Global Perspectives: Short duration shines amid tariff uncertainty

Castleton: Hello, and thank you for joining this episode of Global Perspectives, a Janus Henderson podcast created to share insights from our investment professionals and the implications that they have for investors. I’m your host for the day, Laura Castleton.

It’s been six months since the Fed last cut interest rates, and the path of inflation and growth are leaving investors with many questions. Will growth remain resilient and allow the Fed to remain on pause, keeping short-end rates high? Will fiscal concerns push the longer end of the curve higher? And how will tariff uncertainty affect both inflation and growth?

To talk through the potential outcomes and address one way investors can navigate this volatility, I’m thrilled to be joined by Dan Siluk, Portfolio Manager and Head of the Global Short Duration and Liquidity Group, and Addison Maier, Portfolio Manager on the same team.

Gentlemen, thank you both for being here. So, Dan, let me go to you first. There’s obviously been a lot going on in the markets as of late. Where exactly do we stand with the Fed right now? We’re recording this June 24th. So, they just had a meeting. What’s your expectation for the rest of the year?

Daniel Siluk: Well, the Fed remain in this sort of wait-and-see mode … You know, they’re very patient. They’re waiting for the hard data to really tell them what to do. For a while now, we’ve seen softness in the softer data, so the survey-based measures, but the hard data isn’t showing an economy that’s materially slowing down.

Tariffs remain a little bit of a headwind for the Fed in terms of that level of uncertainty, so they’re not really sure how to navigate tariffs and what it actually means for policy and policy implications. But they remain at a point where they could really go in either direction. Now, look, let’s be honest, there’s no talk of rate hikes. We’re not concerned that inflation is going to spiral out of control. But if you look at GDP growth, it is at roughly a long-term trend. If you look at the level of employment, it’s at a point where they’d consider it to be at a long-run average. So, they’re pretty happy with those two measures. The one that’s uncertain is inflation. It’s slightly higher than expectations, but it’s not rising. And so, with that said, they’re in a position where they can cut and even cut aggressively should the economy slow materially.

So, I don’t think we’re going to see any, you know, additional activity over the summer. Certainly not at the next July meeting. I think that’s a little too soon. I don’t think we’re going to have enough hard data that leads them to move. So, they’re in a good spot.

But what I would say is that if you look at the dot plot, that looks to be a little bit more dispersion amongst voting members. Some are calling for no cuts this year. Some maintain their two-cut stance. And so, the dot plot didn’t change. It’s still, you know, two cuts for the rest of this calendar year.

And I think the other thing that investors should be mindful of is Powell’s term is going to be up in a little under a year. So, May of ‘26, over the next few months, you’ll probably see a few more, let’s call it “auditions”, in the media. And we got one last week with Waller, stating his case for cuts, and Bowman earlier this week, who, you know, made some comments that were a little dovish, and she typically leans a bit more hawkish.

So, I think there may be the potential for some more volatility in rates just off the back of, you know, who this next candidate is going to be.

Castleton: Yeah. So, the market and investors have been just pricing in more cuts than have materialized for a very long time. I mean, cash still on the sidelines. That’s the winning strategy … if there isn’t massive amount of rate cuts, why would that be a mistake for investors? Addison, if they’re still holding on to cash given this uncertainty.

Maier: Yeah. So, we see the opportunity from moving out of cash into the front of the yield curve and fixed income generally from being picking up some yield. So, you’re getting paid to wait. Right now, the front end of fixed income markets, you can get close to 5% yields, whereas cash is paying you closer to 4%. So you get a little bit of extra cushion there, pay you as you wait. And what you might be waiting for are rate cuts or yields to come down. And when that happens, you get some of that capital price appreciation as well – a little kicker on top of the carry.

So that’s the case for stepping out of cash. Because when those cuts do come, and we’ve seen this cycle after cycle, once the Fed starts to cut or continues to cut. Technically they’ve already started the cutting cycle, at the end of last year, the front end of fixed income markets, where you have a little bit of duration plus that little extra carry, have over every cycle outperformed, just holding on to cash. And we’re arguably at the cusp of that, looking forward over the next 12 months.

Castleton: And I should have mentioned that both of you again, the Global Short Duration and Liquidity team at Janus Henderson, you do manage a strategy that is on the short end of the curve. So, it does actually kind of fit exactly what you’re talking about, where and in my consultations with clients, if they do have cash on the sidelines, there is this kind of worry that if they go jump into a 10-year duration strategy, that there’s all this uncertainty, they’re not sure how that might pan out. So what you’re talking about is not necessarily trading cash for a ton of duration risk, but just edging out onto the yield curve slightly.

Dan if I go to you, there are clients we’ve talked to that have edged out in duration and they are anticipating a Fed cut. And their play would be to go in on longer-term bonds. Ten [years] plus, what’s your thesis on the yield curve going forward? What’s the benefit of going long duration versus potentially staying short right now?

Siluk: Well, the front end of the yield curve and then further out the yield curve are used in, you know, very different ways in in people’s portfolios. And as Addison discussed, our value proposition in the front end of the curve, particularly now that that yield curves of normalized, you know, we don’t have that negatively sloped yield curve as we did a couple of years ago. That stepping out a year or two of duration in order to lock in those yields provides you a really attractive excess return over cash.

Now, the front end of the curve is much more impacted or correlated to what central banks do. Whereas as you step further and further out the curve, you introduce a lot more variables into what drives interest rates. So if you just think of the 10-year Treasury, it’s going to be driven by, you know, growth and inflation expectations. It’s going to be driven by some of these geopolitical issues that we faced over the last couple of years. And really importantly, here in the U.S., it’s also going to be driven by what’s happening with the deficit and what’s happening with the level of debt and debt service ability. And so you’ve seen rating agencies downgrade the U.S., you’ve seen the back end of the yield curve underperform, meaning that rates rose at a much faster rate in the back end of the yield curve because as investors, we want to be compensated for that deteriorating credit quality.

Now, I’m not suggesting that the US is going to default. It’s nothing like that. But investors demand to be paid more to take the risk, you know, further out the U.S. yield curve. And so, with that said, it’s just more volatility. We’re in an environment of higher vol. If you think back to the period between Global Financial Crisis and COVID, central banks pretty much managed that volatility. And rate volatility across the whole curve was very muted. In a post-pandemic world, I actually think we’re back to the old normal, meaning structurally higher interest rates, structurally higher inflation, and structurally high volatility. And that volatility has really shown itself in the back end to the yield curve.

So, unless you’re really convinced that there’s going to be going to be a deep, protracted economic slowdown and an aggressive cutting cycle, then it’s probably a little bit early to be in the long end of the yield curve. You’re going to weather significant volatility. And we’ve seen that the last 12, 18, 24 months.

Castleton: Dan, that’s a great point because when we do analysis in our portfolio consultations over the last five years, it’s easy to just say, well, 2022 threw everything off, so we should look at what’s going on going forward. Well, that has been the case for the five years.

In general, duration and interest rate vol has been back, save 2022. It’s even continued this year. So there does seem to be this opportunity to kind of weather that interest rate volatility a little bit on the short end of the curve. To your point, when there’s not a major catalyst necessarily telling you to go out super long in duration, obviously that has a role in portfolios as well, but potentially it’s a more of a balancing act of bar-belling. It’s what we’ve been talking to clients about.

So that being said, then maybe if I go to you, to Addison, on the implementation of which your strategy covers the span of basically a lot of credit focus, and I’m curious, the economy seems to be holding up, but maybe you can talk to the state of corporations and the credit opportunities that you are finding.

Maier: Definitely. So, we look at both corporate credit, securitized credit, all asset classes. And we’re looking across the globe as well. It’s kind of the sandbox that we play in. But the big behemoth of all of this is U.S. corporate credit. And right there, companies are very strong. You look at the backdrop, slow growth, totally fine for credit. We don’t need to live up to growth expectations like stocks need to do; with credit, slow, steady growth is fine. A little bit of inflation is generally good for companies. You see margins expand as inflation goes up. So that means more pricing power, more margins, more cash flow, which we want, which could go to pay back, which we always like on the credit side.

So the overall backdrop is very healthy from a fundamental perspective. And then you have this underlying degree of uncertainty, which I think keeps companies somewhat boxed in from getting too much leverage. So the balance sheets are still being run very conservatively. And but then the other part of that is that you do see M&A picking up more from the deregulation perspective of the, of the new administration. So that creates opportunities, and also risks. So, we keep an eye across all of that. And I think the underlying corporates are strong and healthy, and there’s a good reason that you can be pretty comfortable with them. And then from a valuation perspective, everybody thinks that valuations are relatively tight in the U.S., a little bit less so in other parts of the world.

And then the front end of the corporate curves are a little bit cheaper than the longer end. We have more of that yield-based technical buying. But so, what you see there is the yields have really impacted investor behavior to where it’s less about spread and it’s more about yield. So if you’re able to buy around these 5% yields, people kind of do it almost agnostic of what the spread is. So that’s led to relatively tight spreads.

So, what do we do as managers? We’re risk managers first and foremost. So, this is an environment, we say, hey, we want to have some carry. We want to have safe carry. And we don’t want to get over our skis. So the temptation might be to go out the yield curve to pick up risk or down the credit curve, to pick up some spread. This is a time where we say, let’s not do that; let’s get some safe carry. And actually, right now where volatility it might actually seem like it, but a lot of the market-based measures have actually seen volatilities come down. So, we’re looking for cheap hedges to protect ourselves in this type of environment.

Castleton: Right. And I think that’s extremely crucial to also distinguish within the credit curve valuations. They are a little bit more attractive on that short end. Whereas in the long run where you’ve got pension buyers and long duration and institutional buyers coming in to again, get very attractive yield across all corporate credit, a lot of that concentration on the longer end of the curve has pushed those to even more extreme valuations. So being active, being able to pick the best opportunities, extremely helpful.

Castleton: Let me just follow up quickly, too. Obviously, the big uncertainty is tariffs. And so, are there any ways that you’re kind of building resilience among the macro environment with either particular sectors, or is it just purely staying risk aware at a moment like this?

Maier: Yeah. Tariffs, a lot of that comes in how we think about global rate exposure is a big part of that because they very much impact the U.S. versus other countries. And how that leads those central banks to react … maybe Dan could touch on that. I’d say what we’re seeing, one great way that we see and learn about tariffs is, what are the companies telling us? And this has helped inform our broader macro perspective. And what a lot of what that’s been has been, “Hey, it’s not as bad as we all thought.”

Kind of in the heat of Liberation Day in the couple weeks after that, one little anecdote is if you have a consumer goods company and they import a lot from Vietnam, we don’t have tariffs established on Vietnam yet. But you might have 20%, 25% tariffs on a lot of their inputs. The way the math works out is you really only need a pass-through price of 5% to recoup that for the company. And that’s only if you do it in the U.S. You can also spread it out across the world, which is what a lot of companies are going to do.

And so that just the math just works out that you might only have 2% or 3% price increase to recoup what seems like a really big tariff. And so, I think that’s feeding through to what the Fed’s thinking, it’s feeding through to maybe healthier margins for some of these companies. We’ll see how the consumer kind of handles that. That’s the big unknown. We’ll find out more in the coming months, especially back-to-school period. But just hearing what companies have said about tariffs helps inform everything.

Castleton: Yeah, that’s a great point. And luckily 2020 did help a lot of these corporations get to a really good spot. So that’s also obviously helping balance some of these uncertainties coming down.

Dan, Let’s talk about that global landscape. That is one of your big differentiators within the short-duration space, is that you have that global opportunity. Why should clients be thinking global at a time like now?

Siluk: Yeah. Look, I think there’s a there’s a really big distinction between what global equities means and what global fixed income means. And obviously for decades the U.S. has been a driver of global growth. It’s been a driver of innovation. And so, it’s no surprise that the U.S. stock market has outperformed, you know, other parts of the globe, especially the larger markets like Europe. But when you look at rates, there are so many different inputs that go into the pricing of a government yield curve or a credit yield curve. And this presents and opens up opportunities for us.

So, if I just focus on rates, a big part of our philosophy is to say that central banks are not coordinated. They are not acting in unison outside of a crisis. So, yes, you’re going to get your Global Financial Crisis. There was one play in the playbook, and that was drive rates to zero and do max QE [quantitative easing]. And that was to get the global economy out of a crisis. You also saw it, I guess, the response to the … the strong fiscal policy after the pandemic that led to some of the inflation; central banks did have to hike rates. But the key is they all really hiked at different paces. They stopped at different levels.

And now on the way down, importantly, there’s quite a lot of dispersion between what central banks are doing. So again, our key sort of tenant of the philosophy is that central banks operate to their domestic economies. And they set the right policy to what’s happening domestically. So, I think of, you know, if you look back just over the last 12, 18 months when the Fed started its cutting cycle, and yes, they did 100 basis points, they started with 50. But they paused because, you know, the demand side growth was strong, unemployment wasn’t rising, so they didn’t need to be as aggressive as perhaps they first thought. Or as you look at other parts of the globe, Europe has instituted 225 basis points of cuts in a similar period with the U.S. [Europe] did 100, Canada also 225. That included two consecutive 50s. You go down to a smaller but open economy like New Zealand, also 225 basis points of cuts, three consecutive 50s in there.

And so, we’re able to position duration. And in developed markets … I got to reiterate that we’re not looking at emerging markets. But where we can drive some of this capital price appreciation, by positioning in the front end of yield curves in some of these other highly rated, well-regulated, government bond markets.

Now, conversely, I mentioned some of the countries that were cutting rates aggressively. Well, on the flip side, Bank of Japan has hiked rates 60 basis points in the time that all the central banks were cutting. Australia only started its cutting cycle in February of this year, almost 12 months behind other developed markets. Central banks in Norway cut rates for the first time in its cycle just last week. So, you can see that there’s this dispersion amongst developed markets, central banks. And for us that presents opportunities. And so, as investors step out of cash into money markets, into short duration, they tend to focus on their domestic market. So, their domestic rates, domestic credit.

But our value proposition is to say, well, there are opportunities in global rates. There are opportunities in global credit. But managing the portfolios in a very risk-measured and risk-constrained way, because we understand that people are using us as that yield enhancer or as a liquidity provider. So, it’s not about dialing up the risk. It’s about allocating risk in a very risk-measured way that’s also, you know, informed by our global macro framework.

Castleton: That makes sense. It sounds like there’s a lot more opportunities, not only just on the individual corporate management being able to pick the right names, but then you also open it up to global opportunities that you can find lots of dislocations.

Just a caveat. And maybe also follow-up on tariff uncertainty: How does that factor in? But then, you know, currency was one of the big drivers of global equity markets outperforming the U.S. equity market this year because we finally saw the dollar come down. Not sure where that will go going forward. Maybe address currency and how you how you approach that within the portfolio as well.

Maier: Yeah. From our perspective, we don’t take active currency risk. But that dispersion amongst global rates creates opportunities in interest rate differentials as well. So essentially what in effect a forward point represents is the interest rate differential between two countries. Think of it as owning a 3-month Treasury bill in one country and selling it in another. That’s the sort of tool that we use to hedge our non-dollar exposure. But that in of itself adds value. Just from a currency perspective, I can certainly provide some views.

Look, I would say that for decades, you know, the U.S. and whatever sitting administration there was, they always had a strong dollar policy. Now the current administration, I’m not suggesting they’re trying to weaken the currency directly. But I think the U.S. as a manufacturer, as an exporter, of, you know … they’re self-sufficient in energy, for example, in oil, it’s a commodity that they could potentially sell. Well, a little bit of weakness from pretty high levels. Of course, the dollar got to pretty strong levels in the recent part of the cycle. So, to sort of reduce some of the hot air in that, that strong dollar balloon, I think some softness in the U.S. will help it from, from a global perspective as well, to, you know, regain some of the market share on manufacturing and production and reshoring and bringing some activity back to the US.

I’d say that on the corporate side of the book, the way that some of the currency plays into it. So, while we’re not taking outright currency views and it’s hedged, as we’re looking across global markets, we see that the companies will issue bonds in different currencies on the same company issue across the globe. A lot of automakers, banks, ag production equipment companies, and they’ll do that. And so, we look across those issuances, we look at them on a hedged back to U.S. dollar basis, and we say, where’s the best relative value across those? So sometimes we’ll buy a bond at Aussie dollars, and we call them kangaroo bonds, and or buy them and Canadian dollars, we call them maple bonds. And we’ll hedge it back, and we might pick up 30, 40 basis points by doing so for same credit, same credit risk, same ratings, just a different currency even after it’s hedged back.

Castleton: Alright, Dan, so are there any risks that clients are making in portfolios today?

Siluk: Well, the way I think about fixed income is, there’s four different ways that a client or an investor can drive returns. One is through their duration choice or going out the term structure of interest rates. And therein lies a potential issue that we discussed earlier around fiscal policy. The debt sustainability here in the U.S., you know, investors demanding more yield, to compensate them for that uncertainty. So going out the yield curve or out the term structure is one of those risks.

The other one is credit. So going down the credit spectrum or going down the capital structure is another way you drive returns. So going from triple A to, you know, triple B or double B, single B assets, or from a capital structure perspective from senior into subordinated debt. So, we do find cases where end investors’ fixed income portfolio might actually have a higher correlation to an S&P or to an equity. And so, you know, where they’re getting their risk from, really going down that credit spectrum.

The third one is liquidity. Now, this perhaps was a little more prevalent in a zero-rate world, but it remains the case today, where people are giving up liquidity in order to chase yield, you know, to generate some additional return. But fixed income as a broader asset class is known for its liquidity. And so to the extent that you require cash or you get a risk-off event and stocks are down 20%, you want to reallocate. Yet that liquidity is tied up. Well, fixed income is not really performing that role as being a liquidity provider.

So that’s the third risk. And then the fourth one is leverage. You know, there are obviously, through the advent of more esoteric products in fixed income, an opportunity for an investor to turn $100 of risk into $200 of risk, you know, really to employ leverage. And so there also, you know, there are potential for quite large drawdowns in a risk-off event.

So, I guess the way we see it is there are the four drivers of return in fixed income. And you can make a mistake in any one of those four levers by extending a little too far. So, from our perspective, you know, being a liquidity provider, being defensive, stable, liquid, our view is that’s the role of fixed income broadly, but particularly, as a short duration manager, where investors are using us for that, you know, just a step or two out the risk ladder from cash and money markets.

Castleton: That’s great. So, I mean, in client conversations, fixed income is generally always looked at as where you can find value being active. Clearly when you also open the opportunity set across the globe and then also across corporations, and using your team’s expertise, there’s a lot of tremendous opportunity for investors to get some added value on the short end of the curve, not at a ton of duration risk within portfolios. What would your final thoughts be for investors as they’re thinking of what to do amidst this volatility?

Maier: I think it is right. We all want certainty. Everybody is saying, hey, once we have certainty, then I’ll know what to do. Once you have certainty, the price will have changed, and you might not want to do that thing anymore. I think the really nice thing about the front end of the curve is that, you know, a lot of times we’re buying bonds and they’re maturing, and we do a lot with investment grade. So, you have a high certainty of that happening, buoyed by the strong research team that we have. And so, I think that’s where, if you have certainty and you have a good enough return, that does what you need to do within your portfolio. I think that’s something you can hang your hat on. And I think right now is a good environment for that.

Siluk: Yeah. I think the other thing is just about being active. You know, you mentioned the importance of that. We are active, particularly when opportunities present themselves. So, for example, the most recent event, you know, the risk-off event would have been Liberation Day. Obviously, stocks were down, credit spreads widened. But if the fundamentals of those corporations that we’re buying, you know, we feel aren’t deteriorating because of that event, yet you’re able to buy them at better valuations. Then we’ll, we’ll certainly lean into that.

And so, you know, we are happy to and we’re comfortable dialing up risk at the right times. But then when valuations become a little stretched, and Addison mentioned earlier, you’re happy to spend a little bit of premium on protection when spreads are at the tighter end to the range. So certainly being active helps and then being globally diverse helps as well, because in events like, you know, going back a few years now, but perhaps a Silicon Valley-style event, U.S. banks sold off more than European banks; European banks sold off more than some of the banking jurisdictions we look at in Asia, such as Singapore, such as Australia. And so having that global diversification also helps when there are more idiosyncratic events in, you know, let’s say the U.S., such as Silicon Valley. So being active helps with diversification, helps with driving value add over the cycle. And, you know, we’ve been doing it for 18 years in that in aggregate. So it’s not a new philosophy and process that we’re adhering to.

Castleton: That’s great. The message to end on, I think we should all be fairly confident that we’re not going to get an exact playbook on what’s going to happen. And clearly, markets move very quickly for end investors, especially in fixed income. Having somebody like yourselves being able to make these changes literally on the daily, if they materialize, is going to help them stay ahead much quicker than they can.

So, thank you both. Appreciate you for being here to walk us through the opportunity set in the short end of the yield curve, global fixed income markets. And thank you all for listening. We hope you enjoyed the conversation. For more insights from Janus Henderson, you can download other episodes of Global Perspectives wherever you get your podcasts, or check out our website at Janus henderson.com I’m Lara Castleton.

Grazie. Vi do appuntamento al prossimo episodio.