Man Group: focus on long-term Treasury auctions; prepare for a potential stock market sell-off – MARKET INSIGHTS
by Kristina Hooper *
(Il Sole 24 Ore Radiocor) - At the start of October, yields on long-dated bonds are at their highest levels in recent years, and volatility in the bond market – as measured by the Move index – is close to the highs reached in April. We have said this before, but we believe it is important to emphasise once again that the rise in long-term yields is not solely the result of inflation expectations. We have witnessed a strong mobilisation of the ‘bond vigilantes’, who are punishing those countries they deem to lack fiscal discipline. This can be seen from yields across Europe over the past week, where there has been greater differentiation based on how each country’s fiscal discipline is perceived. Unfortunately, the United States has a deficit-to-GDP ratio that is far higher than that of some European countries – standing at around 6 per cent – and we have seen no serious effort on the part of US lawmakers to try to reduce the deficit.
Nor can we overlook the risks arising from the continued issuance of AI-related debt. There are very real concerns that the underlying data centres will become obsolete more quickly than the maturities of the debt associated with them, which could push the yields on those bonds even higher. Growing opposition to the construction of AI data centres – public opinion on this issue has shifted very rapidly – could also affect AI-related shares.
We should pay close attention to a number of US long-term bond auctions scheduled for this week. The term ‘bidless’, as some have described these long-term bonds, strikes me as an exaggeration, but I believe demand could be weak, which would only serve to push yields on the long-term segment even higher. More importantly, I think we should be prepared for the possibility of a significant sell-off in the equity market this month. Investors would likely benefit from good diversification and ensuring adequate exposure to low-correlation asset classes, including alternative strategies.
* Chief Market Strategist at Man Group
