, that's that lenders, you know, sells the loan off and then somebody retains that annuity that can get prepaid. So you go pay off your mortgage, I go pay off my mortgage, that annuity disappears. There's optionality there. You have to hedge that, right? So you have interest rate risk, volatility risk. Things move up and down, the more likely you are to decide if rates fall to prepay. So it's all of that good stuff. And then, yes, you can have credit risk and other types of assets.

• 8:23Barry Ritholtz?

  You use one of my favorite words, optionality, because every time I have a discussion with people who are not in the world of finance, and they say, have you ever calculated how much it costs to take your boat or jet ski out? And figure out what each ride costs you? And I'm like, you don't understand optionality. I have the ability to do that every single day, whether I choose to exercise that or not. That is still a value that would cost somebody something. You join a boat club or a rental club or whatever. Laypeople don't get optionality. Tell us how that applies in fixed income.

• 9:01Speaker 04

  Yeah, and you see this in different ways, Barry. So, I mean, not dissimilar, right? So, as an example, again, going back to the homeowner part, if you have a mortgage, you can decide to prepay that. A lot of people don't. Interestingly, there are stories that exist, and I'm sure you've heard them, where people still have 10% mortgages somewhere.

• 9:19Barry Ritholtz?

  Get out. Is that true?

• 9:20Speaker 04

  There are stories about that. And so if you look at statistics, I haven't done this in a while, by the way. So hopefully, after this long period of time, maybe they've paid them off. But you can find these very high coupon mortgages that are still out there, and nobody really knows why they haven't paid them off. But it is your right, but you're not forced to pay it off. You would think you'd want to if interest rates were low enough. But that exists in different ways. Just like when companies issue debt, a lot of times they'll issue callable debt. So same idea. If interest rates fall or credit spreads tighten, they can call that debt and issue cheaper debt, right? And so that's just sort of a basic tenet of how people like to structure their liabilities.

• 10:00Barry Ritholtz?

  My equity version of that is BlackRock S and P 500 fund is like five bips, four bips. It's like practically free. And sometimes portfolios come into the office. And why are you paying 100 basis points for what's effectively an S and P 500 index? Why don't we save you 95 bips a year, compounded over 20 years? That's a lot of money. So the market is kinda, sorta, almost efficient. I don't know how else to describe it.

• 10:31Speaker 04

  No, I think that's right. I mean, and over time, you know, we've really started to see investors gravitate towards this idea of efficiency. And, you know, again, this is a theme that you really, really hammer home, which is, you know, Basic sort of blocking and tackling is don't surrender a lot of your return to fees. I think everybody thinks that's incredibly important. It took a while for people to wake up to it, but I do think over time, people have really started to understand fees matter. The strategy matters too, but fees matter as well. And so we have-

• 11:05Barry Ritholtz?

  You want both?

• 11:06Speaker 04

  Yeah, you want both. You want both.

• 11:07Barry Ritholtz?

  So I know we'll get to BlackRock starting in 09, but how long were you at Bank America for?

• 11:13Speaker 04

  From 97 through 09.

• 11:15Barry Ritholtz?

  Oh, so you watched the debacle front row.

• 11:20Speaker 04

  Front row.

• 11:20Barry Ritholtz?

  Did you start at Merrill or did you start at Bank America?

• 11:22Speaker 04

  I started at Merrill.

• 11:23Barry Ritholtz?

  Oh, you did. So a lot of people slagged, was it John Thune? I thought he cut a great deal that worked out really well for Merrill employees and relatively well for Merrill shareholders, at least compared to, you know, Bear Stearns and Lehman and so many other companies. He did a solid and it took a while before people recognized it. What was your experience like going through that mayhem?

• 11:49Speaker 04

  I mean, it was stressful. You know, I was not involved with the particular businesses that were under stress, but it was stressful for all of us.

• 11:56Barry Ritholtz?

  Oh, sure.

• 11:57Speaker 04

  As the headlines scrolled day after day after day, you know, was a front seat in history, as it turns out. And so I think, you know, hopefully a lot of lessons have been learned from, from, you know, that period of time. As you know, and I think you've said this many times, each crisis looks a little bit different. So hopefully we take lessons from the last one and that starts building a knowledge base up over time. So maybe the next time, we're a little bit better equipped to deal with it. But it was, yes, it was an interesting time.

• 12:29Barry Ritholtz?

  Yeah, to say the very least. Hopefully we take the right lessons. Sometimes we draw the wrong lessons. That's a whole nother story. So how did you find your way over to BlackRock in 2009? I'm assuming that was once the dust settled a little bit? Was it late, past March 09?

• 12:44Speaker 04

  Yeah, it was. It was interesting. You know, you have sort of contact and networking with different folks and I had, and it was at the time Barclays Global Investors and I did know, I did know a couple of, a couple of folks over there and we had just, you know, had casual conversations, but-

• 13:04Speaker 04

  At one point, and this is a former mentor of mine, a gentleman named Matt Tucker reached out to me and said, hey, you know, this is an interesting opportunity. It's called bond ETFs. It's a business that I've really been working hard on over here. And I'm looking for a skill set that that sort of maps to that. And, you know, I kind of think that that your background might be, might be interesting for this. So, you know, let's, let's talk about it and then, you know, sort of the rest is history. But I was very, very excited about it. And there is a funny story to this, which is I discovered bond ETFs on my own, sort of accidentally. I was trying to buy treasuries and I was very frustrated by the commissions I was getting charged on that.

• 13:46Speaker 04

  A colleague actually pointed me to the iShares website and showed me that bond ETFs actually exist and you could simply buy this on exchange without actually having to buy physical bonds and, you know, pay a commission for it.

• 14:00Barry Ritholtz?

  And not only was the commission, you know, next to nothing, the spread and the price discovery seemed to be a little friendlier to buyers.

• 14:08Speaker 04

  I was really blown away by that and I could not stop, you know, scrolling through that website and fascinated by the idea that you could take bonds and put them on exchange. Absolutely fascinated by that and feeling a little stupid that I hadn't stumbled on it before. But so, so the fun part about that was it helped a little bit in the interviews to be able to say, yes, I'm familiar and, and, you know, by the way, yes, I'm actually a customer, albeit at a small scale, but.

• 14:34Barry Ritholtz?

  For those people who are unfamiliar with BGI or Barclays Global Investments, eventually, what I have argued is the single greatest acquisition in at least wealth management history. Barclays Global gets bought up by BlackRock and the whole iShares product line gets really supersized with just a much savvier group of product developers, marketers, traders, just everything about it went next level. How much of that were you there to witness? Did you start at BGI? Started BlackRock.

• 15:15Speaker 04

  It's funny because people often ask me what was BGI like. I was there for one month before the actual, yeah, so.

• 15:22Barry Ritholtz?

  Like what I've heard through the grapevine is it was a solid shop with a great product, a little sleepy, kinda backwater. If you are at Bank America Merrill Lynch and you still haven't discovered their bond ETF, somebody is not doing the marketing job they should.

• 15:39Speaker 04

  Well, it was interesting. They were very much, I think, quantitative and academically oriented. And I think, I think a little bit of the culture was okay with, with being, you know, somewhat under the radar because it was, you know, a very proprietary place. And so that might, that might be, might be some of it. But yeah, BlackRock did come in and, you know, they did that deal. It was interesting. If, I don't know if you remember, Barry, there were, there were some discussions about whether, you know, it would be some sort of a private deal or what have you. And then BlackRock kinda came in and said, we'll take the whole thing. And that, that was announced, I think, in June. So I'd only been there a very short period of time and then it closed in the fall. And I will never

• 16:20Speaker 04

  forget, you could tell that BlackRock was, was very efficient at this because the day after the merger closed, the signage was up on the building. You walked in, all the screensavers had changed overnight. You had a nice pad, notepad with the logo on it and, you know, some nice pens and all that stuff. So very, very impressive how, how they were able to, to do this so cleanly and, and quickly.

• 16:44Barry Ritholtz?

  That's fascinating. And I failed to mention, BlackRock is a little shop over on the west side of the city. 11, 12 trillion dollars in assets, somewhere in that range. How big a chunk is fixed income and fixed income ETFs at BlackRock?

• 16:59Speaker 04

  We just hit 1 trillion in fixed income ETFs.

• 17:03Barry Ritholtz?

  So keep at it. You'll get some AUM soon. Keep, keep plugging away.

• 17:06Speaker 04

  Keep plugging away. Yeah. And, and you know, the industry is, is now globally, the industry is approaching 3 trillion. We're at around 2.8 trillion and change. And we think that number is going to get to 6 by the end of the decade for the industry. And we, we hope to be obviously a sizable chunk of that. But it's been, you know, it's been experiencing double digit growth, you know, for years and years. And it's just been a very, you know, fast moving river for us.

• 17:32Barry Ritholtz?

  Really, really quite fascinating. So Steve, you just mentioned you think bond ETFs can reach $6 trillion by 2030. Is that right? What is the key driver of that growth? That's doubling in less than five years.

• 17:49Speaker 04

  Yeah, and it's a number of things, and we've talked about these trends. So I think you have, you have a series of waves of adoption that happen. And it's interesting because where we tend to see the largest uptake of bond ETFs is when you have stressed markets. And so I think this is, we have several, several test cases at this point. So, you know, we've had many ones since the financial crisis. So, financial crisis happened, and I think that's the first time where I personally started getting reverse inquiry from sophisticated investors asking about the bond ETFs because they noticed that even at the worst of it, let's call it September or October

• 18:31Speaker 04

  of 08, they were still trading on exchange very robustly, other markets not doing so well, right? And so that got the attention of a lot of investors. At that time, products were probably too small for a lot of those investors, but they became very intrigued by them. Over the ensuing years, you had, you know, you would have occasional blips in the markets, whether it was, you know, some sort of an energy dislocation in high yield or what have you. But what we noticed was every single time you would have one of these stressed markets, you'd see a huge surge in volumes in bond ETF trading on exchange. That would get the attention of larger investors. They would start adopting the products. Why? Because when you need to trade something, you were able to

• 19:15Speaker 04

  trade bond ETFs, even if other things were really struggling to trade. And so every single time you'd have one of these waves of dislocation in fixed income, you started seeing more and more and more investors gravitate to bond ETFs. The big one was COVID. So

• 19:31Barry Ritholtz?

  For sure.

• 19:32Speaker 04

  February, March 2020, you know, even treasuries, high-quality investment grade, you know, the whole thing, everything was seeing dislocation, right? So that's when we saw probably our largest wave of adoption in fixed income ETFs was during that period of time. Same story. You saw things that people would just take for granted, suddenly struggling, you know, in terms of bid ask and depth of liquidity. But what could you trade? You could trade bond ETFs. You could trade them in size. That got at that point, a lot of attention because now the products have scaled to a level where even the largest investors could use them in their portfolios. And so that was interesting.

• 20:13Barry Ritholtz?

  So you're absolutely preaching to the choir. I have heard mostly on the equity side, but also on the fixed income side. You know, these ETFs, you don't know what the underlying is priced at. They're filled with all sorts of stuff. It's really hard to get a print on. When it hits the fan, you're not going to be able to get in or out of it. You're going to have giant spreads and no liquidity. That wasn't true in 08, 09. That wasn't true during the flash crash, COVID, and the most recent tariff volatility, even in 22, when stocks and bonds were both down double digits for the first time in four plus decades, ETFs traded like rock stars. Why is this such persistent

• 20:58Barry Ritholtz?

  squabbling? You know, you'll say, just wait. Is it that people are losing business to ETFs? Why is there so much fear and concern that for 25 years have been completely unjustified?

• 21:12Speaker 04

  Yeah, I think it's a little bit of, it might be a little bit of the

• 21:16Barry Ritholtz?

  Sour grapes?

• 21:17Speaker 04

  A little bit, but I think part of it too was after the crisis, there was, it felt to me like there was this search for what's the next thing?

• 21:26Barry Ritholtz?

  Right.

• 21:26Speaker 04

  What's the next thing that could go wrong? Not quite sure why that focus shifted to ETFs, but it was ETFs and probably a number of other things. But I think the idea of a bond ETF in particular drew attention because the, the talk track was, well, you're taking something over the counter and you're putting inside this box and you're putting this box on exchange and that might, you know, cause some, some interesting things to happen. And in reality, what we've seen is just the opposite of those fears buried. Again, just, you know, you pointed out the tariff volatility, same story, different verse, right? So you have, you know, markets are really, really stressed. You see a lot of

• 22:06Speaker 04

  dislocations, volumes on exchange once again, set new records. I think, you know, on the day of the announcements, I think we saw close to $100 billion of bond ETF strain on exchange, way more than the the previous record during during COVID. But the the sort of, I think skeptic has always said, well, you know, we haven't seen a good test yet. We haven't seen a good test yet. I think COVID was a good test. This was just a reminder, right? And so really what happens is, you know, the exchange keeps trading, even if the underlying doesn't. And unlike, you know, the fears, you don't see these quote unquote, forced redemptions or anything like that. Nobody's forced to redeem an ETF. It can just trade on exchange. And I think that's the elegance of it. It gets proven time and time again.

• 22:51Speaker 00

  At KKR, we've spent 50 years understanding what matters to our clients and companies. From pioneering private equity to investing across credit, real assets, insurance and sports, KKR has built the experience to navigate complexity, the judgment to recognize opportunity, and the conviction to create lasting value. Because when people and institutions are counting on us, understanding what matters isn't just important, it's everything. KKR, understanding what matters. Visit kkr.com/whatmatters.

• 23:23Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands on experience matters more to recruiters than advanced degrees with the company looking for people with raw innate intelligence. A spokesperson for SpaceX. SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 24:06Speaker 01

  But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 24:46Barry Ritholtz?

  So I just wanted to find some terms you reference because in the back of my head, I'm always thinking, "Does my real estate agent mom or my art teacher wife know what that means?" So when we talk about on the exchange, we're talking about anything that's publicly traded that you could just log on to your online trading account, buy or sell instantly. When we talk about over the counter, OTC, that's one bond desk calling another bond desk and saying, "Hey, do you guys have this 2019, you know, muni, California muni series, whatever?" And someone has to go locate that. So over the counter means two people literally speaking to each other to engage in a transaction.

• 25:31Barry Ritholtz?

  Is that, is that a fair description?

• 25:32Speaker 04

  That's exactly right. And so, yes, over time, bond trading has gotten more efficient. You know, in the underlying market, you have electronic trading of treasuries and now, and now credit. But, you know, if you go back 20 years when ETFs were, were first new, bond ETFs were first new, it was still very much a voice market. It was a very much pick up the phone, exactly as you described. And even today, I think even the most sophisticated institutions still believe in the, you know, efficiency and the elegance of being able to trade a bond ETF on exchange. You're trading, if you, if you just step back for a second to think about what you're actually doing, you're trading hundreds or sometimes thousands. Of bonds simultaneously at a penny bid ask on exchange.

• 26:17Speaker 04

  You actually still can't do that in the underlying market. So, you know, it doesn't matter if you're an individual, it doesn't matter if you're a large sovereign wealth fund. That's still a very impressive feat to be able to do a transaction like that. And bond ETFs allow you to do that. But I want to get back to, you know, you would ask what are sort of the long-term drivers? I think this idea of just, okay, you can trade these things when you need to, that's important. Another one would be when we're building portfolios, and we see this both again on the wealth and on the institutional side. Do we need to build portfolios with hundreds or thousands of bonds? Or could we take a low-cost bond ETF as sort of the core of that portfolio? Could we then use individual bonds to sort of flavor that or tilt that in different ways?

• 27:01Speaker 04

  And then maybe add our favorite active managers on top of that. Might that be a more efficient way to do it than just going out and buying? You know, to your point, picking up the phone and calling around and putting together hundreds or however many bonds, which might take days or weeks. And so I think there's this growing realization that, you know what? It's fine to trade in and out when things are volatile, but actually might be more efficient to use these things long-term in a bond portfolio. So I think that's a huge part of the adoption too, is the recognition that this might be a smarter way to build bond portfolios in general.

• 27:32Barry Ritholtz?

  On the equity side, I'm fond of telling people, before you go chasing alpha, why don't you at least lock in beta? And I'm pleased to hear that's a similar approach on the fixed income side.

• 27:46Speaker 04

  Very much, very much. And I think it's a, and this has been a journey because, you know, you've run into this and I've heard you talk about this on your show before. Everybody wants to believe that, you know, if I'm buying this security, I have intent, I did my homework, it matters a great deal. And that may be true for that security, but when you do that a hundred times, some of that starts getting canceled out, right? And so that's when you have to step back and say, all right, if I'm looking at my portfolio holistically, I want a certain beta. I want a certain tilt, I want a certain amount of yield coming from, you know, one place or another. What's the most efficient and the cheapest way to do that? And that's, I think, people are slowly recognizing that maybe the ETF actually has that, has that utility.

• 28:31Barry Ritholtz?

  So this is a good time to ask a question about.

• 28:36Barry Ritholtz?

  Active fixed income investing, it seems like it's super challenging on the equity side. We all know the stats. 60% of active managers underperform the benchmark in year one. By the time you get to five years, it's 80 plus, 10 years, it's 90 plus. And by the time you get to 21, it's a handful of guys like Warren Buffett and Peter Lynch. I don't see that uphill battle the same on the fixed income side. It seems like fixed income active does much better than fixed income equity. Is that fair?

• 29:12Speaker 04

  I think there are a few things. So one, we think that all investing is active to a degree. You're making decisions. So if you're using ETFs, you're making sort of these broad beta calls and you're deciding, you know, which beta, which sector, what have you. So there's an active choice there in how you build that portfolio. But to your point, strictly active in fixed income, what does that mean? That means that, hey, I'm going out and I'm assembling a bond portfolio. I'm going to compare that to a benchmark and I'm going to see if I beat it.

• 29:42Barry Ritholtz?

  And you guys have the benchmark, the iShares Core US Ag, or as everybody calls it, the Ag.

• 29:50Speaker 04

  Yeah, the Ag. We have AGG. We have the universal, which is iUSB. One of the things that we've been vocal about is which benchmark are you looking at? Because sometimes you'll see a manager buy a bunch of high-yield bonds in their portfolio, not all, but like they'll hold, you know, a large allocation of high-yield bonds, benchmark to the aggregate, which has none, and say, oh, look, I'm beating the aggregate. Now, that's, that's fine.

• 30:18Barry Ritholtz?

  By taking on more risk.

• 30:19Speaker 04

  They're taking on more risk. Okay, that's fine. You may give some of that back every, call it five years, right? What we sort of preach too is, okay, let's get benchmarks that look a little bit closer to the risk you're taking and see what you're actually adding through security selection. Right? So some of it's benchmark mis specification, but fixed income markets still are less liquid, they're more fragmented. So yes, there are opportunities there. And so, you know, people often ask me, do you believe An active or quote passive, we call passive index because actually even in indexing.

• 30:51Barry Ritholtz?

  Still an active choice.

• 30:52Speaker 04

  Yeah, exactly. So.

• 30:53Barry Ritholtz?

  Wait, market cap weighting? That's a choice.

• 30:55Speaker 04

  It's a choice. And so my answer to that is, we believe in all of the above. We think the best portfolios have elements of both of these things, index and quote unquote, active together. Much better portfolio, much more resilient than just sort of suiciding one or the other. Oh, I'm all active or I'm all index, right? So we think both makes a lot of sense. And that's, that's how we sort of design our product set.

• 31:19Barry Ritholtz?

  Given the million plus Qsips, the million plus bonds that are out there. My simple thesis was always, if you want to be an active fixed income manager, how hard is it to screen out the lowest quality, weakest credit, poorest, poorest yield relative to risk you have to take? And if you're just cutting out the bottom half of that, that should do better than, than whatever the ag is going to do or whatever your benchmark is. Because there's, you know, hey, there's 3,500 stocks, not all of which are great. A million bonds, there's a lot of room for the bottom. Pick a number. Decile, quartile, half, a lot of junk can get mixed up into that. And I don't mean high yields.

• 32:03Barry Ritholtz?

  I mean, lower quality fixed income opportunities.

• 32:07Speaker 04

  Yeah. And this is the trick with fixed income. You could see great opportunities. But when you try to act on them, it can be really costly to actually implement. And that cost, or just can you find that bond, right?

• 32:20Barry Ritholtz?

  Right. Can you locate it?

• 32:21Speaker 04

  The search cost, the actual transaction cost.

• 32:23Barry Ritholtz?

  Wait, there's a search cost for locating a bond? I always thought it was kind of built into the transaction cost. I didn't realize, hey, find me this, that's going to cost you just to ask that question?

• 32:34Speaker 04

  Well, let's call, let's call that the time it takes to actually get ahold of it. You're sitting in cash.

• 32:39Barry Ritholtz?

  Right.

• 32:39Speaker 04

  And, and, and I've, I've heard you say this many times, you probably should not be sitting in cash very long. It's a medium of exchange, right?

• 32:46Barry Ritholtz?

  That's.

• 32:47Speaker 04

  But this is the time it takes you to locate that particular bond and then you have to pay the transaction cost, you know, the bid ask on top of it. So, you know, yes, optically, you could see opportunities all over the place. The question is, are you able to actually move on them and implement them at the right, at the right price? And that's, that's where there's a lot of skill involved in fixed income, I think.

• 33:09Barry Ritholtz?

  And I've heard some clients say, especially institutional clients, listen, my cash, my money allocation, I've got that. I've hired you to do, you're my equity guy, you're my fixed income, you're my opportunistic distress guy. I don't need you to carry cash. And I wonder how that impacts people's thoughts of when you start to see 1, 2, 3, 4% creeping up as a cash balance. Got to put that money to work. There's an opportunity cost of just sitting in cash. Fair?

• 33:42Speaker 04

  Yeah, and there is. I think what has happened the last couple of years is, you know, money market assets are, you know, in the trillions.

• 33:51Barry Ritholtz?

  Well, now that it's 4.5%, 5%.

• 33:53Speaker 04

  Now that it's 4.5%. And so there's been a little bit of what I would call, I think, apprehension of giving up that certain, or what people view as certain, you know, 4.5% to 5%, then moving out. The trick to that is, you know, if you wait too long,

• 34:09Barry Ritholtz?

  Right.

• 34:09Speaker 04

  the market's going to move past you.

• 34:10Barry Ritholtz?

  And we've watched it, you know, it broke below 4, it went back over 5. You're not locking that in, you're taking what, look, if you're saving for a house or something, six months, a year down the road, and you're afraid of, you know, 2022 type year, of course, a money market makes perfect sense. But if you're looking out a couple of years, you want a product where you can sort of lock in a higher yield? Fair statement?

• 34:37Speaker 04

  Yeah, and you also want to be able to have, it's so, look, cash is great. We launched money market ETFs. Cash plays a role in a portfolio. To your point, it shouldn't be a huge part of the portfolio. You need to get those assets allocated, you know, on a risk basis. So whether it's, you know, equities, safe bonds, riskier bonds. It's like an orchestra, right? You have your string section, your horn section. They all need to play together. And just sitting on the sidelines, that's okay for a while, but it doesn't make very good music. You need to actually have everything, you know, kind of playing its role in the portfolio. And so, long-term, that is what's going to actually, you know, build your return.

• 35:16Barry Ritholtz?

  Right. And I'm spitballing these numbers off the top of my head. I have to double-check them. But I want to say, cash is a drag on performance four to five years in equity and nine out of 10 years in fixed income. Am I close there, ballpark?

• 35:30Speaker 04

  Haven't heard that part on fixed income, but I see your point. I mean, you know, if you just sit forever and the Fed cuts rates, you're going to miss it, right? And so that's

• 35:40Barry Ritholtz?

  That's right.

• 35:40Speaker 04

  And, you know, and I think the consensus right now is, ah, you know, maybe they'll cut a couple times this year, maybe a couple times next year. Things can move pretty quickly on the ground. And, you know, it's one of those things where, you know, yeah, by the time you wake up and decide to move, the market may have already moved past you. I mean, to your point, we were at around 4.5% almost a year ago, and guess where we're sitting at today? Around 4.5%, but it's been quite a bumpy ride, up and down. And so, who knows where we'll be in six months?

• 36:08Barry Ritholtz?

  So, the question is, if you were sitting in money markets for the past year, or you had bought some equivalent bond ETF, which performed better over the past 12 months, given all the volatility?

• 36:23Speaker 04

  Well, on a risk-adjusted basis, you could say, alright, I had less risk in the money market, and I'm sort of sitting where I was, you know, a year ago.

• 36:29Barry Ritholtz?

  Yeah, but if you're in high-quality bonds, how much risk is there really?

• 36:32Speaker 04

  If you bought, sort of last, if you think about where we were, closer to 5%, you know, you actually ended up locking in pretty good yields. Now, the one thing I would say is, it's hard to time, it's hard to time rates. It might be actually the hardest thing to do, is to time the top in yields. That can be a very, very fleeting thing. So, it's more about get invested, build a durable portfolio, make sure you have risk in the right buckets. You need some high-quality bonds for ballast. You need some riskier bonds for income, right? That all plays together with the equity side and the alt-side of your portfolio. Portfolio, all these things need to come together. Yes, cash plays a role, but you will probably miss out on some very good opportunities. We haven't had yields like this in 20 years, right?

• 37:17Speaker 04

  So are you really going to try to hit the top when you're seeing yields that are as good as they've been in a generation?

• 37:24Barry Ritholtz?

  Yeah.

• 37:25Speaker 04

  So you can get greedy, right? But

• 37:27Barry Ritholtz?

  Which is kind of funny because it, I always laugh when I think about someone who's 40, 45 years old on a stock desk, on a bond desk, have not seen 7% yields in their entire professional career. And I recall people's bonds coming up, like the New York City Geo Bonds finally got called 7%. Like they were getting, I'm getting 15%. What am I going to do with 7%? There, that was when New York City was going to collapse. You can't get 15% today, 7% Treasuries. Hey, that's a good deal. No one realized how great a deal it was 25 years ago, but that's just, just the reality.

• 38:07Speaker 04

  Yeah. And you do have to go back to the mid 2000s to see yields at these levels. So it's a great opportunity. And you know, rather than saying, well, I really want to hold on until 5%. You know, I mean, you just may miss it. So we think it's just a great, great time in fixed income.

• 38:23Barry Ritholtz?

  Absolutely. And I want to just remind everybody who thinks they can time yields or the Fed collectively, everybody has been completely wrong about when the Fed was going to start cutting, how far they were going to cut, how often they would have cut. Like the consensus could not possibly have been more wrong for like, what? Three years, four years? Here comes the recession, here comes the Fed cuts, here comes. If you're waiting because you think you can guess, if you're going to be a macro tourist, best of luck to you.

• 38:55Speaker 04

  Right. Yeah, exactly. It's build the portfolio for the long term, you know? And you may say, well, I could have gotten a higher yield or hey, I locked in a pretty good yield here. Either way, it's about the next 10 years. It's not about the next month.

• 39:09Barry Ritholtz?

  Huh, really, really interesting.

• 39:13Speaker 01

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• 41:29Barry Ritholtz?

  So let's start out talking about fixed income today and the obvious spike in bond market volatility we've seen this year. Tell us what's going on.

• 41:40Speaker 04

  It's, uh, we've covered a couple of these things, but it's, pick your theme. Okay. So let's, let's go back a few years. We had COVID. Um, we had the policy response to that. We then had transitory inflation, which became not transitory inflation. We then had the, uh, we had the reverse policy response, which was to aggressively hike rates, the, the most aggressive tightening cycle in, in 40 years. Right? So people were used to seeing rates, you know, bumping up against zero. I think at one point, the 10-year yield was, you know, somewhere in the, you know, 60, 70 basis point range at the very, very, very lows. And I think this was quite a shock to people who were just sort of used to seeing

• 42:23Speaker 04

  the post-crisis, post-crisis, sorry, quantitative easing regime. All of a sudden you have yields moving, you know, to a two handle, three handle, four handle, and then ultimately a five handle. Um, something, to your point, many investors haven't seen this before. And so it was, it was quite a shock to the system. Then we kind of hit sort of, um, equilibrium. The economy seems to be doing all right. As we talked about, you know, people were worried about recession. It hasn't materialized yet. The Fed, you know, paused for a while, started easing. Then all of a sudden you get new policy initiatives coming in, specifically tariffs. Right? And so that caused a general rethinking of the way the economy is going to move going

• 43:05Speaker 04

  forward. Will inflation come back? Won't it? It's just been, you know, a lot of up and downs. And, and as we were talking, if you just look at the trajectory of the 10-year yield, you know, we, we just sort of do this large, you know, kind of sine wave between, you know, call it sort of high threes and high fours. And we've been doing that now for a few years. Um, so you're just sort of stuck in the middle of, you know, kind of a four handle, but you get these ups and downs depending on, on what the driver is.

• 43:34Barry Ritholtz?

  And just to put some specifics on this, when, when we look at the broad economic consensus about tariffs,

• 43:43Barry Ritholtz?

  They're generally perceived as inflationary, sort of a giant fat tax on consumers. I know a lot of people in the administration push back on that characterization. But if you're spending more money on tariffs, you have that much less money to spend on other things. Therefore, it should hurt corporate revenues and perhaps be somewhat inflationary. Is that a fair assessment?

• 44:07Speaker 04

  It's hard to say. So I think, you know, I've heard both arguments. I think really what inflation is about, right? So whether it's tariffs or something else, you know, people often talk about these things as, well, that's a one-time shock versus something that happens repeatedly over and over again. I think some of that's academic. Inflation's really, I almost think it's a mind game or an expectations game. The real, I think, question is, does inflation, you know, a higher expectation for inflation somehow get embedded or get sort of resurfaced, right? As a result of whatever policy initiative. And so I think what the Fed's looking at is less about a specific thing and more about

• 44:48Speaker 04

  whether people start worrying that inflation will be at X level, like which may be above where the Fed wants it to be. To me, I think that's what they're really focused on is, you know, hey, we got things down, we're at 2.3%. And by the way, what's interesting, I actually looked at this, if you go back to, let's call it 95 to 2005, average inflation was around 2.5, not 2. Right? So if you kind of look at a long, long time series on Bloomberg as an example, right now where we're sitting isn't too far off where we've been on a long, you know, 20-odd, 30-odd year journey. But I think what the Fed's worried about is, will any particular action cause people to start worrying that inflation will be higher?

• 45:30Speaker 04

  And as you know, sometimes that can become sort of a self-fulfilling thing. I think that's kind of the concern.

• 45:35Barry Ritholtz?

  So I'm going to play devil's advocate on every point you said, and I want to hear your pushback. But before I get to that, former Vice Chairman of the Fed, Roger Ferguson,

• 45:47Barry Ritholtz?

  Did this accidentally very funny piece about the 2% target. And he could not find an academic basis for that number. But he traced it back to an interview from the Australian, their central bank chief on TV in the 1980s. And he mentioned 2% is their target. That was the first mention of it. I mean, it certainly was a credible target in the post-financial crisis while we were trying to get up to 2% inflation and deflation was the fear. But once the CARES Act and the new era of fiscal stimulus passed, isn't 2% kind of the wrong target?

• 46:31Barry Ritholtz?

  Why doesn't 2.5 or 3% make sense in an era of fiscal, not monetary stimulus?

• 46:38Speaker 04

  I'm gonna, I'm gonna say that is above my pay grade. But what I will say is, if you look at a long, long time series, whether it's 2, whether it's 2.5, I mean, I think generally, right now, we're sort of in that zip code, right? So can they get it all the way down to a perfect 2? I don't know. And, and do they want to? Or, you know, does, do you risk going to 1.5? I mean, that's, that's for them to worry about. I do think that we're not too far off. If you, if you were to look at this over many, many, many years, the worry is somehow, does everything that's happening right now start sending you in the other direction? Again, people worrying about it, does that start, you know, causing, you know, specific actions that actually lead to it, to it becoming more of a reality?

• 47:22Speaker 04

  I think that's what the Fed's sort of focused on.

• 47:24Barry Ritholtz?

  And I, I think transitory has become a dirty word, but I, we sometimes want stuff right now. I can make the case that this bout of fiscally driven inflation was transitory. Transitory just took a little longer than everybody expected compared to the sort of deep structural inflation we saw in the 1970s. This wasn't structural. We passed a giant, everybody stay home, here's $2 trillion. Takes a little while for the pig to work its way through the python. Right?

• 47:59Speaker 04

  That's interesting. I mean, yeah, you had a huge, huge fiscal impulse, you know, very, very significant fiscal impulse. And sure, it could take time for that to work through. If you couple that with the idea that you unleashed that fiscal impulse at a time when policy was still easy, the textbooks would tell you that you probably should expect some inflation. But I think, you know, if you look at just the way people had sort of entrenched their thinking post crisis, they were caught off guard.

• 48:25Barry Ritholtz?

  When you were at Wharton, did you have Jeremy Siegel as a professor?

• 48:29Speaker 04

  I did not. I did sit, I was a little bit, I was a little bit disgruntled about that it didn't work out scheduling. I did sit in on some of his lectures just as a guest in the back row, but yeah.

• 48:39Barry Ritholtz?

  I had him in here, I don't know, two months after the first CARES Act was passed, and he was the first person I recall saying, hey, this is economics 101. $2 trillion, the largest fiscal stimulus as a percentage of GDP since World War II. We're going to see a giant bout of inflation, maybe even double digits. And I got emails. We love Jeremy, you've had him on the past, but he's crazy. We're not going to get anywhere near 9%, 10%. He doesn't know what he's talking about. And it was kind of shocking to hear someone, Stocks for the Long Run, talk about inflation and bond yields. And he turned out to be pretty dead on.

• 49:22Speaker 04

  Yeah. Again, if you just sort of go back and you look at a large fiscal impulse coupled with easy monetary policy, that's right out of the textbooks.

• 49:32Barry Ritholtz?

  And yet, it was so hard, another failure of imagination, it was so hard to say, no, no, we've had inflation 2% for 20, 25 years. What are you talking, 8%, 9%, 10%? It just, it just seemed that regime change was so hard to incorporate because it just seemed like such a break from everything we've experienced before.

• 49:55Speaker 04

  And it happened quickly.

• 49:57Barry Ritholtz?

  Very, very, very quickly. So, um, so, so let's talk a little bit about the next easing cycle. I'm assuming that six months from now, by the time we get into the fall, the worst of the tariff is behind us. Things will have stabilized. At that point, is the Fed starting to think, all right, we can unfreeze the housing market a little bit and talk, talk about a few more rate cuts this year or next? Like, what sort of timing should we be thinking about?

• 50:28Speaker 04

  That's what the market, I looked at this this morning, the market's pricing in a couple cuts by the end of the year, pricing in a couple cuts next year. And so it looks to me, the market's sort of settled on this idea that maybe we'll end up with a terminal rate of around, you know, three and a quarter, three and a half, somewhere in that zip code. So we'll, we'll see. I mean, the cut definitely got pushed out to September.

• 50:51Barry Ritholtz?

  Right.

• 50:52Speaker 04

  I think originally, you know, if you go back even, you know, a few weeks ago, we were still thinking sort of, you know, mid to late summer, but that's, that's now pushed into September for sure. So, so we'll see.

• 51:02Barry Ritholtz?

  So, the big question is, everybody's been expecting cuts for so long and has been so wrong. Is there anything in the data that you look at that suggests, maybe we're going to get it right this time in terms of the Wall Street consensus as to when the timing of rate cuts might be?

• 51:20Speaker 04

  Well, you, you just said it. Consensus has a funny way of maybe not actually materializing. Right. So I think everybody's sort of locked in on this, on this path now. It looks like just the way the curve is shaped and everything else. Well, we will see. The data has come in, um, you know, it depends. You can find, you can find people who have raised growth concerns, but then you can also find the resiliency crowd. Um, there's, there's just a lot of, I think, sort of mixed data right now. But overall, you know, the economy seems to be holding in pretty well so far.

• 51:52Barry Ritholtz?

  Pretty resilient. You know, one of the things I always look at are spreads, and they seem to be relatively low for all the people running around with their hair on fire.

• 52:02Speaker 04

  They are.

• 52:02Barry Ritholtz?

  Um, what does that tell us of the state of the economy? And the state of the fixed income markets.

• 52:09Speaker 04

  Yeah, I think if whether you're looking at investment grade spreads or high yield spreads, right, the spreads to treasuries, they're both pretty tight relative to historical, long-term historical averages. So yeah, the credit markets are telling you that so far, they are buying the resiliency story. They think that, you know, balance sheets are still in pretty good shape. I mean, you've heard this anecdote before that when yields were low, corporations did do, you know, very thoughtful issuance and they were able to lock in yields and really, you know, shore up their balance sheets and have these strong cash flow profiles. Now ultimately, people will have to refinance and, you know, that may be at higher yields. So we'll see how long that holds. But so far, spreads are telling you that the resiliency story is intact.

• 52:54Barry Ritholtz?

  So corporate debt issuers refinanced at lower rates, households did it, everybody did it except Uncle Sam. We'll save that for another time. But if you're a buyer of debt, how should you be thinking about duration? When do you start extending your duration, looking to lock in a little higher yield on the possibility that we see lower rates in the future?

• 53:20Speaker 04

  This is the debate, capital T H E, right? So I think we've been very much in the camp of, you know, the intermediate part of the curve is pretty attractive. So, you know, if you're looking in

• 53:33Barry Ritholtz?

  Five to seven?

• 53:34Speaker 04

  Three to seven, somewhere in that zip code, you know, whether it's in treasuries or high grade or even even high yields in that area. Anyway, that's the maturity profile. But if you look at that versus, say, 30 years, I think that, you know, right now, a lot of debate going on on the fiscal situation, Moody's action sort of resurfaced that debate. If you look at term premium, meaning, and you know, again, let's define terms, the amount that investors want for holding very long-term bonds has gone up quite a lot over the last several months. And I think all of this is sort of playing into this idea that, yeah, longer-term yields are flirting with 5%. Could they go higher? They might. There's

• 54:17Speaker 04

  a lot of ambiguity around what our fiscal trajectory is. Are we at risk for further deterioration? We are running deficits with a growing economy. And that is, you know, and we're running larger ones than we historically have with a with a growing economy. So that's what's caused this fear of the long end. Now, Are longer-term bonds to be avoided completely? I think there's healthy debate on that. I do think that they still hold some shock absorber value, depending on the situation. So, you know, we like, we kind of frame this as being positioned, you know, overweight in sort of this belly of the curve because we think that's a sweet spot. It doesn't mean that you should have zero

• 54:56Barry Ritholtz?

  Right.

• 54:57Speaker 04

  long-term bonds. You know, it could be, having some might be a good sort of, you know, insurance policy in a way.

• 55:01Barry Ritholtz?

  So, when, when yield comes down, bond values go up and vice versa. If you're making a bet, what's the next 200 basis points in yield? Is it more likely to go higher or more likely to go lower? It would take a pretty big screw-up to send yields up 200 basis points. Not a zero possibility, but is that kind of the core bet? We're more likely to see move down than up?

• 55:28Speaker 04

  I think the current view is that long-term yields could edge higher on this

• 55:35Barry Ritholtz?

  Edge higher?

• 55:36Speaker 04

  Edge higher.

• 55:36Barry Ritholtz?

  Like 25, 50 basis points?

• 55:38Speaker 04

  That's been discussed because of this idea that depending, okay, depending on how the tax and spending bills come out and how people score that and what's that going to look like for the deficit, et cetera, et cetera. You know, the discussion could be, could you see further pressure on the very, very long end? The intermediate part is probably okay. So, the real debate is, are we going to see more of a steepening, depending on the outcome of, of the, you know, tax and spending bills, et cetera, et cetera. That's been the debate. Now, if you get an unexpected slowdown, you could see long-term yields come down temporarily. And so, to your point, you know, do you get 200 basis points up or do you get 50 to 100 down? It all depends on, you know, the unexpected by definition.

• 56:22Speaker 04

  If you get a sharp slowdown that nobody saw coming, you probably do see longer-term yields coming down. And I think not a lot of people are expecting that at all.

• 56:30Barry Ritholtz?

  Well, except everybody for the past five years predicting recessions that never showed up. The other question that I always like to ask is, hey, what happens if we yields don't go appreciably higher or lower? Can we just be stuck in a 4 and 1/4 to 4 and 3/4, you know, money market yields, plus or minus around 4 and 1/2 percent? What does that look like? Can we just stay in that range for three, four, or five years?

• 56:57Speaker 04

  Sure. Are you likely to? Probably not. History would tell us that. Except you had this long period that doesn't look really like anything that we've seen.

• 57:07Barry Ritholtz?

  The 2010s.

• 57:07Speaker 04

  The 2010s, right?

• 57:08Barry Ritholtz?

  Just totally unique.

• 57:09Speaker 04

  So unless we go back to the 2010s, probably not. But I think, you know, my earlier point, it's going to be really hard to call like this is the best yield that I want to get into. It's more about, we're going to have ups, we're going to have downs, we'll have cycles. It's really about building that portfolio out for the long-term and getting income. So it's the first time in 20 odd years, the income is back in fixed income. So that's pretty compelling.

• 57:34Barry Ritholtz?

  So if someone's a fixed income investor or looking to add fixed income as a sort of shock absorber to their equity portfolios, what segments of the fixed income market do you find attractive? Where are the opportunities today?

• 57:50Speaker 04

  We've been seeing flows mostly go into very high quality. So that being treasuries, that being investment grade. That's where, you know, the bulk of flows have been moving into. And again, much of it has been in that sort of belly of the curve type of exposure. Now mathematically, as a shock absorber, you're going to get your biggest kick from the very long end of the curve. We just talked about that.

• 58:12Barry Ritholtz?

  Right.

• 58:12Speaker 04

  You're taking some risk there. So

• 58:14Barry Ritholtz?

  Because if it goes the other way.

• 58:16Speaker 04

  If it goes the other way, it hurts. And so the debate's going to be, you know, will it play that role if you get a big slowdown, right? If you get a huge risk off, will you see long-term yields rally like they have in the past? In light of some of the fiscal concerns, that's the big, big debate.

• 58:32Barry Ritholtz?

  And the dollar concerns on top of it, yeah.

• 58:34Speaker 04

  That's the debate.

• 58:35Barry Ritholtz?

  And what about, you know, we always have clients who are looking into their retirement. You know, I just want X dollars and not worry about taxes. If you're in a high tax state, how are you looking at the muni markets these days?

• 58:50Speaker 04

  Yeah, and I think munis have really, you know, seen some whipsaw as well, right? So a lot of folks now look at munis and see some opportunities there. Again, this discussion around tax policy has really, really sort of caused a lot of volatility. At some point, you just have to really make an allocation decision. And if you're, if you are, you know, in a high tax bracket, I mean, munis can be pretty compelling and they've cheapened up a fair amount.

• 59:20Speaker 01

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• 1:01:35Barry Ritholtz?

  All right, so I only have you for a limited amount of time. Let's jump to my favorite questions that I ask all of my guests. Starting with, what's keeping you entertained these days? What are you watching or listening to?

• 1:01:49Speaker 04

  Uh, well, so, the funny part about this is, it's, so, Masters in Business, big fan. We already talked about that, but no, I also, um...

• 1:01:58Barry Ritholtz?

  Whenever someone says that, I always feel like Rodney Dangerfield in Caddyshack. Keep it fair, keep it fair.

• 1:02:03Speaker 04

  No, um, I, right now, um, you know, streaming wise, um, my, my wife makes this joke, so, she and, and my, uh, my older sons, you know, will watch Yellowstone or something like that. I've always got my laptop open.

• 1:02:15Barry Ritholtz?

  Right.

• 1:02:15Speaker 04

  It's so, she's like, you, you don't really watch TV with us, you pretend to, but I think one of the fun things, I'm watching, um, you know, Friends and Neighbors right now.

• 1:02:24Barry Ritholtz?

  So interesting.

• 1:02:25Speaker 04

  Yeah, it's fun.

• 1:02:26Barry Ritholtz?

  Are you, are you caught up?

• 1:02:28Speaker 04

  Not caught up, not caught up.

• 1:02:29Barry Ritholtz?

  Oh, so the, whatever the last episode was, five, really fun twist.

• 1:02:35Speaker 04

  No spoilers.

• 1:02:36Barry Ritholtz?

  No spoilers, absolutely.

• 1:02:37Speaker 04

  But, but yeah.

• 1:02:38Barry Ritholtz?

  Not unexpected, but the way they execute it was really well done.

• 1:02:43Speaker 04

  All right, cool. That'll, that'll be some good binge, and I, I am still very fond of binge-watching Law and Order. I will try purposely to hold out, because I do like binge-watching.

• 1:02:54Barry Ritholtz?

  Really?

• 1:02:54Speaker 04

  All of the above, right? So whether it's organized crime, or, or what have you, so...

• 1:02:58Barry Ritholtz?

  My wife makes, eight o'clock, the screens go away. You can watch TV, you have to put that away. So that means, right before I go to bed, the last couple of minutes, let me just see...

• 1:03:08Speaker 04

  We try to impose that rule, it kind of falls apart.

• 1:03:11Barry Ritholtz?

  No, no, I, she's a strict, stern taskmaster. She who must be obeyed. All right, so let's talk about, you mentioned one of your mentors. Tell us about the folks who helped shape your career.

• 1:03:23Speaker 04

  Yeah, and, and, and many of them are, are folks who've moved on, but I, I think there are certain people that I remember, um, you know, who really gave good advice, and, and, you know, I'll give you a couple of examples. Um, I had a boss, one of my first ones, out of, out of, uh, out of business school, and he basically said, "Look, I view my job as teaching you, I want you to listen and learn, and then if you work hard, I view my other job as to help you create financial security for yourself and your family. But you have to do..." Those things in order for that to happen. So if you listen and you work hard, I'll try to keep up my side of it as well. And that always struck me and I thought that was a

• 1:04:06Speaker 04

  great way to put it. You know, he viewed his job as teaching, but also if I did the right things to help me in the long term. And so I thought that was really interesting. Another mentor, you know, told me that you can be really good at what you do, but you really have to get along with people. You really have to be able to know where somebody else is coming from, work well with people, because you can be great at what you do, but if you're not pleasant to work with, it's not going to get you too far at all. And so I think that's, that's another lesson. I mean, you know, a lot of times you like to think you're right in a certain debate or whatever, but you really do have to learn to bridge those gaps, or it doesn't even matter how good you are, what you do.

• 1:04:47Barry Ritholtz?

  Huh. Good, good advice for anyone listening. Let's talk about books. What are some of your favorites? What are you reading currently?

• 1:04:53Speaker 04

  Well, I'm reading How to Think Like a Monk.

• 1:04:56Barry Ritholtz?

  Huh. I saw that go by on Amazon.

• 1:04:59Speaker 04

  Yeah, no, it's pretty cool. I had a friend of mine, I'm not sure why he recommended that book to me. There might be a hidden message in there, but I think that's pretty cool.

• 1:05:08Barry Ritholtz?

  Don't read too much into it.

• 1:05:09Speaker 04

  One of my, you know, I, I like history books. And so, you know, I've read a lot of the Ken Burns stuff. I think in particular, the things I've been fascinated with, the 60s, I think, really helped shape the world that we're living in.

• 1:05:21Barry Ritholtz?

  For sure.

• 1:05:22Speaker 04

  So I've been a junkie of a lot of that stuff.

• 1:05:24Barry Ritholtz?

  Name some authors and books you like.

• 1:05:26Speaker 04

  The Ken Burns stuff.

• 1:05:27Barry Ritholtz?

  All of Ken Burns.

• 1:05:28Speaker 04

  Yeah, yeah, I really like that. So, but, but I'll watch any number of documentaries. I just think that really was a pivotal time for the country and the world. And it kind of has echoes and, you know, really long shadows. So I always thought that was, that was really interesting. I like a book that really kind of stuck with me over the years. It was about, you know, I love math, statistics, all that stuff. It was a book called Against the Gods. And it was the remarkable story of risk.

• 1:05:54Barry Ritholtz?

  Peter Bernstein?

• 1:05:55Speaker 04

  Yeah.

• 1:05:55Barry Ritholtz?

  Oh, my God.

• 1:05:56Speaker 04

  Still one of my favorites.

• 1:05:57Barry Ritholtz?

  One of the all time great finance books that most people absolutely 100% should be reading. No, no doubt about that. So I always pick out a handful of books to read over the summer. I'm so happy sitting on the beach, waves crashing in the background, banging through book after book. What just came a couple of days ago was Ron Chernow's Mark Twain.

• 1:06:23Speaker 04

  Oh, wow.

• 1:06:24Barry Ritholtz?

  And, you know, Chernow did Hamilton, he did a bunch of giant books. I'm super excited about that, so I'll let you know if that's interesting. I can't imagine it's not given both the author and the subject matter. All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in either investing or specifically fixed income and ETFs?

• 1:06:48Speaker 04

  Yeah, I think the most important thing is you have to be honest with yourself about what you like to do. And so I have met, I've met students who say they want to get into the markets and, you know, when you ask why that is, they have trouble articulating why. So I think part of it is you just really got to want to do this because if it's going to be your life's pursuit, you got to wake up on good days and bad days and still want to do it, right? And there are good days and there are very bad days and you still have to have that same sort of love of it. And so if you don't love it, right, if it's not, if you're just saying, well, you know, I heard it's a profitable thing. I want to, you know, I have these certain personal goals. That's, that's not a good reason to do it.

• 1:07:29Speaker 04

  But if, if you really do love the idea of markets and just this, you know, really elegant thing where somebody, you know, two people on the opposite sides of the planet can somehow find a common price. You know, what's the saying? A trade is an agreement on price, a disagreement on value. I always thought that was the coolest thing, right? So, you know, just this idea that, you know, the markets find a way. I, I think if you love that, then it's the right career for you. But that, that's the key thing. Find what you love and be really, really honest with yourself. And, you know, it's fair to say, I don't know yet, and that's why you have to feel around a little bit. You know, whether you're, you're trying different things, you know, you may land on one desk and hate it, rotate to another one and love it. It's, it's, it's a process, but you got to really be honest with yourself.

• 1:08:15Barry Ritholtz?

  Really, really interesting. And our final. Question, what do you know about the world of fixed income ETFs and investing today? You wish you knew back in the 1990s when you were first getting started?

• 1:08:26Speaker 04

  Yeah, I'm gonna admit this to you. I know many of your admonishments about investing. I was an original sinner on many of them.

• 1:08:37Barry Ritholtz?

  No one bigger than me. I learned the hard way.

• 1:08:40Speaker 04

  So I did, in fact, do a lot of the common mistakes. You know, I chased things. I remember, you know, during the original internet boom, buying some really expensive, racy mutual funds, which I subsequently rode into the ditch. So I think part of it is, you know, the long-term idea, you know, really, really taking like that long-term view. Now, I did learn not to panic over the years, right? And not, you know, sort of...

• 1:09:09Barry Ritholtz?

  Useful skill set if you're running a trillion dollars.

• 1:09:12Speaker 04

  I think try to, you know, keep your money, you know, don't pay away too much of fees and definitely don't chase the hot, hot thing. I think being diversified. Look, it may not be fun to talk about with your friends, but having a broad diversified portfolio over time, you're gonna be fine. It's hair-raising sometimes, but you're gonna be fine over the long term.

• 1:09:31Barry Ritholtz?

  Yeah, very often the cocktail chatter, it's not what makes you money. I love the title of Ned Davis's first book, Do You Want to Be Right or Do You Want to Make Money?

• 1:09:41Speaker 04

  Right.

• 1:09:42Barry Ritholtz?

  And that really sums it up.

• 1:09:43Speaker 04

  Yep.

• 1:09:44Barry Ritholtz?

  Well, Steve, this has been really fascinating. Thank you for being so generous with your time. We have been speaking with Steve Lipli, Global Co-Head of Bond ETFs at BlackRock. If you enjoy this conversation, well, check out any of the 530 we've done over the past 11 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. And be sure and check out my new book, How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth and How to Avoid Them. I would be remiss if I did not thank the crack team that helps put these conversations together each week. John Wasserman is my...

• 1:10:27Barry Ritholtz?

  My audio engineer, Anna Luke is my producer. Sean Russo is my researcher. Sage Bowman is the head of podcasts at Bloomberg. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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