WEBVTT - Marvin Loh on the Bond Markets (Audio)

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<v Speaker 1>This is Taking Stock with Kathleen Hayes and Pim Fox

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<v Speaker 1>on Bloomberg Radio. We are broadcasting live from e t

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<v Speaker 1>F Exchange b N Y Melon's et F Symposium in

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<v Speaker 1>Downa Point, California. I'm Pim Fox, my co host Kathleen

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<v Speaker 1>Hayes joining us now as Marvin Lowe. He is managing

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<v Speaker 1>director at the b N Y Melon and he's here

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<v Speaker 1>to tell us more about bonds. Marvin, always a pleasure,

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<v Speaker 1>Thanks for being with us. Thank you for having me again.

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<v Speaker 1>What the what is new about bonds? Because boy, I mean,

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<v Speaker 1>it seems like we've been beating this forever that you know,

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<v Speaker 1>rates are low, We got that, and now people have

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<v Speaker 1>to go and find something alternative, like a high yield bond,

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<v Speaker 1>or maybe even go outside the United States and look

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<v Speaker 1>to emerging markets. What are you hearing? Yeah, I mean

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<v Speaker 1>in the grand scheme of things, there isn't a lot new.

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<v Speaker 1>Yields are still low, not as low as they were

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<v Speaker 1>a couple of months ago. I think what's new is that? Um,

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<v Speaker 1>the commentary around what central banks may do as the

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<v Speaker 1>next step has certainly shifted. We came out of the

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<v Speaker 1>summer with the volatili and Brexit really expecting at least

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<v Speaker 1>the investors began to expect that central banks we're going

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<v Speaker 1>to move towards the next level of accommodation. We've bit

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<v Speaker 1>up assets all around the world based on that. We

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<v Speaker 1>push yields kind of back down to levels we hadn't

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<v Speaker 1>seen in many, many years. And lo and behold, they

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<v Speaker 1>didn't do what they said. And here we are right

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<v Speaker 1>now with a lot of um, with a lot of

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<v Speaker 1>central bank meetings that are welcome us back from summer vacation. Yes,

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<v Speaker 1>and uh, it's a couple of people now have commented

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<v Speaker 1>today that even if the Fed were to move the

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<v Speaker 1>key rate tomorrow, even though it's more more more of

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<v Speaker 1>a bed on December, right, that if it root moves

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<v Speaker 1>this year, it's not that big of a deal potentially.

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<v Speaker 1>Do you agree with that for the bomb market? You

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<v Speaker 1>know what, in the grand scheme of where rates are

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<v Speaker 1>basis points, is not a significant um move in terms

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<v Speaker 1>of market psyche and the impact that US rates have

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<v Speaker 1>on many other asset classes. I think every rate hike

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<v Speaker 1>has been significant, and I think we've seen stresses to

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<v Speaker 1>various asset classes. Whenever they even talk about rate increases,

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<v Speaker 1>you have been looking at bonds on a relative basis correct.

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<v Speaker 1>In other words, you can't just look at them in isolation.

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<v Speaker 1>You have to say, in relation to what let's say

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<v Speaker 1>the US tenure one point six eight percent, are investors

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<v Speaker 1>taking on more risk than they really understand when they

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<v Speaker 1>look to get yield that is greater than let's say

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<v Speaker 1>one point six eight percent. Well, I hope they understand. UM.

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<v Speaker 1>You know, certainly we should take our investment processes as

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<v Speaker 1>the most important thing, or one of certainly one of

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<v Speaker 1>the most important things we wind up doing. UM. There

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<v Speaker 1>aren't a lot of choices out there, so hopefully they

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<v Speaker 1>are conscious decisions around that. There might be a little

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<v Speaker 1>bit of too much comfort that the central banks are

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<v Speaker 1>going to be able to control the volatility, if you will,

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<v Speaker 1>But that UM investment thesis has actually worked for the

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<v Speaker 1>last you know, four to five years. You've had good

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<v Speaker 1>returns across you know, many asset classes during this period,

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<v Speaker 1>even though UM kind of as as you know, the

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<v Speaker 1>professionals in the market, we've a lot of a lot

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<v Speaker 1>of times, you know, gone along this path begrudgingly. So, uh,

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<v Speaker 1>what's next. We know that the we know that the

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<v Speaker 1>money is going to remain in this system, there's still

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<v Speaker 1>going to be a lot of liquidity. But if you're

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<v Speaker 1>if you're trying to put together a portfolio bonds, a

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<v Speaker 1>lot of people been saying shorten duration. A lot of

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<v Speaker 1>people are a lot more in cash than they were

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<v Speaker 1>a lot of fun managers. What what what are the

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<v Speaker 1>marvel thows of the world do? Yeah? You know, I

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<v Speaker 1>I like both of those right now. I think that

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<v Speaker 1>UM kind of this steepening gield curve and discussion as

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<v Speaker 1>to whether or not the next step for monetary policy

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<v Speaker 1>is to get to a more steeper yield curve UM

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<v Speaker 1>plays into that lower duration type of discussion. I think

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<v Speaker 1>UM in the US we've seen UM the CP markets

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<v Speaker 1>and the Lieborar markets really increase their rates with money

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<v Speaker 1>market reforms. So there are alternatives around there which didn't

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<v Speaker 1>exist before. And you know, really from evaluation perspective, if

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<v Speaker 1>you're holding onto your fundamental UM analysis with d cfs,

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<v Speaker 1>and you know, however, you evaluate some of this corporate

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<v Speaker 1>paper that's out there, UM, maybe a greater allocation to

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<v Speaker 1>cash does make sense because valuations are high by historical standards.

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<v Speaker 1>Who's on the other side of the trade when you're

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<v Speaker 1>selling these bonds at such low interest rates because someone

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<v Speaker 1>eventually it's got to be holding the bag. And when

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<v Speaker 1>they ring that bell, I can't imagine that they're gonna

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<v Speaker 1>want to hold onto them. You're gonna see a rush

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<v Speaker 1>to the exits. So you know what's really been a

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<v Speaker 1>challenge is that on the other side of the trade,

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<v Speaker 1>to a larger and larger degree, have been the biggest

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<v Speaker 1>asset holders in the world that never have to sell,

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<v Speaker 1>that never have a margin call, and those are the

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<v Speaker 1>central banks. And if they change, um their philosophy with

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<v Speaker 1>regard to how they want to increase their portfolios, yeah, absolutely,

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<v Speaker 1>it becomes um a bit more challenging. And remember, um,

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<v Speaker 1>not everyone is um uh the bottom fish or not

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<v Speaker 1>everyone is kind of a market time or there are

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<v Speaker 1>a lot of asset owners that have to own based

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<v Speaker 1>on various mandates, you know, whether your insurance companies, whether

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<v Speaker 1>you're just you know, an asset allocation that kind of

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<v Speaker 1>goes in the market. So there is a natural demand

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<v Speaker 1>for this type of product. But when we start talking

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<v Speaker 1>about the Bank of Japan that owns thirty of the

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<v Speaker 1>j g B market owning a larger and larger percentage

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<v Speaker 1>of their equity markets, when you talk about the e

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<v Speaker 1>c B running out of bonds to buy, believe it

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<v Speaker 1>or not running out of bonds to buy. Those are

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<v Speaker 1>thinking about buying equities and thinking about buying other asset classes. Um.

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<v Speaker 1>That becomes um a trade that's very powerful, and it's

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<v Speaker 1>kind of been that type of trade that's driven a

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<v Speaker 1>lot over the last several years. You know, one of

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<v Speaker 1>the things that the one of the possible scenarios for

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<v Speaker 1>the Bank of Japan, and it's like the fit. It's

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<v Speaker 1>kind of binary. Either they can raise the rate of

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<v Speaker 1>they don't. But the Bank of Japan you have to

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<v Speaker 1>make a Rubik's cube and a diagram, right, because they

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<v Speaker 1>could do this in that or none of that. Right.

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<v Speaker 1>They could buy more bonds, they could buy fewer bonds.

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<v Speaker 1>They can put a range on the you know how

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<v Speaker 1>many they're going to buy an outous that number. But

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<v Speaker 1>this idea that they can do an operation twist, right,

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<v Speaker 1>that they can buy fewer bonds and steep in the

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<v Speaker 1>yield curve while they cut the key rate a little

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<v Speaker 1>more navative. You know, us tried that a couple of times.

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<v Speaker 1>Didn't work. Operation twist didn't work here without work in

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<v Speaker 1>Japan and achieve their desired goal. You know, interestingly, it's um,

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<v Speaker 1>it's reversed twists right, because it would be an attempt

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<v Speaker 1>to steep in the longer end of the curve UM.

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<v Speaker 1>It's to be seen whether or not they're able to

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<v Speaker 1>um to get it done. I think the market would

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<v Speaker 1>initially take it seriously because it is something different. It

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<v Speaker 1>certainly is a move away from the paradigm that we've

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<v Speaker 1>gotten comfortable with and and pretty much accepted for the

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<v Speaker 1>last several years. I will say that when you look

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<v Speaker 1>at their economy, it's hard to see them not continuing

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<v Speaker 1>to put money into it. It's just the function of

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<v Speaker 1>where they decide to do it and how they do it.

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<v Speaker 1>Marvin Lowe is Managing director b n Y Melon, where,

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<v Speaker 1>of course broadcasting from the BNY Melon et F Some

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<v Speaker 1>Posium in Dana Point, California. Marvin Central Banks, as you

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<v Speaker 1>just describe buying all these bonds, they end up being

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<v Speaker 1>the lenders. If they're the lenders to all of this,

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<v Speaker 1>they don't have the same incentives that perhaps institutional lenders

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<v Speaker 1>or banks have. How does that change the market, because

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<v Speaker 1>if they're going to hold how are you going to know,

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<v Speaker 1>whether you know any of the ratings make sense or

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<v Speaker 1>any of the cash flow projections makes sense if ultimately

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<v Speaker 1>the buyers says, I don't really care about that. I'm

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<v Speaker 1>just buying the bonds anyway. It's changed everything already, you know,

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<v Speaker 1>the valuation discussion that we talked about. UM. You know,

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<v Speaker 1>there is no other alternative, you know, Tina, That's why

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<v Speaker 1>we can get That's why we can get valuations where

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<v Speaker 1>they are. You know, do they cause asset bubbles elsewhere

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<v Speaker 1>just because there's no place else to go? And UM,

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<v Speaker 1>the liquidity in the market, UM changes because they're not

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<v Speaker 1>UM sellers in it. So you know, everything so one

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<v Speaker 1>way trade. Everything has changed, UM, it will remain changed

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<v Speaker 1>for a while. It's we're talking I believe in the

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<v Speaker 1>range of thirteen and a half trillion in the G

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<v Speaker 1>four Central Bank bound sheets. UM. To unwind that type

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<v Speaker 1>of trade, you know, it's gonna take a while. You know,

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<v Speaker 1>high profile Goldman Sachs in the last couple of weeks

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<v Speaker 1>has made this call for much uh, much stronger dollar

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<v Speaker 1>and yields rising right uh and and more fed tightening

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<v Speaker 1>over the next two or three years. And a lot

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<v Speaker 1>of other people are looking for, uh what do you

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<v Speaker 1>see on that front? Because I don't know. It seems

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<v Speaker 1>like eventually the economists and the Fed will be right

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<v Speaker 1>and yields will rise, But the bond market keeps arguing back, no,

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<v Speaker 1>we're not, No, we don't believe economies that's not that strong,

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<v Speaker 1>and yields have not risen that much even today, right,

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<v Speaker 1>I mean to me, I still don't see on the

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<v Speaker 1>economy at a level that can support and or justify

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<v Speaker 1>significantly higher yields. We can get higher yields, you know,

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<v Speaker 1>like like you know, we're talking about twenty five basis

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<v Speaker 1>points once again this year we're belaboring it to uh

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<v Speaker 1>the nth degree the way we did last year, and

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<v Speaker 1>in the grand scheme of basis points, it's not that

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<v Speaker 1>big of a deal. Having said, we've seen asset classes

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<v Speaker 1>get very, very stressed, and you can see a strong dollar.

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<v Speaker 1>Even if we don't get rates that much higher, we

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<v Speaker 1>still have a certain degree of divergence amongst monetary policy. UM.

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<v Speaker 1>But the one thing that I think we've learned over

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<v Speaker 1>the last several years that the stronger dollar and the

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<v Speaker 1>dollar itself is a very important catalyst to look at

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<v Speaker 1>in the market, UM, and it affects a lot more

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<v Speaker 1>than just what's going on here? Do you mean that

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<v Speaker 1>it's in terms of the sort of macro effact like

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<v Speaker 1>a stronger dollar week again, which the Japanese need and

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<v Speaker 1>would love to see, or do you mean in terms

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<v Speaker 1>of companies Tyffer time UH exporters strong dollar? You know, um,

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<v Speaker 1>the market is very good at um analyzing what we know.

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<v Speaker 1>It's what we don't that really cause the stress in

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<v Speaker 1>the system. So when you get stronger dollar, you do

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<v Speaker 1>see asset classes that get affected that you didn't realize.

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<v Speaker 1>We're as reliant on the dollar in the example in

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<v Speaker 1>five seconds U emerging market emerging market debt um in

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<v Speaker 1>dollar terms, and that certainly saw a lot of stress

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<v Speaker 1>right when we saw the tape potential Marmon Lou thank

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<v Speaker 1>you so much, covering a lot of ground for us

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<v Speaker 1>here to day. He's managing director b N Y Melan,

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<v Speaker 1>and of course we're broadcasting alive here at the b

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<v Speaker 1>N Y Melan. It's et S Symposium in Dana Point, California.

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<v Speaker 1>Katheen Hay's pim Fox. This is Boomberg