Trump reflation bites into bull bond market

Global index drops US$1.7T in November

The 30-year-old bull market in bonds looks to be ending with a bang.

The Bloomberg Barclays Global Aggregate Total Return Index lost four per cent in November, the deepest slump since the gauge’s inception in 1990. Treasuries extended declines Thursday as OPEC’s agreement to cut oil production added to prospects of higher inflation. The reflation trade has been driving markets since Donald Trump’s election victory due to his promises of tax cuts and US$1 trillion in infrastructure spending. All this has prompted investors to dump debt that was offering yields near record lows.

Calling an end to the three-decade bond bull market is no longer looking like a fool’s errand: the Federal Reserve is expected to raise interest rates again — and do so more often than once a year — inflationary expectations are climbing and there are hints global central banks may buy less sovereign debt going forward. Investors pulled US$10.7 billion from U.S. bond funds in the two weeks after Trump’s victory, the biggest exodus since 2013’s “taper tantrum,” while American stock indexes jumped to records.

“The market has moved with remarkable swiftness to price in the anticipated reflationary impact of a Trump administration,” said Matthew Cairns, a strategist at Rabobank International in London. “This has, in turn, prompted a notable rotation out of fixed income and into equities.”

Still, Cairns cautioned the moves are “remarkable given the distinct lack of clarity as regards what policies the president-elect will actually pursue.”

November’s rout wiped a record US$1.7 trillion from the global index’s value in a month that saw world equity markets’ capitalization climb US$635 billion.

The yield on 10-year U.S. notes rose 56 basis points in November, the biggest jump since 2009, and was at 2.45 per cent as of late morning in New York, after reaching the highest since July, 2015.

The average yield on the Bloomberg Barclays Global gauge climbed to 1.61 per cent on Nov. 23, after touching a record low of 1.07 per cent on July 5.

“A lot of people are beginning to think that it is the end of the bull rally,” said Roger Bridges in Sydney at Nikko Asset Management’s Australia unit.

U.S. 10-year yields may rise to 2.7 per cent in January, Bridges said.

Bonds will be especially vulnerable if the European Central Bank discusses reducing its debt-purchase program at its Dec. 8 meeting, he said. The New York Stock Exchange. Investors are dumping bonds and putting their money into stocks.