Economic Slowdown: Weakness in Financial Markets: Ray Dalios Bridgewater Bets on US and European Corporate Bonds | News

Rising inflation and more and more Monetary policy Bridgewater’s worries
Co-CIO Greg Jensen: Loans can get expensive soon
Bridgewater bets on US and EU corporate bonds

Rising inflation and tightening of monetary policy

p> “We are in a completely different world,” Jensen told the Financial Times, warning that inflation would be much more persistent than economists and the market had predicted. This, he said, could put pressure on the Federal Reserve to raise interest rates even more, which in turn could have a negative impact on the economy. “We are approaching a slowdown,” FT Jensen quoted. If Fed decision makers wanted to bring inflation down to the 2% target, they would have to tighten it considerably. According to Jensen, this would likely hit the economy, especially the weaker companies. According to Bridgewater Co-CIO, the US economy is unlikely to return to the relatively strong growth rates of the past five years. “We believe nominal growth will continue. The real economy will be weak, but there will be no self-perpetuating weakness, ”echoes FT.

In any case, the Fed has already signaled that in trying to contain inflation it will accept a slowdown in economic expansion. So the US Federal Reserve has already raised interest rates from historic lows and wants to cut its bloated nearly $ 9 trillion balance sheet.

According to Jensen, it is the tightening of monetary policy by the Fed, along with a number of other central banks around the world, that is sucking liquidity from the financial system, and he expects many asset prices, which have risen over the past year, to come under pressure. “They want to be on the other side of this liquidity gap, away from assets that need and don’t need liquidity,” said the Financial Times.

Lending money can get expensive soon

Higher interest rates have increased consumer mortgage rates as well as loan costs for companies looking to secure a new debt and companies that cannot obtain new financing may face financial difficulties or go bankrupt. Bridgewater believes that “it will be much more expensive to borrow money,” Jensen said, and the declining stance in corporate bonds reflects this belief.

Bridgewater bets on US and EU corporate bonds

Bridgewater used baskets of credit derivatives in Europe and the United States to bet on corporate bond markets in April, reports the Financial Times, citing people familiar with the industry. Jensen declined to comment on Bridgewater’s short bet structure or position size.

According to FT, by the time Bridgewater opened bets against US and European corporate bonds, the hedge fund had already prepared for an extended $ 23 trillion US government bond sell-off, as well as falling stock prices on Wall Street, even after they had lost a total of nine trillions of dollars in 2022. According to the ICE Data Services indices, high-quality US corporate bonds fell approximately 12 percent in 2022 based on total return, while corporate bonds in Europe fell by 10 percent in local currency.

However, despite the currently hawkish rhetoric of the Fed, Jensen believes that inflation should be accepted above the 2% target due to the ramifications of raising interest rates high enough to meet this target, he will not tolerate. On the other hand, if the Fed is really trying tirelessly to fight inflation and stick to its target, Jensen is concerned that stock prices may “fall” another 25 percent from current levels, according to FT.

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