Bond Markets Hit by Oil Shock

Summary

• Not overly concerned about the U.S. bond selloff; real yields are attractive relative to global peers like Germany (~75 bps on 10-year) and Japan (35-50 bps on 10-year).
• U.S. real yields: approaching 2% on 10-year Treasuries and close to 3% on 30-year, offering value in developed markets.
• Energy price spike from geopolitical events is not expected to be sustained; market futures indicate only a 10-15% rise in 12-month contracts, reducing long-term inflation risks.
• Economy shows slow job growth but no firings; unemployment claims are low (~250k), indicating labor market stability.
• Higher energy prices could act as a de facto rate hike by causing demand destruction, potentially dampening inflation.
• Overweight U.S. versus rest of the world in investments due to unassailable competitive advantages in demographics, geography, institutions, and education.
• Neutral duration in fixed income currently, using bonds to fund equity overweight rather than taking a bearish stance.
• Expects one or two Fed rate cuts this year, with one likely before the midterm elections in November.
• Fed chair transition (e.g., to Kevin Warsh) could shift policy; Warsh may view AI-driven productivity as disinflationary, paralleling the mid-1990s.
• Inflation target of 2% has not been hit in five years; average inflation is 3.3%, but the economy and markets perform well with 3% inflation.
• Long municipal bonds are attractive for high tax rate investors in the current environment, offering tax-efficient yield.