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Expert: 'Not everybody is looking to weather the volatility of the equity market'

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Matt Brill, Invesco Sr. Portfolio Manager and Head of US Investment Grade, joins Yahoo Finance's Alexis Christoforous to break down the latest market action as stocks dip amid the short-squeeze chaos.

Video Transcript

ALEXIS CHRISTOFOUROS: All right, let's stick with the markets now because there's so much to dig into here and bring in Matt Brill. He's senior portfolio manager and head of US investment grade at Invesco. Matt, thanks for being with us. Just as you're seeing all of this play out with these speculative stocks, have you seen anything like it in your professional career? Some people are saying it's similar to what we saw during the dot com bubble bursting in the late '90s and early 2000s. What could you liken it to?

MATT BRILL: Yeah, good afternoon. It does remind me a little bit of that. I was in college at that time. And I certainly remember the volatility. But we're in the bond market. And this is kind of the financial Super Bowl right now, if you will. And the bond market guys didn't get invited to this party. So we're kind of on the sidelines here, watching this, and trying to just figure out what this means for the overall markets. But right now, our market has been actually well bid because people are looking for a place of safety and a little bit more calmness.

ALEXIS CHRISTOFOUROS: Yeah, I mean, all this volatility in equities, are you seeing that flight to safety in fixed income right now? What have the inflows been like over the past few days?

MATT BRILL: So yeah, we're starting to see this. The inflows are pretty strong. Not everybody out there has diamond hands. So not everybody's looking to weather the volatility of the equity markets to really stay long in this market.

And some people are just saying, you know what, I can't figure it out. I don't know where this is going. I had a really good 2020. Let's put some money on the sidelines. Let's go into fixed income.

So we're seeing that. We've been seeing flows the last several days from US retail funds, which is actually reversing what we had seen the early part of the year, when the biggest concerns for everybody were rising rates.

JARED BLIKRE: Let me follow up on the bond market here. And by the way, I love your terminology borrowed from Wall Street Bets, diamond hands. It's been a lot of fun this week. But we have long-term interest rates rising generally. We have the yield curve expanding. Breakevens are at multi-year highs. What's your read of the US Treasury market and what it's saying about the global risk market right now?

MATT BRILL: So what it's telling us is that the economy is poised to do well. And this is really a distraction near-term. So it's a distraction near-term. Yes, there's going be regulations that are announced around this. Yes, there's going to be gains and losses and huge days.

But at the end of the day, it's all about the fundamentals of the overall economy. And the economy is going to accelerate in 2021. We're going to see a stimulus package. We're going to see some inflation start to pick up in the second quarter.

And when you start to see those big numbers hit in the second quarter, the big question is, is this transitory or is this long-term, is this permanent? It is our view that that it is temporary. And we believe that the Fed is going to tell you over and over and over that this is temporary. But you have to be prepared for it. And right now, the market's really kind of a push and pull between those who think there's going to be inflation and those who think that this equity market volatility is going to cause a greater bid for safety.

ALEXIS CHRISTOFOUROS: I know you're on a fixed income guy, Matt. But I want to ask you a question about equities for a moment. Do you think that there is a correlation between the rise we're seeing in the speculative trades, like GameStop and AMC, which were on another tear today, and the fact that the rest of the market seems to be down so aggressively? It seems to me like hedge funds are having to dump stocks in other areas in order to make good and sort of cover their short positions. Do you think there's a correlation there?

MATT BRILL: So I think there's a correlation, but it's not necessarily because they have to sell. I think there's a bit of just people just not understanding what this means. I mean, you don't normally see 200%, 300% moves in one individual stock in a day. Our fund for 2021 will probably move less than any of these stocks will during this entire interview. So that just shows you how volatile these stocks are right now.

And so when we think about that, you think maybe you want to put some more money on the sidelines. And I think that that's what's happening with hedge funds. Yes, some are getting tapped on the shoulder. Some equity investors are saying, I need to get out of this. But I think mainly it's just people saying, I don't know where this is going. And I'll just get my popcorn and watch it.

ALEXIS CHRISTOFOUROS: Right. Well, you know, what about investors who are trading on the Robinhood platform? They might have nothing to do with all of these speculative trades. They just have an account with Robinhood. I mean, if you had money in Robinhood right now, would you move your money out? I mean, they have to raise a whole bunch of cash for the firm overnight.

MATT BRILL: Yeah, I can't comment to that. But I would just say that there are very traditional banks out there that can be very safe places to put your money. Maybe that's a better route. I'm not an expert.

But my opinion right now is that it's a time for-- get your ducks in a row. Make sure that you're not risking your tuition money. Make sure you've got your mortgage paid for. And then start to figure out where are the fundamentals headed in this market.

And the fundamentals are strong. You saw it this week with earnings. They were very strong. I don't know if anybody needs to pull money out of any individual firms. But I think going forward, the economy in 2021 is going to be good. And if you take away the speculation aspect, which is really the exciting part-- and obviously, it's a lot of fun to watch. But the fundamentals are going to be there. And that's where we need to be, kind of looking forward to.

JARED BLIKRE: So let me follow up on that. At least in the corporate bond space, are you seeing the money moving into value and cyclicals? I know we've seen that in the equity space where they've been bid up. But how does that translate into the bond market?

MATT BRILL: Yeah, so we're certainly seeing travel and leisure doing quite well. Just this week, you saw Hawaiian Airlines do a deal. Those bonds are up about 4 points. You also saw United Airlines do a deal, secured by their their engines and their planes. And that deal is up about 3 points. So travel and leisure does appear like it's the place to be in 2021. Kind of your deep cyclicals, we do believe, are going to get bid up.

The area that we like is high yield, particularly technology and homebuilders. Those are the two spaces that we expect upgrades. We think 2021 is the year of the upgrade. You're going to see about 50 billion, maybe even 75 billion of bonds that are going to be upgraded in 2021. And so that's a cyclical trade.

2020 was about survival. 2021 is about growth. So we're really, actually, optimistic about the trajectory for overall fundamentals here. And we think you need to have a little bit more credit risk. However, you've got to make sure that you're avoiding some of the more correlated stocks or more correlated bonds to this equity move that you're seeing on days like today.

ALEXIS CHRISTOFOUROS: We know the Biden presidency has stated it wants to roll back those Trump tax cuts. What would a higher corporate tax rate mean for the bond market this year if they're able to pass that?

MATT BRILL: Yeah, so we do expect them to increase taxes, probably to 28%. And one of the biggest things is, when you think about writeoffs or the ability to avoid taxes-- we don't call them avoid taxes but limit taxes-- if you can tender for your debt, or if you can take out your debt at a higher premium-- basically, a lot of these bonds are trading at a 130 dollar price.

The companies are going to look to go buy these bonds back and take a 30-point hit. And that results in a near-term loss. That near-term loss enables you to reduce your tax bill. So you're going to see a lot of companies, once the tax is enacted, which is going be the latter half of the year, then you're going to see a lot of companies buying back their debt, paying huge premiums for bonds because they want to take a near-term loss so they can avoid a large tax bill.

This is the biggest trend we're going to see the back half of the year. We think that the tax bill-- people always are coming up with new ways to avoid it. But right now, it's going to be to lower your taxes by taking huge losses on buying back your own debt, which for us is actually really good from a fundamental standpoint as well.

ALEXIS CHRISTOFOUROS: All right, Matt Brill of Invesco, thanks so much for being with us on this very busy market day. Appreciate it.

MATT BRILL: Thank you.