Corporate bonds

Bridgewater bets against US and European corporate bonds on slowdown fears

Bridgewater is betting on a corporate bond selloff this year as the world’s largest hedge fund takes a gloomy view of the trajectory of the global economy.

The bet against US and European corporate debt underscores Bridgewater’s assessment that recent weakness in major financial markets will not be short-lived.

“We are in a radically different world,” Greg Jensen, one of Bridgewater’s chief investment officers, told the Financial Times. “We are approaching a downturn.”

Jensen, who helps steer investment decisions alongside co-CIO Bob Prince, warned that inflation will be much more rigid than economists and the market are currently predicting, which could put pressure on the Federal Reserve. US – the world’s most influential central bank – to raise interest rates higher than expected by many on Wall Street.

He added that if Fed policymakers committed to bringing inflation back to its 2% target, “they could tighten very sharply, which would then crack the economy and probably the weaker one.” [companies] in the economy”.

He added: “We think nominal growth will hold up. The real economy will be weak, but not a self-perpetuating weakness.

Bridgewater had already positioned itself for a sustained sell-off in the $23bn US government bond market and also bet on falling Wall Street stock prices – even after they had already collectively lost $9bn dollars in value this year. Investment-grade U.S. corporate bonds are down about 12% this year on a total return basis, while those in Europe have fallen 10% in local currency, according to ICE Data Services indices.

Rising interest rates have led to higher mortgage rates for consumers and higher borrowing costs for businesses that take on new debt. If companies fail to secure new funding, they could spiral into financial difficulty or go bankrupt, and Jensen said the bearish stance on corporate bonds reflected Bridgewater’s belief that “it’s going to start to become much more expensive to borrow money”.

Top Fed officials have signaled their intention to slow economic expansion as they attempt to rein in the highest inflation on record since the 1980s. interest rates from all-time lows and this month they will begin to reduce the size of the Fed’s nearly $9 billion balance sheet.

Jensen said the Fed’s decision, coupled with tighter policy from an array of central banks around the world, would drain liquidity from the financial system. In doing so, he said prices for many assets that rallied last year would come under pressure.

“You want to be on the other side of that liquidity hole, between assets that need liquidity and assets that don’t,” he said.

Bridgewater in April used baskets of credit derivatives in Europe and the United States to bet against corporate bond markets, according to people familiar with the trade. The spread on the main high-yield CDX index, which tracks insurance products that protect against riskier corporate bond defaults, fell from around 375 basis points in early April to 475 basis points this month. -ci, indicating an increase in the cost of protection. against issuers who waive their debts.

Jensen declined to say how Bridgewater structured the short credit bet or what the size of the position was.

Even with the Fed’s current hawkish rhetoric, Jensen said he ultimately believes the Fed will blink and accept inflation above its 2% target. Policymakers, he says, will be unable to tolerate a stock market sell-off and the high unemployment that would likely result from raising rates high enough to bring inflation down to that threshold.

Otherwise, he estimated that stocks could “collapse” another 25% from current levels if the Fed was relentless in its efforts to fight inflation.

Earlier investments in the year paid off for Bridgewater, which is best known for its global macroeconomic approach in which it tries to profit by making bets based on economic trends. The fund was managing $151 billion in assets at the start of the year and its flagship investment fund Pure Alpha was up 26.2% this year through the end of May, according to a person familiar with the matter, versus a 13.3% drop for the benchmark S&P 500 index over this period.

Jensen attributed the current US stock market volatility in part to the Fed’s conclusion on quantitative easing. Without the central bank in place to absorb the large supply of Treasuries, other investors had to step in and, in doing so, sold other assets such as stocks. “So you see this flip-flop between selling bonds or selling stocks,” he said.

As for areas where the fund is bullish, Jensen said he favors commodities and inflation-linked bonds. Both asset classes would benefit, he said, from a stagflationary environment — a toxic combination of weak growth and rising prices.

On the greatest systemic risk to markets and the economy

Greg Jensen, Bridgewater’s co-chief investment officer, warned that the biggest systemic risk facing the US economy was that the Federal Reserve was effectively running out of ammunition.

Skyrocketing inflation has limited the tools at the disposal of the Fed and the federal government, given that an intervention by either would likely fuel the price pressures already weighing on the country, he said. -he declares. He warned that policymakers in Washington should “essentially allow a recession because the trade-off with inflation is so bad.”

In recent years, the Fed has supported financial markets in times of distress by lowering interest rates to historic lows and spending trillions of dollars on Treasuries and mortgage bonds, purchases that have helped inflate the value of other riskier assets. But Jensen said policymakers would struggle to use either when inflation is so high.

“You have reached the limits of interest rates and private sector debt and you have reached the limits of, say, printing money and using fiscal policy,” he said. declared. “The biggest systemic risk is that markets aren’t used to the kind of declines you have when the central bank can’t use monetary policy in weakness.”