Fixed Income Begins with the Currency

The U.S. Treasury has expanded its long-term Treasury buyback program at a time when federal debt has surpassed $40 trillion for the first time and the cost of servicing that debt continues to rise.

The buyback program helps improve market liquidity and smooth dislocations at the long end of the yield curve. It makes debt management more flexible, but it does not change the underlying reality: the stock of government debt continues to grow.

These developments shape the way I approach fixed-income investing. Yield matters, but an even more important question comes first: Which country's currency do I want to hold my wealth in over the next ten to twenty years?

Nearly two years ago, I began gradually reducing U.S. dollar exposure in client portfolios. First came U.S. Treasury securities, followed by U.S. equities. This was not because the United States ceased to be the world's largest economy. Rather, economic size alone does not guarantee the long-term resilience of a currency.

A government bond is, first and foremost, a loan to a sovereign issuer in its own currency. That is why my fixed-income process begins with assessing the quality of a country's public finances and its currency, not the size of the coupon.

Today's financial news cycle rarely encourages that perspective. Most discussions focus on Federal Reserve policy, inflation, or short-term market forecasts. Far less attention is paid to fiscal balances, sovereign debt dynamics, and a government's ability to meet its obligations without relying on ever-increasing borrowing.

Norwegian Krone

The Norwegian krone remains one of my highest-conviction long-term currency positions. Over the past two years, it has appreciated by approximately 8% against the U.S. dollar, but the price movement itself is not the reason for my investment.

The real story lies elsewhere. Norway transformed its oil and gas revenues into the world's largest sovereign wealth fund while maintaining one of the strongest sovereign balance sheets and a AAA credit rating. The krone may be volatile in the short run, but Norway's fiscal fundamentals remain among the strongest in the developed world.

Australian Dollar

The Australian dollar has appreciated by approximately 11% against the U.S. dollar over the same period.

Australia combines abundant natural resources, sound public finances, and deep economic ties with Asia. Iron ore, natural gas, copper, gold, lithium, and rare earth elements are all strategic resources for the global economy. Together, these strengths provide long-term support for the Australian dollar.

Euro and British Pound

Over the past two years, the euro has appreciated by approximately 13% against the U.S. dollar, while the British pound has gained around 7%.

One potential source of long-term support for the European economy could be the large-scale reconstruction of Ukraine, assuming favorable political conditions. European banks, industrial companies, construction firms, and insurers could become major participants in that process. Currency markets typically begin pricing in such structural developments well before they become visible in macroeconomic data.

Over the long term, the quality of a country's public finances often matters more than the current level of interest rates. Yields fluctuate with every economic cycle. Fiscal discipline, debt sustainability, and a government's capacity to honor its obligations are built over decades.

Andrievskii Verdict

When you buy a government bond, you are choosing more than a yield. You are choosing the sovereign that stands behind it. That is why my investment process always begins with the currency—not the coupon.

Aleksei Andrievskii | Advisory Board Member, Bendura Bank AG | Liechtenstein