Global Courant
The debt ceiling crisis is over now that the bill has been signed, but investors have yet to navigate the aftermath. Some analysts say there are opportunities – but also potential minefields to avoid – after the debt ceiling is lifted, such as government bond inflows. This is what they say. Risk assets Paul Gambles, managing partner of the MBMG Family Office Group, said he expects “risk assets and risk currencies to rebound briefly” following the debt ceiling agreement, but added that it creates challenges “at the portfolio level”. “While data patterns have been disrupted by the policy-driven economic and market disruptions of particularly recent years, it is not clear whether the rollercoaster ride will continue and cross-asset correlation will continue to make traditional diversification pointless,” he said. added. Gambles said the debt ceiling fiasco was the “latest iteration” of a series of systemic missteps by the US Federal Reserve and the Treasury Department, citing aggressive post-pandemic asset purchase programs that contributed to the country’s continued inflation. the country. For now, he said the near-term outlook for high-risk assets will be “very fragile.” US Treasuries Investors should also be prepared for “massive volatility” in US Treasuries in the near term after the deal, given that the Treasury has to issue a large tranche of those bonds, Gambles warned. In a June 4 report, Citi said it expects a net increase of about $400 billion in U.S. Treasury issuance in the near term, most of it in short-term bills. “Such a large supply of ‘risk-free’ high-yield government bonds is competition for all kinds of investor assets,” Citi said, adding that with six-month bills now yielding nearly 5.5%, most of the lending will initially be concentrated in the highest yielding, least risky government bonds. “This may or may not effectively tighten financial conditions in the period ahead,” it concluded, adding that other markets are likely to underperform “for a while.” “Biggest Beneficiaries” The “biggest beneficiaries” in the current market are likely to be gold miners and long-dated government bonds, Gambles said, adding, “That’s where we’re really going to see the price increases.” He said the Japanese yen is also a buy. “If you still believe that US policymakers have it under control, and this is the first time they’re going to successfully achieve a soft landing, I think they’re providing portfolio insurance,” he told CNBC. “If you think there’s a high risk of them being wrong, then the best sectors to be in (are) gold diggers and zero-coupon 25-year Treasuries.” Citi, meanwhile, said opportunities could arise in non-U.S. debt, particularly higher-yielding, investment-grade emerging market bonds. US Banks Citi analysts also warned, however, that there is a possibility that higher government bond yields will divert deposits away from weaker US banks. “A shift from bank deposits to US Treasuries should not necessarily lead to new bank failures, but systemic risk to banks may increase again despite the 4.8% rise in regional bank stocks this week,” Citi said. The bank’s analysts urged investors to be wary of the most vulnerable banks, particularly those whose portfolios contain a high percentage of commercial real estate loans. Small and Mid Caps Citi noted that small cap stocks are tied to the performance of regional banks. However, the bank said they could recover once regional bank stocks do better on the back of stabilizing economic conditions. “While it may be a little premature to add (small and mid-cap stocks) during the government bond boom, quality small-cap value stocks look attractive at current levels with a multi-year time horizon,” the bank said, adding that profitable small-cap stocks now trade at a 26% discount to their larger peers. “In 2024, when the Fed is running, we also expect a catch-up in small-cap growth stocks, led by non-cyclical healthcare and technology companies. Don’t forget that ‘bearish investors’ have a record amount of sidelined money to put to work Citi added.
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What to Avoid and Buy After US Debt Ceiling Deal, Analysts
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