Unsustainable Debt: Strategic Asset Allocation for a New Era

By: Dirk Hofschire, Irina Tytell

Unsustainable debt: Strategic asset allocation for a new era

With no simple solutions to stabilizing debt and policymakers facing complex financial-market challenges, investors may need to reconsider their approach to diversification across asset classes, geographies, and strategies.

Key Takeaways

• The rise in interest rates, coupled with persistently high fiscal deficits, is creating further upward pressure on U.S. government debt levels that are already at record peacetime highs.
• The upward adjustment in long-term Treasury bond yields puts them closer to what we would consider fair value, but if debt keeps rising over the medium term, yields may need to go higher to attract the more price-sensitive investors that now make up the vast majority of Treasury ownership.
• It’s unlikely that high enough real economic growth can be achieved to single-handedly level out the debt trajectory, implying policymakers may be increasingly motivated to attempt financial repression to hold interest rates at artificially low levels (even in an environment of persistent supply-side inflation pressures).
• These dynamics imply monetary and fiscal policies may be more challenged to respond to economic or financial shocks, and potential policy swings may generate bouts of financial-market volatility; but we don’t believe a catastrophic loss of confidence in the U.S. is the most likely scenario.
• Given the unprecedented backdrop, we believe prudent strategic asset allocation warrants maximum diversification: global assets denominated in non-U.S. currencies; hedges (commodities, real assets, TIPS, gold or bitcoin), and alternatives, including liquid alternatives.
   

Read More From Fidelity Investments

For important information, see the full linked content.
1215444.1.0
C71A2CF84AB4487FBD94A37B714D9E94
Past performance is no guarantee of future results.

This information is intended for the sole use of institutional investors. Retail investors and any other persons who are not institutional investors should not act or rely on this information.

Unless otherwise expressly disclosed to you in writing, the information provided in this material is for educational purposes only. Any viewpoints expressed by Fidelity are not intended to be used as a primary basis for your investment decisions and are based on facts and circumstances at the point in time they are made and are not particular to you. Accordingly, nothing in this material constitutes impartial investment advice or advice in a fiduciary capacity, as defined or under the Employee Retirement Income Security Act of 1974 or the Internal Revenue Code of 1986, both as amended. Fidelity and its representatives may have a conflict of interest in the products or services mentioned in this material because they have a financial interest in the products or services and may receive compensation, directly or indirectly, in connection with the management, distribution, and/or servicing of these products or services, including Fidelity funds, certain third-party funds and products, and certain investment services. Before making any investment decisions, you should take into account all of the particular facts and circumstances of your or your client’s individual situation and reach out to an investment professional, if applicable.

Registered investment products (including mutual funds and ETFs) and collective investment trusts managed by Fidelity Management Trust Company (FMTC) are offered by Fidelity Distributors Company LLC (FDC LLC), a registered broker-dealer. Fidelity Institutional Asset Management (FIAM) investment management services and products are managed by the Fidelity Investments companies of FIAM LLC, a U.S. registered investment adviser, or Fidelity Institutional Asset Management Trust Company, a New Hampshire trust company. FIAM products and services may be presented by FDC LLC, a non-exclusive financial intermediary affiliated with FIAM and compensated for such services.