Bond bull market ‘has come to an end,’ says Guggenheim’s Minerd

Guggenheim Partners chief investment officer Scott Minerd called attention to the long-running Treasury bull market, warning that interest rates could “trend up for a generation” as the Federal Reserve tightens policy. monetary policy to combat inflation.

The comments follow an intense sell-off in the $23 trillion US Treasury market, the backbone of the global financial system, triggered by aggressive rhetoric from Fed officials. 10-year Treasuries this week hit 3 percent for the first time since 2018, having more than doubled since the end of 2021.

On Wednesday, the US central bank will raise interest rates for the second time this year, with investors and analysts expecting an extraordinary half percentage point increase, larger than the typical quarter point increase, for the first time. since 2000.

“I have to throw in the towel,” Minerd, which helps oversee $325 billion at the Guggenheim, said in an interview. “The bond market’s long bull run has come to an end.”

It marks a sharp reversal for Minerd, who said a year ago that he expected rates to fall and potentially even turn negative in the US. As recently as March, he told CNBC he thought rates were in the neighborhood where he would expect to reach their peak.

He said Tuesday that he doesn’t expect rates to “shoot higher” right away, but that they could “cut” before rising again.

His concern now is that instead of letting the market determine the terms of the loans, the Fed will continue to raise interest rates, pushing the US economy into recession.

“Instead of following a solid policy. . . we have decided that we are going to raise rates and shrink the balance sheet so that the Fed has credibility on inflation,” he said. “My concern is that when we turn around and see inflation start to slow, the Fed will. . . don’t recognize where the neutral rate is and we will eventually have a collision.”

The neutral rate refers to an ideal level for interest rates at which they contain inflation while allowing the US to maintain full employment.

Minerd warned that policymakers could not know how strict the conditions were. Companies are having a harder time raising capital as indicators of US financial conditions return to pre-coronavirus levels.

Tighter Fed policy could “induce a financial crash” and pointed to a $46 trillion US stock market sell-off as a “likely place” for that to happen.

“We have never reduced inflation by more than 2.5 percent without inducing a recession,” he said.

“I don’t think they are preparing for a soft landing,” he said, adding: “Recession is inevitable,” and some European countries are also “sliding” into one.

For a brief period this year, the policy-sensitive two-year yield had risen above the 10-year yield, an inversion of the yield curve, one of the most widely used and reliable indicators of an impending recession. That suggests investors believe monetary policy will tighten faster than the US economy can handle and push it into a recession sometime in the next two years.

The end of the bond bull market would have significant implications for other markets. Rising Treasury yields have pushed up borrowing costs for businesses and have also pushed mortgage rates higher. The rally in US stocks to record levels in 2021 was built on low interest rates, and rising yields have started to weigh on performance on Wall Street.

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