In our latest Q&A with Hedgeweek, we share our perspective on interest rate trends, the Federal Reserve’s cautious approach, and why U.S. dollar credit remains a key focus in our investment strategy.
Watch the full video to gain insights into navigating today’s evolving market environment and how ASG Capital identifies unique opportunities while minimizing risk.
Transcript:
1. With other major Central Banks notably in Europe cutting interest rates earlier, is the Federal Reserve behind the monetary policy curve?
At the present time No.
US monetary policy is aligned with market expectations. Initially late off the mark, the recent interest rate cuts are now more in line with the level of 2year Treasuries for example.
The inflation genie is looking to be firmly back into its bottle. Having said that, the inflation rate has yet to reach the Fed.’s 2% target. It is expected, by the Fed., to move there in 2025.
The Fed. is right to take a prudent step by step approach at the present time, with the optionality to decrease, pause or raise rates from here. Too much uncertainty remains, including the impact of policies from the new Trump administration.
2. How do you see interest rates evolving over the next year in the US?
On the one hand, lower inflation prints with unemployment edging higher will encourage the need for further Fed. Fund rate cuts.
World economic activity is already on the edge of recession. International pressure exists on world interest rates to come down from their current levels.
To add to this paradigm is the cost of current interest rates, which represent a massive burden on Federal deficits. This situation is not sustainable over the medium term.
On the other hand, a more resilient US economy and/or stickier US inflation would bode for rates not to come down much further from here.
On a balance of probabilities, short term rates are likely to edge lower in 2025. How quickly will depend on US economic data, Federal deficits and general world events.
Longer term rates could be more volatile in 2025, weighed down by the overwhelming funding needs from the Federal government.
3. Why this non-committal answer?
At ASG we have learned to be prudent on the consequences of monetary and fiscal policy.
We cannot exclude short-term or long-term interest rates being adjusted more or less than anticipated.
We must be prepared for multiple outcomes.
4. Europe seems to be heading into political and economic uncertainty, how will this weigh on monetary policy in the US?
On paper, what happens in Europe will have no effect on US monetary policy. In practice due to the interconnectedness of international markets as well as the large pool of derivatives sitting on international bank off-balance sheets, this is not the case.
The ‘EuroDollar’ market for example provides US Dollar liquidity outside of the United States. If the non-US banking sector is not functioning properly, then Dollar liquidity in this market will become an issue, especially for the Europeans as they are most exposed.
Stress in this EuroDollar market will obviously bring some stress in the US domestic capital market.
The Fed. is sensitive to what is going on overseas and will work to alleviate this financial pressure if it can. So yes, what goes on in Europe could indirectly weigh on US monetary policy.
5. What is your focus of investment and why?
Our investment focus is on US Dollar credit with a specific emphasis on the subordinated debt of quality institutions, predominantly located in the OECD Markets. Why?
Firstly, yields are around twice those of traditional credit for a same name. With 7% returns on a subordinated bond as compared to 4% on senior debt, the investor can access a ‘real’ rate of return, which is a better hedge against inflation.
Secondly, this niche area of investment provides a stronger capital gain potential compared to traditional bonds. Instrument specifics in this very specialized market offer interesting and unique investment opportunities for investors.
Thirdly, by allocating to large franchises with strong balance sheets through a well-diversified portfolio, we work to bring down risk to a minimum.
Our investment philosophy is to always minimize risk, while optimizing the return potential.
This Investment strategy provides flexibility and nimbleness essential to Risk management.
The Alternative Income Investment Solutions are Emerging Market & High Yield which provide the same level of Yield with substantially more Risk.
Also, we do not have a geopolitical risk associated to emerging markets as we invest in OECD Markets mainly.
The ASG team is available to guide investors in this asset space which, when well actively managed, offers a strong revenue stream, high yield returns, and capital gain optionality.
