Michael Novogratz is convinced the bull market in fixed income is over.
“The bear market has started,” Novogratz, principal at Fortress Investment Group LLC, said in a Bloomberg Television interview with Stephanie Ruhle and Erik Schatzker. “We’ve seen probably a low yield in 30-year Treasuries.”
Novogratz made the comments at the SkyBridge Alternatives Conference in Las Vegas where he also gave a presentation touting opportunities in Chinese stocks. Yields on 30-year U.S. government debt rose to an almost five-month high Wednesday after Federal Reserve Chair Janet Yellen said long-term interest rates could jump when the central bank raises borrowing costs.
Novogratz follows investors including Alan Howard of Brevan Howard Asset Management and Bill Gross of Janus Capital Group Inc. warning last month that yields are too low, especially in European debt.
Gross said in an investment outlook this week that the bull market “supercycle” for stocks and bonds is approaching its end, as the unconventional monetary policies that have kept it alive since the financial crisis are running out.
Novogratz said in his presentation that U.S. monetary stimulus, asset prices and the debt to GDP ratio are at all-time highs, which is worrisome.
He referred to former Citigroup Inc. Chief Executive Officer Chuck Prince’s infamous explanation in July 2007 about why the bank wasn’t slowing its lending amid turmoil in the U.S. subprime mortgage market: “As long as the music is playing, you’ve got to get up and dance.” Novogratz said that instead, “sometimes you have to get off the train before the music stops.”
Novogratz said prices of fixed income securities peaked in the last few weeks. The shift from a bull to bear market won’t have a major impact in the equity and credit markets until the Fed begins to raise rates, he said.
Most Fed officials predict that will happen this year for the first time since 2006.
“I would highlight that equity-market valuations at this point generally are quite high,” Yellen said in Washington on Wednesday in response to a question at a forum on finance. “Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.”
Rich Byrne, head of credit at Providence Equity Partners, said at the SkyBridge Alternatives Conference that the high valuations extended into credit markets, which today are more expensive relative to fundamentals than they were before the financial crisis.
“Not only does it resemble 2007, but in many ways it’s probably frothier,” Byrne said in an interview. “You tend to get to some bad outcomes as people aggressively get leverage higher.”
Until recently, Treasury prices were supported by a global government-debt rally on the European Central Bank’s bond-buying program, since stronger yields made U.S. debt more attractive relative to international peers. That difference in yield also helped fuel a rally in the dollar.
All changed in the past two weeks as European government bonds fell from historic highs, in a drop that erased $430 billion of value from the global debt market. On Wednesday, the yield on 10-year German bunds rose to their highest level this year. The dollar fell to a three-month low today, creating a selloff Goldman Sachs Group Inc. compared to the “taper tantrum” in 2013.
The market reversal hurt money managers including Gross, whose $1.46 billion Janus Global Unconstrained Bond Fund has lost 1.45 percent in the trailing past month.
Novogratz’s Fortress Macro Fund was down 4.7 percent through March. The strategy oversaw about $3.2 billion as of Dec. 31.