Roubini Warns Higher U.S. Yields Will Bite in Era of Excess Risk

(Bloomberg) -- A fresh spike in Treasury yields will rattle markets and could send more family offices and hedge funds down a similar path to Bill Hwang’s Archegos Capital Management, according to Nouriel Roubini.

Roubini, a professor at New York University’s Stern School of Business and a former adviser to the U.S. government, said the combination of low-to-negative rates across advanced economies and fiscal stimulus is leading investors to take excessive risk. He pointed to cyclically adjusted price-earnings ratios at highs seen in 1929 and the early 2000s as one sign of the recklessness.

“We’re seeing widespread frothiness, bubbles, risk-taking and leverage,” Roubini said on Bloomberg TV. “Lots of players have taken too much leverage and too much risk and some of them are going to blow up.”

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The professor, who earned the nickname “Dr. Doom” for his ominous prognostications about the economy and financial system, joins investors including Scott Minerd of Guggenheim Investments in warning that more Archegos-style meltdowns could be triggered. Roubini said one shock could come if 10-year U.S. Treasury yields climb higher than 2% this year. Other risks include the return of inflation and the prospect of a hot war between the U.S. and China, he said.

While a stronger dollar has led some hedge funds and other investors to capitulate on their bearish bets, the greenback will weaken over the medium term as twin deficits in the world’s largest economy widen, according to Roubini. Meantime, U.S. sanctions may lead countries like China, Russia, Iran and North Korea to diversify away from dollar assets.

“Even if in the short-term growth outcomes in the U.S. strengthen the dollar, the direction of the dollar is south over time,” he said.

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