Before an increasingly tensioning fiscal perspective, it is an interesting time to evaluate how markets are reacting and how investors in the current environment should position themselves.
The elephant in the room revolves around the sustainability of public finances in the United States. The tax plans introduced by previous administrations, and more recently the “One Big Beautiful Bill” Trump, continue to exert upward pressure on the deficit and debt trajectory. If current policies are maintained, the US debt could exceed approximately 100â € ¯% of the current GDP to around 124-125â € ¯% in the next decade. This trajectory implies that the market will have to assume a substantial increase in the issuance of public debt, which could press the yields over time.
If we take a step back to observe the current level of the interest rateswe see that, before the pandemic, they remained unusually low for a prolonged period. However, the inflationary shock of 2022–2023 caused a strong reevaluation, bringing them to a higher range.
Since the beginning of 2023, the rates in the US.especially in the 10 -year expiration stretch, they have been operating in a wide but relatively stable range around 4.5%. These high nominal rates also translate into real returns (adjusted by inflation). Within 10 years, real returns in the US are around 2.1%to 2.2%, while longer maturities offer about 2.6%.
From one historical perspectiveThese are exceptionally attractive levels for long -term investors seeking inflation sets. However, in the light of the ongoing fiscal expansion and the increase in debt issuancethere is an understandable concern that even these high levels could be insufficient to counteract longer -term offer pressures.
The Uncertainty about inflation caused by the continuous ads of updated Trump tariffs further complicates the panorama. Although inflation has been moderating in general, it has not yet been completely normalized in the United States. In fact, Trump’s bet for protectionist measures runs the RiSgo to invest this trend.
This dynamic can cause the Federal Reserve to be more cautious when it comes to more flexible in the future. Although we are still waiting for the Fed to cut interest rates, since the current configuration of the policy is restrictive and signs of economic slowdown continue to emerge, this cycle of cuts is now developed now with greater moderation and within a longer period.
In contrast, The perspectives for fixed income in Europe diverge significantly. The macroeconomic panorama is clearly weaker. In addition, inflation has been largely normalized throughout the continent and is expected to fall below the 2% objective of the ECB, without great chances of a rebound in the short term. There are several deflationary forces at stake: a strong euro, a contained domestic demand and an increase in low -cost goods, especially from China.
It is true that countries like Germany They are finally increasing their investments in infrastructure and defense. However, these efforts are in an initial phase and will take years to have a material impact on growth. For now, the continent continues to operate below its potential, which reinforces the Uninflationary perspective in the short and medium term.
In this context, we hope that The ECB adopts a more accommodating position. We see margin for at least an additional decrease in interest rates and we consider that the market is incorrectly valuing possible uploads. Therefore, we maintain a positive vision of the duration in Europe throughout the yield curve.
As for the creditwe have seen a strong broadcast so far this year, with a Efficient absorption of the new offer. The differentials remain adjusted, although they were briefly expanded during the recent volatility caused by commercial ads. Since then, the Spreads have recovered and are currently located near the levels of the beginning of the year. This offers reasonable profitability in the face of sovereign debt, although differentials are unlikely to compress much more.
In the absence of a clear catalyst that moves the spreads in one or another direction, we maintain a neutral posture in terms of credit positioning. Although current valuations do not point to an immediate opportunity for higher profitability, they also do not indicate a significant risk of extension. This vision applies to both credit with high performance investment, which continue to offer stable income without the need for large prices movements.