Two-Cycle Approach: Rates and Credit

In this episode of Excess Returns, we talk with Carl Kaufman, Co-President and Co-CIO of Osterweis Capital Management, about navigating today’s fixed income landscape. Carl breaks down the major segments of the bond market, explains how credit and interest rate cycles interact, discusses private credit risks, and shares how he builds durable, low-volatility bond portfolios. Drawing on more than two decades managing one of the top multi-sector income funds, Carl offers clear, practical insights for investors trying to understand yields, defaults, duration, and where returns are most attractive today.

Main topics covered:
• Overview of investment grade, high yield, leveraged loans, and private credit
• How today’s credit quality is shifting across the bond market
• Why the high yield market may be higher quality than most investors realize
• How levered loans and private credit have changed system dynamics
• How Carl uses the interest rate cycle and credit cycle to position the portfolio
• Why he avoids style boxes and instead buys bonds like a stock picker
• The flaws in fixed income indexing and why active management matters more in bonds
• How he evaluates companies, business models, leverage, and free cash flow
• Why distributors and equipment rental companies are strong long-term bond businesses
• The risks of the AI Capex boom and echoes of past bubbles
• Where defaults are rising and why private credit concerns may not be systemic
• Why his portfolio is short duration and how he uses cash as optionality
• How he protects against large drawdowns and manages risk across cycles
• His perspective on the Fed, inflation, employment data, and rate cuts
• Carl’s one investing belief most peers disagree with
• The one lesson he would teach every investor

Timestamps:
00:00 Intro and bond market quality shift
01:00 Carl’s background and fund philosophy
02:42 Defining investment grade, high yield, loans, and private credit
08:00 Why high yield quality has improved
10:07 The two-cycle approach: interest rates and credit
14:31 How today’s cycle differs
18:03 Why forecasting matters less than knowing where you are
18:52 Buying bonds like a stock picker
25:28 Index flaws in fixed income
26:56 Sectors Carl prefers
29:16 Thoughts on AI Capex, Nvidia, and financing trends
33:10 Sector concentration in bond portfolios
34:51 Position sizing and portfolio construction
35:43 Cracks in private credit and default data
39:45 Private credit for retail investors
40:34 Why Carl is short duration today
44:57 Using cash and liquidity as a strategic tool
45:44 Risk management and drawdowns
47:29 The Fed, inflation, employment, and policy uncertainty
53:53 Closing questions: belief peers disagree with
54:45 One lesson for the average investor