SUMMARY
Geopolitics is once again unsettling investors amid attacks on a vital maritime trade route. But history shows that these episodes seldom have enduring effects on markets, so we reiterate our positive investment case.
Since peaking over 5% in late October, 10yr US Treasury (UST) yields have fallen on lower inflation readings and a less hawkish Fed.
After the New Year, bullish economic data and a realization that a March rate cut was uncertain initiated market reversals. The S&P 500 fell roughly 2.5% the first week of 2024 before closing at a record high Friday. Bond yields climbed higher as the 10yr UST traded back above 4%.
The narrow pass at Bab-el-Mandeb in the Red Sea is now blocked as violence has erupted in the region. Houthi rebels in Yemen have attacked maritime vessels passing close to shore. In response, the Combined Maritime Forces (led by the US and UK) have undertaken air and missile strikes in Yemen.
As a result, the number of vessels transiting the strait has plummeted by more than 50%. The owners of more than 2,300 merchant vessels restricted travel and insurers boosted rates 10-fold or stopped writing policies altogether.
The initial market response to the October 7th Hamas attack was a large increase in both Baltic dry and wet shipping costs. Subsequently, the dry container shipping prices rapidly normalized, while the dirty wet shipping of crude oil have continued to rise. At the same time, the price of Brent crude oil has actually fallen since the later Red Sea conflicts erupted.
Despite the importance to global trade of the Red Sea, we expect the final impact on consumers and markets around the world to be modest, in the aggregate. As we have written before, most geopolitical crises do not have durable market impacts including, for now, the war in the Middle East.
The combination of both strong economic data (higher long-dated yields) and Fed easing (lower short-rates) has driven a bull steepening of the US Treasury curve that has been inverted since mid-2022. In fact, US 2s10s curve traded this week at the “least inverted” it has been for the entire cycle. This is a very welcoming sign and is consistent with the guidance in our 2024 Wealth Outlook regarding moving out of money markets and into the intermediate part of the yield curve.1
Citi Wealth’s Global Investment Committee (GIC) holds a 12% allocation to both intermediate corporates and securitized credit. These ~4-year duration assets are yielding about 5-6% on average.
