Guggenheim’s Minerd Says Fed Faces Reckoning for Market Support

(Bloomberg) -- The Federal Reserve's efforts to stabilize the economy may encourage companies to take on too much risk, inflating a corporate-bond bubble, according to Scott Minerd, chief investment officer at Guggenheim Investments.

“It's going to allow the excessive leverage -- which had already been building up into the system coming into this -- to continue, and to levels that are completely unprecedented in our history,” Minerd said at a virtual insurance conference Wednesday. That increases the risk a bubble in corporate bond markets “will just be extended and become more extreme.”

Policies by the Federal Reserve and Treasury have helped some companies in industries such as aviation and hospitality survive the economic collapse caused by the coronavirus lockdown, Minerd said. But in some cases, government actions have also prompted firms with too much debt to take on even more.

The Fed's actions will eventually force it to face a “day of reckoning,” Minerd said in a Bloomberg Television interview after the conference.

Peter Gailliot, global chief investment officer of BlackRock Inc.'s financial institutions group, said at the conference that the Fed had tried to keep the moral hazard issue at bay. But “they're crossing some lines, and it remains to be seen what other moral hazard or assumptions that investors might build into their investment process, in terms of how far the Fed might be willing to go,” he said.

Gailliot pointed to the central bank's decision to add high-yield debt and so-called fallen angels to its balance sheet. He expects commercial real estate and distressed debt markets to face the most stress as the crisis persists, and expressed concern about the likelihood many companies will go out of business.

“We do have a fear that there is going to be much less of a stigma associated with bankruptcies and defaults than you've seen in the past,” Gailliot said.