Tighter Fed = Wider Credit Spreads? No, Says Guggenheim’s Minerd

(March 7, 2013) – Fixed income guru Scott Minerd has rained on investors’ parades with a new commentary predicting that credit spreads will not loosen up when the US Federal Reserve makes a much-anticipated move to raise interest rates.

“As credit spreads continue to tighten, the market will eventually anticipate a move by the Federal Reserve to normalize interest rates,” he wrote in a piece published by Guggenheim. “Intuitively, rising interest rates should lead to widening credit spreads, but historically that has not been the case … Given the historical precedents, investors should recognize that a normalization of monetary policy is unlikely to immediately cause spreads to widen.”

Minerd, chief investment officer of the fixed-income firm, pointed out that the last several times the Fed has tightened its monetary policy after low-rate periods, it has been interpreted as positive for markets. “This was because the Fed would only cease accommodative policies when its members believed that economic growth would continue to accelerate,” Minerd explained.

By most indicators, the US economy is gathering some steam: The Dow Jones industrial average hit an all-time record high of 14,253.77 on Tuesday to much fanfare; GDP growth for the fourth fiscal quarter was recently revised into positive territory; Pending home sales hit their highest levels in two-and-a-half years in January, climbing 4.5%.  

Even if credit spreads do not open up, a hike in the federal funds rate will be good news for plenty of institutional investors. Many corporations with defined benefit pension plans have been shoveling in contributions, only to see their unfunded liabilities grow due to low interest rates. 

The Federal Open Market Committee—the group within the Fed responsible for monetary policy—issued its most recent statement on January 30. The group affirmed its commitment to near-zero rates “at least” until the jobless rate falls below 6.5%.

“To support continued progress toward maximum employment and price stability,” the group’s statement said, “the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after … the economic recovery strengthens.”

As for a timeline for this rise, Minerd’s recent forecast on CNBC echoed what aiCIO has been hearing from other top asset managers: Not this year, but probably next.

Related cover story:Gross, Dalio, Gundlach…Minerd? Is Guggenheim Partners’ Scott Minerd set to enter the Pantheon of fixed-income investing greats?