Yahoo Finance

Welcome to a new episode of Opening bid. I'm Yahoo Finance's executive editor Brian Sai. Like I always say, this is the podcast that will make you a smarter investor, period. Let's get one minute on the shot clock here locked and loaded stock of the day is in fact.No drama or maybe some drama. It is Nvidia. We're seeing shares under pressure here. Nvidia is saying it's taking a $5.5 billion charge as the Trump administration barred it or put restrictions on it from selling its powerful AI H20 or H20 AI chip in China. So the stock under pressure there as well. Interesting that many on the street that I have talked to have expected this news coming. Still shares are down. I think this.This news provides two warnings for investors. First, that China and the US remain very far apart in terms of reaching a trade deal. That is something that I was reminded of sitting right across from Treasury Secretary Scott Besant in an interview on Tuesday. You can go to finds and check that out. They haven't even begun talks yet to get a deal done, and that comes with, of course, risks, risks to companies that sell stuff in China such as Nvidia. And last but not least.I mentioned that even though this news was expected by the street, still to see the stock decline, I think in this environment the reminder is that maybe nothing, uh, not all bad news is priced into a stock, especially a market leader like Nvidia, so buyer beware in many respects. All right, let's go from stocks to fixed income, another area of the markets that are very much in focus here. Kathy Jones, chief fixed income strategist Charles Schwab, is here with me.The Nasdaq in Times Square. Cathy, good to see you. It's been a while. Thanks for having us. Uh, you've been, uh, quite busy, I imagine the last two weeks, fixed income getting its moment in the sun as it should, as it should, um, so much focus on where the 10 year treasury has moved the past few weeks. I believe it touched 4.5%. From your vantage point, what has been driving this? And is that 4.5% number, is that really a big deal?

I think what we're experiencing is a loss of confidence in the policy because you know it was disturbing to see yields go up and the dollar go down at the same time in a week when the inflation numbers came in better than anticipated, so something else was going on and there's a lot of talk about leverage trades coming unwound, but why would they come unwound.I think the reasoning is that the policy uh mix is just not coherent for people so um I think they're really a lot of confusion about which way we're going, what the tariffs are meant to accomplish, whether the tariffs are in place, not in place for how long.

I mean you just get like struckexactly.

So I think we have this, this problem with confidence in the market and people just don't know where to go when they don't know where to go, they just sort of sit on their hands and say I'll go to cash and and wait and see what happens.

Do investors not view the US as a safe haven anymore?

I, I think that's going too far. I think people do view the US as a safe haven, and we have seen yields kind of settle down now, um, as the trade talks unfold, uh, but I think we're, you know, we're not doing ourselves a lot of favors right now with picking fights with some of our closest creditors.So, um, you know, we have to tread carefully because these are people who hold our, our securities, um, and not just not just bonds. I mean a lot of foreign capital has flowed into the US for investment purposes and equities as well as into bonds and um if we're having conflicts with our investors um that is a risk to the market.

I had a.As I mentioned at the top, I, I sat down with the Treasury Secretary Scott Bess and I, and I asked him, of course, um, China's second largest holder of treasuries, and I asked him what if they started selling treasuries and he didn't want to go too far down the rabbit hole as you can imagine, but he did say China were to weaponize treasuries, the Fed and the the treasury would respond. Are you worried about China selling treasuries?

You know, I don't think that that's a high probability. Um, I think China's very smart about the way it handles its strategy around this these investments and so, um, I think what we're seeing is China take other steps because if they, if you have an asset and you you force down the price of that asset you're hurting yourself, um, and they also then have to deal with the currency implications.of that so it's not probably in their own best interest to do that uh it's kind of the last resort but it is something that China can hold out in these negotiations and say, well, by the way,

andit's something that hasn't been in play that that fear that they would weaponize Treasury treasuries has been around for many years but now it seems more important than ever. Let's say that let's say they do.That's they don't aggressively dump treasuries, but they do unload some. What are the ramifications to the US economy and and USmarkets?

Well, presumably if it's a slow moving, uh, event, then what happens is yields go up. Uh, we have to find other buyers for that debt as our deficit goes up, probably pushes the dollar down and that's not great for the economy. It's not great for inflation.Um, so it, it would produce a bad mix, but I think what the Treasury Secretary is probably alluding to is that the Fed could buy bonds and, and make up be the buyer of last resort and hold them on their balance sheet. That is kind of a last resort on the US side.Something we did with quantitative easing during the pandemic and during the financial crisis, I think that might be the response he's alluding to

ifyou mentioned that this may have been some, uh, speculative trades unwanting that's what I heard from the Treasury secretary is that trade done unwinding on the street?

It certainly appears to be done, um, not that there might not be other leverage traders out there that that might need to liquidate, um, but at this stage of the game, uh, yields have settled down into a range and frankly we're back to levels we've been at we've been in this range.For a month or two back and forth and back and forth so um it looks like things have settled down

yeah what would you compare what we're going through today to other periods in your career? Is this what we're seeing in the bond market? Would you quantify it as a crisis.

I wouldn't say it's a crisis. Um, I, I, I, I don't think there's anything comparable in my career. I've been doing this a long time.

I've doing this a while.

I, I, I've been doing this a very long time and I've been through several crises, you know, the long-term capital management situation.Um, the bursting of the tech bubble, uh, that was around during the Volcker years when yields went up to 20%. So,

um, imagine 20%,

yeah, that, that was wild. That was wild, uh, although you could get a CD at 17.5,

it gets a positive, but inflation was ripping people's pieces

off, yeah, yeah.Yeah, so it's, it's just different, but every, every, you know, I always say it's like recessions that they're all unique, um, every big event has its own unique qualities and so sometimes we like to look back and say, oh well this is the average of these events or recessions or whatever but there's no average recession.This one, if we are going to have a recession is more um due to the trade war than a typical sort of credit cycle or something or an exogenous event like COVID so it's just

different. I encourage everyone uh just Yahoo search. Yahoo Search, Paul Volcker.Inflation and yields, especially if you're under 30 years old, go, go research these things, but I think a lot of younger investors have gotten to this, this viable yields are only in this range, and they do this thing and stock prices only do this. Let history, uh, help you dictate what you do, uh, in the markets today and into the future history, of course, is very important. You mentioned recession though and a lot of folks are saying that what is happening in the bond market is signaling a recession are you in that camp?

I think the probability of recession in the next year has gone up quite a bit. Um, I wouldn't say it's at levels where we'd be convinced there's a recession.Uh, that you'd need a probability of over 50%, maybe 60% or so. I don't think we're there. I think we're in the 35 to 45% region, but again, a lot of it depends on policies as they play out. We go into a full blown trade war, then the probability of recession will rise, and I think the market's trying to discount that, but.It's just really hard because we don't get consistent signals on what's going on and there's so many things going on at once so you have the doge cuts that are and funding for institutions like universities that has a a widespread impact on the labor market and if the labor market deteriorates um then we.Could see a recession because consumer spending would pull back um

well a lot of these colleges too, Kathy, as you know, they have large endowments. I mean they own fixed income. Are these cuts impacting? Are you hearing anything about these cuts impacting how endowments invest their in fixed income?

No, I haven't. Uh, I haven't heard any change from the endowment side or the institutional side. I, I think the bigger question.when, um, say the NIH cuts come through that affects the price so for every federal worker they're estimated to be two private contractors and the NIH funds, um, and National Institute for Health, um, if you cut the funds there that flow through the university you're cutting jobs associated with that.So I think these cuts could have a bigger impact on the labor market than people recognize and if they continue.Uh, as they appear to be, if the funding continues to dry up, then we are gonna see, um, more, more weakness in the labor market that could cascade us intoa recession.

Is there any way I can get this 20% CD because this you're just setting up a backdrop that would suggest like, I don't know, I maybe I need more safety in my portfolio.

Well, I, you know, I still think bonds are safe, um, and you can get 20% out of the question, um, but you can get, you know, anywhere from 4.5 to 5.5%.Uh, in very high quality bonds, investment grade corporate bonds, treasuries, other government securities, you can look to the municipal bond market if you're high tax bracket, and a lot of people here in New York City pay a fair amount of taxes, um, and.And you know, the, the yields on long term municipal bonds of very high credit quality are are very high on a tax equivalent basis so there are places to invest and relativelysafely.

All right, uh, hang with us, Cathy. We're gonna go off for a quick break. We'll be right back on opening bid.All right, welcome back, uh, to opening bid, and you know, usually we, we talk about stocks and, uh, uh, even crypto sometimes and opening bid, but I want to lock and load on fixed income and for that conversation you have to reach out to Cathy Jones, uh, like we did chief income strategist at Charles Schwab. I wanna go down or take through the different types of types of bonds, corporate bonds. What's their risk right now given the trade war like.Even credit worthy companies, how concerned should investors be about putting money to work in those type ofbonds?

Yeah, we think investment rate is still solid. Um, corporate profits have probably peaked for the cycle, but, um, over the years that these big companies have termed out their debt, meaning they've locked in low, lower, uh, cost of funding over a number of years, uh, and so even in a downturn in the economy they usually have.Strong balance sheets, enough earning to pay their bondholders. So investment grade, we're, we're pretty, we feel pretty good about the high yield below investment grade.

It's dried up, yeah, I think I, I just read a story I believe in the Wall Street Journal that there's been no what high yield issuance in the past fewyears

because the markets haven't been particularly receptive. So, um, and the spread versus treasury is very wide or not very wide, but it has widened significantly.And these are the smaller companies more leverage more debt on the balance sheet, more susceptible to the ups and downs of the economy, so we're pretty cautious on high yield we think there will be an opportunity to to go into high yield where you get enough yield to warrant the risk.Uh, we don't think we're quite there yet.

Let me, I will, I wanna drill down further in this. So you mentioned investment grade safe. so many companies, even investment grade, could have their profits completely wiped out this year, next year, and maybe even the year after because of tariffs. So how safe issafe?

Well, remember, bondholders have a legal right to their principal back and their interest payments before stockholders or dividend.Uh, holders, so, um, we think that by and large the bigger companies will be able to pay their bondholders, whether they cut their dividends or their earnings aren't so good is another question, but the bondholders, I think we're in good

shape. You think dividend cuts are next.

Oh, I, I don't know. I mean, it's gonna depend on the industry and the company, uh, but again this is not really a credit cycle where this is driven by over leverage companies getting overextended and then getting hit with a downturn. This is a different kind of a slowdown.

If riskier companies can't get the debt they need, what do we what do we see rolling bankruptcies?

You start to see defaults and bankruptcies and rest.Structurings now a lot of what we've seen over the last several years is private credit funds have taken up some of the lower quality companies so you get these, um, and they do restructurings where they it's a distressed exchange they take you get equity instead of of debt um but that's more on the private credit side on the public side uh what you'd get is probably some sort of restructuring but.Uh, it depends on the covenants that are that are involved with the, uh, with the issuer, but you could see some, some defaults and some bankruptcies

when you talk to international clients or really I guess any clients, Cathy, do you have any of them questioning the US credit worthiness?

There's a lot of questions, um, and there's a lot of concern. We've sort of heightened concerns about long term problems with our, our deficit and our debt now.Over the years it never has reached a crisis level because people believed in the full faith and credit of the US government and

all this stuff gets punted to the next generation, right, they'lltake care of it right

right and and as long as the US economy is growing at a healthy rate, then we can sustain, right? So it's unsustainable in the long run it's sustainable in the short run if we're growing.And um and we have you know a healthy strong economy it's when you hit these downturns what's our capacity now to deal with the downturn in the economy? Usually the fiscal side kind of kicks in to provide unemployment insurance and other kind of help when we're in a downturn now we maybe don't have that fiscal space.Do it because we've spent a lot of money on other things, accumulated a lot of debt. When

I, when I talked to the Treasury secretary, we got into briefly the Trump tax plan. Now he told me that some form of deal or maybe the whole plan will be done by July 4th. Now as part of any deal, my interpretation is that we will add potentially trillions of dollars more onto the deficit.What, how would the bond market take that in terms of we get that tax deal, they dig the market digs into the details, they see trillions of dollars added to the deficit. Where's the 10 year go?

Yeah, I think on the margin it it keeps yields higher. So the, the, the sort of three drivers of the treasury market, uh, typically are what is the Fed doing, what's inflation doing, what's the economy doing?The deficit has never factored in in a big way, um, but there is a risk premium embedded in the longer term bonds, particularly treasuries, um, called the term premium and um that has expanded recently and I think that it continues to expand if we pass that kind of a budget deficit, uh, bill.Uh, I think that term premium will push up longer term yields. People will question, well, how are we gonna do this in the long run. So yeah, another, um, big expansion of the deficit on the presumption that tax cuts boost economic growth. We've done this before we, we've done this where we, we cut our revenue and we increase our spending and you know you can only do it, uh, so many times before the.Market starts to send yields up and says, you know, we're not buying it. Is it,

you know, given that backdrop, does it make sense to invest in treasuries? Should I have a portion of my portfolio in them?

I still think it's part of our what we call our core bond holdings and yeah, they are backed by the full faith and credit of the US government, which I, I think at the end of the day, uh, if they have to take special measures to pay, they will pay.Um, so I still think it makes sense to have

treasuries. In the last, uh, portion of our podcast, Cathy, we always love to get a hot take from our guests. Uh, this one, just pulling these out of thin air, uh, Cathy, what is the someone want to invest in bonds or fixed income today? What's the most important thing they need to know based on your many years of covering the space?

Just know what you own. The bond market's huge. It's and we talk a lot about treasuries, but the bond market is ginormous as they.There is

lifebeyond Treasury,

right, yeah, and, um, understanding the different types of bonds so you can have a really well diversified portfolio is, is important. So just, um, so many times I see people say, well, I, I bought this fund or I bought this ETF and I thought I was buying XYZ and I ended up with ABC. So it just know what you own. I think that's the most importantthing.

How has the past two weeks been for, uh, you and your, your buddy Liz Anne Saunders over at Charles.I'm also a friend of Finance.

Yeah, we've been, we've been busy. We've been, we've been communicating a lot and we've been very busy, but it's, you know, sometimes times like this can actually be fun as well as scary.

I are people as nervous as we see reading the tape in the market when you talk to them?

Yeah, a lot of investors are nervous. There's just a lot happening at once. It's hard to interpret. It's hard to sort it out. It's hard to keep up.There seems to be something new every day from all over the world and so yeah, I, I think people are a bit nervous that we we're not seeing people make rash decisions so much as just ask a lot of questions

like what's the what's the best question you're getting from them or the most recurring?

Um, I think we've gone from, you know, should I just go to cash because I'm nervous to what are the opportunities? So I think people are readjusting their outlook and saying, OK.You know, uh, we may have some ups and downs, but that produces volatility produces opportunity. I

think years ago they would have just went all to cash, right?

Yeah, uh, we might have. I mean, there's always a component of that, you know, if people get ner and that tells you, look, if you're tempted to go all the cash, that tells you maybe your portfolio isn't structured the way it should be, right? Your risk tolerance isn't what you thought it was, which is fine, um, but that tells you a lot about yourself as well as about the market,

so true, uh.We're gonna leave it there. Kathy Jones, chief fixed income strategist at Charles Schwab. Good to see you. Tell us then we said hello. Uh, always good to talk with you both. Uh, that is it for the latest episode of Opening bid. Like I always say, hit us with those 5 stars on all the podcast platforms. Thumbs up on YouTube. Love your comments. They keep me going. I always try to answer them. We'll talk to you soon.