Fixed Income Conversation Corner with Lindsay Rosner (GSAM) and Leslie Falconio (UBS CIO)

Lindsay Rosner · Goldman Sachs Asset Management

Five-plus percent yields make bonds an asymmetric winner, since yields this high usually earn positive returns.

The US investment-grade aggregate proxy yields a bit over 5% to worst. Rosner says that cushion protects returns against surprises. Historically, when the starting yield was around 5.5%, investors usually came out ahead. Growth or inflation surprises that could push the Fed much higher look unlikely, since inflation components are becoming more benign. Together, the high starting yield and the limited hiking risk create an asymmetry that favours bond investors. Yields across investment grade, CMBS, high yield and EM sit between the 70th and 90th percentile of their ten-year range, which she calls awesome.

“it has a five and change percent yield to worse right now. So you have a lot of yield there to protect you for events that we don't foresee happening.”at 8:26

Leslie Falconio · UBS Chief Investment Office

Short-term yield moves matter less than carry; rapid rises can't be offset in short windows.

Falconio argues that media coverage of negative fixed income returns overstates the short-term damage. Investors focus on each 20 to 25 basis point move in yields, but the compounding income is the real driver of returns. The aggregate index was roughly flat in September even though prices fell, because the carry offset the losses. A rise of 30 basis points in two weeks is too fast for carry to offset.

“you're not giving enough time to earn the carry. That compounding income is a tailwind to return. ... going up 30 basis points in two weeks, you just don't have enough time to earn the carry.”at 9:42

Lindsay Rosner · Goldman Sachs Asset Management

Corporate balance sheets are in good shape, with no near-term wall of maturing debt.

Rosner argues that despite the rise in yields, the growth outlook is not being hit as much as might be expected. Corporate debt maturities have been pushed out and laddered, with no cliff of maturities coming soon. She acknowledges higher yields raise the cost of capital, but she thinks corporate balance sheets are in a strong position to handle that.

“there isn't a wall of maturity coming to a theater near you soon. ... they've done a really good job of pushing them out into the future and having a good ladder of maturity. Right? It's not like a cliff.”at 11:17

Lindsay Rosner · Goldman Sachs Asset Management

This year's high-yield losses are concentrated in CCC credits; BB and B bonds have barely moved.

Rosner says the high-yield market's losses this year are almost entirely in CCC-rated bonds, not BB or B. She attributes this to weak balance sheets and business models among the weakest companies. She thinks this is a reasonable outcome in a higher-yield environment, so the pain falls on the most challenged borrowers.

“The best example of that is if you unpack high yield, the moves this year have not been in BBs and Bs. The moves have been almost entirely in CCCs.”at 11:59

Lindsay Rosner · Goldman Sachs Asset Management

Tax-loss harvesting into municipal bonds is an attractive opportunity at current yield levels.

Rosner says municipal bonds are worth considering, especially for wealth clients. Current yields let investors sell bonds at a loss, book the tax loss, and buy back in at attractive yields. She calls this a unique opportunity in munis and elsewhere in fixed income.

“there's an interesting opportunity right now because you can do, not just in muni land but elsewhere, tax loss harvesting and get back in at these yield levels and have that tax loss, which is a unique opportunity.”at 17:08

Lindsay Rosner · Goldman Sachs Asset Management

Triple-B investment grade bonds offer attractive extra yield and diversification versus hyperscaler-heavy AA and A debt.

Rosner likes BBB, the lowest rung of investment grade, because it offers more yield and spread without going into high yield. Higher-quality AA and A paper is largely hyperscaler debt, so it is less diversified. BBB offers broader sector exposure, which she sees as a benefit.

“in investment grade, we like triple Bs, the lowest part of the investment grade universe. You're getting more yield there, and we think yield or spread, and we think that that's an interesting place to be.”at 19:21

Lindsay Rosner · Goldman Sachs Asset Management

AAA CLOs at about 120bp spread and AAA CMBS in the 80s offer strong structured-product value.

Rosner calls structured products a favourite area. AAA CLOs offer around 120 basis points of spread, and AAA CMBS are in the 80s. These are the highest-quality tranches with credit enhancement, so investors can earn attractive spreads and yields without going down in credit quality.

“The other place that we really like is structured product. And as an example, you can be in the highest quality, the AAA in CLOs at 120 basis points of spread. You can be in AAA commercial mortgage backed securities in the 80s.”at 20:02

Lindsay Rosner · Goldman Sachs Asset Management

Fed holds in October, hikes in December, possibly once more early next year, then cuts by end-2027.

Rosner argues the market is pricing in too many hikes. She expects no Fed move in October and a hike in December, then a possible second hike early next year. She sees a plausible path to cuts by end-2027 because growth and inflation are not overheating. She says that if growth or the labor market overheated, or inflation took off, hikes of 100 to 200 basis points could follow, but she sees no sign of either. That probability distribution makes bonds attractive.

“we do believe the Fed will not go in October. We think they will hike in December. ... We think that maybe there could be another one hike in the beginning of next year. But very much, we could be in a world where the Fed is cutting by the end of twenty twenty seven.”at 8:02

Leslie Falconio · UBS Chief Investment Office

Market prices too many Fed hikes; UBS expects December and March hikes, then cuts from end-2027.

Falconio says the market's projection of the future Fed funds rate is too hawkish. Her base case is a December and March hike, followed by cuts starting at the end of 2027. This matches Rosner's view. She treats the path as a reason fixed income is attractive, since the market is pricing in more tightening than she expects.

“We believe the market's projections of future Fed fund rate is too hawkish. We think December, March hike and then as to your point, they start to cut at the end of twenty twenty seven.”at 13:47

Leslie Falconio · UBS Chief Investment Office

Higher yields make fixed income a better equity diversifier than when yields were low.

Falconio says the higher yields go, the better the opportunity for fixed income to act as a diversifier. That role was hard to see when yields were much lower. Her point is that the higher yield now offers both income and a hedge against equity risk.

“the higher these yields get, the better the opportunity is to serve as that diversifier that was very difficult to see when yields are much lower.”at 16:04

Lindsay Rosner · Goldman Sachs Asset Management

Favour intermediate-duration bonds over the long end, which faces fiscal and supply headwinds.

Rosner suggests investors move out of money market funds into the belly of the curve, which is intermediate duration. That part offers decent yield with less exposure to risk. She sees headwinds at the long end, particularly the 30-year, from fiscal concerns and rising Treasury issuance. The result is that the middle of the curve offers the best upside and downside balance.

“it does make sense to start going into what we call the belly of the curve, somewhere in the intermediate duration. There are some headwinds to the very back end of the curve.”at 17:48

Lindsay Rosner · Goldman Sachs Asset Management

Prolonged Middle East conflict is pushing inflation above targets and forcing central banks to rethink policy.

Rosner says the Middle East conflict itself is not new. What has changed is its duration. The longer it lasts, the more it affects inflation, which is running above central bank goals. That shift is why markets have moved from pricing cuts before the conflict to pricing hikes, and why traders are asking how many more hikes central banks will deliver.

“The biggest thing that's happening is not that this conflict in The Middle East is new, but how long it has lasted has really begun to impact how central banks have to think about inflation that is higher than what their goals are.”at 2:20

Lindsay Rosner · Goldman Sachs Asset Management

Heavy AI-related bond issuance funding data center capex is a major source of fixed-income supply.

Rosner points to very sizable AI-related issuance. Companies are borrowing to fund the capex that is meant to drive future AI-related growth. She sees this as a large factor in fixed income supply. The result is that the debt is concentrated in hyperscaler issuers, which affects how diversified the high-quality part of the market is.

“it's been very sizable AI issuance, issuance to fund the CapEx that fuels what is anticipated to be very productive AI related growth.”at 3:04

Leslie Falconio · UBS Chief Investment Office

UBS underestimated 2026 US growth and the consumer, and expected Fed easing that didn't happen.

Falconio admits that UBS's economists underestimated 2026 growth. They had expected the Fed to ease, but the consumer proved stronger than expected. She says the Middle East conflict lasted longer than expected, and the market has had to recalibrate to a stronger economy and higher rates.

“we did underestimate growth in 2026. We did start the year anticipating that the Fed would ease, and we underestimated the consumer.”at 5:31

Leslie Falconio · UBS Chief Investment Office

Equities are elevated on AI-driven wealth effects but UBS does not expect a near-term collapse and likes equities.

Falconio says the consumer has been the economy's driver through the wealth effect. That wealth effect comes from AI-related investment and capex that has pushed equity markets to elevated levels. She does not expect that to collapse soon, and she says UBS likes equities. Fixed income is also attractive now, but equities remain a core holding.

“not that we believe it's going to have collapsed anytime in near future because we don't, we actually like equity.”at 15:51

Lindsay Rosner · Goldman Sachs Asset Management

Heavy Treasury supply and fiscal pressure will weigh on the long end; restraint is politically hard.

Rosner says the 30-year part of the curve has to contend with fiscal questions. Treasury issuance is rising, and she expects supply to keep growing, with more of it than ever before. With elections coming, she argues it is hard for politicians to run on a fiscal restraint platform. That is why she finds the back end hard to view favourably.

“There's gonna be more supply than there ever has been. And it's very hard, just as we face elections coming up, to run on a good fiscal restraint platform.”at 18:12