Andy Constan on US Treasury Demand, Recession Fears, and Tariffs' Impact

Bond Market Outlook

• 💡 The 10-year Treasury yield has moved significantly, and a further decrease would require actual economic contraction, not just the fear of it.
• 🎯 A funds rate of 3% could lead to the 10-year yield settling around three and three-quarters percent.

Portfolio Positioning and Recession Scenarios

• 📉 While a recession has been the baseline for positioning, significant price changes in stocks (NASDAQ down 22.5%, S&P down 17.5%) suggest a deeper recession would be needed for further stock declines.
• ⚖️ The speaker is currently fairly neutral, slightly short on stocks due to these market shifts.

European Bonds vs. US Treasurys

• 🇪🇺 When FX-hedged, there is not a significant pickup in owning French, Italian, or German bonds relative to US Treasurys on a 3-6 month basis.
• 🏠 European investors might exhibit home bias due to this lack of yield pickup.

Tariffs and Demand for US Assets

• 🇺🇸 Tariffs are expected to reduce global imports, leading to fewer dollars in foreign hands.
• 🏦 Foreigners have historically invested these dollars in US dollar assets, including Treasurys, foreign direct investment, and equities. Tariffs reduce this demand.
• 💰 Consequently, the US deficit and assets will need to be absorbed by domestic savers.
• 📈 The US bond market is rallying significantly, indicating strong demand likely driven by the economic slowdown, not foreign concerns about taxation or defaults.

Foreign Direct Investment Dynamics

• 🤝 While the US seeks more foreign direct investment, tariffs simultaneously reduce the dollars available to foreigners, potentially forcing this investment into US equities.