“Many Ways to Win”: Dan Ivascyn on Making the Most of Rate…

PodcastAccrued InterestDan IvascynOct 16

Dan Ivascyn sees high starting yields as a source of income and potential resilience, even without price gains, while acknowledging that higher real rates could weigh on fragile parts of the economy. He points to risks from refinancing pressure, private credit, and volatility tied to AI investment, but also describes a possible AI-driven disinflation scenario that could support high-quality fixed income. His approach emphasizes global diversification and some duration exposure as potential sources of yield and protection, rather than a tactical call against the Fed.

Fixed Income Interest Rates Market Volatility Investment Strategy Risk Management Private Credit

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Key Takeaways

Ivascyn says high starting yields give fixed income a stronger income cushion than in the earlier low-yield environment, when Treasury yields were around 1%–2% and reached about 55 basis points in 2020. He cites a 5.5% yield on the Bloomberg Aggregate Index and says an illustrative portfolio yielding 8% could still produce positive returns after another 100-basis-point rate sell-off, while emphasizing that he does not expect rates to reach that level.

Ivascyn sees a value shift toward high-quality income-producing assets after 15 years of fixed-income underperformance, as high-quality yields reach their highest levels in more than 25 years while equities approach all-time highs and lower-quality credit spreads near historical tights. He says investors can also look beyond the U.S. to markets including Australia, the U.K., Canada, parts of Europe, and high-quality emerging markets, where many offer a yield pickup and some higher credit quality.

Ivascyn expects higher real rates and market tightening to weigh on fragile parts of the economy with a lag, moderating U.S. growth over the next several quarters without causing a recession. He also says borrowers in weaker direct lending and commercial real estate face refinancing challenges with real rates 100 basis points higher, especially on debt originated when lenders were optimistic.

Ivascyn says AI investment and wealth effects have again linked equity markets, credit markets, and the real economy, so a modest loss of confidence in riskier markets could spill into economic activity. He expects near-term localized volatility from AI uncertainty and Middle East conflict, and warns that AI-related prices could fall if CapEx fails to deliver stronger earnings benefits, though current signs may be a blip.

TECHNOLOGY

AI Productivity — Ivascyn says that if AI proves disinflationary and boosts productivity as AI agents enter the workforce, lower service-provision costs could benefit portfolios in that right-tail scenario.

“Or if the cycle is different and this AI technology does prove to be disinflationary productivity enhancing, pushing the cost to provide services as all these AI agents enter the…”—

ECONOMY

2023 Policy Shift — Ivascyn recalls that inflation data improved and growth surprised to the downside in 2023. A dovish Fed then discussed rate cuts into 2024, preceding a major rally.

“So just when it felt at its worst, you began to see the data turnover. Inflation data got better. Growth numbers surprised to the downside…”—

Real-Rate Lag — Ivascyn says higher real rates affect the economy with a lag, weighing on fragile parts of the U.S. economy and financial markets. He argues that current starting yields can generate some of the highest yields or returns in 25 years without positive price performance. Fixed income still has potential appreciation scenarios.

“Higher real interest rates are going to impact the economy with a lag, and you have various forms of fragility across certain areas of The US economy and financial markets…”—

Pandemic Inflation — Ivascyn attributes the pandemic-era inflation shock to COVID-related supply-chain disruption and unprecedented fiscal and monetary stimulus. He describes the combination of shocks and pandemic euphoria as an unusually unlikely convergence.

“Then you had a supply side shock, meaning that COVID occurred. It impacted supply chains…”—

MARKETS

Rate Reversal — Ivascyn says recent rate-market price action reflects more than fundamentals; deleveraging and technical unwinds have contributed to choppy trading. He sees signs that the market was oversold in the short term and notes that rates subsequently reversed.

“I think that's true, certainly, if you've been long interest rate exposure. But what I…”—

Income Cushion — Ivascyn argues that high income can provide a value cushion and significant margin for error for investors with even an intermediate time horizon.

“Yeah. I think that's right…”—

2023 Yield Spike — Ivascyn recalls that negative sentiment about U.S. fiscal conditions, upside inflation surprises, and stronger-than-expected growth coincided with the two-year Treasury yield rising above 5% in 2023.

“At that time, those... That negative sentiment around The US fiscal situation, that inflation numbers kept surprising to the upside…”—

FORECASTS

Near-Term Volatility — Ivascyn says momentum-driven selling and possible forced unwinds have affected equities and credit across the AI ecosystem. He expects the Middle East conflict and AI uncertainty to contribute to more localized volatility in the short term.

“Yeah. All that's accompanied by what looks like similar momentum driven selling and perhaps some force unwinds across the AI ecosystem both within equities and credits…”—

AI Disinflation — Ivascyn describes a possible, not base-case, scenario in which AI-driven disinflation and high starting yields support attractive returns for high-quality fixed income, if near-term CapEx and Middle East uncertainty ease. He says executives at major technology firms express strong conviction that deflation is near.

“For example, almost all of these heads of major tech firms, innovative AI oriented firms, you know, we're all aware of these folks…”—

Rate Volatility Reversal

Ivascyn attributes recent rate swings partly to technical selling and deleveraging, while noting that positioning may have become oversold and that further volatility is likely.

Yield Cushion And Returns

Ivascyn argues that high starting yields provide a margin for error and can support attractive returns over a multi-year horizon, even if rates rise modestly.

2023 Rate Selloff Lessons

The speakers recall how pessimism and rising yields in 2023 preceded improving inflation data and a strong bond rally, while emphasizing that a repeat is not their base case.

Fixed Income Versus 2022

Ivascyn contrasts today’s higher yields and stronger inflation-adjusted income potential with 2022’s unusually low starting yields and pandemic-era supply and demand shocks.

Underowned Bonds And AI

Ivascyn sees fixed income as underowned after years of equity outperformance and says both market stress and AI-driven disinflation could favor high-quality bonds.

AI Investment And Growth Risks

The speakers discuss how AI could boost productivity and lower prices, but warn that disappointing returns on investment could trigger market losses and a flight to quality.

Credit Losses And Refinancing

Ivascyn warns that AI disruption, higher real rates, and debt accumulated during easier lending conditions may increase losses and refinancing pressure in fragile credit sectors.

Duration In Global Portfolios

Ivascyn explains that duration is a deliberate relative-value choice, as high-quality yields look attractive compared with expensive equities and tight credit spreads.

Global Diversification And Income

Ivascyn points to foreign markets, inflation-protected securities, and high-quality bonds as ways to diversify risk while seeking income and resilience.

Duration As Positive Optionality

Ivascyn says modest duration can provide income in the base case and potential price gains in a downturn, while remaining compatible with continued equity strength.