Episode Transcript
Joyce Choi: With the dollar being down again, around 10%, I think it's really forced investors
to look at other markets. Given the fact that around the world we've seen pretty stable and stronger currencies, whether you're talking about,
the euro or the yen. So I think that there is an increasing opportunity set outside of the U.S.
Marina Mets: Welcome to FTSE Russell Convenes. I'm Marina Mets and I head up fixed income in the Americas for FTSE Russell, and today I'm so pleased to be joined by Joyce Choi, who is the Head of Institutional Strategy at BlackRock. Welcome, Joyce.
The topic I wanted to discuss today is something that's been gaining quite a lot of relevance in the U.S. lately, and that's, of course, the growing interest by U.S. investors in opportunities beyond the U.S. borders. And not just for diversification, but also strategic litigation, as they think about international fixed income. So let's dive right in. Let's start with the big picture. We've seen a lot of macro volatility, shifting rate expectations, divergent central banks' paths. Where do you see fixed income markets kind of settling in today?
Joyce Choi: Yes. It has been quite a year. Or should I say more specifically, it was a matter of a few days in which I think we all lost a little bit of our lives, with the market volatility. So it's interesting to see how those few days have really played out in creating increased uncertainty in the markets today, but I certainly think that over the next six to twelve months, there are a number of dynamics that we need to watch and that obviously includes tariff policy, fiscal deficits in the U.S., primarily, monetary policy, and obviously that's going to be driven by growth, inflation and implications on employment or unemployment with regards to some of the policies that are being put in place today.
So right now we're sitting in the middle of the range. When we look at U.S. 10 Years, around 4.5%, and really, if I were to have closed my eyes over the past couple of months, not much has really changed. But I would say that the internal structure of the market moves have certainly shifted. So that means the curve has steepened quite a bit over the course of the year. I think now we're sitting at about 90 basis points from 230s. Equity markets are now slightly above flat for the year, but I think the biggest implication for the market moves that we saw is the impact on the currency.
So the dollar has seen a fairly large drawdown, where at its trough, we were down about 10% year to date. So we've recovered a little bit off of that, but nonetheless, I think that there are some questions regarding the movement in the dollar and therefore that has a lot of implications on how one looks at their fixed income allocations. And I think there are opportunities, thinking outside the borders of the U.S., just given a lot of these changing dynamics that are taking place.
Marina Mets: What we've seen is for a long while now, U.S. investors were very U.S.-centric and it's a trade that's played out really well for the market. Given the kind of dynamics you're describing, we're starting to see more and more interest in looking beyond the borders of the U.S. from the investors, given the macro backdrop that you've described and the kind of, I think what you're alluding to is this relative value kind of shift in mindset, what do you think is driving some of those dynamics?
Joyce Choi: Well, as I mentioned before, I would say the biggest driver really has been the move in the currency. With the dollar being down again, around 10%, I think it's really forced investors to look at other markets. Given the fact that around the world we've seen pretty stable and stronger currencies, whether you're talking about the euro or the yen. So I think that there is an increasing opportunity set outside of the U.S., and a lot of that also hinges upon the fact that we're now in an environment where 80% of global fixed income assets are yielding over 4%. We could not have said that a few years ago, and I think that highlights there's a number of opportunities, structurally as well as tactically. Nonetheless, I think the markets are changing and I think that this is an opportunity for a number of investors to look outside the U.S. So whether we’re talking about JGBs at 1.5% or Bunds at 2.5%, I think that the fact that there's positive carry to be made across the world, in addition to obviously the benefit for U.S. investors when they swap the currency back into dollars. So there's kind of a double whammy of opportunity when you're looking abroad.
Marina Mets: Just to make sure for our listeners, we'll clarify what we mean when we say international fixed income. In my mind, it's typically the world ex-U.S. Right, and when we think about that, that’s typically a broad universe: diverse sovereign rates, Treasuries for U.S., corporates, developed markets, emerging markets. How should investors think about those segments and investing in those segments?
Joyce Choi: I think you brought up the fact that there is a wide swathe of investments when you look at any fixed income markets, but certainly when you open your eyes up to what's out there globally, you're right—there's everything ranging from sovereign government bonds to corporate risk, local rates.
So there is a number of opportunities when you're looking at the rest of the world.
I think, though, for the investor that's stepping into international investing for the first time, as we've seen in other markets as well, probably inching in with sovereign debt exposure makes the most sense.
Again, you can look at this from a dollar perspective or local rates as well, and then once you get comfortable and understand some of the local dynamics there, kind of inching further into the corporate world, whether it's investment grade or high yield, is probably your next step.
But I think keeping it simple with sovereign debt allows you to also really benefit from the currency moves as well as term structure in a number of these countries.
Marina Mets: I mean, that makes a ton of sense, right? Control, for one thing at a time, as you think about those exposures. But to your point, it does add some layer of complexity once you step outside your own local currency. What do you think are the most important things that people should be aware of when they think about going into international?
Joyce Choi: Well, I do want to preface this by saying ultimately we are looking at bonds at the end of the day. So when you're looking at bonds, they're no different in the U.S. versus in the rest of the world. But there are additional considerations that need to be made. Obviously, currency being the number one. So you have to think about, do you want the unhedged currency exposure or the hedged? The term structure of that given sovereign market? There are varying degrees of duration in each of these countries, and so being cognisant of how the term structure is created, as well as obviously the monetary policy that's driving that. And lastly, that particular sovereign exposure, being very aware of the dynamics that take place from both a monetary policy and fiscal policy perspective can also impact both term structure and FX at the end of the day. So kind of collectively understanding these three large, broad considerations are vital when you're looking at international markets.
Marina Mets: Yeah, I mean super helpful. I think the other kind of commentary we hear from investors, especially when considering new markets, is how efficient and effective—like what is my access point into these markets? Are you seeing innovation in the space? What is kind of available to allow for consideration of that investment allocation?
Joyce Choi: Well, we've been getting a lot of those questions, particularly since April.
So we've certainly seen, in fact, in addition to the inquiry, flows into a number of iShares fixed income ETFs in the U.S. that provide that exposure to the international markets.
And if I were to speak through the lens of the sovereign exposure, again, this is the first step in a long international game. And I think that the ETF provides a lot of the efficiency and the ease to access a diversified basket of international exposures so that you don't necessarily have to do the bottoms-up work with any individual sovereign.
Marina Mets: Wrapped in a wrapper. And so when you speak with those investors and they are thinking about venturing in or adding this kind of international allocation to their portfolio, do they typically think about it as a diversifier to the current U.S. allocation? Is it a complementary exposure?
How do people think about it in terms of overall portfolio context?
Joyce Choi: I would say certainly at this juncture, complementary. I think that the concept of U.S. exceptionalism may be in question right now, but nonetheless, it's hard to argue the fact that there's liquidity and very deep markets in fixed income markets in the U.S. So to move holistically away from that would be incredibly difficult. So again, complementary. I think international markets certainly add a diversifier. We mentioned it before with diverging monetary policy, obviously desynchronising growth, inflation. We're seeing just different dynamics in each of these countries. So duration in the U.S. does not equate directly to duration in the rest of the world, and so we've seen it in performance, we've seen it in returns. So I think it's important to consider again, when you're building out a whole portfolio, the impact of FX, the term structure, and the sovereign risk really being able to be additive in one's portfolio—and that would be complementary. But potentially even structurally going forward, just given where we are with today's fixed income markets and being able to generate in a number of these markets today, which again we didn't have too long ago.
Marina Mets: Joyce, thank you so much. This has been incredibly helpful, very interesting, very relevant for U.S. investors. Thank you for joining us today.
Joyce Choi: Thank you very much for having me.
