How ‘Cliff’ Could Affect Bonds: Sean Egan
If the U.S. economy goes over the "fiscal cliff," bonds will remain a safe haven, Sean Egan of Egan-Jones Ratings Company said Thursday on CNBC.
"The assumption is that the U.S. has incredibly deep pockets, and even if it's downgraded a notch or a couple notches, it's still the safest place to be of all the alternatives in the developed market," he said on "Futures Now."
One potential headwind could come from interest rates starting to ratchet up once the economy picks up, but Egan said that wouldn't happen for another 12 to 18 months.
"I think there's a lot of tension being worked out," he added. "The biggest difficulty right now is the developing currency war whereby Japan is trying to devalue their currency over the next six months so they can help their export sector, and Europe is using massive monetary policy to help the weaker countries."
Tokyo is expected to push for stimulus and move toward weakening the yen in order to boost exports.
Egan cautioned against piling into the trade.
"I think you have a lot of things happening at once," he said. "I don't think the conclusion is that you can go into long-term Treasuries."
Investors would likely wait for less uncertainty before they move forward, Egan added.
As for the so-called "fiscal cliff," the series of tax hikes and spending cuts to take effect Jan. 1 if Washington lawmakers fail to reach a budget agreement, Egan said it was likely a deal would be struck in mid-January or later.
"Keep in mind that this is a prelude to a much bigger deal later in 2013, and it also reflects an ideological clash whereby the Republicans believe in lower taxes, lower government expenditures, and the Democrats believe in a redistribution of wealth and a fairer society," he said. "It's a much bigger deal than the one we're faced with right now."
Egan also said he believed that yields on 10-year Treasury notes would be higher next year.
"I think they'll probably be slightly higher because the economy will be better off," he said. "Housing is improving, and that is a major driver for economic growth. You look at most industries, they've improved over the past 12 months."