Our mid term and long term thesis is for inflation and yields to come down. Long term drivers include

• Poor demographics in almost every country with the exception of the African continent.
• Boomers retiring has a deflationary effect, not an inflationary effect.
• Technology acting as a deflation driver. This can be said of many technologies, but AI could be the most single important driver going forward.
• Debt burden. Is is very hard to create inflation in a world laden with debt when a huge percentage of every dollar earned goes to debt service.
• The pure necessity to go back to lower rates to avoid corporate and sovereign defaults. Too many zombie companies and countries.
• "Re-globalization". This might be a slightly contrarian view, but we feel the the de-globalization trend - while evident after Covid and the Russian invasion of Ukraine - might reverse at some point. The benefits of comparative cost advantages and the global dependencies are just too big to give up.

Hence, we believe that going long treasuries might be a very lucrative trade, for the first time in decades. But is it the right moment to buy? What are the short and medium term drivers?

The technical picture: Positive. It appears that US long bonds (using TLT in this example) might have found solid support. Indicators and a declining wedge pattern on the 4hr chart hint at a potential upside opportunity, provided the price maintains its support level. See picture below.

If we look at commitments of traders in interest rate futures, the picture looks positive as well, with large speculators being surprisingly short at this point, which we view as a contrarian opportunity to go long. See below.

So all is well? Not quite - yet - or at least not fully. The problem in the short term stems from the (hopefully now resolved) debt ceiling mechanics. Let us be clear, we believe the negotiations are merely a political Kabuki theatre - it WILL be resolved. But the problems lie in the short term mechanics and effects on liquidity. Once a deal has been reached, the US Treasury can and will issue new debt - and quite a lot, because in addition to the regular financing needs, the Treasury needs to fill up its own checking account (the TGA, or Treasury General Account), that has been drained by the political impasse of recent weeks. This effect could be mitigated by flows from the Reverse Repo Facility, but only partially.

The net effect will be an increased supply of US government paper in the next 1 or 2 months, decreasing market liquidity. Adding the heightened probability of 2 more FED rate hikes instead of the previously anticipated 1 in June also drives yields up.

In a nutshell, the picture is slightly clouded right in terms of the perfect entry, but with a long enough holding period, we believe this might be one of the best trades going forward, with lofty equity valuations and real estate still waiting for the big hit.