Payden & Rygel: 2025 Bond Wars

Payden & Rygel: 2025 Bond Wars

21 januari 2025

Obligaties
Obligaties (03)

Inflation dynamics remain in flux, a new Treasury Department strategizes the balance between fiscal and monetary conditions, and Donald Trump's incoming second administration all introduce important dimensions to policy and growth.

Although [new US Treasury Secretary] Bessent's objective aligns with [Fed Reserve Chairman] Powell's, namely in containing inflation, the strategies by which that goal is achieved could diverge significantly and have a material impact on financial markets.

Bessent's primary tool as Treasury Secretary is the department's approach to debt issuance (U.S. Treasuries). He has voiced strong opposition to [his predecessor] Janet Yellen's decision ro reply on short-term debt issuance during a non-recessionary period, arguing that it has contributed to easier financial conditions and undermined the sustainability of the U.S. economy.

As a result, a plausible outcome is a more balanced approach to debt issuance, with a greater reliance on long-term debt. This shift would tighten financial conditions as asset prices, particularly equities and real estate, are more sensitive to longer-term interest rates. The likely effects would include reduced demand, slower growth and lower inflation.

If these conditions materialize, Jerome Powell and the Federal Reserve would have justification ro reduce interest rates, simultaneously alleviating the U.S. federal interest expense burden.

The ideal outcome for the Trump Administration would involve a balanced approach, combining growth-oriented measures like lower taxes and deregulations with policies aimed at tightening financial conditions and containing inflation.

The Payden Unconstrained Bond team envisions a potential plot twist where bond yields must rise before they can fall. A rise in yields, particularly in longer-term maturities, would tighten financial conditions and temper growth expectations, As a result, the Unconstrained Bond team prefers less exposure to the long end of the yield curve. Conversely the team finds the front end of the yield curve attractive, with 2-year interest rates just above the Fed Funds Rate and aligned with the Fed's reaction function to any deterioration in the labor market or growth.

Within credit, [the team] remains constructive on higher-quality corporate credit and certain parts of emerging market debt. This is despite valuations that are historically tight. Alternatively the team is more cautious on areas that are sensitive to higher long-end yields, like commercial real-estate and other consumer facing segments.

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