WEBVTT - BNY Mellon's Loh Sees Bond Yields Continuing to Fall (Audio) 0:00:01.080 --> 0:00:04.080 You're listening to Taking Stock with Kathleen Hay and Pim 0:00:04.160 --> 0:00:08.280 Box on Bloomberg Radio. The Bank of Japan, the European 0:00:08.400 --> 0:00:11.840 Central Bank, as well as several other European authorities have 0:00:12.000 --> 0:00:15.680 ventured into uh I guess what you could call unchartered 0:00:15.960 --> 0:00:19.520 territory of negative interest rates? How did this all happen 0:00:19.600 --> 0:00:22.000 and what does it mean? Well, that's why we have 0:00:22.079 --> 0:00:25.919 Marvin Lowe. He is the senior global market strategist for 0:00:26.040 --> 0:00:28.360 b N Y Melon and he joins us now in 0:00:28.360 --> 0:00:30.320 the studio. Marvin, thank you very much for being with us. 0:00:30.480 --> 0:00:33.120 Thank you for having me. So when someone asks you, 0:00:33.800 --> 0:00:37.600 how did we get here and what happens next? There's 0:00:37.640 --> 0:00:40.400 no real playbook for this, is there? No? No, there 0:00:40.440 --> 0:00:45.080 really isn't. I think that, um, we are in uncharted territory. UM. 0:00:45.200 --> 0:00:47.640 Up to now, it seems like the world and investors 0:00:47.680 --> 0:00:50.200 have taken a certain degree of comfort that the central 0:00:50.200 --> 0:00:52.400 bankers will get us out of this. I think we're 0:00:52.400 --> 0:00:54.520 starting to see that fray a little bit. UM. Certainly 0:00:54.640 --> 0:00:57.440 volatility over the course of the year and the fact 0:00:57.480 --> 0:00:59.720 that maybe some of these negative yields are not a 0:00:59.800 --> 0:01:02.080 list sitting. The type of response that the central bankers 0:01:02.080 --> 0:01:04.959 would have expected is starting to come out into the market, 0:01:05.040 --> 0:01:08.000 and um, you know, kind of plays into whether or 0:01:08.000 --> 0:01:11.160 not investors will continue to trust what our central bankers 0:01:11.160 --> 0:01:15.560 are doing. Um in the worst case scenario, where would 0:01:15.959 --> 0:01:20.680 a steady drop in bond yields lead. We now have 0:01:20.920 --> 0:01:22.960 more than eleven trillion dollars worth of bonds around the 0:01:23.000 --> 0:01:25.440 world of negative territory. The e c B, of course 0:01:25.520 --> 0:01:28.440 is buying more, that's focusing on corporates, but it all 0:01:28.480 --> 0:01:30.600 seems to defeat And of course the Bank of Japan 0:01:30.640 --> 0:01:33.760 officially went to negative rates in January. There were having 0:01:33.760 --> 0:01:35.960 wrapping up their two day meeting. They're not expected to 0:01:35.959 --> 0:01:38.280 buy more bonds yet, but if they don't do it now, 0:01:38.319 --> 0:01:40.000 they're supposed to do it in July. Where what does 0:01:40.040 --> 0:01:42.920 this mean for the markets? Well, you know, you know, 0:01:42.959 --> 0:01:46.000 clearly clearly it's difficult. Um. By going into this negative 0:01:46.040 --> 0:01:49.720 yield paradigm, Um, the central bankers are hoping to elicit 0:01:49.760 --> 0:01:52.240 some sort of response both from the business world as 0:01:52.280 --> 0:01:57.000 well as from consumers. And in fact, we've seen um 0:01:57.040 --> 0:02:00.200 that there's a certain part of the world that look 0:02:00.240 --> 0:02:02.880 at negative yields not necessarily as a positive, as a negative. 0:02:02.920 --> 0:02:06.080 So it is ultimately very scary, and I think it 0:02:06.440 --> 0:02:09.119 um is playing into this commentary that's out there where 0:02:09.160 --> 0:02:12.040 we're going to have a global slow growth type of 0:02:12.200 --> 0:02:15.880 environment that seems very difficult to break free of. Well, 0:02:15.919 --> 0:02:18.160 if you can't break free of it, you've still got 0:02:18.160 --> 0:02:21.359 to live through it. What are you telling your clients, 0:02:21.360 --> 0:02:25.280 your customers, how are you advising them about their money? Well, 0:02:25.440 --> 0:02:28.080 I mean we all have to reset expectations, right, you know, 0:02:28.120 --> 0:02:31.240 certainly we've gone through decades of some of the best 0:02:31.280 --> 0:02:33.320 growth the world has seen, and there are certainly a 0:02:33.360 --> 0:02:35.919 number of factors that went into that, whether it was technology, 0:02:35.919 --> 0:02:39.359 whether it was um, a global decline in yields from 0:02:39.360 --> 0:02:42.240 a very very high perspective. Certainly inflation came down over 0:02:42.280 --> 0:02:44.720 the last several decades. If we are in this lower 0:02:44.760 --> 0:02:49.200 inflation environment with these yields either low or negative, that 0:02:49.320 --> 0:02:52.959 are difficult to break out of this range, Um, you've 0:02:53.000 --> 0:02:57.680 got to reset your expectations and plan accordingly, which you know, 0:02:57.720 --> 0:03:01.080 in turn kind of promotes the concept of greater savings, 0:03:01.080 --> 0:03:03.760 if you will, which is not what the central bankers want. 0:03:03.760 --> 0:03:06.360 They want you to take that money and put it 0:03:06.400 --> 0:03:09.320 into the economy rather than in the bank certainly plenty 0:03:09.320 --> 0:03:12.440 of stories, much of an anecdotal of large amounts of 0:03:12.480 --> 0:03:15.280 safe sales in Japan, the you know, greater amount of 0:03:15.280 --> 0:03:17.680 ten thousand end notes that are in circulation now than 0:03:17.720 --> 0:03:19.960 they were in any period over the last couple of decades. 0:03:20.000 --> 0:03:22.440 So you know, there is that that degree of hoarding 0:03:22.760 --> 0:03:25.240 and concern out there. So let's take the other side 0:03:25.400 --> 0:03:28.400 just for fun. Jenny Allen and said, I know it's 0:03:28.440 --> 0:03:31.200 a double negative. It's not impossible there could be a 0:03:31.320 --> 0:03:34.360 rate increase in July at the next meeting, because if 0:03:34.360 --> 0:03:36.560 the economy perks up and jobs look better and I 0:03:36.600 --> 0:03:39.720 would add for her, and if the Brexit vote is 0:03:39.760 --> 0:03:43.000 to remain, you can imagine how global sentiment would shift 0:03:43.040 --> 0:03:46.120 at least some right, what are the odds of that 0:03:46.200 --> 0:03:48.440 and how do you how do you position for that? 0:03:48.560 --> 0:03:51.600 If you're a bond investor or bond trader, well, um, 0:03:51.680 --> 0:03:54.160 so you know investing in trading certainly potentially could be 0:03:54.200 --> 0:03:56.200 two different things. Um. You know, traders are going to 0:03:56.280 --> 0:03:59.080 take the short term view of that. If they're comfortable 0:03:59.120 --> 0:04:02.280 one way or another with um a large rebound in 0:04:02.320 --> 0:04:04.960 the non farm report, if they're comfortable with the remain 0:04:05.200 --> 0:04:07.680 versus a Brexit. You know, they can certainly take a bed, 0:04:07.720 --> 0:04:10.280 and it's kind of easy to look at which asset 0:04:10.320 --> 0:04:13.360 classes have been the most negatively affected with kind of 0:04:13.360 --> 0:04:17.400 this recent type of of concern in the market. When 0:04:17.400 --> 0:04:21.800 it comes from an investment perspective, um basis points, it's 0:04:21.839 --> 0:04:23.760 not really the biggest thing in the world. Quite frankly, 0:04:23.800 --> 0:04:26.800 I mean we as strategists, as traders, as animals, we 0:04:26.800 --> 0:04:29.800 spend a lot of time um wringing our hands over 0:04:29.920 --> 0:04:31.160 is it going to be July? Is it going to 0:04:31.240 --> 0:04:33.680 be September? But in the grand scheme of things, going 0:04:33.800 --> 0:04:38.159 from this kind of basis points to basis points, is 0:04:38.200 --> 0:04:41.360 not a deal breaker, all right, it's not a deal breaker. 0:04:41.400 --> 0:04:44.440 And once your thoughts on the European Central Bank and 0:04:44.600 --> 0:04:49.880 its corporate bond buying program and what you believe that will, 0:04:49.920 --> 0:04:52.760 what effect that will have so um, you know, it'll 0:04:52.800 --> 0:04:57.320 probably um play out the way we've seen the sovereign 0:04:57.560 --> 0:05:01.080 yield part of the world play out. Um. Those yields 0:05:01.080 --> 0:05:03.600 are negative. You know, many of the headlines around the 0:05:03.640 --> 0:05:06.360 bund getting into negative out to ten years. And like 0:05:06.400 --> 0:05:09.400 you said, Kathleen, we've got eleven billion, eleven trillion, remember 0:05:09.440 --> 0:05:12.720 the big figure here eleven trillion in sovereign bonds around 0:05:12.720 --> 0:05:16.240 the world that are negative, and that in effect has 0:05:16.320 --> 0:05:20.560 kept rates somewhat captain the US, just because eventually the 0:05:20.600 --> 0:05:23.120 spread gets so wide that people are going to look 0:05:23.160 --> 0:05:25.360 at the U s D and at our rates as 0:05:25.440 --> 0:05:28.479 a good alternative, particularly when um, you're looking at minus 0:05:28.480 --> 0:05:31.120 one basis points in Germany and ten years if we 0:05:31.320 --> 0:05:33.840 if we we, we've seen the e c B get 0:05:33.880 --> 0:05:36.839 fairly aggressive in their at least what they've announced so 0:05:36.880 --> 0:05:39.440 far in their corporate bond buying. They are running out 0:05:39.440 --> 0:05:42.520 of assets, they're still dealing with slow growth. One would 0:05:42.600 --> 0:05:45.839 presume that they're going to remain aggressive on that front. 0:05:45.920 --> 0:05:48.400 And you know, once again it promotes the concept of 0:05:48.440 --> 0:05:51.440 lower yields making making their way out here despite the 0:05:51.480 --> 0:05:53.359 fact that the Fed is trying to put on a 0:05:53.360 --> 0:05:56.080 brave face. Okay, you've been in the ball market for 0:05:56.080 --> 0:05:58.119 a long time. Does this Raley continue? Does a tenure 0:05:58.160 --> 0:06:00.320 note in the US break below one for D does 0:06:00.320 --> 0:06:02.520 it hit it keep going? And for that to happen, 0:06:02.560 --> 0:06:04.560 what would you have to see? I mean, I think 0:06:04.600 --> 0:06:09.560 I think the risk is definitely to a lower yield continuing. Um, 0:06:09.600 --> 0:06:12.520 I think that there was certainly a note of caution 0:06:12.600 --> 0:06:14.960 that came out of the FLMC today, so we need 0:06:15.000 --> 0:06:18.520 to take that into effect. It was a note of 0:06:18.520 --> 0:06:21.680 caution despite the fact that they didn't um change their 0:06:21.720 --> 0:06:24.600 economic projections too much, so they're concerned there. And then 0:06:24.600 --> 0:06:26.320 when we kind of get into the red friendum vote, 0:06:26.320 --> 0:06:30.359 you know, all bets are all well, uh, I'm betting 0:06:30.360 --> 0:06:33.640 it's going to be an interesting eight days. Marvel Low, 0:06:33.760 --> 0:06:36.000 thank you so very much for joining a senior global 0:06:36.040 --> 0:06:38.480 market strategist at b n Y Melon. In the wake 0:06:38.560 --> 0:06:41.919 of the Devash statement, the bond rallye may continue. He says, 0:06:42.040 --> 0:06:44.039 this is taking stock on Bloomberg Radio.