Bonds irrelevant to the financial system and no longer defensive
Pendal Group’s Vimal Gor says crypto will become the new gold and will play a greater role in the financial system. As the world becomes more digital, central banks will have to change the way the financial system works.
The head of bonds, income, and defensive strategies also said at Investment Magazine’s Fiduciary Investors Digital Symposium that the US Federal Reserve will have “no choice” but to take interest rates negative and bond yields will follow suit.
Gor said the rise of cryptocurrencies was an acceptance that the financial system was changing and currently people see bitcoin as a legitimate store of value because supply is fixed. “Cryptocurrencies are currently transactional but they probably won’t be in the future,” he said.
That said, Gor also believes that the most popular digital coin will be a version of stablecoin, where the cryptocurrency sits over other currencies like an SDR (special drawing rights), an international reserve asset created by the IMF (International Monetary Fund) for its members. It’s also linked to a real-world asset or pool of assets, thereby stabilising its price.
On the bond market, the Pendal executive said the US Federal Reserve and other central banks had thrown every possible measure at the economy to get rates down. “They don’t want to take rates down, he said. The problem is when US rates are 50 basis points and we get inflation, real rates will rise which will crunch the real economy even further.”
In his view, the bulk of the impact from the pandemic has yet to come and Fed will have to counter the negative interest rates.
Gor said the US government is doing everything to get the velocity up – to increase the number of transactions per unit of cash – through fiscal policies, but the lockdown had stopped people from spending. “Velocity is has come down along with GDP and interest rates,” he added.
“The government is also trying to counter (the pandemic) through a massive increase in money supply but when lockdown starts easing, velocity will stop falling,” he said. “I worry about the deflationary period which will hit in the next few months.”
The bond specialist expects to see marked deflation over the next six months. “And as the world comes out of the deflationary period and the economy and velocity start picking up you are staring at inflation which central banks will want to ensure won’t spiral out of control,” He said a vaccine for coronavirus would be “super inflationary”.
Gor also said that the government wants inflation of around 5 per cent to inflate out of huge debts. “But inflation of 7 per cent becomes problematic and it’s harder to stop if it picks up that quickly.” He also said that anyone worried about inflation should buy real assets like crypto gold and real estate but they would be mad to buy government bonds.
He said bonds will continue to play a defensive role in portfolios but at some point, they will be a “terrible asset and no longer defensive”.
“But it’s not now,” he said. “You will see a significant rally in bonds before we get to that point.”
He predicted that the Australian ten-year bond will go to zero or minus one, but just not now. He also envisaged a Japanese situation whereby the government will own the bonds and stop yields from rising. “Trading in a 30-basis point range, bonds have become irrelevant to the financial system,” he said.
Gor said investors don’t need to dump bonds in fear of taking capital losses but because they do nothing for their portfolio.