Strong Payrolls...All Eyes on CPI
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…
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