Future of AI: Microsoft’s ChatGPT-Bing launch, Zoom's push

PIMCO market strategist and portfolio manager Tony Crescenzi joins Yahoo Finance Live to discuss the future of AI, generative AI in the bond market, and yield markets.

Video transcript

- And as the AI craze escalates across tech and beyond, a move yesterday may have highlighted a limit to the takeover and the obsession that we have with all things AI. Shares of Zoom communications fell by over 6% in yesterday's session proving that the video platform's AI expansion wasn't enough to sway investors. That drop could be a signal that despite apparent AI hysteria, consumers need more to be convinced, especially investors might need more to be convinced.

Let's get back to Tony Crescenzi, PIMCO market strategist and portfolio manager. And this was something I wrote about in our "Morning Brief" today because it struck me that we were doing all these counting of conference calls and on--

- Zoom's conference call.

- It was something like 80 times--

- That said AI.

- --the word, phrase AI was mentioned. And yet, investors still want to see a growth prognosis for a company. So how do you think people should be weighing all of this?

TONY CRESCENZI: Well, for those who can think back this far to 1995, it was a so-called technology shock. So it reminds me of that. Lots of worry about what that new technology, such as the one where being transmitted from right now.

It was the advent of new technology that people thought would displace workers. But think last month, the US jobs report.

- It was better than expected.

TONY CRESCENZI: At 3.4% jobless rate, the lowest since 1968. So even amid tremendous change over 20 years, we still have a low jobless rate here in the United States, and in Japan, for example. So yes, in certain industries, there'll be this creative destruction. But more broadly probably have.

- And it does seem like each time we're in a cycle like that, there's this scary part of the cycle, where yes, it causes jitters. And you worry about the displacement within or disruption within your industry. And to your point, yeah, we were heading into Y 2000 with that?

TONY CRESCENZI: Y2K.

- Yes, the Y2K. Exactly. We thought all the computers were just going to shut down and everything. So that was the advent of a new age, the '90s. And so we've experienced that transformation in AI, generative AI especially. But does it even matter to financial markets, in general, in the sense of like, let's say, the bond market? Does this generative AI matter in the bond market?

TONY CRESCENZI: It's hard to imagine. We're using it at PIMCO and others are simply for research and to gain insights, perhaps to do some writing, to have help with our writing. So it could create--

- ChatGPT.

- --efficiencies. ChatGPT, that sort of thing. For the markets, I think the more information that an investor has in his or her hands, the better to make informed decisions. And I think AI will help bring that about. So perhaps, it'll create efficiencies. But what it won't do is change liquidity in financial markets. Because ultimately, you have to have an intermediary. It's called the principal agent model. And so it won't change that. It simply supply us with more information.

To take it to the extreme in a different fashion, investors worry about the information flow they get from China on companies. There's not enough of it. So AI--

- Worry that it may be fuzzy.

- Yeah. And it shows you that assets can become underpriced and its inefficiency in terms of raising capital because of that. Because the price of capital then can be higher. So it could lower the cost of capital in the end is what I'm trying to say because investors can make informed decisions.

- I want to broaden it out a little bit. Because as we talk about these various parts of the market right now, I know that you are still bullish on the bond market broadly. But drilling into that, I'm looking at some of the things that you favor. Agency mortgage-backed securities, cash and short-term strategies, total return and income. And I'm just curious as we go through the rest of the year given what we might see from the debt ceiling from the Fed, et cetera, et cetera. So you don't think we're at peak yields then? It sounds like maybe.

TONY CRESCENZI: Well, so Memorial Day weekend is ahead. And one thing that a bond investor can get excited about and nerdy thing is--

- Yes.

TONY CRESCENZI: --three days of interest payments. And so these days they get excited looking at the interest payments hitting client accounts, my account, owning T-bills, whatever. And so yields might go up perhaps a little more. But we think they're likely peaking. So one quick view on this. The aggregation of bonds, treasuries, mortgages, corporates according to the so-called Bloomberg aggregate, it's about 4 and 5/8%. But credit security is about 5 and 3/4% with a little so-called alpha.

This means that returns are likely to be 5%, 6% in high quality assets. Because starting yield is the major determinant of future returns. Now, importantly, that yield is up from 1% as a low. You think they're near the peak because of one simple factor. Last year, markets had a big miss on the forecast for the Fed and what it would do. They said 1%. Forecasters, it was five. This year, markets are saying five. It won't be nine. Maybe it'll be a little higher. Probably, not.

We think the Fed's done. But the forecast missed its plunge. And yields peaked last October. And the stability in the bond market and return to correlation. As they say, when stock market falls, bonds rise. So expecting more of that.

- So it's still a safe haven because there are no other havens.

TONY CRESCENZI: And Tara, there are reasonable alternatives these days.

- No Tina.

- But I guess what you're saying too is that, whereas, yields may have peaked, they're not going to come down that much.

TONY CRESCENZI: But the key is, though, and the history of it is going back to 1978, 90% of the time core bonds, meaning, with the average maturity of call it six, seven years high-quality bonds have outperformed T-bills on a three-year rolling return basis.

So lately, of course, last year was a bad year for bonds and core assets. But just a few months before recession, they tend to start outperforming. And three years later, you'll have this outperformance. And the average has been three percentage points.

And so it looks like yields could decline. That's the thing you've got to be thinking about. Get price gains that help you beat T-bills.

- All right. We've got to put a pin in our conversation. I love all the topics that we're going through here. We appreciate you so much. Tony Crescenzi, PIMCO market strategist and portfolio manager. We appreciate you.