[Chris Hyzy and Matt Diczok speaking throughout]
Please read important information at the end of this program. Recorded on 05/29/25.
[Chris Hyzy speaking]
After a spring of market turmoil and rallies driven mainly by tariffs as well as deficit news, investors continue to have concerns around three main topics. First, selloffs in the volatility of U.S. Treasurys. Second, impacts of a declining U.S. dollar. And third, how do you think about a fixed income portfolio throughout all of this?
Chris Hyzy
Chief Investment Officer
Merrill and Bank of America Private Bank
Hello, I'm Chris Hyzy. Joining me for perspectives is Matt Diczok, head of fixed income strategy for the Chief investment office.
[Chris Hyzy speaking]
Matt, thanks for joining me today.
[Matt Diczok speaking]
Thanks, Chris.
On-screen text:
What’s really going on in the Treasury market?
[Chris Hyzy speaking]
Let's dive into something that we've all been witnessing, which is the back up in Treasury yields that's concerning a lot of investors and clients. A lot of reasons for the worries could be tariffs, could be trade-related situations, worries even over the economy despite yields going back up, which is counterintuitive. It could also be the deficit. In your opinion, what's really going on in the Treasury market?
On-screen copy:
Matthew Diczok
Head of Fixed Income Strategy
Chief Investment Office
Merrill and Bank of America Private Bank
[Matt Diczok speaking]
So we're seeing less foreign buyers now. And, as you mentioned, we're seeing concerns about deficits... more Treasury supply than we have buyers. So yields are adjusting higher.
[Chris Hyzy speaking]
And that's not only at the auction per se but that's also in the actual open market?
[Matt Diczok speaking]
Correct. Not just at the auction but in the in the open market. If there are going to be less dollars overseas, you might find more buyers in the U.S., who are more price sensitive and might require a higher yield. Now the important thing to think about is that's really a more short-term factor.
Over the long term, it's really inflation that drives short-term and then long-term interest rates. Very similar to equities... in equities earnings drive stock price longer term. Same thing with bonds. Inflation will drive bond rates over the longer term.
[Chris Hyzy speaking]
And that's steepening the curve right now?
On-screen text:
Steepening the curve: A growing difference between short- and long-term yields, generally a sign that the markets expect economic growth in the future.
[Matt Diczok speaking]
Yes, that is steeping the curve, meaning the back end... 30 years are rising higher than shorter-term yields, making it actually more attractive for clients to think about moving bonds out the term a little bit.
[Chris Hyzy speaking]
Break-even inflation does not appear to be the reason why the back end of the curve is going up.
On-screen text:
Break-even inflation: The inflation rate at which traditional government bond yields and inflation-indexed bonds of similar maturities are equal.
[Matt Diczok speaking]
You might see yields on the longer end move up for a couple of reasons. One might be people think inflation is really going to rise. And so they require more. That's actually not what we're seeing at all. Inflation expectations haven't changed really significantly in 1 to 2 years. So all the rate rise now actually means that bond investors can get more yield relative inflation. So it's an unambiguous positive for people who are investing in bonds at the moment.
[Chris Hyzy speaking]
We also had a credit downgrade, an adjustment per se, by Moody's that matched the other rating agencies. Any effect on the long-term end of the curve on that perspective?
[Matt Diczok speaking]
That was a more minor factor. It was expected. The U.S. was already, as you mentioned, not triple A by two rating agencies, and now it's all three. So it was one small factor, but not really as important as the makeup of who's buying Treasurys and the amount of deficits. And then a Treasury supply that is in the markets, which is really the rating agency, was just reacting to news we already kind of knew.
[Chris Hyzy speaking]
It seems like supply demand drives a lot of things.
[Matt Diczok speaking]
Exactly.
[Chris Hyzy speaking]
Now let's talk a little bit about a friend and a neighbor per se. Over across, over in Asia, Japan. A little different as it relates to their debt to GDP. But yet their bond market is backing up as well in terms of the yields.
[Matt Diczok speaking]
Correct, their bond market, their 30- and 40-year bonds, have moved up fairly dramatically over in the past couple of months. The important thing to take away from that, from our perspective again, is this is not just a U.S.- centric phenomenon.
If you look at Japan, for example, they have approximately twice the level of debt to GDP that we have. And again, even though they've had a higher move in yields, it’s only 3%.
On-screen text:
Higher long-term yields are currently a global phenomenon, not an isolated U.S. risk.
So this higher long term yields, steeper curve, as we said it's more of a global phenomenon. It is not an isolated U.S. type risk that people need to be overly concerned about in our opinion.
[Chris Hyzy speaking]
Let's go over to the dollar right now. It's been weak, not extremely weak. We like to say that it's wiping away its extreme strength that we've seen over the last few years. Give or take.
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Is the U.S. dollar’s status as a reserve currency in question?
What is the big driver of the currency on a go-forward basis, in your opinion? And is the U.S. currency reserve status in question?
[Matt Diczok speaking]
Yes, the dollar has been weak, declining in value. But two important points on that. One, as you said: it was very overvalued. It's the most expensive it's been on one metric since 1985.
The second point is, if one of administration's ideas is they want to export more, then a cheaper dollar actually makes our exports much cheaper for the rest of the world. So it might actually be a feature and not a bug. Over longer periods of time, what's going to drive the dollar is the strength of the U.S. economy. We do not see that changing. And while there are concerns you'll see in the press about the dollar losing its reserve status, we are not believers in that.
[Chris Hyzy speaking]
And very difficult to suggest that there is a formidable alternative or competitor out there, whether it's Europe or China, or even Japan. We talk a lot about the bond market already, the liquidity of our bond market, the size of our bond market also lends itself to very difficult to have another currency take over the dollar's reserve status. Correct?
On-screen text:
$51 trillion: Size of the U.S. bond market, the largest in the world.
Source: US Treasury Securities Statistics, June 2025. Sifma.org
[Matt Diczok speaking]
Absolutely. So we've actually continued to see capital inflows into the U.S. We don't expect that to change. A moderation in dollar’s value makes sense. A loss reserve status is, in our opinion, quite unlikely.
On-screen text:
How do you manage a fixed income portfolio in a world of unknowns?
[Chris Hyzy speaking]
Now let's talk about portfolio strategy. How in the world can you manage a fixed income portfolio with everything going on, what you just talked about in a world which many times is still unknown.
[Matt Diczok speaking]
It's a really easier thing to do actually in this environment. When you don't see wonderful opportunities, you just pull the horns in a little bit and you don't take a lot of risks. We've been very neutral across sectors, not overweighting too much in investment grade, not overweighting too much, just staying relatively neutral.
On-screen text:
For yields that potentially beat inflation, take advantage of today’s longer-term higher yields.
Our most important point for clients remains being, even though cash yields are attractive, move out the curve, right. Take advantage of longer, higher-term yields is probably the most important. That gives us the benefit that when we do see a better opportunity then we could possibly overweight sectors that are more valuable. But without seeing too much value now, staying close to home in terms of sectors, not tilting too much in terms of sectors, keeping a duration that is reasonable and not too short term, waiting for better opportunities.
Again, you can earn approximately, you know, 5% on a diversified investment-grade bond portfolio or about 4% out of tax annuity portfolio. Those are yields well in excess of inflation, much better than 3 or 4 years ago. Take advantage of that.
[Chris Hyzy speaking]
That's great. Now you mentioned going out in the curve a little bit. You mentioned duration. Can you just explain what you mean by going out in the curve a little bit? Not on all instruments, but in terms of your average ownership of the bonds you have.
On-screen text:
Look for fixed-income opportunities that mature in about 6 years.
[Matt Diczok speaking]
So if we look at the overall U.S fixed income market, it has about a six-year duration or so. And so for clients with a particular preference for shorter term or longer term, that's fine. But without a stated preference, having average average maturity around that six year is probably a good baseline to start talking to your advisor about.
[Chris Hyzy speaking]
Thanks for joining me, Matt.
[Matt Diczok speaking]
Great. Happy to be here, Chris.
[Chris Hyzy speaking]
We hope this video helps you prepare for both the risks and the potential opportunities ahead as you focus on your long-term strategy. Stay invested, diversified, speak with an advisor, if you work with one, and check back here for updates. Thanks for watching.
On-screen disclaimers:
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