DIARY OF A PORTFOLIO MANAGER

May 30, 2025

“Faster than a bullet from a gun
He is faster than everyone
Quicker than the blinking of an eye
Like a flash you could miss him going by”

-Faster, George Harrison

Good morning

Two weeks to go to the Canadian Grand Prix. I’m excited to go but less excited about ticket prices. The Netflix show “Drive to Survive” has driven the sport to an unprecedented popularity and now tickets are three to four times more than they were in 2018. The song referenced above was inspired by the 1979 Grand Prix season and dedicated to a driver that lost his life in 1978.

What’s been happening this past week?

Global equity markets continue to grind higher on the back of the trade war de-escalation. Moreover, a U.S. federal court recently ruled that President Trump had overstepped his authority in using an emergency law to impose tariffs, leaving investors and businesses questioning the implications. The U.S. administration has indicated it will appeal the court’s ruling and it appears too early to draw any real conclusions. U.S. stocks are close to where they began the year, whereas other stock markets are nearing or sitting at all-time highs.

What’s interesting, though, is what have been positive contributors to the S&P 500 performance in 2025.

Palantir – a Government contractor with an AI bent trading at 500x earnings (the market overall is 20x).

Philip Morris – a tobacco company which doesn’t really fit within our values.

Newmont – a gold company and while gold has been great in 2025, I do not look to the U.S. for resource ideas.

Some of you have asked about possible changes to tax on U.S. holdings. It is hard to build a strategy around something that hasn’t happened yet and may not happen. Also, I was waiting for thoughts by our strategy group. I now have it and I will post it to my Website shortly. If you want to see it in the meantime, please let me know by replying to this email.

As trade tensions ease somewhat, markets have increased their attention to movements in government bond yields. Yes, bonds. Not exciting until they are…exciting.

A brief primer on government bond yields

A government bond is a form of debt issued by sovereign countries to fund spending and cover financial obligations. For major developed nations, these bonds are often considered lower-risk investments since they are backed by countries with reliable revenues, political stability, and liquid capital markets. The yield on these bonds effectively be considered a proxy for the cost of government financing and the return demanded by investors to lend to that government.

The higher the yield, the greater return investors seek to lend to a government, and vice versa. These instruments can vary in maturity with differing factors driving yield changes. The yields on short-term government bonds (five years and less), are generally subject to a mix of market factors and central bank policy (interest rates), whereas long-term yields are driven more by broader market dynamics and fiscal stability. In a "normal" environment, markets tend to pay close attention to interest rate decisions by central banks (influencing short-term yields more) but in recent weeks and months, the focus of investors has been on the rise in longer-term government bond yields.

Long-term yields moving higher in many places

During periods marked by elevated uncertainty and investor concern, government bonds typically see their prices rise - and yields fall - as investors seek the stability and safety that can be offered by government bonds. That relationship has been put to the test this year. At the beginning of April when the U.S. government unveiled its reciprocal tariffs on a range of countries, longer-term U.S. government bond yields rose abruptly as the bond prices fell. And after a brief recovery, long-term U.S. government bond yields continued to climb higher, suggesting investors may be reassessing some of their views around the U.S. and its government.

It is tempting to think this is a U.S. issue, but it appears to be part of a global phenomenon. Despite the moves noted above, the U.S. 10-year Treasury yield has fallen modestly year-to-date, compared to sovereign yields in other major developed countries (Canada, Germany, Japan, Australia, and the U.K.) that have risen. Meanwhile, the rise in the 30-year U.S Treasury yield has been much more notable, but broadly in-line with the aforementioned countries. In fact, longer-term (30-year) government bond yields across a range of developed countries sit near or above levels that haven’t been seen in well over a decade. This suggests that investors are demanding more return than they have in the past for locking up their money in longer-dated loans to governments.

Investors increasingly focusing on the sustainability of government finances

There may be a variety of factors that are responsible for the recent move higher in longer-term bond yields. However, concerns over the trajectory of government finances appear to be playing some part. Debt levels across regions have been trending higher in recent decades. That had not been a big concern when interest rates were falling and were relatively low. However, the interest rate regime changed a few years ago and the cost of servicing debt has meaningfully increased as a result.

Budget deficits are also aggravating the issue as some governments continue to plan to spend more than they are earning, which will require them to raise even more debt in the future. The most recent example is in the U.S., where the government is trying to pass a bill that includes higher spending and lower taxes and will require another increase in the government’s so-called debt limit. Other regions are dealing with similar issues to varying degrees.

The unsustainable nature of governments’ fiscal trajectories is not new. It has been a concern on the minds of some investors for as long as we can remember. Yet that has not presented too much of a hurdle for governments (except the U.K. in 2022) and investors.

Nevertheless, at some point, investors may demand a return that is high enough that governments may be forced to take more decisive action to address their fiscal issues. It does not look like that time is nearby, but I remain mindful of it.

I hope that you have a great weekend.

Regards,