We want to take a look at the bond market now. After the Bank of England cut its key rate, there was a big rally in UK guilts those are tenure US Treasury bonds in the United Kingdom. In fact, there was a global bond market rally. We want to bring back to our show now Marvin Low. He's senior global market strategist at d N Y Melon. So Marvin, isn't so funny. Earlier in the week it was all the Japanese bond market route was you know, maybe it was
the end of the global bond market rally. Huh, looks like today maybe it's not over yet. Every day brings a different surprise, doesn't it. It sure does. What do you think? Um, you know, we did get, um, the amount of stimulus that we had expected. What the Bank Japan didn't do earlier this week was delivered. What the market had thought. In this case, there was you know, really pretty much odds that, um, the Bank of England
was going to cut their interest rates. They did, um, but they also reintroduced bond buying, which included corporate bonds for the first time for the b o E. So it did kind of almost over deliver and you know, like you said, we had a pretty nice rally in UM in guilts, but that did carry over into mostly all the sovereign bond markets, Japan being an exception to that.
UM and for the US, you know, we continue to push yields kind of the middle point of this range, but you know, definitely lower again, Marvin, should we read anything beneath the surface? Is the global economy really that bad that we've got the Bank of England lowering rates twenty five basis points? Is it really that terrible that this is necessary? Well, you know what, um so Brexit definitely changes all the rule if you will, because we
really don't know how it's going to evolve. You can make the argument that the Bank of England was a little bit aggressive in making a move right now, but Marko was pretty pretty pointed in his belief that there was going to be a slow down in UM in the UK economy, and he acted based based on that, and of the prevailing thought was that there's going to
be a spillover effect into other eCos. To me, so I think we're gonna continue to see this doubest type of commentary come out of at least three of the four bigger central banks, you know, the FED being the exception, which is still saying that they're in a position to raise rates this year. So and this seems to be
one of the tough things for the FED. Actually, if you look at w I r P, those are world interest rate projections, very important page on your Bloomberg where you can check out the odds of the Fed's next rate hike going meeting by meeting, and it's a good bank of Japan, all the big develop nation central banks. Now there's no the odds of a of a rate hike don't move above in the FED funds futures market view until the end of next year. That was already
at September. Now, granted they may be under pricing when the Fed's gonna move, but that's idea seems to be that, you know, it's getting harder and harder for the FED to high grades because the rest of the world is going in the opposite direction. They don't want to be the odd central bank out. I think I think you got a spot on, and I will UM, I will promote w I r P. Also, I use that I use that page pretty much every day. UM. The market is definitely looking at the Fed's words in a very
skeptical eye. Um, the you know, whether it's the GDP number that we had, whether it's the you know, bouncy employment number. I guess we'll see whether or not UM last month's employment report was more indicative of where UM jobs were in the US or the one before that, which showed a very weak job market. But um, now the market is expecting to ECP to do something. The
market is expecting more from the Bank of Japan. The market is expecting and and and pretty much the Bank of England said that they would be ready to act, to act if they needed to. It makes it really hard for the FED in that type of environment. Does it just make it easier and less expensive for governments to borrow and issue lots of debt, whether it's the U S Treasury or whether it's the UK Treasury. Yeah,
barn costs there are definitely low. UM. So from a mathematical perspective, Um, you know, when they issue debt, it is going to cost less. When they're when they refinance older bonds with higher coupons, it's gonna cause less. But there is so much debt that's being issued and Um. It doesn't take much of a backup and yields to really start to worry people. Um. The next part of the accommodation uh slash stimulus. Stimulus discussion has started to
um uh go down the route of helicopter money. And you know, whether or not that would really make investors uncomfortable U is something to be seen. But you know, Karney today said that he was not a fan of
helicopter money. Uh. Carney said today that he UM and this is the Bank of England governor um said that he was not a fan of negative eiel So uh, we're not expecting that to come out of the Bank of England, but that is kind of the next stage when the tools become far scarcer and the episicacy, the efficacy of what they're doing is questioned. Well, and he was quite adamant, wasn't he. He's uh definitely in league with said chair Janet Yellen that negative interest rates or
negative bond yields anyway, certainly not not something he's heading toward. Uh. And of course, UH, it's possible too that he does not face the same kind of situation, for example, the Bank of Japan does, right, I mean yes, the UK economy is going to take a big hit from Brexit. And Carl Weinberg from High Frequency Economics and the same thing earlier on the show today that you just said there's no precedent for Brexit. Nobody, no one can say in two years where the US the UK economy is
going to be. But it went into all of this with remember, up until the Brexit worries, maybe the UK was gonna see a rate hike. So maybe that's another reason he's not going to consider it. He doesn't have to. Well, you know, I'll say that I was encouraged that he was adamant about not going into the negative yield regime or or a really um dead seat against it. And I was encouraged that um he really dismissed the concept
of helicopter money. So it certainly makes the argument that that is one of the reasons the Fed wants the high rates if they can, because would give them a
few more options. And remember it's not like they have a whole lot, but being able to start a bond buying program again, being able to actually cut rates and not have them in negative territorial territory already is an advantage that at least the b o E and the FED has UM so they can um take that hard line and hopefully, uh give the market a little bit
of comfort that we're not going down there. But uh, well, once again get into an area where there's not a lot of room if in fact, these economies turn or there is a big financial shock, and and and that is this ongoing concern that we've had for you know, quite some time, because um, we're not seeing the growth that one would expect this late in um an accommodation cycle, and they're just are not that many traditional tools that are left in their toolbox. Well, Marvin, you just said it.
If all of the action that they have taken after the financial debacle of two thousand and eight, if the action for lower interest rates has produced anemic growth and continues to produce anemic growth, or at least you have it concurrently, why don't they stop doing that? I mean,
isn't that the definition of the crazy thing? Right? I mean, you know, if you keep getting the same results, stop, you know, absolutely great question, and we would be second guessing as to whether or not things would be far worse. So that certainly would be their argument. Um, But that's a that's a pretty thin I mean, I'm not saying that's your argument. I'm just saying, but that's a that's a pretty you know, thin, uh, basis on on which
to you know, basis uh, you know, global monetary policy. Yeah, and um, and you know, Governor Carney was quite adamant in his um in answering one of his statements where um, I believe someone asked about either negative interest rates and or what savers should do, and he was of the approach that, you know, we think that X number of people are going to lose their job and we can't stand by. So while it is kind of a thin argument, it's an argument that I believe a lot of these
central bankers hold true to heart. Um. We've kind of heard that come out of dragging before. Uh. And we've heard and read about, um about how the Fed kind of views it's extraordinary policy as okay, But but Marvin, let's let's just suppose that some of your clients actually received a decent yield on their bonds. What would they do with that money? Would they not go out and spend it in the economy? Um? You know, absolutely, it would be a better environment for savers and UM again.
You and I I think are are coming from the same approach where we think that this um really artificially low rate environment is not doing what it's supposed to
do from from from the economic perspective. At the same time, we've got central bankers that do not seem to be comfortable allowing volatility to come to the market for any extended period of time, and we see them time and time again, Uh go in and try to quash that volatility whenever it spikes, And unfortunately those periods of volatility seem to be more frequent, um slightly, you know, more acute, and the responses um from the central banks come quicker.
And it's really this vicious cycle that we find ourselves in. Well, you know, I think I could take the other side of this too. So let's imagine a world where central banks start raising their key rates. Let's say the banking can raise the key rates. People would sell those or buy those guilts so fast, push up that price, push the yield down even further because they'd say, oh my gosh, he's gonna make what could be a mild recession into a deep recession. I think the presumption is here that
central banks alone control what the bond market does. There's a lot of investors out there making decisions now. True, if they keep buying bonds, that's gonna keep dry being down yields and pushing you know, the yields lower and you know, bringing down the yields on US treasuries. But I think that's the one of the problems for for
central banks right now. They only really control the short end. Yeah. Well, well a few things UM kind of that that are you know, very interesting observations from what you just said. Number one is that we do have a flat yield curve, so and that curve continues to flatten, and today we did see a flattening as well as a decline in um an overall yields. So the long end UH declined even more than the UH than the short ends. So that certainly is not a resounding um affirmation of you know,
future growth in the economy. Um. The other aspect of it is that, you know, if they do wind up buying as much of the markets as they do, as we have in Japan, those markets start start to function very very um uh. They start to misbehave in a way that's very difficult to either analyze and or for the central banks to control. And we saw yields into hand increase from a percentage perspective after UM, the I guess disappointing b O j um decision as well as
the disappointment from the physical stimulus perspective. Um, it's performed very poorly from a percentage perspective. Granted, you know, you went from negative negatives, so financing costs for the Japanese government is still pretty low, but the roads investor confidence in kind of this low rate environment, you can very easily wind yoursel wind up in a situation where it
becomes harder for these governments to finance themselves. And that's a big concern too, because the amount of debt out there um is quite large that the central banks own. Even though we keep talking about a scarcity of government bonds, well that's if that's scared. If that's scarcity of government bonds continues, maybe the central banks can just open up their books and start selling some of them. Yeah, yeah,
you know. UM, I had hoped that as part of the normalization process that said would start to reduce its balance sheets. Um. You know, And again the perspective is that the central banks are starting or continue to expand their balance sheets, so we're not even getting at that discussion, but they certainly could. Um. It would help normalize the market.
It would possibly um get the curve to be more positively shaped, which you know from a from from an investor perspective, might um build a little bit of comfort into the future prospects of the economy. But it's a very big house of cards. You talk about the housing market, you talk about UM, you talked about a lot of these other sound curves that are flying. Kind of the implications for those moves do become magnified. Thank you very
much for spending time with us. Marvin Lowe is senior Global Markets strategist for b n Y MELON, giving us his perspective on the Bank of England's rate decision today and the policy of central banks around the world.