- 01 — The Fed
Fed Goes
All-In
Fed Chair Kevin Warsh’s carefully chosen words in his inaugural Jackson Hole address had already opened the door to a rate rise, with further evidence of persistent inflation subsequently driving the move. Arguably, the more telling point was not the increase itself, but the unanimous vote behind it, with at least one further rise now widely expected before the end of the year.
Fixed income rarely grabs headlines, however rising yields further increase potential returns, and we continue to favour bonds as a ballast to diversified portfolios.
- 02 — The Long End
It's Going to Cost You
The longer end of the market has also made its views known, with investors now demanding higher compensation for holding longer-term government debt. The US 10-year reached circa 5%, while the US 30-year went above 5.3%, its highest level since before the financial crisis. Beyond inflation, the longer end is also pricing concerns surrounding fiscal sustainability and US federal debt, which has now risen above $40 trillion. The US is not alone, with similar long-yield pressures playing out across other major developed markets.
We currently don’t see sufficient value at the long end to justify the duration risk. Our preferred exposure remains the short to intermediate end of the curve.
- 03 — AI & Power
Pump the Brakes
Markets have largely absorbed the volatility triggered by recent calls from AI leaders to slow the development of frontier models, citing the risk of losing control. With competition against China creating political resistance to a slowdown, and AI capex expected to remain elevated, a meaningful handbrake appears unlikely. What was once a story about chip supply has shifted towards infrastructure and power, with electricity and grid connections becoming binding constraints, and Elon Musk estimating a 15GW power shortfall by 2027. Coupled with increasing debt issuance to fund capex and ongoing questions around end-user monetisation models can leave an already crowded trade vulnerable to pullbacks.
We remain broadly positive about the AI theme, but overconcentration is all too easy. The more traditional sectors still matter and their importance in delivering the AI journey is apparent.
- 04 — Our Approach
(Still) Unheroic by Design
Nothing from the past month has changed our underlying philosophy. If anything, it continues to reinforce it:
- Bonds continue to provide valuable income generation and portfolio stabilisation.
- With inflationary pressures persisting and at least one further rate rise on the cards, we remain cautious about locking in long-term yields.
- Continue to look beyond the chip names to the more traditional sectors increasingly gating the AI trade.
- Diversify across regions, asset classes and outcomes, and resist building a portfolio around a handful of confident guesses.
The Fed has made its call. Ours hasn’t changed: a portfolio positioned to be Ready for Whatever…
