Listen to Eddy’s interview on the “Money Life with Chuck Jaffe” to hear his thoughts on fixed income investing during the pandemic economy. The coronavirus has put such a big wrench in the markets that it’s forcing investors to reconsider their entire playbook


Chuck Jaffe: It's Big Interview time on today's show, and I'm very happy that I get to spend this time today with Eddy Vataru. He's the Portfolio Manager for the Osterweis Total Return Fund. That's O-S-T-R-X. If you want to learn more about the firm and the Fund, and I suggest you do, they do really interesting stuff, great commentaries and they run good funds. It's

Eddy Vataru, thank you for joining me again on Money Life.

Eddy Vataru: Thank you for having me.

Chuck Jaffe: To say that we're living through proverbial "interesting times," really doesn't capture it. We're living through the strangest market times of our lives. It's impossible to believe that no matter how long we live, we're going to go through anything that remotely resembles this again. How much has the playbook for investments to you have been thrown out? How much of this, in spite of how unusual it is, and as we get back to normal, is still going to be classic, let's go do what investors do?

Eddy Vataru: You know, it's an interesting question. The last several times we've had markets that were remotely as dysfunctional as they seem to have been the last couple of months, there have been reasons for those events that have been predictable. At least by some market participants. Whether you look at 2008 with the mortgage crisis or 2000 with the tech bubble, you usually have something that you can predict that will create some imbalance that creates the opportunity and creates the disruption in the market.

This one literally came out of left field - impossible to predict both the virus, even though we saw headlines about it going back to January, although it seemed contained, but also the response to the virus was something that we just have never seen. I don't want to say you throw the playbook out, but certainly you have to rethink what it means ... When we talked about recession before this happened, we were talking about anchoring GDP at 0%. I made the comment to a colleague of mine, I said, "Well, if the economy is completely shutting down, 0% isn't what you're anchoring to. You're anchoring to -100% and then adding back essential services.

This is not kind of your run of the mill, look at the data and see what falls out of it. This is a much, much bigger deal and we're living it every day. All of us are. And hopefully we're all well and can get through this and we will, but it's just such a big wrench in the markets and really in life that really causes you to really think about your portfolios and really think about what is a prudent investment in this kind of environment.

Chuck Jaffe: So what is a prudent investment in this kind of environment? And especially given volatility, where you're on the record on commentaries, as I suggest to people, go to to see them. You're on the record as saying that volatility is going to be up, whatever normal is, it's going to include more volatility. So, what is the thing or the things that you're looking at?

Eddy Vataru: Well, I was going to say it almost changes every day. The entire menu of investment grade fixed income is really on our plate. This is the combination of treasuries, agency mortgages, and corporates, comprise 90% of that market. We do look at ABS, CMBS, and others, but we think about those three asset classes as the trinity where you like to rotate between. And there's a lot of opportunity to allocate among those three sectors and to rotate between them.

In March we had corporates underperform treasuries by double digit percent. They've since recovered by about 4% this month. But these are numbers that are an order of magnitude greater than any kind of dislocation we've seen historically, outside of the major crisis of '08. It's creating a tremendous amount of opportunity if you have some acumen both in terms of picking the right securities and obviously timing.

Now within what we're seeing in the markets is that since the Fed has basically thrown the kitchen sink and provided an incredible amount of stimulus, the markets have reacted in kind and equities have retraced a lot of their losses, corporate bonds have retraced some of them, agency mortgages have retraced most of them, but every day is a day of ping-pong where different market participants, for whatever reason, whether it's forced selling or redemptions or opportunities, or literally the news cycle, could be trading one asset class against another and creating moves that are several times greater than what we're used to seeing in more normal times.

Chuck Jaffe: You also are somebody who has looked at and commented in the past on interest rates. We're now in pretty unprecedented territory on rates. At one point I know you were looking and discussing how rates here could get close to zero but they couldn't go negative. You know, we're challenging it. The Treasury can't go negative, but we could see theoretically the market get close. Is this as close as we're ever going to be? And if so, what does that portend? Because in central banks in Europe, if they can't get the money flowing they're going to struggle to recover. Here, they're trying hard to get the money flowing, aren't they?

Eddy Vataru: Yeah, they sure are. One of the reasons that I think in the U.S. you won't see rates go negative, and this was something I've written about, is that a third of our bond market is the mortgage market. The mortgage market represents basically a very efficient asset class where borrowers have the ability, maybe not as fluidly today as you would like, but certainly the mortgage market is still up and running and functioning.

Borrowers have the ability to refinance their homes, take out equity. Basically bring duration to the market. Bring interest rate risk to the market by refinancing from higher rates to lower rates. That's kind of a spigot that you have in the U.S. market that you don't have in Europe or in Japan. While their rates are snugly negative and have been for a while, in the U.S. you have this very efficient source of duration that adds duration to the market exactly when rates hit their lows. Historically what we've seen is that interest rates when they rally as fiercely as they have over the last few, I guess, weeks, typically you see a bounce back where rates will shoot back higher after all of this mortgage origination comes through the system. It flushes through and there's no investors left to buy them.

But that investor now is the Fed. The Fed has bought a huge sum of mortgages and Treasuries over the last month and they're interested in keeping rates low. And we do think rates will stay low for now, but we don't see them going negative and we do see The Fed has actually reduced the size of their purchases in a way that try to make the market function while keeping rates low. They're not trying to distort the market, at least not the Treasury and mortgage market in my mind through their actions. You see that by how they're tapering their purchases.

But that being said, when I looked at a 10-year in the 60 basis point area, as a long term investor that does not offer a tremendous amount of value. I prefer to keep my interest rate bets on the shorter end thinking that the Fed will keep rates anchored at zero to a quarter on The Fed funds rate and probably do that for a significant period of time. So, owning two-, three- or even five-year Treasuries at sub-50 basis points I'm comfortable with, but somehow we're going to have to pay for all this fiscal stimulus. And owning 10 years of about 60 and 30 that's barely over 1% does not offer much value. I think those are pretty risky propositions.

Chuck Jaffe: Bringing this back to stocks. Do you have certain things where you're looking at the investment proposition in stocks sort of the same way and going, hey, there are entire sectors of the economy or entire businesses that you aren't going to be able to make a case to go there?

Eddy Vataru: Well within ... I'll answer the question more from a fixed income perspective simply because my mandate is entirely a fixed income mandate. We don't invest in stocks in my Fund. But the question is the same question. For this I employ a common sense approach to looking at assets and thinking about industries.

So yes, you look at the cruise industry or the hotel industry, anything really in travel or restaurants or so, and you know those are the areas of maximum disruption. Their question there is A, can they survive given their debt burden? And B, what is reopening the economy look like? Is it going to be back to where we were a year or two ago? Is it going to be some kind of hybrid of social distancing or measured travel and occupancy? Because if that's the case, if you can't fill an airplane with all of the seats being filled and you have to keep some form of social distancing by say eliminating middle seats, that's going to impact profitability for airlines in a pretty dramatic way.

When I look at our corporate investments, and I think you can draw the same comparison to equities, I think just employing a common sense approach to what it is that you're buying, A, can it survive several weeks or months of zero income in servicing their debt? And when they come out of this, what are their prospects for profitability going forward? Is it the same as it was? Is it more than it was? Or is it dramatically less?

I think when you take that approach it really pushes you into sectors that have less impact. Say certain tech sectors obviously. Businesses without naming individual companies, might even benefit from stay home delivery or folks that work from home. We've seen that already in the equity market. But I think it's important to keep that perspective as long as the virus is in play, because at this point it's very difficult to know what normal looks like coming out of this and if we're going to see fundamental changes.

Chuck Jaffe: And quickly, will that play out on the bonds as well? I mean, if you're saying this is what I would do if I were looking at equities, well you look at corporate bonds, et cetera. So, will you be looking that much harder at, I've got to be in the right industries on corporate bonds as opposed to looking at each debt issue individually?

Eddy Vataru: It's more important than ever. At a time when you have a lot of dispersion in markets like this and a lot of winners and even more losers, it's very important to keep that perspective. We've been very picky on industries, and within those industries we've been very picky on the names themselves. I think this is really the right time to have that laser focus on that level of granularity. It's more important now than ever.

Chuck Jaffe: Eddy, great stuff. Thank you so much for joining me and taking the time. Please stay safe. I look forward to chatting with you again down the line.

Eddy Vataru: Thanks a lot.

Chuck Jaffe: That's Eddie Vataru, everybody. He is Portfolio Manager at the Osterweis Total Return Fund. The ticker symbol O-S-T-R-X. Learn more about the firm, the fund, find his commentaries and more at

Okay. We just hit the halfway pole on the April 21st edition of MoneyLife, but halfway means we're just getting rolling. Up next, we're going to be talking about a survey talking about whether people are able to keep their long term focus in these times. Then it'll be market call time. We'll be talking stocks with Lamar Villere from Villere and Company. So, we're living the MoneyLife and we've got much more to go, so stick around.

This interview was from the "Money Life with Chuck Jaffe" podcast.

The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members—the seven members of the Board of Governors and five of the 12 Reserve Bank presidents.

A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.

A commercial mortgage-backed security (CMBS) is a type of asset-backed security that is secured by a commercial mortgage or collection of commercial mortgages.

An asset-backed security (ABS) is a security that is secured by a pool of loans that are not mortgages.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.

A basis point is a unit that is equal to 1/100th of 1%.

Duration measures the potential volatility of the price of a debt security, or the aggregate market value of a portfolio of debt securities, prior to maturity. Securities with longer durations generally have more volatile prices than securities of comparable quality with shorter durations.

Par is the face value, or value at which a bond will be redeemed at maturity.

Mutual fund investing involves risk. Principal loss is possible.

The Osterweis Total Return Fund may invest in fixed income securities which are subject to credit, default, extension, interest rate and prepayment risks. It may also make investments in derivatives that may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. The Fund may invest in in debt securities that are un-rated or rated below investment grade. Lower-rated securities may present an increased possibility of default, price volatility or illiquidity compared to higher-rated securities. Investments in foreign and emerging market securities involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks may increase for emerging markets. Leverage may cause the effect of an increase or decrease in the value of the portfolio securities to be magnified and the fund to be more volatile than if leverage was not used. Investments in preferred securities have an inverse relationship with changes in the prevailing interest rate. Investments in Asset Backed and Mortgage Backed Securities include additional risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments. It may also make investments in derivatives that may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. The Fund may invest in municipal securities which are subject to the risk of default.

Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC. [41392]