The consensus view that the new Trump administration will deliver significant economic growth is too optimistic for bond veteran Gibson Smith.

Smith, founder of Smith Capital, said it is logical for market participants to expect an upbeat economic outlook based on the combination of the Federal Reserve’s rate cuts and the belief that the new administration will be pro-growth and pro-business.

But it maintains a defensive stance in its portfolios, expecting plenty of volatility in 2025, in part because of President-elect Donald Trump’s penchant for using headlines to garner attention.

“Headlines can bring volatility. I think anyone who manages money and doesn’t expect more volatility will be surprised,” he said.

Smith helped build what was then Janus Capital’s bond business into a fixed-income powerhouse and, in the 2010s, worked for several years at Janus alongside Bill Gross.

Not that Smith is discounting the incoming administration’s plans, noting that he is “very confident” in a pro-growth, pro-business administration. “But that will be balanced by a Fed that will continue to be very diligent in fighting inflation,” he said.

Market expectations for accelerated growth may be too high, he said, while ideas that Trump’s team will be fiscally irresponsible and run large deficits may be too pessimistic.

“It may be that this newly created DOGE (Department of Government Efficiency) will be really aggressive and maybe even very successful in cutting back on the excess government that we’ve all come to accept as reality. So it will be a very interesting moment”, he said.

Because he expects high volatility, Smith said he maintains high levels of liquidity in his portfolios, including the actively managed exchange-traded fund, ALPS/Smith Core Plus Bond ETF (SMTH).

The fund is also celebrating its first anniversary, having earned $1.3 billion in assets under management, with an annual return of 4.2%. The fund has 44.4% public debt, with an average credit rating of A and an effective duration of about 5.6 years.

Smith said credit spreads are at their tightest level in 15 to 20 years for both investment-grade and high-yield credit, leaving little value overall in credit markets. He wouldn’t be surprised to see spreads widen in the first six months of 2025. Meanwhile, US Treasuries yields around 4% remain very attractive, even with inflation around 2.5 %.

“Even at 3%, you’re looking at real rates of 125 to 150 basis points. And they’re pretty good in historical terms,” ​​he said.

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