The recent fall in United States bond yields has highlighted the complacency of investors who have ignored the likelihood of inflation risk and problems within that country’s share market, according to a boutique fund management firm.
Talaria Capital co-chief investment officer Hugh Selby-Smith said the current state of the US bond and share markets highlighted the threats that were inherent when both were moving in the same direction.
“The overwhelming bet on falling US long bond yields, despite considerable economic uncertainty and still-high S&P 500 valuations, is historically aligned with low or negative long-term returns from equities,” Selby-Smith said.
“This contrasts with consensus forecasts that assume double-digit earnings growth, indicating a market perhaps too sanguine about the future.”
He pointed out that since 2020, the proportion of global equities positively correlated with falling US long bond yields had increased from over 10 per cent to around 70 per cent and the shift in the US share market to technology stocks meant bond duration was even more important for investors.
“In outlining arguments for lower long bond yields, we suggest that market pricing assumes a lot of directional certainty where none exists,” he said.
“Most investors in global equities have positioned themselves for falling yields. There is little contingency planning in that and a great deal of confidence.
“In the bond yield discussion, the US remains fundamentally reliant on large-scale foreign capital inflows to balance its external accounts, US$1.9 trillion last year.
“That reliance is now under pressure from both shifting policy priorities from the Trump administration and growing economic nationalism, which we have seen rampant examples of in recent days, as trade policies threaten both global growth and falling inflation.
“A range of governments are looking to retain capital for domestic projects, with initiatives in Europe, the UK, Australia and elsewhere aiming to redirect savings away from US assets. If foreign appetite softens, the consequences could extend beyond US long bonds, challenging the broader US asset and currency superstructure.”
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