Pal: The Bond Market Will Figure It Out

Your Real Vision Daily Briefing for May 22, 2020

Senior editor Ash Bennington sits down with Real Vision CEO and co-founder Raoul Pal to explore the latest developments in markets and macro.

  • Debt mutualization in Europe may feel like the answer, but it is not the answer because there are broader structural issues at play.
  • China’s proposed national security law is a huge threat to Hong Kong and a very bad set up economically for the entire region.
  • The plummeting two-year U.S. Treasury yield may well fall to zero and even go negative.

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Debt mutualization in Europe is simply not enough and this is not a problem that can be solved with the stroke of a pen, Real Vision CEO Raoul Pal said during today’s Daily Briefing.

Pal said that Europe’s broader structural issue of being made up of economies operating with convergent monetary policy but divergent economic growth make debt mutualization an impossible solution – especially as countries would still be able to behave independently on the fiscal side.

It feels like the answer, but it’s not the answer, he said, and argued that the eventual solution will not be decided with the euro at 109. Rather, the euro will have to go to 75 cents for the decision to break apart or choose closer integration to happen. 

“Nobody does anything without a gun to their head; it will take a crisis for something to be reached,” he said.

In China, Pal thinks the elimination of GDP targeting will have little impact but he is concerned about the special status of Hong Kong being threatened. With their stock market under pressure, the risk that eventually Hong Kong’s currency will go, and China itself being very weak, it’s a very bad setup for that whole region. 

Pal said this is more about solvency than liquidity and because of that, whatever happens will take time to play out.

In the U.S., Pal said he is watching the bond market as the two-year treasury yield has plummeted and he expects it to go to zero and possibly into negative territory, which has already happened in the UK.

While there’s no way to predict what happens to the virus when economy reopens, Pal said the bond market will figure it out. He said the two-year yield curve will tell us if things are not going as well as we think or if they’re looking better than anticipated. 

Keep your eye on the bond market,” he said. “The two-year is the important part – that’s the big one and it will tell us.”