One on One with Jack Malvey, Chief Fixed Income Strategist at Lehman Brothers
Monday, July 30, 2007
|
|
|
|
SUSIE GHARIB: Bond prices fell today as investors returned to stock buying. But Treasury yields are still significantly below 5 percent on investor concerns about reduced access to credit for borrowers. Joining us now for more analysis of the credit markets, Jack Malvey, chief fixed income strategist at Lehman Brothers. Hi Jack.
JACK MALVEY, CHIEF FIXED INCOME STRATEGIST, LEHMAN BROTHERS: Hi.
GHARIB: As you know, there are serious concerns about a credit crunch. What are your views on that subject?
MALVEY: I wouldn't say it's a credit crunch. I think what we've experienced is the repricing of credit risk. We have been priced to perfection over the course of early 2007. Now we're in the midst of resetting to such that we're pricing to reality. Where we stand now is after the adjustment over the course of last month, we are still on the historic low side in terms of pricing of low quality credit risk. For investment grade credit risk we're roughly average, maybe a little bit cheaper.
GHARIB: Do you think as we go through this repricing of risks, that it is going to be more difficult for borrowers, whether we are talking about businesses or consumers to get credit?
MALVEY: I think that the high quality and medium grade borrowers will have no problem whatsoever accessing the market. It may be a little bit more difficult and challenging for folks who are businesses who have lower quality credit in this environment. Certainly that is one of the signs and one of the reasons why we are repricing credit.
GHARIB: So you don't see any risk of this repricing of risk hurting the U.S. economy? Am I reading you right?
MALVEY: I think that there's a very low chance this really has a substantive effect of the U.S. economy over the near term. But certainly to the degree this became more pronounced or extends for longer than we currently expect, it certainly could. But it's a very important part of the termination of the length of the business cycle.
GHARIB: There are some people who have been forecasting now, saying that the housing sector will not bounce back until maybe 2009. So there are fresh concerns that the housing sector and the problems in that sector could pull down the economy, the U.S. economy into a recession. What is your view about the recession to date?
MALVEY: Well, I think certainly some day there will be another U.S. recession, but it's probably longer out than maybe some of the folks who are more bearish would currently suggest. Housing ultimately (ph) probably will be a part of it, but housing alone is not sufficient to drive the U.S. economy down. We went through a challenge in the mid to late 1980's and it was not sufficient really to knock the U.S. economy off. So I think certainly part of maybe many factors which ultimately will knock the U.S. economy down, but it's several years out, not in 2008 and maybe not even in 2009.
GHARIB: We see that in the Treasury market, a yield of below 5 percent. Do you think that the markets are telegraphing to the Federal Reserve that maybe it's time to cut interest rates?
MALVEY: You can extrapolate that from what the curve has done over the course of the last month, but I don't think that's really the message. The reality is I think the curve engaged in the classic risk-aversion move, equity sank, credit spreads rose and yield curves benefitted not just in the U.S., but around the world. We don't think that it necessarily means that the Fed is any more or less inclined to lower interest rates over the balance of 2007. More likely they'll sit on the sidelines unless there is a significant increase in risk.
GHARIB: Jack, there has been a lot of volatility and a lot of uncertainty in the markets. By the markets I mean both in stocks and in bonds. When do you think all of this is going to sort itself out? You've been through so many of these cycles before.
MALVEY: Over the last 25 years we've had about a dozen of these types of credit setback months as we've had here in July of 2007. And almost always they settle down in one to three months. So I think that it is the case that this also will subdue over the course of the next two to three months. But I think it does signify that there's been a change in the status of the cycle. We're off the peak for sure in our view and these types of volatility escapades are likely to become more common over the course of the next two to three years. So a different set of market conditions than we've enjoyed over the last five years.
GHARIB: Real quickly, so for investors who maybe want to switch out of stocks and go into bonds for safety, how long or how short of a maturity should they seek?
MALVEY: Right now we recommend high quality securities, government securities and high quality municipal securities. We probably say short to medium term maturity.
GHARIB: All right, Jack, thank you so much. My guest tonight, Jack Malvey, chief fixed income strategist at Lehman Brothers.
