• Hedge fund expert warns against focus on wrong data
• Spreads between high-risk bonds and government bonds too small
The US Federal Reserve raised interest rates by 0.25 points to between 4.5 and 4.75 percent at its most recent FOMC meeting. The US monetary authorities surprised the market with an unexpectedly slower pace of interest rate hikes.
Expert warns against focus on wrong data
Nevertheless, Nicholas Ferres, chief investment officer at the hedge fund Vantage Point Asset Management in Singapore, warns investors against exaggerated expectations of the central bank’s policy. The hope of many market participants is currently reflected in the stock market and in the market for high-yield bonds – but the expert considers this hope to be misleading. The S&P 500 and high-yield corporate bonds “do not take into account the business cycle and the risk of a recession,” making them vulnerable to another sell-off, Bloomberg quoted Ferres as saying.
He believes investors are overly focused on backward economic data like US jobs, rather than indicators pointing to future demand, like manufacturing orders. “Because the Now data is okay, people have a false sense of security,” he warns, noting that the monthly US manufacturing orders gauge has been down for the past two years and has been in the moderation phase since September. In Europe, the correspondingly similar measuring instrument has been shrinking for six months, according to Ferres.
Forecasts may be wrong
Forecasts that there will be a fall in riskier assets in the first half of the year and then a recovery in the second half of the year could turn out to be wrong, the hedge fund expert warns. In doing so, he focuses in particular on the yield difference between high-yield bonds and government bonds: he advises that the gap should be larger here.
His hedge fund keeps 10% to 15% of its assets in cash and has no money invested in fixed income securities given the bond market’s underperformance over the past year and the possibility of a tighter one monetary policy. “It was an important decision because fixed income didn’t work as a defensive asset class,” Ferres said. Instead, he now sees credit default swaps as a safer form of protection in the medium term. If economic signals weaken, the price of corporate debt default protection will rise, offering investors focused on CDS indices an upside prospect, he said.
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