A just-published report updated our multi-asset strategy, which included following through on our recent recommendation to augment bond holdings. We repeatedly warned in recent weeks that the A.I. bubble would soon deflate and the U.S. mid-term elections acted as the catalyst for equity investors to head for the exits and shift some funds into bonds.
The global bond market had been extremely oversold and primed to consolidate, but was missing a catalyst to trigger such a move. The smash-up in A.I. plays has helped to offset ongoing solid U.S. economic growth and elevated inflation, helping to lower Treasury yields and easing upward pressure on all global bond markets.
Whether our shift from being bond-bearish to neutral proves temporary or progresses to moving full circle to recommending an overweight bond position depends on the performance of the overall economy. We anticipate that the U.S. and global economy will be able to weather the A.I. storm, even factoring in a slowdown in the A.I. capex boom. However, a growth “scare” could develop if A.I. plays continue to deflate rapidly, thereby delaying the next upleg in bond yields. Stay tuned.
