‘I think we’ve put in a bottom in yields’: Portfolio Manager

Jack McIntyre, Brandywine Global, Global Fixed Income Portfolio Manager, joins Yahoo Finance to discuss the outlook on inflation following the latest economic data, Delta variant impact on the market, and outlook on the bond market.

Video Transcript

KRISTIN MYERS: I want to bring in Jack McIntyre now. He's the global fixed income portfolio manager at Brandywine Global. Jack, let's just start with inflation. And I'm hoping you can talk to us a little bit just about this push and pull right now that we're seeing with the Fed and inflation. Of course, PPI hitting another record for the month of July, and just yesterday, we were chatting with Eddie Ghabour, and he said that he does not see inflation as transitory. I'm curious to know if you think that perhaps the Fed really needs to start thinking about taking that punch bowl away from the party, and if markets right now might be getting a little bit drunk off of it.

JACK MCINTYRE: Yeah. It's a good point, because I think this Fed probably wants to err on the side of keeping stimulus in the system longer. They like their optionality, and once you go down the path of talking about tapering is imminent, you can't pull back from that standpoint. So I'm probably a little bit more in Brainard's camp. Hey, let's see-- and Evans'-- let's see more data over the coming months to figure out when we actually want to taper.

And you're right. One of the things that's certainly clear source of inflation is supply constraints. But if you think about the Delta variant, it's spreading like wildfire. Let's get a foothold in China. We're already starting to see it impact ports and shipping. So the point being is that maybe supply constraints last a little bit longer, and if that's the case, it keeps inflation a little bit more perky longer than what the Fed might expect.

BRIAN CHEUNG: Now, Jack, on that point, it sounds like you're in favor of a wait-and-see approach. But what are you seeing in terms of pricing in the market right now? Because on one hand, if you take a look at airline stocks, barring American Airlines, it seems like most of the majors have been pricing in the Delta risk. We were talking yesterday with a number of guests about cancellations and actually slower bookings in future quarters. But when it comes to the market at large, though, we saw the Dow hit a record high. So I guess, where are you seeing the proper pricing of that Delta risk?

JACK MCINTYRE: So this is where it gets a little bit interesting, because there's certainly a counter-intuitive nature to this. You think about last year, the policymakers stepped up, did more stimulus. As the COVID got worse, they did more monetary and fiscal. I think we could see something similar. Maybe not necessarily more stimulus, but certainly keep that stimulus in this pipeline longer than they would otherwise, and that's probably good for risk assets. But you certainly have to look what the different sectors within the equity market value, which over the last several days has done better, but it's certainly not today.

When we look at treasuries, we've seen a pretty good rally in treasuries. And I get it. I think part of that is everybody was bearish on treasuries, and now they've reversed that. But certainly, treasuries have probably priced in-- I can't say all, but certainly a big part of the Delta variant slowing the push-- the full-scale reopening of the US economy in here. But bottom line, it's actually-- Delta could actually be positive for risk assets, just going to keep stimulus in the system longer.

KRISTIN MYERS: I actually want to delve into that a little bit more, because I'm going to read what you wrote in your notes. You said that even with the Delta variant spreading like wildfire, you're still looking at the pandemic through the lens of a global natural disaster as opposed to a global financial crisis. Now, of course, throughout this pandemic, we have seen markets essentially go on a tear. We've seen record highs. Just yesterday, we had the Dow hitting some fresh record highs, so it is a point well-taken. But how much do you think perhaps that the variant could present some headwinds going forward, especially as we've seen a lot of volatility, we've seen some serious sell-offs as the concerns over the Delta variant continue to mount.

JACK MCINTYRE: So I might push back a little bit about the serious sell-offs. When you look at equities, you haven't really seen that much of a sell-off. But my point, though, getting back to viewing this through the lens of a natural disaster, the point here is that the economy snaps back much faster. There weren't these excesses that we had to go through that you typically see in economic contractions, recessions, those sorts of things. But that's only half the equation.

The other half, though, is the policymakers are treating this as though it is a recession. They've been incredibly aggressive. And I get it. There was, enmasse, this view they didn't do enough in response to the GFC. And if you remember, post-GFC, it was all about monetary policy. Fiscal policy was kind of limited. People were looking at austerity, say, hey, we've got to pull back.

We've got a double-barrel approach right now in terms of fiscal and monetary policy in here. And remember when it comes to stimulus. You've got-- it takes time to work through the pipeline. So you've got old stimulus that's coming to the forefront now, we've got current stimulus. And then you look at what's coming out of Washington, we're going to get even more spending on the fiscal side of things. So when I put everything together, I think-- and again, I'm not trying to be cavalier. Delta is going to be bad. It's very extremely contagious. It's sort of an aftershock. I don't think it's the primary shock. I think it's an aftershock. So when I think about where we're going to be six months from now, I view a very strong growth environment globally.

BRIAN CHEUNG: And Jack, lastly, you talked about equities pretty in depth there, but how about bond markets? It was only about two weeks ago that we saw the 10-year at about 1.17% in terms of basis points. Now we're up at 1.36%. Do you see this as a trend to get back to maybe where we were in the spring? I remember back a few months ago, we were talking about next stop being 2%, but we obviously haven't gotten there. So what do you think is the story for longer-term bond yields?

JACK MCINTYRE: Well, that kind of goes to my point, because everybody was expecting a position bearishly for bonds to go up to 10-years, to go up to 2%, if not 2.5%, 3%. So yeah, I think we've actually put in a bottom in yield, but maybe we're going to go to 1.50%, 1.60% in that area. I'm not sure yet if we've got enough to get through there. But I just don't see yields declining significantly lower from here. I think with, again, that stimulus that's in the system, opening up the economy, markets becoming forward-looking, looking beyond Delta, I think we're going to be more of a range bound for treasuries.

KRISTIN MYERS: All right, let's leave that there. Jack McIntyre from Brandywine Global. Thanks so much for joining us today.