KKR Questions US Bonds as Risk Hedge Amid Market Shifts

Kohlberg Kravis Roberts (KKR), a prominent asset manager with over $360 billion in assets under management, has expressed concerns about the effectiveness of US government bonds as a hedge against risky assets. According to a recent report, KKR has indicated that traditional safe-haven assets, such as US Treasuries, are no longer providing the same level of protection they once did. This shift in perspective comes at a time when investors are increasingly seeking alternative strategies to manage risk in their portfolios.

The changing dynamics in the financial markets have led KKR to reassess the role of US government bonds. Historically, these bonds have been considered a reliable hedge against market volatility and economic uncertainty. However, recent market conditions and economic policies have altered the landscape, making it necessary for investors to explore new avenues for risk management. KKR's stance reflects a broader trend among institutional investors who are looking beyond conventional wisdom to navigate the complexities of the current economic environment.

Henry McVey, KKR’s head of global macro and asset allocation, stated that during periods of market stress, government bonds are no longer fulfilling their role as the ‘shock absorbers’ in a traditional portfolio. Many chief investment officers (CIOs) are considering moving assets out of the United States toward other parts of the world. McVey also noted that the US dollar is about 15% overvalued, and a weaker greenback is likely approaching as the new trade agenda develops.

McVey further elaborated that the traditional role of U.S. government bonds in many global portfolios will become more diminished. The reality is that the US government is burdened with a large fiscal deficit and high leverage, and its bonds are likely over-owned by many global investors who have benefited from both positive interest rate differentials and a strong US dollar. This perspective is supported by Moody’s recent downgrade of America’s credit rating from AAA to AA1, citing the country’s soaring national debt and interest payment ratios that exceed those of other countries with the same credit rating.

Moody’s attributes the downgrade to the United States’ soaring national debt and interest payment ratios that exceed those of other countries with the same credit rating. The agency expects budget flexibility to remain limited, with mandatory spending, including interest expense, projected to rise to around 78% of total spending by 2035 from about 73% in 2024. If the 2017 Tax Cuts and Jobs Act is extended, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade.

This shift in perspective from KKR and the broader investment community underscores the need for a more dynamic and adaptive approach to portfolio management. As the global economy continues to evolve, traditional investment strategies may no longer be sufficient to mitigate risks effectively. This realization has prompted KKR and other asset managers to consider alternative investment vehicles and risk management techniques. The shift away from US government bonds as a primary hedge against risky assets highlights the importance of diversification and exploring new opportunities in the current economic environment.