Debt
One of the highest conviction trades throughout the market is selling long dated US debt. Specifically, treasuries with a maturity date of 30+ years are almost universally advised to be avoided or actively shorted by most funds and asset managers. A persuasion against debt as an asset isn’t exactly new. But the nature of this targeted rotation out of long dated debt is more significant. Year to date, the short end of the US curve has seen yields fall and prices rise. Those gains are led by the 5-year, with yields down 42 basis points. The trend is also shared by the 2- and 10-year which have seen yields decline by 34 and 17 basis points respectively. The fact that a fairly significant debt rout has shown such an obvious epicentre around a specific jurisdiction and maturity is concerning. It’s even more worrying when you consider that ballooning debt in the US certainly isn’t new.
The logic behind the avoidance of 30+-year treasuries is debt sustainability. Investors have created a narrative that conveys concern over the United States’ ability to service its ballooning debt pile over the long term. This argument usually follows (you decide whether anachronistically or not) that this has been compounded by Trump’s trade war threatening global growth and therefore fiscal revenues. Over the past few days, markets have been keeping a close eye on the China-US trade deal negotiations. Such discussions appear to be souring with each side accusing the other of breaking their temporary agreement.
At the same time, the US and Europe have been at odds with each other over the threat of a unilateral shift in the temporary terms of trade surrounding steel and aluminium. Such developments continue to be negative to the value of long dated US debt and have become so significant that there are now rumours of the US limiting issuance of long dated debt for fear of the reward the market demands to buy it. A quick flash back to the Mar-a-Lago accord: China is one of the largest holders of US debt and whilst an offloading of such debt may achieve the President’s ambitions to weaken the Dollar, it could be highly disorderly. As risks mount, we must hope this President has some tight roping skills in the locker that just haven’t been shown yet.
Discussion and Analysis by Charles Porter
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