23 May 2025: Weekly Update – Fiscal Deficits, Bond Markets and Rising Term Premiums

The bill also has the potential to stoke inflation further as provisions such as extended tax cuts, increased deductions, and new spending measures may boost consumer demand and government outlays. At the same time, tariffs and efforts to reshore manufacturing could constrain supply and drive up costs in the longer term.

For now, however, the recent rise in long-term government bond yields across major economies appears less driven by fears of runaway inflation and more by mounting concerns over fiscal sustainability and a rising term premium. At present, the bond market’s inflation expectations remain steady.

Spending pressures exist in many other western economies and with governments issuing more debt to finance such policies, markets are demanding higher yields to compensate for the increased supply and the perceived risk that fiscal discipline may be eroding.

At the same time, the term premium - the extra yield investors require for holding long-dated bonds in an uncertain environment - has risen as buyers seek greater compensation for risks related to policy unpredictability, geopolitical tensions, and shifting global capital flows. This marks the significant shift in the global bond market that has come about over the last couple of years or so, where investors are no longer willing to accept historically low yields in the face of growing fiscal and structural uncertainties.

On the US tariff front, the week ended with a sudden threat by the US to impose a 50% tariff on all European Union imports. This sent a brief shockwave through financial markets and raised the risk of a major transatlantic trade conflict. Although the measure was quickly postponed following talks with European leaders, the episode underscored the unpredictability of US trade policy and the fragility of economic relations.

This week we caught up with Sean Peche, manager of the Ranmore Global Equity Fund held within each of the T. Bailey funds of funds portfolios. This fund has demonstrated resilience and agility through the current volatile economic environment, comfortably outperforming global equity benchmarks.

Sean maintains a disciplined, value-driven approach that seeks out undervalued stocks globally, often capitalising on market overreactions and sentiment swings. This strategy has allowed the fund to benefit from recent volatility, with notable successes such as rapid gains in Foot Locker and active rotation into companies like EasyJet and Tesco, which were unfairly punished by broader market fears.

The portfolio is diversified across regions whilst maintaining a healthy cash position to seize new opportunities as they arise. A standout attribute of the fund is its focus on asymmetry: accepting that losing positions are an inevitable part of investing but ensuring the risks taken can lead to winning positions that generate returns several times larger than losses. The fund’s ability to adapt quickly, avoid crowded trades, and exploit inefficiencies - whilst keeping costs competitive and remaining operationally focused - positions it as an attractive option for the T. Bailey funds of funds portfolios.