The world’s biggest bond investors are doing something that would have sounded borderline contrarian a year ago: they’re betting against US Treasuries and moving money into Australian and European government debt instead. The reason is straightforward, if uncomfortable for the Fed. Global institutions are losing faith in America’s ability to get inflation under control.
Schroders Plc, which manages roughly $1.1 trillion in assets, is leading the charge. The firm has been actively increasing bearish positions on US 5-year and 10-year Treasury notes while reallocating capital toward front-end government bonds in Australia, the UK, and the eurozone.
Why the Fed is losing the room
The Federal Reserve’s most recent policy meeting didn’t exactly inspire confidence. The central bank held interest rates steady, but the decision wasn’t unanimous. Some officials pushed for further rate hikes, citing persistent inflationary pressures.
Meanwhile, central banks in other regions are telling a more decisive story. The Reserve Bank of Australia raised its overnight cash rate by 25 basis points to 4.35%. The European Central Bank has signaled that further monetary tightening is on the table. While the Fed holds steady, Australia and Europe are actively tightening.
That contrast is creating what bond traders call a “relative value” opportunity. Front-end bonds in non-US markets, those with shorter maturities, are looking increasingly attractive compared to their American counterparts.
The mechanics of the rotation
The shift isn’t subtle. Institutional investors are taking outright short positions in US Treasuries, meaning they’re actively betting prices will fall and yields will rise. At the same time, they’re going long on front-end sovereign debt in Australia, the UK, and the eurozone.
The growing consensus among global fixed-income managers is that US debt instruments carry a risk premium that isn’t being adequately compensated. Put differently, investors don’t think they’re getting paid enough to deal with America’s inflation uncertainty.