Hedging

Let’s take another look at the rotation out of the U.S. narrative. For years, investing out of the U.S. has been a bad decision, as returns have been far superior than most international markets fueled by technology, and AI in particular. But there was also the currency component. Hedging the dollar has made little sense for most institutional investors as there was al yield pickup between U.S. short rates and European, or Japanese rates, for example. But as the valuation gap between U.S. equities and the rest of the world widen and the view on U.S. rates is more dovish, paired with the deficit impact on the dollar, and geopolitical events, international investors are starting a rotation out of the US. Since international markets, both debt and equities, don’t have the depth of the U.S., they are looking to diversification in steps: keep the delth of the U.S. equity market and hedge the currency. Slow down Treasuries purchases, and let the existing portfolio runoff, as the Fed is seen lowering rates. If rates continue to rise in Japan, there may be a point where it would make sense to borre money in dollars to invest in JGBs, which is the inverse Yen carrry trade. A few months do not make a trend, but the U.S. exceptionalism may be getting tired.

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