Ep 2 - Bill Housey - Is the Inverted Yield Curve a Broken Signal or Is a Recession Still Coming? And What Does that Mean For Fixed Income? - ROI Podcast

Historically, an inverted yield curve has often preceded economic recessions, and many investment professionals view the current inversion as a troubling sign for what may lie ahead for the US economy.  However, the 10-year US Treasury yield has been lower than the 2-year US Treasury yield for over a year, and a recession has (apparently) not yet begun.  In this episode of the ROI podcast, Ryan and Bill Housey discuss:

• Is the inverted US Treasury yield curve a broken signal today or is a recession still coming?
  
  
• Are investors too optimistic about “soft landing” (or “no landing”) scenarios for the US economy?
  
  
• What’s lies ahead for Fed policy?
  
  
• How should investment professionals think about risk and positioning fixed income portfolios for what lies ahead?

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Chapters

• 0:00 Introduction and Shackleton Story
• 3:10 Bill Housey's Background and Role at First Trust
• 4:21 Top Question from Financial Professionals: Are We Heading into a Recession?
• 6:08 Interpreting the Yield Curve: A Broken Signal or Recession Indicator?
• 9:54 How Long Does It Take for a Yield Curve Inversion to Predict a Recession?
• 11:04 Is the Yield Curve Inversion Different Post-COVID?
• 13:48 The Impact of Money Supply and Aggressive Fed Policy
• 16:38 Fed's Rate Hikes and Future Outlook
• 18:38 Does Politics Influence Fed Decisions?
• 20:00 How the Macro Discussion Affects Portfolio Management
• 22:45 Positioning Fixed Income Portfolios in the Current Market Environment
• 26:07 Reinvestment Risk and Fixed Income Strategy
• 28:10 Conclusion

Transcript

00:00:00:00 - 00:00:13:18

Ryan

What was. Remind me what the background of Shackleton's story was.

00:00:13:20–00:00:38:23

Bill

Well, so that's where our stories are sort of similar in terms of how we thought about the year. So I was talking about Sir Ernest Shackleton's 1914 expedition. He had a crew of 27 down to Antarctica to cross Antarctica by foot. And I started—you know, the more I learned about this story, the more enamored I became with it.

00:00:38:23-00:01:09:06

Bill

Because you think about 1914, a couple of years after the Titanic hit an iceberg. This guy goes out on this expedition in a wooden ship to cross Antarctica. And within a short period of time, ships are frozen in the ice, and they're left trying to figure out how they're going to get out from underneath all of this. And I love this story because the whole time, at least in the early days, they thought the ice melts were going to get out of this.

00:01:09:06-00:01:20:09

Bill

This is going to be just fine. So they're going on with their work every day, only to find out that the ice eventually overtakes the ship and sinks it. And they actually found that ship last year, 10,000 feet below the Weddell Sea.

00:01:20:14-00:01:24:21

Ryan

So they never actually got the ship off shore. It just stayed there.

00:01:25:02-00:01:25:14

Bill

It stayed.

00:01:25:14-00:01:28:23

Ryan

Frozen. And you actually get to rescue them!

00:01:29:00-00:01:37:17

Bill

So it was an incredible story of how they actually survived this, because I think the whole expedition was something like almost two years. Front to back

00:01:37:19-00:01:42:06

Ryan

There was no like, you know, sending in communications probably at that point.

00:01:42:15-00:02:05:12

Bill

Think about 1914. And just think about what gear they had. Right. You know, they didn't have the synthetic gear that we have today. They didn't have, you know, all the technology we have today. I mean, they probably had wool clothes. That's tents. You know, they got a lot of things off the ship before it sank.

00:02:05:14-00:02:28:01

Bill

So they were on the ship. They heard the cracking, and they were able to get a lot of the stuff off to try to help them survive. But, you know, I don't recall the specifics of how they made it. But it was a long journey to safety, and it was, you know, just Shackleton and a couple of the crew, and they left a lot of the guys behind where they were.

00:02:28:01-00:02:48:01

Bill

They had been to row essentially and sail, what with the dinghy that they had to get to safety. But it was an unbelievable story of rescue and heroism. And they all survived, which I think was really the punch line of that story in my mind. Right. I mean, that's the big takeaway. They all survived.

00:02:48:03-00:03:10:06

Ryan

All right. Well, we're going to get started. My name is Ryan Issakainen. Welcome to the First Trust ROI podcast. Joining me for this episode is Bill Housey. Bill has been with First Trust for, I believe, about ten years. He is a managing director of fixed income and a senior portfolio manager. He's been in our industry for about 27 years.

00:03:10:08-00:03:13:08

Ryan

So, Bill, thanks for joining the podcast today.

00:03:13:10-00:03:16:20

Bill

It's a pleasure to be with you. And we're going into year 14.

00:03:16:22-00:03:17:22

Ryan

You're 14.

00:03:17:22-00:03:20:23

Bill

Yeah, it's unbelievable how time flies.

00:03:21:01-00:03:56:22

Ryan

Bill, You spend a lot of time traveling around and talking to financial professionals when you're not doing your day job, which is managing mutual funds, ETFs, and managed accounts, and we get a lot of questions, which is great because it helps you understand what people are thinking about. And sometimes they're questions that you agree with, sort of the premise behind the questions. Sometimes they're questions that you may disagree with. As you've traveled around this year, what is the number one question that you have been getting from financial professionals about what's happening in the economy and in the markets?

00:03:57:00-00:04:21:03

Bill

I think the most prominent question on people's minds today, at least from the conversations that I've had, the television stories that I watch, and the news that I read, is really whether we're heading into a recession or not, whether it's a hard landing or a soft ending. That's really, I think, the ultimate crux of where most people are focused. And, you know, hey, the S&P is up 1000 points from the low.

00:04:21:03-00:04:29:01

Bill

It's easy to see why the narrative of Soft Landing has been as strong as it is. But I think that's probably what's on most people's minds.

00:04:29:05-00:04:47:22

Ryan

Okay. So take a step back. We hear a lot about hard landings versus soft landings. What do we mean by that? I guess both of those scenarios are consistent with a recession. And maybe it's just the depth or severity of the recession? What do we mean by hard landing or soft landing?

00:04:48:00-00:05:17:18

Bill

Or no landing, or no? Right. That's the other one. So. So I do think that a hard landing would be in a recession, and in a harder recession. Maybe soft landing is mild recession, and no landing is no recession at all. And it seems like, at least from what I can gather today, most investors are in the no-landing camp. I mean, after all, if the S&P is 4540 600, it certainly seems to me to sort of think that the market is no landing.

00:05:17:18-00:05:40:17

Bill

Right. Why would you be there if you thought that there was going to be even a mild recession? But that's how I would distinguish it. And I always like to joke about this, but I think handicapping the probability of a recession is incredibly difficult. Attempting to assess the potential severity of a recession is nearly impossible.

00:05:40:19-00:05:49:18

Bill

Right. And the timing, of course, is always unknown. So, you know, there are three different dimensions when you start talking about the type of landing.

00:05:49:22-00:06:08:03

Ryan

So is there a good way to know when we have landed, I guess, in any of these scenarios, apart from, you know, six or nine months later, the National Bureau of Economic Research saying, Yeah, if we were in a recession, then what are some of the things that people should pay attention to?

00:06:08:05-00:06:27:14

Bill

Well, I think as you look at the market, over time, people are going to assess what's happening to employment and what's happening to growth in the economy over time. And a lot of these things are only known in arrears. Right. And we can't look at the stock market as the end-all indicator because, as you know, stocks go down.

00:06:27:14-00:06:47:18

Bill

That doesn't mean the economy's in a recession. They can certainly be decoupled. Stocks go up. That doesn't mean you're not heading into a recession. So there's a lot of different decoupling that can take place in the market. But I think ultimately the reason that it becomes so difficult is because a lot of the things that we look at to discern whether we're in a recession are lagging.

00:06:47:19-00:06:55:23

Bill

Right? They're very late. And in fact, the employment rate in particular is one of the most lagging indicators that anyone can look at.

00:06:56:01-00:07:24:02

Ryan

I want to talk a little bit more about the employment rate and the really low unemployment, whether a recession is even. Some people say it's not possible with the rate of employment. That's why our unemployment is this low. But before we do that, I want to ask you about the yield curve in particular. Your team put out a piece recently that talked about the yield curve and how it has been a reliable indicator that has sort of predicted recessions.

00:07:24:04-00:07:38:08

Ryan

So leading indicator in the past, and I think it's one of these indicators that is a bit understood and misunderstood, and some people have begun to question whether it's going to work this time because we're pretty deeply inverted. So what's your take on that?

00:07:38:10-00:08:01:15

Bill

Yeah, it seems that in nearly every cycle, there's this debate that occurs about the yield curve, about whether it's viable this time, whether it's different this time, and whether it will be a good predictor this time. And, you know, I still believe that it is a good indicator for us in the business cycle. The challenge is, and this goes back to Milton Friedman's long and variable policy lags, right?

00:08:01:15-00:08:23:00

Bill

The yield curve is such a leading indicator that it's so far out that people look for instant gratification. They say that when you start to see the yield curve invert, the first thing they say is that the yield curve is inverted. This must mean something terrible's happening. And then they look around, and a few months later, nothing's happened, and they say, It's different this time.

00:08:23:00-00:08:52:15

Bill

The yield curve isn't valuable. But what we did was point out that yes, there have been some inversions that didn't result in a recession, but we said, Let's look more closely at this to try to assess for people's benefit the length of time that it typically takes from inversion to recession. And when you look at that data, you know, for example, I like to look at the two-year Treasury against the ten-year Treasury, and that curve tends to invert first before the three-month bills tend to invert.

00:08:52:15-00:09:12:21

Bill

So that's why I like to look at twos and tenths. So when I look at twos and turns and I say, Wait a minute, we're inverted, I try to start thinking about how inverted we are. How long have we been inverted? The 210 curve was inverted about a year ago. So was round last July, 2022. We had the inversion on 2/10, and it's basically been inverted ever since.

00:09:12:21-00:09:37:04

Bill

It's over 100 basis points inverted today. And that's really one of the steepest inversions we've seen since the 1980s. So we've had other inversions since that have preceded recessions. They just haven't been as steeply inverted. And that makes sense because the Fed controls that front part of the yield curve. So when they're raising 500 basis points in a very short period of time, the front part of the yield curve really reacts aggressively to that.

00:09:37:06-00:09:54:16

Bill

And two-year treasuries tend to land right around where the Fed is going. So you get the sense of why that front end is moving up so aggressively while the back end of the curve is, well, it's pricing in expectations as well, but over a much longer horizon. So what are our expectations for inflation? What are our expectations for growth?

00:09:54:18-00:10:22:12

Bill

What are our expectations for Fed policy over time? But in fact, as we look at that yield curve, what we tend to see is that there is a very long time between inversion and recession. In fact, we ran some analysis on that, as you mentioned. And so we're about a year into that inversion on the two stands, and the average time is around 478 days from inversion to recession; the median time is 502 days.

00:10:22:12-00:10:49:18

Bill

So we're talking about being about 12 months into this inversion today, an average and median time of 16 to 17 months for which you have this lead time for the ultimate recession to hit. So by every measure, we shouldn't be in a recession today. But I also think that until we're through a typical length of time, we're not out of the proverbial woods yet.

00:10:49:20-00:11:04:18

Ryan

So you don't think to summarize that the signal has failed. It's actually not supposed to have started. Recession doesn't typically start this soon after the yield curve has inverted. Have I got that right?

00:11:04:19-00:11:25:10

Bill

Yeah, that's right. I mean, we looked at, you know, the last five cycles, and I excluded the COVID cycle from the analysis because if we did have some inversion in the curve, then, you know, I would be the first to tell you that I don't think yield curve inversions predict government shutdowns of the economy and sort of government-induced recessions.

00:11:25:10-00:11:45:09

Bill

So that one seems like an outlier scenario. And so, in my analysis, I thought it was appropriate to kick that one out. But looking at a traditional business cycle, right, those are the cycles we looked at. And when we analyze those cycles, it takes a long time for these yield curves to sort of come to pass to a point where you say, Wait a minute, it was right this time.

00:11:45:09-00:12:05:14

Bill

And so when I look at the severity of the recession and the depth of that inversion—100 basis points on 2/10 over 150 basis points on three-month bills against tens—those seem to me to be incredibly important warning signs for us today, and that's why I wouldn't take it. I certainly don't want to take our eye off the ball with respect to that.

00:12:05:14-00:12:09:08

Bill

And that's why we think it's still a very valuable leading indicator.

00:12:09:10-00:12:33:11

Ryan

So you mentioned that you excluded the COVID recession because of, I think, reasons that make sense to most of our listeners. But then the question is, well, could it be different this time because we're in this, this, this, you know, period, post-COVID, where all sorts of things are different? Is there a chance that maybe it's different?

00:12:33:12-00:12:49:02

Ryan

The inversion of the yield curve is not going to lead to a recession. And actually, phrased differently, why do inversions of the yield curve often lead to recessions? Is it a cause, or is it just something that tends to happen afterwards?

00:12:49:04-00:13:14:15

Bill

Yeah, it's a really good question. So, of course, there is no 100% chance of any outcome in everything we do. So there's always a probability of something not having the predictive power that you thought it would have. In the case of the yield curve, I don't think we can rule it out yet. And do I think that there have been things that have led to this cycle being unique?

00:13:14:15-00:13:48:13

Bill

Of course. Well, number one, it's a very short business cycle. Business cycles are typically longer than we think they will be. But a lot of that is because the cycle is different. Right? You had just injected trillions of dollars into the economy, which led to demand outstripping supply, right? So the Fed and others have called that supply chain disruption, but it was trillions of dollars being injected into people's checking accounts, people going out and spending demand outstripping supply.

00:13:48:13-00:14:13:09

Bill

So certainly, there are supply chain disruptions when everybody is running out and spending all that money. Those supply chains needed to be rebuilt. But the Fed has reacted very aggressively. And now we're seeing, you know, a money supply contraction as opposed to the big money supply growth boom that we saw. But typically, these are the things that cause money supply contraction and just the passage of time and inflation, which erode some of that money supply growth over time.

00:14:13:11-00:14:32:20

Bill

That's where you come up with this long and variable policy lag. So I think my intuition around this is something like this. Think about the way a bank makes money at a typical bank, right? So borrowing money from depositors goes into a deposit account. What do banks do? They take that money and make loans to customers.

00:14:32:20-00:14:54:08

Bill

Right. And if the yield curve is upward-sloping, the economics of those loans relative to the borrowing costs can be really fruitful. That makes a lot of sense for these banks. But as you see inversions and yield curves and you think about the economics of making those loans, right, for a bank where they say, wait a minute, this curve is inverted, right?

00:14:54:08-00:15:16:08

Bill

I'm borrowing here, but it's priced off of a lower number out the curve. It starts to cause banks to say, Wait a minute, we're going to start to tighten our lending standards. And so the financial institutions are the backbone of the economy. So as you start to tighten those financial conditions, well, does that have an immediate impact on the economy?

00:15:16:08-00:15:38:06

Bill

Will not in 15 seconds, right? Does it, over time, start to impact the economy? In my opinion, it does. And that's where it takes. It could be 16 months, or it could be 18 months. But this Fed has moved very aggressively by 500 basis points in a very short time. I don't think you feel that right away, but I do think we will start to feel that over the next several months.

00:15:38:07-00:16:04:23

Ryan

I wanted to ask you about the Fed in particular and what your outlook is from here. As you mentioned, they've been very aggressive in raising rates by 500 basis points. Are we done? Do you expect another rate increase? You know, how many more rate increases do you see between now and the end of the year? Sure. And why has the market been so wrong in pricing and expectations?

00:16:04:23-00:16:29:20

Bill

Sure. Well, I think there's a lot in there to unpack in that question. But I think, as you look at the Fed, they have a dual mandate, right? It's inflation and employment, and one of the things that we've tried to key in on is the fact that this Fed has obviously woken up to transitory being wrong, and they were very concerned about how wrong they were.

00:16:29:22-00:16:50:12

Bill

And so they had to move much more quickly. And when they look at the analysis today right there, they are very aware of long and variable policy lags. So they don't; they don't want to do incredible damage to the economy, although I believe this Fed thinks that whatever damage they do, they can solve by going in the other direction.

00:16:50:14-00:17:10:03

Bill

But I ultimately think that this Fed will continue to leak additional hikes into the market until, as Powell puts it, the job is done. So we have to start to really make sure that we understand what that means. What does it mean to have the job done? So what are they concerned about? Well, obviously, they've been concerned about inflation.

00:17:10:03-00:17:33:05

Bill

We've had disinflation. Inflation has been trending lower. We're not back to 2%, though, right? We're certainly not there with the core. And so this Fed is still concerned about inflation, but they're also very concerned about the tight labor market. And I think that this Fed will continue to leak hikes into the market until they start to see that the unemployment rate begins to climb.

00:17:33:07-00:18:03:01

Bill

And as they see that the unemployment rate starts to climb, that will give them comfort that the job is done. The challenge with that is that you typically see that unemployment rate climbing when you're either in a recession, knee deep in it, waist deep in it, or right in front of the recession. So you can look back at every previous business cycle going back to 1960 and see that that unemployment rate doesn't begin to climb until you're either right in front of and staring into the recession or you're in it.

00:18:03:01-00:18:28:00

Bill

And so that's why I think the probability of a recession, whether you're looking at the yield curve or whether you're looking at the Fed's own track record, is as high as it is. I don't believe that the Fed has, despite some of the differences in this business cycle, any sort of clairvoyance about what the right neutral rate is that could lead to the no landing scenario.

00:18:28:04-00:18:38:18

Bill

And their track record proves that in just about every prior cycle, they raise rates to the point where they ultimately break something in the economy, and that's where you get that recession.

00:18:38:20-00:18:59:18

Ryan

So the last time I checked, the market was pricing in cuts. Still next year. Next year is an election year. Do you think that that will have any impact on what the Fed does leading up to an election? Will their actions be impacted by that, do you think, at least on the margins?

00:18:59:20-00:19:38:17

Bill

It's hard to know. Should it be? The answer is no. The job is the job. It's a dual mandate. There is no such thing as a triple mandate. Right. It's employment and inflation. It's not employment inflation in politics, right? But somehow, I think it does come into play. Ultimately, though, as we look out that far, when we start to talk about that point in the cycle, I think we'll know full well whether or not we have a recession by then that aligns with our yield curve analysis, that aligns with some of our own predictions about where we see the overall economy heading, and certainly where our own chief economist and deputy chief economist,

00:19:38:22-00:20:00:01

Bill

Westbury and Stein have been with respect to the timing of an ultimate recession. So I think those things sort of coalesce around that recession case before an election anyway. So it's possible and probably even likely that they are backing off in terms of interest rates by that point, because I think we'll know where we're at with this economy by then.

00:20:00:06-00:20:28:05

Ryan

So as a portfolio manager, you are on your team; you're analyzing companies and evaluating their creditworthiness. To what degree does a sort of top-down macro discussion about the economy impact what you're doing? As a portfolio manager, does it really matter to you whether we're in a recession, heading into a recession, or coming out of a recession? Does it impact what you're doing on a day-to-day basis?

00:20:29:03-00:20:46:22

Bill

Incredibly so. We have to make sure that, from a positioning perspective, we're thinking through any possible scenarios in terms of where our base case is, where we think this thing is headed, and where we think the economy is headed. And just think about it from a sector bet perspective. When do I want to lean into cyclical bets?

00:20:46:22-00:21:16:20

Bill

Do I want to lean into cyclicals before the recession? No, probably not, because I think they're going to cycle down. But I certainly want to leg into those downturns, as I think we're going to make a turn. When will I see that turn? More likely than not, it'll be when we see that what I call that bull steepening or what drives that in the yield curve is when the Fed is slashing rates, or at least expectations for the Fed to be pricing in those rate cuts start to work their way through interest rates.

00:21:16:20-00:21:34:00

Bill

And you go from this massive inversion in the yield curve to something much steeper. Right. We're going to be looking for those signs to give us, you know, an indication of where we want to be. So absolutely, we have to be thinking about where we want to go with respect to the economy so that we can position ourselves appropriately.

00:21:34:00-00:21:57:11

Bill

We have believed that because we think we're going into a recession eventually here and because we think the probability of the Fed engineering this immaculate or no landing scenario where I have inflation come back to 2% confidently with no change to the unemployment rate and the economy continues to expand So that's certainly what some people are betting on today.

00:21:57:11-00:22:21:21

Bill

That's just not our bet. So we would much rather be up in quality and more defensive. We want to make sure that we are positioning for that view. Ultimately, though, it becomes tricky because yields are a lot more attractive when you're pricing off of a higher Treasury curve, and that's just unpacking that a little bit. How are bonds priced right?

00:22:21:21-00:22:45:07

Bill

I start with a risk-free rate, and I add on a spread for the risks that I'm taking. So in low-quality junk-rated credit that spreads, it should be a lot wider. And of course, in high quality, it's a lot narrower. And what we're seeing is that those spreads are relatively tight, but the all-in yields remain pretty compelling, especially when you're pricing off of a yield curve that has baked in 500 basis points of hikes.

00:22:45:07-00:23:01:14

Bill

And of course, it's moving around a lot because it's based on where the market sees the Fed heading in the future as well. So are we pricing in further hikes? At the end of the second quarter, it looked like we were pricing in at least 1 to 2 additional hikes, and they were going to hold rates higher out to the middle of next year.

00:23:01:14-00:23:23:21

Bill

That's sort of what was being priced in. I call that more fair value. So as we're pricing off of that, the all-in yields start to look really attractive if you're getting eight and a half to 9% in high yield, for example, and that can certainly offset quite a bit of volatility. I've got to lose eight and a half to nine before I lose a penny when I'm writing a coupon that high, for example.

00:23:23:23-00:23:44:17

Bill

So these yield levels can sort of be a really good shock absorber, despite the fact that spreads are running a little tighter. And that's probably why we're seeing spreads get tighter. But I also think that into an equity tape where volatility does pick up again, potentially into that weakening economy scenario as we move forward over the next six months.

00:23:44:19-00:23:52:02

Bill

You know, that's when we'll see those spreads widening out again. But you also see rates moving down as well. So you'll have a dual variable there.

00:23:52:04-00:24:15:22

Ryan

Bill. It seems like, as I think about the last ten years, much of what we talked about was positioning fixed income portfolios for an ultra-low rate environment, a rising rate environment. Now we're at a point where rates have moved up, and as we've been discussing, the Fed is much closer to the end of their rate-hiking cycle.

00:24:16:00-00:24:31:17

Ryan

And my question is, how should investors be thinking about positioning client portfolios or investment professionals positioning client portfolios for this kind of environment? Because this is different than what we've seen for quite a while. So what are your thoughts there?

00:24:31:23-00:24:49:23

Bill

You're absolutely right. And I think ultimately it's important to remember that bonds are just mathematical instruments, right? It's a lot different when we start talking about the stock market. And I like to joke about the fact that there's a lot of hope embedded in stock prices, at least in the short term. Over the long term, you know, Dave McCarroll, our CIO, and I talk a lot about this.

00:24:49:23-00:25:18:08

Bill

Of course, there are absolute drivers of valuation and fundamentals that drive stock prices over time. But in the near term, there's a lot of hope in stock prices. When I look at a bond, it's a mathematical instrument. And so one of the things that I think investors have to be aware of is the fact that after 500 basis points of rate hikes, the math in bonds is a lot different than it was when the Fed was embarking on this rate hike expedition back in March of last year.

00:25:18:08-00:25:44:06

Bill

So when you started out with a zero-interest rate policy, you had no shock absorption against higher rates. So while I still think that the Fed is going to leak additional hikes into the market and the Fed has no idea when they're going to be done, this is why investors have been so wrong with respect to Fed predictions. How are we supposed to predict where the Fed's going to end when the Fed has no idea when they're going to end reacting to the data that's coming in?

00:25:44:08-00:26:07:13

Bill

And so when we're looking forward, sure, there'll be additional rate hikes that are coming into the market. At least that's my view. They will leak those hikes into the market over time as they react to this data until they're ultimately sure that the job is done. But when we look at bond valuations and bond math income relative to duration or rate risk, I think that equation is a lot more balanced today.

00:26:07:13-00:26:31:03

Bill

And in fact, we have to go back to 2009 to find a time where, if I were looking at yield relative to rate risk or duration in the AG index, the Bloomberg AG index, which is all my high-quality, safe fixed income, I'd have to go back to 2009 to find a ratio that's comparable to today. So that valuation looks a lot better to me.

00:26:31:05-00:27:08:14

Bill

I think that investors would be wise to start thinking about reinvestment risk as opposed to rate risk, at least at this point after 500 basis points of hikes. It's very simple for me. I don't think there are 500 basis points left in the magazine. Right. I think they've spent 500 rounds there. There's probably not 500 left. And so that means that while they may leak additional hikes in and probably hold those rates higher for longer until we see sure signs that something is turning to give them the confidence they've achieved, the outcome they're looking for, which, in my opinion, is more likely than not, is going to be a recession.

00:27:08:16-00:27:30:12

Bill

I think that reinvestment risk is going to be probably the most important thing that investors could be thinking about today, because 12 months from now, when those really high-yielding CDs and T-bills in those short-term securities that investors have put their money in start to roll over, the reinvestment environment could be very different than what we're in today.

00:27:30:14-00:27:44:13

Bill

So the ability to lock that in for longer and work that duration out, I think, could be a real ballast against risky assets for quite some time, especially if you work that duration out further at a time when valuations make more sense to do so.

00:27:44:15-00:28:10:16

Ryan

And reinvestment risk isn't really a concept that we've talked much about over the last decade because you haven't had a scenario where you've got to lock in high yields. That's right. And you've got the potential for them to head lower. And as you pointed out, you've got to reinvest that as bonds become due. And if you're ultra short and know three-month T-bills, you're going to have to reinvest in a lower rate environment, potentially as rates move lower.

00:28:10:18-00:28:38:22

Ryan

Exactly. Well, Bill, thank you for joining the podcast. It's always great to get your insights. It was great having a conversation with you. Thanks to all of you for joining us on First Trust, our podcast. I'm Ryan Cohen. Thanks.