Fixed Income Insights
Key Highlights:
- The US fiscal trajectory, marked by rising debt levels and structural deficits, is influencing global sentiment and prompting investors to reconsider the dominance of US Treasuries and the US dollar.
- Shifts in global capital allocation reflect the potential for gradual de-dollarisation, with implications for currency markets and portfolio diversification.
- Eurozone debt, driven by structural resilience, policy adjustments, and institutional backing, and emerging-market debt, supported by fiscal discipline and improving credit ratings, are gaining prominence as viable alternatives.
Impact of US fiscal outlook on treasury market, dollar, and global sentiment
The US fiscal trajectory is under scrutiny as federal debt approaches levels last seen after World War II, driven by entitlement spending and rising net interest payments. This has led to a widening fiscal deficit and increased term premiums on US Treasuries. Structural challenges, including the twin deficits and slower economic growth, are pressuring the US dollar’s dominance in global reserves. Foreign investors, particularly in Asia and Europe, are beginning to reassess their exposure to US assets, potentially reallocating capital to local currencies and other geographies. This evolving sentiment could weigh on the dollar’s value while supporting alternative currencies.
What are the alternatives beyond US dollar-denominated bonds?
As investors seek diversification, eurozone and emerging-market debt are emerging as compelling alternatives. The eurozone benefits from structural resilience, institutional support, and improving debt dynamics, despite challenges like geopolitical risks and market fragmentation. Increased foreign inflows and the eurozone’s transition to a net lender position globally further bolster its appeal. Emerging markets, on the other hand, offer higher yields, fiscal discipline, favourable demographic trends, and narrowing inflation differentials. These factors create attractive carry opportunities, supported by improving credit ratings and stable public debt-to-GDP ratios. Despite regional disparities and geopolitical uncertainties, both regions present significant opportunities for diversification and the potential for long-term growth.
The views expressed above were held at the time of preparation and are subject to change without notice. While any forecast, projection or target where provided is indicative only and not guaranteed in any way, HSBC Global Asset Management (UK) Limited accepts no liability for any failure to meet such forecast, projection or target. Diversification does not ensure a profit or protect against loss.