Guggenheim’s Minerd Says Treasury Yields Can Still Turn Negative

Scott Minerd isn’t buying the recent Treasury-market consensus that efforts to spur the U.S. recovery mean an inevitable march higher in yields.

The Guggenheim CIO said the five-year Treasury yield could fall to an all-time low of 0.10%, and suggested the 10-year equivalent could drop below zero as a surge in cash holdings from federal stimulus programs finds its way into government bonds and other fixed-income securities. The firm’s model for benchmark yields projects them troughing at minus 0.50% in January 2022.

Guggenheim’s Minerd Says Treasury Yields Can Still Turn Negative

“The foregone conclusion today is that long-term rates are on an uninterrupted trajectory higher,” he wrote in a note Tuesday. “History tells us something different.”

The investment veteran’s bullish views on bonds come after last week’s chaotic selloff in the Treasuries market which saw five-year yields spike to 0.86%. Traders have started to position for a Federal Reserve hike by 2023, well ahead of the central bank’s guidance for no change until the end of that year.

Minerd’s argument is that the safest and most liquid assets will keep pulling in cash from a system flooded by Federal Reserve emergency provisions and government aid. While bond traders are selling Treasuries on hopes for reflationary growth, he noted yields continued to retreat in the early 1980s, despite pronounced inflation anxiety at that time.

“No doubt, prices will rebound from post-pandemic lows but given the surplus capacity throughout most of the economy and high levels of unemployment, any increase in the rate of inflation is likely transient,” he said.

The Guggenheim CIO is by no means the lone bull in the Treasuries market with some traders betting expectations for interest-rate hikes have become too aggressive and other big investors remaining positive. But, he recently raised eyebrows when he said Bitcoin should be worth $400,000.

Fed Pushback

Minerd expects the Fed will push back on any sharp increase in real yields that could derail an economic recovery.

“Prospects are for asset purchases to extend into next year with short-term rates to remain pegged at zero until at least 2024,” Minerd wrote, as evidence of the forces pinning down the shorter-dated bond yields. He sees that pressure extending along the curve, making current 10-year yields around 1.40% unsustainable.

Fed governor Lael Brainard said Tuesday that the speed of the bond selloff had caught her eye and could warrant a delay in any reduction in asset purchases by the central bank.

“As the money continues to flood into the private sector we continue to see a
rise in stock and bond prices,” Minerd wrote. “Over time, as stimulus payments and tax refunds are distributed and more money looks to be put to work, investors will extend maturities on their bond portfolios in a reach for yield.”

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