The Long View – Eric Jacobson: The Entire Face of the Bond Market Has Changed

Podcast: The Long View (Morningstar)
Date: November 25, 2025
Host: Dan Lefkovitz
Guest: Eric Jacobson, Senior Principal for Fixed Income Strategies, Morningstar Manager Research Team

Episode Overview

This episode explores the evolution and current complexity of the bond market, focusing on the interplay between active and passive management, structural changes post-financial crisis, the rise of private debt, and the risks and opportunities now facing bond investors. Eric Jacobson shares his three decades’ worth of insight into fixed income markets, offering both history and guidance for navigating today’s investment landscape.

Key Discussion Points & Insights

Active vs. Passive in Fixed Income

• Rationale for Eric’s Paper
  Jacobson discusses his recent in-depth report: “The bond market is fertile ground for active management,” emphasizing why bond markets are fundamentally different from equities—particularly regarding the case for indexing versus active selection.

  • “I think a lot of people don't really pay that much attention to bonds. There's this notion that, well, if indexing is great for stocks, it must be the way to go with bonds as well. And the factors are just pretty different.” (01:49, Eric Jacobson)

• Why Active Succeeds More Often in Bonds

  • Success rates for active management are notably higher in bonds than in stocks, especially when fees are controlled and management isn’t excessively aggressive.
  • “If you are not charging too much money and have good, competent... management on the bond side, generally speaking, you can outperform indexes reasonably well... as long as you're dealing with areas of the bond market that have inefficiencies.” (03:02, Eric Jacobson)

• Bond Market Structure

  • Bond markets are “fragmented” with multiple sectors and subsectors; unlike common stocks, bonds from the same issuer can vary dramatically in features and risks.
  • “You can't just go to the market and say, I want a bond from that company, expecting it to be the same as any other bond from that company. You can do that with stock... It doesn't work like that with bonds at all.” (04:20-06:16, Eric Jacobson)

Inefficiencies and Tools Available to Active Managers

• Fragmentation = Opportunity

  • Complexity and smaller audiences in certain bond segments (especially mortgages, niche asset-backed securities) create inefficiencies that skilled managers can exploit for steady, compounding gains.
  • “If you know where to look, you can actually [find cheaper bonds] repeatedly... you chug along over time.” (06:33-08:38, Eric Jacobson)

• Derivatives, ETFs, and Swaps

  • The toolkit for managers has “expanded.” Managers now use derivatives (like credit default swaps), ETFs, and futures to create “synthetic” exposures. Sometimes, “synthetics” can be cheaper than purchasing the bond itself—without adding significant risk if used properly.
  • “There are ways to use derivatives that are not especially dangerous, and this is one of them, where you're really just... trying to take advantage of efficiencies in the marketplace.” (09:00-11:16, Eric Jacobson)

Key Historical Case Studies

• Index Concentration Risks

  • Indexes increase exposure to the most indebted issuers (e.g., automakers in the early 2000s, Greek government debt during the Euro crisis).
  • “The reason that these companies became larger exposures in bond indexes is they were borrowing and borrowing... More indebted... And eventually they both filed for bankruptcy. That was bad for the indexes.” (11:34-14:58, Eric Jacobson)

• Post-2008 Treasury Issuance

  • The explosion in Treasury and long-dated corporate bond issuance has changed the “face” of broad market indexes, making them more sensitive to interest-rate risk.
  • “When the government borrows more and Treasuries take up a bigger... chunk of the market... That literally changes the face of the market... It’s more sensitive to interest rate risk now than it was just a few years ago.” (15:08-17:05, Eric Jacobson)

Behavioral Pitfalls in Bond Investing

• Market Timing is Exceptionally Hard

  • Investors who try to shift between cash and bonds, or time interest rate cycles, generally underperform.
  • “It's just really, really hard to get the timing right under any circumstances.” (17:28, Eric Jacobson)
  • Even legendary managers (like Bill Gross) didn’t rely solely on interest rate bets and occasionally got it wrong.
  • “There’s lots of reasons that interest rates move back and forth. Doing that is more of speculation than it is investing in some ways.” (19:36, Eric Jacobson)

• Lessons from 2022 and Post-GFC Rates

  • Market consensus on “inevitable” rate changes can remain wrong for years; managing for an interest-rate apocalypse too early can mean lost returns.
  • “If you had positioned your portfolio... expecting that interest rates are going to spike... you would have sat on the sidelines for years...” (19:49-22:57, Eric Jacobson)

The Role of Indexing Today

• When Indexing Makes Sense
  • For core exposure to Treasuries, high-quality corporates, and broad mortgage markets, low-cost index funds are reasonable—provided rate sensitivity and coverage limitations are understood.
  • “I'm definitely not against fixed income indexing at all. But you certainly want it to be cheap and you want to recognize that you're not going to have the breadth of market that you might get by being more active.” (23:03-24:56, Eric Jacobson)

Deep Dive: The Rise of Private Debt

Definitions, Market Structure, and Fund Vehicles

• Private Debt vs. Private Credit vs. Asset-Backed Finance

  • Private debt generally refers to loans originated outside the banking system, often via private equity firms.
  • “Private credit” typically means “direct lending to middle-market companies.”
  • “Asset backed finance” refers to cashflow-producing asset pools bundled into securities—yes, including oddities like the securitized David Bowie royalties.
  • “That is a form of asset-backed security. And that is the kind of market that we're talking about here.” (25:56-29:09, Eric Jacobson)

• Liquidity Considerations

  • Many private credit assets are “privately placed,” illiquid, and cannot easily be sold or even valued daily.
  • When securitized (“wrapped up” with legal/industry markers), some become much more liquid but are still more complex than plain-vanilla bonds.

• New Fund Structures

  • Funds offering exposure to private debt now exist as mutual funds, ETFs, “interval funds,” and “tender offer” funds.
  • ETFs like PRIV (State Street/Apollo) appear riskier than they actually are, due to their larger allocation to more liquid asset-backed finance rather than highly illiquid pure private debt.

Notable Segment: The Complexity of Level 3 Assets

• What Are Level 3 Assets?
  • Hard-to-value, illiquid investments whose pricing must be determined by hand, not market quotes. Often indicates underlying holdings are truly opaque.
  • “Level three is something that cannot [be] valued [with] readily observable inputs... you can expect that that kind of thing is not going to be liquid.” (31:42-34:20, Eric Jacobson)

Risks and Red Flags

• Liquidity and Transparency

  • “Semi-liquid” interval or tender offer funds can restrict redemptions, leading to potentially serious liquidity mismatches in times of market stress.
  • “You can only get some of your money back at certain times... They’re not even obligated to send it back to you [in a crisis].” (34:40, Eric Jacobson)
  • Investors should not use these funds as a regular cash substitute.

• Unknown Systemic Risks

  • While 2008-level crises aren’t predicted, the transparency deficit and interconnected risks in these private structures could have unforeseen consequences.
  • “There are connections and... linkages that are hard to see because the information's not public. ...when you have risk in financial markets... you always have to be ready for the possibility that something can happen that nobody anticipated.” (40:09, Eric Jacobson)

• Medalist Ratings for Private Debt Funds

  • Morningstar leans favorable toward managers (like Pimco) with deep experience and prudence in private debt and asset-backed securities—not those taking on unproven or excessive risks.
  • “The baseline here... is you’ve got to be much more conscious of what you’re doing. ...You don’t want them to be forced to sell something if it's not easily sold.” (41:56, Eric Jacobson)

Career Reflections and Industry Practices

The Mutual Fund Industry: Then and Now

• Motivations and Missed Alignment

  • Jacobson shares his early impression that many firms prioritized profitability over investor outcomes: “There were firms... looking at it as profitability sweet spot. They didn't want to have star managers... keep as much of the profits as you can while you sort of keep your investors happy enough. It was almost mediocrity by design.” (42:14, Eric Jacobson)

• The Era of Gimmicky Bond Funds

  • Historically, many bond funds were sold using yield-generating gimmicks that routinely blew up: “A lot of these things blew up. ...It taught me a whole lot of lessons... We always talk about history not repeating, but rhyming.” (42:14-45:37, Eric Jacobson)

Closed-End Funds and Research Evolution

• Why Closed-End Funds Had Their Own Desk
  • These funds were a favored format for yield-seeking, often older, investors and were once considered a distinct product category worthy of specific coverage. Changes in investor preferences have since diminished their standalone status. (45:49-47:38, Eric Jacobson)

Memorable Industry Encounters

• When Fund Managers Push Back

  • “I've had more than one try to get me fired. ...One of the things I love about Morningstar is we really prize that independence in research.” (47:51, Eric Jacobson)

• Lessons from the Financial Crisis: Dan Fuss Story

  • Amid 2008’s chaos, renowned bond investor Dan Fuss exuded excitement at distressed market opportunities—a true “be greedy when others are fearful” moment:
    • “He was upset because nobody would sell him anything. He... wanted to buy them. ...His frustration was even though the prices were down... there weren't people ready to sell.” (47:51-50:47, Eric Jacobson)

Notable Quotes

• On Market Inefficiency and Active Edge:

  “...the bond market is extremely fragmented. ...Even within the same sector... you can have dozens and dozens of different things going on from one bond to the next in terms of whether it's a call feature or some other issue...”
  (04:20, Eric Jacobson)

• On Market Timing:

  “Doing that is more of speculation than it is investing in some ways.”
  (19:36, Eric Jacobson)

• On Liquidity Risk in Private Debt Funds:

  “You can't just get your money back right when you want it. ...You may have to wait months if you are trying to get your entire investment back.”
  (34:40, Eric Jacobson)

Important Timestamps

• 01:49 – Why active management can work in bonds
• 03:02 – Higher success rate of active fixed-income managers
• 04:20 – Fragmentation and diversity of bond market
• 06:33 – Inefficiencies and opportunities for active managers
• 09:00 – Modern tools: derivatives and ETFs
• 11:34 – Case study: index weighting and automaker debt
• 15:08 – Treasury issuance post-GFC and index interest-rate risk
• 17:28 – The pitfalls of tactical timing in fixed income
• 23:03 – When indexing is—and isn’t—appropriate in fixed income
• 25:56 – What is private debt vs. private credit
• 29:31 – The evolution of “private” bond ETFs and mutual funds
• 31:42 – Level 3 assets and liquidity concerns
• 34:40 – Mechanics and risks of interval funds
• 40:16 – Medalist-rating philosophy for private debt funds
• 42:14 – Jacobson’s early career and industry practices
• 47:51 – Dan Fuss, the 2008 crisis, and the mindset of a great bond investor

Podcast Tone and Style

• Jacobson expresses thoughtful, technical but plain-spoken views.
• The conversation is candid—pragmatic rather than dogmatic on indexing, and open about both opportunity and risk in new bond fund structures.
• Rich with historical context, personal anecdote, and clear-sighted warnings.

Summary Takeaways

• Bond markets remain far more complex than equities, with more opportunity for skilled active management—especially when fees are kept in check and risk is measured.
• Market structure changes—like massive Treasury issuance and the rise of private credit—have increased certain risks and limited the reach of passive, index-only solutions.
• New investment vehicles in private debt offer yield, but bring liquidity and transparency trade-offs that demand caution and careful research.
• The keys to bond investing remain patient exploitation of market inefficiencies, thoughtful tool selection, and relentless focus on investor outcomes over salesmanship or fads.