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Interest rates in the United States are bouncing near record lows.So low, in fact, that it is hard for investors to get excited about being long fixed income right now. The refrain "the only place to go is up" is pretty widely shouted around the world.
This morning, however, one of our guests, Chris Aherns, head of U.S. interest rate strategy at UBS, provided some important colour on his position as a reluctant bull.
Here are his three reasons.
First, there is a supply/demand imbalance. There is about $38 trillion US worth of non-financial debt outstanding. That generates about $1.2 trillion in coupon interest income alone on an annual basis. Put that up against a system that is only creating some $1.2 to $1.3 trillion annually of debt, and the market is pretty tight.
Second, U.S. economic growth remains very moderate and the prospect of an increase in U.S. central bank rates is remote in the near future. That, along with the ongoing anticipation of another round of Quantitative Easing (or bond-buying by the Federal Reserve) could keep a bid under bonds.
Finally, with some central banks around the world looking to cut rates (Brazil recently did so and the Reserve Bank of Australia may do so within the next 24 hours) and global currency and economic uncertainty, investors are being encouraged to retain their treasury exposure.
While Aherns isn't pounding the table on large new positions, he is keeping a long recommendation out there, reluctantly anyway.