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.
A new fragmented world order can render some of today's infrastructure obselete, but it also calls for massive new investments across the globe, which requires a new set of strategic and tactical investment strategies.
Steen Jakobsen,
Chief Investment Officer
As globalisation turns to fragmentation, China seems set on playing a role in the global economy, while simultaneously working towards proofing its own economic situation from external shocks and crises.
Redmond Wong,
Market Strategist
The recent bank runs and ensuing challenges are reminicent of something we've seen before. Will it end like the S&L crises of 1986 and 1995?
Chris Dembik,
Head of Macroeconomic Research
Equity markets need to recalibrate to another - fragmented - global world. What's your view on equities in this market - are they going up or down?
Peter Garnry,
Head of Equity Strategy
With every development comes new opportunites, some of which could be in India. Have you considered the country as a part of your diversification strategy?
Charu Chanana,
Market Strategist
A collar is an option strategy that allows some protection while maintaining some upside potential. What investment would you like to use a collar strategy for?
Hans Oudshoorn,
Trainer Academy
There are arguments to be made for many commodities to have upside. Which are you paying the most attention to this quarter?
Ole S. Hansen,
Head of Commodity Strategy
In a very challenging macro environment, which currencies do you think will come out on top?
John J. Hardy,
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
