Underneath a seemingly resilient U.S. economy, Denver-based Janus Henderson Investors is finding signs of a potentially more fragile environment than many in financial markets realize.

Perhaps the most powerful signal that the U.S. economy faces headwinds can be found in the composition of the 10-year Treasury yield
which includes a “meteoric” rise in the inflation-adjusted or real yield. This real yield is at roughly 2.5% and represents the highest cost of capital U.S. businesses and households have faced in over a decade, according to Adam Hetts, portfolio manager and global head of multi-asset investing for Janus Henderson.

Source: Bloomberg, as of Oct. 31.

Real yields reflect the stated return on long-term Treasurys after adjusting for inflation. Higher real yields are good for savers and generally drive more investors into cash-like vehicles, while making riskier options like stocks less attractive. They’re a big factor behind the recent rise in the nominal 10-year yield, which burst through 5% in October and traded around 4.6% on Tuesday.

“Importantly, nominal yields have continued to climb even as inflation has subsided,” Hetts wrote in commentary distributed on Tuesday and posted to his firm’s website. “We interpret this as the recognition of a potential regime change in rates.”

Janus Henderson, which manages $308.3 billion in assets, isn’t the only big name to suggest the U.S. economy may be more fragile than it appears. In late October, Pershing Square’s Bill Ackman said the “economy is slowing faster than recent data suggests,” and Bill Gross, a co-founder of fixed-income investing giant Pacific Investment Management Co., said he foresees a recession unfolding by year-end.

In Janus Henderson’s case, the firm is recommending that investors “prioritize quality companies capable of steady cash flows and possessing sound financials as we enter the later stages” of the current cycle.

Here are more reasons why Hetts sees diminishing hopes for a soft landing by the U.S. economy and what investors can do about it.

Personal savings diminish

Source: Bloomberg. Data on personal savings is as of Sept. 30. Credit-card data is as of June 30.

“The bulge in personal savings owed to pandemic-era stimulus packages has largely run its course,” according to Hetts. “Furthermore, consumption has more recently been powered by credit cards. With borrowing costs having reset to decade-plus highs, we question American households’ desire — or ability — to keep racking up such purchases.”

Higher-for-longer rates in lots of places

Source: Bloomberg, as of Nov. 1.

Another reason to doubt the durability of consumption is “our long-held view that policy rates will remain elevated for longer,” with expectations for a pivot by central banks in 2024 becoming “tempered,” Hetts wrote.

“Compounding this risk is our belief that the U.S. economy — and others, for that matter — have yet to feel the full brunt of previous rate hikes,” he said. “Relative to other tightening cycles, we are still in fairly early innings, meaning the curtailment of demand that is the intention of hawkish policy is still working its way through the system.”

Reasons to stay defensive

Unlike fixed income, which has undergone repeated rounds of aggressive selloffs, low-quality corporate bonds have yet to reflect the myriad of risks posed by higher interest rates.

The spread on high-yield corporates and those of risk-free benchmarks “remains below long-term averages,” Hetts wrote. “Our concerns for this segment are compounded by the risk of a harder-than-expected landing, which could stress some of these companies’ leveraged business models.”

Source: Bloomberg, as of Oct. 31.

Equity returns, decomposed

The risks from higher interest rates and a possible harder-than-expected economic “landing” aren’t being spread out evenly across stocks, with mega-cap technology and internet companies holding up better than the broader market.

“Many of these business models, in our view, are well positioned to weather an economic downturn given their consistent cash flow generation, strong balance sheets, and exposure to durable secular themes,” Hetts said. “Value and more cyclically exposed names, on the other hand, could come under additional pressure in a slowing economy.”

Source: Bloomberg, as of Oct. 31.


Uncertainty over how long interest rates will stay elevated, coupled with geopolitical risks, are clouding the outlook, creating market volatility. That volatility and uncertainty is causing asset classes like stocks and bonds to occasionally move in tandem.

But bonds “have the potential to act as [a] ballast to riskier assets in a broad portfolio,” Hetts said.

On one hand, yields have reached levels that offer attractive income potential and possibly lower volatility if rates stay within current ranges. On the other, should a rapidly weakening economy force central banks to pivot, which is not Janus Henderson’s base case, “bonds’ potential for capital appreciation could offset losses in more cyclically exposed asset classes.”

In a nutshell, bonds are relatively more attractive, with the potential to produce income and “capital generation” in a risk-off scenario.

Source: Bloomberg, as of Oct. 31.

As of afternoon trading in New York on Tuesday, all three major stock indexes


were higher as fixed-income investors looking for stabilization sent 3-
through 30-year Treasury yields

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