Unlocking the Editor’s Digest for free, Roula Khalaf, the Editor of the Financial Times, highlights her favorite stories in a weekly newsletter. The writer, who is the chief market strategist for Europe, the Middle East, and Africa at JPMorgan Asset Management, discusses the current challenges that bond investors face as voters in the west decide on their governments. The recent shift towards right-leaning parties in the EU has led to uncertainties in the bond market, particularly in France where President Emmanuel Macron called for a national election following unexpected results.
The surge in support for right-leaning parties in Europe stems from discontent about immigration and climate policies that are seen to be detrimental to domestic industries. While the rise of these parties may raise concerns among bond investors, it is important to note that they are not advocating for an EU breakup. This discontent has led to questions about France’s fiscal direction and a rise in French government bond yields. However, the case for pushing yields higher in countries like Spain and Italy is weaker.
Looking ahead to the US election in November, the writer expresses a more positive outlook for European bonds compared to US Treasuries. Both Joe Biden and Donald Trump’s campaigns focus on America-first policies, which include curbing migration and raising tariffs on imports to promote reshoring. However, the low unemployment rate in the US suggests that these policies could potentially reignite inflation concerns, prompting investors to reevaluate their expectations for lower interest rates from the US Federal Reserve.
The writer underscores the broader discussion surrounding escalating US debt levels and their trajectory. The US is currently running a 6 percent fiscal deficit, with half of it attributed to the government paying more interest on its existing debt. The structural shortfall, resulting from Trump’s tax cuts, could see the deficit rise to 7 percent of GDP and debt levels to 124 percent in the coming decade. The implications of such high debt levels raise questions about potential risks and the inadequacy of term premiums.
Although the US’s status as the world’s reserve currency may shield it from a bond crisis like that faced by the UK, the risks associated with high debt levels cannot be ignored. Uncertainties in the Treasury market could impact government bond markets globally, emphasizing the need for caution. Despite potential volatility, the writer sees European government bond markets as a safer haven due to lessons learned from past fiscal challenges. As investors navigate through the complexities of global bond markets, staying informed and vigilant is crucial in mitigating risks and preserving investments.
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