Protecting Your Portfolio Amid Market Uncertainty

MIKE TOWNSEND: We are now a month into a war with Iran, a war impacting countless lives across the Middle East, shutting down a critical shipping lane, disrupting global trade, and sending oil prices on a roller coaster ride up and down.

Both the equity markets and the bond markets have struggled to adapt to the constantly changing assessments of what's happening and when it might be resolved. We saw some of that uncertainty at last week's monetary policy meeting at the Federal Reserve, where policymakers voted 11 to one to hold interest rates steady and cast a lot of doubt about when and whether there would be any rate cuts at all this year. Fed Chair Jerome Powell said repeatedly in his post-meeting news conference that there was a high level of uncertainty about the impact of the war on the economy. The economics effect, Powell said, could be bigger, it could be smaller, it could be much smaller or much bigger. We just don't know. Powell's words were hardly reassuring, but they reflect the complexity of analyzing the situation. 

At the White House, President Trump on March 21 issued a 48-hour deadline to Iran to reopen the Strait of Hormuz, the narrow shipping lane that is essential to global trade, or the U.S. would bomb the country's power plants. But on March 23, he announced a five-day delay, citing progress in negotiations with Iran, progress that Iran denied. Equity markets rose, and oil prices dropped, with no guarantee that they would stay there for 24 hours, let alone weeks or months. Normally, times of uncertainty mean that investors flock to perceived safe havens like the bond market. But Treasury yields have been on the rise as inflation fears grow and the Fed signals it may be a while before it considers cutting rates, making Treasuries less attractive than one might expect during geopolitical turmoil. So what's a fixed income investor to do? And if anxious equity investors want to lower their portfolio risk, are bonds still the place to go? 

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to. Coming up in just a few minutes, I'm going to be joined by Collin Martin, head of fixed income research and strategy here at Charles Schwab. Collin's going to provide his perspective on the state of the bond market and the dollar amidst all of this uncertainty and share his thoughts on where the opportunities might be for anxious investors. 

But before we get to my conversation with Collin, here are three things I'm watching in Washington right now. 

First, the war against Iran continues to dominate the day-to-day headlines. The human toll is, of course, immeasurable. There is widespread uncertainty about when and how the hostilities will end. Oil prices have undergone dramatic changes, rising and falling on the president's social media posts and public comments. 

The markets are growing increasingly worried about the potential longer-term impact on the energy sector. And now the cost of the war is moving to the front burner on Capitol Hill. Last week, the Pentagon asked the White House to submit an emergency request to Congress for $200 billion in supplemental funding for the cost of the war, a number that raised a lot of eyebrows in a Washington that is used to big spending numbers. Just a couple of weeks ago, it was expected that the war would need an additional $50 to $100 billion in funding.

But the larger number is a reflection of the challenges of this conflict, the scope of the bombing, and the likelihood that we are not very close to the end. It also reflects that the U.S. and Israel are both running low on weaponry and munitions, so some of that money will be directed towards a rapid increase in production. With Congress out of session for the two weeks on either side of Easter, a debate on supplemental funding for the war will be pushed off until April.

But what a whopper of a debate it will be. War funding is a particular challenge in Congress, pitting fiscal tensions against the desire to support U.S. troops. But this debate is likely to be a referendum on the goals of the war itself, with election year politics looming as a big factor as well. It's hard to see the deeply divided Congress agreeing to such a big number, especially with a need for a 60-vote supermajority in the Senate.

Some Republicans have talked about using the budget reconciliation process, the same procedure used last summer to pass the One Big Beautiful Bill, which would circumvent the need for 60 votes in the Senate, but would require nearly every Republican in Congress to be on the same page, a tall order. But it's also hard to see Congress just outright rejecting the request. Stay tuned for this important debate next month.

Second, as this week began, the shutdown of the Department of Homeland Security was heading into its sixth week. Negotiations on Capitol Hill were picking up momentum as lawmakers on both sides of the aisle worried about the optics of heading into a two-week break without a resolution. 

The driving force toward compromise is increasing wait times in security lines at airports due to high rates of absenteeism among TSA agents who, like most employees of the Homeland Security Agency, are working without pay. President Trump began deploying Immigration and Customs Enforcement agents to airports this week to increase staffing for security roles, though they are not expected to be directly involved in reading x-rays of luggage or screening passengers beyond ID checks. As is typical of these shutdown scenarios on Capitol Hill, the two parties seem both hopelessly far apart in their negotiations and also on the precipice of a breakthrough.

Senate Majority Leader John Thune has threatened to keep the Senate in session through this weekend and into next week if no deal is reached, something few senators are eager for. Bipartisan negotiators are reportedly close to a deal that would fund everything at the agency, including back pay for employees, except for migrant removal operations. Earlier this week, the Senate confirmed their colleague, former Senator Markwayne Mullen, to be the new secretary of Homeland Security, replacing the controversial Kristi Noem. Mullen even received a couple of Democratic votes, a sign of his reputation as someone willing to reach across the aisle. There's hope that he might bring more transparency to the agency's activities, and that may contribute to resolving the long-running standoff over the agency's funding. 

Finally, last week, the White House unveiled a set of guidelines for federal legislation to regulate artificial intelligence, kicking off what I anticipate will be a very complicated debate on Capitol Hill. The White House plan seeks to create federal standards that would supersede AI laws already on the books in more than a dozen states. It's a wide-ranging proposal that would give a long leash to companies developing AI. The proposed guidelines are in keeping with the president's executive order last year that aims to make the United States the global leader in AI development, calling for minimally burdensome regulations on developers and limiting their liability for harm caused by AI systems. But it also acknowledges a number of areas where there is a need for regulation, including guardrails on the government using AI for censorship, protection for children, and stronger parental controls. And it dives into one of the more politically complex AI-related issues right now, the construction of data centers. 

While the administration calls for the easing of regulations to streamline the building of data centers, it also would require companies building them to cover higher energy costs for the massive amounts of power and water needed to run the centers. The impact on the energy and water bills of local residents near data centers has become a political hot potato in communities across the country. 

The proposal now needs to be turned into actual legislation that can pass Congress. Republican leaders like House Speaker Mike Johnson quickly embraced the plan, but viewpoints are not clearly delineated by party affiliation on Capitol Hill. AI will not be an easy issue for lawmakers to get their arms around. And the technology is evolving so quickly that new developments could leapfrog older protocols while Congress is still trying to figure out how to regulate last year's or last month's technology. 

It's an election year. So I'm skeptical that Congress can pass something meaningful on AI in the next few months. But this is an issue quickly moving to the top of the priority list for politicians from both parties. And given its potential implications for companies, the economy, the markets, and ordinary citizens, it's one that I'll be watching carefully in the months ahead.

On my deeper dive today, I want to take a closer look at how the fixed income markets are responding to the war in Iran and how investors should be thinking about bonds, the dollar, and the credit markets broadly amidst genuine uncertainty about how the war will play out and what its implications will be for the economy. To help me sort through that, I'm pleased to welcome back to the podcast Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research. Collin's been with Schwab for 14 years, and he holds the Chartered Financial Analyst® designation. Collin, thanks so much for joining me today.

COLLIN MARTIN: Hi, Mike. Thank you so much for having me back.

MIKE: Well, Collin, let's start with last week's Fed meeting where the Fed held rates steady. And with the war driving up inflation fears, absolutely no one was surprised by that move. But that of course is not the whole story. As they say, the devil is in the details, and we got some of those details in the policy statement. So what's your assessment of Chairman Powell's comments after the meeting? And have you changed your outlook for where the Fed might be at the end of the year? Is there any chance that there's no rate cut in 2026?

COLLIN: We have changed our outlook a little bit, and we do think there's a chance that there is no rate cut in 2026. And that's a change from what we were expecting coming into the year, where we thought the Fed might cut rates one or two times. But that seems like too many cuts right now, given the potential spike in inflation, given the rise in oil prices and gas prices we've seen since the start of the war. With that outlook, we're expecting one cut, or no cuts at all, by the end of this year. 

But this is highly uncertain. And that was a theme that we got at last week's meeting, and it was a theme in Powell's press conference, about uncertainty. So it's important to take any these projections, whether from us or with Fed committee members, take those projections with a grain of salt.

When we come up with our expectations for Fed policy, it's usually based on economic fundamentals. It's usually based on inflation and the inflation outlook, the strength or weakness of the labor market. but given the ongoing war, there's a lot more questions than answers right now. We're not really sure what that economic impact is going to be. So again, very uncertain. And this is something that Powell hinted about. He was asked a few times about the oil shock and what it might mean for the economy going forward. And at one point he said, "We just don't know." And I think that was good to hear him say that because the situation is very, very fluid right now. So we think that these recent events though have likely pushed back the timing of the next rate cut, mainly because of the potential rise in inflation from here. 

The Fed has a dual mandate of maximum employment and price stability. When we talk about price stability, it's really just another way of saying low inflation. And since we're expecting inflation to rise from here, at least over the short run, and given that inflation, by most measures, has been above the Fed's 2% target for nearly five years now, it doesn't really give much room for the Fed to cut rates right now. They should probably hold rates steady. We think they'll hold rates steady to hopefully bring down inflation closer to their 2% target over time.

MIKE: Yeah, clearly the war was front and center for the Fed. And I think it's front and center for pretty much everyone right now. What was supposed to be quick, like with Venezuela, is now at nearly four weeks and counting with no real sign of an end date. It's causing supply shocks that are rippling through the economy and the markets. The increase in the price of oil, of course, is immediately felt at the pump, but it impacts transportation costs in general. Trucking, airlines, basically, anything you buy came from somewhere, and it probably needed oil and gas to get to you. The closure of the Strait of Hormuz is also causing supply chain disruptions to liquid natural gas and fertilizer, and a surge in fertilizer costs is anticipated to drive up food prices. So when consumers have to spend more on gas and food, they tend to cut back on discretionary spending, like travel or going out to eat. All of these concerns keep volatility going in the equities markets.

Usually bonds are perceived as a safe haven by investors, but it seems that there is plenty of volatility in the bond markets as well. So what's going on here? Is a flight to safety still a thing?

COLLIN: We do think the flight to safety is a thing, but so far it really hasn't been the trade or the movement in the bond market that some may have thought it would be. Usually when something like this happens, something big like this, like a war that pulls down stock prices a bit, or if there's a lot of uncertainty, you usually see high quality bonds, like U.S. Treasuries, you tend to see them benefit. Since they're considered to be very high quality, they're backed by the full faith and credit of the U.S. government. They tend to be very liquid. So investors tend to buy them when they get worried. And that pickup in demand usually pulls prices up and their yields down. 

But that hasn't happened. So while the textbooks might say that that should happen if we're worried about the outlook or the uncertainty, we've basically seen the opposite. The 10-year Treasury yield is up more than 40 basis points since the end of February through March 24. Forty basis points is 0.4%. That's a pretty big move in a short period of time. And this just shows that investments might behave differently than what you expect. And when we talk about the flight to quality and how that can be a benefit if investors are worried, there's a risk too, because it hasn't really worked out so far just yet. And rising yields tend to be more of a risk to long-term bonds, because most bonds have an inverse relationship with their prices and yields. The longer the bond, the more sensitive it is to rising interest rates. So it can be a risk to holders of long-term bonds. 

We've seen this—maybe an unorthodox move, maybe not—I'd say what's driving Treasury yields though isn't that flight to quality. but it's inflation and, I think, the risk to higher inflation and higher inflation expectations. When we look at Treasury yields and long-term Treasury yields and try to value them, they can be based on a number of things. We usually look at inflation and inflation expectations of key drivers. We also look at expectations for Fed policy, not just over the short run, but over the coming years, because what the Fed's expected to do over the next five or 10 years can impact what investors might want to earn holding, say, a five- or 10-year Treasury.

And since interest earned on bonds is usually fixed, inflation can eat away at those returns over time. So if inflation is expected to rise, given that jump in oil prices, investors tend to demand a higher fixed yield to help protect themselves against future inflation. So I think that's really the key driver of why we've seen the move up in yields versus the flight to quality that traditionally would have pulled yields lower and prices higher.

But I want to go to a point you made before about the potential negative consequences if the war goes on longer than expected. When you see a rise in oil prices that can impact us as consumers, if we're paying more for gas prices, that's less money that we can spend elsewhere, but it's a big input for a lot of businesses. So there are negative consequences here, and the longer the conflict or the war goes on, maybe we start to see that trickle into less consumer spending and slower economic growth. If we were to see signs that this is going to go on for a while and signs that the economy is expected to slow, then I think we probably would see that flight to quality come back, where we'd probably see Treasury yields begin to fall and see their prices rise as investors get worried about the economic outlook or maybe the risks to their equity holding, something like that. So I think the longer this goes on, maybe we'll see that flight to quality return, even though we haven't seen it just yet. 

Now, with this sort of outlook we're talking about here, I hesitate to use the term "stagflation" because obviously it has a lot of negative connotations. When we talk about stagflation, we're talking about slow growth and high inflation. And while that might be thrown around a little bit right now, we'd like to caution that it would probably be nowhere as bad as what we saw in the 1970s, mainly due to our inflation outlook. Yes, inflation is above the Fed's 2% target, but it's still kind of just in that 2.5% or 3% area by any number of measures. We're not worried that it's going to go back up to double digits or something like that. But in a slow-growth, high-inflation environment, that does pose a challenge for investors. And one potential opportunity for investors to consider is Treasury inflation-protected securities, or TIPS. 

Now, they're like traditional Treasuries in that they're backed by the full faith and credit of the U.S. government, but their principal values are indexed to the Consumer Price Index, or CPI. So they can benefit if inflation stays high or reaccelerates from here. But while they have those benefits, there's still risks there because TIPS are still bonds, and their yields can still fluctuate in the secondary market. So if their yields rise, like the yields of traditional Treasuries, you can see the value of a TIPS decline over the short run. So something to consider, if you're looking at TIPS, they're not necessarily a hedge over the short run, but they can help protect against inflation over the long run.

MIKE: As you said, Collin, a lot of movement in the bond market. We've also seen a lot of action with the U.S. dollar. Big decline over the last year, pretty sharp rebound since the start of the war. So what's your outlook for the dollar in this rapidly evolving environment?

COLLIN: Yeah, the dollar seems likely to hold steady for the time being and maybe even appreciate a little bit from here. And just like our Fed view, this is an updated view. Coming into the year, we thought the dollar had a little bit more downside. We thought the dollar would continue to gradually fall, but with some ups and downs along the way. One reason for the shift in our view is really the direction of Fed policy and our shift there.

One of the key drivers of a currency's value is interest rate differentials, or the interest rates you can earn by investing in different countries—say, the U.S. versus a European government bond. And with the Fed now likely on an extended hold, meaning it doesn't look like they're going to cut rates anytime soon, interest rate differentials between the U.S. and other developed-market countries may have hit their lows for the time being. Now, monetary policy outlooks have shifted at a lot of other central banks as well. The European Central Bank and the Bank of England are now expected to hike rates given the rise of inflation. But the fact that U.S. yields have risen and the idea that market expectations have pushed back the timing of the next rate cut should keep demand strong for the dollar.

A second reason for our view is the growth outlook of the U.S. versus other developed-market countries. And this is where that flight to quality could come into play a little bit. The U.S. is generally in better position than many other G7 economies to weather the oil shock. Europe, for example, they import a lot of their oil and gas. So there might be more of a hit to their economic growth than what we see here at home.

This should keep the dollar steady and maybe even appreciate a little bit over the short run. Now, longer term, we often hear about the potential demise of the U.S. dollar as the world's reserve currency. We tend to think those fears are overblown. Over time, maybe it loses some of its status of a reserve currency, but it would take a really, really long time. It's still the dominant currency held by most global central banks, although its share has fallen over time. Most trade globally is done in U.S. dollars, and Treasuries are still the largest, most-liquid bond investment out there. So in short, Mike, there's just not much of an alternative to the dollar as a reserve currency. So we think those fears are generally overblown.

MIKE: Yeah, I appreciate that. One of the most common questions I've been getting over the last year or so at client events is about concerns that the U.S. could lose its status as the world's reserve currency. So good to hear that that's not maybe as big of a concern in your mind. 

Well, I know you have also been talking lately about how the majority of U.S. Treasuries are now held by private investors, where it used to be that the Fed and financial institutions, along with foreign central banks and governments, were the primary buyers. What does this shift in ownership mean for the U.S. Treasury markets?

COLLIN: We have seen a shift in ownership over time, and given the shifts that I'm going to talk about, it means that maybe we see more volatility with Treasuries, and maybe it results in slightly higher long-term Treasury yields, or just Treasury yields staying elevated as the economic outlook evolves a little bit. Let's talk about who owns Treasuries, because just like you get the dollar question a lot, Mike, I get asked all the time about foreign ownership of U.S. Treasuries. There's two ways I like to break it out, because there's a lot of holders of U.S. Treasuries, both domestically and abroad. But I like to break them out into what I consider price-sensitive and price-insensitive holders. Price-insensitive holders, in my opinion, would be a foreign central bank, the Federal Reserve here in the U.S., and other banks or financial institutions. These entities hold Treasuries for a number of reasons, but usually the yield isn't one of them. 

For example, the Fed has purchased Treasuries in the past to implement monetary policy, and banks who tend to be big holders, they buy Treasuries for regulatory reasons. So whether the 10-year Treasury yields 2% or 4%, that might not matter for these price-insensitive holders. 

Now a price-sensitive holder can include individual investors like you and me, or it can include foreign private investors, so private meaning individual investors and not central banks. So we have seen this shift over time, but when we hear the question about foreigners selling Treasuries, I think the question is usually about central banks and governments. And I think it's always framed as a risk if some of the larger holders, like China, for example, were to sell our Treasuries. And there's two ways I like to frame this. On the one hand, foreign official holders of Treasuries, meaning central banks and governments, they really haven't been selling their holdings over time. There's a way we can track this data. We get it from the Treasury. It's called Treasury International Capital, or TIC for short, and we can see what foreign official holdings of Treasuries have looked like over time. And they've hovered near 4 trillion since 2012. That's fluctuated a little bit. It's gotten as high as 4.2 trillion in 2020, dropped to 3.6 trillion in 2022. In January of 2026, it was back to just under 4 trillion. And when you look at it that way, it shows that central banks and governments haven't really been selling Treasuries en masse the way some people worry that they might. But another way to look at this is that those holdings have not kept pace with the amount of Treasuries outstanding. There's over 30 trillion in marketable U.S. Treasuries outstanding as of January 2026. And that compares to 10 or 11 trillion in 2012. So as a share of all Treasuries outstanding, central banks and governments, their holdings are making up a smaller and smaller share, which means that they have less influence on the Treasury market today, but they're buying less, as relative to our total holdings, which means someone else needs to pick up that slack.

MIKE: Well, that someone else often seems to be foreign private investors. Central bank holdings haven't risen much, but holdings by those foreign private investors have been going up. Meanwhile, there's a record supply of corporate bonds in the market right now. Governments around the globe are revving up to issue significantly more debt. At the same time, the U.S. government needs to fund the cost of the war with Iran. That's something I talked about at the beginning of the show. How will this shift in ownership—more foreign private holdings of U.S. Treasuries compared to foreign official holdings impact the Treasury market? Can the U.S. government offer high enough yields to stay competitive? Will there be enough demand to cover the supply?

COLLIN: Let me tackle that last part first. Will there be enough demand to cover supply? Our answer is mostly yes. We're not really worried that there won't be enough buyers out there, but the risk is, do we need to offer higher yields to attract those new buyers? I think supply and demand dynamics need to come into play at some point. And that's something that we're considering as well. If we issue more debt, who will those buyers be? We have seen that shift in foreign ownership where official holders of Treasuries have kind of been holding their Treasury steady for over a decade now. But we have seen a big pickup in foreign private investors. They now own about $5.4 trillion in U.S. Treasuries, and that's up from just $2 trillion a decade ago. And I mentioned before the idea of a price-sensitive versus price-insensitive buyers. And if we're talking about foreign private investors, they would be what I consider price-sensitive. They're evaluating income, yield, total return prospects, when they're making a decision to hold a bond. So if an investor in the United Kingdom, for example, doesn't find U.S. Treasuries as attractive because he or she can earn an attractive yield by investing domestically in the United Kingdom, that money could flow out of the U.S., and then someone needs to replace that person who has found a more attractive yield in their home country.

And the more debt we issue, the more buyers we need to find. So this is something that I'm paying attention to with a rising share of what I would call those price-sensitive buyers. Just means that maybe yields need to remain elevated to attract those potential buyers as we issue more and more debt. Now, I don't want to try to be an alarmist here. We think that the upside in yields as a result of this is probably limited to a degree.

We're not expecting this to send the 10-year Treasury yield up to, say, 6% or more anytime soon. But we think it can keep long-term yields elevated even if we get to a point where the economic outlook evolves and maybe we start to begin pricing in Fed rate cuts again. Maybe we don't see those long-term yields fall if we're expecting those Fed rate cuts.

MIKE: Another area of the markets that has been generating headlines recently and somewhat negative is a part of the credit market, private credit. Can you give us an idea of what this all means, and should fixed income investors be concerned?

COLLIN: All right, bear with me here, Mike, because we're going to get into the weeds a little bit, but it's making a lot of headlines. So I think it's important to talk about what this is. Private credit is sort of a niche asset class, but it's grown a lot lately. And private credit can mean a number of things, but a lot of the headlines are focused on what would be considered direct lending. And let me explain what that is a little bit. An easy way to think of private credit, but more specifically, direct lending, is to compare it to the high-yield bond market. If you're familiar with it, the high-yield bond market or high-yield bonds, they're corporate bonds, but they have sub-investment-grade or junk credit ratings. 

And that means there tends to be a greater risk lending to these companies than lending to those with investment-grade credit ratings, because if you have a sub-investment-grade credit rating, it usually means you have more debt relative to your earnings. Maybe you have volatile cash flows. It might be a smaller company. And because of those risks, like a greater risk of default, investors tend to get rewarded with higher yields. Now, high-yield bonds, which I think a lot of investors may be more comfortable with, banks usually handle the underwriting of those bonds to find potential buyers. With private credit, however, the borrowers, if you're a business looking to borrow, you tend to go to what are called non-bank lenders for financing. So instead of banks, you might go to a private-credit fund that will lend to them, but they're basically lending the investors' money. So Mike if you and I invest in a private credit fund, that pool of money would get lent to a to a borrower at relatively high rates. And then to kind of wrap it up, the loans are done in private.

So there's very little transparency around the terms, and there's not much of an active secondary market. And that's where redemptions come into play. A key feature of private-credit funds is a redemption limit. Funds usually put some sort of limit in place around how much of the fund can be redeemed each quarter. And given the illiquid nature of the underlying holdings, this is usually done to protect the investors because if everyone tried to redeem their funds or their assets at the same time, and the private credit fund needed to sell its illiquid holdings, they might not get the best prices. There might not be a lot of buyers out there. It is meant to protect the net asset value. A lot of what we've seen lately is around those redemptions, and a handful of companies, I'd say, have been getting more redemption requests than they're able to pay out. And that becomes a challenge because it's a negative headline where investors are saying, wait, I want my money back. But it means it might result in a lot of selling. And that's a challenge if there aren't enough buyers out there. The risk isn't just with redemption requests, though. There's been some funds that have actually lowered the net asset value. And that's because some of the loans and investments have actually seen their prices decline either due to a greater risk of default or something like that.

So that's kind of the framework there, Mike, and why we've seen a lot of headlines. And the questions that I've been getting from a lot of our clients is, OK, what's this risk to other parts of the market? Because I compared it to high-yield bonds, for example. Does this mean there's going to be a big risk to high-yield bonds? Generally, I don't think so. I think there could be some spillover. If there's concerns about junk-rated or sub-investment-grade private credit, it would be natural that there would be some concerns with the public markets as well in terms of maybe deteriorating credit quality or maybe a potential pickup in defaults. But on the bright side, when we look at the high-yield bond market, the index we track, the Bloomberg U.S. Corporate High Yield Bond Index, about 55% of the issues in the index are rated BB. And that's relatively high within that sub-investment-grade spectrum. That means more than half are in kind of the upper tier of the sub-investment-grade credit universe. Another, I'd say, positive thing for high-yield bonds is that they don't tend to have a lot of tech exposure or exposure to software companies. That's been a risk with some private credit loans. We've seen a lot of issuance for this AI tech build-out, and there's concerns about what that payout might be down the road. Will this all work out? It doesn't seem to be as much of an issue with the high-yield bond market. So maybe there could be some spillover. We'd expect some price volatility if there's concerns about sub-investment-grade issuers. Obviously, the war with Iran leads to volatility as well. But we're not worried that we're going to see a very, very large sharp drop in high-yield bonds. And we generally have a neutral outlook there. 

Related to high-yield bonds and private credit is something called bank loans.  It's publicly traded, but it's more similar to private credit in my view. We have a little bit more of a negative outlook there mainly because they tend to have lower credit ratings. Seventy-five percent of the Bloomberg Bank Loan Index has ratings of B or lower, so the bottom tiers of the sub-investment-grade credit spectrum. We're a little bit less favorable there, so something to consider if you are looking at the public markets of areas that have a little bit more risk. We're neutral on high-yield bonds, but we expect volatility to kind of remain elevated. And we're a little bit less favorable on bank loans right now.

MIKE: Well, that's a great overview of a lot of things going on in that complicated market. And generally there seems to be a lot going on in the world of fixed income. We're at a nine-month high in volatility for bonds. And as you've discussed, there's so much uncertainty out there about how long the war in Iran will last, how long global oil supply will be disrupted, what the impact on consumers will be. Investors just have a lot of concerns right now, and the bond market doesn't feel as reassuring as I think we all hoped it would. So what are you telling fixed income investors who are anxious right now? And maybe then what are the opportunities that investors should be looking at? Is it TIPS, munis, global bonds? What are you telling fixed income investors right now?

COLLIN: Our main guidance to fixed income investors is to focus on high quality right now. Prior to the war, we had a bit of a more favorable outlook on some of the riskier parts of the market, like high-yield bonds that I just mentioned, but we're more neutral and less favorable on bank loans. We've shifted that view since there's so much uncertainty right now. We've seen the volatility, not just in the bond market, but in the stock market. Now doesn't appear to be the time to be taking more risk in your bond portfolio. So high-quality bond investments, when we say that, we usually mean Treasuries, investment-grade corporate bonds, investment-grade municipal bonds, and agency mortgage-backed securities. Now it's not just credit ratings or credit quality that we focus on; maturity matters. Because of that inverse relationship that a bond's price and yield has, the longer the maturity, the more sensitive that is to fluctuating interest rates. So given all the volatility we've seen, given that we've seen yields rise, we prefer more short-to-intermediate-term maturities. When we talk about intermediate term, we're usually talking about four to 10 years. Short term, we'd say, would be four years or less. We think that's a good balance of risk where we don't want to be taking too much interest rate risk by focusing on longer-term maturities, given that elevated inflation risk right now and given what can happen to their values if long-term yields continue to rise from here. From a tactical standpoint, municipal bonds are an area that we think tend to make a lot of sense in most environments. Tactically, they're not super attractive right now because their relative yields compared to Treasuries are pretty tight. But we still think they can make a lot of sense for investors that are in those top tax brackets. With munis, always run the math of what your tax rate is to make sure you're optimizing your after-tax yields. 

And then finally, Mike, I mentioned this before, TIPS, or Treasury inflation-protected securities, we think they can be a nice addition to a portfolio if investors haven't considered them right now, since they are backed by the full faith and credit of the U.S. government, but they can also provide inflation protection, because their values are indexed to the Consumer Price Index. I gave the caveat before, they're still bonds. So their prices, their values, can fluctuate in the secondary market. Consider them more of protection for the long run rather than a short-term hedge.

MIKE: Well, great perspective as always Collin. And before I let you go, wanted to congratulate you, as last week, you joined the podcasting nation, became the official co-host of our sister podcast On Investing, where you'll be diving into the market news every week with our colleague Liz Ann Sonders. You are stepping into some pretty big shoes, replacing our colleague Kathy Jones, who is retiring. But your first episode was terrific. I have no doubt you will continue to shine in that new role. And I just want to say that given that big transition has just happened, I am especially appreciative of you making the time to join WashingtonWise this week.

COLLIN: It's my pleasure, Mike. I always appreciate the invite. You're right. I do have some big shoes to fill, but the good news is I've worked with Kathy Jones my whole career here at Schwab. So I've learned from the best. I hope to take those insights as I step into my new role co-hosting with Liz Ann Sonders. I'm very excited, and I hope to have you on as a guest going forward, Mike, and return the favor of you having me as a guest on your podcast.

MIKE: Well, I look forward to that. That's Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research. You can read Collin's commentary on schwab.com/learn. You can follow him on LinkedIn. And he recently joined X, where you can find him @CollinMartinCS. That's Collin with two L's. And as I mentioned, check out Collin on the On Investing podcast.

Well, that's all for this week's episode of WashingtonWise. We'll be back in two weeks with a new episode, when Joe Mazzola, Schwab's head trading and derivatives strategist, will join me to offer some real-world suggestions on how investors can navigate this volatile market. Take a moment now to follow the show in your listening app so you get an alert when that episode drops and you don't miss any future episodes. 

And don't forget to leave us a rating or a review. Those really help new listeners discover the show. For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript. I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.