Latest / Bloomberg Intelligence / Morgan Stanley's Hornbach Favors 'Belly' of Yield Curve (Audio)

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Morgan Stanley's Hornbach Favors 'Belly' of Yield Curve (Audio) · Bloomberg Intelligence

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  Speaker 1: And that's a Bloomberg business flash. You're listening to Taking
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  Speaker 1: A lot of focus on stocks, two big days of declines,
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  Speaker 1: a rebound today, But if you've been watching the bond market,
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  Speaker 1: your eyes should be equally popping, if not more. The
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  Speaker 1: rally in the US government bond market, actually in bond
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  Speaker 1: markets around the world has continued a little bit of
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  Speaker 1: a rebound pullback, I should say, in the yield on
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  Speaker 1: bonds today um to drop in the price, but that
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  Speaker 1: tenure note is still at one point four six it's
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  Speaker 1: it's substantially below one point five zero. The third year
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  Speaker 1: at two point to seven eight point seven trillion dollars
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  Speaker 1: worth of negative bond yields around the world. What does
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  Speaker 1: it mean? And where can a person find value in
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  Speaker 1: bonds these days? We're gonna put all these questions to
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  Speaker 1: Matt Hornback. He's head of Global interest rates strategy at
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  Speaker 1: Morgan Stanley. Matt, welcome to the show. Thank you very
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  Speaker 1: much for having me. Well, one of the reasons we
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  Speaker 1: really wanted to have you on today is, uh I
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  Speaker 1: have some few people that have been on the show
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  Speaker 1: who correctly forecast we'd have a rally at a time
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  Speaker 1: and maybe the tenure was up around you know, just
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  Speaker 1: stuck in its range from like one point one point
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  Speaker 1: seven up to two people say, you know, or even
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  Speaker 1: over two percent, that it was going to rally would
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  Speaker 1: continue in March you said one point seven five on
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  Speaker 1: the ten year note. After you look at the bond landscape,
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  Speaker 1: you called that, well, what do you see now for
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  Speaker 1: the tenure treasury? So we're still forecasting by the end
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  Speaker 1: of the year that the tenure treasury to be around
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  Speaker 1: one point seven. But to us, what is more important
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  Speaker 1: at this point in time is where we see yields
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  Speaker 1: over the course of the next three months. And when
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  Speaker 1: you look at our forecasts to the end of the
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  Speaker 1: third quarter of this year, we're still forecasting yields to
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  Speaker 1: remain around these levels. So our our forecast is one
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  Speaker 1: point four or five into the end of the third
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  Speaker 1: quarter for the tenure for the Tenure Treasury. Yes, that's correct.
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  Speaker 1: Is there a risk that if the as if and
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  Speaker 1: when the dust does settle on the Brexit vote, that
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  Speaker 1: people will reverse this trade or was that just a
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  Speaker 1: catalyst for this steady march down in yields. We maybe
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  Speaker 1: got here faster because of the Brigsit vote, and there's
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  Speaker 1: a potential for actually, if there's another big negative of
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  Speaker 1: some kind, to push that yield even lower. Yeah. Absolutely,
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  Speaker 1: I think. You know, when you look at what had
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  Speaker 1: where the Tenure Treasury was trading before the Brexit vote,
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  Speaker 1: it was actually trading closer to our year end target
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  Speaker 1: at one point seven. But as the tide had turned
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  Speaker 1: on that day of the vote, we we had yields declined.
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  Speaker 1: So I think certainly the decline from one in three
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  Speaker 1: quarter percent was a result of the Brexit vote coming
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  Speaker 1: out in a way that most people did not expect
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  Speaker 1: it to. But um, now you're starting to have a
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  Speaker 1: greater amount of uncertainty way on the minds of investors,
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  Speaker 1: and that has caused you know, what we would refer
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  Speaker 1: to as a flight to quality bid into the into
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  Speaker 1: the treasury market. That bid probably will be sustained for
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  Speaker 1: a period of time, and that is in effect what
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  Speaker 1: we are forecasting in our numbers, eight point seven trillion
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  Speaker 1: dollars with a negative yields on bonds. I think what
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  Speaker 1: there was one day when that jumped by three eight billion,
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  Speaker 1: Uh Matt, it's you know, for people who watched bonds
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  Speaker 1: for a long time, any other time you'd say, oh
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  Speaker 1: my gosh, the world must be ending. Everybody be afraid
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  Speaker 1: some kind of crisis is coming. What does that? What
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  Speaker 1: does the signal from from that, from this big amount
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  Speaker 1: of negative bond yields, and what does it mean for investors?
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  Speaker 1: Sure well, I mean, I think one of the things
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  Speaker 1: that is difficult to observe when you're sitting here in
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  Speaker 1: the United States is is where bond yields are trading
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  Speaker 1: outside of the country. And when you're bringing up a
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  Speaker 1: number like eight point seven trillion of bonds trading at
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  Speaker 1: negative yields, you know, we we can all see that
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  Speaker 1: none of those bonds are are exists in the United States,
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  Speaker 1: so as a result, they have to be trading outside
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  Speaker 1: of the United States at those negative yield levels. Well,
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  Speaker 1: what that means for investors here is that um, what
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  Speaker 1: you might perceive to be a rich government bond is
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  Speaker 1: unlikely to be the perception of investors outside of the US.
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  Speaker 1: And that's exactly what we're seeing is investors outside of
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  Speaker 1: the United States come to the US where they see
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  Speaker 1: yields that are all positive UM and in some cases
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  Speaker 1: UM much more positive than what those investors could hope
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  Speaker 1: to get in their local bond markets. And we're seeing
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  Speaker 1: those investors take money and bring them to treasuries. You
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  Speaker 1: like the the long you know you want to be
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  Speaker 1: long the belly of the curve, five year U S transuries,
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  Speaker 1: five year guilts um UH swaps for Japanese and the
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  Speaker 1: Euro five year five year four is it in our nutshell?
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  Speaker 1: Explain this strategy to our listeners, so you know, ultimately,
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  Speaker 1: when you invest in in the bond market, you can
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  Speaker 1: do so for a variety of reasons. One of them
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  Speaker 1: maybe to enjoy what we call carry, which is an
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  Speaker 1: effect yield adjusted for UH duration and and and in
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  Speaker 1: other cases you might just want to belong an asset
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  Speaker 1: that you would expect to perform well in an environment
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  Speaker 1: of flight to quality. So you're really trying to maximize
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  Speaker 1: your duration exposure in the bond market UM, and our
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  Speaker 1: our strategy is is really trying to to combine those
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  Speaker 1: two where, you know, for investors that are looking for
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  Speaker 1: more of a medium term horizon investment UM and for
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  Speaker 1: investors that are looking for a place to park their
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  Speaker 1: money during this time of uncertainty. You know, we think
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  Speaker 1: that the intermediate sector of the yield curve and the
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  Speaker 1: treasury market as well as in some bond markets outside
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  Speaker 1: of the US, we think offers that right balance for investors.
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  Speaker 1: So the five year maturity US Treasury note UM is
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  Speaker 1: currently where we favor UM where we're telling investors to
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  Speaker 1: put their money in the treasury market. Of course, you
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  Speaker 1: know that that can change, but at the point in time, yeah,
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  Speaker 1: nad Hornback thinks so much. He's head of Global Interest
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  Speaker 1: rate Strategy at Morgan Stanley. I'm Kathleen Hayes taking stock
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