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Guggenheim Warns Fed May Delay Tapering on Debt Ceiling Risk

(Bloomberg) — The Federal Reserve may hold off on its tapering announcement as the two political parties spar on raising the debt ceiling, sending Treasury yields further down, according to Guggenheim Investments.

The decision, which most investors expect to come in November, could be delayed to December as the “upcoming drama” over the debt limit could lead to market turmoil, according to a note from the office of Guggenheim’s Scott Minerd. Recent economic data, including slowing job growth, suggest that the Fed is unlikely to pare back monetary stimulus at the policy meeting next week, the note said.

“The upshot is that bond yields could fall further as a patient Fed and rising fiscal risks get priced in,” Guggenheim’s economists Brian Smedley and Matt Bush wrote in the note. They pointed out that the yield gap between five-year and 30-year Treasuries is now flatter than it was in August 2020 when Fed Chair Jerome Powell unveiled a new policy framework to temporarily raise consumer prices, suggesting lower inflation expectations.

Also, a tapering postponement would suggest markets are too optimistic to expect interest-rate hikes in early 2023, it said.

Minerd and his team have been bullish Treasuries for a while. In March, he said the firm’s model suggests 10-year yields could turn negative by early 2022. The yields peaked that month, falling from a one-year high of 1.77% to the current level about 1.33%.

Minerd’s $27 billion Guggenheim Total Return Bond Fund has gained about 5% annually over the past five years, beating 92% of its peers, according to data compiled by Bloomberg.

(Adds current bond yields in fifth paragraph.)

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