- Negative interest rates are coming to the US, Guggenheim CIO Scott Minerd said in a note published on Sunday.
- Minerd sees the 10-year US Treasury rate tumbling to 25 basis points, before hitting his target of negative 50 basis points in the coming years.
- Minerd warned that it’s not sustainable for the US government to respond to every financial crisis by printing money, even if we see sustained negative interest rates.
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Negative interest rates are coming to the US, Guggenheim CIO Scott Minerd said in a note published on Sunday.
The fixed-income manager said he thinks the 10-year US Treasury yield will tumble to 25 basis points, before hitting his target of negative 50 basis points in 2022. Minerd said that in certain circumstances, interest rates could go even lower.
“Given the economy’s and U.S. Treasury’s need for continued support by the Fed, utilising bond buying and forward rate guidance will, over time, continue to exert downward pressure on rates,” Minerd said.
The 10-year US Treasury rate is currently trading at 70 basis points.
Minerd observed that recent action from the Fed means companies that would normally be shut out of credit markets in times of market stress are instead able to access the debt markets and raise money, helping them potentially avoid bankruptcy.
The assurance from the Fed has fuelled record back-to-back months in investment-grade corporate bond issues.
In March, $US262 billion in investment-grade debt was issued, breaking the previous May 2016 record of $US168 billion. And in April, the March record was surpassed by a record $US285 billion in new such debt issues.
Minerd opined that the ability for corporations, especially ones that based off of where their bonds were trading during the week of March 23 were considered distressed, to issue a record amount of debt two months in a row is a success for the Fed.
By merely announcing its intentions, not acting on them, the Fed shored up the credit market, Minerd said.
The scenario reminded him of a period from 1942 to 1951 in which the Fed targeted a maximum 2.5% interest rate for long-term bonds. Minerd explained:
“Amazingly, the Fed ended up buying only a small amount of Treasury debt during that period. The reason, of course, is that the market perceived that the Fed had given Treasury investors a put. Any time rates began to approach 2.5 per cent, investors would step in and start buying because there was very little downside. A similar dynamic is at work right now in the credit markets.”
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Minerd ended his note with a warning: It’s not sustainable for the US government to respond to every financial crisis by printing money, even if there is a prolonged period of negative interest rates.
“But as Americans we will need to have more faith in the willingness and the ability of our government to print money as the ultimate solution to every problem,” Minerd said.
He continued: “Every time we get ourselves into a recession, the total debt of the U.S. economy rises relative to gross domestic product (GDP) to new and higher levels. This is not sustainable in the long run, even if we are able to push interest rates into significantly negative positions on a sustained basis.”
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