“If there is something untoward coming at us that people haven’t anticipated, it’s probably going to come from the fixed-income side,” says Michael Aronstein, president of Marketfield Asset Management. That’s where the participation is, that’s where the expectation is the highest and the fear of something disruptive is the lowest, he added.
Asked why something disruptive hasn’t happened yet in the fixed-income market, Michael said it is beginning to happen. We had a pretty substantial backup in all high grade bonds since the Fed embarked on its latest program (of buying mortgage bonds). The 10-year US Treasury notes bottomed out at 1.40 percent last year and the yield is at two percent now. Treasury yields are unlikely to come down again and the 31-year long bull-run in the bond markets exhausted in last summer.
Asked how should investors play in the bond markets, Michael said he would be very careful in holding fixed-income products and examine how much duration risk it has in high-grade bonds. It’s interesting to note that we have essentially the same structure in housing finance now (that we had before the crisis), he observed.
We have a federal agency (The US Federal Reserve) that is accumulating a tremendous amount of high-grade risk (and we are calling it the “Feddie Mae”) and are doing the same thing (that caused the sub-prime crisis).
The Fed is inventorying all the paper that is allowing a huge leverage to build up, and the central bank is getting into the same kind of a situation, he noted. Consequently, you are getting the same sub-prime issuance; e.g. Mongolia issued a 10-year dollar bond two months ago at a yield of about five percent. In another 20 years, people are probably going to look back at that and wonder “what the earth people were thinking,” though fortunately it’s all over now, he added.
The corporate issuance this month (January) was over $400 billion. So even with the Fed stepping in and accumulating a lot of this credit, you’re still getting an enormous, outsized swelling of that (fixed-income) marketplace which is one reason that even though the demand has kept up, excessive supply has prevented any price appreciation; i.e. essentially it’s the same dynamic that occurred with houses, he concluded.
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