"Anchors for global asset pricing" dancing again? The rise of "populist" policies, the storm of long bond sell-off is coming.

In the unprecedented wave of selling triggered by the "stagflation" expectations in the global government bond market last month due to the Iran war, bond funds that are still generating strong positive returns are betting, as governments around the world implement expansionary fiscal policies with a strong "populist" color to buffer the impact of energy shocks, the global government bond yield curve will tend to steepen. In other words, as "developed countries spend to stabilize public opinion," the bond market may soon begin to demand a price -- especially an upward trend in the "term premium" indicator may drive global long-term bonds into a "steepening storm," triggering a continuous rise in the yield of long-term bonds with a maturity of 10 years and above. The 3 billion (approximately $35 billion) bond fund called Carmignac Portfolio Flexible Bond focuses on buying short-term government bond assets as its core strategy, as the market is expected to see a decline in yields as the aggressive bets on global central bank rate hikes are unwound amid multiple positive factors driving the market. However, the senior fund manager who successfully avoided the major bond market sell-off in March warned that "populist" policies will significantly impact bond prices as governments adopt "populist" fiscal stimulus measures to address economic downturns, leading to higher yields on long-term government bonds. Guillaume Rigeade, Co-Head of Fixed Income at Carmignac, said in a recent interview that as economies absorb the shocks to growth, governments are likely to respond with more aggressive fiscal stimulus measures, which will significantly raise the term premium indicator and subsequently increase the yield of long-term government bonds with a maturity of 10 years and above. The 10-year U.S. Treasury yield is dubbed "the anchor of global asset pricing," and if this yield continues to rise due to term premium driven by fiscal stimulus, it will undoubtedly lead to a new round of valuation collapses for high-yield corporate bonds, technology stocks, and cryptocurrencies, which are the hottest risk assets globally. According to performance comparison data compiled by institutions, the above-mentioned bond fund launched by Carmignac achieved a return on investment of 0.5% in March, while the global government bond index dropped significantly by 3.4%. This performance ranked the fund second among the 282 bond type investment strategy funds in the Euro Diversified Bonds category on Morningstar Direct. The fund benefited from its short duration strategy in March in most markets, which means it can profit against the trend when yields rise. Populist policies will impact bond assets In a recent interview, Rigeade said that the economic consequences of the Iran war will prompt global governments to introduce "somewhat populist measures to help households and businesses." He said, "Governments will be under a lot of pressure and will have to spend more money to help families." Despite a one-day rally driven by a two-week temporary ceasefire agreement between the U.S. and Iran, Rigeade's investment team still believes that such short-term securities assets hold value. Due to waning optimism in the market for the ceasefire agreement, French two-year government bond yields rose by about 6 basis points on Thursday to 2.71%, while German and Italian two-year government bond yields also saw substantial increases. Rising bond yields imply falling bond prices. Many developed countries that have been relatively severely impacted by the surge in energy prices have begun to extend or introduce new fiscal support measures. Italian government officials have approved temporary measures to reduce the country's fuel consumption tax, the U.K. government is exploring stimulus measures to ease the burden of energy bills, and the South Korean government has introduced a supplementary budget of around $17 billion to support its economy. With ongoing geopolitical tensions, global defense and military expenditures by governments are also expected to rise. Although the two-week temporary ceasefire has contained the rise in energy prices, traditional global energy prices including oil and natural gas remain elevated compared to levels before the conflict, and are prone to sharp fluctuations in the short term. On Thursday, due to ongoing Israeli attacks on Lebanon and the continued blockade or closure of the Hormuz Strait, investor sentiment for a lasting ceasefire weakened, causing oil prices to rebound. Monetary policymakers have expressed concerns about excessive stimulus. European Central Bank President Christine Lagarde warned European political leaders last month to exercise caution in providing funding for consumer spending, seemingly cautioning against repeating the practice of massive stimulus aid during the 2022 energy crisis that led to inflation. Rigeade said, "Some populist stimulus policies will be costly for governments, especially when they already face huge budget deficits." Populist policies may lead to a resurgence of the "term premium hurricane" The term premium refers to the additional government bond yield compensation that investors demand for holding long-term bond risks. An IMF policy study for 2025 has found that the connection between deficits and debt with higher long-term rates and term premiums significantly increases after fiscal conditions deteriorate. Some economists believe that the term premium indicator of government bonds in developed countries will be much higher in 2026-2027 than before, especially considering the Trump 2.0 era in the U.S., where government debt and budget deficits are expected to be significantly higher than official forecasts. This is mainly due to the Trump-led new government's core economic growth and protectionist framework centered on "tax cuts domestically + tariffs imposed externally," combined with the increasingly large budget deficits, U.S. debt interest, and military defense expenditures amid the catalyzation of the Middle East geopolitical conflict, the U.S. Treasury debt issuances may be forced to expand even more in the "Trump 2.0 era" compared to the Biden administration, which has been spending money extravagantly. The term premium is likely to be higher in this case. Short-term government bond yields may tend to decrease due to the removal of bets on rate hikes in the market, or even including rate cuts, while the long-term portion faces different forces -- after the energy shock drags on growth, governments tend to introduce more aggressive fiscal support measures to support households and businesses, often resulting in higher government bond supply, potential military expansion, and concerns about deteriorating fiscal discipline, thereby pushing up the yield of long-term government bonds with a maturity of 10 years and above again. Therefore, the potentially populist-driven fiscal stimulus policies are likely to raise term premiums and long-term bond supply pressures, exerting upward pressure on yields for government bonds with a maturity of 10 years and above. However, if the energy shock turns out to be a strong temporary growth shock rather than a persistent inflation shock, or risk aversion intensifies sharply, long-term bonds may also benefit from safe-haven demand in the short term. It is worth noting that the 10-year U.S. Treasury yield is the anchor of global asset pricing, and if this yield continues to rise due to term premium driven by fiscal stimulus, it will undoubtedly lead to a new round of valuation collapses for high-yield corporate bonds, technology stocks, and cryptocurrencies, which are the hottest risk assets globally. If the yield of U.S. government bonds with a maturity of 10 years and above continues to rise, this will mean a significant increase in funding costs, weakening liquidity expectations, and expanding the macro denominator simultaneously for core risky assets such as stocks, cryptocurrencies, and high-yield corporate bonds.