- • Scott Minerd of Guggenheim believes that the widely held belief that interest rates will continue to rise is possibly incorrect, speculating based on historical patterns.
- • “Whether it’s negative rates or rates which are barely positive, I think that over the course of the next 18 months, we should expect to see a high likelihood that we end up with significantly lower long-term rates than we have today,” Minerd remarked further.
- • Last week, the recent rise in Treasury yields gained traction, with the benchmark 10-year yield trading well above 1.5 percent and briefly breaching the mark of 1.6 percent.
Guggenheim’s global chief investment officer, Scott Minerd, said Tuesday that Wall Street’s widely held assumption of increasing interest rates was possibly incorrect, and that the benchmark US Treasury rate might even turn negative.
Despite a close recent bounce in interest rates, Minerd confidently stated that a formula used by his company to make clever investment decisions showed that interest rates were still on a downward trajectory if we take an overall glance.
“Whether it’s negative rates or rates which are barely positive, I think that over the course of the next 18 months, we should expect to see a high likelihood that we end up with significantly lower long-term rates than we have today,” Minerd said. Guggenheim is in control of $310 billion.
Last week, the recent rise in Treasury yields gained traction, with the benchmark 10-year yield trading well above 1.5 percent and briefly breaching 1.6 percent. On Monday and Tuesday, the yield fell, but it is still well above where it was a few months ago.
Some strategists and economists are becoming increasingly concerned about inflation. After the financial crisis, the US economy has struggled to meet the Fed’s inflation targets, but some fear that low rates, economic stimulus, and pent-up demand would push prices sharply higher in the coming year.
Many strategists predict that Treasury yields will rise as the year progresses and the economy reopens, but Minerd is less optimistic.
“We have yet to see a reversal in the trend that has been in place since the early 1980s. It has been a fool’s game so far to every time we make a new low in rates to predict the end of the bull market, and until the market tells me something different, I’m not in a hurry to join the crowd,” Minerd said.
In a note, he clarified that Guggenheim’s regression tool, which was based on legendary economist Eugene Fama’s “random walk” theory, indicated that the 10-year was approaching its near-term ceiling and could trade in negative territory in 2022.
“Our work shows that as long as this trend stays in place — which as I said it hasn’t been violated yet in 35 years — the models tell us that we’re going to have a 10-year yield that’s negative,” Minerd said. “The mean expectation is for it to be about negative half of one percent.”
The strategist said he didn’t see the possibility of another nearly $2 trillion stimulus package from Washington as a justification to change his mind. Minerd clarified that rising American savings levels, as well as the possibility of a Fed “twist,” might work to lower interest rates.
Minerd has long cautioned about bond market excesses, especially in corporate debt. Last February, he cautioned that the looming coronavirus pandemic, which had yet to affect the US economy, was an example of a danger that could derail markets.