A potential debt-deflation cycle in China could spell opportunity for U.S. Treasuries and Asia corporate bonds outside of China.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income and Thematic research for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the impact of China's economy on fixed income markets. It's Wednesday, September 20th, at 10 a.m. in New York.
We spend a lot of time on this podcast talking about the market ramifications of the evolving US-China relationship, and understandably so, as they are the world's biggest economies. But today, I want to focus more on the evolving economy inside of China and how it has implications for global fixed income markets.
A few weeks ago on Thoughts on the Market, my colleague Morgan Stanley's Global Chief Economist Seth Carpenter, detailed how our Asia economics team is increasingly calling attention to what they term China's 3D challenge of debt, demographics and deflation. In short, there's a risk that servicing high levels of debt in China's economy could strain its weak demographic profile and dampen demand in the economy, all leading to a debt deflation cycle. While such an adverse outcome currently is in our economists base case, there's been material slowing in China's economic growth. So in either case, China, at least for the moment, is a weaker consumer on the global stage, meaning they may effectively export disinflation to developed market countries. And while our economists flag this weakness may not translate to substantial disinflation pressures, they also note directionally it may help already cooling inflation in places like the United States.
Understandably, our team in fixed income research across the globe is focused on many potential impacts from the spillover effects of China's 3D challenge. But there's two that stand out to me as most relevant to investors. First, for investors in U.S. Treasury bonds, this disinflation pressure, even if modest, could help push yields lower in line with our preference for owning bonds over equities. That disinflation pressure could add to other more meaningful pressures in the U.S. in the fourth quarter, as student loan repayments start in the absence of major entertainment events that were a one time shot to consumption this past summer.
Second, if you're an investor in corporate bonds, our Asia corporate credit team sees opportunities to diversify away from China Credit, which has been struggling to deliver solid risk adjusted returns and remains concentrated in the property sector, with our team seeing opportunities in Japan, Australia and New Zealand in particular. Credit markets in these countries not only provide geographical diversification but also diversification into sectors like financials and materials.
This is a developing story that's sure to impact the global outlook for the foreseeable future, and you can be sure we'll keep you updated on how it will influence markets.
Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.
Will the Fed’s Pivot Favor Bonds Over Equities?
Mike Wilson: Does the U.S. Equity Rally Still Have Steam?
Economic Roundtable: What’s in Store for ’24?
Sustainability: Mixed Signals on Decarbonization After COP28
Michael Zezas: The U.S. Election, Clean Energy and Healthcare
2024 China Outlook: Can Growth Rebound?
Mike Wilson: Could Bond Market Consolidation Weigh on U.S. Equities?
David Adams: A Contrarian Call on the U.S. Dollar
2024 Asia Equities Outlook: India vs. China
An Early Guide to the 2024 U.S. Elections
2024 Asia Economics Outlook: Still Divergent?
Mike Wilson: Are Markets Following the Right Playbook?
Andrew Sheets: November’s Early Holiday Gift to Investors
Pamela Kaufman: Anti-Obesity Meds Could Bite Into Food Sales
Ravi Shanker: A New Golden Age of Travel Ahead?
How Education Companies Can Benefit from AI
Vishy Tirupattur: Debating the Outlook
Special Encore: Matt Cost: How AI Could Disrupt Gaming
Special Encore: US Economy: What Generative AI Means for the Labor Market
U.S. Consumer: Mixed Holiday Spending Expectations
Create your
podcast in
minutes
It is Free
The emPOWERed Half Hour
Now, What’s Next?
Access and Opportunity
At Scale: A Sustainability Podcast