May 21, 2025 • 23 mins
Asian shares were mixed and Treasuries continued their slide at the open Thursday following losses in Wall Street on concerns about the US's ballooning deficit. Treasuries fell across the curve Wednesday with long-term debt bearing the brunt as the 30-year yield rose 12 basis points. Tepid demand for a $16 billion sale of 20-year bonds rekindled fears over US government borrowing and budget deficit. That sapped sentiment after a sharp rebound in risk assets over the past month and revealed structural concerns in the bond market. We get some market perspective from Joe Little, Global Chief Strategist at HSBC Asset Management.
Traders have been piling into bets that long-term bond yields would surge on concerns over the US's swelling debt and deficits, with Moody's Ratings on Friday lowering the nation's credit score below the top triple-A level. For many, the message was: Unless America gets its finances in order, the perceived risks of lending to the government will rise. We get reaction from Rebecca Walser, President at Walser Wealth Management.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Daybreak
Asia podcast. I'm deg Chrisner. The bond market was rattled
in the last session by worries over the federal budget deficit.
It's been a major theme all week, beginning with that
Moody's downgrade. Today, the sale of sixteen billion dollars in
(00:25):
twenty year bonds saw lackluster demand. We're talking about a
five percent coupon rate, the highest since the twenty year
was reintroduced back in twenty twenty. Here is Gina Martin
Adams from Bloomberg Intelligence.
Speaker 2 (00:37):
It's just really difficult to justify owning bonds in that
kind of environment to degree that you would have yesterday,
the day before, a year ago, and that certainly is
creating some risk peripheralist to the equity market.
Speaker 1 (00:49):
That is Gina Martin Adams from Bloomberg Intelligence. So we
saw yield spike right across the treasury curve today. The
ten year was up eleven bases points to just under
four to sixty, and those higher yields and turns sent
stocks lower. In a moment, we'll take a look at
today's market action and reaction with Rebecca Walzer. She is
president at Wallser Wealth Management. But we begin in the
(01:11):
Asia Pacific. Joining me now is Joe Little. He is
the global Chief Strategist at HSBC Asset Management. Joe joining
from our studios in Hong Kong. Joe, thank you so
much for making time to chat with me. Can you
take me inside the HSBC Asset Management morning meeting? How
much consensus is there right now? I know there are
(01:31):
so many different points of view. It's a very mercurial
world that we're living in right now. Is there much
in the way of consensus in your shop?
Speaker 3 (01:39):
Yeah? I mean that's a great question, and you're quite
right because we're living in unusual times, ultra high policy uncertainty,
many different dimensions to the investment market equation at this
point in time. So we tend to run an approach
to think about investment markets based around scenarios. We like
(02:01):
to have three scenarios in mind. Juggling more scenarios than
that becomes quite quite quite difficult mental mental exercise, and
it means then you've got less time to really kind
of develop and think about what the data flow and
investment market action might look like under different scenarios. The
central theme that we've had is what I call spinning around,
(02:23):
so lots of policy uncertainty, high volatility in markets, a
big challenge to US exceptionalism, rotation into other global stock markets,
policy support in Europe and China, and a situation then
where the rest of the world equities e F equities
can outperform the US, but clearly with the tariffs, with
the Dodge fiscal agenda to a degree, as well some
(02:46):
of the themes around immigration policy in the US. There's
a there's a left hand scenario which we've been also
highly attuned to, particularly colleagues in the in the fixed
income area, highly attuned to to this idea of big
challenges around the growth, inflation mix, recession worries elevated still
(03:08):
and that has a slightly different set of prognoses in
terms of how investment markets then behave. And on the
right hand side, you know, investors in our equity area,
more growth focused investors still want to think about technology
and the importance of AI, which increasingly is the most positive,
(03:29):
most bullish scenario in the chessboard. And again that would
have a slightly different set of consequences for markets as
we think through the scenario so we like to think
in terms of that framework, and most of our discussions
are focused on a central scenario of spinning around lots
of volatility, but a way forward for markets over the
(03:50):
course of the next twelve to eighty months, or a
more adverse negative scenario. Worries about recession risk being a
big feature of a lot of our conversations, and tracking
the data very closely to monitor that risk.
Speaker 1 (04:02):
No doubt about that. So maybe you can tell me,
in your view, what is the most critical pressure point
right now? Is it trade policy where the US is concerned.
Is it what's happening in Beijing as they try to
balance doing a little bit more to stimulate domestic demand.
Is it a story about the FED and being a
little hesitant to be a combinative given the risk not
(04:26):
only to the inflation outlook, but maybe a period of
stagflation here in the US.
Speaker 3 (04:32):
Yeah, certainly in the NATO. I mean, all of those
are big issues and definitely part of our ongoing conversations
with investment managers across our business. But I think the
big one is the bond market vigilantes waking up, they're
settling up, riding into town and really exerting a big
influence on the situation, both in terms of the response
(04:57):
to recent news around credit and grades and the fiscal
measures being unveiled and talked about. But the consequences of
a situation where the FED is already in a cutting
cycle and long term bonyards arising. That's quite a puzzling
trajectory and pattern relative to what we normally see in history.
(05:18):
But if it sustains itself and we still see this
pattern of fiscal risk premium coming into the long term
part of the US Treasury curve, it has really big
consequences for investment markets in the US but right around
the world. So at some point, maybe a level around
five percent long term boniards, the consequence and the pressure
on equity markets get pretty severe in our view. In
(05:41):
other words, higher bond yields squeeze out the last drops
of risk premium from the equity market and make that
valuation arithmetic really difficult to justify at a point in time,
whether macro vibes, the vibes around the profits outlook, the
fuzzy and vague guide that's being offered by S and
P five hundred corporates, that really has a big effect.
(06:05):
So rising bond yards has a big effect in terms
of the outlook for US stock market, and then it
also forces investors to reconsider where safe haven assets really are.
Maybe investors are better off positioning in the European bond
curve or in the UK guilt curve, or looking at
emerging market bonds in India, for example, where yields are
very high and there's some shelter from all of the
(06:27):
tariff news, or even looking at the corporate sector where
balance sheets are a lot better than the situation in
the US government balance sheet. So I think it's these
bond market vigilantes that's the key issue, but it's highly
linked to the other policy themes fed themes global geopolitical
issues that you mentioned as well.
Speaker 1 (06:47):
So as I'm listening to Joe, I'm wondering whether the
clients that you serve are inclined to reduce some of
their exposure to US assets right now, whether on the
fixed income side or on the equity side. Is that
a fairest statement.
Speaker 3 (07:01):
The end of exceptionalism? Yeah, exactly exactly like you say.
I mean, I think most global investors looking at US
stocks are now reflecting on the point we reached at
the end of twenty twenty four beginning of twenty twenty five,
where US stocks was seventy percent of global market capitalization
(07:21):
as something that's something like a high water mark or
a medium term top maybe in terms of the relative
share of US stocks in global equities. And I think
where investors are still keeping US exposure, they're doing it
with a little bit less conviction around the dollar. So
the exceptionalism story reflects on expectations around what the currency
(07:43):
is going to do as well. So maybe for global investors,
hedging equity exposure makes sense, or even else, rotating into Europe,
rotating into China where stock markets are more lowly valued
with big, positive visible catalysts for markets to continue, you
to show good outperformance, especially if we can have a
twelve to eighteen month time horizon, because the short term
(08:06):
is very hard to predict, as you know, and it's
ditto for the treasury market outlook. Many investors ask asking
me about treasury markets substitutes long term treasuries, ten year,
thirty year treasuries. With that bear steepening dynamic in place,
investors want to explore opportunities in European duration opportunities in
(08:26):
other parts of the India curve or areas in alternative
assets as well. Private credits comes up, hedge funds come
up a lot, and the reason is that you're looking
for some sources of resilience in the portfolio in a
world which is, you know, where markets are more volatile,
not something that we've been so used to in recent years,
where the policy uncertainty situation keeps that high level of
(08:50):
volatility as a feature of investment market. It's not a
short term bug, something that investors have to get used to.
And so there's a real need and focus for having
a more varied, many different color slices of pie in
the pie chart of the portfolio to try and build
good resilience in an unpredictable and volatile world.
Speaker 1 (09:14):
I'm going to ask you to make a prediction. That's it.
To what extent are you confident that we are going
to see a resolution to some of these trade issues
before the end of the year.
Speaker 3 (09:26):
Well, we've already seen some important progress, haven't we, with
the process now around de escalation and some trade deals
being formed with the UK, for example. Most investors I
speak to are expecting US tariffs to continue to some
of the heat to continue to be taken out of
(09:47):
that story, and maybe the average tariff rate settled down
in the mid teens relative to what we've seen post
the Liberation Day events. That's a positive outcome, but of
course LuSE, it's still a big shock to the system,
maybe six or seven times the tariff rate what we
saw in the first Trump administration, So that still invokes
(10:10):
a big stagflationary shock at least in the near term
for investment markets and for economies to digest. But maybe
in a situation where there are some good market stories
round valuations around profits in other parts of global equity markets,
particularly in China, particularly in Europe, there's something for investors
(10:32):
to be positive about and look towards. But it's clearly
a difficult situation, high level of uncertainty, and as much
as anything in a more volatile environment, being agile and
tactical and nimble in how we plot investment strategy is
really really key.
Speaker 1 (10:49):
Is there some counter intuitive intuition that you have right
now that you would be willing to share something that
you believe the market may be overlooking, that you think
will develop in a way that represents opportunity.
Speaker 3 (11:03):
Yeah, I mean there's lots because these sort of phases,
there's an awful lot of focus on the very near
term and if investors can take a slightly longer term
time frame, the volatility and the uncertainty I think are
throwing up a lot of opportunities, anomalous valuations for investors
to look at different allocations in different parts of asset
(11:26):
classes around the world. I mean, an interesting example is
the movement that we've seen in Switzerland with bond yards
going into negative territory. Is that something that is going
to become a bigger feature of what we're seeing elsewhere
in Europe. Maybe to reflect on the question about whether
the European Central Bank should be more like Switzerland or
maybe it should be more like the FED, it's clearly
(11:46):
more like Switzerland. So Europe is going to be very
proactive in cutting rates, and unless there's an awful lot
of bond issuance, there's a big downward pressure on rates
in Europe. So there are some very interesting positive fixed
income stories, and there's a lot to focus on in
the Asia region as well, India, fixed income, China stock markets.
I think a lot of these themes tend to be
(12:07):
a little bit overlooked by global investors because the story
around US markets, US exceptionalism, which has been that dominant
meme over the last decade, has sucked all of the
interest and oxygen out of these other themes. As that breaks,
as the fault lines appear in US exceptionalism, then it
gives oxygen to some of these other stories. So big
(12:30):
opportunity for rotation, A big opportunity to look at themes
in Europe and Asia over the next twelve to eighty months.
But extending a time horizon rather than just focusing on
the very near term is probably the best advice at
this juncture.
Speaker 1 (12:43):
Great conversation, Joe, thank you so much for joining us.
He is Joe Little, the chief global strategist at Hsbcsset Management,
Joining from Hong Kong here on the day Breakasia podcast.
Welcome back to the Daybreak Asia Podcast. I'm Doug Krisner.
(13:05):
So the US equity market sold off today as those
US treasury yields jumped. The message from the bond market
seemed to be get your fiscal house in order. We
had the S and P closing down one point six
percent today for its sharpest slide in a month. Joining
me now, is Rebecca Wallzer. She is president at Wallser
(13:25):
Wealth Management. She's on the line today from Phoenix, Arizona.
Can I begin by asking for your assessment on what
we saw in today's market price section.
Speaker 4 (13:35):
Yeah, well, you know, Doug, it's what we've been talking
about really for the last six months. This there global
macroeconomic change that is really being spurred here by debt
spend and growth of debt by central governments. You know,
really for the last last i'd say fifteen twenty years,
but since coronavirus in twenty twenty, it has been exponential.
So we started off expecting this week to be a
(13:56):
little bit turbulin in the equity space because of the
downgrade on Friday Moody's to align with all of the
other rating agencies. But we expected that that was going
to create some turbulence. But now what we're seeing is
that global impact. If you look at the twenty year
sale yesterday in Japan that went really poorly and that
was a big tell for Japan, and now today Wednesday
(14:19):
we see similarly.
Speaker 5 (14:20):
And obviously twenty years is never.
Speaker 4 (14:22):
The same as the thirty or the ten, but it's
still a tell, right and anytime we start to see
sluggishness and US selling our debt. That has got to
be a wake up call. And so obviously the equity
markets did not like that. We are looking at a
global slowdown, and obviously the tariff policy is on top
of that. You know, we've been talking about this slowdown
(14:42):
before Trump came in, before Trump starts hooking terraff, So
this has been happening. Then he's got his policy on
top of that. And then when you see that, you know,
the global demand. This is not just a United States problem.
Speaker 5 (14:53):
This is it.
Speaker 4 (14:54):
China has issues and is collapsing from the property side.
Japan has issues and collapsing from their debt financing. Their
debt financing is way beyond ours. As you know, they
are the highest leveraged country in the world. So, you know,
we have all of these things that are pointing us
to just real systemic, underlying foundational issues that are not
(15:17):
just going to get worked around by micro quarterly expectations
of Fortune one hundred companies to do well.
Speaker 1 (15:24):
The yield of the tenure just under four sixty today.
I think we've picked up if you just look at
the ten year alone since the FED pivot around ninety
basis points. That's a monster size move. How much higher
do you think the ten year yield can go from here?
Speaker 4 (15:38):
Well, I mean, I think that if we continue to
see more what's happening is things that are being priced
in right now is just too much risk. I mean,
if you look at that Moody's, you know, PRISS release
for what our debt, they finally you know, followed all
of the other rating agencies and gave us a downgrade.
It's simply a matter of the inability to sustain our
interest payments. We can't have our interest payments be thirty
(16:01):
percent plus of our budget in the next ten years
or the next five years. And what happens when you
have an administration like the Trump administration not saying pro
or against, but his package is multi trillions of dollars,
just as Biden's budget was a seven point two trillion
dollar budget. When you're collecting five trillion dollars in taxes
and your budgets are in the seven trillion dollars range,
(16:21):
which you're debt financing two trillion, but you're not just
debt financing two trillion jog. You're debt financing all of
the interest on the thirty eight. I'm going around it
up thirty eight trillion that we've already not collected in
tax revenue that we've spent. And so you know, we
used to say this is our grandchildren's problem, and then
you say it's our children's problem.
Speaker 5 (16:38):
This is actually our problem.
Speaker 4 (16:40):
The people that are alive today are going to be
dealing with this problem in less than ten years. This
is a global macroeconomic catastrophe that is not going to
be mathematically avoided at this point.
Speaker 1 (16:51):
So if you see the risk of a yield on
the tenure pushing above, let's say we get to four
seventy five on the tenure, that would be another fifteen
basis points from here seem like a lot. Do you
avoid the longer end of the curve right now? And
if you had to put money to work in the
bond market, stay on the short side.
Speaker 4 (17:08):
Yeah, I think you have to, And let me tell
you why, because this is a self fulfilling prophecy. At
a certain point, you have to understand that this is
all interconnected. And even though the bond will really finances
the world, we know that we do also know that
Wall Street is the one buying the bonds eventually. And
if Wall Street isn't seen that they can invest, they
can't buy low and invest into their companies and make
(17:30):
profits and sell make the differential, then they're not going
to be doing that.
Speaker 5 (17:35):
And the fact is that when you have yields that
are that high.
Speaker 4 (17:39):
And you have deficits that are this high, and you
know you're going to be doing nothing but deficit financing
for the foreseeable fear. I mean, we have economists that
have basically said, we will never be able to pay
our debt.
Speaker 5 (17:48):
It will never happen. And so we are.
Speaker 4 (17:50):
Globally entering kind of a debt spiral of just too
much debt with too little income and too little revenue.
Speaker 5 (17:57):
To sustain it.
Speaker 4 (17:58):
You can't have a four percent, you know, net deficit
trade deficit when you're only growing your economy by two
point four percent or two point three percent a year.
You're literally losing GDP as you speak. You're literally contracting
the entire economy.
Speaker 1 (18:13):
So President Trump seems to be intent on getting his
giant tax bill pushed through. The Joint Committee on Taxation
is estimating this bill would increase the deficit by three
point eight trillion over a decade to your point, what
does this mean for the equity market? And if you
had to put money to work in stocks right now
for clients, how would you go about doing that?
Speaker 4 (18:35):
Well, it comes back down to what we've been talking
about for six months down when we were getting to
a point where there is a global macroeconomic problem with
your currency, with the M two money supply, with what
is happening with liquidity, because you remember, you've got all
these commercial banks that now have unrealized equity losses since
the chariffs went into a place, and they have all
kinds of unrealized property losses that they haven't wanted to
realize yet because the property valuations of our commercial lenders,
(18:57):
obviously the commercials have gone down. So when you're looking
not that, you have to think commodities. You have to
think what are the safety assets for if we have
some kind of collapse, You've got to have some kind
of allocation to safety, and that's real assets, hard asset classes,
real estate, gold, silver, commodities, energy utilities.
Speaker 5 (19:16):
Beyond that, because we have to have all of that
to live.
Speaker 4 (19:19):
Beyond that, you have to then say, okay, on a
certain portion of your portfolio, we want growth. So we're
looking at AI robotics, quantum computing, but you can't look
at that if you have to have immediate returns because
this is in the monetization phase. It has not yet monetized.
It's going to take a while to monetize. So we
want to mix. But I will tell you these global
changes that are happening right now are definitely make us
(19:39):
be more macro resistant and a little bit more cautious
and a little bit more going towards the things that
we know are going to perform if we do have
I mean just Japan yesterday and then in the United
States to day, both on their twenty year auctions.
Speaker 5 (19:53):
This looks really bad, Doug.
Speaker 4 (19:55):
And this is on the heels of another credit downgrade
that we've had in our country.
Speaker 5 (19:58):
So I just think that tr.
Speaker 4 (20:00):
Has got a really hard time dealing with all of
this and still trying to pass a multi trillion dollar
budget and package. And we can't have the salt limit
at forty thousand, which is what is being the held
up now by the Republicans.
Speaker 5 (20:12):
How can you authorize forty thousand as.
Speaker 4 (20:16):
Assault limit when ten thousand was scored to give us,
you know, multi trillions of dollars of deficit. We just
don't have the money, and we're starting to see that
the rest of the world isn't going to buy it
for us, isn't going to provide it for us.
Speaker 1 (20:26):
So you seem to be saying that it's not just
a US issue when it comes to the risks of
equity markets. It's global. I'm getting that clearly right.
Speaker 5 (20:35):
But absolutely it's.
Speaker 1 (20:36):
Something that I think we have to look at in
terms of sell America. Is that still a predominant theme
that maybe you want to look at markets like Europe,
Maybe there are selective markets in Asia that the theme
of sell America is still something that you want to
kind of stay true to.
Speaker 4 (20:52):
If you look at the institutionals, the hedge funds and everything,
they were still very pro Europe and anti America. And
we're still net selling out in April. So I think
that there are still a lot of groups that are
like that. What will you be able to find a
country that does and outperforms America in twenty twenty five, Yes,
but will that country be have the economic security that
we have here in the United States as the world's
(21:13):
reserve currency. No, But is our security as the world
reserve currency? What it's always been, and can we just
relax on that and go to bed at night and
not have any cares.
Speaker 5 (21:21):
That's a no now too.
Speaker 4 (21:22):
So everything is changing almost all together at the same time, Doug.
And this is what you get when you start to
approach a debt spiral. This is exactly the beginning stages
of a debt spiral. The interest becomes too much of
a portion of your budget, and therefore you cannot keep
expanding and expanding and expanding your spending. It just has
to end at some point.
Speaker 1 (21:42):
So Rebecca, in your model portfolio right now, talk to
me about the level of cash or cash equivalents as
high as thirty percent at the moment.
Speaker 4 (21:51):
Well, we do like to go We don't like to
have a lot of autocash for too long, so we
will go to to you know, strong hard asset before
we six thirty percent in cash, but I would like
to see an allocation of cash. And we're from ten
to fifteen right now, because this is just a very
rapidly changing environment.
Speaker 5 (22:07):
And you can see that.
Speaker 4 (22:08):
You know, we've had five consecutive months of University of
Michigan coming in with negative sentiment and the consumers aren't
you thinking that they're going to be able to go out
and buy once the tariffs hit. We only have a
ninety day paus on tariffs, so I would say right
now we're at ten and fifteen, between ten and fifteen percent,
and the difference between that and thirty would be we'd
allocate to heart assets.
Speaker 1 (22:27):
It's always a pleasure to talk with you. Thank you, Rebecca.
Rebecca Walzer there, president of wallser Wealth Management, here on
the Daybreak Asia podcast. Thanks for listening to today's episode
of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we
look at the story shaping markets, finance, and geopolitics in
the Asia Pacific. You can find us on Apple, Spotify,
(22:50):
the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Join us again tomorrow for insight on the market moves
from Hong Kong to Singapore and Australia. I'm Doug Prisoner
and this is Bloomberg
Bloomberg Audio Studios, Podcasts, Radio News. Welcome to the Daybreak
Asia podcast. I'm deg Chrisner. The bond market was rattled
in the last session by worries over the federal budget deficit.
It's been a major theme all week, beginning with that
Moody's downgrade. Today, the sale of sixteen billion dollars in
(00:25):
twenty year bonds saw lackluster demand. We're talking about a
five percent coupon rate, the highest since the twenty year
was reintroduced back in twenty twenty. Here is Gina Martin
Adams from Bloomberg Intelligence.
Speaker 2 (00:37):
It's just really difficult to justify owning bonds in that
kind of environment to degree that you would have yesterday,
the day before, a year ago, and that certainly is
creating some risk peripheralist to the equity market.
Speaker 1 (00:49):
That is Gina Martin Adams from Bloomberg Intelligence. So we
saw yield spike right across the treasury curve today. The
ten year was up eleven bases points to just under
four to sixty, and those higher yields and turns sent
stocks lower. In a moment, we'll take a look at
today's market action and reaction with Rebecca Walzer. She is
president at Wallser Wealth Management. But we begin in the
(01:11):
Asia Pacific. Joining me now is Joe Little. He is
the global Chief Strategist at HSBC Asset Management. Joe joining
from our studios in Hong Kong. Joe, thank you so
much for making time to chat with me. Can you
take me inside the HSBC Asset Management morning meeting? How
much consensus is there right now? I know there are
(01:31):
so many different points of view. It's a very mercurial
world that we're living in right now. Is there much
in the way of consensus in your shop?
Speaker 3 (01:39):
Yeah? I mean that's a great question, and you're quite
right because we're living in unusual times, ultra high policy uncertainty,
many different dimensions to the investment market equation at this
point in time. So we tend to run an approach
to think about investment markets based around scenarios. We like
(02:01):
to have three scenarios in mind. Juggling more scenarios than
that becomes quite quite quite difficult mental mental exercise, and
it means then you've got less time to really kind
of develop and think about what the data flow and
investment market action might look like under different scenarios. The
central theme that we've had is what I call spinning around,
(02:23):
so lots of policy uncertainty, high volatility in markets, a
big challenge to US exceptionalism, rotation into other global stock markets,
policy support in Europe and China, and a situation then
where the rest of the world equities e F equities
can outperform the US, but clearly with the tariffs, with
the Dodge fiscal agenda to a degree, as well some
(02:46):
of the themes around immigration policy in the US. There's
a there's a left hand scenario which we've been also
highly attuned to, particularly colleagues in the in the fixed
income area, highly attuned to to this idea of big
challenges around the growth, inflation mix, recession worries elevated still
(03:08):
and that has a slightly different set of prognoses in
terms of how investment markets then behave. And on the
right hand side, you know, investors in our equity area,
more growth focused investors still want to think about technology
and the importance of AI, which increasingly is the most positive,
(03:29):
most bullish scenario in the chessboard. And again that would
have a slightly different set of consequences for markets as
we think through the scenario so we like to think
in terms of that framework, and most of our discussions
are focused on a central scenario of spinning around lots
of volatility, but a way forward for markets over the
(03:50):
course of the next twelve to eighty months, or a
more adverse negative scenario. Worries about recession risk being a
big feature of a lot of our conversations, and tracking
the data very closely to monitor that risk.
Speaker 1 (04:02):
No doubt about that. So maybe you can tell me,
in your view, what is the most critical pressure point
right now? Is it trade policy where the US is concerned.
Is it what's happening in Beijing as they try to
balance doing a little bit more to stimulate domestic demand.
Is it a story about the FED and being a
little hesitant to be a combinative given the risk not
(04:26):
only to the inflation outlook, but maybe a period of
stagflation here in the US.
Speaker 3 (04:32):
Yeah, certainly in the NATO. I mean, all of those
are big issues and definitely part of our ongoing conversations
with investment managers across our business. But I think the
big one is the bond market vigilantes waking up, they're
settling up, riding into town and really exerting a big
influence on the situation, both in terms of the response
(04:57):
to recent news around credit and grades and the fiscal
measures being unveiled and talked about. But the consequences of
a situation where the FED is already in a cutting
cycle and long term bonyards arising. That's quite a puzzling
trajectory and pattern relative to what we normally see in history.
(05:18):
But if it sustains itself and we still see this
pattern of fiscal risk premium coming into the long term
part of the US Treasury curve, it has really big
consequences for investment markets in the US but right around
the world. So at some point, maybe a level around
five percent long term boniards, the consequence and the pressure
on equity markets get pretty severe in our view. In
(05:41):
other words, higher bond yields squeeze out the last drops
of risk premium from the equity market and make that
valuation arithmetic really difficult to justify at a point in time,
whether macro vibes, the vibes around the profits outlook, the
fuzzy and vague guide that's being offered by S and
P five hundred corporates, that really has a big effect.
(06:05):
So rising bond yards has a big effect in terms
of the outlook for US stock market, and then it
also forces investors to reconsider where safe haven assets really are.
Maybe investors are better off positioning in the European bond
curve or in the UK guilt curve, or looking at
emerging market bonds in India, for example, where yields are
very high and there's some shelter from all of the
(06:27):
tariff news, or even looking at the corporate sector where
balance sheets are a lot better than the situation in
the US government balance sheet. So I think it's these
bond market vigilantes that's the key issue, but it's highly
linked to the other policy themes fed themes global geopolitical
issues that you mentioned as well.
Speaker 1 (06:47):
So as I'm listening to Joe, I'm wondering whether the
clients that you serve are inclined to reduce some of
their exposure to US assets right now, whether on the
fixed income side or on the equity side. Is that
a fairest statement.
Speaker 3 (07:01):
The end of exceptionalism? Yeah, exactly exactly like you say.
I mean, I think most global investors looking at US
stocks are now reflecting on the point we reached at
the end of twenty twenty four beginning of twenty twenty five,
where US stocks was seventy percent of global market capitalization
(07:21):
as something that's something like a high water mark or
a medium term top maybe in terms of the relative
share of US stocks in global equities. And I think
where investors are still keeping US exposure, they're doing it
with a little bit less conviction around the dollar. So
the exceptionalism story reflects on expectations around what the currency
(07:43):
is going to do as well. So maybe for global investors,
hedging equity exposure makes sense, or even else, rotating into Europe,
rotating into China where stock markets are more lowly valued
with big, positive visible catalysts for markets to continue, you
to show good outperformance, especially if we can have a
twelve to eighteen month time horizon, because the short term
(08:06):
is very hard to predict, as you know, and it's
ditto for the treasury market outlook. Many investors ask asking
me about treasury markets substitutes long term treasuries, ten year,
thirty year treasuries. With that bear steepening dynamic in place,
investors want to explore opportunities in European duration opportunities in
(08:26):
other parts of the India curve or areas in alternative
assets as well. Private credits comes up, hedge funds come
up a lot, and the reason is that you're looking
for some sources of resilience in the portfolio in a
world which is, you know, where markets are more volatile,
not something that we've been so used to in recent years,
where the policy uncertainty situation keeps that high level of
(08:50):
volatility as a feature of investment market. It's not a
short term bug, something that investors have to get used to.
And so there's a real need and focus for having
a more varied, many different color slices of pie in
the pie chart of the portfolio to try and build
good resilience in an unpredictable and volatile world.
Speaker 1 (09:14):
I'm going to ask you to make a prediction. That's it.
To what extent are you confident that we are going
to see a resolution to some of these trade issues
before the end of the year.
Speaker 3 (09:26):
Well, we've already seen some important progress, haven't we, with
the process now around de escalation and some trade deals
being formed with the UK, for example. Most investors I
speak to are expecting US tariffs to continue to some
of the heat to continue to be taken out of
(09:47):
that story, and maybe the average tariff rate settled down
in the mid teens relative to what we've seen post
the Liberation Day events. That's a positive outcome, but of
course LuSE, it's still a big shock to the system,
maybe six or seven times the tariff rate what we
saw in the first Trump administration, So that still invokes
(10:10):
a big stagflationary shock at least in the near term
for investment markets and for economies to digest. But maybe
in a situation where there are some good market stories
round valuations around profits in other parts of global equity markets,
particularly in China, particularly in Europe, there's something for investors
(10:32):
to be positive about and look towards. But it's clearly
a difficult situation, high level of uncertainty, and as much
as anything in a more volatile environment, being agile and
tactical and nimble in how we plot investment strategy is
really really key.
Speaker 1 (10:49):
Is there some counter intuitive intuition that you have right
now that you would be willing to share something that
you believe the market may be overlooking, that you think
will develop in a way that represents opportunity.
Speaker 3 (11:03):
Yeah, I mean there's lots because these sort of phases,
there's an awful lot of focus on the very near
term and if investors can take a slightly longer term
time frame, the volatility and the uncertainty I think are
throwing up a lot of opportunities, anomalous valuations for investors
to look at different allocations in different parts of asset
(11:26):
classes around the world. I mean, an interesting example is
the movement that we've seen in Switzerland with bond yards
going into negative territory. Is that something that is going
to become a bigger feature of what we're seeing elsewhere
in Europe. Maybe to reflect on the question about whether
the European Central Bank should be more like Switzerland or
maybe it should be more like the FED, it's clearly
(11:46):
more like Switzerland. So Europe is going to be very
proactive in cutting rates, and unless there's an awful lot
of bond issuance, there's a big downward pressure on rates
in Europe. So there are some very interesting positive fixed
income stories, and there's a lot to focus on in
the Asia region as well, India, fixed income, China stock markets.
I think a lot of these themes tend to be
(12:07):
a little bit overlooked by global investors because the story
around US markets, US exceptionalism, which has been that dominant
meme over the last decade, has sucked all of the
interest and oxygen out of these other themes. As that breaks,
as the fault lines appear in US exceptionalism, then it
gives oxygen to some of these other stories. So big
(12:30):
opportunity for rotation, A big opportunity to look at themes
in Europe and Asia over the next twelve to eighty months.
But extending a time horizon rather than just focusing on
the very near term is probably the best advice at
this juncture.
Speaker 1 (12:43):
Great conversation, Joe, thank you so much for joining us.
He is Joe Little, the chief global strategist at Hsbcsset Management,
Joining from Hong Kong here on the day Breakasia podcast.
Welcome back to the Daybreak Asia Podcast. I'm Doug Krisner.
(13:05):
So the US equity market sold off today as those
US treasury yields jumped. The message from the bond market
seemed to be get your fiscal house in order. We
had the S and P closing down one point six
percent today for its sharpest slide in a month. Joining
me now, is Rebecca Wallzer. She is president at Wallser
(13:25):
Wealth Management. She's on the line today from Phoenix, Arizona.
Can I begin by asking for your assessment on what
we saw in today's market price section.
Speaker 4 (13:35):
Yeah, well, you know, Doug, it's what we've been talking
about really for the last six months. This there global
macroeconomic change that is really being spurred here by debt
spend and growth of debt by central governments. You know,
really for the last last i'd say fifteen twenty years,
but since coronavirus in twenty twenty, it has been exponential.
So we started off expecting this week to be a
(13:56):
little bit turbulin in the equity space because of the
downgrade on Friday Moody's to align with all of the
other rating agencies. But we expected that that was going
to create some turbulence. But now what we're seeing is
that global impact. If you look at the twenty year
sale yesterday in Japan that went really poorly and that
was a big tell for Japan, and now today Wednesday
(14:19):
we see similarly.
Speaker 5 (14:20):
And obviously twenty years is never.
Speaker 4 (14:22):
The same as the thirty or the ten, but it's
still a tell, right and anytime we start to see
sluggishness and US selling our debt. That has got to
be a wake up call. And so obviously the equity
markets did not like that. We are looking at a
global slowdown, and obviously the tariff policy is on top
of that. You know, we've been talking about this slowdown
(14:42):
before Trump came in, before Trump starts hooking terraff, So
this has been happening. Then he's got his policy on
top of that. And then when you see that, you know,
the global demand. This is not just a United States problem.
Speaker 5 (14:53):
This is it.
Speaker 4 (14:54):
China has issues and is collapsing from the property side.
Japan has issues and collapsing from their debt financing. Their
debt financing is way beyond ours. As you know, they
are the highest leveraged country in the world. So, you know,
we have all of these things that are pointing us
to just real systemic, underlying foundational issues that are not
(15:17):
just going to get worked around by micro quarterly expectations
of Fortune one hundred companies to do well.
Speaker 1 (15:24):
The yield of the tenure just under four sixty today.
I think we've picked up if you just look at
the ten year alone since the FED pivot around ninety
basis points. That's a monster size move. How much higher
do you think the ten year yield can go from here?
Speaker 4 (15:38):
Well, I mean, I think that if we continue to
see more what's happening is things that are being priced
in right now is just too much risk. I mean,
if you look at that Moody's, you know, PRISS release
for what our debt, they finally you know, followed all
of the other rating agencies and gave us a downgrade.
It's simply a matter of the inability to sustain our
interest payments. We can't have our interest payments be thirty
(16:01):
percent plus of our budget in the next ten years
or the next five years. And what happens when you
have an administration like the Trump administration not saying pro
or against, but his package is multi trillions of dollars,
just as Biden's budget was a seven point two trillion
dollar budget. When you're collecting five trillion dollars in taxes
and your budgets are in the seven trillion dollars range,
(16:21):
which you're debt financing two trillion, but you're not just
debt financing two trillion jog. You're debt financing all of
the interest on the thirty eight. I'm going around it
up thirty eight trillion that we've already not collected in
tax revenue that we've spent. And so you know, we
used to say this is our grandchildren's problem, and then
you say it's our children's problem.
Speaker 5 (16:38):
This is actually our problem.
Speaker 4 (16:40):
The people that are alive today are going to be
dealing with this problem in less than ten years. This
is a global macroeconomic catastrophe that is not going to
be mathematically avoided at this point.
Speaker 1 (16:51):
So if you see the risk of a yield on
the tenure pushing above, let's say we get to four
seventy five on the tenure, that would be another fifteen
basis points from here seem like a lot. Do you
avoid the longer end of the curve right now? And
if you had to put money to work in the
bond market, stay on the short side.
Speaker 4 (17:08):
Yeah, I think you have to, And let me tell
you why, because this is a self fulfilling prophecy. At
a certain point, you have to understand that this is
all interconnected. And even though the bond will really finances
the world, we know that we do also know that
Wall Street is the one buying the bonds eventually. And
if Wall Street isn't seen that they can invest, they
can't buy low and invest into their companies and make
(17:30):
profits and sell make the differential, then they're not going
to be doing that.
Speaker 5 (17:35):
And the fact is that when you have yields that
are that high.
Speaker 4 (17:39):
And you have deficits that are this high, and you
know you're going to be doing nothing but deficit financing
for the foreseeable fear. I mean, we have economists that
have basically said, we will never be able to pay
our debt.
Speaker 5 (17:48):
It will never happen. And so we are.
Speaker 4 (17:50):
Globally entering kind of a debt spiral of just too
much debt with too little income and too little revenue.
Speaker 5 (17:57):
To sustain it.
Speaker 4 (17:58):
You can't have a four percent, you know, net deficit
trade deficit when you're only growing your economy by two
point four percent or two point three percent a year.
You're literally losing GDP as you speak. You're literally contracting
the entire economy.
Speaker 1 (18:13):
So President Trump seems to be intent on getting his
giant tax bill pushed through. The Joint Committee on Taxation
is estimating this bill would increase the deficit by three
point eight trillion over a decade to your point, what
does this mean for the equity market? And if you
had to put money to work in stocks right now
for clients, how would you go about doing that?
Speaker 4 (18:35):
Well, it comes back down to what we've been talking
about for six months down when we were getting to
a point where there is a global macroeconomic problem with
your currency, with the M two money supply, with what
is happening with liquidity, because you remember, you've got all
these commercial banks that now have unrealized equity losses since
the chariffs went into a place, and they have all
kinds of unrealized property losses that they haven't wanted to
realize yet because the property valuations of our commercial lenders,
(18:57):
obviously the commercials have gone down. So when you're looking
not that, you have to think commodities. You have to
think what are the safety assets for if we have
some kind of collapse, You've got to have some kind
of allocation to safety, and that's real assets, hard asset classes,
real estate, gold, silver, commodities, energy utilities.
Speaker 5 (19:16):
Beyond that, because we have to have all of that
to live.
Speaker 4 (19:19):
Beyond that, you have to then say, okay, on a
certain portion of your portfolio, we want growth. So we're
looking at AI robotics, quantum computing, but you can't look
at that if you have to have immediate returns because
this is in the monetization phase. It has not yet monetized.
It's going to take a while to monetize. So we
want to mix. But I will tell you these global
changes that are happening right now are definitely make us
(19:39):
be more macro resistant and a little bit more cautious
and a little bit more going towards the things that
we know are going to perform if we do have
I mean just Japan yesterday and then in the United
States to day, both on their twenty year auctions.
Speaker 5 (19:53):
This looks really bad, Doug.
Speaker 4 (19:55):
And this is on the heels of another credit downgrade
that we've had in our country.
Speaker 5 (19:58):
So I just think that tr.
Speaker 4 (20:00):
Has got a really hard time dealing with all of
this and still trying to pass a multi trillion dollar
budget and package. And we can't have the salt limit
at forty thousand, which is what is being the held
up now by the Republicans.
Speaker 5 (20:12):
How can you authorize forty thousand as.
Speaker 4 (20:16):
Assault limit when ten thousand was scored to give us,
you know, multi trillions of dollars of deficit. We just
don't have the money, and we're starting to see that
the rest of the world isn't going to buy it
for us, isn't going to provide it for us.
Speaker 1 (20:26):
So you seem to be saying that it's not just
a US issue when it comes to the risks of
equity markets. It's global. I'm getting that clearly right.
Speaker 5 (20:35):
But absolutely it's.
Speaker 1 (20:36):
Something that I think we have to look at in
terms of sell America. Is that still a predominant theme
that maybe you want to look at markets like Europe,
Maybe there are selective markets in Asia that the theme
of sell America is still something that you want to
kind of stay true to.
Speaker 4 (20:52):
If you look at the institutionals, the hedge funds and everything,
they were still very pro Europe and anti America. And
we're still net selling out in April. So I think
that there are still a lot of groups that are
like that. What will you be able to find a
country that does and outperforms America in twenty twenty five, Yes,
but will that country be have the economic security that
we have here in the United States as the world's
(21:13):
reserve currency. No, But is our security as the world
reserve currency? What it's always been, and can we just
relax on that and go to bed at night and
not have any cares.
Speaker 5 (21:21):
That's a no now too.
Speaker 4 (21:22):
So everything is changing almost all together at the same time, Doug.
And this is what you get when you start to
approach a debt spiral. This is exactly the beginning stages
of a debt spiral. The interest becomes too much of
a portion of your budget, and therefore you cannot keep
expanding and expanding and expanding your spending. It just has
to end at some point.
Speaker 1 (21:42):
So Rebecca, in your model portfolio right now, talk to
me about the level of cash or cash equivalents as
high as thirty percent at the moment.
Speaker 4 (21:51):
Well, we do like to go We don't like to
have a lot of autocash for too long, so we
will go to to you know, strong hard asset before
we six thirty percent in cash, but I would like
to see an allocation of cash. And we're from ten
to fifteen right now, because this is just a very
rapidly changing environment.
Speaker 5 (22:07):
And you can see that.
Speaker 4 (22:08):
You know, we've had five consecutive months of University of
Michigan coming in with negative sentiment and the consumers aren't
you thinking that they're going to be able to go out
and buy once the tariffs hit. We only have a
ninety day paus on tariffs, so I would say right
now we're at ten and fifteen, between ten and fifteen percent,
and the difference between that and thirty would be we'd
allocate to heart assets.
Speaker 1 (22:27):
It's always a pleasure to talk with you. Thank you, Rebecca.
Rebecca Walzer there, president of wallser Wealth Management, here on
the Daybreak Asia podcast. Thanks for listening to today's episode
of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we
look at the story shaping markets, finance, and geopolitics in
the Asia Pacific. You can find us on Apple, Spotify,
(22:50):
the Bloomberg Podcast YouTube channel, or anywhere else you listen.
Join us again tomorrow for insight on the market moves
from Hong Kong to Singapore and Australia. I'm Doug Prisoner
and this is Bloomberg
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