The outlook for bonds: Vimal Gor interview
What’s the outlook for bonds right now? Pendal’s Head of Bond, Income and Defensive Strategies Vimal Gor gives a snapshot here in a video interview with online business channel Ausbiz on April 17, 2020.
Ausbiz is Australia’s newest online business channel. Watch here: www.ausbiz.com.au.
Ausbiz TV interviewer: I know early into this piece when we were at the cusp of these lockdowns and the work-from-home scenarios … you were talking about the need for massive fiscal responses. You said unimaginable amounts, maybe 20% of GDP or more. That’s not quite the extent that we’ve seen clearly in Australia, but that $2.3 trillion package coming out from the Fed last week — is that the kind of, do all, take-no-prisoners response you had been expecting or are you still expecting more?
Vimal Gor: Well in the US, if you take the monetary and the fiscal stimulus and normalise it and add it together, it’s about 40% of GDP. It’s so large, it makes your brain hurt to think about this size.
To give you an idea, if you’re a small company in the US, less than 500 people, the government is now going to pay your wages, rent and utilities, it says for two months. So you don’t have to any outgoings for two months.
Now that’s going to be fine if the duration of the coronavirus is quite short. If we drag this out for three, six, 12 months from now, well then that’s not going to be enough. And that’s the problem.
What the central banks and what the fiscal authorities are doing is they’re providing liquidity into the system, but we’re not solving the solvency issue at all.
You’re still going to have so many companies going bankrupt over the next few quarters.
Interviewer: Absolutely. What is your gut telling you, Vimal? Do you think that the worst of this is over? And just as a side note, we have had this unemployment read coming through here in Australia — the March unemployment rate’s at 5.2% — that’s better than the consensus of 5.4%. But when it comes to talk about economies opening up potentially, what are you feeling about where we’re at in this timeline?
Vimal Gor: The US number is expected to go from about 5% to about 20%. The April numbers are going to be roughly about 20% unemployed in the US. So when we’re talking 5.2, 5.5, they’re rounding errors. It’s completely irrelevant in the broadest trend of where things are going.
In terms of when we can reopen, obviously there’s a big clamour to reopen. Trump talked about the cure being worse than the disease and that’s true on an economic viewpoint. And right now we are purely looking at the lockdowns in terms of what it means to the population, in terms of deaths from the virus.
But there are also deaths from what happen if we lock down the economy. There’s poverty — look at India, which is in a full lockdown and it’s just been extended again. [consider] people in poverty there who are at risk of dying because they’re unable to get food.
So there are economic impacts as well. I think at the moment we’re clearly looking at the medical side — we’re not looking at the economic side — and there needs to be a full realisation of how bad the lockdown is for people and the communities and also health levels.
So I think that there’s both sides of the argument that needs to be looked to this. But I don’t see a quick re-opening. Also from the reading I’m doing we’re 12 to 18 months away from a vaccine. So we’re going to be living with this for a long time.
And as I mentioned, the solvency issues haven’t been dealt with, they’ve just been pushed further into the future. So I think this is going to be with us for a long time yet.
Interviewer: So given all of that, where to for global bond yields now do you think?
Vimal Gor: ,Oh that’s the easy one. They go to zero. Global bonds, apart from maybe Italy or Spain or Portugal or some of the smaller peripherals — pretty much global bonds around the world are going to zero. Central banks need them at zero.
We have to also accept and acknowledge the fact that bond yields going down doesn’t really help. It doesn’t really cushion the impact of the virus and the economic data, but it [also] doesn’t do any harm and that’s really where we are now.
It’s about doing anything that doesn’t do harm to help the economies along and pushing bond yields down to zero. It’s supporting them at those levels as we’re doing mass issuance across the world. It’s the only thing they can do. They can’t allow bond yields to sell off because that would have a slowing impact in the economy.
One of the issues for the US is, if your currency is weak, your currency’s strengthening, and your equity market’s going down — and then you get bond yields selling off — well then all three parts of your financial positions are tightening, and that’s really bad.
So they need to hold bond yields down — and they will hold bond yields down. We’re seeing the RBNZ talking about negative rates, RBA in any size at 25 basis points in three-years. The size of the programs we’re seeing in the US — to give you an idea, in the last QE program in the US they were buying about 80 billion a month. They were buying 75 billion a day, just last week.
I mean the size of the packages are so large and they have one aim, and that’s to get bond yields to zero across the world.
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