Today, we continue to quote from our recent Bond Fund Symposium conference, which was held late last week in Newport Beach, Calif. The "Senior Portfolio Manager Perspectives" featured Crane Data's Peter Crane moderating a session with BlackRock's Richard Mejzak, UBS Asset Management's Dave Rothweiler and Federated Hermes' Nicholas Tripodes. We first asked Mejzak about BlackRock's recent launch of Money Market ETFs. He tells us, "They're on the smaller side. However, the growth has, I think, exceeded expectations thus far.... This is not your father's money market business.... Clearly, the market's evolving in this space." (Note: Attendees and Crane Data subscribers may access the conference binder, Powerpoints and recordings via our "Bond Fund Symposium 2025 Download Center.")
Mejak explains, "I think several things led us to this. I mean, first off, it seems that cash, we would expect, is going to remain an asset class, right? Yields, they're 4% now. But if you look back historically, like 3.0, 3.5% seems to be the magic number as far as absolute level of yields. And if you can maintain that allocation to cash, we would expect to maintain, kind of balance, as to where they are. So that was one driver of it."
He continues, "Two, the ETF wrapper, without question, is becoming, the wrapper of investor preference. So, we felt getting a product into an ETF wrapper would be an incredibly effective tool. Then lastly, what we saw with money market fund reform, specifically around prime money market funds and ... how they were going to implement discretionary and mandatory fee structures. We thought an ETF would help the marketplace in that ... a lot of the liquidity in and out of an ETF is done on an exchange and not within the fund itself. So, we thought that would actually improve the kind of the operational aspects of those two types of fees."
Mejzak adds, "I mean, it's no surprise ... in the marketplace now there's tons and tons of models that are comprised exclusively of ETFs. So, if you want to have a cash allocation within that, this is a product that fits very well in there."
Discussing supply in the ultra-short space, Tripodes comments, "Last year, I think there was over $300 billion in U.S. issuance of ABS, which was pretty much a new record. And we think this year should be kind of similar from a new issues standpoint. And like I said, in looking at subprime, we're kind of sticking to the higher quality subprime names."
He says, "Because when you do see a spike in unemployment, like some of the smaller subprime issuers that maybe are private equity-backed and don't have sources of financing, like a GM, in the corporate market or the equity market or bank lines of credit, they could experience issues, some of these smaller companies. And if they do have servicing issues, then, that causes all types of problems. So you have to be careful."
The Federated PM comments, "But overall, we really like the ABS market. And we think it's a really nice asset class, especially for short-duration securities. Because you're getting your amortization every month, for the most part, once your bond starts paying down in autos and equipment. And it's just the short-weighted average life is a nice fit for, one- or two-year short-term bond product."
Rothweiler weighs in, "In terms of what I'm buying, I mean, we're an IG strategy. And, like yourself, we're focusing more and more with an up-and-quality focus. You focus on ABS. And for us, we're staying away from subprime. We're in the prime space, more nominally like AA3 or better. And from introducing another asset to the sector, you're definitely, on that northwest efficient part of the frontier, from a risk-return standpoint."
He states, "But, within the corporate space, focusing on financials, we think credit overall is still pretty good. But like it was mentioned this morning, you look at stuff like the autos, you have some pockets of volatility. But for us, it depends where the maturity is for that kind of paper. In terms of what we're not buying, as I said, we can't do high-yield or split-rated. But we're also staying away from the lower BBB realm."
Mejzak also tells us, "If you look ... just from a pure valuation perspective, especially when you talk about credit spreads, which look kind of beyond the tighter end of the range, especially when you think about where we are in the economic cycle. However, just the overall carry of, I'll call it one to five-year kind of fixed-income assets is incredibly compelling. But the amount of movement you need in yields to actually lose money at these absolute levels of interest rates and carry is massive, right?"
He explains, "So, I'd say consistently the folks that we talk to, or let's say our separate account clients and big corporations that we run money for, really are just comfortable adding carry here, high-quality carry, that is, and being comfortable clipping the coupon, knowing that that coupon is going to be able to endure a pretty severe movement in interest rates. I mean, what we heard from the Fed a couple weeks back was, they had two options. They're either going to stay put or they're going to cut rates. I didn't hear anything about raising rates, right? So, in that environment, I think carry is the game."
Asked what he's buying, Tripodes comments, "It depends on the strategy. So, on our Micro-Short strategy, that's really a combination of liquidity, securities, and bonds, about 50-50. So, in that portfolio, we don't buy anything past two and a half years for fixed rate, three years for floater. We have a 15% BBB limit and no high yield. Now, as we move to the Ultra Short Fund and Short-Term Income Fund, `we have the capability to buy high yield. I know there's discussions on CLOs. We have a pretty deep high yield team. So instead of buying CLOs, I mean, yeah, you can buy the AAA rated CLOs, but the underlying collateral is, BB or high yield loans."
Finally, Rothweiler adds, "Credit for us is a much easier bet right now. I have an old saying, 'You can't model fraud, and you can't model politics,' right? That's just the reality of it. So, I feel like in a way, whether it's tariffs, fiscal policy, a lot of things up in the air, and you look at how [volatile] even the two years have been.... For us, from a duration standpoint, we're staying close to home. It's just a more difficult bet, and we'd rather spend our risk budget on credit versus duration. So how we play that right now is staying close to an index and limiting any kind of major bet either way. Because one headline, and it goes against you. So, we'd rather just stay out of it."
