Stay away from US bonds — expert warns as debt crisis looms

Key Takeaways:

• The US debt crisis threatens more market volatility.
• Should investors turn to bonds or stocks?
• Ryan Payne weighs in, suggesting stocks, but there’s a catch.

YEREVAN (CoinChapter.com) – The absence of a limit increase on the US debt ceiling put an additional strain on retail investors, leaving them unsure of whether it is more profitable to buy undervalued stocks or dive into the bond market.

Ryan Payne, the President of Payne Capital Management (PCM), weighed in, claiming the bond market is a “dangerous place to be right now.”

Bonds vs. stocks – which to choose in the upcoming storm?

In detail, bonds are debt securities, similar to an IOU (phonetic acronym of the words “I owe you”). Governments, municipalities, or corporations issue bonds to raise funds from investors willing to lend them money for some time. When you buy a bond, you lend to the issuer, collecting interest.

Bonds do not represent ownership, and their yield may vary depending on the Federal Reserve’s policy. For example, the Fed has raised interest rates in ten consecutive revisions since Q2, 2022, threatening the bond market.

On the other hand, stocks, also known as equities, represent the ownership of a fraction of the issuing corporation. Thus, they don’t depend on interest rate hikes. However, stocks, being risk-on assets, still fall prey to the overall policy, as the stock market tends to yield lower interest in times of high volatility.

Payne warns against the “bond bubble.”

In a recent interview with Reuters, Payne commented on the danger of “hollowing the herd” and investing in the bond market.

He mentioned that a quarter of all bond inflows throughout the previous ten years happened in the last ten months. “That’s a sign of a bond bubble forming,” saying that a big retail money inflow is going into the same place, “bonds specifically.”

Instead, the expert suggested hedging against the 10-year benchmark that “dipped to a three-year low” and diving into the underpriced equities market, calling it a “tremendous buying opportunity.” However, he pointed out that he does not only mean the battered S&P 500 index stocks but rather value stocks and oversea markets.

Value stocks right now are selling at a tremendous discount. I look at value [stocks] and the overseas market. You get a 5% dividend on a basket of high-dividend-paying European stocks. It’s ironic to get a negative yield on the bonds.

mentioned Payne.

Meanwhile, financial analyst Jeff Sommer agrees, saying that the debt ceiling fiasco shattered the US credibility as a borrower. Moreover, he said the upcoming months might see market participants regarding the US government as riskier borrowers than Bulgaria, Croatia, Greece, Mexico, or the Philippines.

Also read: China-US relations worsen as Beijing sentences old US citizen to life in prison.