Episode summary
The 40-Year Bond Bull Is Over. Your 60/40 Didn't Get the Memo | The Bet Hiding in Your Bond Fund
Excess Returns
· · 1 hr 5 min · Hosts: Matt Zeigler · Guests: John Kerschner, Michael Contopoulos
Summary
The guests argue that the 40-year bond bull market is over and that the old habit of holding a generic core bond fund no longer matches today’s inflation and rate regime. They say the Bloomberg US Aggregate Bond Index now packs in too much duration, too much Treasury exposure, and too little compensation for the interest-rate risk investors are taking.
Their view is that secular forces like deglobalization, labor constraints, and persistent inflation are colliding with cyclical pressures from fiscal spending, defense outlays, and easy monetary conditions. Mike Contopoulos argues rates are more likely to trend higher over the next several years unless recession hits, while John Kerschner says investors should stop thinking of fixed income as one asset class and instead separate it into safety, income, and insurance.
The alternative they favor is a more intentional mix of short-duration and floating-rate securities, especially AAA CLOs and agency mortgage-backed securities, plus selective securitized credit and other niches where the market offers better value. They also make the case that fixed income ETFs have made these exposures more accessible, more liquid, and easier to trade than in the past, even during periods of market stress.
Key takeaways
- The guests argue the Bloomberg US Aggregate Bond Index has about 6 years of duration, so a 100 basis point rise in rates could roughly wipe out a year of income.
- John Kerschner says AAA CLOs have had no defaults in over 30 years and can be a floating-rate alternative for investors who want high-quality bond income.
- Mike Contopoulos says deglobalization, fiscal spending, and labor constraints are creating a secular inflation backdrop that could keep yields higher for years.
- John Kerschner says investors should think of fixed income in three buckets—safety, income, and insurance—instead of relying on a single core bond fund.
- The guests say fixed income ETFs improve liquidity and price discovery, especially when underlying bonds are not trading during stressed markets.
- Mike Contopoulos says AI is inflationary on balance because of capex, energy demand, labor scarcity, and wealth effects.
Notable quotes
“the the bulk of 40 years, it was about 65 67% of the time, interest rates fell between 1980 and and 2020”
“if interest rates go up a 100 basis points, which is not out of the realm of possibility. It's not that much. Looking historically, you actually lose 6% more or less”
“There's never been a default in over 30 years in a AAA CLLO. Incredibly safe. You know, it's gone through the GFC, it's gone through COVID, all these other dislocations”
How the episode opens
Watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use where better questions lead to better decisions. The bond market changed a little bit. Couple of different regimes, maybe even most investors, if we're looking at portfolios, they haven't changed their portfolios much to match.
Today's guest here to explain, break it all down, what it means for your fixed income allocation. Right now, my guests, Janice Henderson's own global head of securitiz products, CLLO, ABS, CNBS, MBS, other miscellaneous loan alphabet soup, inevitably, John Kersner. Say hello, John.
Yep. Uh, hi everybody and uh, very happy to be here. — We're happy to have you. We also have your partner in crime, head of multiasset macro investing. Hopefully not in crime, macro models, multis sector strategies, Mike Kopoulos. Mike, welcome to Access Returns.
Thanks so much. Thanks for having us.
All right, you guys wrote a doozy of a report. That's where a big part of this came out of the time for short duration bonds. And let's be honest, a lot of people hate bonds right now, which feels mean.
It just feels cruel because they have a place. They have a home in the portfolio. So, it's a declarative title.
Let's start with the case in plain English. What's going on right now? Who wants to take this one first?
You know, I'll just I'll I'll jump in really quickly and and just hit on something you said, which is a lot of people hate bonds. And I think that's because um most investors think about bonds in an old school sort of way. Um you know, they think about, oh, you have this defined coupon and ultimate payment of principal inherently long duration.
And that kind of blew up right in in 2022 when you had higher inflation and higher interest rates.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- short-duration bonds
- inflation and higher rates
- bond benchmark risk
- aaa clos and securitized credit
- bond etf liquidity and price discovery
Companies and tickers mentioned
- Janus Henderson
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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