(Reuters) – The bond market is in a “bubble,” notably sovereign debt, Guggenheim Partners international chief funding officer Scott Minerd warned on Thursday, and he stated that efforts by the Federal Reserve to go off a recession by chopping rates of interest will finally show futile.
FILE PHOTO: Scott Minerd, Chairman of Guggenheim Investments and Global Chief Investment Officer, speaks in the course of the Reuters Global Investment 2019 Outlook Summit, in New York, U.S., November 12, 2018. REUTERS/Brendan McDermid/File Photo
Minerd, who oversees greater than $240 billion in belongings beneath administration, stated his agency is responding by decreasing publicity to company credit score.
He stated the backdrop in financial coverage reminded him of 1998, when the U.S. Federal Reserve slashed charges to battle the Asian monetary disaster, solely to reverse course lower than a yr later. Minerd stated the central financial institution’s actions helped drive the know-how bubble that burst in 2000.
“Where is the bubble today?” Minerd wrote in a letter to shoppers. “I hate to admit the ugly truth, but it may well be in bonds, and in particular the sovereign debt of governments around the world. The category of supposed ‘risk-free’ assets has risen to prices which guarantee a loss to investors in many countries around the world.” He named Europe and Japan, as examples.
Escalating commerce tensions between the United States and China, worsening international progress, political tensions in Europe and extra central banks embarking on financial coverage easing has resulted in greater than $15.9 trillion of negative-yielding bonds worldwide, as calculated by Deutsche Bank.
Minerd stated he doubts the top is close to. “The curse of negative rates will be with us for a while, and eventually may reach the shores of the United States,” he stated.
The yield on the 30-year Treasury bond dropped to a document low final week, breaching the two% degree for the primary time. The yield on the lengthy bond is presently buying and selling round 2.10%.
Last week, Minerd informed Bloomberg News he believed the Fed ought to execute a 50-basis-point inter-meeting reduce in order to reveal its dedication to preserving the financial enlargement on monitor.
The Federal Reserve, which hiked charges 4 occasions in 2018, reduce charges by 25 foundation factors at its July coverage assembly. Its subsequent scheduled coverage assembly is in September, and merchants now see one other quarter-point minimize because the Fed’s most probably subsequent transfer as an alternative of an aggressive half-point one, based on CME Group’s FedWatch software.
Minerd advised Reuters in a phone interview Thursday that his forecast has been “evolving.”
Fed policymakers are “inventing the rules as they go along … they are definitely improvising,” Minerd stated. “What I used to be taking a look at, maybe incorrectly, was how Fed chair Jay Powell and his colleagues have been making selections.
“They created a third mandate – the Fed needs to keep away from the recession,” he stated. “At the end of the day, there will be recession but the Fed is attempting to forestall it with rate cuts.”
Reporting by Jennifer Ablan; Editing by Leslie Adler