Co-CIO Greg Jensen: Borrowing could soon become expensive
Bridgewater bets against US and EU corporate bonds
Rising inflation and tighter monetary policy
p> “We are in a radically different world,” Jensen told the Financial Times, warning that inflation would be far more persistent than economists and the market were currently anticipating. He said that could put pressure on the Federal Reserve to raise interest rates even more, which in turn could have a negative impact on the economy. “We are approaching a slowdown,” quoted the FT Jensen. If Fed policymakers wanted to bring inflation down to the 2 percent target, they would have to tighten significantly. That would then probably hit the economy and especially the weaker companies, according to Jensen. According to the Bridgewater Co-CIO, the US economy is unlikely to return to its relatively robust growth rate of the past five years. “We believe that nominal growth will continue. The real economy will be weak, but not self-reinforcing weakness,” the FT echoes him.
In any case, the Fed has already signaled that, in its attempt to curb inflation, it will accept that economic expansion will slow down. And so the US Federal Reserve has already raised interest rates from historic lows and is looking to reduce its bloated nearly $9 trillion balance sheet.
According to Jensen, this tightening of monetary policy by the Fed, along with a number of other central banks around the world, is draining liquidity from the financial system, which is why he expects the prices of many assets that have risen over the past year to come under pressure. “They want to be on the other side of that liquidity hole, away from assets that need liquidity and assets that don’t,” he was quoted as saying by the Financial Times.
Borrowing money could soon become expensive
Higher interest rates have increased mortgage rates for consumers as well as borrowing costs for businesses looking to secure new debt, and businesses that cannot obtain new financing could face financial difficulties or go bankrupt. Bridgewater believes that “it’s going to start getting a lot more expensive to borrow money,” Jensen said, and the declining position in corporate bonds reflects that belief, he says.
Bridgewater bets against US and EU corporate bonds
Bridgewater used baskets of credit derivatives in Europe and the US to bet against corporate bond markets in April, the Financial Times reports, citing people familiar with the trade. Jensen declined to comment on how Bridgewater structured the short bet or the size of the position.
According to the FT, before Bridgewater opened bets against US and European corporate bonds, the hedge fund had already positioned itself for a prolonged sell-off in the $23 trillion US Treasury market and similarly for falling stock prices on Wall Street set, even after they have already lost a total of nine trillion dollars in value in 2022. According to ICE Data Services indices, high-quality US corporate bonds fell by around 12 percent in 2022 on a total return basis, while corporate bonds in Europe fell by 10 percent in local currency.
However, despite the Fed’s currently hawkish rhetoric, Jensen believes that inflation should be accepted above its 2% target because of the consequences of raising interest rates high enough to meet that target , would not tolerate. On the other hand, if the Fed is really relentless in trying to fight inflation and sticking to its target, Jensen fears stock prices could “slump” another 25 percent from current levels, according to the FT.
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