Financial Markets
A weakening economy will apply downward pressure to Treasury yields, but the Trump term premium will keep long-dated yields higher than they would otherwise be. This makes Treasury curve steepeners the most attractive trade in US fixed income.
It may take several months for the tariff shock and policy uncertainty to filter through the real economy, but survey-based data are already sending a warning. Equities have priced in a lot of good news, and investors are too sanguine about the risk of a US recession.
The US High Quality (USHQ) portfolio outperformed on the margin through April, returning -0.6%, whilst its SPY benchmark returned -1.2%. On a trailing three-month basis, performance remains robust vs. benchmark, with USHQ generating +230bps of excess return. Volatility and drawdown are lower too.
MacroQuant sees the risks to US growth as being to the downside and the risks to inflation as being to the upside. Such a stagflationary brew justifies an underweight on stocks.