Pessmisic thoughts about the economy
Interview: Lehman Brothers---Malvey, Jack---Fixed Income Strategist
>> quick check on u.s. treasuries now, how we fared today. the 10 and five-year notes both lower. the yields inching higher and if we look at the shorter end of the yield curve, the three and two also down, not quite as much, though. but definitely down. today, currency trading, a lot of red arrows. the dollar buying a little bit less yen. the yen rising, the euro and the pound both down verses the dollar. so, mixed picture there. in the latest trades, but not big moves as you see. well, global bond investing, our next guest says, terrorist activities like the madrid bombings are a suppressant for the global bond markets . jack malvey, chief global fixed income strategist at lehman brorse joins us now from the firm in new york. jack, thank you very much for joining us. of course, we just ran through the 10-year yield. how do you embrace treasury yields when they’re this low, without thinking really pessmisic thoughts about the economy that’s apt to crash?
>> well, i wouldn’t say crash, but we are a little bit pessimistic about where yields will be strategically over the course of a one or two-year rising. we believe the fed, in many of the speaker there is who, over the course of the last several months, have been warning at some juncture interest rates will probably go a bit higher. but over the very short-term here, as you mentioned at the top of the show, we have some short-term suspect press sands on yields, like heightened geopolitical risk awareness.
>> what’s interesting―i put a chart on the bloomberg a 10-year graph of the yield on the 10-year treasury and one thing jumps to mind and that is the yield started moving higher. well, really almost a year ago. it was actually june of 2003. why did the bond markets wrongly move higher so early?
>> well, at the end of june last year, the feds actually eased and, as you recall, there was a great disappointment that they only got 25 basis points instead of some wide lid held supposition that it would be 50 basis points. two t feds and others began to indicate correctly that u.s. economic growth over the third quarter of 2003 likely would be stronger. so, there was, as you recall in july of 2003, a tremendous backup in the u.s. yield curve and that really was a function of adjusting to the notion that the feds had concluded its easing cycle, which it had. all those created higher yields.
>> you told our producers that there is really three choices in the near term for investors. capitulation, go-long or i assume you’re buying buy long-term or long duration bonds.
>> longer duration, yes.
>> or stay short. you say right now you should probably endorse option one, capitulation. please explain.
>> well, what we said here is that over the very short-term here, the next couple of weeks t likely shood that we’re still until a bullish channel for u.s. interest rates. we still have the overhang of likely intervention over in asia. up untille the beginning of the new fiscal year in japan on april 1 and we have the psychology over here that, gee, where ises the u.s. labor market recovery? its isn’t visible. and we had reenforcing this week with the knowledge that we’ll keep interest rates at the front end where they are for the foreseeable future. all those for the near term here spell a ress pee of continued slightly lower yields. but we also said at the same time for the investors on a longer horizon and there are a few out there still, over the six to 12-month horizon, we would be cautious and would not chase this bond yields curve tale at this juncture.
>> does terrorism play any role in your decision not to chase yields?
>> you know, actually, on the first it’s a little bit more in the very, very short-term a reason to be slightly more bull irbling on rates. over the medium term, a couple of things. first, we cannot predict geopolitical risks nor can anyone else over the medium term and hopefully there are no events. it is really not a factor in our calculus. we’re assuming that we do not have a significant event that induses a massive global capital market flight to quality.
>> some say the bank of japan’s sales of its own currency selling yen is creating another bubble of sorts in that they typically take the proceeds and buy u.s. treasuries, driving the yields down to record lows and thereby creating an artificial rally in that market . what do you make of that?
>> there is some substance to that. their intervention has been enormous. last year, $20 trillion yen t. first two months of this year, 10.5 trillion yen and more in the way in march. by tenls of the first quarter, they may have intervened in an order of 60% to 70%.
>> is that creating a bubble, though?
>> i wouldn’t say bubble, but it is creating incremental wild card, almost exogenous demand for u.s. fixed income securities outside traditional source of demand. no question it has contributed to keeping yields in the u.s. lower than than they otherwise might be.
>> jeff, we only have 30 seconds left. this first quarter is almost closed, but you are expecting this perhaps could be the best quarter of the year for bond investors?
>> well, you know, i hate to be bearish, but i will be a little bit here. this is a year where we eventually do worry about growth and deficits and the countdown to the fed tightening. even if it is not this year, by the end of the next year, we will be getting closes to that and that will play a role.
>> already. jack malvey, thank you very much. we’re back right after this.
