Yields on offer from many longer-dated bonds still aren’t attractive relative to inflation and government debt levels, according to Orbis Investments’ Rob Perrone, who said he is “not tempted” by the higher coupons offered by the UK, US, Japanese, and German governments.
In Orbis’s quarterly market commentary published on Monday (12 October), senior investment specialist Perrone said his views are based on various pressures affecting the long-term bond market.
Perrone argued that increased demand for capital has become “the dominant force in bond markets” since 2024, driven by $1trn of shareholder payouts, the $300bn AI buildout, and the US government’s “larger budget deficits” – issuing an additional $550bn debt in the year to March.
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Taken together, Perrone said: “American demand for capital is about six percentage points of GDP higher than it was a year ago.” Naturally, this increases the cost of capital, raising the cost of bond yields. In Perrone’s words: “If the world’s hunger for capital remains voracious, pressure on bond yields will remain upward.”
Similarly, high inflation is making long-term bond yields less attractive, since yields must outpace inflation to remain profitable. Of these concerns, Perrone said: “Inflation remains high in much of the rich world, and interest rates remain too low to credibly bring inflation down. Oil, gas, diesel, and a raft of other commodities remain volatile.”
The senior investment specialist is also concerned by the “financial repression” policies exhibited by US Treasury Secretary Scott Bessent. To Perrone, Bessent’s buyback of long-term bonds by selling short-term bills is likely to increase the volatility of the government’s interest bill – “because more of the debt pile must be rolled over every year”.
Compounding these macroeconomic forces is the need for other states to fund their own deficits. Other state actors, especially those with substantial deficits, are seeing increased borrowing costs, “creating more competition for savers’ capital” and further elevating cost.
For Perrone, this combination of “irresponsible fiscal policy” and increasing bond volatility is enough to dissuade him from adding long-term bonds to his portfolio, despite the high yields on offer.
Instead, Perrone said: “[Orbis will] prefer shorter-term or inflation-linked bonds, as well as those from more fiscally responsible governments like Norway, Iceland, and Australia.
“If financial repression is the endgame, the US dollar will bear the brunt of the pain, so we remain underweight the dollar in favour of gold and more reasonably valued currencies.”
