Macquarie guru says bond market red flags still matter
Consumers may have come to the same conclusion as Robert Almeida, portfolio manager and global investment strategist at US$650 billion ($868 billion) mutual fund giant MFS Investment Management, who says that inflation is just the bill to pay for the extraordinary stimulus unleashed during the pandemic by central banks and governments.
“It’s as if the politicians don’t just offer everyone a drink in the bar; they left the tab open all night,” he says.
Local consumers are not the only ones who are increasingly concerned about the impact that rising inflation will have on interest rates.
Bonds have fallen into an extraordinary bear market in recent weeks, with yields (which move in the opposite direction to prices) surging across the world as investors anticipate a wave of central bank tightening.
In the United States on Monday evening, another part of the yield curve inverted, with five-year U.S. Treasury yields rising above 30-year yields for the first time since 2006.
The inverted yield curve – which suggests short-term rate hikes before a slowdown or decline in economic growth leads to lower rates – has been seen as a reliable indicator of a recession in the future. come in past cycles and as such is guaranteed to attract market investors. Warning.
So far, the spreads between 20-year and 30-year yields, and between 5-year and 30-year yields, have reversed, while the closely watched spread between 2-year and 10-year yields years has moved closer to about 12 basis points. points.
But it is fascinating to see how little impact these bond market warning signals have had on equity markets, which continue to ignore both yield curve action and signals such as the weakening consumer confidence and rising inflation expectations.
The ASX 200 is up 7% in the past three weeks to be down just 1.6% for the year, while Wall Street’s S&The P 500 is up 9.7% over the same period and less than 4.6% from its record high at the start of the year.
Macquarie Group’s head of global and Asian strategy Viktor Shvets said the muted response to the yield curve inversion may not come as a surprise.
Speaking on the excellent Odd Lots podcast, Shvets says the value of information that can be gleaned from the yield curve has been “massively eroded” by central bank actions.
Whereas in the past, the long end of the yield curve represented private sector (banks and corporates) views on future financial conditions, central bank bond purchases and attempts to control rates – passing, as Shvets vividly describes, from acting as conductors to also playing in the orchestra pit – were game changers.
“What informational value do you have when the market is so distorted? ” he asks. “It conveys less information to the market about what the real economy is doing, rather than the financial economy.”
Still, Shvets doesn’t completely dismiss the signals from the bond market and says, “The creeping reversal is bad news for long-term growth and recovery.”
He fears central banks could raise rates too much in a global economy he says is already showing signs of slowing, leading to a deflationary plunge that triggers massive volatility and sends asset prices skyrocketing.
But the alternative to that is “shallower, milder waves of heart attacks, without falling into a recession or a significant contraction in asset prices.”
Shvets considers the latter outcome to be more likely, but neither of the alternatives seem very amusing.
Notably, Almeida and Shvets expect to see investors gravitate towards quality stocks, which tend to have attributes such as strong balance sheets, cash flow and earnings.
“When uncertainty is high as it is today, investors may want to focus on owning assets where cash flow visibility is clearer and where products are mission critical,” says Almeida.