Somedays you wake up and you just don’t want to read the news. It’s hard to trust the media in a pay-per-click world where speculation and speed seems to be more important than factual reporting. For instance, six months ago, when covid was just starting to shut down the economy, all we had to do was wait 12-18 months for a vaccine, yet today the media is filled with stories on how covid is wreaking havoc on small businesses and causing a global recession.
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Announcer: Now AM 1220 KDOW presents New Focus on Wealth with certified financial planner, Chad Burton, drawing from his 20 year background in finance and investing to help you make sense of your money matters. New Focus on Wealth. Get a new focus on personal finance, wealth management, Wall Street, and the economy. Now your host for New Focus on Wealth, Chad Burton.
Chad Burton: Welcome into the show. I’m your host, Chad Burton, certified financial planner. Want to find out more about me and my team of CFP practitioners, just go to chadburton.com, newfocusfinancial.com. Hopefully by the end of the day, we got that July retirement investing webinar that’ll be up that you can sign up for in July. Should be up by the end of the day. So basically retirement income tax strategies, because we had a lot of issues going on between the 2017 Tax Act, the CARES Act, SECURE act, investing in a post-pandemic world, dealing with taxes, dealing with low interest rates. We’re going to talk a lot about that today. I’ve got Ashok Bhatia, CFA managing director at Neuberger Berman. We’re going to talk a lot about what the heck is going on in the bond market. He’s coming up on the third and fourth segment today.
Chad Burton: Today, June 24th, though, I got to tell you that some days you wake up and you say, I don’t even want to read the news. The headlines are just [inaudible 00:01:44]. So far, you wake up and you hear each of California, Texas, and Arizona posting their largest daily case edition so far. Arizona’s pretty much the first one that opened up in terms of bars, restaurants. Well I guess, Florida was before that. And a lot of activity in Phoenix, a lot activity in Scottsdale, Havasu, all of those areas. And you’re seeing increased cases there.
Chad Burton: I don’t necessarily pay attention to the increased cases because testing has gone way up. Testing has gone way up, because if you go in for any kind of elective medical procedure right now, in most cases, they’ll have you do a coronavirus test a couple of days before that, or the day before, in some cases. It’s the hospital issues, right? How many people are being hospitalized? That’s the big question that’s out there. And I don’t know about you, but it’s just hard to trust any new sources these days, because it’s a pay per click world. You start seeing some of these financial websites post news articles about dropping futures or rapidly increasing futures right after the market closes. And it’s like you don’t even know anything yet.
Chad Burton: But there’s some pretty tough fork headlines today. So you’ve got the increase in coronavirus cases. And I was mentioning this before that we kind of went to this point of oversold in March to, well, now the market seems to be pretty much priced for no major return of the virus in the fall. Because we’re going to be battling the flu and the coronavirus at the same time. And kind of almost like, oh yeah, we’ll get a vaccine within 12 to 18 months.
Chad Burton: So it’s kind of confusing to see these headlines, such as today, IMF forecasts deeper global recession from the growing virus threat. They went from a 3% decline in contraction. So a 3% contraction, global economic contraction, to now 4.9%. And it’s crazy to see where it is because most of it has to do with the small business side of things. I heard of another restaurant, one of our favorites, near the Vancouver Washington office that shut down. A pretty popular place in Portland that shut down.
Chad Burton: A lot of restaurants just aren’t going to open anymore because it’s kind of one of those things where it seems like a great fun idea to run a restaurant. And then you realize that, oh boy, it’s a lot of work. Unless you can franchise it, it’s kind of a limited income situation. And so those that were already struggling because rents were going up, property taxes were going up, they’re just done. They’re like, “All right, I’m out of here. I’m using this as a chance to move on.”
Chad Burton: And then you’re starting to see some of the more bigger layoffs in different companies like Precision Castparts, and things like that. This is anything that’s a little bit tied towards aerospace. I’m not going to personally invest in airline stocks because if I’m going to take the time to invest in individual stocks, they have to be dividend achievers. Companies that raise their dividend on a consistent basis. And you’re not going to see that out of airline stocks. But there’s a lot of companies in the aerospace sector that do, or industrial stocks that have a pretty decent size aerospace division. But there’s going to even be layoffs there.
Chad Burton: And it’s tough because you’re looking at this news and you’re kind of hearing about this from your friends, and seeing the economy not anywhere close to where it was in 2019. And 2019 retail sales were good, but the economy was already slowing a bit. We were already kind of post-recovery mode into a bit slower growth mode. And then this happened. Yet, you’re looking at the S&P 500 pretty close to its all time highs. And you’re looking at the 12 month P/E ratio for the S&P 500 based on current analysts estimates for the S&P 500 stocks at 21.9. That’s above the five year average of 16.9, according to FactSet, and above the 10 year average of 15.2 for a P/E ratio.
Chad Burton: Now the 10 year average is going to include 2010 when the P/E ratio was still pretty low, post the 2008 and 2009 recession. So you got to understand why. And we’re having this dispersion on returns right now because the five largest stocks in the S&P 500 now account for 20% of its total market cap. And that’s above the 18% concentration level that happened in the dot com bubble.
Chad Burton: So when you look at the S&P 500, it’s not an even amount of stocks in terms of what’s driving the return. It’s just not. Microsoft, Apple, Amazon, Alphabet, and Facebook. That’s what’s driving a big portion of the return. And that makes sense. So all of them are being used more these days. You’ve got, of course, Microsoft. Everybody’s using Office 365 it seems and Teams. Apple seems to be able to continue to sell their latest and greatest phone for 1,200 bucks or more. Amazon packages all over everybody’s porch. Everybody’s just at home online a little bit more. And dealing with Facebook in terms of protests and elections.
Chad Burton: And that’s where the advertising is going, Facebook and Instagram. Why? Because if it works. It absolutely works. Unless you end up on Instagram and you buy something that ends up coming from China directly, and it takes three months to get there, and then it’s broken when it gets here. So I don’t know. I think they need to be a little bit more careful in terms of what they allow on the platform, but it’s working. I mean, just look at people making money being influencers on Instagram. It’s crazy. Post a couple selfies a day, and you can make 100 grand a year. Who would have known?
Chad Burton: So it’s kind of one of those things where there are certain stocks that have become a heck of a lot more valuable and will continue to become more valuable because of the new way that we have to live. And hopefully it goes away. And we just remember this as like, hey, remember that time when all of our governors were telling us if we went outside we had to wear masks. Do you remember that? Ha, ha, ha. I sure hope it’s a memory that fades quickly. Because everywhere we go now you have to wear a…
Chad Burton: It’s just hearing people argue about it one way or the other. On one sense, yeah, I definitely want to protect other people if I happen to have something. And then you hear other people argue about it, but the government can’t tell us what to do like that. Let it be our own choice. And I get it. You got to be a little open minded in terms of how people feel about it because a lot of people are very scared of government control because the government hasn’t done a good job on a lot of issues. Look at the rising debt. Look at how social security works. Look at how politicians work and argue against each other.
Chad Burton: Look at who we have to vote for, people. What a disaster that is. We’ve got Trump or Biden. Come on. That’s the only options that we have. Please some independent run. Please some independent run that we can have something that unites us for once, and tackles the hard issues like social security and taxes and healthcare. Why can’t we have that? I don’t know. That’s on my wishlist.
Chad Burton: All right, next. We’re going to be talking a lot about bonds today because stocks, they just make money over time. Bonds are a little bit tougher these days with low rates. We’re going to talk about bonds next couple of segments and how they work. We’ll take a quick break. We’ll be right back.
Chad Burton: (singing)
Announcer: You’re listening to NewFocus on Wealth on AM 1220 KDOW.
Chad Burton: Welcome back into the show. I’m your host Chad Burton, certified financial planner. Do you have a money question for the show or maybe you are looking for some financial planning help, some retirement planning help, just go to chadburton.com, newfocusfinancial.com. Got a webinar coming up in July all about retirement income planning and investing post the pandemic.
Chad Burton: Next segment, I’ve got fixed income specialist, Ashok Bhatia, a CFA managing director at Neuberger Berman. We’re going to talk about, kind of get into the weeds a little bit when it comes to fixed income. And fixed income is such a funny term. It sounds pretty good, right? When you go into retirement, I’ve got fixed income. That used to mean a pension. People used to work for 40 years, retire at 65, and they have a pension that would replace 70% of their income plus social security. And they were okay. Their only issue was having a lump sum of money to be able to fix their home up, and other things like that.
Chad Burton: Fixed income, it means the same thing as a bond. And when you buy a bond, you’re actually loaning money to a company, or a government entity, or municipality in exchange for income. And then you get your money back at the end of the term of the bond. So let’s take the 10 year US Treasury bond. Closed last night at a rate of 0.71%, right? So you buy those types of bonds from the government, from the US government. It’s considered the safest investment in the world. If you buy a $100 bond, you’re going to put out 100 bucks, you’re going to get 0.71% return in terms of income, and it’s consistent income. Now 0.71%, that’s also, know when you hear that term, it’s seven tenths of 1%, or 71 basis points. That’s how a lot of mortgage brokers will talk, or people that are in the bond business.
Chad Burton: And so you’re looking at that saying, okay, well, if all I can get at a 10 year treasury is 0.71%… And by the way, if we go back to pre-credit crisis in 2008, when we were closer to, let’s see, let me go back to 2009. We’re right about 4% in December of 2009. 3.85% on the 10 year treasury. So we’re 3% lower on income. And then you might say, why buy a 10 year government bond? Because I can go online, and I can go to Ally Bank, A-L-L-Y, I can go to Capital One 360, we use Flourish. I can earn over 1% on my money, FDIC insured, sitting in an online bank. I can transfer it back and forth to my checking account whenever I want. Why would I loan the government money 10 years at seven tenths of 1%, when I can earn over 1% on a FDIC insured liquid account?
Chad Burton: Well, one reason is there’s nothing safer than the 10 year bond. FDIC insurance limit is $250,000. Now, if you have a trust, if you have an FDIC insured account that is a living trust, it’s the trustees plus the beneficiaries times 250 grand. So you can get more than $250,000. So just keep that in mind. But the thing is is that your FDIC insured liquid bank account, won’t go up if there’s a market event, which has people flee out of riskier assets into more bonds. And sometimes you have situations overseas where something happens overseas, like in emerging markets, where people that have money there want to get the heck out of their currency. The currency goes into the US dollar, and then sits in treasuries because it’s easier to buy US treasuries than it is to just open up an FDIC insure bank account if you live overseas. It’s just plain and simple facts. So there’s tons of demand for it out there right now.
Chad Burton: And if you look at an ETF like GOVT, which owns a bunch of different types of treasuries, because they go from T-Bills all the way up to the 30 year bond. They even brought back the 20 year bond a little while ago. GOVT bottomed in November 2018. And since then, it’s up over 18%. CDs didn’t do anything, but just pay you interest. So that’s why you still want to own some conservative bonds in a portfolio because of the increase in value. If a negative market event occurs, it gives you something to be able to trim, sell, and buy stocks on the cheap. Right?
Chad Burton: Now, most of the time, if you own a bond, and as long as that company or that entity doesn’t go bankrupt or default, you’re going to get your money back at the end of that 10 year period. Problem is most people own these things in mutual funds. So what happens is in your 401(k), you’re putting money into a bond fund. The bond manager has to go out and buy individual bonds. And when rates rise, when rates go up, when you hear about the 10 year treasury going up in interest rates, like the taper tantrum in 2013, all of a sudden you’ll look at your 401(k) statement, you’ll see a decline in value on those bond funds.
Chad Burton: And it’s because the bonds that are inside that were bought when rates were lower, and now new rates are higher. And so those bonds, nobody wants them right now. They can go buy new ones at a higher rate. So why would they want to buy your bonds? So on paper, the bonds look like they’re worthless. Yet, if you would just hold them until maturity, you get the money back, okay? But that’s not what happens. People look at those net asset value declines on their mutual funds in their 401(k) and they start to sell when rates go back up. And it forces the bond managers to sell bonds that they would just rather hold to maturity. All right. So that’s what can happen.
Chad Burton: And so you can get short term price movements in mutual funds, five, six percent. You look at the duration of your bond mutual fund. That’s how you can tell how much will go down if the interest rates go up by 1%. So if a duration of five, a 10 year treasury goes up by 1%, your bond fund will likely go down in value by 5%. That’s a very simple layman way to explain it. Bonds can trade at a discount or premium. So the bond coupon yield, or the income is based on par. So a par rate for bond is usually 100 or 1,000 dollars. But they can trade at a premium or a discount. So if you have a really good bond with a high rate, instead of trading at 1,000, it could be trading at 1,050.
Chad Burton: And then you got to know what your yield to maturity is. Because you’re paying 1,050, but you’re only going to get 1,000 bucks back at the end of the bond term. So you have to look at what’s called yield to maturity. And that can be different than the coupon on the bond. Until about 12 to 15 years ago or so, I can’t even remember now, in 25 years in the business, mostly did individual bonds. But here’s the deal. There’s such a lack of options and pricing power now. I was on TD Ameritrade’s website yesterday because when we manage money for people at NewFocus Financial, we don’t hold the money. It’s people have their accounts, their own individual accounts at TD Ameritrade. We’re just authorized to trade the accounts for them on a daily basis.
Chad Burton: And I was looking at the fixed income offerings, and it’s the lowest I’ve seen. There’s like 11 corporate options at TD Ameritrade yesterday. Now, other places might have more options out there like Fidelity or Schwab, but it’s just, there’s been so much demand for that type of investment that bigger companies like Neuberger Berman, Guggenheim, BlackRock, they’re able to get bonds and do DFA. They’re able to get the bonds in bulk at a cheaper rate than most individuals are. So now I use, when I can, institutional bond funds where I know the managers, know what they’re doing, know what they’re able to buy. So we’re going to talk about a lot of bond issues today. Treasury inflation, protected bonds, mortgage backed securities, convertible bonds, junk bonds, high yield, senior loans, structured credits all coming up. We’ll take a quick break. We’ll be right back.
Chad Burton: (singing)
Announcer: This is NewFocus on Wealth on AM 1220 KDOW.
Chad Burton: Welcome back into the show. I’m your host, Chad Burton, certified financial planner. As I mentioned earlier in the show, we’ve got a great guest with me. We’ve got Ashok Bhatia. He’s a chartered financial analyst. He’s deputy chief investment officer for fixed income at Neuberger Berman. And he’s also a lead portfolio manager on multi-sector fixed income strategies. 25 years in the fixed income business. As I explained earlier in the segment, fixed income, you think of that as bonds. There’s a lot of different types of bonds out there. And they, I guess, you could say moved quite a bit in different directions in some cases, depending on whether it was government bonds or high yield/junk bonds. Lots of things going on in the bond market. And Ashok, thanks for joining me. I appreciate it.
Ashok Bhatia: Hey thanks, Chad. I’m happy to be here and thanks for the opportunity to join you this afternoon.
Chad Burton: Yeah, you bet. I mean, let’s start, I kind kind of want to go back in time here because back in, oh, say March timeframe after the big correction occurred, and it still felt pretty awful, my son asked me, he’s in personal financial planning degree program, and he’s like, “So, are you going to pay more attention now to the inverted yield curve?” Because I think you heard me say, and a lot of people say that, “Well, yeah, it inverted, but it might be because of the Fed, what they’re doing. And it doesn’t feel like a recession. It doesn’t seem like it’s going to occur.”
Chad Burton: I think I remember you on CNBC talking about retail sales doing pretty well. And then we got a pandemic. So inverted yield curves, that’s where longer term maturities are paying less in income than shorter term bonds. It happened a couple of times in 2019 in certain areas of the bond market. What are your thoughts on, should we pay attention in the future to inverted yield curves?
Ashok Bhatia: Yeah. The inverted yield curve has got a pretty long history of suggesting that the risks in the financial markets are brewing. And I think the intuition is that, as you, and I’m sure all your listeners know, the Fed, the Federal Reserve, sets an overnight interest rate. And when the yield curve is inverted, it’s often because the market expects that whatever the Fed’s policy rate is today, that it’s going to be lower sometime in the future. And typically the Fed funds rate would be lower in the future because there’d be an economic slowdown or a recession.
Ashok Bhatia: So the intuition behind an inverted yield curve is that the market thinks that there is probably some sort of economic slowdown coming in in the future. And I think, we’ll look back on, as you know, the March period and even the six months before that, where this ended up being another episode where the inverted yield curve was suggestive that there was a growth slowdown kind of coming in the future.
Chad Burton: Yeah. It may not have been nothing, but then we had a pandemic. Right?
Ashok Bhatia: Yeah.
Chad Burton: Yeah. So it’s just, you never know what’s going to happen to cause it to push it to the other edge. I mean, recessions are normal and healthy, wouldn’t you say?
Ashok Bhatia: Recessions are certainly normal. The aspects about it is, I think, recessions tend to, and they involve people losing their jobs and losing their livelihoods. And it’s something that we should all be concerned about because these are real people and real families that are impacted by the economic slowdown. Now recessions tend to happen because we build up extra capacity in the economies, or we build up extra debt. So there often tends to be a cause of a recession that is, we’ve had a period of really high growth. And then something happens to slow down growth. Or we’ve had these periods of financial instability that lead to up to a pullback, something along the 2008 period.
Ashok Bhatia: So the causes of a recession, there tends to be a few that have caused them throughout economic history. This one obviously, the pandemic, is an interesting one because it was a sudden fall in consumer’s desire to spend. And some of that was government’s closing down. And a lot of it was consumers choosing to stay at home and not go out and engage in economic activity. And for everyone’s dollar that they a earn, that’s also a dollar that gets respent into the economy. And in this case, it was much more of that quick pullback of demand that has led to the sharp and sudden recession we’ve seen.
Chad Burton: Yeah. And we’ll have to talk about that in terms of some businesses. I mean, I’ve seen a lot of local restaurants where I live, they’ve closed down. Popular restaurants that are, they’re done. They’ve closed their doors for forever. That’s kind of the small business sense. Some of that, I guess, will occur in certain sectors of the economy. I was looking at a chart on a webinar, Neuberger Berman was doing it. It said degree of impact, and direct and material is one section, negative is another, neutral is another, and positive impact in certain sectors. In terms of fixed income, what’s been the hardest hit areas in terms of bond investing, where you’ve seen defaults, and you’ve seen maybe bonds become worthless in some cases?
Ashok Bhatia: So there’s been two pockets where the risk has really shown up in bond markets, and also in equity markets. And the first pocket is really the energy companies. And as you probably remember, back in March and April, in addition to this economic slowdown, we also saw crude prices fall quickly. At some point, people may remember the headlines of crude prices trading negative. Well, there has been a lot of pressure on energy companies and particularly energy producers. And the thought there is that with less demand, crude is at a lower price. And that pressures a lot of the solvency of energy companies. So that’s been one pocket.
Ashok Bhatia: The second pocket has been in the industries that are most impacted by COVID. These are the car rental agencies. Here, we’ve seen a bankruptcy from Hertz. It’s also been in some of the lodging and leisure and the hotels. It’s been in the airlines. And there’s pressure for higher education institutions that issue debt in the muni market. There’s been pressure there as well.
Ashok Bhatia: So the sectors that we’re seeing, I think you mentioned the small businesses. They tend not to issue debt. They’re too small to issue into the big public debt markets. But there is that other host of industries that’s primarily related to travel and transportation, that’s been awfully severely hit. They tend to be debt issuers. And that’s where we’ve seen bond prices, either companies go into bankruptcy, or see significant deterioration.
Ashok Bhatia: Another pocket has been retail. So here we’ve seen the Macy’s and names like Nordstrom and some of the mall issuers, mall companies, that have seen pressure as well. Here, I think, COVID has just accelerated pressure on a lot of the brands and the malls that was already building before this happened.
Chad Burton: Yeah. It’s interesting because, I mean, the malls were already kind of hurting anyways because people were either looking for experiences, or they were looking to shop online. And it’s just not as much brand loyalty with millennials these days. They’re really quick to ditch a company if they’re not, I guess, environmentally responsible in some way, shape, or form, or if they don’t match a value. So it was just one more hit to that whole sector.
Ashok Bhatia: Yeah, exactly.
Chad Burton: What do you think… I mean, are we done? I mean oil, you mentioned, got hit by COVID. Oil prices were already low. And then Russia came out and said, “Hey, forget about this deal with OPEC. We’re going to pump as much oil as we want.” Is the damage already done? Are you starting to see more and more? What do we expect in terms of defaults in that area?
Ashok Bhatia: I think in the energy sector, the defaults are largely behind us. And this is energy and crude prices trading in the 30 to 40 dollar barrel range. So gas prices and oil prices generally around where we are. This is the second energy shock that a lot of these companies have seen. There was the energy shock when crude traded from 100 plus dollars down to $20 in 2015 and ’16. And so a lot of companies have adjusted for a lower dollar price oil. So at this type of energy price, we don’t expect that you’re going to see a significant number more of the energy defaults. It would really take a sustained move down to 10 to 20 dollars, and sit there for a long period of time to get another wave in energy.
Ashok Bhatia: I think the defaults are more likely to come where, and this is, I think, the debate that the markets will be having for the next six months is how much of the demand destruction from COVID is permanent? How many you know of the restaurants, as you said, are not going to come back? If you have car rental agencies and airlines that have been built for certain amounts of business travel and leisure travel, if consumers, this is going to be a semi-permanent shift to different behaviors, well, demand’s going to be lower, capital structures need to get realigned. And that’s where the bigger pocket of default risk looking forward, we think, sits.
Chad Burton: Got you. In about two minutes, because I want to ask you in the next segment about where the value is in credit spreads and things like that, because we had this term, record level spreads, when it came to fixed income or bonds back in February, March, even April timeframe. How do you explain to somebody that doesn’t invest in individual bonds and things like that, what does that spread mean, and what should it tell people?
Ashok Bhatia: Well, the spread means what an investor is going to earn for taking a company’s credit risk. So just as you see mortgage rates vary for borrowers of different credit worthiness, different FICO scores, what banks will charge a borrower depends on that. It depends on the loan to value of the mortgage. And it also depends on the level of interest rates. The analogy is the same for Corporate America. What companies charge depends upon the perception of investors on their likeliness to pay you back.
Ashok Bhatia: And in the March, April period, what we saw was the bond market really feared that we were going to be in a prolonged, severe recession where companies wouldn’t be able to pay back to the same extent. And so investors demanded significantly higher interest rates. So as an example, a high yield issuer. So this would be a company that would be double B rated. These can be well known companies. But before this happened, they might’ve been able to borrow at four to five percent yield. At the peak, they would have been borrowing at 11 to 12 percent types of yield. And so when we say wider credit spreads, it’s wider risk. It’s an opportunity for investors, if you think the companies can pay you back, to earn extra income and return. But it is reflective of a rising risk perception.
Chad Burton: Got it. Well, we’ll talk a little bit more about it after the break, where the value is, where spreads are now, and what people should be looking forward to, or be aware of. We’ll take a quick break. We’ll be right back.
Announcer: Now back to NewFocus on Wealth on AM 1220 KDOW.
Chad Burton: Welcome back into the show. I’m your host, Chad Burton, certified financial planner. You can find me at chadburton.com or newfocusfinancial.com. Check out the retirement income and investing post-pandemic webinar that we’re doing in July. That’ll be up on the website here shortly. Joining me though, we’ve been speaking with Ashok Bhatia. He’s a chartered financial analyst, deputy chief investment officer at Neuberger Berman. Specializes in the fixed income area. So basically you analyze bonds, you analyze different types of bonds. What might be overpriced, what might be at a value.
Chad Burton: We were talking about these large credit spreads. These record levels spreads in March where essentially, is it fair to say that just high yield bonds, which used to be known when you and I first got into the business mostly as junk bonds, right?
Ashok Bhatia: Yep. That’s the same market.
Chad Burton: Yeah. And at some point I think it was, I don’t know, early 2000 or so, the term high yield was starting to be used. Which I think pulled in a lot of investors that didn’t realize where the risks were. I guess that’s a different story here. When it comes to high yield, and we saw the market just really fall apart, essentially, in March, from March 9th to about March 19th. I don’t know about you and how you felt, and we’ve been in the business about the same amount of time, but 2008, when the credit markets weren’t working, that was a long, horrible period of time. It just felt awful. This one didn’t scare me as much, except for that timeframe, that short 10 days or so before the Fed stepped in, in March. How did you feel when you saw the bond market acting like it was acting back in March?
Ashok Bhatia: Very similar to you. It reminded me of 2008. I think the big difference though, in 2008, this was really the first time a lot of us had lived through a crisis where the Fed was going to be really coming into the markets to support them. The difference around, and I think you noted it, it was a pretty short period of extreme volatility. The credit markets bottomed about four days after the peak of volatility period on March 23rd. And that was when the Fed announced its intention to buy corporate bonds. So that’s something that Fed never really did in 2008. So this was new. But that was, I think, the reason it was pretty short lived. And when we saw that it, it did stabilize the market. And I think that set in place the components for why we’ve seen a lot of equity markets and fixed income markets do a lot better over the last couple of months.
Chad Burton: Well, yeah. And I’m looking at the range of high yield bond exposure, essentially, or junk bond exposure in the Neuberger Berman strategic income fund. Which is one that many of my clients own. And you guys increased your weighting to that area. So the credit spreads widened, the risk essentially in the market was, okay, there’s more risk, and some of these companies defaulting. But those that jumped in after it all fell apart in March, got pretty well paid. Are you guys still kind of at the high end of that? Are you starting to trim? Where are you at when it comes to junk bonds?
Ashok Bhatia: Yeah, we are still at the high end. We, in that period, increased car exposures to things like agency mortgages, investment grade credit, and high yield, as you noted. We are still maintaining just about all of those exposures. Our basic premise is we’re going to be in a period of 0% Fed policy rates and extremely low interest rates for a long period of time. And that’s going to create a lot of support for credit markets like high yield and investment grade credit.
Ashok Bhatia: So we think these are still attractive, expected returns, and were things in sort of maybe the mid single digit ranges for intermediate term holdings. And we think that’s going to end up looking pretty attractive to a lot of other markets. Now, if we do see further strong performance from things like high yield and investment grade credit, wouldn’t surprise me that we’ll start to be reducing those allocations. But we’re still quite favorable on the credit markets.
Chad Burton: When it comes to the spreads, and the spreads widen, that tends to say for those that are willing to take the risk, if things turn around, they could get rewarded pretty well for that risk that they take. But looking at one of the charts that you put out, or about to release, I think it’s for an upcoming webinar for advisors, is you’ve got a chart that shows this spreads. And most of them are well off their wides. Most of them besides maybe emerging market debt is almost back to where they were, right? Almost back to where they were prior to this, or am I off base on that?
Ashok Bhatia: No, a lot of markets have retraced. So if I reference something like the high yield market, today, the spread in that market’s about 550 basis points. Before this all started, that spread was around 375. At the worst, it was about 1,100. So your point is really well taken. Spreads have come in a lot from the wides, but we’re still off the tightest levels. I think the things that have changed is, first, rates are going to be low, and the market expects and prices rates to be very low. That’s going to create more demand for credit instruments.
Ashok Bhatia: Second, companies are repairing balance sheets. This COVID experiences as emphasized the need for Corporate America to have liquidity and stronger balance sheets. Those are things that are good for bond investors. And then the third thing I’d say is the Federal Reserve, and really the global central banks, have moved from being kind of a passer-by or not really involved in the credit markets to being purchasers of these bonds. And that, we think, can mean spreads tighten even from these levels. But some of the larger total returns that have been generated from the March period, that was, I think, it’s going to be very hard mathematically to replicate those over the next few months. But mid single digits is where fixed income yields are settling in for a lot of asset classes. And we do think investors will view that pretty favorably globally.
Chad Burton: Got you. Okay. We’ve got about 30 seconds left, and I don’t know if this means anything, but I just had popped on to see what some of the offerings were out there. I popped on to TD Ameritrade’s site where, our company, that’s where clients hold their accounts, are at TD Ameritrade. Very, very few corporate offerings, it seems. Is that because they’re all just gobbled up as soon as people can get them?
Ashok Bhatia: Yeah. Well, I would say the big change has been any offering in five year maturity, just this past, a week ago, last Monday, the Fed started buying securities, five year maturities and [inaudible 00:38:02]. And we have definitely noticed a dearth of offers, and liquidity, it’s getting tougher to buy bonds because the Fed is actively purchasing corporate securities and those maturity buckets. So wouldn’t shock me if that’s one impact of what you’re seeing.
Chad Burton: All right. And that’s why I use Neuberger Berman to help buy them for me. So I appreciate the help. I appreciate the content, Ashok. Thanks for joining us again. We’ve been speaking with Ashok Bhatia. He is with Neuberger Berman. We got to cut it off there. Thanks for listening. Please tell a friend about the show. You can find me at chadburton.com. Don’t forget about the webinar we have coming up on retirement income planning, post-COVID at chadburton.com. Have a great day, everybody.