According to HSBC Holdings head of fixed-income research Steven Major, bond investors shouldn’t be particularly worried about the Brexit or about the possibility of a Donald Trump presidency. But they should be worried.
Major believes the Brexit vote is simply the latest event in a story decades in the making that will result in a prolonged period of low and negative interest rates around the world.
“It looks to me like everyone is going to end up converging on a similar view: The Fed can’t do much,” Major said. “I’m already there. It’s more of a structural story and the Fed for international and structural reasons can’t hike.”
Prior to the Brexit vote, the futures market was predicting roughly a 50 percent chance of another Fed rate hike by the end of 2016. Since the vote, that percentage has fallen to only 15 percent.
Major said the prolonged global slump in interest rates has been driven by central banks over-spending to stimulate their economies in the past 30 years, including huge spending following the Financial Crisis. The heavy debt loads than many countries now carry have limited their ability to support growth via spending.
Since the Brexit vote, the iShares Barclays 20+ Yr Treas.Bond (ETF) TLT is up 5.4 percent.
Disclosure: The author holds no position in the stocks mentioned.
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