Anders Faergemann 

Welcome to the PineBridge Investments’ podcast, where we will be discussing current drivers of global rates and effects, and more controversially, perhaps, raise the question of whether we've entered a lower volatility carry regime. We've just finished our investment meetings where we further consolidated our view of a soft landing and affirmed our 4% forecast for US 10-year rates over the next 12 months. 

I'm Anders Faergemann, Head of Global Sovereigns and Economics. With me is Hani Redha, Head of Strategy and Research for Global Multi-Asset. So Hani, tell me, what have you been working on the last month, and have your findings led you to reassess your risk stance?

Hani Redha 

Hey Anders, so top of mind for us has been deficits and debt and “one big, beautiful bill” in the US, which has clearly been a key narrative running through the bond markets and for good reason. We are in a very unusual period, where deficits really are unusually high, given the fact that we're not in recession, unemployment is still very low, and yet deficits are running above, 6, 7, even 8% at times. And that's a very US phenomenon, you know, the rest of the world doesn't really look like that. 

Europe, for example, has been consolidating its fiscal position over the last few years. And so, it's quite right that concerns are being raised, especially by bondholders, about the trajectory that the US is on. Now with the actual tax policy that's going through and with all of the spending plans. It does look like, as scored by the CBO, that this would add an extra $2.8 trillion over the next 10 years to the deficit of the US, the additional debt that you'll see, and that's been quite alarming, and lots of headlines around that, but what we've been highlighting in our discussions is that you do need to also include the tariff revenues that we're very likely to see to some extent. 

It is difficult to know exactly how much, because tariffs have not been pinned down yet, but they're clearly not going to zero, and we estimate they'll come in at least 200 to $300 billion a year, which adds up to about two to $2 - $3 trillion over the next 10 years. And so, when you factor that in, we don't see a lot of net additional debt being added to the deficit despite all of those very sensationalist headlines. I guess it's a lot more interesting for journalists to fearmonger. So, to us, it's less problematic than it looks. 

That said, we're not on a very good trajectory to begin with, but it's just that this is not making it that much worse than it was before. And you do get something in return for that debt, you get growth. And so, we will be seeing a positive fiscal impulse coming through in the US yet again, from next year onwards, in the order of about a 1% addition to growth. 

And yes, tariffs are going to be a detractor to growth against that. So, they largely offset each other, but we think the sequencing really matters here. You get an initial hit to growth in the next few months when it should be coming through, but then you'll get a positive tailwind to growth from the tax cuts from next year onward. So that's how I would assess it. It's more of a slow burn problem, rather than a heart attack that we should be watching out for. Now with that, I would say we did have a range of views expressed in our strategy meetings. How would you describe the differences of opinion that we've heard?

Anders Faergemann 

Yes, we did have a somewhat heated discussion. We did force participants in our investment meeting to choose a camp between the 4% and the 5% in 10-year rates. Somewhat surprisingly, at least to me, a majority viewed the 4% as the most plausible outcome over a 12-month period, so largely premised on the expectation that labor market conditions will soften over summer and inflation from tariffs will be considered a one-off hike. 

In this respect, the main argument for 4% is that we will still expect an economic slowdown in the US due to higher average effective tariff rates, while higher real yields will enable the Fed to eventually resume its easing stance, either late in the year, or perhaps with greater panache in the first half of 2026.

I would have thought that we'd have more participants favoring a move towards 5% as that has been the direction US Treasury yields have taken in recent months which are driven by three factors. You talked about fiscal concerns, the other one has been risks of inflation expectations becoming unanchored. We've had inflation coming out a bit more subdued, so maybe that's fading. And then the third concern has been diminishing institutional strength in the US, particularly in relation to Fed independence. 

And I'm sort of curious to hear if you have any thoughts on the shadow Fed chair, but in conclusion, from all of this, I think it's clear that while we cannot rule out a US dynamic, equivalent to “a Liz Truss moment”, short-term factors are fading, and a move to 5% 10 year Treasury yields will probably be short-lived for two main reasons:

One is we would anticipate intervention, and our “5% campers” thought the same, so both the Treasury and the Fed could step in. But secondly, investor demand. Rob [Vanden Assem], who was on the podcast two months ago, was very firm that if we saw 5% there'd be significant demand. So overall, I'd argue, markets have moved on from peak uncertainty in April. We've seen it in equity markets and credit, Treasuries are now offering better value you could argue - and appear on a firmer footing from a technical perspective, and I'll just highlight implied bond market volatility has subsided. We've made a round trip since early April, but Hani, is this the calm before the storm? Or can we extend this low-vol carry regime into the second half of the year?

Hani Redha 

Yeah, that's a great question. I think, we are in uncertain times and very interesting times, maybe too interesting, and there are potential flare up events. You know, we're watching the Middle East very closely right now, but it does seem to me that uncertainty itself has probably peaked at exceptional levels. Difficult to see us return to those type of levels again, and I see that we've had a lot of the bad news or challenging policy decisions come out, front loaded around tariffs, around immigration, these are all negatives, but we make a point in our team to highlight the positives at the same time and keep a balanced view. 

It's very easy to doomscroll or do the equivalent of that in watching the screens. And so, the other positive, aside from a net fiscal impulse that we'll see next year, we would also add de-regulation to that list. And what I've come to realize is that there are actually three certainties in life. It's not just death and taxes, it's the inexorable rise of more and more regulation. 

It's quite astonishing to realize that one way that regulation is measured in academic analysis, is the number of new pages of regulations that are added each year to the books, and it never goes down, Anders. It never goes down. All you ever see is more and more new pages. I mean, the lowest we've ever seen is something in the range of 50,000 new pages in the 80s, when President Reagan was, supposedly, de-regulating the economy. He did no such thing. He only reduced the pace of new regulations. And that's the most we can hope for. And recently, we've been running at almost record levels, near 90,000 new pages of regulations coming in. 

So, I think with this administration, we will see a significant reduction in the pace of new regulations that is being called “de-regulation”. And I think it matters. I think it makes a difference. It's a slower burning, slower moving phenomenon, kind of like the slow burn on the debt and deficits, but in a positive direction, and it should lead to a tailwind for growth, a quiet one. It's not a big bang, like a tax bill that gets announced and rolled out. It's not like tariffs that get announced and rolled out. It's a slower thing happening in the background, but nevertheless, a very positive one that helps to reduce costs for companies. It makes investment decisions move faster through the system and can help to stabilize growth looking into next year. 

So overall, I would say cyclically, it makes sense, as you said, to expect slower growth in the near term and yields to grind lower. In the face of that the Fed should be cutting eventually. But I would say that as we look further into next year, there are good reasons to say that we're going to not only avoid a recession, but we may even see an inflection in growth as we go through the year. So with that, I'll hand back to you to summarize what our recommendations have been.

Anders Faergemann 

Sure, interesting what you talked about in terms of potential recovery in the US, and that's partly the premise for our Eur/USD forecast. So, our 12-month forecast is we've kept it at 115, we are aware of the factors that are driving the dollar weaker for the moment. The dollar has decoupled from its interest rate differentials, but as you said, we expect the US economy to trough in Q3 and look more positively into 2026.

Obviously, there are aspects that should keep the euro relatively strong compared to previous years, but overall, I think 115 is within the range around that is rational. In terms of concluding on the rate side, we kept, as I said, our US Treasury 10-year forecast at 4%. Where we did change was the forecast for Italy, where we've seen significant compression in spreads versus German bunds, so that we've now moved our 10-year Italian yield forecast from 4% to 3.75%. 

So, if I can summarize from our side, policy uncertainty remains elevated, and policy unpredictability is heightened. Markets are showing signs of tariff fatigue. Fiscal concerns are slow burning, as you've highlighted, and investors still need to stay invested. Yields are attractive. US Treasury yields are attractive. And ironically, volatility may have peaked, and summer is lining up to be a carry story. Great, thanks Hani. That's all clear and actionable. We'll be back next month. For more information, please visit pinebridge.com. Until next time, thanks for listening. 

ENDS