Betting man Kyle Bass wagers Fed policy will turn Japanese

Betting man Kyle Bass wagers Fed policy will turn Japanese

Kyle Bass, the outspoken hedge fund manager who rose to prominence through prescient bets against the US housing market, Greece and Iceland, is now wagering that US interest rates will collapse to near zero next year as the country enters a recession and the Federal Reserve is pushed into crisis mode.

Investors expect that the US central bank will cut interest rates when it meets later this month, as a pre-emptive measure to ward off headwinds of trade tensions and slowing global economic growth, and to ensure that inflation creeps back up to its target of close to 2 per cent.

Interest rate futures indicate that traders think this will be the start of a longer rate-cutting cycle, with the Fed potentially lowering rates by a full percentage point to 1.25-1.50 per cent by this time next year. But Mr Bass — the founder and chief investment officer of Dallas-based Hayman Capital Management — thinks the forecasts are too mild.

He is betting that the current US economic slowdown worsens into a recession by mid-2020, which will force the central bank to move monetary policy back to its financial crisis setting — and stay there for the foreseeable future.

“As we have all learned, once an economy falls into the tractor beam of zero rates, it’s almost impossible to escape them,” the hedge fund manager told the Financial Times.

Betting on the Fed slashing interest rates has become a popular trade among hedge fund managers. Commodity Futures Trading Commission data indicates that money managers are now the most “long” on popular interest rate futures — in other words, betting that rates will fall — than they have been since early 2008.

“The steady fall in US Treasury yields, despite a strong economy and a large deficit, raises the prospect that the US could join the zero bond yield world of Japan and Europe in the next few years,” Jan Loeys, a senior strategist at JPMorgan, wrote in a note to clients last week.

Mr Bass’s concerns over the US economic outlook have been stirred by the “inverted” yield curve, with the 10-year Treasury trading at a lower yield than three-month bills since late May. An inverted yield curve has historically been an accurate omen of recessions, preceding every US downturn since the end of the second world war.

The US yield curve has steepened somewhat recently, after Fed chair Jay Powell last week hinted that a rate cut is indeed coming at the end of July. But Mr Bass still expects a recession to hit next year, and that the Federal Reserve will ultimately have to follow the Bank of Japan’s playbook and restart quantitative easing and even buying equities.

“In the long run the US is heading the same way,” he said. “Growth numbers are going to come down and real growth might go to zero. We’re probably never going to go away from zero rates.”

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