US Election Risk Factoring Into Rates Outlook: OCBC Bank

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Bloomberg Jul 2 00:04 · 10.8k Views

OCBC Bank's Vasu Menon says the lender has updated its rates outlook to reflect US election uncertainties. "The risk that Trump may come into power and some of his policies, if implemented, could fuel inflation to some extent," he says. OCBC Bank has raised its 12-month forecast for the 10-year US Treasury yield from 3.75% to 4.25%. Menon speaks on Bloomberg Television.

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Transcript

  • 00:00 He's actually updated his rates outlook, raising his 12 month forecast for the 10 year U.S.
  • 00:04 Treasury yield to 4.25%.
  • 00:07 With us now is Vasu Menon, managing director of investment strategy, OCBC Bank.
  • 00:12 And and Vasu, really great morning to have you on with that call, but
  • 00:15 tell us what's behind it and what changed your thinking.
  • 00:19 Well, you know, I think election risk is behind the thinking.
  • 00:23 The risk
  • 00:24 that Trump may
  • 00:26 come into power and some of his policies if implemented, could
  • 00:29 fuel inflation to some extent
  • 00:32 and
  • 00:33 that may lead to some rebound in inflation,
  • 00:36 resulting in our forecast being taken up from 3.75%
  • 00:40 on the 10 year U.S.
  • 00:41 Treasury
  • 00:42 for the next 12 months
  • 00:44 or rather 12 months down the road, we've increased it to 4.25%.
  • 00:47 It's a 50%, a 50 basis points increase,
  • 00:50 but it's a reflection.
  • 00:51 It's to reflect the risk of,
  • 00:54 you know, the election outcome as well as the
  • 00:56 risk of a inflation rebound
  • 00:58 in the event
  • 00:59 Trump wins elections.
  • 01:03 And, and what is it exactly about it?
  • 01:04 Is it is it the tariff risk?
  • 01:06 Is it policy around immigration?
  • 01:09 Is it
  • 01:10 fiscal prudence?
  • 01:12 What are you most
  • 01:14 concerned about and most watchful on?
  • 01:17 Well, all of those actually really.
  • 01:19 I mean,
  • 01:20 there are questions of him
  • 01:21 cutting taxes, which could fuel economic growth and lead to a rebound in inflation.
  • 01:27 Immigration curbs clearly will hurt
  • 01:29 labor supply, push up labor cost.
  • 01:32 Tariffs will clearly increase
  • 01:34 import cost in the United States.
  • 01:36 So all those factors that you mentioned could lead to
  • 01:39 slightly higher inflation in the US,
  • 01:41 But at the same time,
  • 01:43 1
  • 01:44 does not want to turn too negative
  • 01:47 because at the background, the economy is slowing down to some extent.
  • 01:50 That slowdown in economic momentum could also, you know,
  • 01:54 pull inflation down.
  • 01:55 So it's a bit of a pull and a push.
  • 01:57 But nevertheless, you know, to be conservative,
  • 02:00 we've taken the forecast up.
  • 02:02 But, you know, we're not suggesting that, you know, investors bail out of the markets
  • 02:06 simply because, you know, Trump might win the elections.
  • 02:11 You're
  • 02:11 turning, though, a little bit more careful when it comes to your credit positioning.
  • 02:17 That's right.
  • 02:17 We've turned a bit more careful when it comes to credit positioning because we think that, you know, a Trump victory may not be necessarily negative for the stock markets.
  • 02:25 The outlook for the stock markets could be relatively mixed because if you go back to history,
  • 02:29 you see that when Trump was president, between 2017 and 2020, the US stock market, based on the S&P Finder index, actually posted a gain of
  • 02:36 70%.
  • 02:38 So he's not necessarily bad for the stock markets, but
  • 02:40 if some of his policies fuels inflation,
  • 02:43 then that's going to pose challenges for the Federal Reserve.
  • 02:46 It may lead to the long end of the bond yield,
  • 02:48 you know, hitting higher.
  • 02:49 And therefore, you know, we've turned a bit more cautious on,
  • 02:53 you know, bond markets and also because the valuations in
  • 02:55 investment grade developed market bonds have become tighter,
  • 02:59 valuations have become less appealing.
  • 03:00 And so we thought, you know,
  • 03:02 we will take it down 1 notch from overweight to neutral.
  • 03:04 But bear in mind, we're neutral, We're not underweight, so we're not negative.