It’s more uncertain today than at any time in my entire career

That is the perspective of David Rolley, Co-Head of the Global Fixed Income Team at Loomis Sayles who has worked in markets for more than 40 years. David thinks that the current White House: “isn't convinced that the global foreign policy, trade, defence, and financial architecture that we've had for the last 80 years serves their purpose.” This is causing considerable change to the global economy and financial markets while making bond, credit, currency and equity markets riskier places to invest.

Listen to the full podcast where David talks to Louise Watson about:

• How he believes investors should be approaching this great time of uncertainty
• Why the structural changes happening to the global economy are the most important in 80 years
• Why he thinks the US is a riskier place to invest and whether this is accurately priced in
• Whether he believes fixed income will be an effective hedge for equity markets in future
• How he is positioning fixed income portfolios in these times and
• The lessons he has learned over 40 years in markets

Podcast recorded on 22 May, 2025.

Lightly edited transcript

Louise Watson: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers, where we bring you insights from our global collective of experts to help you make better investment decisions.

I'm Louise Watson, and today we're in for a treat as we're joined by the very entertaining and insightful David Rolley from Loomis Sayles.

David Rolley is a portfolio manager and Co-Head of the Global Fixed Income Team at Loomis Sayles & Company. He is a very experienced fixed income investor with more than 40 years in markets and around 30 of those with Loomis Sayles. 

We're delighted that Dave is visiting us in Australia. It has been a while since we saw him last, but Dave and Loomis' global fixed income team are regular visitors to our shores, where they've been looking after clients' money for more than 25 years.

Dave, it's a delight to have you on the podcast. Thank you for taking the time to chat to us.

David Rolley: Louise, I'm very happy to be here.

Louise Watson: Now, you're a highly experienced investor. You started your career back in 1981, which is coincidentally the same year that Ronald Reagan became president in the United States, and Reagan was famous, among other things, for his global trade policies. Are there any lessons learned from early in your career that can help investors today?

David Rolley: It's a good question, but I have to be completely honest. When I talk with my portfolio team about things like Reaganomics and "Morning in America," they respond by saying, "We have no idea what you're talking about, David."

So let's go back to 1981. You may not know that in the 1970s, we had pretty serious inflation in the United States, which pretty much horrified international investors. We gave them ten years to get out of the country. That started with Nixon going off gold. But we had bad inflation; it was pretty severe. By 1981, we were under-owned by our own and international investors. The P/E ratio on the S&P 500 was about 8, and inflation was 13%.

Reagan came in, he kept Paul Volcker in place, and then he cut taxes and increased defence spending. So we had a policy mix of fiscal ease and monetary tightening. Even though fiscal policy was loose, monetary policy was even tighter with over 20% interest rates.

The consequence of that was that we had a short, sharp recession that broke inflation, but after that, profits recovered, the economy recovered, stocks went up, and bond yields went down. It was "Morning in America," and we had a four-year dollar bull market.

Let's compare that to now. In many ways, what we have now is exactly the opposite. We've had more than a decade where I've heard that the US equity market is the only alternative. Mega cap US tech is owned by everybody, arguably over-owned. US share of MSCI started this year at all-time highs.

So from a positioning standpoint, there may be a question mark. And then if we turn to the policy mix, it's the opposite. Tariffs are a tax hike; that's fiscal tightening. We started cutting interest rates late last year, and the futures expect more of that.

So we've got fiscal tightening and monetary ease, and maybe an equity and bond market that are somewhat over-loved. In that world, I think you look for dollar weakness, not dollar strength.

Louise Watson: We appear to be in a time of great global change that you just described. Which do you think are the most important of these changes for the world and for investors?

David Rolley: I think that the most important change is that the current White House isn't really convinced that the global foreign policy, trade, defence, and financial architecture that we've had for the last 80 years serves their purpose.

We've had a lot of questions. Markets tend to focus on whether the US dollar will be the reserve currency, but I'm not sure that we would be the reserve currency without the defence alliances and the hard US power that backs up our promises of a level playing field for all the world's actors.

So the question for investors now is: is that US set of guarantees still good? And then you can be more precise. Do we still like NATO or not? If we're going to stay in, what kind of guardrails?

Mexico and Canada thought they had binding trade agreements and discovered one day that they didn't. So there are more questions than answers here, but 

Louise Watson: And you're obviously based in the US, but you invest globally and also travel regularly to talk to investors all over the world. How do you think investors' impressions of the US have changed in the recent past?

David Rolley: I would say they are confused. They don't really know what to expect. You know, at recent major conferences, prominent asset managers have been trying to tell the US story, and they said, "Well, you know, we're still exceptional. Maybe we're not dependable." I'm not sure if you can be one without the other.

So I just think that the level of uncertainty about policy and about US intentions is so extreme that investors are kind of wondering whether we're still a haven asset or not. And if we're not, what might be? Is it gold? Is it Switzerland? We'll try and answer that question by the end of the podcast.

Louise Watson: Do you think the changes are likely to be long-lived, or can the US bounce back from this?

David Rolley: Oh, I think that this has probably been a structural change, almost as important, here ending an 80-year period, as the Bretton Woods Agreement that began it 80 years ago. Even if there is a change in governance and a change in policy, the kind of loss of confidence that we've experienced—the uncertainty and unpredictability that is now associated with the Americans—is going to take a long time to resolve and may never be resolved. So I would say it's probably structural.

Louise Watson: Yeah, that's a good segueway to this next question. Do you think that the US's recent policy changes and announcements have made the USA a riskier place to invest? And if so, do you think the risk is accurately priced in by markets or not?

David Rolley: It's a pretty good question because what we have seen is some correlation breaks that are quite interesting. When equity markets fell in the immediate aftermath of Liberation Day, you would think that bond markets would rally. They did not.

Even though people priced in more Fed ease because of risks of tariff damage to the consumer and the economy, bond markets did not rally in line with the Fed funds futures. That's a structural break that implies that buyers are less willing to buy treasuries just on business cycle inputs. They are worried about other things.

What are those other things? They could be worried about stagflation; they could be worried about our debt stock and its debt service in the future. But this is a fundamental break. I would say that if you look at US assets—whether it's stocks, bonds, or the dollar—you need a higher risk premium.

When you look at market action, you can see that the dollar is embedding that risk premium. It's been trading weakly all year, more or less independently of high-frequency data and events, so I'd say it's starting to be in the price of the US dollar. I'd say it's in the price of the US Treasury yield curve.

I'll tell you where it's not in the price: that is in credit spreads. They're still very tight, and it's not in the stock market, that has fully recovered from its Liberation Day sell-off. 

Louise Watson: For most of the century, bonds have been negatively correlated to equity, so an effective hedge in an investment portfolio. This famously ended in 2022 when fixed income had its worst returns in centuries—possibly ever—while equities had a poor year. Equities and fixed income have been more closely correlated since then, but it's not clear-cut.

How do you see this playing out in the future? Is fixed income likely to be a useful hedge for equities or not?

David Rolley: Well, I don't think it's an all-time record because bond history goes back 5,000 years, courtesy of the Bank of England, and certainly, the French bankruptcy of 1789 did not do anything well for French treasuries. So we've had other volatility, but nonetheless, it was a big shock in 2022.

I think one of the reasons why it was so shocking is that people kind of naturally believed in that negative correlation, but they forgot where it came from. Bonds are a hedge against equities in terms of their returns. Bond returns will hedge equities when a shock to the economy is recessionary.

Meaning that you've suddenly got a recession, that you have to price that. Well, that's bad news for profits; it's bad news for the growth rate, but it usually means you have the opportunity to cut interest rates and bonds rally. There's your hedge.

What if the shock is inflationary, which it was in 2022? In an inflation shock, your response as a policymaker is to raise interest rates. Bonds sell off. But why should equities rally if there's a supply shock to the economy raising inflation? That's not necessarily good for profits, and it's very bad for equity multiples.

So that was really the story of 2022: it depends on the nature of the shock to determine the sign of that correlation. Going forward we're worried about both kinds of shocks, so we actually think that the correlation is quite unpredictable. It will just depend on which side of the marketplace it's coming from.

Louise Watson: With the return of more normal interest rates and the recent volatility in equities, we've been seeing big demand for fixed income from our clients. How have you been seeing demand for fixed income around the world?

David Rolley: I'd say it's an interesting mix. I would point to sort of three themes in what we see from investors and potential investors. Theme one is absolutely what you've just described. People are much more interested in global aggregate mandates. Those tend to be treasury-heavy, and the yield picture today is so much better than it has been for most of the last 10 or 15 years.

You no longer have negative yields in Europe. The 30-year Japanese JGB yield just hit 3%, which is its highest yield in 25 years or more. Bloomberg data doesn't go past 1998, but it might be an all-time high. I don't think it's an all-time record; yields were higher in Japan in 1990.

So you look at that and you say, well, alright, it's no longer obviously value destructive to own treasury or global aggregate mandates. What about credit? Well, the yields are good, but the spreads are still really tight. So I think we still have some folks on the sidelines there waiting to see if any of this volatility leads to an increase in credit spreads.

In that case, we would expect much more interest in global credit and global corporate mandates, and that would include emerging market corporates as part of that opportunity set.

The third thing, the last thing I wanted to mention: 

Louise Watson: And how have your investment positions changed over the last six months? Where have you seen opportunities to gain higher returns, and what are your biggest positions at the moment?

David Rolley: Well, like everybody else, when Trump was elected in November, our first reflex was to say, "Well, tariffs are coming, and there might be some short-term dollar strength here." If we think about trade wars in the first Trump administration, he wanted to declare war on trade, but his advisors talked him into a trade war with China.

So maybe China is the thing you may be under-owning in that world. By February, we looked back and said, "You know, maybe January was peak tariff. We have to think about this again." We began actually shifting portfolios because we became increasingly convinced that we were looking at a dollar bear market and not just a technical dollar bear market, but very possibly a structural dollar bear market.

The reason for that comes from what I've just described: global investors over-own the United States, and this may not be the right place to get the highest future returns, in which case they may need to reallocate. All the movement we've seen so far has been fast money, pod shops, hedge funds, technical guys.

The big portfolios—the sovereign wealth funds, the big pension funds—they tend to be more slow-moving. You have a lot of committees before you make a major change in asset allocation in a shop like that. I think they're just beginning to show their colours, and it looks like they want to be more diversified than they have been.

Louise Watson: And with all of these policy changes and uncertainty, have you been making greater changes to the portfolios more frequently?

David Rolley: Well, I would say that what we've done is we have tilted our currency strategy in a non-dollar direction, and that has been a move we're happy with. We will add to that opportunistically depending on individual markets.

On the duration side of things, we like certain markets better because yields are higher, so we have been tactically extending duration in a cautious way, partly because neither we nor anybody else can predict how the US is going to fund its deficit. Is it going to be through fiscal tightening? Is it going to be through financial repression? Or if we refuse to pay taxes, the inflation tax is the ultimate tax you always have to pay, which could mean that these higher yields are not yet compelling value. So, a little longer duration, but tactical and with great caution.

Lastly, credit. We have not bought credit yet; the spreads are too tight, and we are going to be patient with this story.

Louise Watson: And what advice would you give investors with regard to managing their fixed income allocation over the medium to long term? Do you think the approaches that have worked in the past will continue to work, or is a new approach needed?

David Rolley: Well, I've argued that we've had a fundamental structural change in the landscape of global finance, and it's the biggest change in 80 years. So with that, you might think that asset allocations might be impacted, and I think they should be.

One of the things that we've talked to a lot of folks about is investors are asking, "Well, what's the safe asset if it's not the US? Is it gold? Is it Switzerland?" I don't think it's any of those things. 

That would include equities, both treasuries and corporate bonds, and it would include the broadest possible range of geographic markets. So that would include emerging markets, not just the developed countries.

Louise Watson: You've been in the markets for 40 years. What is the biggest lesson you've learned and can you share with investors to ride out these cycles and waves of volatility and uncertainty?

David Rolley: Alright, a biggest single lesson... I'm not sure if I have a biggest single lesson, except that the price you pay to buy an asset is probably the most important decision you have to make.

So it behooves the group, the team, the company, the research institution to work especially hard on a fair value conclusion. And if the assets are not at fair value, don't chase them. Wait for the market to give you a discount to that fair value and then buy a lot of it.

I think if there's been a mistake we've been making as investors, sometimes it has been that when we get a compelling opportunity, we don't size it right. A little too much caution, a little too much looking at that tracking error.

Louise Watson: Well, thank you, Dave. It's been an absolute pleasure to chat to you today, and I'm sure our listeners got as much out of our conversation as I did. If you enjoyed the episode, please click follow on your favourite podcast platform to be notified of future episodes and tune in again to hear more from our global collective of experts.