U.S. treasury yields surge over Covid-19 vaccine progress, Biden victory

BNP Paribas Chief U.S. Credit Strategist Dominique Toublan joins Yahoo Finance to discuss the outlook for U.S. treasury yields in wake of the recent Fed meeting and 2020 election results.

Video Transcript

ZACK GUZMAN: Welcome back to Yahoo Finance Live. We've been talking a lot about the action we're seeing on the equity side here, but not to be overdone, I want to spotlight the action we're seeing right now on the 10-year, jumping about 14 basis points today. The yield there on the 10-year up to 0.96%.

I want to chat more on what we're seeing play out on that side of the market here with our next guest, Dominique Toublan, who is BNP Paribas Chief US Credit Strategist, joins us now. And Dominique, appreciate you taking the time to chat. Obviously, a lot of the reaction here getting kicked off by the vaccine front here. How are you seeing it impact credit spreads, too, when you look at that, at kind of a one, two punch, after we've got the election news, now this coming as well. How are you seeing it impact the market?

DOMINIQUE TOUBLAN: Quite positively. Quite an impressive last 48 hours in terms of the news cycle. Rewind one week, and we were all thinking about the risk of the US election, the risk of COVID, and in 48 hours we've changed quite a bit on that perspective. So it's very good. It's very good, because it's good for growth.

So many companies that have been suffering from COVID who have been more vulnerable in that cycle will be seen as more investable, more resilient, throughout, throughout this, and essentially brings patience to, to investors and to issues as well, to say I can survive this. I can look at the next wave of COVID, if there is any, and then my downside, which is control. And so very important news here in terms of, we're respecting the timetable that the companies have been telling us about, but the efficacy is quite, absolutely amazing, and I think that's what the market is seeing, is upbeat on that so much.

- Yeah, Dominique, Zack highlighting there the big jump that we've seen in yields for the 10-year T note today. I mean, when you look at those two key risks that it sounds like you believe have been removed from the market, how much more upside do you think is there? I mean, we're looking at almost 1% right now.

DOMINIQUE TOUBLAN: Yeah, I think you can go a bit higher. We have to have more news in between, right? So the risk that has been removed is essentially the short term risk. And if you want, if you look at the US election, if it's a divided government in the medium term, it's positive. Investors, companies, would look at that as a positive background.

If you look at probably the vaccine or treatments being out there and on time and very efficient, I think it also means people [INAUDIBLE] more comfortable about investing. So in essence, the five last week was a little bit off. That is the short term risk, and they cannot look through this. And I think that's what you see here.

So that's a question is, where do we go? That's a tough question right now, because we moved so much. I would say we can go a bit higher. All these [INAUDIBLE] don't remove the volatility we can have in the short term, but in medium term perspective, this is, this is quite positive. Again, positive for growth for these companies that have been left behind by the crisis.

ZACK GUZMAN: Again, Dominique, to me, I mean, the interesting thing here, too, is this kind of expectation is a little bit longer out, right? When we think about the Fed's, you know, expectation there to keep rates steady until 2023. You think about inflation expectations, too, how much that's changed by the vaccine news here. I mean, how different does that look? I think about a world where we didn't get the update from the Fed maybe stressing they're willing to move past that 2% inflation target here, what it would look like now with all the news we're getting on the vaccine and how quickly this recovery could move forward. When you look longer term, what are the expectations now and how has that changed?

DOMINIQUE TOUBLAN: So I think that's a great question, because I think the Fed has a signaling, signal that they want to be better for some time. They really want the situation to be out of the woods in that respect of the pandemic, the recession we've been having, and so it's actually better than a year ago. It's better than a year ago, because the Fed is explicitly [INAUDIBLE], and the rest of the other conditions you can think of are quite positive.

So all together, you have investors that have cash to put at risk. They reduced risk quite a bit before the election, and we saw the price action last week very much reflecting this. And for credit specifically, but also globally the fact that yields are increasing is a positive, because people have been looking for years, but we have again $17 trillion or so globally that have never [INAUDIBLE] as of Friday. That's better. So the picture for investing into fixed income in general and credit in particular for the pick up you get with this Treasury is quite positive.

- Dominique, how should we be looking at corporate credit, particularly high yield? I mean, to the point that we were making earlier, you know, we've certainly seen some of these stocks, these that are likely to be positive on the back of the vaccine coming to market, like the travel stocks, you know, seeing a big pop in a big way, but there's still some significant debt there. So how do you think investors should be looking at that space?

DOMINIQUE TOUBLAN: So I think the fact that the vaccine is in time and very efficient, the fact that it could promote growth and inflation is actually a good picture for these companies that were not able in the last six months to increase cash liquidity on the balance sheet or increase efficiencies. And so that means that on the back of it, maybe April or May, I don't know when-- you know, the weather is better and the COVID situation is improving with a vaccine in the background, many of these companies will be able to organically deliver, right? Because your revenue, EBITDA is going to grow quite naturally on the back of this.

And so the question whether a balance sheet tax card is actually less salient to do than it was two days ago, because of the vaccine and the patience it gives investors and issuers to be in the game, right? So I would think that we've seen many [INAUDIBLE] sponsorship for companies throughout the last six months and that will continue, because now it's a question of, it's a game of patience, but we're seeing the light at the end of the tunnel. So it's only really very, very risky companies that might be in trouble, but for many of these companies that have been quite hammered vulnerable into the profit, they are the ones with keys to give you interesting valuation. So in relative value perspective, if you believe that the narrative is continuing the rates in [INAUDIBLE] confirmed today in some sense, then these are good places to invest in.

ZACK GUZMAN: Yeah, right now we'll see. I think that's the story is going to shift quickly into how quickly this vaccine, if approved, can come out here. That's the big question now. But Dominique Toublan, BNP Paribas Chief US Credit Strategist, appreciate you joining us today.

DOMINIQUE TOUBLAN: Thank you.