US military action in Venezuela puts into sharp focus big structural themes for fixed income markets that have already been under way, argue Pictet Asset Management’s portfolio managers. In a nutshell, expectations are for further dollar declines and further upside for emerging market debt.
Q: Does the US intervention in Venezuela change the strategic landscape for investors?
A: What it doesn’t change is the ongoing drive to rebalance portfolios away from the US. For instance, the US represents 64% of global equity market capitalisation, but only about a quarter of world economic output. This rebalancing, ‘de-USification’ in the words of our managing partner Raymond Sagayam, is not an anti-US shift, but rather represents a dialling down of US exceptionalism and a recognition that there are attractive investment opportunities beyond the US's borders.
Q: What does this mean for the dollar and US Treasury bonds?
A: The dollar was down nearly 10% against a basket of currencies last year. Portfolio rebalancing suggests that will continue this year, particularly if investors become uneasy about the US’s volatile approach to international relations.
That weakness could be exacerbated if President Donald Trump succeeds in forcing the US Federal Reserve into cutting rates further than is warranted.
Easy monetary policy would tend to be positive for the front end of the US yield curve, but the level of the US term premium – the extra compensation investors demand for holding longer duration assets – looks too low. The risk is that a US policy mistake drives up longer dated yields, or in other words causes longer dated Treasury bonds to sell off. This, in turn, would be negative for equities, notwithstanding strong company fundamentals. Our base case is for US 10-year Treasury yields to stay below 5%, but higher yields remain a significant tail risk. US Treasury bonds will undoubtedly remain a core part of global portfolios. But with US foreign policy in flux, it also makes sense to hedge this exposure. One of the major ways of doing this is to allocate to gold, which is also a natural hedge for the dollar.
Latin American trade with US and China, as percentage of GDP
Source: CEIC, Pictet Asset Management. Data covering period 01.01.2000 to 01.08.2025.
Q: How might the dynamics change for investors in Latin American bonds and currencies?
A: Today's US foreign policy is more focused on North and South America than it has been for decades. The political pendulum in South America had already been swinging to the right, but that’s now being reinforced by US policy. Because right-leaning governments tend to be more market oriented, they are also generally positive for their countries' sovereign debt. The US’s involvement means that it is also inclined to offer more direct support for these economies – the decision to backstop the Argentine peso last year was a case in point. Of course, the risk is that this approach engenders moral hazard, but it also reduces the risk premium on these economies. At the same time, South American countries have been able to extract trade and other concessions from China in exchange for their raw materials, despite the Washington’s efforts to reduce China’s influence in the region (see chart).
This increases the attractiveness of Latin American hard currency sovereign debt relative to that of, say, Asian debt, where yields are already compressed. For local currency debt the case isn’t quite so clear – we expect the dollar to lose more ground against both Asian and Latin American currencies.
Q: And how might the changes in the global geopolitical landscape impact the investment thesis for emerging market fixed income more broadly?
A: The structural case for making allocations to emerging market bonds is very strong. Despite their rally last year, EM bonds are still relatively cheap. They are also likely to benefit from justified monetary easing. Local EM interest rates average around 5.5% in what is broadly a low inflation environment. We see potential for another 1.5 percentage points of cuts. Meanwhile, emerging market economies are growing ever faster compared to developed countries. And they’re deeply integrated into the AI supply chain, which means they benefit from the boom in this new technology.
