This morning, alas only briefly, I attended Bloomberg's Portfolio Manager Mash Up held in a converted garage on West 34th Street, a part of Manhattan that is strangely still un-gentrified. (That said, the event space was glamorous.)
What struck me at the Mash Up --- Bloomberg's second, a conference in which top asset managers discuss trends and markets and etc. --- was how upbeat the fixed income managers were. Well, existentially upbeat—since the panelists all see interest rates rising at some point, but just not now. That was my impression anyway. I had expected a sort of death watch given all of the fiscal problems facing the U.S.
The first discussion was entitled, “Post-Elections: Impact on Stocks and Bonds.” There were three fund-manager guests and a moderator.
On the election that returned a class-warfare, business-bashing president to the White House? At least the uncertainty over monetary policy has been removed, Jeffery Rosenberg, CIO for fixed income, BlackRock.
"Bernanke won the election too," chipped in Kenneth Volpert, head of the taxable bond group at The Vanguard Group. "Monetary policy continues."
“The wall of liquidity is not ending,” said Rosenberg.
As for Q-Eternity: The Fed said the quantitative easing stance would be in effect until 2015. That was no promise, said Volpert. But certainly it would continue through 2013--or until consumers started spending and the economy picked up.
In that event, the Fed would have to tighten. And that would be bad for bonds but good for stocks, the three panelists agreed. Q-Eternity is fueling bond flows, said Volpert. In fact, over $1 trillion has flowed into fixed income over the last four years--since the financial meltdown, the panel said.
If “rates go back to normal” in a “regular growth economy,”said Volpert, 10-year Treasuries yields would jump to about 3.5%. And that would be bad for current Treasury holders, agencies, mortgage backs but “good for everybody else,” Volpert said. So, the message was: Stay on the short end of the yield curve; corporates on the short end were attractive, said Volpert.
The fiscal cliff: Yawn. "Congress has shown that it won't deal [with important, radio-active, re-election-killing issues] until the last minute," said Volpert. In short, the three panelists, seemed to agree that there would be a compromise--at the last minute. Somehow. Republicans, after all, had been making nice the day after the election.
Diane Jaffe, group managing director , U.S. equities, for TCW, said the Moody’s downgrade looming, while not the end of the world, would put pressure on Congress and the president (who has “legacy issues” since he is in his last term), combined with pressure from the business community, “will help resolve [the fiscal cliff problem].”
But, noted Rosenberg, “The long-term problems persist.”
Wait. Another rate cut for Uncle Sam’s debt? Another yawn. Rating agencies are utterly useless, the panel agreed. Rosenberg, chief investment strategist of BlackRock, said for the most part, they don’t even look at rating agencies' opinions anymore.
The scary boogey man rating agencies are all pants and no bite (at least for Treasuries): Last Aug. 4 when U.S. sovereign debt was downgraded, well, go look at the chart. Investors still bought them up, sending yields to new lows.
Besides, because the U.S. dollar is the reserve currency of the world, rating agency opinions are less relevant. On top of that, a downgrade in U.S. Treasuries is an inflation risk and NOT a credit risk. All were in agreement.
As for “safe” assets? Gold, TIPS, commodities, “Safe assets are over,” said Jaffe.
The long-term problems, of course, are the “mandatory” federal payouts: Medicare, Social Security and the like, which now account for 88% of the federal government’s expenditures. But reform is on the table, and “you couldn’t have mentioned that 10 years ago, you [the politicians] would have lost their jobs,” Rosenberg said.
The panelists essentially see growth ahead, because the clouds of political uncertainty are clearing and the pressure is on Washington to work together to get compromise on fiscal issues.
“This is a good time to bet on America,” said Volpert.
One interesting comment: “We’ve been wrong on interest rates for 15 years,” said Rosenberg. Then he ventured: “We’re in a phase where it’s getting ugly.” He recommended: “Get shorter, fatter and floating.”