Annualised performance data in euros at 25th August 2023

With short-dated government bond yields approaching 4% in the EU and over 5% in the US, conservative investors now have a real option to generate a return on their hard-earned capital. Irish banks are also finally passing on some of the recent ECB interest rate increases to depositors, which is a very welcome, if a belated  development. That is where the real value ends however in the fixed income market.

Despite the rise in short-term rates this year, longer-term bonds remain unattractively priced and the yield curve remains inverted. In the US, the gap between 2-year yields (4.9%) and 10-year yields (4.2%) remains 70 basis points. This gap needs to be closed. Economic growth remains healthy, unemployment rates are at record lows and energy prices continue to rise. This is not a bond-friendly environment.

US long-duration Treasuries are considered the world’s reserve asset of choice, yet they have plunged in price in recent years, declining over 40% since 2020. This is a large and growing problem for the US, particularly as their budget deficit is surging due to out-of-control government spending. The supply of US Treasuries into a weak market is about to accelerate. The US is scheduled to issue $1.9 trillion in new government bonds in the second half of this year to finance the gaping hole in its finances. This is at a time when international buyers of US Treasuries are cutting back. China has already reduced its US Treasury holdings from over $1.2 trillion to $860 billion. There are no signs that this trend is about to reverse. Caveat emptor.