US policy shifts and bond investing implications

Matt Eagan: I think you're asking about trade policy, but there's a lot of policies that I think are having big structural effects. And there's some of the things that we've been talking about a long time. Part of that-- we can talk about immigration, for example, the effect that has on demographics, and the tightening of the labor force, and, in the United States, the tariff situation.

All of these, I think, are playing into the theme of inflation, really. Number one, think about it as a structural inflation or higher for longer rate environment that we've seen. That's the number one thing that I take away from. It all ends up in the deficit. And a lot of these structural things do. In other words, when you think of the tariff policy, for example, the root cause of that is really the challenges the US has in a multi-polar world and some of the security issues that are coming to the forefront. And there are some other political situations going on here.

When you think of the biggest battle that's taking place, it's the US versus China. That's the number one thing. And you can see how that's heating up right now. But there's been episodes of this. So this is a structural feature. And what happens when you have security as the most important consideration you're making, price levels, or cheapness of getting products, is a secondary consideration.

And what that does is structurally changes all of your trading relationships around the world. Global trade is still going to exist. It's just going to shift around the globe. And there's sort of a dislocation between the US and China. And I think what that may lead to will yet to be seen, but more trading spheres. So China will have its sphere. We'll have our sphere. And we'll trade within those friendly, let's call it, spheres.

But the net effect of it is it raises the cost of production. It can decrease productivity, things like that. So I think that's here to stay. You'll see that structurally in the bond market with higher for longer, higher real rates, and higher inflation in term structure premium.

That's not a bad thing for bond investors. It can be good. You just have to manage your duration more carefully in that environment. You don't set it and forget it. You don't hook it to a long duration and just forget about it. But you manage it actively up and down that yield curve, and probably a more sort of appropriate duration level could be in the four-year range on average. And then you're managing it up and down from there.

From a credit spread environment, that's going to be still driven by losses. And I think the structural implications are more of a cyclical perspective there. We're going to see a slowdown. We're going to see more dispersion across different industries. Obviously, companies that are exposed to tariffs in a big way are going to get punished here. There's some serious consequences for that. We'll see how it plays out. But there are going to be winners and losers. So you have to be a good bond picker. And that's going to be meaningful, not just in the corporate space, but also the countries that are out here.

As a nation, I think what else is at stake here is a big question mark is the value of the dollar as a reserve currency, the safety of it, the safety of treasuries. And we have to be very careful as a nation on that front, because we don't want to lose the privileges that we get on that. And I can understand the reason for wanting to shore up our trade and all that from a strategic perspective. That's important too. But we don't want to lose that privilege that we have in the market.

And if we start to erode that, we're going to see much more problems with respect to the underpinning of the Treasury market. It's another reason to be cautious going out the curve, though, when you're looking for getting term structure premium here. And we'll just have to see how that plays out.

But that's the things that are at stake here. This used to be a market where, well, I think over the last, say, 20 years or so, you really had to pay attention to credit spreads. You had to pay attention to what the Fed's doing. Now you have to really be a policy expert and think about what those major policies are and the implications. I think decoupling higher prices, different trading relationships, all of that is going to come into the fold over the next 5 to 10 years.