The US dollar has been strong over the past decade primarily because the Fed increased interest rates more than other central banks, due to stronger US growth and, at times, higher inflation.
Last month, this relationship broke down, as US government bond yields surged, and the US dollar declined, suggesting a degree of capital flight, with ‘bond vigilantes’ actively influencing the market.
We anticipate that tariffs will not be as high as was originally proposed, with countries able to negotiate with the US to secure trade deals, exemptions and delays. Despite this, policy uncertainty remains, which will likely weaken US and global growth.
US dollar rate differentials have broken down, an alarming signal for US assets
Source: Bloomberg, 9 May 2025.
Rates
We maintain overweight duration positions in Colombia, Brazil, Indonesia, Peru, and Mexico, reaffirming our confidence in Latin American and emerging market rates.
We have taken some profits on Eurozone outperformance compared to Canada by reducing our European duration and decreasing our short position in Canadian government bonds.
US duration has been increased as valuations have become more attractive outright and cross-market following a sharp selloff. But we have recently trimmed some of the ultra-long end exposure due to concerns around additional US fiscal stimulus which could un-anchor long end rates.
In the UK, we’re still overweight but have trimmed slightly after some good performance vs other markets.
Australian duration has also been reduced to fund our reduction in the Canadian rates short position, after Australia outperformed compared to Canada.
We have recently added to our long Norwegian duration position. Norway rates have lagged the rally seen in the rest of the world, which seems to present value here given the sharp drop in oil prices should take rates lower.
Inflation
While we consider it unlikely that tariffs imposed this year will un-anchor long-term inflation expectations, the fact that so little inflation is priced in beyond this year still makes inflation protection quite cheap. Therefore, we are maintaining long positions in US and European inflation-linked assets.
Currencies
Recent events reinforce our conviction to be bearish on the US dollar. Emerging market currencies stand to gain from this, as many are exceptionally cheap with nominal and real yields at historic highs in EM local bonds.
We have recently added BRL and removed TRY due to growing concerns about Turkey depleting its FX reserves to support its currency. Despite a recent central bank rate hike, the weakening pressure persists as locals continue to buy USD. Meanwhile, Brazil’s economy is outperforming, its currency has stabilised, and the carry remains very attractive.
We have also added a long position in INR vs USD. An India-US trade deal could be possible in the near-future, and although India is relatively insulated from the global trade war due to its closed economy, India’s manufacturing sector is likely to benefit at China’s expense. The drop in oil prices is very favourable for India and may push its current account into surplus. The recent conflict with Pakistan has led to a cheapening of the INR, providing a better entry point.
Credit
The correction in risk assets also provided an opportunity to close out underweights and short positions in credit, as economic pessimism widened spreads, although much of this move has since been given back.
The fund has a slight risk-on stance, as weak growth expectations are unlikely to trigger a liquidity crisis. With the rally in risk assets, there may be a chance to reduce credit exposure further if spreads tighten more from here.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Fidelity’s range of fixed income funds can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. FIPM 9058
The US dollar has been strong over the past decade primarily because the Fed increased interest rates more than other central banks, due to stronger US growth and, at times, higher inflation.
Last month, this relationship broke down, as US government bond yields surged, and the US dollar declined, suggesting a degree of capital flight, with ‘bond vigilantes’ actively influencing the market.
We anticipate that tariffs will not be as high as was originally proposed, with countries able to negotiate with the US to secure trade deals, exemptions and delays. Despite this, policy uncertainty remains, which will likely weaken US and global growth.
US dollar rate differentials have broken down, an alarming signal for US assets
Source: Bloomberg, 9 May 2025.
Rates
We maintain overweight duration positions in Colombia, Brazil, Indonesia, Peru, and Mexico, reaffirming our confidence in Latin American and emerging market rates.
We have taken some profits on Eurozone outperformance compared to Canada by reducing our European duration and decreasing our short position in Canadian government bonds.
US duration has been increased as valuations have become more attractive outright and cross-market following a sharp selloff. But we have recently trimmed some of the ultra-long end exposure due to concerns around additional US fiscal stimulus which could un-anchor long end rates.
In the UK, we’re still overweight but have trimmed slightly after some good performance vs other markets.
Australian duration has also been reduced to fund our reduction in the Canadian rates short position, after Australia outperformed compared to Canada.
We have recently added to our long Norwegian duration position. Norway rates have lagged the rally seen in the rest of the world, which seems to present value here given the sharp drop in oil prices should take rates lower.
Inflation
While we consider it unlikely that tariffs imposed this year will un-anchor long-term inflation expectations, the fact that so little inflation is priced in beyond this year still makes inflation protection quite cheap. Therefore, we are maintaining long positions in US and European inflation-linked assets.
Currencies
Recent events reinforce our conviction to be bearish on the US dollar. Emerging market currencies stand to gain from this, as many are exceptionally cheap with nominal and real yields at historic highs in EM local bonds.
We have recently added BRL and removed TRY due to growing concerns about Turkey depleting its FX reserves to support its currency. Despite a recent central bank rate hike, the weakening pressure persists as locals continue to buy USD. Meanwhile, Brazil’s economy is outperforming, its currency has stabilised, and the carry remains very attractive.
We have also added a long position in INR vs USD. An India-US trade deal could be possible in the near-future, and although India is relatively insulated from the global trade war due to its closed economy, India’s manufacturing sector is likely to benefit at China’s expense. The drop in oil prices is very favourable for India and may push its current account into surplus. The recent conflict with Pakistan has led to a cheapening of the INR, providing a better entry point.
Credit
The correction in risk assets also provided an opportunity to close out underweights and short positions in credit, as economic pessimism widened spreads, although much of this move has since been given back.
The fund has a slight risk-on stance, as weak growth expectations are unlikely to trigger a liquidity crisis. With the rally in risk assets, there may be a chance to reduce credit exposure further if spreads tighten more from here.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Fidelity’s range of fixed income funds can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. FIPM 9058
