Economist Andrew Hunt joined Director Jonathan Ramsay to discuss the surprising movements in bond yields and the potential regime change taking place in global finance that could have far-reaching impacts for investors.

Contrary to expectations of rising bond yields amid inflation fears and plans for increased U.S. debt issuance, yields have actually declined in recent weeks. Hunt attributes this decline to the U.S. issuing far less debt than anticipated since the inauguration. However, this fiscal tightening has come at a cost, economic growth has plummeted as the deficit reduction sucks money out of the economy.

Meanwhile, the rapid growth of crypto assets and stablecoins is introducing a new dynamic that could help fund U.S. deficits. If crypto markets add $1-1.5 trillion in capitalisation and stablecoins reach $500-750 billion in assets, that represents significant new demand for U.S. Treasuries to back those stablecoins. This Crypto Collateral is a form of "Quantitative Easing (QE) several steps removed" that could restart credit expansion. 

However, the U.S.'s protectionist trade policies risk driving foreign investors away, potentially triggering a wave of capital repatriation—where investors pull money back to their home countries, destabilising U.S. financial markets. Countries like Australia, Japan and much of Europe with positive net international investment positions could see funds flow home. This is already evident in the 10-15% gains in European equities compared to declines in U.S. markets year-to-date.

According to Hunt, most financial relationships and correlations investors have relied on since 1985 could get reversed in a world of capital repatriation. The U.S. in particular, which has relied on enormous capital inflows to fund its trade deficits, could face a reckoning.

Hunt warns that the global financial system may be approaching a turning point, with risks ranging from reduced cross-border investments and rising real yields to a potential crisis-level repatriation of capital, similar to the upheaval seen in 2008. Navigating this uncertain environment as an investor requires carefully managing risk - matching assets to liabilities, not straying too far from benchmarks, and reacting to events in a measured way.

If major repatriation occurs, Hunt anticipates it will be accompanied by massive monetary easing as countries from Europe to Japan to the U.S. engage in QE to offset currency appreciation. This could sow the seeds for an inflation spike down the road in 2026.

In the meantime, Hunt advocates identifying promising micro themes and single-stock opportunities rather than relying on indices. He points to historical parallels in the 1970s, where stock-picking in the right countries and sectors was key to investment success during a similarly unstable macro environment.

The global investment regime appears poised for a seismic shift - one that could diminish the role of the U.S., disrupt long-standing relationships between assets and open up new pockets of risk and opportunity. Investors would be wise to observe carefully and be ready to adapt to a rapidly changing world.