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Technicals are outweighing the fundamentals: Head of Fixed Income Efficient Beta

After Jerome Powell comments on the Fed at Jackson Hole, Head of Fixed Income Efficient Beta at Mellon, Paul Benson joins The Final Round to discuss this and what is happening in fixed income markets.

Video Transcript

MYLES UDLAND: All right, welcome back to The Final Round here on Yahoo Finance. Myles Udland with you in New York. Well, this week has been a very busy week for the Fed and a big week in the fixed income markets. And for more on that, we're joined now by Paul Benson. He's the Fed-- the Head of Fixed Income Efficient Beta over at Mellon.

So Paul, thanks for joining the program. Let's just start with this week's actions, what we heard from the fed, and what we saw in fixed income markets, because for the first time in really a couple of months here, we kind of saw a move on the longer end of the treasury curve that maybe has some people's attention.

PAUL BENSON: Absolutely. It's great to be here. Now, as Brian mentioned earlier, you know, this isn't exactly new. Not that much has changed from our perspective, in the sense that the Fed is-- the Fed is saying we're not even thinking about thinking about raising rates. And now they're coming out and talking about the possibility of allowing inflation to run a little bit hot.

Essentially, what we're hearing is lower for longer. And lower for longer is not just at the Fed level. It's at the global central bank level. So this is a globally coordinated effort. And what that means for investors is that the hunt for yield is on, and it's going to continue to be strong.

MYLES UDLAND: Well, and thinking about some of the dynamics we've seen on the corporate side, I mean, after a brief pause, companies have been able to come to market at tremendous rates, huge amounts. And it's really, I guess, it seems to me, and I'm curious for your thought on this, like, the playbook that worked at the end of the last expansion, where people just accepted rates are going to be low, you're going to have to deal with lower yield, it seemed like everyone used that immediately at the beginning of this pandemic. Do you see that kind of dynamic sustaining here in fixed income for the next couple of years?

PAUL BENSON: Absolutely. And you know, we do have a lot to thank the Fed for here, because I think that the Fed was instrumental in allowing firms to come out and raise the capital that they have. And they needed to raise this capital, because there is still a tremendous amount of uncertainty around the future. We just don't know how this is-- how this pandemic is going to play out, and it's absolutely smart what the companies are doing, going out now and raising cash when they can.

And they can because the Fed has come in and put in this risk mitigation effort. They haven't necessarily spent a whole lot of their-- their dry powder. But the fact that the Fed is coming and expressing support has allowed the market to issue record levels of debt. Between IG and high-yield, we've issued $1.6 trillion this year, so breaking all past records.

But I think what's even more interesting than the level of issuance being at record highs is the global insatiable appetite for these bonds. That has been met-- that issuance has been met without a raising of the spreads. And that's what's incredible here. That's what tells us that the technicals are outweighing the fundamentals. There is demand that is stronger than the supply, and you're seeing it not just from the US side, but from the global side.

Bonds are fungible across the globe. And a year ago, it was expensive for Japanese investors, for European investors to buy US bonds because the hedging rate was pretty-- was pretty high. That's gone down to record lows now, almost zero, because the Fed has lowered rates to record lows. So that means that US bonds, US corporate bonds are very, very attractive now to Japanese and European investors, as well as to domestic US investors.

MYLES UDLAND: And you're suggesting here, you know, that kind of a more global pool of capital obviously is going to help a US issuer. But I'm curious also, and you mentioned the appetite, and I think a lot about what happens-- or what's been happening in the US is private equity type vehicles, whether it's, you could call it private credit vehicles, nonbank banks, basically, raising tons of money and needing to deploy it. Is that part of where this relentless bid is coming from, in your view?

PAUL BENSON: I would not say that that's a major portion. I think that there is a lot of traditional money going into the markets here. Think about larger institutional investors such as pension plans across the world. These have a certain target that they need to try to meet in terms of their return objectives. And in a market where traditionally a lot of that gets invested in defensive bonds that are now yielding close to 0%, where are they going to deploy that capital?

Equities, of course, is going to be an answer, but equities can be risky. So there's a new area within bonds-- it's not new-- I'm sorry-- but-- but it's-- it's gaining more attention, which is considered this-- this crossover space, you know, the lower echelon of investment grade, the triple-b bonds, and the higher-quality, high-yield bonds, such as double-B rated bonds, you know, these are actually very, very attractive from a fundamental perspective. And they can yield 4%, 5%, 6%, which is absolutely what the community of institutional investors are looking for here.

MYLES UDLAND: All right, Paul Benson, he's the Head of Fixed Income Efficient Beta over at Mellon. Paul, thanks so much for joining the program. We'll talk soon.

PAUL BENSON: Great to be on here. Thank you.