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Citi Private Bank Head of Global Fixed Income Strategy Michael Brandes says the bond market is an indicator of the economy and that the economy isn’...
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For months we've been getting conflicting data about is the economy improving or is it not.
But a look at interest rates on treasuries.
Show that they fell to a new low this past week is this the clearest indication that the economy -- is not recovery joining me now.
It's a global head of fixed income strategy for Citi private bank Michael Brand this and Michael.
I am everybody around here teases me because everybody's focused on the stock market except for me -- focus on the bond market I think the bond market.
Is a much clearer indication of where the economy going people are betting.
That interest rates are going to stay down if their.
Putting their money that these low interest rates for ten years they're there's they're they're betting they're gonna stay down.
For some -- or maybe even go lower correct.
That's right and and I think you know one of the key things we've been telling our clients.
Over the last six months we've seen the equity rally.
And we -- this kind of stubbornly low interest rates we say you know what is the market telling you.
It's certainly the the stock market's discounting earnings expectations the bond market looks -- growth and inflation prospects.
And what is the bond market Tony's been telling you that growth prospects are probably going to be some part inflation is not the real -- he should have right now.
Yeah and I think for the for the person watching at home.
You know if if if you thought interest rates were going up or that inflation was going to be coming along pretty soon.
You would not lock up your money at these low interest rates but that's what.
Wall Street is doing to professional investors are walking in.
-- these low interest rates so are they are they calling a bottom or -- they do you think this thing is even going to show that the interest rates are gonna go further what we have a new record low this week.
That's right and and I think that this is both a reflection of both prospects for growth.
-- attitudes about inflation inflationary pressures because remember.
Interest rates are really dictated long end of the curve by inflationary pressures.
At the short end by what the Central Bank is doing so a lot of this in terms of the term structure the variety of interest rate to get along the yield curve.
That kind of keep sit lower but at the same time.
We have this flight quality issue.
So much of what's happening right now is you know which it's one thing to say the ten year yields -- one point 6% or thereabouts.
These days and that's not a very compelling return.
But this isn't about total returns -- is about.
As we like to save the return of your capital rather -- the return on your capital and that's where investors are buying.
Deal will Rogers stain and it and so this had a lot more to do you're saying with people are just getting out of European bonds.
They're getting out of European stock whatever they're getting out of this is the flight to safety so.
Is it is it really then good indicator this time or my being fooled by the European impact them.
Well I mean if you take out the you know the impact of the of the safe haven bid -- we call -- demand for treasuries.
Because regardless when you look the treasury market remember.
That the so that the breath and depth of the treasury market is unparalleled.
We're double A rated.
The security and you know by one of the rating agencies will likely go to double A with with the other agency over the next couple years.
But what the US represents -- US treasuries represented something beyond.
What the yield is so.
You know it's it's not that they did there's no confidence that yields aren't gonna go up in growth won't be sustained at some point we don't think the US recession is gonna proceed.
We don't think a double dip recession is likely in the US but what is happening in Europe.
And the demand for duration I belong into the curve is really what's driving.
In the inhibiting yields at these -- And you talk about the yield curve the yield curve is from from three months to thirty years.
And so you'd it normally that in a normal market he goes higher if you -- if your money for a longer period of time to get a higher interest rate that's right but that is not.
What we're necessarily seeing right now.
But the ten years very important because the ten year.
Treasury is what the mortgage people used to price mortgages -- -- it's not the exact same number but there it's based on that ten year treasury and so for people that are thinking should I refinance should I go get a mortgage -- are awfully low mortgage rates and here.
Doesn't seem to be everybody's -- -- about the worried about them going back up anytime soon.
Well I think again what's gonna drive and a climate of higher interest rate is going to be better growth prospects.
And higher inflation.
And right now when you looking at levels of fiscal austerity.
You looking at the fiscal cliff here in the United States the end of the year.
You're looking at sluggish growth is sluggish growth is not really a recipe for higher interest rates you're right I -- affordability of homes right now because of financing is very compelling.
That may or may not drive the housing market near term but certainly what we're looking at is -- climate.
Of low interest rates for a long period of time.
I gave a speech about a year ago who have been to a group of business people.
And I said you know with the Fed is throwing up of QE1 QE2 trillions of dollars of money.
All inflation it's gotta be rhetoric of the quarter right I'm a little embarrassed to say.
There's no inflation yet why hasn't been with all the money thrown at this market why has an inflation cop.
-- that you it all comes back to growth you could.
Community are we pushing on a string remember -- to say that with Japan years ago.
What were not quite yet they are yet you know but we do believe that you know.
There's just so much of central banks can do in the Central Bank to certainly been bearing a disproportionate.
Amount of the burden.
I'll try to sustain -- recovery because there they're trying to -- they don't want exactly monetize fiscal areas of fiscal Evers.
But certainly there's been a lot of political dysfunction and and not a lot of progress on that front.
So what we're looking at is an environment with central banks to as much as they can but they have to handed off to the real economy.
And that hasn't quite -- into the growth and we end to the employment rate come down.
You talked about fiscal cliff we've done shows are here -- -- -- whatever you wanna call 494 billion dollars.
Plots of tax increases coming in January 1 if congress doesn't get anything done the the the bond traders.
Are watching Washington that -- I mean there's some politics involved here they're thinking they're not gonna get anything done.
Well I I think that you do the EP if you were to look at the consensus and where where the street is -- let things happen.
We would not expect at least in our view we don't expect to be.
Tax hikes to really move flow we would expect them to defer that but things like the payroll tax cut with the unemployment benefits have been expire.
There will be some drag on the economy and when you're only grown at about 2%.
You talk about may be.
You know it would be 4% -- next year and -- calendar year basis or 5% dragged on fiscal year basis.
Odd but if you only grown 2% and maybe you dilute that down -- one -- one half percent fiscal drag.
Your barely keeping your head above water and and this is where we have a lot of concern and that is what bond market is telling you all so.
-- bond market to someone up.
Is saying we're not looking for any rebound in the economy any time soon that's right.
That's right Lou -- where I think that if -- were to take away the flight to quality bid but what's happened in new in the only with Europe if you -- -- take federally completely.
You'd still see yields in the two to two and a half percent area because really it's reflection of growth and inflation and we expect inflation pressures to be well anchored.
Or or to subside somewhat as we go through the year and we expected that growth is going to remain sub par and and pending what -- the fiscal -- All right I love the bond market -- -- I have a big fan of ability area that you work in every day Michael -- thank you very much thank you for having that.
