Sectors: Bonds
Dear learned team,
The US Fed hiked for the first time in 3 years this week while Bank of England (BOE) left its cash rate on hold, although it warned that hikes may be required if the US-Iran War continued to pressure inflation.
Weakness in bond markets remains a global phenomenon, Japan’s 10-year bond yield hit 3% for the first time in 30-years. There are some big factors weighing on Japanese bonds from the Bank of Japan’s (BOJ) aggressive hiking path to July wages rising at the fastest pace in nearly three decades to the simple spillover effect from weakness in US bonds.
US bond yields surged ~0.3% last week as a second Fed rate hike before Christmas was priced into bonds and stocks. There were several factors causing the move, some of which we touched on earlier – August core CPI rose 0.3% month-on-month, above the 0.2% consensus estimate, oil prices are above US$100/barrel, PPI data was firm last week, President Trump’s mid-term cash splash would result in a trillion-dollar debt increase and the US Treasury Department bought fewer bonds than expected in its first expanded buyback operation. Almost as importantly there was nothing crossing the news wires to support bonds (yields lower).
Hi MM,
America’s attempts to hold up their own government bonds are failing. The world is abandoning them. No one trusts US debt any more. What are the consequences of that here at home, both in bonds and our own stock market? And what is this talk of their using crypto as a way out? Why would that work if the rest of the world wasn’t interested in following suit?
Hi Guys
Interested in your preference in relation to income generating asset classes (excluding equities) at the moment.
Private Credit particularly with property development exposure is obviously becoming increasingly risky. RMBS typically has less development risk but still has exposure to rapidly declining residential property prices. Bank hybrids are drawing to a close. Term Deposits are now offering north of 5% p.a. for 3 months.
Would you please provide your thoughts on where the best risk adjusted returns can be found in the income generation space?
Appreciate your thoughts.
Cheers
Tim
In his Livewire article, Shane Oliver argues that the long-term trend in global bond yields reversed in 2020 with a multi-decade super-cycle bear market driven by structural inflation pressures, expanding government debt, and a resurgence of “bond vigilantes.” This shift toward higher yields reduces the tailwinds enjoyed by risk assets and traditional growth strategies, with lower real returns and increased volatility across most asset classes.
Given the structural shift into a long-term bond bear market driven by rising government debt, sticky inflation, supply chain de-globalisation, increasing inequality and populist insurgencies, as well as escalating geopolitical tensions, how is MM positioning its portfolios to navigate these macro headwinds? Considering these macro realities, if you had to commit to just one of your model portfolios to navigate this environment over the coming 3-5 years, which one would it be and why?
As we mentioned earlier US 2-year yields hit an 18-month high last week as thee hot Jobs Report increased the odd the Fed will increase rates into Christmas – credit markets are fully building in one hike with the 40% chance of a second before we tuck into our Christmas turkey. Lower fuel prices and end to the US-Iran war feel like the pivotal catalyst which could see yields lower but as we approach 200-days of conflict both sides continue to attack each other in the Strait of Hormuz.
September is generally a weak month in equities, with an average decline of 1.8% over the past decade. However, as we touched on earlier, there was one clear outlier that impacted September of 2022, and importantly, the catalyst was a sharp acceleration higher by local bond yields – which is also playing out today, although with some obvious differences.
