Ranjit Khanna’s Post

Transcript

About those Todd Schubert, Managing Director and senior fixed income strategist at Bank of Singapore. Todd, I don't know if you had a chance to hear what Garfield had to say there, but our traders sort of itching to get these cuts started around the world. Yeah, I I think definitely they are. If you look back in January, in January the market was expecting seven rate cuts and the Fed to make the first one in March. Now I think as some of the previous people have said, we're now down to three rate cuts and the first one it's almost. 5050 in June and possibly even July. So I think we've been higher for longer for a long time and people are looking forward to the pivot and when we can start to move to rate reductions. So then, Todd, this is Jennifer and Johannesburg. What does that mean then for yields right now? What's your expectation at least in the short term? I think in the short term, Jennifer, yields will probably stay where they are and I mean the the 10 year will probably trade in a range between 4:00 and 4:00 and a quarter. But we think as we start to approach get closer to the June, July time frame, traders will start to price in the cuts. I think we probably end the year with a 10 year at around 3 1/2 percent. You're a little skeptical the Fed can make the soft landing happen. Yeah, I think if you look historically, since the end of World War 2, there have been thirteen instances where the Fed has raised rates at least 300 basis points, and only four times were they able to execute a soft landing. And the last one actually was in 1996. So it's not impossible, but it's pretty difficult to execute the soft landing. But are are we on that track though, Todd? Because we did hear from Goldman Sachs CEO David Solomon saying something similar then. Where do you think we're at right now in terms of achieving that soft landing? I think that the soft lining is, is always a a potential. We think that there's probably a 30 to 35% chance of executing a soft landing, which isn't bad. And if you look at the Atlanta GDP now forecast, they're forecasting 2.9% GDP growth for the first quarter, which is pretty robust. So as I mentioned, the soft landings are pretty hard to execute. There's always the what makes things different now, but I think what does make things different now is consumer savings if we do. Do still have pretty robust GDP growth, so there is a nontrivial possibility, Jennifer, of executing that elusive soft landing. What are your thoughts on local currency bonds elsewhere in the world? We've had several people come on recently and say there's so many pockets of opportunity. I think that there are pockets of opportunity. I think that's because typically when you have the US interest rates going down, it makes the carry from US interest rates much less. Should expect their currencies to rally into that. And with currency rate rallying, it would imply that local currency bonds should perform fairly well in 2024. We're then, Todd, I mean where exactly are you looking to in terms of a portfolio allocation? We actually still think that the majority of ones portfolio should be in to develop market credit and by that I mean US and European. And the reason for that is if you're looking right now you're starting at a a yield on the 10 year or 4. 30, if you go down to 3 1/2% that's a pretty big decrease in interest rates. And US European credit, they're actually the most exposed, the highest duration still benefit the most in the decline for interest rate, but we also like emerging market. Hard currency bonds as well too, and there's really three reasons for that. One, you have a starting yield of around 8 1/2%, so you have good carry. It's one of the the few credit classes that aren't trading at post global financial credit tights. And 3rd defaults actually we think should go down dramatically this year after two years of above average historical defaults, mostly stemming from the Chinese property company. Yeah, I was interested in that. So you think we're sort of over the hump when it comes to China property and a sense, at least in default sense. Thinking of default sense we are we you know we heard the news today that the country garden is gonna gonna wind up. I think what you see there is investors putting pressure on country garden management to execute a a restructuring along best practices. But I think the reality is that most we had 125 billion in defaults in Chinese property. So most of those names have already left major indices and So what we're left with in emerging market hard currency bonds is a more diversified less concentrated and less volatile index with Chinese. Pretty largely gone from the index. So then Todd when do we start seeing the turn around actually happening because we are seeing some slight glimmers as you mentioned of of turn around and upside but when do we actually see this really take shape. Well, we're already seeing it to Jennifer in emerging market hard currency bonds, They're up almost 3% year to date, which is pretty substantial. But the, the headwinds actually for the other asset classes have been tight spreads and it's been rates. I think rates should start probably later in the spring, April, May, when there's more clarity on the Fed move from being a headwind to a tailwind. So I think some of the other asset class is the Pixie Cam asset classes will start to see some positive momentum. Maybe in April or May? Alright, we'll watch out for that. Todd Schubert and managing director and senior fixed income strategist at the Bank of Singapore. Thanks so much for joining us in studio in Dubai.