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Markets have become obsessed with the rise of global long-dated yields. To some extent, we agree with the concern. Bonds are trading on "vibes," alarmed by the incoherent US geopolitical policy. Oil prices are obviously the conduit between that policy and the markets. On the other hand, growth is also robust. As such, bond market selloff is not all just negativity.The one secular theme driving the bond market selloff that does not bother us all that much is fiscal policy. We see signs — including actual budget deficit data! — that the US, policymakers and voters alike, is starting to understand that there are limits to profligacy. As such, we would advise clients with a long term focus to begin nibbling at the hated bonds.
Investors overestimate the threat current interest rate levels pose to both equities and the economy. Despite a rising long end, the gap between high-yield borrowing costs and both nominal growth and corporate profits is at five-year lows and falling. Remain overweight equities. Within Fixed Income, Upgrade High Yield and Downgrade Government Bonds and EM Debt. Downgrade Chinese Equities to Neutral.
The wide crack spread reflects a bifurcated oil market. The severity of the crude oil disruption has recently softened, while the US-Iran and Ukraine-Russia conflicts have created a perfect storm for refined product markets. Going forward, even though conditions are not yet in place for the crack spread to return to its pre-conflict level, it is likely to narrow over the coming months.
MacroQuant recommends a slight underweight position in equities, counterbalanced by a slight overweight to bonds, and a significant overweight to cash. The model is positive on the US dollar, modestly negative on gold, and bullish on copper and oil.
An investor might not guess it from the Trump administration’s impatience with bond-market, military and tariff roadblocks, but the US economy is faring just fine. Asset allocators should remain fully invested as per their benchmarks.
Our colleague Matt Gertken has penned a sober analysis on the midterms, calling for a Democratic Party sweep in 2026. It is a measured, data-driven, analysis that we encourage you to read.This quick Insight is neither sober nor data driven. It is hyperbolic and based on “vibes.”
US aerospace and defense stocks still have a structural tailwind from geopolitics, but face rising cyclical challenges from macro and market fundamentals, as well as eventual Iran and Ukraine ceasefires and political change in the United States.