5% is New 4% in Era of Higher Yields, Says Guneet Dhingra

[00:00:00]Yeah, I think you're right to point out foreigners have been a big source of demand for the bond market, but I would say that's getting more and more of a statement of the past. President of the present.

[00:00:09]What's happening now is if you look at the countries, for example, Brazil, India and China. These are three big buyers.

[00:00:16]If you look at official data in the last 8 to 12 months post Liberation Day, net sellers. Wow.

[00:00:22]If you look at, uh, even Europe, big countries in Europe who were net buyers before liberation, they have slowed down their pace of purchases.

[00:00:30]What's happening now is very interesting.

[00:00:32]The net buyers overseas are mostly from financial centres.

[00:00:37]They are not the traditional yield watching buyers who would just buy because these buyers are more sensitive.

[00:00:46]They care about relative value, they care about the macro environment.

[00:00:50]And the fact that financial centres now dominate these overseas flows tells me the bond market remains vulnerable. So you say here, which is kind of disquieting here. 5%.

[00:01:02]We're talking about the 30 year yield. 5% is the new 4%.

[00:01:06]That's exactly right. And the question the question that remains is, is 6% going to turn out to be the 5%, because if you go back to 2023, what happened was we were struggling to break 4% of the total year bond yield. It took 3 or 4 tries.

[00:01:21]Once we broke through it, there was no stopping it.

[00:01:24]We landed directly at 5%. And what's fascinating is what it took to bring the bond yield back down. Was this coupon supply change from the US Treasury back in November 2023, so 4% to 5%.

[00:01:41]The thing that changed the trajectory was coupon cuts.

[00:01:44]It's a very similar backdrop today. You have no anchor above 5%.

[00:01:49]Could we go from 5% to a much higher number?

[00:01:51]Yes. And the question is is the US Treasury put got to come back. Are they going to make changes to coupon supply? They can.

[00:02:00]The good news is they can. But if they do then we might have some consolidation. Um, I've got a new chairman of the Federal Reserve and the guy, you know, he's got a tough place right now.

[00:02:13]He's in a tough spot. He's got a president that would like lower rates. Yet the economics of the data is pushing rates higher. I mean, that's a tough spot to be in, I would think, for this new guy. Yeah.

[00:02:24]So what's interesting about that is I've always talked about there's a gap between what the market thinks the fed will do and what the fed should do.

[00:02:32]The will do is going to be placed in the front end.

[00:02:35]The should do well priced in the long end.

[00:02:37]Right. So what happens is if you look at Japan for example, Japan's on the path to hiking rates.

[00:02:43]And yet their long bond yields keep going up because the market's saying yes you are hiking rates but the hikes are not enough.

[00:02:51]Given the inflation given the economy. So it's very possible right.

[00:02:54]Even if the new fed chair ends up delivering a hike or two, the bottom market is still push the long bond higher in yield because that may not be enough. Can you tinker with this BNP Paribas just definitive definitively with a blistering no or 5% is the new 4%.

[00:03:10]Liz Goldenberg taught me look at price. So I look at price from the end of February and the 30 year bond, longer duration, I got a 7% 8% price decline.

[00:03:21]Does that hurt anybody? Are we at a point where that's just ignored? Yeah.

[00:03:25]So I think that that's exactly why, uh, it's now in the hands of a more price sensitive investor. That 8% price decline you talked about term is going to hurt people. They are thinking about whether it's a good investment now or not. Well, it also makes more sense in a world where relative value dominate. And one concern I have here is people don't look at the bond yield, and people are going to look at equities and say, okay, well they're more value. Like we go back to 2023.

[00:03:53]What happened was higher bond yields became a hedge for the equity rally.

[00:03:58]That's another dynamic which is very crucial now where if people have had massive gains in equities, higher bond yields are going to prove to a very effective hedge. I'm reading some research from your old colleagues at Morgan Stanley and they're saying, yeah, I know the energy stuff is out there and that's spooking people. But the underlying economic fundamentals are still strong. I mean, does that suggest that what we're seeing in the bond market is a little bit more technical, kind of driven by the higher energy prices, the uncertainty caused by the Iran war?

[00:04:31]So there is part of that, I think end of the day, a strong economy means the fed not lowering rates and possibly hiking rates, and bond yields are supposed to keep going up. So what are we doing out here in terms of duration here? How do you think about that?

[00:04:48]Yeah. So we are suggesting that investors continue to play for higher yields. Uh, you can also look at this in the form of uh, what we call yield curve steepness.

[00:04:57]So flight then yields will have a little bit more of a cushion because they might not go up as high. But the long bond no anchor a price sensitive demand base uh and possibly a hedge to equities.

[00:05:10]All the reason suggest that we're going well above 5%.

[00:05:13]One final question. I'm going to be real short here.

[00:05:15]We're running out of time. What's the correlation right now of our global bond market that Lloyd. Convexity in Japanese bonds is frightening. Are they linked together or are they each idiosyncratic. Yeah.

[00:05:28]Great question. So I would say if you look at the bond market in Japan, look at the bottom like in the UK, we could have actually been a lot higher already. The US bond market is resisting the pressure right from the Japanese upsurge and from the UK upsurge.

[00:05:44]But at some point that anchor comes loose.

[00:05:46]We're going higher.