Senior Fixed Income Strategist
Summary: Powell's dovish message is bad news for the market. The Fed is dragging us towards unsustainable levels of corporate debt and ever low interest rates. This is forcing investors to accept lower yields for riskier assets and removes any upside from holding Treasuries, which have become the biggest mouse trap of all time.
Last night the Federal Reserve killed any hope that there was in the market to see fair asset valuations ever again!
Holding interest rates near-zero until Powell's delusional dream of maximum employment turns to life will drag the US market towards a new version of Europeanization.
To be precise, we will see companies leveraging up their balance sheets as we have never seen in history. Investors are going to be forced to buy low yield bonds for the simple reason that there is no other choice available. You can definitively call it an investor's inferno, with the Fed being Charon taking you straight to it.
Company bond sales this year have already overcome last year’s. Underwriters say that bond issuance will be sustained until the US election as companies are taking advantage of low interest rates, and investors' demand is high. We are seeing deals in the investment-grade space as well as in the high yield space oversubscribed by more than four-time. A dovish-for-longer Fed incites investors to buy more now because yields will fall tomorrow. This is exactly what happened in Europe; however, with the US joining the club investors should be scared.
What is happening is that more and more leverage is added to a pressure cooker. However, there is only enough pressure that the cooker can sustain, and sooner rather than later, it will explode. Downgrades and defaults are the future we have in front of us.
Hold yourself tight. Investors' inferno is a really nasty place because one cannot seek relief from Treasuries. Actually, Treasuries will be the worst thing that you will be holding in your portfolio.
Why?
Currently, Treasuries provide more downside than upside for the simple reason that they offer near-zero yields. They can go as much near zero, or even negative, but that’s all you will get: 60 or 70 basis points. However, the risk of inflation is real, and at a certain point, it will surprise us, and sovereigns will be the first ones to tumble.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
