Hannah Rosencrantz: Hello and welcome to the Q1 2025 Plus Fixed Income team recap. My name is Hannah Rosencrantz, a portfolio specialist on the team, and today I'm joined by Janet Rilling, senior portfolio manager and head of our team. Thanks for being here, Janet.

Janet: Thanks for having me, Hannah.

Hannah: So, I think if I had to sum up what drove markets in Q1 in just one word, I would probably choose “uncertainty”. To get things started, would you mind taking viewers through a quick recap of what we saw in Q1?

Janet: So, I would agree on the word “uncertainty” for the first quarter. Investor sentiment really started to soften throughout the quarter after being pretty optimistic coming into the year. That was driven by things like the unknowns related to tax policy, immigration, and then, of course, the big one: tariff and trade policy. Despite the federal funds rate being unchanged, overall, Treasury rates did come down over the quarter. That was what really was reflecting the concerns about an economic slowdown. In total, that contributed to positive total returns in the fixed income market for the quarter.

Hannah: Was that the same across the board or were there some distinctions depending on yield curve and quality positioning?

Janet: Well, returns did vary depending on where you were on the yield curve, as well as the quality spectrum. So, first looking at quality, the higher-rated bonds within the market generally outperformed lower-rated bonds in the market. And then, those bonds with more duration—in other words, the bonds that have more sensitivity to moves in interest rates—outperformed those bonds with less duration. Now again, yields fell, which was helpful for total returns. Spreads, on the other hand—which is the compensation investors receive for taking on risk—we saw those widen. So, corporate credit spreads widened during the quarter, but they did still end the quarter at what we thought were somewhat elevated levels—meaning somewhat rich levels —and certainly tight versus long-term averages.

Hannah: Got it. Thanks for that Q1 recap. Again, sounds like a strong quarter for fixed income even amidst deteriorating investor sentiment. Speaking of which, of course, this video covers Q1, but we'd be remiss not to talk about what has been, shall we say, an eventful first week and a half of Q2. Can you speak to this at a high level and touch on how it may change the Federal Reserve’s, or the Fed's, trajectory amidst all of this?

Janet: Of course. Uncertainty has been on the rise throughout the first quarter and a big reason for that has been the unknown future of trade policy. Many were hopeful that the tariff announcement would lead to some clarity. Unfortunately, that has not played out. In fact, many more questions have arisen. Are we moving to a full blown trade war or is this going to be a back-and-forth negotiation? As a result, uncertainty seems to have continued to climb and along with it, market volatility. Notably, volatility isn't being driven by restrictive rates but by tariff policy. So, lower front end rates will not be a cure to what the ailment is right now. And the Fed probably agrees with that assessment. Recession risks, though, have definitely skewed higher through all of this, along with the risk that something could break, given the complexity of the negotiations and a lot of the uncertainties about how individual parties will react. Will the Fed step in if we run into a liquidity situation? We have seen in the past that to be the case. So, there still is likely some support from the Fed, but it's going to be a bit different than what we saw during COVID or the Financial Crisis.

Hannah: So, sounds like market expectations have shifted considerably, now pricing in potentially four rate cuts this year. Does that seem reasonable to the team? What are your thoughts there?

Janet: Well, our base case is for something less than that because we are still concerned about inflation. The Fed's hands are a little bit tied in this situation. We could see growth falling off, but at the same point in time, if the tariffs lead to price increases, there is concern about inflation. So, that is going to be a delicate balancing act for the Fed, but we do think they're going to focus on that inflation piece.

Hannah: So, given all of that, can you give viewers a glimpse into how that's translating into portfolio positioning?

Janet: Sure. So, from a positioning perspective, during the first quarter, our duration posture was mostly neutral. However, in mid-March, we began to move to a bit longer duration posture as a hedge against what we were starting to see is a downward revision in growth. We've continued in that trend as we moved into second quarter in terms of duration. For the credit allocation in the portfolio, we had been at a lower allocation and that really started in 2024 and carried over into the first quarter. And that was based largely on valuations that looked to us to be rich and really not giving any wiggle room in the event we had any type of risk-off event. So, that has served us well coming into the first quarter and gives us plenty of room to capture opportunities, which we think are continuing to unfold here. And we do expect continued volatility in the markets, so having that dry powder in the portfolio, we think, will be helpful.

Hannah: So, with volatility and uncertainty abundant and rising in today's markets, what final thoughts would you leave with viewers until we catch up again after Q2?

Janet: I think the main message is that we believe now is an opportune moment to invest mindfully in fixed income. We think that fixed income is well positioned to offer ballast within the context of a balanced portfolio, especially given that the starting point has ample yield, and that gives a cushion against spread widening and even potential losses from an equity portion of a portfolio. We also think that an approach like ours, which prioritizes flexibility and diversification, is especially equipped to capitalize on dislocations that periods of heightened uncertainty may provide.

Hannah: Couldn't agree more. Thanks again, Janet, for sharing your thoughts and I look forward to catching up after Q2.

Janet: Thanks, Hannah.