A combination of inflation concerns, rising debt levels and shifting investor demand is pushing US Treasury yields higher, according to Dickie Hodges, head of unconstrained fixed income at Nomura Asset Management, saying the implications could extend well beyond government bonds.
The recent sell-off in US Treasuries has highlighted the range of factors shaping fixed income markets and raised questions about the potential impact on credit markets and corporate borrowers.
Dickie Hodges, head of unconstrained fixed income at Nomura Asset Management and manager of the Global Dynamic Bond Fund, believes the move higher in yields reflects a much broader set of concerns than the economic outlook alone.
“The sell-off in US government debt is as a result of not one factor alone and not in the least, the economic outlook.”
Instead, Hodges points to a combination of inflation concerns, the growth of US government debt, rising interest servicing costs, declining overseas demand for dollar-denominated debt, questions around monetary policy and wider confidence in the US dollar and central banks.
While Treasury yields have risen sharply, Hodges argues current levels should be viewed in historical context.
“Let us not remember that presently yields are not a million miles away from levels seen prior to the Great Financial Crisis of 2008,” he said, adding that it could be argued current yields are “normal and not extreme”, despite the significantly higher level of global debt today.
For fixed income investors, the knock-on effects on credit markets may be particularly important.
Hodges believes borrowing costs and access to debt markets are likely to have a greater impact on default rates than economic growth alone.
“Elevated borrowing costs, higher inflation, reduced investor demand and most importantly, access to debt capital markets will always define the rate of growth of defaults across any cycle.”
He noted that lower-rated borrowers are already facing higher refinancing costs, with pressure building as existing debt matures and companies are forced to refinance at current market rates.
Nomura has consequently maintained a cautious stance towards high-yield bonds.
“We have been cautious on high yield for some time given how tight spreads were,” Hodges said. “Our view has been that tight spreads on HY have not sufficiently compensated investors for the associated risks.”
Despite these concerns, Hodges does not see signs of immediate economic weakness emerging in the US.
“As yet the US economy has shown resilience with corporate America remaining in reasonable health as the consumer has been able to weather higher prices.”
However, he expects investors to continue monitoring the impact of higher rates as more corporate debt comes up for refinancing.
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