A global bond market rout intensified yesterday while the dollar strengthened as investors bet that US president elect Donald Trump’s commitment to economic stimulus will herald
faster growth and the return of inflation.
Since Mr Trump’s surprise win in last week’s election, investors have begun to question long held consensus forecasts for subdued inflation and mediocre growth that underpinned a
rally in bonds over the summer. Yields on US, UK, German and Japanese government debt are now rising from record lows and fixed income investors have lost nearly $1tn since the
election.
“It is a sea change in thinking with Trump being elected,” said Margie Patel, a senior portfolio manager with Wells Fargo Fund Management. “We are in a new paradigm and it opens
the door to the possibility that we have seen the end of 35 years of declining rates. Could we be on the cusp of seeing rates rise? It’s too soon to say.”
The 30-year US Treasury yield jumped above 3 per cent for the first time since January before paring its losses while 10-year yields rose 4 basis points to 2.19 per cent, the highest
level since January. Ten-year UK gilt yields regained pre Brexit vote levels, while the yield on the German 30-year bond briefly moved above 1 per cent for the first time since early
May. Yields rise as bond prices fall.
The dollar index rose back over the 100-point mark it last hit in December. The dollar has also strengthened against its major rivals, with the euro falling 1 per cent to $1.0747 and the
yen 1.3 per cent weaker at ¥108.06 per dollar. The pound dropped 0.8 per cent to $1.2494.
The sell off has hit emerging markets and yields have soared in Mexico, Brazil and Argentina. Mexican sovereign dollar bonds maturing in 2026 slid below par for the first time since
February.
“Markets are betting that Trump will implement much of his domestic agenda of a fiscal boost and deregulation while ditching most of his international agenda of protectionism and
‘America first’,” said Holger Schmieding, chief economist at Berenberg.
Analysts at Morgan Stanley said “the realities of political dealmaking” meant investors might be in the dark for some time. Still, Mr Trump’s economic agenda was likely to provide a
needed fiscal boost to US growth, they said.
Despite the bond sell off, equity markets appear untroubled, with US investors now anticipating higher corporate profits. The S&P 500 slipped 0.4 per cent in midday trading after
recording its best week in two years. The Euro Stoxx 600 finished 0.3 per cent higher.
Exiting bonds is part of a broader strategy among investors of ditching low yielding assets and buying equities expected to prosper if Mr Trump delivers expansionary policies. But Vitor
Constâncio, European Central Bank vice president, warned that Europe and emerging countries could suffer from protectionism in the US.
“We should be cautious in drawing hasty, positive conclusions from those market developments,” he said. “So far, those developments point to a US rise in economic growth, but in the
context of an ‘America first’ policy.”
Michael Hunter and Michael Mackenzie
