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I'm your host, Zach Griffiths, head of U.S. investment-grade macro strategy at Credit Sites. Today, I'm very excited to be chatting with Gordon Chui, Managing Director and Head of Fixed Income at Ping An in Hong Kong. Gordon has been at Ping An for three years now and had previously held roles as the Head of Fixed Income at Taikang Asset Management, various senior roles at Hang Seng Investment Management, including Deputy Chief Investment Officer, and also spent time earlier on in his career at the Hong Kong Monetary Authority.
Gordon, thank you so much for coming on the podcast. Thank you, Zach. Good to be here. So, Gordon, we met about a month ago in Hong Kong during my client trip to Asia, and I found during those meetings, including ours, the two key focuses of U.S.
dollar investors in Asia are what are happening with U.S. deficit and debt and what is going on at the Fed. And in our discussion, you described yourself as a bond vigilante. Can you explain what that means to you and how that has shaped your recent investment decisions?
I have invested my own career in the fixed income industry for more than two decades. As you mentioned, I was sent to the New York Representative Office by the Hong Kong Monetary Authority back in 2001, just before the traumatic event of September 11th. And after throughout that three years, I built up, well, I would say, hopefully, acumen in analyzing the political setup for fixed income investors to operate successfully. So after coming back, actually, in 2004, I successively went into the bank treasury book for Hansen Bank, and then the fixed income business for Hansen Investment Management.
And then after that, actually, I spent eight years with the Chinese insurance company, Taikang, and now with Ping An for three years. And here, actually, we are among the, you know, substantial investors for deploying the insurance general account money to the global fixed income, and in particular, the U.S. one. And as you mentioned, bond vigilante, I think it is basically built in our blood because we want governments to be prudent.
We want them not to do financial repression and reduce the buying power, the purchasing power of bond investors in the long run. So when, for example, during the pandemic days, when the Biden administration did the, I would say, modern monetary theory, right, the MMT, by pumping up the fiscal deficits and then facilitated by the Federal Reserve in boosting up the QE as well as suppressing the short interest rates, all this, you know, were not welcomed by bond investors. And I still remember back in, you know, March 2020, the hand year note actually went all the way below 1%, and it was the kill, you know, for one boost before that. But after that, it was a disaster for everyone who were still invested in the long end.
So I think bond vigilantes or, you know, the traits of all our fixed income investors appears, not just in Asia, but also across the world. Yeah, that's a great point. It's certainly a big focus now with debt and deficits across the world, seemingly rising across a variety of G10 countries. When you think about where we are today with the 10-year note yielding something like 4.4%, I think a little bit below that, how are you positioned?
Are you, do you think that offers compelling value given sort of what you're seeing in terms of the fiscal backdrop and in terms of the U.S. inflation growth prospects? Or do you think yield are more likely to rise from levels today and therefore aren't looking to be adding duration materially in U.S. dollar?
Frankly, I think the U.S. fiscal situation is quite like what happened after the Second World War. Basically, the debt burden of nearly 100% debt to a nominal GDP is perhaps still okay given the military might of the United States. But I think down the road when all those discretionary spending, including Medicaid, including Social Security, continue to power up in the coming decades, I think the current administration is perhaps thinking a very good way to try to tackle that.
On the one hand, even though, you know, President Trump always, you know, criticizes Jerome Powell for being late in cutting interest rate, I think President Trump does have a point because compared to the, for example, Eurozone, which are also very well developed economies, the overall, you know, interest cost for those Eurozone countries versus their, you know, income, their fiscal income is only about 3%. But on the other hand, for the United States, it is about 12% just because, you know, since the interest rate hike back in March 2022, in fact, perhaps the neutral rate is now maybe 2% to 3% only. But just because the short end is pegged at 4% to even, you know, 5.5% before the 1% cut last year, I think that that has created some unnecessarily high interest cost to the federal government. On the other hand, Trump hasn't, you know, also criticized Janet Yellen for not issuing enough long-term debt back in 2021-22 when the, you know, the long end was such a low level.
And I also agree with him. So I think right now what the Trump administration is planning is basically push down the overall supply as a percentage of the financing need, you know, in the 10-year, in the 30-year. And on the other hand, maybe creating enough pressure that perhaps it will become more effective for the Federal Reserve as a whole, as an institution to move the 7th straight gradually down maybe 2%. I think that 2% is not that excessively low.
And on the other hand, all the bills issuance on the stable corn demand for the short end, I think that can create enough buy power for the short end of the interest rate curve so that the overall interest cost to the federal government can move closer to the Eurozone's level. Not necessarily to as low as 3%, but compared to the current 4x level, I think that there are enough room for the U.S. federal government to reduce the interest cost. You bring up a lot of very interesting and topical items that we're dealing with.
I'm interested to hear more. So you're not as concerned about a perceived or actual loss or dent to Fed independence. You're more focused on the idea that the U.S. should have lower borrowing costs today.
And you would perhaps side with some of the messaging from the Trump administration that the Fed is, in fact, too late in terms of lowering its policy rate. I do think so. I think after the Bokker's exercise of suppressing inflation rate, of course, people respect Fed independence. And there are always anecdotes that Obama basically co-shouldered the president during those days by not answering their formal request to lower interest rates, even under the Reagan administration in his second term, just before the second term election, right?
And I think coming to the, you know, it's more like 30, 40 years later. In fact, if we look at the federal deficit compared to those days, now I will perhaps safely call U.S. the largest borrower in the world. So their interest, the federal government's interest, is totally unlined with borrowers in the mortgage space in the corporate American world.
And on the other hand, if we look at all those problems created by a, maybe, you know, the QE created by the low interest rate that leads to a lot of acceptables and in turn cause a lot of income inequality, I think the root cause of all these problems, perhaps it is also why Trump could win the election, you know, last year, I think that could be solved by dealing with the income inequality. And in this case, basically, a lower interest cost in a short end can bring down the cost of living for many poor Americans. And on the other hand, for the federal government, if they could see a lower interest cost from their big pile of more than, you know, 30 trillion U.S. of a federal debt, maybe they don't need to cut as drastically the Medicaid or those of the stamps that, you know, in the necessity for the war for the lowest income class in America.
So I do believe that federal reserve, you know, independence may be useful in the 80s and the 90s, but not necessarily currently. That's very interesting to hear, Gordon. Our sense in the U.S. is that foreign investors would be much more unsettled by the prospect of the loss of Fed independence, especially when considering the amount of studies out there suggesting that in general, when you have an economy or a society that is perceived as not having an independent central bank, that pushes up inflation rates, pushes up inflation expectations, which ultimately increases borrowing costs further out the curve.
But you make the point that you think with the passage of the Genius Act and the potential for stable coins to introduce quite a bit more demand for T-bills, Treasury's own study suggests it could be as much as 900 billion through the end of 2028, that the Treasury could finance more of its deficit through the front end of the curve. And of course, the Fed has much more direct control on that part. And so my question to you is, with the core CPI running right around 3%, a touch below, and the Fed's stated target at 2%, equity markets in the U.S. at all-time highs or nearly there, and credit spreads near the tights, are you concerned about inflation running away if the Fed were to cut now when the economy looks to be on solid footing, financial markets are strong, and inflation is not at the Fed's target?
Thanks for the question. I think it's a very good one. I will say the military might and the supremacy of U.S. in the geopolitical game of the military, you know, always equips country with a lot of great endowments.
On the one hand, foreign investors and accredited countries, they all need to buy U.S. dollar papers in order to facilitate, for example, currency manipulation and settling their current account and capital account payments in U.S. dollar also with other countries, not just with the U.S. And I think that keeps the demand for U.S.
dollar denominated papers, you know, papers to fixed income investments in a very good, you know, demand picture. On the other hand, I think even though, for example, people are talking about inflation, it occurs, you know, prices could perhaps weaken the purchasing power of these accredited countries. But on the other hand, when all the investors in the fixed income space, when they buy, for example, 10-year or 30-year treasury, in fact, the calculation is on the short end of the curve, whether it is a real kind of, you know, for example, if the short end is closed up to 4% plus, like right now, the funds organized is 4.33, then obviously the attractiveness of buying 10-year, of buying 30-year is not so strong. Whereas there's a picture when the Fed is willing to cut interest rate to 2% only, and if you can still get 4.3%, why not just a right U curve?
So the purchasing power kind of a dilemma in the present days is on whether this kind of inflation number will keep the Fed at a kind of tightening bias. But on the other hand, if, you know, my previous input, that from administration who perhaps pushed the Fed into a very accommodative posture, then on all these inflation numbers may not necessarily have the same impact on the monetary policy making as in kind of independence kind of setup. And I also want to add one point. In fact, the price induced by all these tariffs, they can actually create a substitution signal to bring in the substitution effect.
What I mean is countries, maybe in the past, all the supply chains have been set up in East Asia, maybe they are very cost-efficient in the pre-edit tariff days. But when the Trump administration is pushing up the average tariff range to 50% to 20% range, right, 15% to 20% range, all these high signals will induce investors, manufacturers to bring back manufacturing, perhaps some to America, but also to some of these, you know, tariff treaties that are basically quite favorable. For example, Indonesia or even UK, UK is enjoying 10% tariff rate, right? So that all goes back down to the comparative cost, comparative advantage after taking into account of all these very varying levels of tariffs.
And who knows, maybe US can really see a manufacturing balance in some of those high value-added industries, including all those that, you know, currently may not find it effective, economic, efficient to produce in the United States. Yeah, there's a lot of interesting points there, Gordon. Obviously, a ton of focus on tariffs today and how that is working its way through the system and also really what the ultimate goal of the Trump administration is. Is it to bring back manufacturing jobs to the US?
Is it to increase revenue for the federal government to offset some of the spending initiatives of the One Big Beautiful Bill Act? And it's interesting, if you look at the amount of tariffs the US has collected over the course of May and June, it's running at about a 1% of GDP annualized rate. And so that's certainly helpful from the perspective of the deficit, which many would argue has gotten too high for peacetime, if we can even call it that, across the globe today. And so it'll be interesting to see if we do bring back manufacturing, that would likely reduce the amount of tariffs that we are collecting as some of those goods are produced domestically.
I think bringing some of the foreign direct investment to the US is certainly a positive, but there are a lot of knock-on effects of these policies that remain to be seen. So I feel like right now you're generally comfortable with US dollar assets and would argue that rates need to come down. And that would certainly be beneficial from a total return perspective. But just thinking about the global fixed income market, are there any other currencies or fixed income markets that you're considering right now or that look attractive to you?
Before helping the Chinese insurance sectors extend their investment in the dollar space, I was actually one of the trailblazers, I would not call myself pioneer, but trailblazers only, in the renminbi offshore market. In fact, in the early 2010s, at that time, the renminbi was understrengthening, impacted, and offshore renminbi. market came into the focus of investors, not just in the retail space, but also in the institutional space. So at that time, I was with one of the Hong Kong's local banks, or one of the biggest ones, the Hanzan Bank.
And at that time, the retail deposits had no way to deploy efficiently unless I accept deposits in the banking systems. So at that time, the bank wanted to expand their retail bond fund product and to cater to the demand of these retail depositors. And at that time, I still remember the offshore Chinese government bonds basically issued in the Hong Kong financial market. It was at 2% below the onshore China bond market, which was at about 4.5%.
So the reason why? Because RMB was able to strengthen as well as providing some pickup for the retail depositors on their deposits. So at that time, in fact, it was perhaps the first golden days of the offshore RMB bond market. And I think at that time, in fact, local currency markets also prosper because the dollar was on a weakening trend in those days after the global financial crisis.
Coming into now, I think this setup is quite similar. The U.S. is trying to push, you know, the move in short interest rate lower. Maybe the fixed income space will also, you know, prosper because of this lower funding cost.
But the exit valve will be the dollar. Maybe it will not necessarily crash because of all those demand for the, you know, to invest into the United States or these test benefits offered by the one big beautiful bill. On the other hand, the local currencies may be also under the Trump's implicit covert pressure to strengthen. Even for example, the yen, I think Japanese Prime Minister Ishiiwa earlier mentioned that he would not give in to the Trump pressure to strengthen the yen.
I think all these countries, when they strike the tariff deal, currency was obviously one of the lever, one of the two, was requested by the Trump administration, I shouldn't say Trump administration, to tackle the large current account imbalances. So the dollar is inevitably under a weakening trajectory in a secular event. Maybe significantly, for example, the euro could plunge significantly in a very, you know, in one or two days, just because, for example, on Monday, people said, oh, the deal, the trade deal between U.S. and eurozone was just not favorable to the EU.
But on the other hand, the structural weakness of the structural, you know, current account imbalance needs to be, you know, dealt with. And I think the currency will be one of the two in moving back to a more long-term equilibrium. So on the overall sense, I think local currency markets could ride away from a weaker U.S. dollar down the road.
Any particular local currencies you'd be looking at as a good place for opportunity if that trend bears out? I think countries with a deep and liquid tax income market will be the picks among, will be the choices among international investors. For example, earlier we mentioned about Taiwan. The local currency market is minuscule.
There is just not enough. I want this dollar-denominated bonds for foreign investors, not to mention local big institutional investors like insurance companies to invest. So I will perhaps safely choose renminbi for market. And the renminbi will be the conduit for these investors.
In fact, a few weeks ago, a, you know, a sovereign wealth fund investor had a meeting and inquired whether in China there would be some good tax income, not necessarily open market bonds, but perhaps a private desk that can offer high single digits of news for them to deploy and to express their positive posture to the renminbi. Of course, you know, the renminbi now, the fixed income market has already performed the past few years when the long-end view fell significantly. And there could be some, you know, swings in the bond use in the long end, for example, over the past two weeks when there are talks among the top authority that there should be some reduction in excess capacity. There were some more positive views expressed in the stock market.
And on the other hand, the long end of the Chinese government bond yield curve also moved back up on a positive end of expectation of economic growth. But on the other hand, for those investors that are willing to take credit risk, I think the Chinese economy is big enough. And I think that is perhaps what investors would need local firms surveys in the credit analysis. I appreciate that, Gordon.
And I think we're definitely at an interesting point in terms of the global fixed income markets. This week, we have the FOMC meeting. I don't think the market is priced for much of a chance of a cut, but we also have treasury refunding. So two of the key things looking at what's happening from a monetary policy perspective and how treasury is thinking about financing the current deficits.
I wanted to ask, when you think about the fixed income markets globally, do you have a specific yield target in mind when you go to look across the globe, say within US dollar assets? And is that target on an unhedged or an FX hedged basis? Because I know that's a big focal point, especially for Taiwanese investors that certainly invest a ton of cash offshore. As you mentioned, the local currency markets are not large enough for the finance or to be able to invest the large current account surplus.
So how do you think about a target yield or yield pickup? And is it on an FX hedged or unhedged basis typically? As a rule of thumb, over the past 10 years, when I spoke to my asset owners in the onshore market, they all mentioned 4% to 5% denominated in their local currency. So if the rum and be, for example, was on a strengthening trend, that would create some net win if, you know, for my primary market in the dollar space.
So I would need to consider hedging, maybe tactical, just because the hedging cost right now is quite expensive. For example, in the WMV space, we need 3% if I want to outporn my US dollar bond exposure. So I would say 4% to 5% on a hedged basis in local currency is what the asset owners would want, for example, in the Chinese market. On the other hand, even that the dollar was such a, you know, in a sweet spot, last year, in fact, owing unhedged would offer very positive, very healthy return, nearly high single digit for some of those US dollar bond exposure.
So it all depends on the view of whether the hedging cost right now is not preferable to lock in long-term hedging. For example, using the cross-currency swap to fully hedge the dollar exposure, maybe relying on some sub-days like 3-month currency forward and catecoding enter and exit all these hedging decisions. On the other hand, I think the big picture for the US dollar market is it is just kind of captive. If you look at those exponers, maybe the hedging ratio right now is only 30-40%.
As I heard from some of those transactional banking bank counterparts, they mentioned that just because the yield of buying US dollar papers is such a more attractive versus buying the local currency in the onshore rumbi bond market. These exporters would prefer, you know, holding on to their dollar proceeds and just buy, you know, maybe not necessarily in very long duration papers, but even for the operant bonds in two years less, that can easily have a 4-5% level that is already attractive enough for them to do it on an unmatched basis. That's really helpful and certainly consistent with the message I heard during my meetings in Hong Kong and Taipei. We've had a more cautious approach to the markets this year, but it's been very resilient.
And I think particularly for US dollar assets, a big part of that story is the attractive yield levels, even though many investors would consider the credit risk or credit spread price into markets right now as unattractive on a relative basis. When you think about the all-in yield, it's a much more compelling argument at today's levels. So Gordon, before I let you go, this has been an awesome conversation. We really appreciate you coming on the podcast.
But my question to you is in terms of market moving events this week, what do you think is more important, the Fed or the Treasury refunding? I will say the Treasury refunding towards the end of the month of July was more important than the FOMC. If we look at the Treasury Borrowing Advisory Committee meeting held in the week of the 21st of July, it was basically on the 24th, which was the first day, and 25th, which was a Friday, I browsed the agenda of the TBEG. In fact, the third agenda item was for the primary dealers in the Treasury market to discuss about the optimal bills issuance level versus the overall funding by the Treasury Department.
I think that that is actually a pointed question to guide primary dealers to bring up a number that is higher than the rule of thumb of 20%. And I think right now it is about 25-26% as a percentage of the Treasury issuance. And who knows, if the Fed funds could come down to 2-3% level, why not bring that up to a higher target in order to lower the funding cost, which is consistent with the Trump request for the Fed below interest rate in order to lower interest costs. So if you look at the price action over the past few days, it is quite interesting.
Maybe the job number showing the creation of jobs is not necessarily good enough. But that does not explain that you, Bonyos, could prove in a sizing, you know, in 19-10 basis point in the long end. I think all the domestic players, they are well-positioned. I had actually paid attention to the 10-year and 30-year bond options two weeks ago.
And in those options, it was the direct leaders. Maybe it's the Pimcos, maybe it's the Fadalities and Black Rocks, all those large domestic players. They all knew that stuff that's in would need to tackle the weighted average maturity, maybe shorten it a bit, reduce the composition of the long ends. Not necessarily cutting it out right, but just pushing up the short end already creates this impact of lowering the overall weight average maturity.
Maybe if the federal government decides that it is more cheaper, it is more economical to borrow, more in the short end, up to two-year or maybe five-year, that can create a very positive kind of setup for long-end bond investors who have positioned correctly before this ought to be refunding announcement. So I think the price action just explains itself this week. All right. If you told me at any point in my career when I first started covering the quarterly refunding in the late 2010s that it would ever be considered more or equally important to the FOMC meeting, I'd say you're crazy.
But here we are. I think it's a key sign of the times in terms of the focus on supply and demand dynamics in large government bond markets. So Gordon, thank you so much for coming on the podcast. I really enjoyed the discussion and hope that we can have you on again sometime in the future.
Great. So thanks very much and have a great evening ahead. All right. And thank you all for tuning in to No More Risk Better.
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