On Feb 9th, I wrote a piece explaining why we were overweight emerging market bonds relative to developed world bonds. It was titled “Lend Money to Countries That Aren’t Broke” and you can read it here if you missed it the first time. That piece aged well - since that day, the largest EM bond ETFs have outperformed by about 500 bps, which is to say they lost about 500bps less since all global bonds got bludgeoned (except China). Money you don’t lose also buys groceries.

It’s time to update that view, but before doing so it is worth saying a word about diversification. Diversification always makes sense…except in a few cases where it doesn’t. When I lived in Beijing, sometimes I would be socially obligated to eat at a restaurant that was, um, maybe not up to code. In that setting, family-style dining - i.e. a diversified set of dishes - was a complete disaster. It only takes one bad dish to blow you up with food poisoning, and all you are doing by diversifying is increasing the surface area of your exposure.

Which brings us to our view of bonds today:

The US stock market is pricing in that we are on the brink of an era of magical abundance, where each of us will have access to infinite super-intelligent robots meeting our every need. If it turns out that we only have access to a finite number of reasonably-intelligent robots meeting most of our needs, it will be a downside surprise and equities will suffer.

Given how easily stocks can disappoint, holding bonds is a critical part of a portfolio. Unfortunately, the macro backdrop for bonds is awful. We think the macro is likely to swamp most country-specific differences and make all bonds do poorly together…except…

The US is - by a large margin - the most willing and most able to cap their bond yield. Bessent has already intervened in the market in relatively small scale, but our strongly-held view is that he was just warming up. He has his job as long as his boss lets him keep it, and his boss is an interest-rate obsessed former real estate guy. There is no way he sits on his hands while the US 10 yr goes to 6%. If he does, he’ll be fired and the next guy will do it.

For us, this gives US bonds a much more favorable payout profile than any other country…so much more favorable, that all things considered we think the optimal allocation to non-US bonds is 0.

In the 6 years we’ve been managing others’ money at Avos, we’ve never come to close to having an asset class 100% concentrated in a single country. We live in interesting times.