Global Fixed Income: Outlook & Strategy

The dollar’s current strength is driven more by AI-related US equity flows and hawkish monetary-policy expectations than by improving trade fundamentals, while the yen offers a contrarian long-term opportunity.

• CTA positioning surveys show the US dollar is heavily overweighted, while oil has fallen from $100 to about $70 per barrel as the new Gulf War has ebbed, improving global growth and inflation prospects.
• US economic momentum is concentrated in AI-related wealth effects and capital spending on data warehouses, chips, GPUs, TPUs, CPUs and supporting utility infrastructure, while short-term rates remain elevated.
• The usual negative relationship between the dollar and risk appetite has shifted: Deutsche Bank reports that equity flows are increasingly dominating the debt flows that mattered more in the past.
• An AI-driven equity bear market is identified as the clearest downside risk for the dollar because of substantial foreign participation in US stocks.
• The yen is near a 40-year low against the dollar and speculative positioning appears maximally short; 10-year Japanese Government Bond yields are approaching German levels.
• Loomis Sayles argues that Japan’s long end already offers value: even if the fiscal deficit doubled from 1.4% to 3.0% of GDP, it would remain half the US deficit of 6%, while Japan retains a current-account surplus and inflation near 2.0%.

Takeaway: Investors should view the dollar as exposed to a reversal in AI equity flows and consider the yen and longer-dated Japanese government bonds as potential contrarian opportunities, although the timing of any yen rally remains uncertain.