There are risks that the UAW action could spread to other industries, but we should remember that US unionisation is low. Membership has fallen from 20 per cent of the workforce in 1983 to 10 per cent at the end of 2022.
US wage growth appears to be slowing, despite the strikes, from 6.7 per cent in June 2023 to 5.3 per cent and vacancies are also starting to fall. Labour markets are still tighter than in the pre-Covid years and strikes could escalate, but there is evidence that conditions are easing.
Bond tsunami
The fourth and final challenge for bond markets comes from a surge in supply. The leading culprit for the surge in supply is the Biden White House and its gargantuan fiscal programmes.
The American budget deficit is running at close to 6 per cent of GDP, or nearly $2tn a year, a level more often associated with wartime spending. To fund this already requires enormous treasury issuance. This is not unique to the US, France and Italy, for example, have also projected materially higher deficits.
As we stated earlier, the other culprits are the central banks, which are in the process of selling vast inventories of bonds that they accumulated during the Covid years and previous quantitative easing programmes.
This year the Fed is expected to sell back almost $1tn of bonds to the banks and treasury markets. Together, US government bond issuance and the Fed’s bond sales in 2023 will be equivalent to almost 13 per cent of US GDP.
Daunting though this is, we must bear in mind that there is always demand for a true safe-haven asset, a US treasury, if the price is right.
Today, with 10-year treasuries yielding 4.7 per cent and US Tips (inflation-linked bonds) delivering a guaranteed 2.4 per cent above inflation for 30 years, rates are starting to look attractive. The more so if inflation falls to something like the Fed’s target of 2 per cent.
Remember, too, that high issuance does not always result in higher yields. Japan has accumulated record debt relative to GDP, yet its bonds have consistently had among the lowest yields globally.
In short, issuance is a concern, but if treasuries and other government bonds are priced correctly, there will always be demand.
Farewell, Tina
For much of the past decade, ‘Tina’ (there is no alternative) has been the norm for investors. With yields on bonds and cash close to zero, or negative in much of the eurozone, equities became the default asset class.
