Tags: Pento | treasury | QE | bond

Money Manager Pento: Fed Needs to 'Stop QE Right Now'

Thursday, 02 May 2013 08:08 AM

By Dan Weil

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The Treasury market's 32-year rally has turned into a bubble that's going to pop with a bang, says Michael Pento, president of Pento Portfolio Strategies.

"It's the most overpriced, oversupplied and over-owned market in the history of American economics," he tells Yahoo.

The proof is in the statistics, Pento says. Treasury yields stand 550 basis points below their 40-year average, almost $120 billion flowed into bond funds from 2008 to 2012, and Treasury issuance has soared 140 percent since the end of 2007.

Video: Economist Predicts 'Unthinkable' for 2013

The Federal Reserve's massive easing program is a big part of the problem, Pento says. "The Fed should stop QE [quantitative easing] now," he states. "It's creating a huge interest rate vacuum," as it's essentially the sole buyer of Treasurys.

When the Fed finally decides to end QE and then unwinds what will be a $4 trillion balance sheet, as a bond market investor "do you think I'm going to be a buyer in front of that or a seller?" Pento asks rhetorically.

"I think they need to stop QE right now," he proclaimed.

He thinks the market will likely start to tank in 2015 to 2016, when investors conclude, "it's impossible the U.S. will ever pay me back in real terms, and I demand a higher interest rate."

However, it could happen before then, Pento notes, if the Fed decides to pop the bubble, but that is not likely.

For now, the 10-year Treasury yield has dropped to 1.62 percent, its low for 2013.

"Cutting and tapering QE is not going to be in the cards for quite some time," Justin Lederer, an interest-rate strategist at Cantor Fitzgerald, tells Bloomberg. "Data continues to be weak.

After the Federal Open Market Committee's two-day meeting ended Wednesday, the Fed announced that it would continue purchasing of $85 billion in Treasurys and mortgage-backed securities per month "until the outlook for the labor market has improved substantially in a context of price stability."

"The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes," the Fed said in its policy statement.

Video: Economist Predicts 'Unthinkable' for 2013


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