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I don’t think you’d really be able to see this on the bond front': Franklin Templeton Fixed Income CIO on Reddit-fueled trading

Franklin Templeton Fixed Income CIO Sonal Desai joined Yahoo Finance Live to discuss fixed income and where investors should be looking amid COVID-19 pandemic volatility.

Video Transcript

ADAM SHAPIRO: But we want to talk about these markets and where we're headed going forward. To do that, we invite into the stream Sonal Desai, Franklin Templeton Fixed Income CIO. Good to have you here. And want to switch our focus right now on fixed income and the kind of yield as investors-- I mean, we always want to get yield, but where we should be looking. You're advising emerging-market debt as well as municipal bonds. Why are you confident that's where we should look?

SONAL DESAI: So it's also high yield, and it goes back to where you started, actually, Adam. When you think about where yields are right now and you go back to first principles, why do people invest in fixed income? Because they want some income. Actually, there is very little income in most parts of that asset class right now.

So I think unless investors take a bit more risk-- which is not a word which most people love, but without that little bit of risk, you're not going to get any income. You're not going to get much return.

Munis are a different issue. Yes, there's income, either tax free or taxable. Now, tax-free munis, the reason we think that that's probably a good place to be is we do think tax rates are going to go up in a variety of different states. That's pretty much a given as we go forward. And so that's one area that we are looking at. And emerging markets where we still think technicals are favorable, and also there is-- not all emerging markets. As always, not all emerging markets, not all high yield. You have to be very selective. But those are the areas where there's still a little bit left.

SEANA SMITH: Well, a lot of the attention over the last week-- I want to talk about this speculative buying that we've seen, this retail trading frenzy because it doesn't necessarily stop with the stock market. And I think a lot of investors when you think about that, you think the ripple effects would just be with equities. But I'm curious if you have any thoughts just on what it could potentially mean for the bond market here going forward.

SONAL DESAI: I think for the bond market, chances are it's not-- it's not quite the same thing. It could happen for high-yield bonds, certainly, or investment-grade bonds. But if I think about the largest asset classes like US Treasurys, for example, it's very difficult to imagine quite the same level of-- let's call it a feeding frenzy because that's what it was.

It is a fascinating episode. There's no doubt about it. We've never seen social media play a role like this, wherein, both as an investor and as an economist, I find the entire episode absolutely fascinating because when you strip away the issues of, yeah, you know, it's the hedge funds who were shorting. Who is at the heart of it? At the heart of it, you've got an enormous amount of buying that isn't necessarily focused on fundamentals, which in turn almost necessitates the type of volatility we've seen.

I just heard that GameStop was down 25%, 27% today. It's not that surprising given how it builds up. If people pile into a stock and watch it go up like that, you're going to see it come down as well. On the fixed-income side, I would like to think it would be harder to get to [INAUDIBLE].

ADAM SHAPIRO: Well, yeah, and Sonal, one of the things that an expert like you and a manager like you provides to a client is protection from someone who might say buy a bond ETF because you could short a bond ETF, or for that matter you could see the shorts go against index funds. I realize it's a stretch, but we're not seeing that kind of thing with bond ETFs, people-- you know, short interest in bond ETFs really rising dramatically, are we?

SONAL DESAI: No, we are not, and I would be surprised if we did. And even-- and inherently a bond ETF-- you just said it-- it's spread out over a huge number of bonds. It's not got that same concentrated power that came-- that was on display the whole of last week with these two or three stocks that were really impacted by what we saw.

I don't think you'd really be able to see this on the bond front. Could you see it with single-commodity ETFs? Potentially. You know, it's not clear whether silver, in fact, was a part of one of these-- let's call it a flash mob. But it's not clear whether that was the case or it wasn't the case.

But for an entire bond ETF, it's just much harder to see the same impact as we've seen. We're not seeing it happen to equity ETFs, for example. You can short equity ETFs as well, but that's not what we're seeing. We're seeing individual names coming up, and that's what I think is harder to see in the bond universe.

SEANA SMITH: Sonal, we only have about a minute here, but I'm curious. There's that story, and then the other big story this week is happening with additional fiscal policy. President Biden is expected to meet with 10 GOP senators in just around two hours talking about the plan that they're putting forward, $600 billion. I'm curious just what you think the market needs at this point or what is necessary to get us on the right track, to get us past the pandemic.

SONAL DESAI: So, you know, it's very interesting. There's what the market needs and what the economy needs. The market would like to see a big, big package because that's what the market wants to see. The economy I think probably could do with a somewhat smaller package because we've got a lot of other tailwinds which are helping the economy-- the vaccine. We've got the natural whatever. We're seeing a reduction in the total caseload of COVID. We are seeing massively easing monetary policy. And we haven't yet fully deployed the last $900 billion.

So, you know, if we got the entire $1.9 trillion which is currently being suggested, $1.9 trillion plus the $900 billion that we already had, you're talking about close to $3 trillion of fiscal stimulus at a time the economy is actually working its way out quite well. So I would say what we will end up with and I think what the market is prepared for is something between $1.9 and the $600 billion. Nobody really anticipates that $600 billion will fly. But do we see the $1.9 trillion being whittled down a bit? Yes, and I don't think the market is going to be shocked if we are at somewhere between $1.2, $1.5 trillion in the end.

ADAM SHAPIRO: We always look forward to you joining us, Sonal Desai, Franklin Templeton CEO fixed income--

SONAL DESAI: [INAUDIBLE]

ADAM SHAPIRO: --so much. So good to see you.