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Structurally treasury yields should not further sell off: HSBC’s Willem Sels

Willem Sels, HSBC Global Chief Investment Officer joins Yahoo Finance Live to break down how 2021 will be an eventful year for investing and weigh in on how the Biden Administration plans to bolster the U.S. economy this year.

Video Transcript

JULIE HYMAN: All right. We want to move on, take a breath for a moment, and look at the big picture here for stocks. For that, we bring in Willem Sels. He is HSBC Global Chief Investment Officer of Private Banking and Wealth Management. Thank you for being here. I want to go back to something I mentioned at the beginning of this segment, which was the aid package that President-elect Joe Biden has proposed.

As you are thinking about markets here, is this enough to give some further steam to the markets? Has it already been priced in? And how much are you thinking about the eventual down the road paying for this, perhaps with taxes?

WILLEM SELS: Yeah, I'll start with the bulls and the bear interpretation of this. So the bulls are going to say, this further stimulates the economy, therefore, you get a cyclical recovery. This should help the cyclical sectors, the small caps. And then, the bears would say, well, this is going to push up treasury yields. It might lead to some earlier tapering. And therefore, you need to get out of the technology stocks and the growth stocks. Because that tends to happen. They tend to underperform when your yields go up.

We are more in the-- in the former camp, where we think this is some positive for the economy, positive for the consumer. And we think structurally there are many reasons for treasury yields to not further sell off from where we currently are. Certainly, there is no big inflation pressure here at any point in time. So the policy rates should be stable. And then, the Fed is also going to be very, very slow to taper.

MYLES UDLAND: You know, Willem, I think on this program we're quite-- I mean, we're all based in the US, the three of us are. So we're quite focused on what all these policy stances mean for US equities. But as you think about it more globally, what are the knock-on impacts of, you know, perhaps treasury yields staying flat when the anticipation is they would continue backing up.

What about the dollar as well? The weakening of dollar was such a big story at the end of last year. How is that kind of feeding into the global outlook for financial markets this year?

WILLEM SELS: Yeah, exactly. And it is of interest. I mean, we have spent a lot of time in the last two weeks, especially talking to Asian investors. And their number one question is about Biden's tax policy. So, you know, it clearly is of global interest. So indeed we are, with our forecast of stable to somewhat lower even treasury yields from here, we are below consensus, therefore, on the treasury yields.

I think the consensus is to go-- for it to go to 125 on the US Treasury. So that, if we are right, that means that there should be very good support for credit around the world. There should be very good support as well for emerging market, hard currency, and even local currency bonds as well. It means also that there is no threat to the technology sector, at least coming from the rate side.

And then also there is other elements of the Biden policy obviously that are interesting, especially the interest in sustainability. Even though he has only a small majority in the Congress and therefore might not get everything through on sustainability, the view is that that is one where he will find more support. And therefore, you know, that is an area where you could see a lot of investment benefiting all of the companies that are involved, either in the infrastructure related to green energy or the electric vehicles, the whole chain of that climate change.

- How concerned are you, and we were having this debate earlier on the show, how concerned are you that this stimulus plan-- let's say if it gets down, whittled down to $1.1 trillion from $1.9 trillion, as President-elect Biden has proposed. How concerned are you that the market will read that as a potential for tax increases, that gets moved up to this year? And that might actually be negative for equities.

WILLEM SELS: Yeah, so, you know, up to-- I think even just last week, the market was mainly focused on the stimulus side. I do get more questions now around the tax angle as well, probably because there were more comments from the campaign as well and from the Biden team. You know, our view is that, of course, there will be some measures that get into place quickly on the tax side.

But there will also be quite a lot of them which will wait until the economy is stronger. I think basically you need to look at both the stimulus and the tax side as a function of how strong is the economy, how much stimulus does it need. And then, when it is really strong, how quickly can we-- can they raise taxes? Same thing from the monetary perspective as well, the Fed, they're probably going to be even slower than that.

They're going to be wanting to make very sure that the economy can stand on its own two feet before they even start to signal that they will do tapering. They really want to avoid a tightening of financial conditions too early before the economy has recovered. Remember also that, on the household side, there are households that have kept their jobs and saved a lot.

But there's also a lot of them that have lost their jobs. Therefore, the Fed will be very careful not to hike too early.

JULIE HYMAN: Yeah, and that was emphasized by Jay Powell's comments yesterday. Willem Sels, thank you very much. Good to see you, HSBC Global Chief Investment Officer of the Private Banking and Wealth Management segment, appreciate your time this morning sir.