Market view: From the desk of CIO Eric Freedman

The Brazilian Steakhouse Allegory

I have a soft spot for college students who want to learn about our industry. Some of my interest may be nostalgic (“nostalgia” is the word that I misspelled in the fifth-grade spelling bee, how is that for irony?) and some may stem from having two recent college grads with one more about to enter college. I had hard time conceptualizing the investing and finance world as a college student; my dad was a small-town dentist and my mom was a volunteer coordinator at our public school, so Wall Street was further away than the five-hour car drive from our central New York state home may imply. I didn’t have a Finance internship and while I studied investing and corporate finance, as the great Ray Dalio said, I didn’t understand “how the machine worked” until I joined an investment bank before the dot.com era began. Thus, when a college student asks for industry perspective, I use analogies to explain concepts like market structure and what private credit is and how cryptocurrencies work. When I throw in an anachronism like “think of a portfolio like an investment manager’s greatest hits album,” puzzled looks prompt me to update the analogy; in the streaming music era, albums are more formalities than formats.

Composer Lin-Manuel Miranda famously read Ron Chernow’s Alexander Hamilton on vacation and turned Hamilton’s voyage from the Caribbean to foundational American politics into a hip-hop infused play. While significantly less visionary, I use a restaurant as the explanatory medium when describing the bond market to an outsider looking in. If you are hungry, now is a good time for a bite before you continue reading.

For the uninitiated, a Brazilian steakhouse or churrascaria is an all-you-can eat culinary delight where upon being seated, you are handed a two-sided card with two colors: green for “Sim, Por Favor” (yes, please) and red for “Ñao, Obrigado” (no, thank you). In many restaurants you first get a plate and visit a salad and potato station (pro tip: go easy on those fillers; you are after the meat). If your card reads green, you are soon encircled by well-dressed passadores offering various cuts of beef, chicken, pork and lamb. You select which cuts you like, and diners narrow their future selections after sampling and gauging their hunger. At some point, green flips to red (if even to signal a pause or “time out”), and one by one a table’s occupants move to a permanent red.

As a bond market investor, we have our own passadores offering every flavor of debt imaginable; more familiar flavors include governments like the U.S., Germany and China offering bonds backed by their taxing authority or deep state-owned coffers, corporations issuing bonds paid through diverse revenue streams, and municipalities promising creditor repayment through project-specific income or municipal taxes. We also see more esoteric issuers including structured finance (bond pools backed by mortgages, auto loans or assets like equipment), insurance-linked securities, real estate debt, private credit and other offerings passing by our table with frequency. Like a churrascaria patron, we decide if we are interested in each type of bond and how much we want on our plate.

U.S. government bonds have enjoyed choice cut status for a long time. Rule of law, military strength, stable government, population growth, and robust economic dynamics relative to other countries drove U.S. government debt demand across several investor types. However, at least one bond market patron group views Uncle Sam’s provisions less appetizing: foreign holders. As Figure 1 shows, foreign holders have dropped from owning nearly half of all U.S. Treasury securities in 2014 to just over one-third as of March 2025.

Sources: U.S. Bank Asset Management Group Research, SIFMA, Bloomberg; December 31, 2015 – March 31, 2025.

While investors don’t leave Yelp reviews on why they are buying or selling securities, market participants suspect a few variables envelop foreign holders’ preference shift. Increasing U.S. indebtedness is an oft-cited reason. The Congressional Budget Office March 2025 projections suggest federal debt as a percent of total gross domestic product (GDP) will exceed “any previously recorded level in 2029 and continuing to soar through 2055. It is on track to increase even more thereafter.” ¹ Lenders seek repayment, so increased obligations to other creditors can weigh on bond buyers. Since that projection preceded the Liberation Day tariff announcement and subsequent negotiations, an August 22, 2025 CBO update from Director Phillip Swagel highlighted that tariff revenues have increased beyond prior estimates but the CBO anticipates tariffs shrinking the domestic economy, and the CBO will update their estimates on September 12th. ² The White House projects deficit reductions of over $8.8 trillion based on tariffs’ impact coupled with the One Big Beautiful Bill Act (OBBBA). ³ Foreign bondholders may adjust their U.S. debt attitudes based on new trade dynamics and fiscal health outcomes, but shakier domestic finances prior to tariff changes have been an issue.

A more contemporary bondholder concern rests in central bank independence. Irrespective of one’s politics, historically markets appreciate separation from a central bank and other governmental entities. While Congress created the Fed, the White House nominates Fed chairs and Congress confirms them, Fed chairs promote autonomous, non-partisan responsibilities to the American people. University of Maryland economist Thomas Drechsel attempted to quantify personal interactions between Presidents and Fed officials using sources from 1933-2016, and as Figure 2 reveals, the Nixon and Ford administrations had unusually high interaction levels relative to other presidents. ⁴ If we were to extend interactions to include social media posts, press conference mentions and now construction site tours, the current administration’s numbers would likely exceed those of prior administrations combined. During an August 26th cabinet meeting where he discussed his intent to fire Federal Reserve Governor Lisa Cook, President Trump said “We’ll have a majority very shortly, so that’ll be great. Once we have a majority, housing is going to swing, and it’s going to be great. People are paying too high an interest rate. That’s the only problem with us. We have to get the rates down a little bit.” ⁵

Sources: EconoFact, National Archives and Records Administration, Presidential Library System.

As bond market churrascaria patrons, gauging our appetites is far more complicated than taste bud reactions or stomach space. The risk to any government, including the Federal Reserve, Treasury, Executive and Legislative branch equivalents around the world, is that diners stop demanding certain passadores’ bond issues. It could be because bond investors anticipate too much supply, they worry about independence across functional entities, or competing offerings look more appetizing. This analogy holds not just for a given type of bond or issuer, but for the bond market en masse. As macro investors, we have our choice of restaurant types; in addition to those serving bonds, we can visit public and private equity, commodity, currency and other purveyors to help fuel desired client outcomes. As we have detailed in prior communiques, how bonds act within an asset allocation context remains of utmost importance to us. We will continue to gauge bond market structure and appetite; should we see patrons flip their cards from green to red (in the form of challenged bond auctions or further drops in foreign bondholders as a percent of total) or actually leave the restaurant (investors shunning bonds for the properties they are supposed to retain), we will not be the last ones at the table.

Bonds serve a critical portfolio role: providing a total return consisting of both price and income while contributing idiosyncratic properties adding to overall diversification. In his seminal Pioneering Portfolio Management, the late Yale endowment Chief Investment Officer David Swensen emphasized traditional bonds’ role in providing deflation protection, or a portfolio offset should prices fall due to an economic slump or other macro event ⁶ Investors can get lulled into thinking past investment properties will perpetuate; plenty of examples exist where stocks haven’t acted like stocks and commodities haven’t acted like commodities, and the same can hold true for bonds should patrons say Ñao, Obrigado.

New trade dynamics, business and consumer tariff adjustments, government debt issuance and other consequential variables will be key in gauging markets in coming quarters. While we retain our glass half full perspective for diversified portfolios and see ample opportunities in many parts of the fixed income market, government bond market appetite remains foundational to consumer and business functioning. The Fed, Treasury, the White House and Congress all shape how appetizing U.S. bonds may be, so we continue to gauge Washington developments with an apolitical and market-driven lens.  In these complicated times, we remain focused on how market shifts may impact portfolios both structurally as well as the day-to-day tactical fray and we will continue to communicate our developing views.

Maybe a little more salad wouldn’t hurt. My Mom would be proud of me for admitting that.