One portfolio manager at Morgan Stanley says U.S. exceptionalism is encountering certain threats, as longer-term U.S. Treasuries suffered declines Monday.
Vishal Khanduja, the head of broad markets fixed income and a portfolio manager at Morgan Stanley Investment Management, said in an interview with BNN Bloomberg Monday that the bond market has reacted to U.S. tariffs in two main ways. He said the zero-to-five-year part of the Treasury curve is “much more focused on the growth downsides” compared to inflation upside. In contrast, he said the seven-to-30-year part of the curve is “significantly concerned about the continuing deficit issue” in the U.S. along with demand concerns within the U.S. Treasury.
“A steepening of the yield curve has become aggressive or in another word…the term premium has been rising as investors are asking for more premium, more yield in the back end of the yield curve here in the U.S. Treasury market,” Khanduja said.
Bloomberg News reported Monday morning that longer-dated U.S. Treasury bonds moved lower along side the greenback as traders evaluate threats from U.S. President Donald Trump to remove U.S. Federal Reserve Chairman Jerome Powell. As Treasuries fell during mid morning trading, the 10-year yield was pushed near 4.4 per cent.
Khanduja said he wouldn’t go so far as to say the U.S. has damaged its image as a safe haven.
“I think it has challenged U.S. exceptionalism. It has challenged the ‘safe haven always’ (view) over the last probably decade, decade and a half, and even if you go back to probably three to four decades from now. So, I think definitely that relative performance of economies, is going to come right back into focus,” he said.
As a result, he said two markets are poised to attract much of the flows the U.S. dollar loses, namely Europe and Japan.
“I think Europe, with the fiscal change that they’re going through after the debt break that Germany announced. Japan is getting their act together after probably about 3.5 decades as well,” he said.
Going forward, Khanduja said there are elements of “overallocation” to the U.S. dollar over the past five to seven years, but he “wouldn’t go as far as calling the end of the U.S. dollar era.”
He added the U.S. needs to put forward clear and sustainable plans for deficit reduction.
Khanduja’s comments come as gold hit record highs Monday with bullion moving above US$3,400 an ounce, according to Bloomberg News.
“The prospective dollars that were supposed to end up in the U.S. market have now ended up in gold,” Khanduja said.
“I think that seems to be, at least from the markets that we track here very closely, the one that is winning out the safe haven bet at the moment in a global asset allocator framework if you take a look at it that way.”
