Commentary: Bullish fixed income?
Debt ceiling related risks in the US, elevated interest rates in most major markets, record high sovereign debts around the world; this may seem like a time to be far away from fixed income assets. On the contrary, we think that both at the short-and-long end of the duration, it is time to get constructive.
First, the US debt ceiling. While appreciating the gravity of the world’s largest borrower on the brink of default due to arcane domestic legal machinations, we are confident that some sort of a resolution, substantive or technical, lies ahead within the next two weeks. That makes the short-term paper a buy.
Adding to our bullish view on the short-end is the likely end of the rate hike cycle in the US. The next Fed meeting, scheduled for June 13-14, is likely to mark the beginning of a pause in this cycle. The next move, in early 2024, in our view, is likely to be a rate cut. Growth and inflation are both losing momentum; even if growth remains positive and inflation refuses to ease below 3%, the Fed would be cutting rates next year, in our view.
For the long end of the spectrum, the view is constructive for very different reasons. Globally, demand for risk-free assets remain substantial, but the supply of such assets is not ample, especially not with the kind of liquidity and variety offered by the US government debt market. A global economic slowdown, sustained geopolitical risk, and financial market jitters, even if they are concentrated in the US, would cause flight-to-safety trades, with the US treasuries as the primary beneficiary.
Wouldn’t a likely correction in the over-valued dollar, moves toward de-dollarisation by some emerging market economies, and the massive debt burden (USD31trln+ or 123% of GDP) of the US government mean its long-term debt is a sell? We think otherwise. Beyond the dearth of safe assets, one should consider the US medium term economic outlook, which, in comparison with other developed markets, remains bright. Shorting the world’s largest issuer of fixed income debt does not carry much credence to us, not yet.
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