Prudential Financial Inc.’s Robert Tipp said the jump in interest rates following the election of Donald Trump may have gone too far.
Tipp, who helps oversee about $680 billion as chief investment strategist for Prudential Fixed Income, said that investors may be overestimating the new administration’s ability to kick the US economy into higher gear. A range of forces, including an aging population, a sluggish world economy and a strong US dollar, may hold both growth and interest rates in check.
“It seems a tall order to assume the long-term prognosis for US growth and productivity will, in fact, substantially improve,” he said in a telephone interview.
Yields on US Treasuries have surged since Election Day as traders speculate that a Republican president and a Republican Congress will implement policies that will boost growth, increase the budget deficit and trigger higher inflation. Trump has pledged to cut corporate and personal taxes and to spend between $500 billion to $1 trillion to rebuild the nation’s infrastructure.
The 10-year Treasury note yielded about 2.32% on Monday up from 1.9% on Nov. 8.
‘Low Ranger’
Before the election, Tipp expected the 10-year Treasury note to trade in a range with a center of between 1.5 to 1.75%. With markets now bracing for fiscal stimulus, the center has probably shifted to around 2%, he said.
Tipp, in a 2013 paper called “The Low Ranger,” argued that rates were likely to stay low by historical standards because of the burdens imposed on the economy by high-debt levels, the need to close the budget deficit and global excess capacity.
Those forces are still in place, Tipp said in the interview, along with a new one: the resurgent US dollar, which could dampen growth and inflation. The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, has climbed more than 4% since Trump was elected, and is trading near its highest level in a decade.
Treasuries are attractive at current yields, said Tipp, who helps manage the $18.8 Prudential Total Return Bond Fund. Still, he sees better opportunities in corporate bonds, both high-yield and investment grade, commercial mortgage-backed securities and emerging-market bonds, denominated in dollars and euros.
The Prudential Total Return Bond Fund has beat 59% of similar funds this year and 83% over five years, according to data compiled by Bloomberg.
Copyright Bloomberg 2016
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