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Anne Walsh, chief investment officer at Guggenheim Partners Investment Management, is ready for the “Fed put” to end.
The “put” has meant that major market shocks over nearly two decades were met by an equally big Federal Reserve response: interest rates cut to almost nothing and a resumption of bond-buying, which is seen as analogous to holding a “put option on the price of stocks at least.
The Fed backstop was a boon for investors in stocks, cash-burning companies and other speculative corners of market, lifted up by its largess. But it also has been a drag for bond investors earning next-to-nothing in yield, particularly when older bonds fell in value the past year as interest rates sharply climbed.
“For last 15 years, we’ve had this quantitative easing environment,” Walsh said this week, in a Guggenheim podcast. “Investors have become trained to expect the Fed to throw in the towel, and pivot, and be very dovish. I think that’s not the world that we live in today,” she said. “I think the Fed ‘put’ is gone.”
While Walsh does see the Fed skipping a June rate hike next week, she also predicts a recession will unfold that isn’t “ginormous” in the third quarter of 2023. However, she doesn’t expect the Fed to cut rates this year, even in a backdrop where stocks and bonds selloff, and a cycle of credit downgrades and defaults kicks in.
Traders in Fed-funds futures on Friday were seeing only a 26.4% chance of the Fed increasing rates next week to a range of 5.25%-5.50%, but a 26.5% chance of a rate cut to a 4.74%-5% range in December.
A caveat to Walsh’s call of no Fed rate cuts this year would be a geopolitical shock or another unanticipated event unfolding that sparks extreme market volatility. But overall, her team at Guggenheim, which oversees about $224 billion in assets, has been gearing up to pounce on riskier bonds it likes, probably at higher yields and steeper discounts.
“I think in the old adage [that] it’s a stock-picker’s market, well, in this case, it’s a bond-picker’s market,” she said.
Until the selloff happens, Walsh sees yields on short-term Treasury bills remaining high as roughly $1 trillion deluge of new issuance flows to restock the Treasury Department’s depleted coffers in the wake of Congress raising the federal debt ceiling last week. The 1-month T-bill yields
TMUBMUSD01M,
was 5.1% on Friday.
Walsh also likes the 10-year Treasury
TMUBMUSD10Y,
around a recent yield of 3.7% as of Friday, with the expectation it will fall to about 3% as inflation keeps retreating.
Her defensive strategy also includes snapping up today’s higher yields in investment-grade corporate bonds offering about 5% yields, certain high-yield debt and roughly 7% available on high-quality collateralized loan obligations.
“The one good thing we can say for our friends at the Fed,” she said, is they, “put the income back in fixed income.”
Stocks were higher Friday afternoon, a day after the S&P 500 Index
SPX,
exited its longest bear market since 1948. The Dow Jones Industrial Average
DJIA,
was on pace for a 0.4% weekly gain, the S&P 500 index up about 0.6% for the week and the Nasdaq Composite Index
COMP,
0.6% higher since Monday, according to FactSet data.
See: A new bull market in stocks? Thank the VIX, says Fundstrat’s Tom Lee
