For professional clients only. The information contained within this post is not intended for retail clients.
The defining shift of 2026 has been the world buying into America’s growth, but not her debt. In the year to June, foreign inflows into US equities (about 2.8% of GDP) exceeded inflows into Treasuries (about 2%) for the first time this century outside crisis episodes. The world still wants exposure to US growth, but it is less willing to fund the US government at old prices. Add AI capex competing for the same capital, and the result is structurally higher term premia. The 10-year yields are around 5.3% while the 30-year has breached 5.6%. This rise is increasingly driven by real yields, not just inflation expectations.
In The Fourth Turning: An American Prophecy (1997), Strauss and Howe argue that late-cycle periods feature heavy sovereign debt, protectionism, geopolitical conflict, and policy that ultimately protects asset prices. The historical pattern is nominal growth and risk assets outpacing bonds, with more volatility. Ray Dalio’s “Big Cycle” points the same way: about 80 years into a US-led order that began in 1945, debt is high, internal conflict is rising, and external rivalry is intensifying.
The US is already sliding toward financial repression, even if it isn’t said openly. More short-term bill issuance, buybacks of long bonds, a programme doubled in August, and Fed reserve purchases all reduce the amount of long-dated debt private investors must absorb. In practice, this resembles an informal form of yield curve control. With interest costs outpacing tax revenue, allowing the bond market to set rates freely is becoming increasingly difficult politically. For now, however, the Fed is leaning the other way, with an additional hike priced in this quarter. The real turning point would be the Fed joining the Treasury in holding long rates down.
For bonds, the risk-reward looks increasingly asymmetric. Long-dated bonds offer limited upside, because rallies meet fresh supply and inflation worries, and they stay exposed while real yields rise. Short-dated and inflation-linked bonds are better balanced. Holding rates artificially below nominal growth quietly shifts wealth from savers to the government by eroding the real value of bonds while shrinking the debt burden. That favours scarce assets: gold, companies with pricing power and, for some, crypto. The dollar is the key variable. If markets conclude Washington will tolerate a weaker currency, the dollar becomes the pressure valve.
For equities, the foundations are thinner than headline indices suggest. Nominal growth and foreign buying favour stocks over bonds, yet new lows are outnumbering new highs even with indices near records, leaving the market heavily concentrated on a narrow group of leaders. The main risk is timing: if real yields spike before policymakers act, richly valued growth stocks would be hit hardest. This argues for quality businesses with strong balance sheets, solid free cash flow and pricing power, companies able to absorb a near-term rate shock and benefit if rates are ultimately held down. The near-term danger is a disorderly rise in real yields, while the longer-term destination is managed rates and a weaker dollar. Portfolios need to be built for the destination, but sturdy enough to survive the journey.