China will further devalue the yuan, fueling the rout in commodity prices and driving investors to seek safety in U.S. Treasuries, according to Scott Minerd, global chief investment officer at Guggenheim Partners.
The “surprise” decision by China’s central bank to devalue the currency last Tuesday shouldn’t have been a surprise, Minerd wrote in a note Monday. The “fundamentals were so overwhelming that the People’s Bank of China’s action was practically unavoidable,” and weakness in the country’s exports indicates the yuan has further to fall, according to the CIO, whose firm manages $240 billion in assets.
The yuan devaluation “will put more downward pressure on commodity prices, so we are not at the end of the road for industrial metals or energy price declines,” he wrote. Whether or not the U.S. Federal Reserve raises interest rates this year, he said, “demand for safe-haven U.S. Treasuries as a result of all this global turmoil could push yields meaningfully lower, even as low as 1 percent.”
The yield on the benchmark 10-year Treasury fell to 2.15 percent today, according to Bloomberg bond trader prices, as the price of oil dropped and sapped the outlook for inflation. The market is fixated on when the Fed will raise interest rates, and its current assumption that liftoff will happen this year is supported by the data, according to Minerd. But that’s not as important as a consumer slowdown, the ripple effects from China’s economy losing steam and the potential for an economic downturn in Europe, he wrote.
The 10-year Treasury reached a record low yield of 1.63 percent in September 2012.
In the U.S., Minerd said, equity markets are “overdue” for a correction after more than four years without one, which is more than twice the historical average for a consistent rally. Investors should use any short-term rallies as opportunities to take money out, lock in gains and boost allocations to high-quality, long-duratoin assets, he said.
Minerd is one of four managers on the $1.7 billion Guggenheim Total Return Bond Fund, which has returned 1.4 percent this year, beating 92 percent of comparable funds, according to data compiled by Bloomberg.
Eventually the turbulence in the markets will yield new opportunities, but it’s too early to jump in now, according to the CIO.
“I see tough sledding for risk assets over the next six to eight months,” he wrote.