In this episode of WealthTrack with Consuelo Mack, Scott Minerd of Guggenheim Partners discusses his outlook for interest rates and fixed-income investments. Mr. Minerd is Guggenheim’s Global CIO and portfolio manager for a pair of 5-star mutual funds:
Bond markets are different from any time in living memory, according to Ms. Mack, as central banks have artificially depressed them. Mr. Minerd refers to central-bank policies as “financial repression” and says people need to get used to the fact that returns are going to be low until central banks start doing something differently.
Moreover, central banks can’t fix the economy by themselves. According to Mr. Minerd’s view, the president and Congress need to use fiscal policy to address the economy’s woes, but he doesn’t anticipate the political will appearing any time on the horizon.
The situation in other countries is even worse, with negative rates in Europe and Japan. Even though these negative rates have had the opposite of their intended effect, European and (especially) Japanese policy-makers don’t know what else to do, so they keep on stimulating and driving their domestic rates lower. This makes U.S. bonds attractive to international investors, even with U.S. rates near all-time lows.
Thus, Mr. Minerd thinks interest rates are going to stay low. Yes, the bond market – especially sovereign debt – is massively overpriced, but markets that stay overpriced for a long time “are called bull markets,” according to Minerd. Long term, interest rates have to trend higher, but in the meantime he says he could see the yield on the U.S. 10-year as low as 1.00%.
So how do fixed-income investors make money in such a low-return environment? They could attempt to ride the bond bubble higher in pursuit of capital appreciation, but Minerd quotes a famous financier of old who said his key to building wealth was to sell early. Instead, Minerd likes floating-rate loan instruments, which should outperform so long as the U.S. economy doesn’t dip into recession – which Minerd believes it won’t.
Mr. Minerd and Ms. Mack both endorsed the book Thinking, Fast and Slow by Daniel Kahneman. Mr. Minerd is dedicated to the type of “slow” thinking (reasonable, deliberate) described in the book, especially pertaining to investment decision-making.
Past performance does not necessarily predict future results.
Jason Seagraves contributed to this article.
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