Bonds actually matter
This past week, Federal Open Market Committee (FOMC) Chair Kevin Warsh indicated that the FOMC will remain inflation focused. Also, renewed hostilities with Iran pushed crude back closer to $100. These two developments, along with growing concern with respect to government debt levels, added fuel to recent inflation and interest rate concerns. This had a direct impact on bonds and financial markets over the past week. Bloomberg publishes an index of global government bonds, and it has risen to the highest since mid-2008 (Please see Figure 1). US Rates have also increased back to decade highs. Ten-year Japanese government bonds touched 3% for the first time since 1996, UK 30-year yields are the highest since 1998, and Australian 10-year yields are back to 2011 levels. Traders now price a near 70% chance of a quarter-point FOMC hike this month, an ECB hike next week is fully priced, and a Bank of Japan hike later this month is all but certain. Looking at Figure 1 again, the period from 2009 to 2021 appears to be a golden age for the world’s governments to borrow at low rates. This now looks like an anomaly rather than the norm.
We note that the US government is paying close attention and trying to have an influence. On August 19th, Secretary Bessent announced that Treasury would at least double its buybacks of 10 to 30-year bonds, funded with short-term bills. Yields fell that day, but two weeks later, the 30-year yield is back exactly to where it was before the announcement. Warsh’s mentor, Stanley Druckenmiller, publicly called the idea a mistake (along with Ken Griffin, Citadel CEO and many other market participants). At the same time, the US Treasury also joined Japan in a record ¥15.4 trillion (roughly US$97 billion) intervention after the Yen fell to a four-decade low against the dollar. Such interventions in the bond and currency are inherently risky. They are essentially signaling exercises – attempts to move the market through “jawboning” rather than a real quantitative impact. Consequently, their success is invariably short-term; markets simply possess far more staying power than any individual administration.
“This means that” we expect long-end yields and volatility to remain elevated, which will be a headwind for equity valuations and economies generally around the world. We expect financial asset volatility to continue.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Conviction Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
Telephone Call Recording Reminder. To maintain accurate records and support quality service, please note that all telephone calls with our office are recorded, in accordance with applicable privacy laws.
For more information, please follow the links above to review the fund term sheets.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Pathfinder Conviction Fund are presented based on the master’s series of each fund. The Pathfinder North American Equity Portfolio and The Pathfinder North American Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder North American Equity Portfolio (January 2011), Pathfinder North American High-Income Portfolio (October 2012) Pathfinder Partners’ Fund (April 2011), Pathfinder Conviction Fund (April 2013), and Pathfinder International Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.