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Corporate debt is “fairly valued” even as the Federal Reserve is poised to hold down interest rates for too long, stoking higher inflation and hurting savers, according to Martin Fridson, global credit strategist at BNP Paribas Investment Partners.
While company bonds currently “offer a good option” to investors, the country’s central bank is “likely to be behind the curve” in boosting its benchmark rate as inflation becomes a threat, New York-based Fridson said in a radio interview on “Bloomberg Surveillance” with Tom Keene.
“They’re going to have difficulty implementing the exit plan that they’ve outlined,” partly because lawmakers would oppose monetary tightening with the U.S. still facing high levels of unemployment, Fridson said. “I think we’re coming to a crunch at some point.”
Savers are being punished by record-low yields as Fed Chairman Ben S. Bernanke, Vice Chairman Janet Yellen and New York Fed President William C. Dudley have signaled further easing may be needed if growth lags behind projections. The central bank’s policy threatens to penalize investors again as rising prices eventually erode the value of their holdings, Fridson said.
“I just think it’s wrong, just in a very basic sense of justice,” he said.
Yields on U.S. corporate bonds declined to a record 3.4 percent on April 16, a 49 basis-point drop from the end of last year, according to Bank of America Merrill Lynch’s U.S. Corporate Master index.
Treasury 10-year note yields today traded below 2 percent for a fifth day on concern the European debt crisis may worsen and as U.S. jobless claims were higher than forecast last week, increasing demand for the safest assets.
Consumer prices increased 2.7 percent in the 12 months ended in March, the smallest 12-month gain in a year. That pace will probably be 2.4 percent in 2012, according to data compiled by Bloomberg.
The central bank’s lending rate has been between zero and 0.25 percent since December 2008, following the bursting of the housing bubble and the collapse of Lehman Brothers Holdings Inc.
When borrowing costs eventually rise, it probably won’t be a smooth transition from the current level of record-low yields, according to Abby Joseph Cohen, senior U.S. investment strategist at Goldman Sachs Group Inc. Equities will give better returns than bonds in the mid-to-long term as companies look to emerging markets for growth, she said.
“Every time there’s been an inflection point in interest rates, it never goes smoothly,” Cohen said during the same Bloomberg Radio interview. “There’s usually a shock to the system.”
To contact the reporters on this story: Charles Mead in New York at firstname.lastname@example.org; Tom Keene in New York at email@example.com
To contact the editor responsible for this story: Alan Goldstein at firstname.lastname@example.org