Its not that the US debt or deficit have changed in the last few weeks - what has changed is the market focus - treasury yields have spiked from 4.35% levels end Jun to 4.78% (4.82% 2 days back). Strong Aug payrolls (162K vs. 56K consensus) aren’t helping, neither is Warsh’s hawkish statement at Jackson Hole. Rate increase probabilities (16th Sep) are elevated at two-thirds, up from one-third pre-Jackson Hole. The rout in bonds is universal across US, Europe, UK . While inflation is a causal factor, the larger issue, and an unsolvable one, is the debt-deficit conundrum that central banks face. With no real political will for austerity, the only way is to inflate their way out. Neither is a palatable option for policy makers. Impact & Positioning (in order)
Precious Metals (negative) - Higher yields = Negative for Gold in particular. Gold has retrenched 7% over the last 8 trading sessions. While the fundamental case remains and if anything strengthens on dollar debasement - without a reprieve on rates, the path is murky in the short-term.
Growth Sectors/ AI Capex (slight negative) - With large, debt funding needed for AI capex, higher yields are a negative. however, elevated margins, tight credit spreads, offset the basis impact. Credit spread dispersion is likely, and will be a differentiator. Position for quality, not yield.
Duration (negative, but priced in?) - While the debt-deficit combo will keep a floor on yields, there doesn’t appear to be a case for a run-away increase in yields. Negatives appear priced in - not a case for extending duration, but equally the best gains on shorting long-dated bonds appear to be behind.
TIPS (positive) - Inflationary concerns benefit TIPS.
Industrial Commodities (positive) - Stronger growth metrics support demand, especially related to AI Capex. Energy remains a beneficiary of a fractured geopolitical set up.
A widespread rout in bonds…
