One week / one topic: Confessions

What happened?

After years of scorching outperformance, non-US investors are now questioning the value (and wisdom) of large allocations to American assets.

While correlations of course matter only until they don’t, the recent gap that opened between the Dollar and US rates is symptomatic of investors trusting “the full faith and credit of the United States” significantly less.

Meanwhile, Gold and Bitcoin are cheering from the sidelines as more and more investors see them as a store of value… which is of course ultimately a self-fulfilling prophecy.

At the same time, tariffs might well prove to only affect inflation as a one-off impact – longer-term breakeven rates have not budged, despite horrific consumer surveys to the contrary – but the recent direct experience of a proper inflation emergency does increase the risk of re-igniting the whole process.

To boot, the impact could well generate deflationary pressures for the countries being targeted – such as Europe.

Based on a handful of recent, real-time observations, Bunds are indeed (still) behaving like true safe haven assets… while Treasuries are not. (Spare a thought for Gilts)

Adding to this, Europe has historically displayed a much more conservative attitude towards the accumulation of public debt than the US – also paying the price for this in the form of lower growth – and the continent already owns massive amounts of US Treasuries. (Plus, section 899)

As European governments and policymakers increasingly vocally make the case for more domestic investments, it’s reasonable to expect more inflows into local government bonds – and primarily Bunds for portfolio insurance purposes.

So – as the stance of ‘economic nationalism’ is taking hold pretty much everywhere – the main exception is represented by US tech mega cap stocks, which still tempt investors of all stripes.

After all, it is hard to resist the allure of strong Q1 earnings, more reasonable valuations and massive buyback authorizations contrasted with (still) light real money positioning…

Make us chaste, but not just yet?

Our observations

• Fundamentals: If you have a robust way of assessing fair value for government bonds in the presence of this much policy uncertainty, please call me… Plus, stablecoins! (see below)

• Price action: The relentless retail and corporate bid for US equities is visible to the naked eye... Believe when you see it.

• Investor beliefs: The Dollar and Treasuries might be going out of fashion quickly... but is it a kneejerk reaction, or a carefully considered one?

So what?

To state the obvious about the US Dollar: the global acceptance of its value as a fiat currency persists because people believe the United States will honour its debts, manage its economy responsibly, and – if necessary – marshal its huge resources to make good on its promises.

The problem is that foreign investors are less and less inclined to maintain those beliefs…

Anecdotally, Nordic and Canadian pension funds have already shifted their USD hedge ratios by ~10% since Liberation Day, with more Dollar selling likely to come after the summer once investment committees meet and update their investment policies.

While we have already significantly reduced our Dollar positions across portfolios, two key questions remain unanswered about US Treasuries and mega cap tech stocks.

On the former, we are increasingly inclined to diversify our government bond holdings from US and UK nominals into German Bunds and inflation-linked G3 bonds as well.

While in real time you can never know with any certainty what market regime you are in, this move would at least decrease geographical concentration and partially address inflationary risks.

With regards to US mega cap stocks, AI adoption still has a long way to go and it’s already driving forward leaps for Mag Seven firm’s own operations.

Perhaps there is room for perfect moderation here, as opposed to complete abstinence?

Mood music: Bob Marley & The Wailers – Exodus