Prudential's Peters calls U.S. bond selloff overdone

Reuters News
Posted: Nov 15, 2016 10:17 AM

By Jonathan Stempel and Jennifer Ablan

NEW YORK (Reuters) - Gregory Peters, senior investment officer at Prudential Fixed Income, on Tuesday said the steep selloff in U.S. bonds following last week's surprise election of Donald Trump to the White House and the Republican sweep of Congress was overdone.

"We're telling our clients and investors, let's take a deep breath," Peters, who helps oversee $681 billion of assets, said at the Reuters Global Investment Outlook Summit. "It was a snap reaction, and I don't necessarily believe it was a game changer."

Peters had correctly predicted in June, shortly before British voters decided to leave the European Union, that "Brexit" would be a buying opportunity for U.S. securities despite the initial knee-jerk selloff in stocks.

On Tuesday, he said the rally in U.S. stocks and plunge in U.S. bonds after the Nov. 8 U.S. election was more a reaction to the Republican Party's sweep of the White House and Congress than Trump's victory alone.

Peters said the 10-year U.S. Treasury note was now probably near the high end of the 1.80 percent to 2.30 percent trading range he expects in the near term.

The note yielded about 2.23 percent on Tuesday afternoon, up from 1.86 percent just before Trump was elected.

Peters said the economic stimulus that may result from Trump's policies could extend the current credit cycle by one year, making it a good time to buy high-yield and investment-grade corporate bonds, especially in cyclical companies.

This could dovetail with higher benchmark U.S. interest rates.

Peters said it was "a given" that U.S. Federal Reserve policymakers would raise the federal funds rate in December, or else "investors would totally lose confidence in them." One or two more hikes could follow in 2017, he said.

On the regulatory front, Peters said the environment was likely to become "less hostile" to business, and he does not expect a full repeal of the Dodd-Frank financial reforms.

He stressed, however, that it remained too early to declare what policies would result.

Peters said the Republican Party was still associated with lower spending and smaller government, with which some of Trump's spending proposals might appear incompatible.

"I'm not convinced Donald Trump himself is a Republican, period, and I'm not convinced that the playbook looks the same today," he said.

Peters said markets would watch closely for any unsparing rhetoric that Trump may use.

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Should Trump "slip up," Peters said an "outsized reaction" could occur, and that markets would focus in particular on potential changes in U.S. trade policies.

"The U.S. can't just grow in isolation," he said.

Last week's election also heightened perceptions about the risks of investing in Mexico, and sparked a slide in the nation's peso on concern about Trump's policies toward that country.

Peters said "we're definitely poking around" Mexico at the margins, to decide how best to benefit from cheaper valuations resulting from the peso's decline, the increased return demanded for investing in government debt, and higher real yields.

"That's interesting to me," he said. "If the U.S. wants to grow, Mexico typically gets carried along with it."

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(Reporting by Jonathan Stempel, Jennifer Ablan and Megan Davies in New York; Editing by Lisa Von Ahn, Bernard Orr)