Ken Shinoda: Higher but Stable Is Good for Credit | Bloomberg TV

In this Bloomberg TV interview, Ken Shinoda provides his reaction to Fed Chair Kevin Warsh's inaugural press conference. Shinoda praises Warsh for bringing credibility to the Federal Reserve while noting that Warsh has signaled openness to significant changes in Fed communication and operations. Specifically, Warsh is skeptical of the dot plot (SEP projections) and forward guidance mechanisms, indicating he will use consultant task forces to examine Fed practices before making changes.

Regarding the Fed's immediate policy stance, Shinoda believes the Fed will remain patient and unlikely to cut rates given inflationary pressures. He interprets recent market movements in Treasuries as an overreaction, particularly the 16 basis point spike in the two-year yield, and suggests the two-year may decline another 10 basis points to settle around 4%.

On credit market implications, Shinoda emphasizes the importance of patience given current valuations. Credit spreads have tightened to yearly tight levels, the credit curve remains flat, and equity market strength has benefited credit. He recommends careful bond selection and warns of potential headwinds ahead. When asked about a higher-for-longer rate environment, Shinoda argues this can actually benefit credit markets given strong fundamentals, good earnings, and solid credit performance. He identifies opportunities in floating-rate securities and short-term fixed-rate securities positioned along the front end of the curve, which can yield 100-150 basis points over Treasury yields (approximately 5.5-6%).

On the Fed's balance sheet and operational changes, Shinoda notes Warsh will maintain accommodative liquidity conditions and help repo markets, but isn't a fan of large balance sheets. He expects balance sheet discussions to be deferred until year-end, particularly if inflation trends downward. Among the five task forces Warsh announced (communications, balance sheet, data sources, productivity/jobs, and inflation framework), Shinoda believes communications changes will be addressed first, likely resulting in shorter press conferences and reduced forward guidance reliance. He supports this shift, arguing forward guidance was necessary during QE but is no longer needed given current economic conditions with low unemployment and adequate earnings.