The standard core bond index has a six-year duration and yields about 5%. A 100-basis-point rate move would cost it more than that yield outright.
Most advisors still put clients in that index anyway, even though it's roughly 50% Treasuries — up from 30% before the financial crisis — largely because that's simply what "the agg" has become, not because anyone designed it that way.
"If you are invested in a typical core plus or core bond strategy... that index over the last five years... is basically been flat to slightly negative for five years."
John Kerschner is Janus Henderson's global head of securitized products; Michael Contopoulos runs its multi-asset macro investing team. Both argue the last 40 years of falling rates were the anomaly, not the norm.
I listened to the full interview so you can skip it. 65 minutes of audio, 9 minutes of reading.
Here are the 8 takeaways that matter.
👤 Guests: John Kerschner, Janus Henderson's Global Head of Securitized Products, and Michael Contopoulos, Janus Henderson's Head of Multi-Asset Macro Investing
🎙️ Host: Matt Zeigler, of Excess Returns
📰 Published: 10 September 2026, on the Excess Returns podcast feed
🟣 Apple Podcasts | ⏱️ 1 hr 5 min | ✅ Time saved: 56 min
Key Takeaways
The standard aggregate bond index would lose money on a 100-basis-point rate move
It has roughly six years of duration and yields only about 5%, so a 1-point rate rise costs more than a year's income
Forty years of falling rates, not the current environment, was the historical anomaly
Rates fell about 65-67% of the time from 1980 to 2020, driven by Volcker's inflation fight and then globalization — both forces Kerschner and Contopoulos say have now reversed
A "guns and butter" redux is layering cyclical pressure on top of that secular shift
Record defense spending plus continued fiscal stimulus, at a time credit spreads are already at all-time tights
Janus Henderson's AAA CLO ETF has never had a single default in over 30 years of the underlying asset class
It's grown from a standing start in 2020 to nearly $31 billion; the category is over $55 billion, at least half of it retail money
AI is adding an estimated 50 to 60 basis points of inflation, by their own analysis
Contopoulos lists four channels: capital spending, energy demand, labor scarcity, and a stock-market wealth effect
They don't like corporate bonds at current spreads, even though credit quality is fine
The compensation for illiquidity, default risk and downgrade risk has compressed to the point where it isn't worth the interest-rate exposure that comes with it
A well-built bond portfolio splits into three buckets: safety, income, and insurance
Each uses a different instrument — floating-rate CLOs for safety, a multi-sector fund for income, agency mortgages for insurance against a recession
1. Why Bonds Got A Bad Name
Zeigler opened by noting how much investors dislike bonds right now. Contopoulos said the problem is that most people still think of a bond as one thing — a fixed coupon with long duration — when the category is far broader than that.
Bonds don't have to mean taking interest-rate risk or credit risk, and some bonds profit in a higher-rate environment, Contopoulos said, calling the reframe the most important thing they could do on the show
Kerschner said the standard core-plus bond index has been "flat to slightly negative for five years," while Janus Henderson's floating-rate triple-A CLO ETF has averaged about 5% annualized over the same stretch, without taking on real credit risk
2. The Case For Higher Rates
Contopoulos laid out why he believes the 40-year decline in rates from 1980 to 2020 was driven by two forces that have now reversed.
Paul Volcker's inflation fight in the early 1980s was the first force; globalization, which imported disinflation as production moved to cheaper countries, was the second
That shift began reversing around 2015, starting with Brexit and Trump's first election, moving the world from globalization toward de-globalization — more competition, more home-country manufacturing, and by nature more inflation
He estimated the resulting secular inflation premium at "one to two extra percent" above central-bank targets, not a return to 2021's 8-9% readings, but enough to matter for monetary policy
3. Guns And Butter, Again
Contopoulos compared today's fiscal backdrop to the 1960s, when the US tried to fund the Vietnam War and Lyndon Johnson's Great Society programs simultaneously without triggering inflation — and failed, in the 1970s.
He named record proposed US defense spending alongside continued stimulus — the "one big beautiful bill," the CHIPS Act, the Inflation Reduction Act — as the modern version of guns and butter
This is landing at a moment of record-low unemployment, above-target inflation, roughly 25% earnings growth, and credit spreads at all-time tights — which he called evidence "the Fed is way too easy at the moment," since monetary policy transmits through credit spreads
His own base case is higher yields through the balance of 2026 into 2027, and likely over the next one to ten years, while acknowledging a recession would still push yields down from wherever they are
4. What's Broken In The Agg
Kerschner argued the core problem with the aggregate bond index isn't a market view — it's how the index was built.
The agg is constructed by whoever issues the most debt, not by any investment logic — a method he said nobody would choose starting from a blank sheet of paper
Treasuries and Treasury-like securities now make up roughly 50% of the index, up from about 30% coming out of the 2008 financial crisis; the rest splits between agency mortgages (about 24%) and corporate credit (about 24%)
With about six years of duration and a roughly 5% yield, a 100-basis-point rate increase — not an unusual move historically — would produce a negative total return, since the price loss from duration exceeds the income
Beyond the aggregate market, he sized the parts most investors are missing: securitized products outside agency mortgages are a $5 trillion market, emerging-market debt is $3 trillion, high yield is $3 trillion, and private credit is $2 trillion
5. The CLO ETF Story
Kerschner walked through the growth of Janus Henderson's triple-A CLO ETF as a case study in what's changed for retail investors.
Launched in 2020, the fund is now nearly $31 billion; combined, triple-A CLO ETFs exceed $55 billion, with at least half of that estimated to be retail money — a market Kerschner said barely existed five years ago
There has never been a single default in a triple-A CLO in more than 30 years, through the 2008 financial crisis, COVID, and other dislocations, according to Kerschner
The fund trades about 10 million shares a day with a one-cent bid-ask spread. In a typical dislocation — he cited Russia's invasion of Ukraine — the fund might fall 1% to 2%, versus zero for true cash, but has historically earned 150 to 175 basis points more than cash over time
Because CLOs are floating-rate, a Fed rate hike raises their coupon income rather than hurting the price — the opposite of a fixed-coupon bond. In 2022, when a typical aggregate bond fund fell 10% to 15%, the triple-A CLO ETF was positive for the year
6. Why AI Is Inflationary
Zeigler asked the pair to define "AI inflation." Both estimated its current impact at 50 to 60 basis points, and argued it's a net inflationary force rather than a productivity-driven offset to inflation.
Massive capital spending on data centers, semiconductors and power infrastructure is itself inflationary — hundreds of billions to trillions of dollars over several years
Rising energy demand from data centers is pushing up electricity costs — Contopoulos cited his own Con Edison bill in New York as an example
Labor scarcity: with roughly 12,000 baby boomers retiring daily and immigration constraints, there aren't enough AI engineers, data scientists and infrastructure specialists to meet the pace of buildout
A wealth effect from AI-related stock gains is the fourth channel, and the one Contopoulos said could reverse fastest if the rally stalls — but for now, he argued productivity data doesn't support the disinflationary story bulls are pricing in
7. Treasuries Versus Corporates
Contopoulos drew a sharp line between the two halves of the traditional bond market.
His biggest fear on the government side is a "Liz Truss moment" — an administration error that spooks confidence in US Treasuries, producing failed auctions or a bond-vigilante repricing. He called it a real possibility, not his base case, but flagged real US economic growth running near 1% to 1.5% against very large deficits as a genuine risk
On corporates, he said the issue isn't credit quality — earnings growth is strong — it's that spreads have compressed to the point where investors aren't paid enough for illiquidity, downgrade risk and default risk, while still carrying full interest-rate exposure
His own macro-team portfolios hold essentially no traditional corporate bonds as a result, preferring securitized credit with subordination and structure instead
8. A Better Bond Portfolio
Kerschner organized his own approach around three separate jobs a bond portfolio does: safety, income, and insurance.
Safety is served by the triple-A CLO ETF — currently yielding close to 5%, floating, so its income rises if the Fed hikes
Income comes from a multi-sector fund he manages, currently yielding north of 7% with under four years of duration — which he said effectively recreates what the aggregate index looked like before the financial crisis, when it carried about four years of duration and a 7% yield
Insurance — protection in case of a recession — comes from agency mortgages rather than long Treasuries, which he said can add about 100 basis points of extra yield over Treasuries through active management, at a low fee
For a traditional 60/40 investor, Kerschner suggested roughly 10-15% investment-grade corporates, 40-60% securitized (much of it agency mortgages), and the remainder in opportunistic credit — private credit, high yield or emerging markets — rather than a single aggregate fund
Contopoulos separately described running multi-asset portfolios around correlations and betas rather than labels — treating high yield as stock-like and staples as bond-like, for example — and said his team currently favors equities, balanced by safe, low-duration fixed income rather than long Treasuries
Bonus Insights
Kerschner said agg-index bond funds often charge 30-60 basis points in fees despite being roughly half Treasuries, which "should be almost free" to manage; he argued a disaggregated version of the same exposure should cost closer to 10 basis points
On liquidity: Contopoulos argued fixed-income ETFs are misunderstood as illiquid risk vehicles, when in every dislocation of the last several years — COVID, tariffs, the Iran war — they have provided price transparency and held up as a liquidity source even when the underlying bonds themselves stopped trading
Data-center debt issuance is still small relative to the securitized market as a whole — Kerschner estimated about $30 billion this year against a roughly $1 trillion ABS market and a $2 trillion CMBS market
On CLO issuance specifically, gross issuance is running around $700 billion this year, but net issuance — after refinancing and amortization — is under $100 billion, which Kerschner said is the more important technical signal
Their bottom line is that the last 40 years of falling rates were the exception, not the rule, and that a bond investor's job now is to disaggregate the standard index into pieces built for safety, income and insurance rather than owning one fund built by accident.
Products, Companies & Tools Mentioned
Janus Henderson (The firm both guests work for, and the source of the CLO, mortgage and multi-sector products discussed throughout)
Janus Henderson AAA CLO ETF (JAAA) (Kerschner's floating-rate "safety" product; nearly $31 billion, with no defaults in the underlying asset class in over 30 years)
Janus Henderson Mortgage-Backed Securities ETF (JMBS) (The actively managed agency-mortgage fund Kerschner points to for the "insurance" bucket of a portfolio)
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