Bloomberg Talks
00:01:24 · David Ingles, Emmanuel Roman, Yvonne Man
[00:01:24] S2: A few weeks ago, there was always this concern that all this AI debt was actually in some ways, I guess, crowding out or adding pressure into, you know, sovereign bond markets, right? Things have stabilized a little bit, but how are you looking at sovereign markets now? [00:01:36] S0: So that is, I understand this is a narrative, but that is not a view. view is that if you look at the swap spread if you look at tips the market is very well anchored and the reason why rates are high is is because of what's happening in the Middle East and what's happening in the energy complex. Yes, there has been $ 500 billion of AI financing, but that's not what's driving the level of rates. If that was the case, you would see some distortion in spread, in the swap curve, and that really hasn't happened. [00:02:15] S1: If it's mainly economic that's been driving rates up, How do you now see the reaction function among central banks that have reacted to rates going up or maybe even caused the short end moving up as well? You know, how much more runway do you think central banks can raise the rates even further?
00:02:15 · Yvonne Man, Emmanuel Roman, David Ingles
[00:02:15] S1: If it's mainly economic that's been driving rates up, How do you now see the reaction function among central banks that have reacted to rates going up or maybe even caused the short end moving up as well? You know, how much more runway do you think central banks can raise the rates even further? [00:02:31] S0: So it depends where you are, right? If you are in the U.S., our view is and the market is telling you that the Fed will raise rates a quarter at the end of the year and then that's it. In Europe, they probably will have to raise rates twice. And of course, the European situation is worse than the US situation. I think it's helpful to remember that Bonds exist in an ecosystem where you can compare US rates, UK rates, Japanese rates, European rates. US rates are sort of at the same level than French rates. So think about, and I'm picking French rates simply because that's where I'm from. Think about the rates you want to own over the next five years in terms of appreciation and in terms of currency. Chances are you would pick nine and a half times out of 10 US rates versus French rates. [00:03:26] S2: Yeah, I mean, talk to us a little more about the situation in Europe right now. It seems like in countries like your home country of France, they're spending more than they can collect when it comes to taxes, right? What does that mean for PIMCO in terms of how you manage your European exposure right now?
00:03:26 · David Ingles, Emmanuel Roman
[00:03:26] S2: Yeah, I mean, talk to us a little more about the situation in Europe right now. It seems like in countries like your home country of France, they're spending more than they can collect when it comes to taxes, right? What does that mean for PIMCO in terms of how you manage your European exposure right now? [00:03:38] S0: So let's flip first at the macro level. I think there is a view that there are other places than the U.S. dollar to put your money. And on the one hand, it's true. On the other hand, the dollar is really the only reserve currency. If you are a US investor, like most people in the region, and you say, where else do I want to be money? Do I want to put money? You may want to have some Australian dollar that we like. You may want to have some emerging market currency that you like. But the diversification in terms of currency is not as attractive as one would hope. And so the days of strong dollars are likely to remain. Now, mind you, it's a difficult exercise to predict currency. And I have to be incredibly humble. But it is a fact. The situation in Europe... is essentially very low growth, high debt to GDP, high taxation, very little room to raise taxes, and clearly popular discontent, first in France, then in Germany, with some smaller problems in Switzerland, and that's a real structural problem, and it's The conclusion of 25 years of globalization and industrial challenges and a public sector which is quite big and what needs to be done.
00:03:38 · Emmanuel Roman, Yvonne Man
[00:03:38] S0: So let's flip first at the macro level. I think there is a view that there are other places than the U.S. dollar to put your money. And on the one hand, it's true. On the other hand, the dollar is really the only reserve currency. If you are a US investor, like most people in the region, and you say, where else do I want to be money? Do I want to put money? You may want to have some Australian dollar that we like. You may want to have some emerging market currency that you like. But the diversification in terms of currency is not as attractive as one would hope. And so the days of strong dollars are likely to remain. Now, mind you, it's a difficult exercise to predict currency. And I have to be incredibly humble. But it is a fact. The situation in Europe... is essentially very low growth, high debt to GDP, high taxation, very little room to raise taxes, and clearly popular discontent, first in France, then in Germany, with some smaller problems in Switzerland, and that's a real structural problem, and it's The conclusion of 25 years of globalization and industrial challenges and a public sector which is quite big and what needs to be done. [00:05:06] S1: What about the alternative that could be China? How far behind do you think the yuan is as a, you know, I wouldn't say alternative to the dollar currently, but simply just looking at the bond market, you'd be hard-pressed to find any other bond market in the world that's done better than China. What we're seeing in China with yields effectively going from, let's say, 3%, 4% to now 1.5%.
00:05:06 · Yvonne Man, S3, Emmanuel Roman, David Ingles
[00:05:06] S1: What about the alternative that could be China? How far behind do you think the yuan is as a, you know, I wouldn't say alternative to the dollar currently, but simply just looking at the bond market, you'd be hard-pressed to find any other bond market in the world that's done better than China. What we're seeing in China with yields effectively going from, let's say, 3%, 4% to now 1.5%. [00:05:26] S3: Over the next 20 years, the single most important decision, macro decision, is whether China will decide to let the currency float. [00:05:44] S0: And I think we all can agree on the plus and the minus. The plus is all of a sudden it will become a second reserve currency for all of the obvious reasons. So there will be real capital going to China to be able to invest in the currency. But then again, there may be Chinese money deciding that they're overexposed to their own currency and deciding to come out of the country and getting into other currency. And what the net effect is, it's very hard to tell. But that's the big decision that they will have to make. [00:06:21] S2: I mean, that's what they want to do in Hong Kong, right? To become this offshore renminbi sort of hub. What is still missing then for that reality to come true? [00:06:29] S0: Is it still liquidity? Is it still market? I think if you're a central bank, you're counting in hundreds of billions of dollars, not in billions. And so that is the key advantage of the dollar. Wow.
00:06:29 · Emmanuel Roman, Yvonne Man, David Ingles
[00:06:29] S0: Is it still liquidity? Is it still market? I think if you're a central bank, you're counting in hundreds of billions of dollars, not in billions. And so that is the key advantage of the dollar. Wow. [00:06:43] S1: Speaking of Hong Kong, we were going to get this later, but I'll bring it up now. I mean, the event, what stood out to you? [00:06:48] S0: Because everyone... Everyone's here. [00:06:50] S1: Everyone is here. [00:06:51] S0: I think this is the only one where everyone's in the same room. I think one has to pay an enormous amount of tribute to Eddie Hu and his team and the event they bring and the amount of people that want to come. as a support for Hong Kong and as a gateway to China. And the fact that, you know, the HKMA has done an amazing job. And it started in COVID. And I just cannot believe how well Hong Kong is doing. And if you had told me five years ago that the city would be at full speed doing great, I think it's wonderful. And I think it has exceeded a lot of people's expectation, rightly or wrongly. But I think the energy here is second to none. And once again, this is an absolutely fabulous event. [00:07:42] S2: It's interesting how, I think it was Jenny Johnson from Franklin Templeton said, people are very excited about Hong Kong. It's different on the other side of the border in China, where you continue to see sentiments quite weak. [00:07:52] S0: Yeah. [00:07:53] S2: I mean, how do you look at the China market here right now?