James Reynolds, the chairman and Chief Executive Officer at Loop Capital, in his recent intervention on Bloomberg has discussed the bonds market and provided his insights on the bond trading factors and the future of the bond trading. He considers that currently the bond market is reacting to what is going on with the economy, which is marked by a “lackluster growth” and moderate increases in the retail sales.
Michael McKee, Bloomberg News Economic Editor, stated:
“The bond market and the equity market have sort of become divorced, except that equities are pricing in at much lower discount rates. There is no inflation out there that people can see in the long run and so, you’ve got a very good situation as long as your earnings hold on and your forecast is going forward.”
In addition, McKee pointed out some external factors that are affecting the markets. One of them is the Fed buying most of the U.S. Treasury Bonds. The European Central Bank, on the other hand, is trying to underpin its countries, which means that the peripheral country rates have been declining.
“If you can get the same yield on a U.S. Treasury, which is completely safe, why would you buy a Spanish Treasury,” McKee added.
Reynolds said that taking into account the current yields on the U.S. Treasury Bonds, “a cyclical shift in the way investors view how they use their money” can be observed.
“I think right now, coming out of ’08, when they lost so much principal in the equities market, it is preferable and desirable to have an allocation to bonds, even if it’s bonds at a 2.5 or 3 percent yield because you get your principal back, and also an allocation to equities,” the CEO of Loop Capital added.
McKee considers that the interest rates are going to raise, even though not very high. However, this will not solve the problem, as there won’t be a “a lot of volatility and a lot of turnover.”
Reynolds also confirmed that the consensus forecast predicts a hike in interest rates. He also added that there will be an increase in the electronic bond trading, which will involve less people who take care of bond trading. However, because the price from electronic trading will not always be a good one, only a part of the bond trading will be conducted electronically, even though it will be a big part.
Watch the full video below: