US bond yields may rise again in 3–6 months; slower AI spending could benefit India: 3R's Neeraj Seth

Neeraj Seth, Founder and CIO of 3R Investment Management, does not believe the worst of the US bond market sell-off is behind us. He expects the long end of the US Treasury yield curve to come under renewed pressure over the next three to six months, driven by the fiscal situation, sticky inflation and demand for capital.

Seth believes the recent easing in yields is temporary, largely reflecting the unwinding of short positions, and sees the US midterm elections and Israel’s political outcome as potential sources of market volatility.

On crude oil, Seth expects prices to soften if geopolitical tensions ease, noting that oil prices around $115 a barrel include a significant risk premium. He also sees AI as a long-term trend but expects the pace of investment to moderate, with hyperscaler earnings, capital expenditure projections and free cash flow in focus. A slower pace of AI investment, he believes, could be good news for India.

[faq type="interview" title="This is an edited transcript of the interview."][ques][/ques][ans][/ans][/faq][faq type="interview"][ques]Do you think the worst of the stress surrounding rising US bond yields is now behind us? For the last couple of days, we have been below the 5% mark on the US 10-year Treasury yield. Is that worry out of the way for now?[/ques][ans]I don't think so. I don't think the worst of the rising bond yields is behind us. I think there are two parts to it. From a Fed rate hike perspective, I think we've seen one hike. We'll probably see one or two more. But I think the concern I have is more around the long end of the curve, driven by the fiscal situation, sticky inflation and the demand for capital. So, I do still think that in the next three to six months, we can see the long end of the curve selling off again.[/ans][/faq][faq type="interview"][ques]So, you're saying this respite is temporary, right?[/ques][ans]I still think the respite in the 10- to 30-year part of the curve is temporary. A lot of this was an unwind. There was a maximum short position in US Treasuries that you saw from the CDAs, and there was an unwind in the last two weeks. I don't think this unwind is sustainable unless something changes on the fiscal front or the inflation trajectory looks better going forward.[/ans][/faq][faq type="interview"][ques]What happens after the elections?[/ques][ans]I'm still of the view that the election outcome is a risk factor for the markets. Hence, at this point, there will still be long duration in the US, more from a tactical standpoint. I do think you have more jitters and noise coming your way in the next couple of weeks from an election standpoint, and hence, you have some support for US rates at this juncture.[/ans][/faq][faq type="interview"][ques]From a global market perspective, if Netanyahu, Prime Minister of Israel, doesn't regain office in Israel, and if the midterm elections don't go in favour of the Republicans, as much of the feedback is suggesting right now, do you think that could lead to some de-escalation and a cooling of geopolitical tensions? The hope is that this could result in lower crude oil prices. Does that thought process deserve attention, or do you think the geopolitical tensions are far from over?[/ques][ans]It doesn't completely resolve the problem, but further escalation aside, if you get the combination of a US midterm election resulting in a Democratic sweep and the Israel election going against Netanyahu, I think you will get some respite. You will see the markets, especially in the Middle East, rallying on the back of it, and some softening in crude prices. I do think there's a fair bit of risk premium built into crude oil at $115. From a fundamental standpoint, I do expect it to soften if you get the result you mentioned.[/ans][/faq][faq type="interview"][ques]The entire artificial intelligence (AI) theme, any sharp views here?[/ques][ans]Simple view. It's a long-term trend which is going to continue. I do think the hyperscaler results will be absolutely critical this week, with a focus on capital expenditure projections, free cash flow, and one interesting fact is that, when you look under the hood, the AI jitters are there. I do think this is basically the market really questioning the return on invested capital (ROIC), and you are seeing that more in the neocloud world than in the equity prices of the hyperscalers. In fact, the credit default swaps (CDS) on the hyperscalers have been widening since January and have been widening much faster in the last month or two. So, I think the AI trend continues, but not at the same pace as we have seen over the last 12 months. Which, by the way, is good news for India, in my view.[/ans][/faq]

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