Franklin Templeton's Sonal Desai on Fixed Income

Summary

Masters in Business: Franklin Templeton's Sonal Desai on Fixed Income

Episode Release Date: July 24, 2025

In this enlightening episode of Masters in Business, host Barry Ritholtz converses with Sonal Desai, the Chief Investment Officer (CIO) for Franklin Templeton’s Fixed Income Group. With over $215 billion in assets under her management, Sonal shares her extensive experience, insights into the fixed income markets, and perspectives on the evolving economic landscape.

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1. Early Career and Academic Foundations

Sonal Desai begins by detailing her academic journey, earning a Bachelor's in Economics from Delhi University followed by a Ph.D. in Economics from Northwestern University—a commitment that extended beyond her initial expectations. Reflecting on her decision to pursue further education, she humorously notes, “I decided to do even more, and I did a PhD” [03:55]. Her passion for economics steered her away from traditional career paths favored in India, such as engineering or medicine, allowing her to explore diverse opportunities.

After completing her Ph.D., Sonal embarked on an academic career as an assistant professor at the University of Pittsburgh. However, her stint in academia was relatively short-lived. At Barry’s prompting, Sonal explains, “Academia isn't for everybody and it might take a year or two to figure that out” [05:42]. Her time at the International Monetary Fund (IMF) was a pivotal turning point, where she developed a profound respect for macroeconomics and gained invaluable experience working on Eastern European economies during the mid-1990s.

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2. Transition to the Private Sector and Hedge Funds

Sonal’s transition from the IMF to the private sector encompassed roles in investment banking and hedge funds. She recounts her tenure at Dresden, Kleinwald, Wasserstein Investment Banking and later at Thames River Capital, a macro hedge fund in London, where she navigated the tumultuous period of the 2008 financial crisis. “It was a fascinating point of time because essentially over the course of the 2000s, the private sector really came into its own” [10:02]. This period not only honed her investment acumen but also underscored the resilience and adaptability required in financial markets.

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3. Ascending to Chief Investment Officer at Franklin Templeton

In 2018, Sonal took on the role of CIO for Franklin Templeton’s Fixed Income Group. She describes this transition as a significant shift from a small, boutique hedge fund environment to a larger, more structured organization. “It was a big change, and now we get to the point where my predecessor was retiring... it's been really fantastic” [14:32]. Her promotion was facilitated by Franklin’s CEO, Jenny Johnson, who encouraged her to embrace the challenge despite initial self-doubt. Sonal underscores the importance of confidence and adaptability, especially for women in leadership roles, noting the “genetic difference” in how men and women perceive job qualifications [15:28].

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4. Insights into Fixed Income Markets

Sonal delves into the current state of fixed income markets, emphasizing the challenges and opportunities presented by today’s economic conditions. She highlights the persistent liquidity injected by the Federal Reserve (Fed) and its implications for risk pricing. “Investors need to price risk more seriously” [20:11], she asserts, pointing out that excessive liquidity has led to historically tight spreads in high-yield credit markets. Sonal expresses skepticism about the widespread belief in an impending recession, stating, “I haven't bought into that. I think it’s a very strong economy” [23:27]. Her analysis reflects a blend of caution and optimism, advocating for a measured approach to fixed income investments amidst uncertain conditions.

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5. The Role of the Federal Reserve and Monetary Policy

A significant portion of the discussion revolves around the Fed’s monetary policies and their impact on fixed income. Sonal argues that the Fed has limited room to maneuver with rate cuts, estimating a neutral Fed funds rate between 4% and 4.25%. “The neutral fed funds rate is probably today at between 4.75 and 5” [36:22]. She critiques the prolonged period of unconventional monetary policies post-Global Financial Crisis (GFC) and stresses the importance of accurately pricing risk in an environment where the Fed has been the ever-present “Fed put” [20:51].

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6. Geopolitical Risks and Investment Strategies

Geopolitical tensions, particularly in the Middle East and China, are discussed as enduring stress points influencing investment decisions. Sonal observes, “Geopolitical uncertainty has become so much a part of the backdrop that you can't actually manage your portfolio to that geopolitical risk” [44:14]. She emphasizes the need for flexibility and resilience in investment strategies to navigate ongoing geopolitical fluctuations, such as trade tensions and regional conflicts.

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7. European and Emerging Markets Outlook

Sonal provides a nuanced perspective on European and emerging markets, critiquing the inefficiency and low multiplier effects of defense spending in Europe. She explains, “The multiplier for defense spending is one of the lowest multipliers you have” [49:58], highlighting the limited economic stimulation such expenditures can provide. Additionally, she comments on the Eurozone’s structural challenges, including bureaucratic red tape that hampers the deployment of fiscal measures intended to stimulate growth.

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8. Portfolio Construction and Risk Management

When constructing fixed income portfolios, Sonal advocates for a cautious approach in an environment characterized by abundant liquidity and low risk premiums. She advises staying “a little bit shorter right now” [42:43] in duration than traditional ranges, given the possibility of further rate hikes. Sonal also recommends active management and selective risk-taking, emphasizing the importance of bottom-up company analysis over passive investments to navigate potential market excesses.

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9. Personal Insights: Mentors and Reading Preferences

Sonal attributes much of her professional growth to early mentorship, particularly from her father and Paul Thompson, her first mission chief at the IMF. “Paul Thompson... was an amazing negotiator” [57:09], she remarks, acknowledging the lasting impact of his leadership style on her own approach. Regarding literature, Sonal enjoys a diverse range of books, valuing classics like "Pride and Prejudice" and "The Lord of the Rings," as well as contemporary urban fantasy, which she finds escapist and engaging [58:24].

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10. Advice for Aspiring Investors and Reflections on Investing History

Sonal offers heartfelt advice to recent graduates aspiring to enter fixed income or investing. She emphasizes the importance of curiosity and deep research, cautioning against relying solely on quick answers provided by tools like Gen AI. “Learn to spend time to dig really, really deep into different areas” [59:44]. Additionally, she reflects on the value of understanding historical market cycles, stating, “Those of us who don't learn from history are condemned to repeat it” [60:42]. Her perspective underscores the necessity of patience and experiential learning in developing a successful investment career.

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Conclusion

Sonal Desai's insights provide a comprehensive understanding of the complexities within fixed income markets and the broader economic environment. Her pragmatic approach, grounded in extensive experience and a deep understanding of macroeconomic principles, offers valuable guidance for both seasoned investors and those new to the field. Barry Ritholtz's engaging conversation with Sonal not only highlights her impressive career trajectory but also delves into the nuanced interplay between policy, market dynamics, and investment strategies.

For those interested in delving deeper into Sonal Desai’s expertise and Franklin Templeton’s fixed income strategies, this episode is a must-listen. To explore more conversations like this, check out over 500 episodes of Masters in Business available on platforms like iTunes, Spotify, and YouTube.

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Note: Timestamps correspond to the episode's transcript for reference.

Transcript

[Mark Reap]

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[Barry Ritholtz]

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[Sonal Desai]

This week on the podcast I have another extra special guest, Sanal Desai. What can I say? She runs the Fixed Income Group as Chief Investment Officer for Franklin Templeton. She directly manages $215 billion in assets. Sonala's been named to just about every most influential woman in finance list. Barro five years in a row. Forbes, Pension Investments. If you are at all interested in fixed income, what the thought process is like in trying to figure out how to structure a portfolio of fixed income, what you think about what affects the returns you're going to see. This is going to be a great podcast for you. I thought this was interesting, really fascinating, and I think you will also. With no further ado, Franklin Templeton's Sonal Desai. Welcome to Bloomberg.

Thank you, Barry. It's so kind of you to have me here.

Well, it's a pleasure. I'm excited to talk to you. Let's start out with the background that you come from. Bachelor's in economics from Delhi University. PhD from Northwestern, also in economics. What was the original career plan?

This is a really interesting one because, you know, I grew up in India. My, you know, there's a. There are two careers. At that time, there were two careers any good parent wanted from for his son, or in my case, daughter. You could be an engineer or you could be a doctor, and if you really didn't want to do either of those, you could work for the government. I didn't want to do any of the three. And economics seemed at that time to be the one which left the most options open for me. So I did economics. At the end of my undergraduate degree, though, I didn't feel like I'd really learned enough about economics. And so I decided, you know, not having understood the concept of sunk cost, I decided to do even more, and I did a PhD and was that.

Two years, three years?

The PhD?

Yeah.

No, that was a full five.

Five years. So that's more than sunk cost. That's double. More than double, exactly. So you come out of north western with a PhD in economics. What was your first job in? Finance or what was your first job out of school?

I was assistant professor of Economics at the University of Pittsburgh. And here's the deal. When I got that job, I had also interviewed with the imf, and I had really liked the imf, but you have to understand, I don't know if it's that way today, but at that time, there was no way I was going to my thesis advisor and telling him, yeah, I do have a tenure track offer from a decent university, but, you know, I'm going to go to the dark side and work for the imf. So I couldn't bring myself to do it. I went and I did the academia thing For a couple of years. And I was young enough that the IMF told me at that time that, look, if you change your mind within the next two years, let us know, huh?

I mean, academia isn't for everybody and it might take a year or two to figure that out. I mean, if that lifestyle works for you, it certainly, you know, could be rewarding intellectually.

Very much so. Look, academia, I admire it. I think it is the pinnacle of what this country does brilliantly. Having academia, having those research universities, all of that is absolutely superb. For me, the problem was I'd spent five years of my life essentially doing research and now I wanted to get out there and do something with it. To me, getting into the IMF, it was mind bogglingly, Iowa. It was fantastic. Remember, this is in the mid-90s, let's let me date myself. Yeah. So this is in the mid-90s. Eastern Europe is just coming in from the cold. And that was where I focused most of my time.

So how long did you stay in at Pittsburgh before you joined the imf?

Two years. It was two years.

So what, what was the experience like in Europe in the 90s? Working for the International Monetary?

No, no, worked out of Washington D.C. i worked on Eastern Europe. So I'm talking about countries like Bulgaria, Macedonia, Romania, Croatia, prior the wall had fallen in the late 80s, 89 was it, you know, and so these countries, some of these countries didn't even have the concept of GDP as we know it. They had gross social product, they didn't have CPI indices. So it was, in some ways the initial piece was like an extension of being at university because we were bringing these concepts to them. It was an amazing experience.

So any lessons that you learn at IMF that ultimately influenced your investment philosophy?

My enormous respect and belief in macroeconomics actually comes from my time at the imf. You know, the IMF got a lot of dings for program countries, you know, for programs which are put into place around the world. Some were better than others. I get all of that. But here's the thing. We would go to these countries and the idea was really, frankly, orthodox fiscal and monetary policy. And sometimes when you're starting from a certain point, be it hyperinflation, be it out of control, fiscal balance, be it lack of any kind of international reserves, you need to go back to orthodoxy. It kind of works. And that carrying that forward, I think it's influenced a lot of how I've thought about emerging markets through the, through the years, for sure.

How long did you stay at the IMF?

For it was, it was six years. It was six years in D.C. and then half a year. Basically. My husband and I, at that time we, we chose to move to the private sector. Right. He was moving to the private sector in London and I was following him and I had accumulated six months of vacation. They let you do that? They wouldn't cash me out for six months, but they said, take the holiday. You know what I did? I had the IMF pay for me to do a professional patisserie course in London because I had to take the holiday. I couldn't go out and work, but I was being paid and I couldn't not be paid. So I took a one year course, squished into six months full on pastry and cordon bleu, basic, intermediate and superior.

Do you still do a lot of cooking?

So I do a lot of cooking, but I don't do much, much baking anymore. My husband always complains. He says, I baked more before the patisserie course because after that I would come into our rental apartment and say, I can't work in these conditions.

So you became a chef prima donna, Is that what you must suggest?

I have to, looking back at myself, I have to believe I became a prima donna.

So you relocate with your husband to London. I'm gonna assume that's how you end up at Thames River Capital, is that right?

No, first actually, I was on the sell side. So I've done it all. I've done academia, then I did the public sector at the imf, then I did the sell side, Dresden, Kleinwald, Wasserstein investment banking. And I was in the research team there and that was in London. And then after six years with them, I moved to Thames River Capital, which was a macro hedge fund in London.

What was that experience like? You were there right through the great financial crisis.

Yeah, actually. So I started with them in 2006 and in 2009 I moved back to the long only buy side. I think it was absolutely eye opening and I think one of the great things about working with them, small team, boutique firm, hedge fund, but a macro hedge fund. So at every stage it felt like, and I'd been on the sell side and now it's on the buy side. It gets you a little bit closer to the end point. I think it was a fascinating point of time because essentially over the course of the 2000s, the private sector really came into its own. So in a sense, when we were at the imf, a lot of these emerging markets, they came to the IMF because there wasn't a true alternative. Private markets, especially for em, had not deepened enough. And now as we got into 0809 you started seeing the strength and power of the private sector. And then we had the global financial crisis. Holy cow. That was, you know, that was when I would walk around and I used to walk home from, from my work. I was just thinking, everyone keeps talking about oh, you know, living in unprecedented times, living through history. I'd rather read about it. You know, living through it was, was, was amazing. I remember waking up at three or four in the morning to find out what had happened overnight. What were markets doing? It was a whole different level. It was just amazing. And now I look back and it's like great, we did that, we did that. But I will tell you, one of the best things about that time was remembering to look out of the window. We worked out of Berkeley Square, lovely offices looking out of the window and watching people having normal lives and realizing, you know, the world doesn't begin or end with finance for sure.

It certainly has an impact. But it's kind of funny some of the younger folks who are late 30s, early 40s, I know this is, it's hard to imagine this is before their time.

It is like they were in college.

So I was in grad school during the 87 crash and it was off on the side. You really didn't pay attention to it. I imagine anybody who's in undergraduate or graduate or even just starting to work into 0809 you really don't understand how unusual and the force of that debacle across the entire economy.

Barry, take it one step further and recognize that somebody, some kid who got into J.P. morgan as a trader and was fortunate enough not to lose their job in 0809. This is somebody who probably through Covid ended up being a senior trader and has never lived through truly non zero interest rates. I mean yeah, the Fed started raising but through what I would consider normal.

Right.

Normal business cycles. It is remarkable. That's when you really realize, wow, you've lived through interesting times. Right?

To say the very least. So you, you mentioned you joined Franklin in 09. They're long only.

Yes.

Pretty good timing to join a long only shop mid mid 09. Tell us what that transition was like going from a long short hedge fund to a long only asset manager.

So actually in a. The reality is the team I joined at that time was the Global Macro team within Franklin Templeton. And in many respects that team works with deep value investing in a sense looking for emerging markets which are totally out of favor thinking in terms of long business cycles and really investing abroad. So it was a bit of a natural transition. The part which was more complicated to get my head around was being part of an enormous organization after having basically been a part of a very small team, a small boutique team, where if you wanted to do something, you could be very entrepreneurial and go out and do it at Franklin, you had to get. To get your arms around a much bigger organization. But it was very good.

2018, you become chief investment officer for the fixed income group at Franklin Templeton. Is that the timing, right?

Yeah, roughly. Yeah, that's the timing.

That's got to be a pretty big change in role from had a research to, yeah, running fixed income.

So it was a big change. And now we get to the point where my predecessor was retiring, and Jenny asked if I thought I could do this.

And Jenny Johnson.

Jenny Johnson, CEO of. CEO of Franklin. And she asked me if I. If I thought I could take this role on. And I have to say my first reaction was that there's too many pieces that I can't do. And I tell you something, this is a difference between men and women. My husband, when he looks at, you know, a job description, there are something like 20 things on that job. And he said, I can apply for this. I said, but, but, but, but, you know, you haven't done. You haven't ticked every one of these boxes. He says, I ticked that one, and he will apply for it, and he will likely get the job.

When. When I had Jenny here for an interview, we talked about that exact thing. And she mentioned. She goes, women will look at this and say, oh, I can't do that. Like, I don't have 1, 7 and 12. And guys are like, yeah, we'll figure it out as we go. It's a very genetic difference.

It's a real genetic difference. Because my instinct is, well, I haven't done that before, so I can't do it. And between. Between my husband and Jenny, they basically kicked me in the pants and said, no, you can do it. Learn, learn on the job. And I guess I did. It was fantastic. It's been really fantastic, really interesting.

[Mark Reap]

This episode is brought to you by Charles Schwab. When is the right time to sell a stock? How do you protect against inflation? Are you taking the right risks with your portfolio? Financial decisions can be tricky, and often your own cognitive and emotional biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab, can help join host Mark Reap as he offers practical solutions to help overcome the cognitive and emotional biases that may affect your investing decisions. [e-mail] FinancialDecoder Every business has an ambition.

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[Sonal Desai]

So let's talk a little bit about Franklin. So you've been Chief Investment Officer for seven, almost eight years now. What's been the most surprising thing about this role?

Number one, when you challenge yourself, you really can step up. Number two, there are parts of fixed income that I thought would be, I'll just say it, boring. They're not as exciting as going out and finding that emerging market. And what you find is actually everything is fascinating if you spend enough time looking at it. So that's been great. And, and I'd say the other part of it which has been somewhat surprising to me, I'd say is it goes actually into broader markets, not just my role within this group. It is the extent to which markets look at what is happening currently. And it's a very short step for analysts to look at what's happening, extend it into the future and give you a reason for why it happened, how difficult it is to break out of the mold and try to actually genuinely look forward. Does this make sense?

Yes. We, you know, flick on the TV or radio and people are constantly explaining what just happened when they had no idea what was gonna happen. So a lot of hindsight bias.

Yes. And there's also what just happened and therefore why it should continue happening. And I think that's something which I never realized, how deeply ingrained it is and how difficult it is to break people out of that way of thinking.

Just extrapolating to infinity.

Infinity.

Yeah, that happens all the time. You recently were on with my colleague Shonali and you said to her, investors need to price risk more seriously. Explain what you mean by that.

What I mean by that is I said more than it's. I'm looking now since the global financial crisis. And Barry, we just talked about the fact that there are entire, entire generations of people who have never lived in a world where liquidity was anything other than hyper abundant. And by the way, we're still in that world. You look at the Fed's balance sheet, it's still enormous. I think it's very hard for people to even realize that the Fed sat on a minuscule balance sheet prior to this. We were not in a situation where essentially there was always a get out of jail for free card out there.

The classic Fed put.

The Fed put. Eventually it was a Fed put, then people thought there was a Trump put. And quite frankly, over the last four or five years, we've had a fiscal policy put. We have puts all over the place. And I think that what happens in that environment, you know, when I said that we need to price risk, start remembering again how to price risk appropriately, it is the fact that when financial markets started moving out along the yield curve, out along the risk spectrum, I've even seen the IMF talk about, oh well, markets need to price risk correctly. Well, hello, they were forcing us into those positions explicitly. When the first set of QE123s happened, it was explicitly there to get financial markets, markets to take risk again. QE1, definitely. QE1 and 2, maybe markets had frozen up. We needed to liquefy frozen markets. And to me, if I look at that, that made sense. Problem is we hung onto it for too long. If I look at high yield credit, let's talk about fixed income markets. High yield credit, typically in a recession, spreads of high yield credit over Treasuries, equivalent Treasuries should be at around 600, 650, even higher. We've never gotten there.

Still very tight.

No, today we are close to record tights. We're only looking at a few hundred basis points. We're sub 300. This to me means that while people like to talk the talk of recession, what they're really saying is cut rates. We want more liquidity because we're not getting rid of all of our assets over here, the risky assets which should sell off if people truly expected a recession.

So I'm going to assume you're not in the recession camp here.

I haven't been. I haven't been. I'd say that I can proudly say that it's been, you know, I'm on record. So I think it was in probably early 2021, when inflation started picking up, that I was saying, yeah, this isn't looking so good. This transitory stuff isn't looking so good. And most importantly, it wasn't at all clear to me why we were expanding fiscal while we also had this mass easy monetary policy and how that could possibly result in a recession. And we've been having recessions which are 2/4 out now, I think a rolling 2/4 out for the better part of something like 3 1/2 years. And I will say we've not bought into that. I think it's a very strong economy.

So it certainly has been. We continue to see consumer spending despite weak sentiment. Consumers continue to spend. The labor market is tight. Yeah, there are some warts on the housing markets and you know, there's always some sector you could, you could poke at. But by and large, this seems to be a fairly robust, fairly resilient economy. Fair, fair statement.

I think that is a fair statement because here's the thing, you know, the. In the first few months of this year, we saw sentiment tank and everyone said, well, hard data will follow. I wasn't so sure because sentiment was moving on something which was unusual. It, it wasn't moving on the back of weakness in labor markets or people feeling uncertain about their jobs. It was weakening on the back of pronouncements, you know, on top of policy pronouncements. I'd say the execution of that stuff was really bad and continues to not be particularly good in terms of tariffs that impacted sentiment. However, people continued to spend. They didn't stop spending, as you said. And I'm not suggesting that this economy is recession proof. I'm just saying so far we haven't got whatever we need to push us right into recession.

Right.

Yeah.

Any thoughts on the idea that perhaps sentiment measures are broken, that when you see Michigan sentiment worse than the pandemic, worse than the Financial crisis worse than the 87 crash. And yet, you know, you look at the data, you're just not seeing anything remotely.

I have to say that I'm looking a little bit less at some of these indicators. I think they need to be leavened. We need to now do more digging. Our country has become very polarized and that feeds into people's sentiment. It doesn't feed into their shopping habits. That's the reality. Right.

So I'm wondering how much of this is driven not just by media, but by social media and algorithms. It seems to send people to more extreme perspectives.

Absolutely huge. And I think that the speed of the news cycle, the need for clickbait style, tweets, headlines, whatever it is, I think that exacerbates every sentiment. However, people still seem to be relatively sensible in terms of how they actually behave because we're not hearing about people massively canceling their European vacations, which according to Delta, we're taking in record numbers. Right.

It's so funny you say that because last quarter they dropped their guidance. Hey, everybody's frozen. JetBlue did something similar. We don't know what's happening. They just came out in the most recent few days talking about not only reinstating guidance, but being pretty aggressive as to what they see going forward. That's fairly constructive kind of fights against the. Oh, this tariff war is going to cause a vibe session and, and crash everybody.

Yeah, you know, I really never bought the vibe session idea on tariffs. I mean, let's. Can we talk about tariffs?

Sure.

I mean, it's been talked to death, but why not? Let's talk about tariffs briefly. Here's the thing. I look at our country and I'm going to use big round numbers here, right? We're about a 30 trillion economy. Okay, 29. Call it 30 trillion economy. 70% of our economy is consumption. Okay, so you get to around 20, 21 trillion, 70% of consumption services. Guess what? Services aren't really impacted by tariffs. Right now I go to, okay, I've got around six, six and a quarter, six and a quarter trillion of consumption of goods. How much of this is actually imported? Around 3.4 trillion of goods are imported. So I'm looking at 3.4 trillion against all of this huge economy size. And I say, okay, they're talking about putting tariffs. You know, let's assume tariff revenue ends up being 300 billion a year. It's not, you know, that's. It could be much lower, 300 billion if I were to spread this out over all goods. And services like the Europeans do, using a VAT that's a 2% tax. Would we all be jumping up and down saying vibe session if magic happened and the federal government did something very intelligent and put just a small consumption tax on the economy to lower the budget deficit? We wouldn't. So I guess what I'm trying to say is I don't love tariffs. Please. Tariffs are a highly inefficient form of. Of raising revenue. They're distortionary because they randomly hit some products relative to other products. I don't love tariffs. I just don't think that they are as catastrophic for the US as they are for the rest of the world. The rest of the world? Yeah. It is a big problem. The US doesn't depend. It's a huge economy, which is essentially a large closed economy.

Closed economy.

Yeah, it is.

That's very interesting.

No, how do I come right back?

It seems like, look, our phones are made in China. I'm wearing a watch. We're in Switzerland. Cars are from Japan and Germany and Korea and elsewhere. It feels like we see so many imported goods, clothing, just all this stuff. But what you're really pointing out is the things we import are relatively small percentage.

Exactly. I think you're totally right. You know, and here's the thing. Should we be manufacturing more in the us this is actually a political decision and people vote for this. And you know, anybody who says that's a crazy idea, well, Germany does it, Japan does it. You know, it's a choice. It's a choice. It's a political choice. And I think that it is up to the people of our country to decide which direction do they wish to go. And there's no right answer. It's a democracy. People need to choose. However, it is an incredibly wealthy country. And therefore when we talk about imports and exports, I look at exports, which is how our GDP gets impacted via tariffs or trade or anything. Imports are 10, 12% of our overall GDP because we import around four and a half trillion of goods and services. Three and a half of just goods. Four and a half trillion out of a 30 trillion economy. Call it 12, 13%. That is where we are looking in terms of our imports. And you compare this to a. Germany, Germany, including its exports to the rest of the euro area, it's around 44% of GDP.

Isn't that true throughout Europe? They're just, they're much like I look at Germany, France, Italy, Spain, sort of like New York, California, Texas, Florida, because there's substantial economies and they're Right there, there's no ocean in between them and they know.

And they also export outside. Right. So they're very, very dependent on what the whims of the rest of the world are because they need. Here's, here's the reality of it, you know. Well, every time the administration talks about VAT as a trade barrier, any economist will tell you that's just plain wrong. It's not because it's a trade, it's a trade adjustment. No, no. And basically it's not a barrier because it's what we call a border adjusted tax. So you know, we export a car to Germany. Absolutely. You have to pay VAT there, but you'd have to pay the VAT on the BMW.

It doesn't matter. Right. Whatever you're going to consume, you're paying for.

And that's just wrong. However, if you want to take again that 20,000 foot up in the air view to this, there is an economic model which I think the Europeans have chosen to follow which is to penalize consumption in Europe with the VAT 22% tax on average on consuming. Which means the Europeans aren't consuming not European stuff and not American stuff.

That's right.

And we have some of the lowest taxes in the world and everyone, we consume everybody's production. So we are supporting global GDP via our desire for consumption.

We also have privatized things that the VAT tax subsidizes in Europe.

Yeah, yeah.

So we pay our own health care and retirement and college. For many European countries they're paying much higher taxes. But that's part of the sort of the social safety net, not part of the private sector.

Totally agree. And again I'd come back to the idea that these are choices made by democracies and there are no right and wrong answers. So it's wrong for us to say get rid of your vat. They made the choice to have that vat.

I will tell you that I have a vivid recollection of being in London and Brussels during the dot com crash, like 2000s for business and you leave New York where everybody's kind of freaked out and stressed and you go to London and people are a little more relaxed. Then you go to Brussels and, and they're even more relaxed. And I guess there's no fear of losing your health care or owing college loans or saving for retirement. Kind of makes people a little more sanguine when it comes to the economic cycle.

It is, you know, there are trade offs on everything. Right. So we could have an entire philosophical discussion in terms of, of the choices people make and everyone doesn't make the same choices. The other side, I would argue of the coin that you, you are pointing out correctly, which is the lack of stress associated with all these fundamental needs of life. The other side can and is a lack of innovation which you see across the board because there is no desire for rich, right? And that's what permeates the entire American dream, so to speak. You know, you work really hard, you, you can be entrepreneurial, you go out there, you do great things and you can make it. And I'm an immigrant, I'm a naturalized American, and I have to tell you, that's what I bought into and I really believe in it. I love that about this country.

Huh? Really, really interesting.

[Barry Ritholtz]

Every business has an ambition. PayPal open is the platform designed to help you grow into yours with business loans so you can expand and access to hundreds of millions of PayPal customers worldwide. And your customers can pay all the ways they want with PayPal, Venmo, pay later and all major cards so you can focus on scaling up when it's time to get growing. There's one platform for all business PayPal open grow today at paypalopen.com loans subject to approval in available locations.

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[Karen Moscow]

Bloomberg Daybreak is your best way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

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[Nathan Hager]

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[Sonal Desai]

You mentioned earlier all the liquidity that the Fed has flooded the system with. What's the implication of that for fixed income today?

So I'd say the implication is when you're looking for, let's call them risky assets within the fixed income space to invest in, it's quite difficult. Like I said, typically risk assets you look at the premium you get for taking the risk over the risk free asset, which is of course the Treasury. And the reality is there's clearly enough to the point of complacency, I would say comfort around what is going on within the economy and what what the expectations are from the Fed that those spreads again I point to something like high yield. They're nowhere close to what I think would be reasonable. Nonetheless you are getting close to 7%, 7.5% depending on the day you're looking at it without not in spread terms but an all in terms for a high yield or a risky bond for a high yield corporate. Now this I think remains reasonable if you are active. I wouldn't buy passively into this because when you have way too much liquidity clearly some excesses are bound to creep up and I think that probably they have we are active managers so we're literally doing bottom up picking company by company and I think you need to do that. So what do you do? I look at 10 year treasuries and I look at Fed funds and I try to to decide at 440, 450. We're range trading right now. Is this a screaming buy? Should you be jumping in because you think that Treasuries are going to rally massively? And the answer is actually no. I would call myself aggressively neutral. I'm stealing that term from a colleague of mine. Aggressively neutral at this range I think fair value for US Treasuries actually is probably today at between 475 and 5. So in fact I think there's more for US Treasuries to sell off and thus this is the backdrop. Now why do I think this? I think all these complaints about where the Fed is, the Fed should cut rates. Cut rates, Cut rates. Well, I think the neutral fed funds rate is actually between 4 and 4.25 or so. So I don't think the Fed has that much room to cut rates. Why do I think it's 4%? Is this a magic number? Well, if I again abstract from these post GFC 1517 years that we're looking at where we've had this very abnormal, unorthodox monetary policy for a large part of this period and I look at the decades prior to that, neutral fed funds was around 4, 55%. That was what this economy took. What does that neutral fed funds rate consist of? Inflation and what you think productivity growth is going to be? I think inflation is around two, two and a quarter. And productivity growth. We're kind of cruising back towards that 2% ish level that we were gives you your Fed funds.

So inflation is softening, productivity is gaining. That sounds like a very productive environment for both the economy and the fixed income market.

Well, I think it's a good time for fixed income from the following perspective. You're getting yield from fixed income and I think you'd probably sell off a bit more. You're getting income from fixed income, let's put it that way. And again, talking about generations of people who were used to getting 1 or 2, 2.5%. There was a point where given where inflation was and given where 10 year treasuries were. We were paying the government in real terms for the privilege of lending the government money, which is what you're doing every time you buy a Treasury. But at least we're not there anymore. We're getting positive real returns. I think it is a constructive environment for fixed income. But you can't expect equity like returns from fixed income. And again because of liquidity flows and so on, people have become a little bit married to the idea of fixed income delivering massive outperformance. And what it should really be doing is giving you boring returns, you know, boring returns. It should be the ballast in your portfolio when your equity market delivers equity like returns. And that is the future state that I anticipate for fixed income.

So let's stay with the issue of liquidity which keeps coming up. How does that affect how you look at fixed income? Whether you want to go out for Further duration or maybe even higher credit risk. What is all of this both from the Fed and elsewhere? What does all this liquidity do to how you construct a portfolio of fixed income?

I think it actually makes it a little bit more difficult. We talked earlier about the issue of pricing risk. When you have this much of liquidity, those spreads, people will get forced into riskier products. You can't stay out of the market because you need to clip that coupon. So you are present, but like I said, you're not getting massively over your skis in terms of adding on extra risk because things are priced to perfection in a market like this one. So what I mean by this is my baseline is that we don't get a recession as we spoke about it. Nobody has perfect foresight into what this looks like. You could get anything coming out of left field. Covid came from somewhere. None of us anticipated very short recession, but it had very meaningful consequences. Clearly there are many areas of uncertainty and these are the reasons why. From my perspective, my baseline on the fundamentals, economic fundamentals, is no recession. But given how assets are priced right now, I would not go overboard loading up on risk at current levels. There are many reasons to anticipate, for example, additional corrections, including on the equity markets. Frankly, just from a macro perspective, which we, we don't have right now, we're.

Going to, we're going to keep it modest on the credit risk side. What about duration? Yes, we had, we had an inverted yield curve for a couple of years. The yield curve more or less uninverted. So you're getting paid a little bit for a longer duration, but you're not getting paid a whole lot. How do you look at, at the long term choices for. Where's the sweet spot? Is it four to seven?

No, I'd say it's, it's short right now. I'd say it's shorter than four to seven. So I'd say I'd stay a little bit shorter right now because like I said, we're at 440. I don't think it would take us very much to grind higher over here. And then if you've taken on a lot of duration, it will hurt you. Now if you're taking some of that credit risk, should you be hedging it out, that is something which you can consider. But outright simply going long, I wouldn't do too much in terms of. We actually still think, think that there is an enormous amount of cash still sitting on the sidelines in everything from money markets onwards. And perhaps one of the best things to do is to at least dip your feet in and get at least to ultra short. Get yourself comfortable with ultra short so you could start moving out the yield curve as opportunities present themselves.

So one of the questions anytime we discuss hedging either credit or duration risk, what are the prices of that look like these days? Because I recall pre financial crisis, it was wildly mispriced and turned out to be really cheap to hedge credit risk. What about today in duration risk? Is it cheap or expensive to hedge that?

It's still expensive. Still expensive. I would say it's still. It's still expensive, but you can do it. You can do it in option space, for example.

But yeah, I would say that that's really, that's really interesting. We hinted at, but really didn't spend a lot of time talking about geopolitical risk. How do you factor that into your investment decisions? How does this drive fixed income choices?

I think the interesting thing about geopolitics is increasingly it's become a backdrop, and I think that markets are not capable of remaining in a heightened state of panic and anticipation indefinitely. What I mean is, when Russia went into Ukraine, we all thought this was going to be a short period. And, you know, geopolitics became very central to everyone's thinking. It's gone on for three years and it's not unclear when, if ever, it's going to go away. And I think what's happening is that geopolitical uncertainty has become so much a part of the backdrop that you can't actually manage your portfolio to that geopolitical risk. You can, when risks get sharply higher, you can try doing something, but you cannot position your portfolio for these geopolitical risks. So what are the geopolitical stress points? The Middle east is, frankly, it was a forever geopolitical stress point which has to give this administration its due, come markedly lower. Based on what we have seen so far, I think actually things are looking a lot better in the Middle east than they have over a very long period of time. So that's a positive. I think the issue of China, you have different geopolitical stress points. You have the trade tensions, but then separately there's the eternal question of what happens with Taiwan. And that is always going to be a part of the backdrop. And I think a lot of people take a great deal of comfort from the fact that the Chinese authorities are extremely, extremely careful. And so we don't anticipate shooting from the hip, so to speak. So this is something which we will continue to see Stress points go up and down. And so I do think that in the early days of this administration, certainly early days post Liberation Day, there was a thought that somehow you have a complete realignment of the geopolitical environment with the US not being credible or dependable. I think that was overstated. The US is more important than any one administration or any one single set of policies.

We talked a little bit about Europe and the euro area. At least in the equity side. Europe is finally outperforming the US after a long period of underperformance. What are your thoughts on the euro area and emerging markets in today's environment?

So you know the euro area. So if I look at the equity markets, I think you can't really talk about the equity markets without talking a little bit about the dollar. And that actually impacts em as well. And I see a lot of discussion again, and it's somewhat related to our previous comments on geopolitics, that somehow the dollar is no longer fit to be the world's reserve currency. It is the end of US exceptionalism, et cetera, et cetera. I think it's mixing up a whole bunch of things. Number one, when we entered this year, trade in trade weighted terms, the dollar was at its strongest level since the Plaza Accord. Do you know that Since a Plaza Accord, I didn't realize we're talking about the absolute strongest levels in trade weighted terms since in something like close to 45, 50 years, really strong. Then what happened? We came into this year and the first thing that happened frankly was deep seq, deepseek burst and somehow, oh my God, the US is not exceptional. And people were putting US exceptionalism hand in glove with the Mag 7. I think, however, if you were a European investor, last two years you got 54% just on the S and P and then you got, what was it, 10, 15% in dollar appreciation. You made out like a bandit. If you were smart, you took some profits right? As soon as you got deep seek happening in short order afterwards you got the Germans Suddenly talking about 1 trillion euros over a 10 year period in terms of spending. So the last fiscal man standing, like I like to say, goes toppling down and we all go yay, yay. That happened. But more seriously, it meant that potentially European growth would not look as lackluster, frankly, as it has been for a while. So that happened and then you had Liberation Day. You had three sets of reasons and the European equity market had been lagging so much more than even the Nikkei in Japan. It was obviously a good time for people to go put money back there. And I think there's a little bit of catch up going on. So I don't think it's anything deep and amazing. And quite frankly, if I look at European growth, European growth is not yet showing. German growth is not yet showing any impact from the 1,000,010,000,000, spend. It's not yet showing up. I personally think that perhaps it's gone a bit too far because if I look at funds which had been approved during COVID time five years ago, five years ago, they still have not been able to deploy them. The Europeans are tied up in red tape at a level which makes me have a certain degree of. I'm not gonna go as far as saying skepticism, but caution in terms of how quickly this money will actually show up.

What about the defense spending that we're hearing about? That's probably weaponized Keynesianism. That's probably gonna be a little quicker to find its way into the economy.

I think it could be. But the only thing is the multiplier for defense spending is one of the lowest multipliers you have. Your highest multiplier is going to be what we did, which was to helicopter drop checks during COVID to everyone that has a very high multiplier eventually. But if you look at defenses, the multiplier is 0.4. It's a low, low, low multiplier. Separately, you have other issues which I think are not discussed enough. And that is, I think there are some that somebody was telling me it's close to 17 different arms manufacturers in Europe. How many arms manufacturers do you need if you have multiple multitudes of people making tanks? The problem is the demand for tanks is not infinite. Right. And so you have a lot of relatively inefficient defence expenditure which is likely to take place as well. I think it will make its way. I don't want to come across as being overly negative. I think it's very positive that the Europeans are taking their own defence in hand. I think we in markets need to be cautious in terms of the speed at which we think this will show up.

Sure. So the European Central bank has cut rates. We've seen other central banks around the world cut rates. We talked a little bit about the Fed. What do you think they're paying attention to? Are they legitimately tight? Especially now with QE ending and QT beginning. How do you look at the role of the Fed here?

Barry? Look, we talked a little bit about what I thought a reasonable Fed funds rate was. When I call it neutral, I mean the economy is neither falling into recession or overheating, that is inflation accelerating. I think that number is 4 to 425 given where rates are right now. Last year, before all of these ups, downs and ins and outs, I thought the Fed had within its gift around 125 to 150 basis points of rate cuts in all, and they did 100 basis points already. So I think there isn't an unlimited amount that the Fed really can or should do. Will they do more? Probably. I don't know. Whether it's this Fed or next year, at some stage they can, it won't be catastrophic. I don't think it's particularly wise to cut rates dramatically. Are they messing up right now? No, actually I don't think they're messing up. This is a very dovish Fed, by the way. Everyone says that all markets will panic if we get a dovish Fed. Hello. The last non dovish Fed chair we had was Paul Volcker. We haven't had a hawkish Fed chair in an enormous amount of time and I don't see it happening now. It's not in the Fed's DNA.

Huh. Really, really interesting. Let me throw a curveball question at you. What do you think investors are not talking about, but perhaps should be?

So that's a really excellent question. In this day and age, I think you can't talk about what's being overlooked without talking about time horizon. I think that we are all talking about fiscal, but in very vague terms. And the mistake we are making is acting as if we suddenly got a fiscal deficit. We have been running ridiculous deficits for the last close to five years now. And it's very much like the excesses we saw with QE in the sense of monetary policy, which lasted long after it should have been withdrawn. And we're seeing that now. I don't see any desire on either party's side to do something serious about that deficit, which implies we won't fall into a recession. But I do think at some stage there needs to be some change in policy which reduces that deficit meaningfully. And I'm not sure you can do that without actually reducing cross. This is an additional reason why I don't think the Fed should go too far today. So are we. And I think this is a long way of saying there's almost nothing that we don't talk about. It is a question of the timing. I think today we're probably looking at most of the important things that need to be looked at.

Really interesting.

[Barry Ritholtz]

Every business has an ambition PayPal open is the platform designed to help you grow into yours with business loans so you can expand and access to hundreds of millions of PayPal customers worldwide. And your customers can pay all the ways they want with PayPal, Venmo, pay later and all major cards so you can focus on scaling up when it's time to get growing. There's one platform for all business PayPal open grow today at paypalopen.com loans subject to approval in available locations there's nothing.

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[Karen Moscow]

Bloomberg Daybreak is your best way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

But special and about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday's news. Instead, you get the latest stories with context.

[Karen Moscow]

And that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world, with reporting backed by data and journalists at the center of the stories.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify or anywhere you listen.

[Sonal Desai]

So I only have you for a certain amount of time, but let me jump to my favorite questions. Tell us about your early mentors who helped shape your career.

So, you know, my earliest mentor, I'd have to say, is. Is my father. I grew up in India. In India, the path that I followed is not very traditional. And I have two brothers. And my father always treated me exactly the same as my brothers. And so, in a sense, when people ask me, even today, how do you get more women into the workplace? And I get asked this question around the world when I go to our different offices, I tell everyone, encourage your daughters, your sisters, your wives to be in finance, and they will be in finance. My father did not encourage me to be in finance. He did encourage me to think exactly the way, frankly, my brothers were thinking in terms of what the future held. So he was my earliest mentor. Second mentor, I would have to say, is one of my first mission chiefs at the imf, Paul Thompson, who subsequently actually led missions to Greece and became the director of the European department. He was my first mission chief. And he is an amazing negotiator. And I still find myself using hand gestures that I've seen, I've learned from him, and I still find myself doing this. How amazing is that? Because now you're talking about a very long time ago. And he definitely shaped how I work in the workplace.

Really interesting. Let's talk about books. What are some of your favorites? What are you reading right now?

Okay, so some of my favorites, I've got an enormously varied. The only thing I don't read is horror of any kind. It scares me too much. My imagination is too real. But if I think about things I always go back to, I will throw out. There's the master in Margarita, which is Mikhail Bulkakov, which was the first book which actually seen. It was translated. Transcendental, I think. Love, Pride and Prejudice. I love the Lord of the Rings. And currently I'm reading urban fantasy. It's called. The author's names are Ilona Andrews, Kate Daniels. It's very escapist. It's about as escapist as anything I think you would watch on Netflix. It is absolutely fantastic.

What's the title?

So it's a series of books. The protagonist is called Kate Daniels, and I think the first one was Magic Bites or something like that. It's set in a dystopian Atlanta where you have a mixture of various types of supernatural elements and things like that. It's really cool, huh?

Really interesting. Our final two questions. What sort of advice would you give to a recent college grad interested in a career in either fixed income or investing?

Number one, Be extremely curious. Right? Extremely curious. I would note that. Learn to do research. I'm not talking about research. What I'm saying is, especially today with Gen AI, I think one of the worst things is immediately having answers. Because if you don't learn to spend the time to dig really, really deep into different areas, I don't think you're going to find answers. You're not going to be able to find the answers all written in the first three lines of a Google search. Actually, I do think that people coming fresh into the markets that we have, they need to read a little bit more about what has gone before them. I think there are some brilliant books out there I would call out. Ken Rogoff and Carmen Reinhart have a couple of them. It's just a good.

This time is different.

Yeah, this time. This time it's different. It's fantastic. And your book, Barry, I'm going to give you that shout out because I think it's good to actually read practitioners books because we live in bizarre times and many people will not have seen the various cycles history.

You know, those of us who don't learn from history are condemned to repeat it.

There's that part of it. And I think the other piece I would say is it's very hard. I know, but try not to be too impatient. If you can't go through a few market cycles, it's very difficult to really understand markets. Right. So I don't believe in time and grade. I'm all for people jumping ahead, but sometimes nothing substitutes for actually living through different market cycles in our business.

Really, really interesting. What do you know about the world of investing today? You wish you knew 30 years or so ago when you were first getting started.

You know, the biggest thing I'd say is that nothing while in the moment it feels like the catastrophe is going to end the world. Number one, it won't. Number two, cycles end. I would have had a lot fewer sleepless nights if I could have just calmed myself down and said, okay, this too will pass. So I think, I think that there is a. There is an element of just knowing that, you know, this is a part of what we do.

Really. So interesting. Thank you Sonal, for being so generous with your time. We have been speaking with Sonal Desafes. She's chief investment officer for Franklin Templeton's Fixed Income Group. If you enjoy this conversation, well, check out any of the 500 we've done over the past 11 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcast and be sure and check out my new book, how not to Invest. The Ideas, Numbers and Behavior that Destroys wealth and how to Avoid Them how not to Invest at your favorite bookseller. I would be remiss if I did not thank the crack team that helps us put these conversations together each week. Meredith Frank is my audio engineer. Anna Luke is my producer. Sean Russo is my researcher. Sage Bauman is the head of podcasts at Bloomberg. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

[Karen Moscow]

Bloomberg Daybreak is your best way to get informed first thing in the morning, right in your podcast feed. Hi, I'm Karen Moscow.

[Nathan Hager]

And I'm Nathan Hager. Each morning we're up early putting together the latest episode episode of Bloomberg Daybreak US Edition. It's your daily 15 minute podcast on the latest in global news, politics and international relations.

[Karen Moscow]

What's special about Bloomberg Daybreak is the immediacy of the news we bring you each day in your podcast feed by 6am Eastern Time.

[Nathan Hager]

This isn't a deep dive on yesterday's news. Instead, you get the latest stories with.

[Karen Moscow]

Context, and that's something you don't get from other news podcasts. So join us for the best from Bloomberg's 3,000 journalists and analysts around the world, with reporting backed by data and journalists at the center of the stories we cover.

[Nathan Hager]

Listen to the Bloomberg Daybreak US Edition podcast each morning for the stories that matter with the context you need.

[Karen Moscow]

Find us on Apple, Spotify or anywhere you listen.