The proposed product is 100% Capital Guaranteed, designed to capitalize on movements in US long-term yields, regardless of direction, within an effective range of 3.5% to 6.0%. It offers protection against potential downturns in fixed income while enhancing capital gains in the event of a sharp decline in yields.
The recent election of Donald Trump has fueled inflation expectations, driven by anticipated policies that could trigger a mix of demand-pull, cost-push, and wage-driven inflation. Additionally, despite headlines about quantitative tightening, evidence suggests that financial conditions remain relatively loose in the US, contributing to the recent resurgence in US CPI (YoY) readings.
US 10-year yields have been rising, even as inflation normalizes from its 2022 peak. This is largely due to resilient economic growth and a reversal of expectations around future rate cuts. Yields have broken out of a long-term trend and could continue to climb above 5% as the US Treasury increases the duration of its funding mix.
Looking ahead, financial markets will require substantial liquidity as a significant portion of debt, issued during the era of ultra-low interest rates, matures this year. However, injecting more liquidity into the system could further elevate inflation expectations, pushing yields—and interest payments—higher. US financial authorities face a delicate balancing act, navigating between the risks of a financial crisis and the need to keep inflation in check.
Our base case is that inflationary pressures and robust economic growth will continue pushing US yields higher, especially if Treasury Secretary Scott Bessent shifts back to longer-dated Treasury securities as suggested. However, a significant credit event or external shocks to US economic growth—such as China’s debt deflation problem—could drive yields lower as investors seek safe-haven assets.