Brij Khurana, Fixed Income Portfolio Manager, Wellington

PodcastAlpha ExchangeBrij KhuranaOct 1

Khurana argues that U.S. inflation is driven more by fiscal and wealth effects than wages, while investment has become less responsive to interest rates. He sees risks in AI-related financing and borrowing, including the potential for heavier issuance to weaken bonds' role as a hedge. He also discusses rate repricing, regional bond markets, and the conditional appeal of nominal versus inflation-linked bonds if growth slows.

Fixed Income Inflation Interest Rates

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Key Takeaways

Khurana says the November election could be a bond-market catalyst: after front-loaded fiscal spending under the One Big Beautiful Bill, markets have historically been quick to price in less stimulus if divided government follows. He expects concern about further Fed hikes slowing growth could emerge a few months after the election, although markets were not yet pricing it in.

Khurana argues that business investment has become less reliably responsive to interest rates since the 2000–01 internet-bubble crash. He says post-financial-crisis low rates encouraged stock buybacks and private-equity consolidation, while post-COVID government borrowing and consumption-focused stimulus further weakened the investment-rate link—a dynamic he says contributed to central bankers cutting rates too low after missing inflation targets.

Khurana characterizes U.S. inflation as primarily wealth- and fiscal-driven rather than wage- or demand-driven: he says core CPI excluding shelter was close to 2% over the past three years and cites weak labor supply and demand. He also points to residual price pressures in shelter, medical care, restaurants, and travel, while noting that baby boomers hold close to 50–60% of U.S. wealth and roughly 70–75% of their assets in stocks.

Khurana says markets were pricing close to 100 basis points of Fed hikes, toward a policy rate near 5%, while Australia and New Zealand faced rising unemployment and temporarily sticky, supply-driven inflation. He argues that tighter policy would meet a weaker U.S. consumer-balance-sheet backdrop than in 2022–23: oil was weighing on real wages, which were negative year over year excluding transfers, while many homeowners’ low fixed mortgage rates make consumption less sensitive to rate changes.

Khurana attributes the recent rise in yields mainly to Fed repricing and an AI-related real-growth story, rather than Treasury supply or inflation expectations; he says inflation expectations remain low on the assumption that Fed credibility will return inflation to 2%. He estimates the 10-year/10-year forward rate at roughly 6.2%, nearly 100 basis points above his implied fair-value range of 5% to 5.25%, while the host notes that the five-year real yield had risen about 130 basis points over six months.

GEO-POLITICS

Election Catalyst — Khurana says U.S. fiscal spending was front-loaded in the first half of the year because of the One Big Beautiful Bill. If divided government follows the November election, he argues, bond markets have historically been quick to price in less stimulus, making the election a potential market catalyst.

“Even in The US, I think the other part of that story has been fiscal and fiscal spending has been so front loaded because of the one big beautiful bill…”—

TECHNOLOGY

Circular AI Financing — Khurana says some AI capital expenditure and chip-financing deals look circular, reminding him of financing before the global financial crisis. He sees this as a concern about the structure of lending behind some AI investment.

“That was where the Feet piece comes in is that I think that the AI CapEx spending, I think some of it is starting to look a little bit circular…”—

ECONOMY

Investment Cycle — Khurana argues that, over roughly the past 25–30 years, nonresidential investment has behaved more like its own cycle. He dates the shift to the 2000–01 internet-bubble crash, challenging the assumption that lower interest rates reliably stimulate business investment.

“And then what I'm really talking about is non residential investment which should be the thing that is very correlated with interest rates and probably historically it has…”—

Cheap Credit — Khurana says that after the global financial crisis, nonfinancial corporations borrowed to buy back stock, while private equity used low rates to merge companies. He argues these developments reduced competition and the economy's structural real rate.

“After the GFC, you didn't see a lot of borrowing in the economy, but you actually did see it from non financial corporates who used it to buy back stock…”—

Post-COVID Borrowing — Khurana argues that after COVID, government borrowing replaced private-sector borrowing, and fiscal stimulus boosted consumption rather than long-term real investment. He says the weak link between investment and interest rates contributed to central bankers cutting rates too low when they missed their inflation targets.

“And then really after COVID, you went from the private sector borrowing, you went to the government borrowing because there wasn't a real cost to having massive fiscal stimulus that…”—

MARKETS

Five-Year Real Yields — The host says the five-year real yield rose about 130 basis points over six months, one of the largest increases over that horizon. The host also notes that the five-year TIPS real yield was 3.5% when the data begin in 1995 or 1996.

“And it's been about 100 basis points over the last six months increase…”—

QE And Bond Yields — Khurana argues that QE may push bond yields higher if investors see a larger central-bank balance sheet as increasing the risk of debt monetization. Investors may buy reflationary hedges instead of bonds, he says, so the balance-sheet channel alone does not explain bond-market behavior.

“And so the argument was is that as the Fed was doing so much QE, they were bringing down yields. It's almost the opposite has happened…”—

Yield Repricing — Khurana attributes the recent rise in yields mainly to Fed repricing and an AI-related real-growth story, rather than Treasury supply or inflation expectations. He says inflation expectations are very low and reflect an assumption that Fed credibility will return inflation to 2%.

“I actually do think the rise in yields recently has been a repricing of the Fed, that it's not about treasury supply as much people want to think it is…”—

FORECASTS

Bonds In Slowdowns — Khurana says that if growth slows, investors would have wanted nominal bonds rather than inflation-linked bonds. He presents their relative appeal as dependent on the growth scenario.

“If we do go through a growth slowdown, you're gonna have wanted to own nominal bonds instead of inflation linked bonds.”—

Wellington Rates Strategy

Khurana describes his unconstrained bond strategy and explains why the historic relationship between interest rates and nonresidential investment has weakened.

Low Rates And Financialization

Khurana argues that low rates often failed to stimulate productive investment while encouraging leverage, financialization, and borrowing that shifted toward households, companies, and government.

QE And Bond Yields

Khurana says QE affected U.S. bonds through concerns about debt monetization and demand for reflationary assets, while monetary policy had different effects in bank-led Europe.

Wealth-Driven Inflation

Khurana argues that U.S. inflation is now driven more by fiscal and wealth effects than wages, with strong asset prices feeding persistent services costs.

Global Tightening Risks

Khurana sees substantial rate hikes priced across major economies and warns that tighter policy, oil-driven pressure on real wages, and fading fiscal support could slow growth.

Yield Curve Repricing

Khurana says forward curves imply eventual inversion and views the recent rise in longer yields mainly as a repricing of Fed policy and AI-related growth expectations.

AI Financing Risks

Khurana flags circular AI financing and bank lending to nonbank financial firms, arguing regulators should consider capital requirements that balance loan risk with credit growth.

Global Bond Opportunities

Khurana favors markets where aggressive hike expectations may be misplaced and sees structural potential in emerging-market local bonds, supported by high real rates and improving fiscal and political conditions.

China And Japan Bonds

Khurana sees limited value in low-yielding Chinese bonds amid household deleveraging and says Japan’s carry-trade dynamics now affect U.S. equities more directly than bonds.

UK And French Debt

Khurana sees better support for UK bonds than during the 2022 turmoil, while France’s wider spread reflects weaker debt metrics but not necessarily extreme euro-exit risk.

Inflation-Linked Bond Value

Khurana favors inflation-linked bonds for their high real yields and limited inflation compensation, while noting nominal bonds could outperform if growth slows.

Why TIPS Look Cheap

Khurana attributes low breakevens to illiquidity, disappointing 2022 returns, and weak investor demand, but sees attractive carry for investors with longer horizons.