Commodity Watch: The long bond goodbye?

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/36adb453-e50e-4c12-a3c7-3906bf7fb8ed/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-v2.jpg?language=en" alt="Ahmad Al Sati v2" title="Ahmad Al Sati v2" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and portfolio manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>The long bond goodbye?</p><p><br></p><p>A tepid auction of the 20-year US government bond on May 21st added to investors’ concerns about higher debt and persistent inflation. Granted, the 20-year is not popular (it was shelved from 1986 –2020), but long-term US government yields remain elevated relative to the last 15 years, Thursday’s auction of 30-year bonds will be telling.</p><p><br></p><p>Continued lower-than-expected demand for the largest and most liquid US financial asset could be a harbinger of the US entering an era where investors allocate away from US financial assets (debt and equity) resulting in a cheaper US Dollar and lower overall returns in the US.&nbsp;</p><p><br></p><p>Emerging market investors are familiar with this. Foreign capital piles into a country expanding credit, increasing the prices of financial assets and appreciating the currency. The stronger currency curtails export growth and increases the current account deficit – as a result, governments attempt to manage the currency by raising interest rates, among other things. When conditions change, capital exits, asset prices deflate, non-performing loans increase, and financial crises ensue. There are many EM examples, Mexico in 1994 after a period of high liquidity post-NAFTA, and the ASEAN 4 in the late 1990s after a period of prolonged capital inflows.&nbsp;</p><p><br></p><p>US investors are generally fortunate that they operate in the world’s largest, most robust economy with deep and liquid capital markets and a reserve currency to boot. Yet, the laws of gravity apply to the mouse and the elephant. And, to mix my metaphors, we have seen this movie before (I just saw the Long Goodbye again. I still like it). In the early, 2000s, after the dotcom bubble burst, the Fed took interest rates to 1%, the US budget deficit rose to levels not seen before, and investors moved away from US assets allocating instead to international and emerging markets. US assets suffered: venture capital funds could not raise capital, the dollar depreciated and the S&amp;P500 was down 0.95% over 10 years.&nbsp;</p><p><br></p><p>In contrast, post-2008 and the EU crisis, foreign investors overallocated to the US as US investors under allocated to international assets and US assets outperformed accordingly. Today, the overallocation by investors to the US vs. US allocation outside the US is at an all-time high as a percentage of GDP. Thus, allocation away from the US for any reason will have an impact, some forecast that if demand for the USD dollar drops to the levels of the 2000’s the US Dollar could depreciate by as much as 25%&nbsp;</p><p><br></p><p>The 2000s is often referred to as a lost decade. But that was only true for the S&amp;P500. Other assets were up. Small-Cap Stocks: ~8%, International Value Stocks: ~7%, Emerging Markets: ~11%. Commodity prices were up ~2x. Prologue is not epilogue. Changes in the investment landscape will bring uncertainty and unease. Diversification remains the only free lunch.</p><p><br></p><p>¹Understanding the Strength of the Dollar, US Fed &amp; NYU Stern, May 2024</p><p><em>The above is an extract from a LinkedIn post by Ahmad Al-Sati from 08/06/2025.</em></p><p><br></p>