The All-Powerful Bond Market Is Getting Rocked by Trump
Bonds fall as investors see more stimulus under Donald Trump
By Christopher Whittall and Sam Goldfarb
A selloff in government bonds picked up more momentum Thursday, spreading across the world as investors reacted to the prospect of increased fiscal stimulus under a Donald Trump presidency.
Investors are now asking whether Mr. Trump’s victory marks a turning point for fixed-income markets that have been on lengthy bull run.
In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 2.083%, according to Tradeweb, up from 2.070% Wednesday. That came on the back of the biggest one-day jump in the 10-year yield in over three years Wednesday.
Yields rise when bond prices fall.
The yield on 10-year German government bonds rose to 0.274% from 0.177%, on track to close at its highest level since May, according to Tradeweb. Yields on British and French government bonds were also higher, following steep overnight falls in the price of bonds in developed Asian economies.
Government bond yields fell to record lows in the summer following Britain’s vote to leave the European Union, as investors bet on central banks keeping rates lower for longer. But yields have been edging higher in recent weeks amid better-than-expected growth and inflation data, concerns over less accommodative central-bank policy and signs that some governments are open to boosting fiscal stimulus.
While much of Mr. Trump’s policy agenda remains unclear, the president-elect has promised infrastructure spending and tax cuts. Political gridlock is likely to ease with Republicans holding the White House and both chambers of Congress, and reshaping the federal budget could be especially achievable thanks to a Senate rule that allows tax and spending changes without the need for a 60-vote majority.
Many analysts say that increased spending and tax cuts would boost bond supply, economic growth and inflation, potentially hurting fixed-income assets. Investors are particularly concerned that an increase in signs of inflation and growth could push the Federal Reserve to raise interest rates at a faster clip than currently expected.
If broadly adopted around the world, fiscal stimulus could also make it easier for central banks to scale back bond-buying programs, creating less demand for bonds and providing another reason for their yields to rise.
Already, the U.K. government has signaled that it intends to boost infrastructure spending, while some European governments have eased off on their austerity policies.
A 10-year Treasury yield below the Federal Reserve’s annual inflation target of 2% “only seems sustainable in the environment that we were in” with central banks “pumping in quantitative easing ad infinitum,” said Gene Tannuzzo, senior fixed-income portfolio manager at Columbia Threadneedle Investments “You needed a political regime shift to change that and we’ve kind of had that.”
Moves in the $13 trillion U.S. Treasury market will likely echo throughout global debt markets.
Treasurys are used as a benchmark to price the foreign-currency sovereign debt of emerging-market economies and for a lot of corporate debt. A rise in U.S. yields would mean higher funding costs for many of these borrowers.
Investors also look at rate differentials across developed markets, so a rise in Treasury yields naturally has a knock-on effect on German bunds. Higher U.S. interest rates would typically strengthen the dollar and weaken other currencies, easing financial conditions in those countries and reducing the need for central bank support.
Investors are already concerned over the future of the ECB’s massive bond-buying program, currently slated to end in March 2017, which officials are expected to clarify at the bank’s December meeting.
“Generally you’re going to see central banks spending 2017 either dialing down the accommodation they have in place now or talking about it, and that’s going to reprice bond yields higher,” said Bob Michele, global head of fixed income at J.P. Morgan Asset Management.
Still, some investors and analysts caution that bond yields could stabilize or decline as markets move past the initial surprise of the U.S. election.
There have been other times recently when investors predicted a lasting turn in bond yields that never quite happened. Yields moved sharply higher in the spring of 2015, led by the 10-year German bond yield, only to resume their descent later in the year.
A major pillar of Mr. Trump’s candidacy was skepticism toward trade, and a return of his antitrade rhetoric could cause a shift in sentiment.
Before taking an abrupt turn, government bond yields initially fell Tuesday evening as a victory by Mr. Trump became more likely, reflecting concerns about his potential impact on the economy.
“Our call for lower bond yields was based on the structural drivers, which include the debt overhang, demographics, productivity and wealth inequality,” said Steven Major, global head of fixed-income research at HSBC. “President-elect Trump will not be able to fix all of these in one go. Indeed, based on the campaign rhetoric he might well make some of these worse.”