A bond fund that delivered strong positive returns during last month's historic global government bond selloff, driven by stagflation fears amid the Iran conflict, is now betting that sovereign yield curves will steepen as governments roll out expansive fiscal measures with populist undertones to cushion energy shocks. The core strategy of the €3 billion Carmignac Portfolio Flexible Bond fund focuses on acquiring short-term government debt, anticipating yield declines as markets unwind aggressive bets on central bank rate hikes due to multiple positive factors. However, the fund’s seasoned portfolio manager, who successfully navigated March’s bond market plunge, warns that populist policies will significantly impact bond prices. Governments are expected to combat economic slowdowns with fiscal stimulus, thereby pushing up long-term bond yields.
Guillaume Rigeade, co-head of fixed income at French asset manager Carmignac, recently stated that as economies absorb growth shocks, governments are likely to respond with more aggressive fiscal measures—a move that could substantially elevate term premiums and, consequently, long-term bond yields such as those on 10-year notes. The 10-year U.S. Treasury yield, often termed the "anchor of global asset pricing," if driven higher by term premiums fueled by fiscal stimulus, could trigger valuation pressures on high-yield corporate bonds, tech stocks, and cryptocurrencies.
According to performance data, the Carmignac fund achieved a 0.5% return in March, while the global government bond index fell 3.4%. This performance placed it second among 282 euro flexible bond strategies tracked by Morningstar Direct. The fund benefited from a negative duration stance in most markets during March, allowing it to profit as yields rose.
Rigeade emphasized that the economic fallout from the Iran conflict will push governments toward "measures with a populist slant to assist households and businesses." He noted that despite a recent rally driven by a two-week ceasefire agreement between the U.S. and Iran, short-term securities remain attractive. On Thursday, two-year bond yields in France rose about 6 basis points to 2.71%, with similar increases in Germany and Italy, indicating falling bond prices.
Several developed economies heavily impacted by energy price spikes have already extended or introduced new fiscal support. Italy approved a temporary cut in fuel taxes, the U.K. is exploring stimulus to ease energy bills, and South Korea unveiled a supplementary budget of approximately $17 billion. Additionally, global defense spending may rise amid escalating geopolitical tensions.
Although the temporary ceasefire has curbed energy price surges, oil and gas prices remain elevated compared to pre-conflict levels and are prone to sharp swings. Oil prices rebounded on Thursday as Israeli strikes on Lebanon and effective closures in the Strait of Hormuz dampened optimism for a lasting truce.
Monetary authorities have expressed concerns over excessive stimulus. European Central Bank President Christine Lagarde recently cautioned European policymakers to exercise prudence in funding consumer spending, implicitly warning against repeating the inflationary largesse seen during the 2022 energy crisis. Rigeade added, "Certain populist stimulus policies will prove costly for governments, especially given existing substantial budget deficits."
The term premium, the extra yield investors demand for holding long-term bonds, could resurge strongly. An IMF policy study highlighted that deteriorating fiscal conditions strengthen the link between deficits, debt, and higher long-term rates. Some economists project that term premiums in developed markets will be significantly higher from 2026 to 2027, particularly in the U.S. under a potential Trump administration, where tax cuts, tariffs, and expanded defense spending could exacerbate budget deficits and Treasury issuance.
While short-term yields may decline as rate hike bets recede and rate cut expectations rise, long-term yields face upward pressure from fiscal support, increased bond supply, potential military spending, and concerns over fiscal discipline. If energy shocks prove transient rather than persistently inflationary, or if risk aversion spikes, long bonds might temporarily benefit from safe-haven demand.
A sustained rise in 10-year U.S. Treasury yields would equate to higher funding costs, weaker liquidity expectations, and an expanding macroeconomic discount rate for risk assets. In valuation models like DCF, the 10-year yield serves as the risk-free rate (r) in the denominator. If cash flow expectations (the numerator) lack positive catalysts—such as during earnings seasons—elevated denominator levels could compress valuations for AI-linked tech stocks, high-yield corporate bonds, and cryptocurrencies trading at historical highs.
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