We are seeing US Treasury yields ease slightly this morning on a report from CNBC that the government could use the $950 billion Treasury general account for long-term debt buybacks while still as sticky inflation as well as mounting debt supply and geopolitical risks keep long-term Treasury yields elevated ultra high net worth investors are demanding a much higher premium to hold.
Da debt and while the treasury is attempting to use those buybacks as well as short term bill issue to contain bing costs analysts warn that a policymakers can't fix structural fiscal deficits or prevent a potential return of the bond vigilantes well here to break down how family offices are positioning portfolios and why he is favoring the belly of the yield curve is Paul Carter co-founder and managing partner at.
Focus Paul, good morning.
Thank you so much for joining us.
So there was a lot of anticipation as we head into the rest of the week and in particular Besson's speech later on this afternoon.
But given what we're seeing in the bond market, in particular in Treasury yields, do you think tactical buybacks yield can ease yield pressure and do you think they are currently failing to solve the structural buyer strike?
It's a, it's a really good question.
Uh, you know, jury's out on this, absolutely.
You know, the, the story at the Treasury has really changed from kind of liquidity management to more of whether or not the, uh, the Treasury can manage, can manage the debt.
And that longer end, as we know, the Fed does a good job trying to control the front end of the curve, but it's really up to the market as to what goes on the longer end of the curve, and not just the ultra high net worth investors, but institutional investors worldwide are really looking for fiscal and inflation credibility here.
Yes, and while I have you here, I do want to get your take on whether or not we could potentially see this return of bond vigilantes.
Uh, absolutely.
Uh, I think they're knocking at the door, um, you know, but it, it's, it's really going to come down to whether or not our overall administration can instill confidence, uh, in, in, uh, our strategies for the longer end of the curve and, and, and, and still remain independent, you know, which is why I Frankly, Worsh has got a, a tough job coming up at the end of this week, uh, where he needs to be signaling, um, you know, we're, we're, we're not going to necessarily mess with, with interest rates, uh, on the, on the low end of the curve, dropping rates in favor of, you know, trying to manage inflation.
Yeah, and speaking of which, of course there's a lot of anticipation, as you mentioned, heading into the end of this week as the Jackson Hole symposium takes place and we hear from Kevin Warsh on Friday, but inflation does remain persistent in real world costs like energy as well as travel, which does drive up term premiums.
So give us your take on why institutional investors are demanding higher yields to absorb some of this long term US debt right now.
I think you, you nailed it.
It's inflation, it's enormous sovereign issuance, and it's higher term premium.
Uh, as you stated, you know, the input costs around energy just have, have gone up.
We, we haven't seen a complete resolution in the Middle East.
Uh, all those high energy prices are seeping over into other areas of the economy.
Um, you know, we've done very well on our energy trade.
We're bullish on commodities here, uh, but it doesn't, you know, that can have a tax on the wider economy.
You mentioned airline tickets, uh, certainly, you know, $5 to $6 here in Boston at the pump.
All of that is a tax on the consumer.
And indeed we continue to monitor those levels on oil prices, and although they are pulling back slightly today they do remain elevated and I do want to also get your perspective on what you call the belly of the yield curve.
So given the fact that we are looking at still elevated Treasury yields, why is this belly of the curve the best risk reward for investors?
We just don't think investors need to take maximum duration risk to get paid.
Uh, you know, we're really in favor of a high quality fixed income.
Uh, we haven't been going off reservation much even incorporate and higher yield credits.
Um, we, you know, we, we think you should be sticking really in that belly of the yield curve.
You're getting a bit paid a bit more than, than at the short end of the curve, but that longer term end of the curve, we, we think that there's risk that that continues to go up here.
Um, you know, if Washington really wants sustainably lower long-term yields, the the eventually the market has to believe that the fiscal trajectory is improving.
You can't debt manage out of, out of the problems, you know, back to the question around bond bond vigilantes.
The Treasury can, you know, the Treasury can fight the symptom, but it cannot fight the cause, you know, that, that's, that's a wider, a wider issue that we're discussing.
And Paul, finally, before I let you go, I do want to get your take on Muni bonds.
So we're talking about inflation, and most of us feel it whenever we go to the grocery store or to fill up our gas tanks and persistent inflation in real world areas to indeed continue to erode purchasing power.
So tell us how you're using short to intermediate term muni bonds to shield the ultra high net worth portfolios without taking on long.
Absolutely, Remy.
As you know, uh, it's, it's all about building a diversified portfolio, uh, a, a portfolio that can really weather multiple scenarios.
And Munis provide MIs and, and, and short-term treasuries as well provide a really nice ballast in a portfolio, which you can offset, you know, kind of barbell risk on the other side.
With equities that you can participate in, you know, this continued growth of productivity, uh, as well as, you know, your, your last guest mentioned gold.
We're very bullish, have been bullish for 20 years on gold.
We like gold.
We like commodities here and believe they provide really strong diversification benefits and a great compliment to Mis and treasuries.
And since you mentioned the word diversification, I do want to get your perspective on that.
So for Americans out there who know that the 60-40 traditional breakdown of bonds and equities no longer applies, what would you actually say to the everyday American that's watching right now?
I, I would absolutely consider adding commodities as a, uh, as a, as a stable portion of the portfolio, given the diversification benefits.
Um, we've always liked 3 to 5% gold.
Some of our portfolios are significantly higher than that because we've let that gold exposure run.
Uh, but it's, you know, it's, it's absolutely a diversification story in a world where the, you know, the, the, the dispersion of outcomes is so wide today, we really think you need to pursue diversification.
Well, Paul, it was great having you on the show this morning.
Thank you so much for joining us and sharing your insight, insights as well as your perspective.
Thanks, Ramon.
