Rising Yields and Slowing Growth: Bonds Regain Appeal Amid Market Turmoil

Wall Street is retreat at least year to date, and the Iran war premium has pushed oil near 110, and that is for Brent and we are looking at WTI above 100.

Meanwhile, we saw the VIX soar past 30 and sent the S&P 500 into its longest losing streak since 2022.

Now this morning, global bond markets are soaring and we are looking at yields pulling back, but this does come after the short and surged as central banks pivot from.

Rate cuts to potential hikes and we saw the long end buckle under inflation panic and fiscal stress and this did drive the US 30 years above 4.9%.

Well joining me this morning is Mike Goosay, the CIO and Global Head of Fixed Income at Principal Asset Management.

Good morning, Michael.

Thank you so much for joining me.

So in New York morning trade, we are looking at US stock futures higher for now and bond yields pulling back.

But today the worry is global growth.

So what do you make of some of those slowdown concerns?

Yeah, good morning.

Thanks for having me.

It's certainly been a bit challenging to, to really make any medium or longer-term assessments on how the economy is unfolding, what this could mean for corporate profit growth, uh, and you're seeing that reflected in the markets with volatility increasing and, and a lot of uncertainty.

Uh, as we kind of look, try to look through this, um, you know, we really have been focused on three different scenarios.

One is, you know, a quick, or what would be considered quick from here on out, um, A solution to the Iranian war.

Second would be a very dragged out, nothing meaningful, but, but long, stagnant like a movement of of really, really nothing in terms of resolution.

And the third option is, is the dire scenario where there's boots on the ground and something significant.

And so we're trying to game around that and thinking about how markets will react, but all of it does revolve around some sort of demand destruction.

And I think that's probably where the markets are starting to migrate towards in the front end of yield curves, which pricing in rate cuts into 2027, but those are starting to get rolled forward a bit, and I think that makes sense given that the inflation story may be transitory, although I hate to use that word, but the reality is that the demand destruction potential for employment deterioration is much more significant.

And I know you dislike that word transitory, but I do want to ask you a question about what we saw at the long end last week.

So we saw the 30 year yield edge towards that 5% level.

So how much of that is actually being driven by this transitory panic?

Yeah, I, I mean, it's certainly if you expect inflation to remain elevated, and you can define elevated as anything above the central bank's target levels, uh, you should expect that the long end would react more aggressively than the intermediate or the short end of the curve.

And I think that's what you're seeing play out is that inflation is unlikely to move down towards the Fed's 2% target level anytime soon.

And you should get some more term premium into the long end of the yield curve.

But when you add to it, there's been, there's going to be a large bill to pay for this military buildup and, and, um, you know, maybe a rebuild of Iran, or the surrounding countries, and that costs money and costs money in, in, in our environment means we have to borrow more and more debt, and that puts more pressure on longer term rates.

And speaking of which, we know that global central banks have a lot to deal with when it comes to inflation expectations as oil remains quite elevated at these levels right now.

But do you think stepping in to buy this massive Treasury dip that we saw is a conviction value play, or would you say this is more of a falling knife?

So it's really hard in the short term to answer that.

Longer term, we would say it's a, there's value in the bond market.

There's income again, uh, you can see the corporate bond spreads have widened a bit.

Uh, overall, government bond rates are higher.

Uh, it's an attractive entry point for things like municipal bonds, which have performed poorly recently.

Uh, so we think that this is, if you were to try to look through the next few weeks or even a few months, this would be an attractive entry point into fixed income.

And Michael, at the end of last week we saw risk parity ETFs down about 8% and investors are talking about that word cash.

So where exactly on the yield curve or in credit can you actually hide and what would you say is wise to avoid at all costs?

Yeah, so it's hard to say what's wise to avoid, but there's certain pockets that are going to clearly be hurt more than others.

Um, some of the, uh, consumer discretionarries, if you do have a labor market that deteriorates from here, some of those segments of the economy are likely to, to, to get hit harder than others.

Uh, so more of the defensive sectors like utilities should do OK.

Um, but if you kind of look, try to look through a little bit, um, you know, just taking on high quality of Investment grade credit spreads, even migrating into below investment grade, uh, credit makes some sense to us because there are opportunities that, that where spreads have widened.

Um, in terms of the yield curve, based on that, that message that just kind of went through, you're apt to see better performance in that intermediate or the belly of the yield curve though.

And finally, before I let you go, here in the US, it is a holiday shortened week.

Good Friday is this Friday, and US markets will be closed.

But at the same time we do get that employment report coming out at 8:30 a.m.

Eastern time and hopefully I'll be sleeping, but I have a feeling I'll be paying attention to those numbers.

So in the short term when it comes to US yields, what are you watching?

And so the labor picture is key at this point.

We know inflation is going to be elevated for quite some time, not only due to the oil price shock, which you, which you've covered very well, but you know, clearly we were already running inflation that was pushing above 3% or thereabouts.

And so, The real story on a go-forward basis is how does that labor market unfold.

And so if you do see, you know, what we've been witnessing for the last 12 months, which is the deteriorating labor market, we think that should give the Fed some cover to actually move policy rates lower in the second half of this year.

Well, Michael, we will leave it there.

So thank you so much for joining us this morning and have a great holiday weekend.

Thanks Roy, you too.