Where Bonds Go, Stocks Follow with Sam Watkins

**Sam Watkins** (0:00)
Markets can remain irrational for longer than you can remain solvent. When you see interest rates move higher, it does put a gravitational pull on equity prices.

**Ren** (0:09)
You know, it's logical, and that's what the textbooks tell us. Why the disconnect? And probably more importantly, who's wrong? The stock market or the bond market?

**Bryce** (0:16)
Equity Mates! Welcome to another episode of Equity Mates, a show where we explore what's possible in the world of investing. My name's Bryce.

**Ren** (0:24)
And I'm Ren, and today we are talking about a market that is much bigger than the equity markets, by some measure one and a half times the size. And no, we are not talking about the Australian property market. Today we are talking all things bonds and fixed income.

**Bryce** (0:38)
We have an expert joining us from one of the world's largest fixed income managers, PIMCO. His name is Sam Watkins. He's the managing director and head of PIMCO Australia & New Zealand.

**Ren** (0:48)
And now this is an interesting time to talk about bonds and fixed income, both because as bond yields rise, the amount that they pay, they've become more and more an attractive income option for investors. But the bond market is also a lead indicator for the share market and I guess the broader economy. And if it is a lead indicator, some of those indicators are flashing red at the moment.
Since the war in Iran started, yields have spiked, meaning investors want to get paid more for the risk that they're taking on. I've just got the chart here. The US 10-year treasury, so like a real benchmark bond, before the war on the 27th of February, the day before the US attacked, the yield was 3.9%. So that's what investors were asking for to take on the risk of funding the US government. Now it's above 4.5%.
So it's gone up meaningfully in a short period of time and we want to unpack what that means, what the warning signs mean and where it could lead both for the economy and for our portfolios.

**Bryce** (1:56)
We want to say thank you to PIMCO for supporting this episode and keeping all of our content here at Equity Mates free.
The ETFs that we discuss in our episode today, the first one is EARN, which is the PIMCO short-term active yield ETF. The second is PAUS, P-A-U-S, it's the PIMCO Australian bond active ETF. And then finally, PGBF, which is the PIMCO global bond active ETF.

**Ren** (2:19)
Yeah, so if you want to check out those ETFs, you can find them all in your brokerage account. But Bryce, with that said, let's figure out what the bond market is telling us and what we might want to do as a result. Let's get to our conversation with Sam Watkins.

**Bryce** (2:35)
Sam, welcome to Equity Mates.

**Sam Watkins** (2:36)
Thank you. Thanks for having me. It's been a little while.

**Bryce** (2:39)
It has been. October 25th was the last time you were on the show. A lot has changed. Since that moment, since you were last on, what's one thing that you've changed your mind on?

**Sam Watkins** (2:48)
One thing that I've changed my mind on, goodness, I change my mind on everything all the time.
I'd be accused of that often. Look, I'd say probably the one thing that hasn't changed has been what I talked about in terms of, that's true. But I guess the environment of uncertainty, what has changed is that that environment of uncertainty now, I think is, if anything, gotten a little more extreme than perhaps where it was in October when we spoke to each other last. Because that period there, we were talking about how there was this dispersion of economic cycles around the world, there was a rise in geopolitical risk. But also what we were talking about at that stage was that we were seeing a tapering off of inflationary pressure.
That's changed. And so that's probably the biggest change. And what's driven, I think, of course, a big shift in the interest rate environment.

**Ren** (3:46)
Well, that's a big theme for what we're talking about today. And I guess what we really want to pick your brain on is what the bond market is telling us. Because there are these sayings in investing markets where bonds move, stocks follow. And often the bond market is maybe a bit more wary and a bit more fast to react to bad news. And stocks will follow after that. And it seems, at least from our point of view, that there's a bit of a disconnect at the moment. We want to unpack what you're seeing in bond markets and then what might follow in stocks. So let's start with bonds. Bond yields are rising around the world. Some are hitting multi-decade highs. We've seen the US tick up. We've seen the UK hit what, like, a 28-year high. We've seen Japan hit multi-decade highs.