Episode Transcript
Joyce: When I think about fixed income markets, whether US or globally, you're right. Duration, yield, convexity, that's always been the main driver of performance and it will continue to be. But I think you have the added element now of the thematic trades, right?
Marina: Hello and welcome to FTSE Russell Convenes. I'm Marina Mets and I'm super excited to talk today with Joyce Choi from BlackRock about fixed income in motion. Welcome Joyce. Thank you very much for having me.
So last time we sat and talked, we raised a trend that was just emerging at the time, which is really allocations into international fixed income, which was kind of new for specifically US-based investment allocations. We've seen over the last, kind of, year that that trend has continued and money has continued to come in to some of those strategies. How are investors thinking about diversifying into these markets and continuing that investment?
Joyce: That has been a consistent theme that we have seen in the past year, primarily after the events that we saw last April of 2025 with the Liberation Day market events and I think that that was a big eye opening event for a number of investors. Just in thinking about, am I really diversified in my portfolio today? And I think we need to rethink the idea of 60/40 equities and fixed income and to thinking a little bit more nuanced with how you are looking at your exposures, particularly in light of the fact that now we are sitting in a world where there's more private credit, private equity and different alts investments. So I think when we think about being diversified, So I think when we think about being diversified, this is a common theme we're seeing in equity markets. For instance, everyone is very cognisant of Mag Seven risk and the concentration risks that exist there. But I think what we’re not seeing necessarily so evidently in fixed income is that a lot of institutional investors are now sitting in a very concentrated position of US fixed income assets. So thinking about diversification from a macro lens, I think is going to be even more critical going forward over the next several years, or the next regime within our market structure.
Marina: That's really interesting because we hear that come up quite a bit and the US has historically been a very domestically biased market and that probably makes sense just given where rates were and where markets were. But the concentration and concentration across portfolio, given you mentioned 60/40 and the equity book, US is a really big part of that counterparty allocation. So when investors start thinking about some of those non-core exposures, where do you see them starting to position for some of the international markets first and then what parts of that, if you will, fixed income specific diversification are you seeing them start to go into?
Joyce: Sure I think it's important to look at, at international investment or the idea of diversifying more as a process rather than as a specific trade. So to your point around kind of the learning curve that I have had with many institutional investors is the idea of like, let's step into international through short duration. short duration developed markets and as we've seen over the course of the past year, the global fixed income markets are very different to what we see in the US. So duration in Europe, for instance, doesn't necessarily equate to duration in the US. For sure. And what you want out of a diversified portfolio is really to think about, how do I need to set up my portfolio so that diversification behaves where I want it to and what I want it to do, particularly in times of stress? So I think short duration for developed markets is a great kind of first step for a number of investors looking at international markets for the first time and then perhaps stepping out into duration and then of course we have European or diversified credit globally. And then of course emerging markets, which is an asset class in and of itself. But I think thinking about it as a process, rather than as specific trades or exposures, is probably the better way to think about that allocation going forward.
Marina: And it's interesting because investors are thinking about adding it, it's a complementary exposure, right, and know what you own. I mean, I come from the benchmarking world, obviously, that transparency and understanding the behaviour of the asset sitting underneath, certainly a big theme for investors. But it's interesting, let's pick up what you just said. This idea of, let's say, developed market sovereign rate being the gateway of stepping into internationals, starting with the short, right, a bit of more manageable risk, maybe terming it out across the curve as you think about your allocation and how that behaves in your portfolio. But EM is certainly a theme that's been playing out more and more, not just in the fixed income space, in the equity space as well. Where do you think there are pockets of EM interest? Because EM looks quite different when you look out internationally and where do you think that kind of gradient of exposures, what does that mean for investors?
Joyce: I think that's exactly right. EM has been an exemplary area of where we've seen investor interest and therefore flows. So I think that that is a very like a really good indicator of how investors are looking to diversify away from the US. So I think as the audience knows, that EM is not certainly a monolith. It is composed of very individual stories and that are very well diversified globally and I think the reason why EM is certainly in focus is because we are living in a market where there are so many different cycles and various interconnectedness of different markets, right? So whether we're talking about commodities, which is even more topical today as we're sitting in 2026, to AI and technology. Yeah. There are so many different ways to play these themes and that's why we're seeing significant flows into Korea, for instance, because of the concentration in that particular geography, with regards to AI with semiconductor names. Or even Brazil, for instance, due to their commodity strength and exporter status. So thinking about EM more as a individual sovereign or country lens through the framework of fixed income and understanding again, the interconnectedness of the various topical themes that are playing out today with AI, oil, commodities and how the importance of understanding the dynamics that drive each of these particular economies in today's market.
Marina: I find that view super-fascinating because we're used to your typical fixed income. You think about income, you think about the yield curve. Right? And so when you evaluate some of these markets, typically you would look at some balance between let's say risk control, whether it's duration or counterparty rate like in terms of a market and the yield. Right. So then you think about the income and we tend to I think historically have always thought about them through the lens of macroeconomic or geopolitical kind of exposure. What I'm hearing is that even in the fixed income market, look at them more through the lens of themes and how those impact, let's say, the regions or the economies. So, which would I guess, influence investment and spending. So obviously the AI hyperscalers, kind of infrastructure build-out is a huge theme, huge funding, huge issuance that we're seeing in the market today. That's what you mean when you say, like, look at the EM markets through that?
Joye: I think that's exactly right again, but when I think about fixed income markets, whether US or globally, you're right. Duration, yield, convexity, that's always been the main driver of performance and it will continue to be. But I think you have the added element now of the thematic trades, right? And again commodities happens to be oil, gold, they happen to be very topical right now. But I think that this is going to be a consistent theme that we're going to see over the next decade and so to be cognisant of a lot of the drivers of these economies, whether it is AI, or commodity importer or exporter, in addition to the fact that, again, the traditional fixed income valuation of yield and income and duration. So it's getting a little bit more, I don't want to say complex but interesting.
Marina: Very interesting, definitely and listen, complexity, brings a lot of opportunity, right. So certainly a lot of opportunities for investors to consider. Let's touch on what products have done, right. Because these big themes require certainly on the benchmarking side, we've had to think about classification and categorisation. How do you peer group some of these issues? How do you think about even country peer grouping? Is it just geographical or is there something more, as you just touched on thematic, how is that permeating into the product lens? You know, BlackRock obviously offers any spectrum of these, but how do you see that kind of impacting the solutions that are being offered to investors?
Joyce: We have products that fit the demands and the needs of investors and particularly in light of the fact that international has been a key focus area. We have a number of exposures ranging from a short-duration, developed markets, extending out in duration, European credit and of course, emerging markets. So it really does span the gamut of exposures from emerging markets to developed markets, short duration to longer duration. What we're trying to do here is to provide the accessibility and the investability for investors to really be able to tap into these markets that may be newer to them. I mean, another great example of BlackRock kind of leading the charge in creating the accessibility point for customers.
Marina: Let's come back to the product construction for a minute. As people think about diversification and diversifying into international market exposures, into EM, naturally steps out of just doing dollar investment, right. So the big question that always comes up, especially when you start thinking about domestic US allocation, is to hedge or not to hedge, right? So how do you view that and what are you hearing back from investors around the hedgeability of some of the product solutions?
Joyce: That is the question because foreign currency or foreign exchange has a volatility profile that can be twice as large as that of bonds, so that will be a key driver of one's return experience when you're investing internationally. So thinking about FX is actually a critical question when you're thinking through all the considerations. What I would suggest is looking at your liability profile, for instance. What makes the most sense for a lot of investors is to match your assets with liabilities. So again, for dollar based investors, that would then imply thinking about FX-hedged exposure. So keeping the dollar assets aligned with dollar liabilities. But then of course there's been so much opportunity with regards to actually alpha being generated with foreign currency or foreign exchange and that's where having a separate, I guess, allocation bucket towards actually tactical allocation to a particular currency, where you might think it's rich or cheap relative to the dollar, or other currency pair for that matter. So think about it in two distinct buckets, I think is is how you should do it and of course, I would advise for those that have not yet invested internationally, to again start off in that learning curve of probably taking a hedged risk than unhedged and of course, BlackRock does have a number of exposures that offer the FX hedge as well.
Marina: Interesting. So there is a gradient in terms of the markets learning curve, we said, and a gradient in terms of hedging and taking exposure for fixed income, or for the currency risk. Well very exciting. I mean, we continue to watch this space, but maybe just to end a note, BlackRock is always incredibly forward looking and does, we find, tend to think about, well, what does this market look like in five years from now? thinking about what we just talked about, thinking about the kind of flowing demand, all the discussions you have with clients sitting five years from now, where do you think we are in terms of the scale, the scope, the investment thesis in fixed income?
Joyce: Well, again, as I mentioned earlier, all of these markets are becoming more and more intertwined today. So even the theme of artificial intelligence and the hyperscaler theme, is resonating today in fixed income. So this is going to be also a major catalyst for the fixed income markets as we look out five years from today. And so what does that mean? I think that there's going to be more products, more nuanced exposures to the entire theme of AI and we're going to see that play out in differentiated products and I think, again, more international exposures as well that fit various themes along AI, hyperscaler risk and so on. So, I will guarantee you it will look quite different in five years.
Marina: Exciting stuff. We should start constructing some benchmarks to facilitate that.
Joyce: Sounds great.
Marina: Joyce, thank you so much, always such a pleasure to speak with you.
Joyce: Thanks, Marina.
