The Federal Reserve is dragging us to investors' inferno

Bonds

Althea Spinozzi

Fixed Income Strategist, Saxo

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.

Source: Bloomberg.
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