Fed's Powell 'is Scrooge McDuck' to markets: Strategist
The Federal Reserve has signaled on multiple occasions that they will keep interest rates higher for longer, much to the chagrin of some investors. The Fed's policies, mixed with a myriad of economic headwinds, have simultaneously opened up new opportunities for investors, including parking investments in fixed-income.
John McClain, Brandywine Global Portfolio Manager, joins Yahoo Finance to discuss his views on the Fed's policies, where its true intentions lie, and how investors should frame these new opportunities.
"This is a generational opportunity for investors to shift capital away from equities into fixed-income. The relative attractiveness of fixed-income compared to equity markets is the strongest it's been in 20-plus years," McClain says on the current economic environment. "What we think is areas of the market that are relatively short-term duration, are particularly interesting in this point in time, so we highlight high-yield at 9.5% yield, forming kind of a Goldilocks opportunity for investors with low default rates, low dollar price bonds, and high yields."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Video Transcript
- People are looking at their retirement, they're looking at their 401(k) and the Fed does not care about your 401(k) at the moment. At what point does that narrative change, though?
JOHN MCCLAIN: Well Jay Powell Scrooge McDuck, right. Like, yes he definitely does not care about the stock market or the 401(k). And I think that's a misnomer that a lot of people thought that the Fed stepped in March of 20 as the stock market was crashing. That was not why they came in at all.
They came in to restore order to fixed income markets, particularly treasuries. You could not trade treasuries for a point in time basically during the depths of COVID, and that's what the Fed cares about. It's orderly financial markets. They don't care about the stock market. And really, we would be massively far away from a Fed put at this point in time.
- And of course, I have to ask you about the action that we've been seeing with bond yields and the impact that's been having on stocks, that dichotomy there. What are your projections for where this goes from here? I mean, we're going to be in this holding pattern of higher for longer interest rates clearly for the foreseeable future.
JOHN MCCLAIN: Yeah we said that. And this is-- look, this is a generational opportunity for investor to shift capital away from equity into fixed income. The relative attractiveness of fixed income compared to equity markets is as strong as it's been in 20 plus years. What we think is areas of the market that are relatively short duration are particularly interesting at this point in time. So we highlight high yield at 9.5% yield is forming kind of a Goldilocks opportunity for investors with low default rates, low dollar price bonds and high yields.
The longer part of the treasury curve is particularly challenging at this point. What we're watching closely here is where the 10-year closes. And if we close above 5% at a point in time, I think that could potentially lead to a real blow off in back-end yields. We could see yields jump massively here.
And what you've got to pay attention to is the ineptitude of Washington DC at this point. You've got politicians that-- it takes three weeks and 4 speakers to elect the new Speaker. So, you know, I think we're going to have to wait and see around fiscal discipline coming out of DC because if we don't have that fiscal discipline, you could see a material rise in back end interest rates.
- And certainly, I mean, when you have a new Speaker now who is he's pro Trump and it's going to be a tough sell here to try and get some sort of-- to avoid a government shutdown here. When you couple that also with what we've seen as you mentioned there with the inverted yield curve, when you couple that with a potential recession, then what are your recession estimates? How deep do you think it's going to be and what could potentially change that narrative?
JOHN MCCLAIN: Well look we were early to a recession call in 2023. And I think as we briefly mentioned, financial engineering and creativity from CFOs has really prolonged this cycle. And I don't think we're going to see a recession in the next 12 months here. So I think it's continued to be pushed out.
But in terms of where we see bond yields going, you know, again, the back end of the curve is relatively murky, but the front end of the curve is reasonably if not particularly attractive.
