John Hussman On “The One Thing That Will Save The Fed”

John Hussman

Will rates surge after QE ends?

As Hussman sees it, there’s only one way that wouldn’t happen:

In bonds, we continue to carry a duration of only about 1.5 years, but are closely monitoring credit spreads. If we begin to observe a persistent uptick in corporate and default-sensitive yields, relative to Treasury yields, we would be inclined to increase our portfolio duration despite the current stance of monetary policy and the relatively muted level of yields. The one thing that will save the Fed from any need to shift its portfolio over the near term would be that sort of increase in credit risk, because it would essentially increase the demand for default-free securities while also muting any near-term inflation pressures.

So basically, rates will jump if the economy stays strong, but if it doesn’t, and corporate default risk grows, then Treasury demand will hold up. That’s pretty much how it always works, of course.