Skip to main content

The bond market is in a “bubble,” particularly sovereign debt, Guggenheim Partners global chief investment officer Scott Minerd warned on Thursday, and he said that efforts by the Federal Reserve to head off a recession by cutting interest rates will ultimately prove futile.

Minerd, who oversees more than $240 billion (195.77 billion pounds) in assets under management, said his firm is responding by reducing exposure to corporate credit.

He said the backdrop in monetary policy reminded him of 1998, when the U.S. Federal Reserve slashed rates to fight the Asian financial crisis, only to reverse course less than a year later. Minerd said the central bank’s actions helped drive the technology bubble that burst in 2000.

Story continues below advertisement

“Where is the bubble today?” Minerd wrote in a letter to clients. “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 trade tensions between the United States and China, worsening global growth, political tensions in Europe and more central banks embarking on monetary policy easing has resulted in more than $15.9 trillion of negative-yielding bonds worldwide, as calculated by Deutsche Bank.

Minerd said he doubts the end is near. “The curse of negative rates will be with us for a while, and eventually may reach the shores of the United States,” he said.

The yield on the 30-year Treasury bond dropped to a record low last week, breaching the 2% level for the first time. The yield on the long bond is currently trading around 2.10%.

Last week, Minerd told Bloomberg News he believed the Fed should execute a 50-basis-point inter-meeting cut in order to demonstrate its commitment to keeping the economic expansion on track.

The Federal Reserve, which hiked rates four times in 2018, cut rates by 25 basis points at its July policy meeting. Its next scheduled policy meeting is in September, and traders now see another quarter-point cut as the Fed’s most likely next move instead of an aggressive half-point one, according to CME Group’s FedWatch tool.

Minerd told Reuters in a telephone interview Thursday that his forecast has been “evolving.”

Story continues below advertisement

Fed policymakers are “inventing the rules as they go along ... they are definitely improvising,” Minerd said. “What I was looking at, perhaps incorrectly, was how Fed chair Jay Powell and his colleagues were making decisions.

“They created a third mandate - the Fed wants to avoid the recession,” he said. “At the end of the day, there will be recession but the Fed is attempting to forestall it with rate cuts.”

Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter