This is Taking Stock with Kathleen Hayes and Pim Fox on Bloomberg Radio. We are broadcasting live from e t F Exchange b N Y Melon's et F Symposium in Downa Point, California. I'm Pim Fox, my co host Kathleen Hayes joining us now as Marvin Lowe. He is managing director at the b N Y Melon and he's here to tell us more about bonds. Marvin, always a pleasure, Thanks for being with us. Thank you for having me again.
What the what is new about bonds? Because boy, I mean, it seems like we've been beating this forever that you know, rates are low, We got that, and now people have to go and find something alternative, like a high yield bond, or maybe even go outside the United States and look to emerging markets. What are you hearing? Yeah, I mean in the grand scheme of things, there isn't a lot new. Yields are still low, not as low as they were
a couple of months ago. I think what's new is that? Um, the commentary around what central banks may do as the next step has certainly shifted. We came out of the summer with the volatili and Brexit really expecting at least the investors began to expect that central banks we're going to move towards the next level of accommodation. We've bit up assets all around the world based on that. We push yields kind of back down to levels we hadn't seen in many, many years. And lo and behold, they
didn't do what they said. And here we are right now with a lot of um, with a lot of central bank meetings that are welcome us back from summer vacation. Yes, and uh, it's a couple of people now have commented today that even if the Fed were to move the key rate tomorrow, even though it's more more more of a bed on December, right, that if it root moves this year, it's not that big of a deal potentially.
Do you agree with that for the bomb market? You know what, in the grand scheme of where rates are basis points, is not a significant um move in terms of market psyche and the impact that US rates have on many other asset classes. I think every rate hike has been significant, and I think we've seen stresses to various asset classes. Whenever they even talk about rate increases, you have been looking at bonds on a relative basis correct. In other words, you can't just look at them in isolation.
You have to say, in relation to what let's say the US tenure one point six eight percent, are investors taking on more risk than they really understand when they look to get yield that is greater than let's say one point six eight percent. Well, I hope they understand. UM. You know, certainly we should take our investment processes as the most important thing, or one of certainly one of the most important things we wind up doing. UM. There aren't a lot of choices out there, so hopefully they
are conscious decisions around that. There might be a little bit of too much comfort that the central banks are going to be able to control the volatility, if you will, But that UM investment thesis has actually worked for the last you know, four to five years. You've had good returns across you know, many asset classes during this period, even though UM kind of as as you know, the professionals in the market, we've a lot of a lot of times, you know, gone along this path begrudgingly. So, uh,
what's next. We know that the we know that the money is going to remain in this system, there's still going to be a lot of liquidity. But if you're if you're trying to put together a portfolio bonds, a lot of people been saying shorten duration. A lot of people are a lot more in cash than they were a lot of fun managers. What what what are the marvel thows of the world do? Yeah? You know, I
I like both of those right now. I think that UM kind of this steepening gield curve and discussion as to whether or not the next step for monetary policy is to get to a more steeper yield curve UM plays into that lower duration type of discussion. I think UM in the US we've seen UM the CP markets and the Lieborar markets really increase their rates with money market reforms. So there are alternatives around there which didn't
exist before. And you know, really from evaluation perspective, if you're holding onto your fundamental UM analysis with d cfs, and you know, however, you evaluate some of this corporate paper that's out there, UM, maybe a greater allocation to cash does make sense because valuations are high by historical standards. Who's on the other side of the trade when you're selling these bonds at such low interest rates because someone
eventually it's got to be holding the bag. And when they ring that bell, I can't imagine that they're gonna want to hold onto them. You're gonna see a rush to the exits. So you know what's really been a challenge is that on the other side of the trade, to a larger and larger degree, have been the biggest asset holders in the world that never have to sell, that never have a margin call, and those are the
central banks. And if they change, um their philosophy with regard to how they want to increase their portfolios, yeah, absolutely, it becomes um a bit more challenging. And remember, um, not everyone is um uh the bottom fish or not everyone is kind of a market time or there are a lot of asset owners that have to own based on various mandates, you know, whether your insurance companies, whether you're just you know, an asset allocation that kind of
goes in the market. So there is a natural demand for this type of product. But when we start talking about the Bank of Japan that owns thirty of the j g B market owning a larger and larger percentage of their equity markets, when you talk about the e c B running out of bonds to buy, believe it or not running out of bonds to buy. Those are
thinking about buying equities and thinking about buying other asset classes. Um. That becomes um a trade that's very powerful, and it's kind of been that type of trade that's driven a lot over the last several years. You know, one of the things that the one of the possible scenarios for the Bank of Japan, and it's like the fit. It's kind of binary. Either they can raise the rate of they don't. But the Bank of Japan you have to make a Rubik's cube and a diagram, right, because they
could do this in that or none of that. Right. They could buy more bonds, they could buy fewer bonds. They can put a range on the you know how many they're going to buy an outous that number. But this idea that they can do an operation twist, right, that they can buy fewer bonds and steep in the yield curve while they cut the key rate a little more navative. You know, us tried that a couple of times. Didn't work. Operation twist didn't work here without work in
Japan and achieve their desired goal. You know, interestingly, it's um, it's reversed twists right, because it would be an attempt to steep in the longer end of the curve UM. It's to be seen whether or not they're able to um to get it done. I think the market would initially take it seriously because it is something different. It certainly is a move away from the paradigm that we've gotten comfortable with and and pretty much accepted for the
last several years. I will say that when you look at their economy, it's hard to see them not continuing to put money into it. It's just the function of where they decide to do it and how they do it. Marvin Lowe is Managing director b n Y Melon, where, of course broadcasting from the BNY Melon et F Some Posium in Dana Point, California. Marvin Central Banks, as you just describe buying all these bonds, they end up being
the lenders. If they're the lenders to all of this, they don't have the same incentives that perhaps institutional lenders or banks have. How does that change the market, because if they're going to hold how are you going to know, whether you know any of the ratings make sense or any of the cash flow projections makes sense if ultimately the buyers says, I don't really care about that. I'm just buying the bonds anyway. It's changed everything already, you know,
the valuation discussion that we talked about. UM. You know, there is no other alternative, you know, Tina, That's why we can get That's why we can get valuations where they are. You know, do they cause asset bubbles elsewhere just because there's no place else to go? And UM, the liquidity in the market, UM changes because they're not UM sellers in it. So you know, everything so one way trade. Everything has changed, UM, it will remain changed
for a while. It's we're talking I believe in the range of thirteen and a half trillion in the G four Central Bank bound sheets. UM. To unwind that type of trade, you know, it's gonna take a while. You know, high profile Goldman Sachs in the last couple of weeks has made this call for much uh, much stronger dollar and yields rising right uh and and more fed tightening over the next two or three years. And a lot of other people are looking for, uh what do you
see on that front? Because I don't know. It seems like eventually the economists and the Fed will be right and yields will rise, But the bond market keeps arguing back, no, we're not, No, we don't believe economies that's not that strong, and yields have not risen that much even today, right, I mean to me, I still don't see on the economy at a level that can support and or justify
significantly higher yields. We can get higher yields, you know, like like you know, we're talking about twenty five basis points once again this year we're belaboring it to uh the nth degree the way we did last year, and in the grand scheme of basis points, it's not that big of a deal. Having said, we've seen asset classes get very, very stressed, and you can see a strong dollar. Even if we don't get rates that much higher, we
still have a certain degree of divergence amongst monetary policy. UM. But the one thing that I think we've learned over the last several years that the stronger dollar and the dollar itself is a very important catalyst to look at in the market, UM, and it affects a lot more than just what's going on here? Do you mean that it's in terms of the sort of macro effact like a stronger dollar week again, which the Japanese need and would love to see, or do you mean in terms
of companies Tyffer time UH exporters strong dollar? You know, um, the market is very good at um analyzing what we know. It's what we don't that really cause the stress in the system. So when you get stronger dollar, you do see asset classes that get affected that you didn't realize.
We're as reliant on the dollar in the example in five seconds U emerging market emerging market debt um in dollar terms, and that certainly saw a lot of stress right when we saw the tape potential Marmon Lou thank you so much, covering a lot of ground for us here to day. He's managing director b N Y Melan, and of course we're broadcasting alive here at the b N Y Melan. It's et S Symposium in Dana Point, California. Katheen Hay's pim Fox. This is Boomberg