Volatility isn't risk

Markets have become increasingly reactive. A stronger payroll number pushes Treasury yields higher. A weaker inflation print sends them lower. Geopolitical headlines move the dollar, trigger safe-haven rallies, and rewrite the narrative — often within hours. 

Investors often interpret this as risk. We do not.

Volatility is the price of participation. Risk is overpaying for an asset, lending to a weak borrower, or owning something where the downside is permanent and the upside is speculative. The distinction matters because elevated volatility often produces the best entry points. Today, we see opportunities across government bonds, currencies and selective Asian credit precisely because markets remain fixated on short-term noise.

The consensus has been consistent: inflation is sticky, deficits are large, yields should move higher. There may be truth in that. But consensus views rarely generate attractive returns, and the more relevant question is whether current yields adequately compensate investors for the risks they are taking.

In our view, they do.

A 10-year Treasury at close to 5% is a fundamentally different proposition from one at 2%. At 2%, duration offered little reward. At 5%, the starting point is far more compelling — and when short-term noise pushes yields beyond what medium-term fundamentals justify, it creates an opportunity rather than a warning sign.

Our assessment is that US growth is weaker than headline data suggests. Fiscal stimulus and Artificial Intelligence(AI) related investment spending have flattered the surface; beneath it, labour markets have softened, household spending has become uneven, and the lagged effects of higher borrowing costs are still working through the economy.

We are not forecasting the exact path of rates. We are making a valuation call — and that is an important difference. One requires precision. The other requires discipline. Over time, discipline tends to win.

This is why we favour duration in Japanese government bonds, Australian government bonds and UK gilts, where valuations remain attractive and the policy direction, should growth continue to moderate, supports both income and capital appreciation.

The dollar's narrative is simple and well understood: US outperformance, high rates, persistent capital inflows. The problem with well-understood narratives is that the good news is already priced. When positioning becomes one-sided, markets become fragile — a modest growth disappointment, a shift in Fed expectations, or improving conditions elsewhere can move currencies sharply.

We are not calling for a dollar collapse. We are saying the risk is more two-sided than most investors appreciate.

There is also a longer structural story developing. The gradual diversification of global reserves and trade settlement systems points to a slow but meaningful shift away from dollar dependence. These changes unfold over decades, not quarters — but they compound, and they are already influencing capital flows.

Our highest-conviction currency view today is the Japanese yen. It remains deeply undervalued, carry trade positioning is stretched, and the Bank of Japan's gradual rate normalisation creates an asymmetric setup. If global growth slows or risk appetite weakens, the yen's safe-haven characteristics add a further layer of support.

Asian credit has carried an excess risk premium for most of the last decade — a product of historical episodes, persistent caution toward emerging markets, and a tendency to treat Asia as a monolith rather than a collection of highly diverse economies.

The fundamentals tell a different story. Many Asian investment-grade issuers run stronger balance sheets than comparable global peers. Management is conservative. Leverage is lower. Growth characteristics are attractive. Yet spreads widen when Middle East tensions flare, or when Treasury yields move — events that have no bearing on whether these issuers can service their debt.

That gap between market reaction and fundamental reality is where credit research earns its value. Our objective is straightforward: determine whether a borrower will continue to generate cash flow and meet its obligations. If the answer is yes, spread widening is an opportunity.

Discipline, however, cuts both ways. Globally, credit markets are displaying complacency — spreads remain tight against a backdrop of late-cycle conditions and rising geopolitical uncertainty. We remain selective, favouring quality and maintaining a cautious stance where spreads do not reflect the risks investors are actually taking.

The temptation in volatile markets is to act. But some of the most valuable investment decisions are the ones you hold — maintaining conviction when positioning pressures valuation, when narratives dominate fundamentals, when the market simply has not recognised what you can see.

The themes driving our positioning today — moderating US growth, a less dollar-centric financial system, normalising credit spreads — are structural. They will play out over years, not months. Patience in service of a thesis is not passivity. It is discipline applied at the right moment.

The rewards in investing rarely accrue to those who react fastest. They accrue to those who are right, and willing to wait.

Uncertainty is real — on rates, on geopolitics, on growth. But uncertainty is also what creates opportunity. Our positioning today reflects three views we believe the market continues to underappreciate:

1. US growth is weaker than it looks. Fiscal support and AI investment have flattered headline numbers. The underlying slowdown is real.
2. The dollar is more vulnerable than consensus suggests. A shift toward a less dollar-centric system is already underway. The yen is our preferred expression of this view.
3. Credit is too comfortable. Tight spreads in a late-cycle environment are a risk, not a reward. We are being paid to be selective.

These positions do not require us to forecast the future precisely. They require us to believe that prices and fundamentals eventually converge.

They always have.