He has been working with mortgage-backed securities (MBS) for nearly 20 years and visited Zurich in May in connection with the launch of a Strategic Income Fund in SIVAC format. Andrew Szczurowski spent a large part of his career at the U.S. asset manager Eaton Vance, which was acquired by Morgan Stanley in 2021. Today, he serves as Co-Head of the Mortgage and Securitized Investment Team and Portfolio Manager. In this role, he is responsible for managing more than $45 billion in assets.

finews took the opportunity to discuss with the Boston-based Szczurowski the developments in the United States that are also relevant to the Swiss financial market.

Mr. Szczurowski, what is behind the new fund? What does the label «Strategic Income» mean?

The fund is new to Europe, but it has existed in the United States for 36 years and currently manages roughly $18 billion in assets. I have also been serving as co-manager of the fund for the past 13 years. For us, Strategic Income means that we are more flexible than a conventional bond fund and can invest outside traditional fixed-income segments.

What does your investment universe look like?

We primarily invest in three areas: securitized products, emerging market bonds, and speculative-grade corporate bonds. We are highly flexible and actively managed. There are no restrictions regarding issuer domicile or currency exposure. Overall, however, we must maintain an investment-grade profile because we do not intend to be a high-yield fund. Our objective is to generate 250 basis points or more of excess return over our benchmark, a broad global bond index, over time.

«If the United States continues to accumulate more debt, the index weighting of Treasuries will increase. This makes active investing in fixed income particularly attractive.»

And is that realistic?

Yes. One reason is that in an index, the largest weight is assigned to the issuer that borrows the most. If, for example, the United States continues to accumulate more debt, the weighting of Treasuries in the index increases. From an investor’s perspective, that is a flawed construction, which makes active fixed-income investing attractive.

The Federal Reserve has had a new Chairman, Kevin Warsh, since May. Do you expect monetary policy to change under the new leadership?

The Chairman certainly matters, but the Federal Open Market Committee (FOMC) includes 18 other members—among them former Chairman Jerome Powell, although seven members do not have voting rights. Warsh cannot simply do whatever he wants; he must build a majority. Naturally, he would like to ease monetary policy, but the economic data must support such a move. At present, that is not the case. Inflation has risen significantly due to persistently elevated oil prices.

Do you believe Warsh has the expertise to lead the Fed independently from the President and strengthen cohesion within the committee?

He enjoys a lot of credibility as a former Fed Governor and was previously considered a monetary policy hawk. I would not overstate the disagreement within the FOMC that became apparent during the rate decision at the end of April. It was primarily about wording rather than substance. Warsh must allow the data to guide him, build trust, and form coalitions within the Fed, and he knows that’s going to take some time.

«Warsh must remain guided by the data, build credibility through his decisions, and forge coalitions within the Fed.»

Is the oil-price shock clearly inflationary? It also weighs on economic growth, which should dampen inflation.

In principle, central banks should respond only to demand shocks and not, as in this case, to supply shocks. However, both headline and core inflation have risen so significantly that the Fed cannot simply ignore it or «look through» it. In addition, the Fed has a dual mandate: not only to maintain price stability but also to support employment.

What does that mean for monetary policy?

The U.S. labor market remains relatively robust, but momentum has been slowing for four years, as reflected in the gradually rising unemployment rate. To preserve price stability, the Fed would need to become more restrictive. To support employment, it would need to ease. Inflation is running above wage growth, eroding purchasing power and weighing on economic activity.

Markets currently expect the Fed to raise interest rates. Could the central bank use such a move to demonstrate its political independence?

Yes, they could do if they wanted to. But I do not believe the Fed will pick a bigger spat with the Trump administration. In practice, the Fed acts independently and in the long-term interests of the U.S. economy, while presidents typically focus on shorter time horizons. Historically, this has repeatedly created tensions.

«To maintain price stability, the Fed would likely need to adopt a more restrictive stance; to support employment, it would be more inclined to ease policy.»

Warsh has argued that lower interest rates are justified because artificial intelligence (AI) will have a disinflationary effect on the economy. Yet today, AI-related investment spending is contributing to upward price pressure. Is Warsh wrong?

Over the long term, AI will reduce inflation. Its goal is to significantly boost productivity by freeing up labor resources. The impact on the labor market could be substantial, enabling companies to produce more with fewer employees. However, at present AI is fueling economic growth, which means the short-term effect is inflationary. That said, this growth is not broad-based and has not yet spread across the entire economy.

Fixed-income experts and credit specialists have been waiting for years for a turn in the credit cycle. Today we live in a particularly uncertain world with many fault lines, yet corporate bond credit spreads remain very tight relative to government bonds. Shouldn’t the credit cycle turn soon?

Yes, you are right. Despite geopolitical conflicts, spreads have remained remarkably tight. That will change only if global economic growth slows significantly and corporate earnings decline. As long as issuers remain creditworthy, investors will continue to buy. A shift could also occur if government bond yields continue to rise, especially at the long end of the curve, resulting in a steeper yield curve through a bear steepening. Investors such as insurance companies tend to focus more on yield levels than on spreads and could then reallocate assets.

«These meagre spreads are unlikely to widen until economic growth slows markedly and corporate earnings begin to decline.»

And what are you doing?

We currently hold a record-low allocation to corporate bonds because, in our view, spreads no longer adequately compensate investors for the risks involved, leaving too little cushion. However, spreads may remain at current levels for some time because substantial amounts of capital continue to flow into the market.

So now would actually be the right time to switch from riskier corporate bonds into safer government bonds.

We have already answered that question for ourselves by overweighting mortgage-backed securities with explicit and implicit government guarantees. At present, it is not worthwhile to take risks in the corporate bond market. We expect yield curves to steepen further. At the short end, markets are pricing in too many rate hikes, while at the long end growing government debt is pushing yields higher.

Are you seeing increased interest as the private debt market shows signs of stress?

Indeed, some investors are returning to public markets. Spreads in private debt have also become very compressed recently.

The global financial crisis of 2008 originated in securitizations linked to the U.S. housing market. How resilient is the market today?

The rise in interest rates during 2022 and 2023 pushed mortgage rates from around 3 percent to 8 percent. As expected, this put pressure on prices for commercial real estate and office properties. In contrast, very little has happened in the residential housing segment; home prices have remained largely unchanged overall. This is because, following the financial crisis, there was underinvestment and insufficient construction for a decade, leaving supply constrained. Moreover, unlike during the financial crisis, homeowners today are staying in their homes because most were able to lock in attractive long-term mortgage rates. The construction industry, however, experienced a recession.