Is the US uninvestable?

By David Roberts, co-portfolio manager of Nedgroup Investments Global Strategic Bond

The US Presidential election has so far only promised economic uncertainty, giving international bond investors little comfort for the long-term outlook. Are US Treasuries in danger of becoming uninvestable?

The presidential election is reshaping the role of US treasuries

As the highest yielding G7 government bond market after the UK with 1% extra yield than Canada, US treasuries have a risk premium attached. That’s what happens when you have a debt to GDP ratio that makes the Italians look fiscally conservative.

But with little policy certainty and at least one presidential candidate who has threatened to upend established fiscal institutions, there an argument brewing on avoiding US Treasuries.

Politicians and strategists alike will tell you how important Uncle Sam is to the global economy, given the dollar remains the world’s reserve currency. Protectionist, inflationary policies are a good way to threaten that position, not least when elected representatives espouse Bitcoin investment as the best hope for deficit reduction. American politicians, American voters need to tread carefully - there are increasing alternatives for global investors.

A global approach gives bond investors more choice

As the co-manager of Nedgroup Investments Global Strategic Bond Fund with an objective  to outperform the Bloomberg Global Aggregate Index (US$ hedged), our nimble approach means we can take advantage of volatility across global bonds to add value. US Treasuries may have been the cornerstone in global bond portfolios for decades, however if its risk-reward profile diminishes, investors no longer need to own any US assets.

Longer term, we believe in the power of fiscal and monetary policy working in tandem to deliver growth. Shorter term, politics can spook markets, making any G7 economy worth avoiding. For example, in the U.K., Liz Truss’ unfunded budget showed that was true and more recently in France, rising debt and decade-high borrowing costs led to political volatility.

So the US. Same thing. Market reaction since the Biden debate debacle has seen long bonds plunge in value relative to short ones. Few investors want to risk lending long to the US. Understandably so. Shorter dated bonds seem OK for now, with the Fed set to cut funds rate. we currently own no USD bonds with maturity longer than 7 years.

And it’s not just pure economics that worries investors. At least one leading candidate seems seriously to be considering:

• Removing independence of the central bank
• Sacking the head of the financial regulator
• Introducing restrictive trade practices
• Maintaining a debt to GDP ratio above 125%

How we are positioning for this
We are underweight the US bond market and closer to the election, we may go further possibly to zero or, whisper it…short! We have started selling down the US, shortening interest rate exposure. Canada may be too expensive, but from Germany to Australia there are value driven, never mind political reasons, to diversify from the US market.

A few years ago Chinese sovereign debt was included in global bond indices for the first time. Today, their bonds represent high single digits portion of the global market. At the moment, it’s a step too far for many global bond managers, ourselves included.

Some investors already do buy China of course. The US needs to be careful. International capital is finite. The more reasons investors are given to look elsewhere, the less money flows to Washington. Or else the higher the price US has to pay to access the market rises further - and with a $2trillion and rising deficit, higher interest costs are not what the American public needs to see.

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