Lead-Lag Live

Fixed & Equity Income Strategies for 2026 | Rates, Rotation & Returns

• Michael A. Gayed, CFA

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In this episode of Lead-Lag Live, Michael Gayed sits down with Jay Hatfield, CEO and Portfolio Manager at Infrastructure Capital, to discuss how investors should approach fixed income and equity income strategies for 2026 as markets adapt to a changing interest rate environment.

From Federal Reserve rate cuts and inflation trends to credit spreads, preferreds, and equity sector rotation, Hatfield explains why income investors may need to rethink traditional allocations—and where the most compelling risk-adjusted opportunities may emerge in the next market cycle.

In this episode:
– How Fed rate cuts could reshape fixed income returns
– Why high-yield bonds and preferreds may outperform investment grade
– Equity income opportunities beyond mega-cap tech
– Small caps, sector rotation, and valuation discipline
– How to position income portfolios for 2026 and beyond

Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.

#FixedIncome #EquityIncome #Investing2026 #InterestRates #MarketOutlook #IncomeInvesting #WealthManagement #PortfolioStrategy

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SPEAKER_00:

If you're here for the CE credits from the CFP board, I will email you after this webinar, get your information, submit that. I'm a little bit behind on that, but I will get that caught up and get those submitted. Uh and if any of you want to ask any questions, just put them in the QA in the chat, and I'm happy to bring it up towards the end here. Uh so again, thank you everybody for being here. My name is Michael Gaia. This webinar is sponsored by Infrastructure Capital. The man himself, Mr. Jay Hatfield, who's uh he's done well this year. Uh and does well a lot of years. So I'll let uh Jay go from here.

SPEAKER_01:

Okay, great. Thanks, Michael. And thanks everybody for joining. Uh, we're Infrastructure Capital, focused on providing income securities. We're based in Midtown Manhattan, but this is not the view from our office. You want to come visit us? You can see the real somewhat mundane view from our office. These are just a quick overview of our funds. Uh, we'll talk a little bit more about them later. As you can see, they all offer um attractive SEC yields and attractive distribution yields. So that's the yields that I was describing. Z SEC yield because the cash coming into the fund. Distribution yield, we do write covered calls. So sometimes for some of the funds, uh, so sometimes the distribution yield is a little bit higher. That's covered by um covered calls. So we've had very accurate targets in the past. The thing I will say about targets, though, is they're meant to not just be a signal to buy, but also a signal to sell. So we had a we have a 7,000 target for this year. Um that's working pretty well. Uh, we got up close to that number, which is a pretty full valuation, 23 times. We ended the uh tech earnings season. Uh during earnings season, you get greed. After earnings season, you get fear. So you're seeing a lot of fear in the market around AI bubbles and overbuilding. So we don't think any of that's significant to at least the companies we follow. But it's causing us to pull back from that 7,000 number. I wouldn't sell everything you own because we do have an 8,000 target for next year that's simply taking 2,027 earnings. So if you have a year-end target, so our target's always year-end. So year-end 7,000 is based on next year's earnings or 26 earnings, year end 26 on 27 earnings. There's a 13% forecasted growth in earnings. And so that's simply the movement from 7,000 to 8. So in a way, it's almost fine if we pull back a little bit off 7,000, just creates more upside for next year. And uh there's two bases for our bullishness. Um, number one, Fed uh cutting cycle, definitely want to be long stocks from the Fed's cutting rates, and vice versa. Not long or out of the market like in 22 when they're raising rates. But we do also think that this AI boom is real. You look at the megeg companies, they're not in a bubble. They were fully valued, uh, particularly when we hit 7,000. And I'm just gonna quickly look up because I keep this live data, what um our estimate is for, and this is using egg ratio, so their PE to growth rate. So it was pretty close to zero when we hit 7,000. Czech has had a much bigger pullback than the market as a whole. So now we see 11% upside on the MAGA. So um at some point, you'll see some buyers come in, we believe, and uh start to buy these tech stocks again. The um our one of our biggest ideas is the private equity firms. This is something we hold in really all of our funds, almost all of our funds. So that's um particularly Apollo and KKR, they have mandatory convertibles, which are preferred. So we do hold them in our preferred funds as well. And we think that there is this unusual situation where two private, pretty small and very low quality auto-related companies filed for bankruptcy and there was fraud. So then there was a notion, sort of the cockroach theory that credit was imploding. And we just thought that there was no evidence of that. When you listen to the private equity firms, they say, first of all, they deal with higher quality companies that um versus ones that banks often deal with. So they have better selection criteria and there's no systemic problem. And that's really proven out to be the case, but has created this opportunity, particularly with um with these private alternative asset managers. Also, some we don't have any recommendations, but BDC has got too cheap. So that we think that was a panic. And um next year, we do think that it's there are um, you know, the tech stocks are starting to look more attractive now at 11% upside, but there's a lot of other companies like the ones already mentioned, and small cap side, GNL. We have a small cap fund, SCAP, um, that have good upside like 30 or more percent upside, whereas tech's more like 11. So good time to look at rotation, small caps. If you do we'll we'll talk about fixed income here next. Um, so on the bond market side, um, we do continue to think they're gonna be three cuts. Um the um reason for that is not just that we're gonna get a new Fed chair and the president's gonna jam the you know Fed, which unclear actually is that he can even do that, but because it is a is a um 12-member board. So the real bullishness is that inflation is really already contained, it's just not properly measured. You can get this on our website. I think we have a slide in here as well, that you look at real-time inflation. So there's this thing called the internet where you can get information about what's going on with rents. You don't need to do what the BLS does, where they call people and send them surveys, um, which is 1970s technology. So if you use real-time data, inflation's already contained because housing is actually very low, pretty close to zero, shelter is zero. So if you that should know the the measurement by the BLS is about two years behind, just now starting to show that decline. So we should get to 2% inflation by the end of the year, next year. And so the Fed will have ample evidence to cut. So it's not just some political jam job to uh force rates lower. They really need to be lower. We have another slide later where you'll see that housing and construction are in recession. So it's really imperative that we cut rates. And um, it's also imperative we stay on the track to cut rates because if we go off that track, the 10-year will rise, 30-year mortgages will rise, and the housing market will get even weaker. Or actually, we're expecting it to bounce off the lows, but it'll continue to get back to close to 7% on 30-year mortgage, then we could have a uh further decline in housing, which could drag us into recession. Not that likely would tech things so strong. Um, we had been correct all year about the fact that the employment market was going to weaken. We were surprised it took so long. It really already had weakened, and the BLS also can't properly measure that. Um, we do think for anybody who likes fixed income as opposed to equities, that you want to be in the higher risk part of fixed income. So you have fixed income, you have DEs, treasuries, mortgages, investment grade corporate bonds. We think that high-yield bonds and preferreds will outperform. And when that happens is when the stock market's relatively strong. Investment grade will outperform in normal, usually when the markets stock markets are weak. It didn't happen in 22, but normally fixed income investment grade will outperform even when the Fed's tightening. Um, but it didn't because they did so quickly in 2022 uh from very high levels. So we're bullish on treasuries. We have, if there's three cuts, we'll get the Fed funds down to 275. The tenure trades almost exactly 100 base points over the terminal Fed funds rate. So we should get to 375. Not a huge rally in the in the treasuries. So that's why we think fixed income will actually be better. Um sorry, a higher risk fixed income, so high yield bonds and preferred stocks. And then on the economy, we covered a lot of this. Um so our CPR is already below two, but they do converge. There's a lag. So that's critical to our whole call, both on stocks and bonds. Keep in mind that um Keynesianism is a political, more of a political um ideology than it is economic, in that it doesn't really fit the historical data. So it totally blew up during the pandemic. Monetarism worked perfectly in terms of predicting inflation. Um, so just because the economy is gonna be stronger next year, we're projecting 3% as housing recovers, doesn't mean we're gonna have inflation. Now, just to be clear, though, it's not totally unreasonable to say, oh, well, if the economy is strong, we're gonna have more inflation. But the sequencing is like in the late 90s, the Fed was concerned about Y2K, cranked up the money supply. That created unsustainable growth. So unsustainable growth coming from excessive monetary growth does produce inflation. So you have to draw that distinction. Just regular economic growth does not cause inflation. So it's caused by um high oil prices, like in the 70s, we had two wars. We also had wage and price controls, which nobody seems to focus on, but that ruined our domestic production. Um and so the two critical indicators, money supply is down year over year, and oil is down. So the chance of re-acceleration inflation is zero. Tariffs should be ignored. There are sales taxes that go away from inflation in year. Not to say they're not annoying, and you can see that in the popularity numbers for the president, and that tariffs are very unpopular. The um we have a slide on a great slide on this. The U.S. economy is less cyclical because we have less peaks in housing. Housing caused 12 out of the last 13 recessions. The only one it didn't cause was the uh 2001 recession. That was a tech bust. But now we have the opposite of that. Well, we have two things. One, we have this tech boom, but it's stronger than in uh the late 90s that it was because it affects the real economy. And then secondly, the housing sector is very weak, but it came off a lower peak. So it makes the economy less cyclical. And everybody's wringing their hands about the budget deficit. It's important to look at real data. We make our own forecast. We're forecasting$1.45 trillion next year because of tariffs and strong economic growth. That is a sustainable deficit. It's also a lot of people like to say we have$37 trillion of debt outstanding. Well, that's total debt. The Federal Reserve and Social Security hold about$8 trillion. So right now we have one times GDP in debt, and it will slowly decline, not fast enough for my taste, but if we get the deficit down to$1.45 trillion, that's about four and a half percent of GDP. GDP grows at five, that means it's sustainable. So this is great data. I haven't seen it from anybody else. Uh, this is the um reason we say housing's in recession. So investment in uh residential structures down 0.20 over the last uh 12 months, and structures down 0.57%, 0.47, sorry. And that makes sense because rates were really high on the 10-year and Fed funds are really high. But you can see that we do continue to have strong investment in um intellectual property, software, and equipment, which can include uh chip equipment, power equipment. So it's really a tech-driven boom, not boom, but tech-driven economy such that we didn't get the normal recession you get when the Fed tightens and housing declines. And then we have some other charts here that are better. Okay, so the other thing that if you watch financial news, which I don't necessarily recommend unless I'm on, but you'll hear everybody wringing their hands about the consumer. Oh my God, the consumer student loans, their sentiments bad, et cetera. But if you look at this chart, consumer spending is very, very resilient. It really only drops when there's a tremendous drop in investment. So first investment drops, then there's layoffs, then there's less consumption. But on average, it's zero. And that's because consumers consume, they're like wood chucks who chuck wood. Uh lower income consumers have to consume to survive. Higher income consumers want to consume. So, unless you have mass layoffs, you basically have very resilient spending. So, if you want to judge the economic growth, look to the investment sectors. The reason we're projecting 3% next year is that negative two negative numbers I showed you are very likely to turn positive. Rates are way lower than they were on average through the year. And so that's likely to turn around. That will spur more hiring and uh more investment, which is a critical part of economic growth. And so uh 100% puts your focus on investment. So the consumers two-thirds of the economy, but in very low volatility. Investment's 20, but very high volatility. So, what should you watch? The high volatility part of it. It's pretty basic, but it seems like very few people seem to understand this based on their predictions. So, this is a great chart that demonstrates what I was talking about. So, if you go back here to when I was a kid in Palo Alto, Northern California, I remember everybody gloating about their uh housing gains. So we had two peaks here in the early and late 70s. There was inflation going on, and and by the way, money supply is growing at 10% a year, and oil prices were skyrocketing. But we got up to 2.5 million homes being built dur in the early 70s and still got to 2.2 in the uh late 70s and 83, looks like about 2.3, uh during the right before the great financial crisis, also about 2.3. But in the latest, and of course the population is at least double relative to 1971, but we have way less peak housing starts, only about 1.7. So this decline from 1.7 to 1.3 is significant, but it's not a crash like you had in 08 or these other enormous declines that all precipitated uh a recession. And you can also see how housing starts went down a little bit, but then kind of powered through the recession because there was a secular decline in rates. And that recession was solely driven by the dot-com bust, which wasn't that important to the real economy because of the fact that they didn't have data centers and power and all these other, it's pretty much just software and computer engineers. So ended up with a pretty mild recession that time. Um, just this is just if you don't believe um our assertion, you can just see every single recession is characterized by these big drops in investment. And you can see that we did have a big drop in the in the 2001 recession. That was all investments. I'm sorry, all tax spending, not housing, but all the other ones were housing related. And even during the pandemic, of course, people stopped building houses and investing, but that was art an artificial one. So we usually don't count. There's 14 if you count the 14 recessions post-World War II if you count the pandemic. So this is just a graphically, so you can see that if it had half a brain, which they don't, they would have realized by just looking at real-time indicators like ours, CPI-R is this blue line. And they would have figured out in the first quarter, 21, when they were squawking about transitory, possibly for political reasons, uh, they would have easily figured out, like, oh my God, CPI is at eight. We better tighten rates. But they didn't figure it out until CPI-U started to get up to six. So that's why this Fed is about two years behind, and probably the worst Fed since World War II. But you can see our prediction now is quite simple, just that this pattern continues and CPI U converges with CPIR because they're using this two-year leg. So, actually, a great graphic to show why the Fed's incompetent and why rates will go down next year is because of U converging to R like it always does. The other thing that I mentioned, um, you can see this very reliable relationship of the 10 year treasury trading on top, 100 base points over Fed funds. And Fed funds usually trade 75 over inflation. So that's where 375 comes from. So most people you listen. To forecasters or your own forecast is going to be always oh tremendous focus on the budget deficit and other factors, but budget deficit pretty much is running around 5% since Bill Clinton was president. It's not like a new news that we have a budget deficit. So it's mostly driven by Fed policy and implicitly also inflation. So because Fed funds usually stabilize about 75 basis points over the inf uh rate of inflation. So just focus on this, not on budget deficit or whatever other factors people are focused on that don't really predict what happens with rates. And by the way, recently rates have ticked up, but the terminal funds rate just went up as well. So that hundred base points gets uh held just by people not understanding that. And there's just more data uh that uh validates what we're saying about the spread being very consistent um with regard to the terminal rate. Um you can if you use Fed funds like right now, it doesn't work because it's gonna go down low later. And the money supply we use is a monetary base, that's what you should focus on. M1 and two get distorted by movement between treasuries and deposits. So in about 5% negative, still highly deflationary. Nobody seems to care at the Fed because they don't understand monetary policy. But this is a critical leading indicator. We only, if you go back into history since World War II, there's the only time we've had inflation is when the money supply spikes. Um so this is fixed income. The most critical distinction you can make is between fixed income and equities. Fixed income, you're senior to common, way lower risk than equities, much more likely to continue your dividends and interest. So good way to balance the portfolio out, have sources of cash if the market's really weak, uh, where you could take some profits on your stock on your bonds and move it in your stocks, and vice versa. So everybody should have some fixed income. So you can do that rotation rebalance. So if you target 20 stocks run up really high, you can sell a little bit of stocks and buy a little bit of bonds. And then within fixed income, I already discussed it, but you have investment grade, and then non-investing grade. So BNDS, PFFA, and PFFR mostly strong, non-investment grade, but non-investment grade. So the yield eight to nine percent. Uh PFFA is over nine. This is the SEC yield. The NDS yield is just under eight. Um, so we think a better way to be in fixed income, if we're correct, about the stock market being strong next year, coming out of this Fed tightening cycle, credit always tightens. And we're coming out of a Fed tightened cycle tightening cycle, or in a cutting cycle, let's say in another way. So these are the sectors that you want to be in, the higher yielding ones. Not true if we're going into a Fed tightening cycle in 22. Unfortunately, nothing worked, not even investment grade bonds worked, but they did outperform high yielding. And then uh talking about our equity funds, uh, AMCA's a pipeline fund. We put it on the left. It does trade right now, at least, like more like fixed income, so it's a low beta. So, like today, even it's up when the market's down. Um it has great yields, you know, 830 yield, and it's typically tax deferred because you get a lot of excess depreciation coming from the pipeline companies. Pipelines are well positioned because of the fact that they're moving natural gas, and AMZA's tilted towards natural gas companies. Great growth story, not well appreciated, so it hasn't been priced in like a lot of AI-derivative plays. So we think there's an opportunity there. Likely to get good dividend growth because the underliers are growing. And also our borrowing costs are going down. We do borrow money in these three funds, just 20%, the lowest um of any fund out there in terms of borrowing. ICAP, um, a great fund, doing really well this year, uh, beating the uh SP equal weight substantially and holding its own against the SP, which is nearly incredible because it's only about 10% tech stocks. So had a lot of great ideas in that fund. But also, most importantly, we write very short-term curated covered calls, and that's a great business. So we write them uh on companies that we think are close to their full valuation where we have a gain. So we don't do the index call writing like Jeppy does, which really hurts their returns. And you should look it up on our website, but our returns are dramatically higher than funds like Jeppy. And that's cap, one of the few ways to get really good yields over seven by owning small caps. There is a rotation going on on small caps. When the Fed cut rate, Fed cuts rates, uh, small caps do outperform. It's likely to continue next year. So we would um recommend that that investors look at diversifying and not just being in tech. I think on a risk-adjusted basis, tech will lag next year. Still might be on an absolute basis higher because it has a risk about double this U.S. stock market, but um unlikely to beat its risk-adjusted returns. And really just talked about this already. We actively select the securities. You know, last year we had this big call on investment banks that in Colman Sachs is up like 105% over a year and a half. So we're picking the stocks, we're writing these very short-term calls, and we have a lot of stocks that do have substantial dividends. We do have a lot of preferreds that have even more substantial dividends. We have AT ⁇ T, Philip Morris, some great McDonald's, great dividend stocks. And so that's why it's um an accomplishment to beat the equality SP and be competitive with the SP, because we have a lot of the non-tech stocks in this fund. And um, this just shows that large cap dividend stocks are are an attractive asset class to be in. Um, you know, everybody's hyper focused on tech. It's important to recognize that tech has done really well since the pandemic, partly because of the pandemic, but over longer periods of time, being diversified does pay off. And SCAP, pretty similar to ICAP, obviously small caps, so less than 10 billion typically. We write a little bit of cover calls on the individual stocks, a little bit of index calls. It's important not to rate too many calls. That's what caps out the returns on ETFs like Jeppy, where deriding almost the whole portfolio on the whole index. Uh, a lot of dividend stocks, we only have dividend stocks in SCAP, only profitable companies trading at reasonable multiples of growth or peg ratio. It's true of ICAP as well. We think that's critical. Uh if you think your own stocks should always know what the peg ratio is. If you're buying Palantir, you're paying seven times the peg ratio. You can buy Marvell for less than one time the peg ratio. Um, when you ignore that, like BroadCong, we owned it, sold it when it got over 400, was trading it above two times peg ratio, and now it's off uh almost 20% from its highs. So don't ignore valuation. Uh, that's what we do with SCAP and ICAP. We can do it for you, but if you're picking your own stocks, make sure that you know what that peg ratio is. It's an approximation of a discounted cash flow. So it's just like any investment, you don't buy an apartment to rent out where you're gonna get a 1% return on your investment if you rent it out. So same thing with stocks. You don't buy stocks where you get the minimum returns by holding their stock and getting their earnings and their growth. So small caps also are attractive long-term uh asset, sort of hard to believe because they've underperformed since the pandemic, but they have beaten the SP 500. So great asset class to include in the diversified portfolio. Um, BNDS, we talked about already, but just high-yield bonds, infrastructure driven. We like collateral when we buy bonds. Uh, you have lower default rates and better recoveries if there is a default. We try not to have defaults, of course. And these are just the disclosures. So, with that, Michael, I would um open up to you to see if you or anybody else has any questions.

SPEAKER_00:

I'm curious if um if the dollar were to weaken substantially, would that change the inflation outlook in your view?

SPEAKER_01:

Well, normally the dollar weakens when you have um a very loose monetary policy. So we don't anticipate the dollar weakening because we're not really we don't have a really loose monetary policy. We're just returning to normal. But at the margin, that does affect inflation. The U.S. is a pretty closed economy. It's about 90% or only 10 there's imports. So we don't think it's a critical factor. And with the Fed being so tight like it is now, um, it's pretty unlikely that the dollar weakens further. The dollar, it's not well appreciated, but trading on top of its 30-year average, it kind of got ahead of itself. Everybody thought that Trump was going to blow up the U.S. economy and spend way too much money, or I don't even know exactly what they thought, but the dollar surged the 108, anticipating his inauguration. Then not much happened that would support the dollar at that level. And then it came back to normal. So we're not dollar bearers, but at the margin, that does impact inflation. The main way it impacts it is a weak dollar would argue for higher oil prices, but we're definitely not seeing that. I'm not sure that would really drive oil prices higher. So that insulates it because of the 10%, probably well, some of it is refined products and oil.

SPEAKER_00:

Can we talk about uh AMSA in the context of that with oil? Just you know, talk about how on the pipeline side oil's price movement might impact the fund?

SPEAKER_01:

Right. So it does affect sentiment um when oil prices are weak. So MLPs have not done well this year. And uh but the great thing about MLPs is they don't have any significant commodity exposure. All the companies got rid of almost all their commodity exposure over the last five years because MLPs were way uh less, more risky and less well structured five years ago. So they really have any significant commodity risk. I mean, if commodity prices go to zero like they did during the pandemic are swinging negative, that's not good. But the pandemic was very, very unusual because you weren't really allowed to drive, or at least weren't allowed to go anywhere when you drove in certain parts of the country. So driving plummeted, throughput plummeted. But in a normal market, when oil prices come down, then gasoline prices come down, people drive more, there's more throughput, pipelines make more money. When natural gas prices are weak, um, or even if they aren't, they're needed for power generation. So the throughput continues. So pipelines are way more resilient. And you're seeing that now didn't used to be the case because pipeline companies were just as volatile as oil companies, but now they're about half as volatile. So the market's finally recognizing that they really are more toll roads than they are commodity plays. Not to say, though, like I said, if you have extreme moves down and drilling is significantly curtailed, then you do um that that can affect pipeline cash flow at the margin. But we haven't seen, we're nowhere near, have to be well below 50 to see any decline in throughput.

SPEAKER_00:

I wonder if you think um some of this recent weakness in the Mag 7 and tech in general um means we're gonna go back to active stock picking as opposed to this kind of passive indexing, which is what's benefited all these Mag 7 names?

SPEAKER_01:

Absolutely. You know, it was easy just to buy the SP and to get really 50% just the Mag 8 is 40. So the total is about 50. So you're basically just buying tech, tech's driving all the market. So we do think stock picking and particularly sector picking, so not being over-allocated to tech will be positive, not just this quarter, which it's already been, but most of next year as well.

SPEAKER_00:

I think that's a good place to wrap up this webinar. Appreciate those that attended. Uh happy holidays and check out all of infrastructure capital's funds. Jay, I will see you later tonight. Great. Thanks, Michael. Thank you, everybody. Cheers.

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Michael A. Gayed, CFA

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