Is­sue of the week: the great bond Trump Dump

The US elec­tion has had a seis­mic im­pact on the bond mar­ket, with huge im­pli­ca­tions for us all

The Week Middle East - - City -

“As with Brexit, the con­ven­tional wis­dom about the im­pact of a Trump vic­tory on fi­nan­cial mar­kets has so far proved al­most 100% wrong,” said Jeremy Warner in The Daily Tele­graph. It was widely as­sumed that share prices would crash, the dol­lar would be mas­sa­cred and that in­vestors would flee to the safety of US Trea­suries caus­ing yields (which move in­versely to prices) to “plumb new lows”. In fact, the op­po­site has hap­pened – Trump’s win has prompted “a long-over­due bond mar­ket rout”. More than $1trn has been wiped off the value of fixed­in­come as­sets glob­ally since the elec­tion, said Harry Wil­son in The Times. They call it the “Trump Dump” – the week “the mighty bond mar­ket fi­nally be­gan un­wind­ing”. The big ques­tion is whether the crash is tem­po­rary or the start of a big­ger trend. Bond in­vestors know what Trump’s pro­posed cock­tail of tax cuts, spend­ing and dereg­u­la­tion means, said Nils Prat­ley in The Guardian. It will boost growth, at least for a while, and it will gen­er­ate in­fla­tion – and that is bad news for bonds. Hence the rise over the past week of what UniCredit has dubbed a “re­fla­tion trade frenzy”, as in­vestors switched en masse out of bonds and into equities. US ten-year trea­suries yield­ing 1.85% on the eve of Trump’s vic­tory hit 2.25% this week – “a huge move in such a short space of time”. Since the US bond mar­ket is ul­ti­mately the ref­er­ence point for all other bonds, the ef­fect has been global. Many have wel­comed the shift: af­ter years of near-zero in­ter­est rates, the re­turn of “more nor­mal yields” is “just what the world is cry­ing out for”. But we shouldn’t pre­tend “such fis­cal medicine is risk-free, es­pe­cially when taken in the dosage Trump in­tends”. The bond bub­ble “has been 30 years in the mak­ing and it won’t de­flate pain­lessly”. Even be­fore the elec­tion, the US Fed was pre­par­ing to raise in­ter­est rates next month, said Se­bas­tian Mal­laby in The Washington Post. Given Trump’s in­fla­tion­ary prom­ises, it will prob­a­bly want to hike them “a lot more” next year – and “Trump isn’t go­ing to like the consequences”. Higher rates mean a stronger dol­lar, which will cause US ex­ports to suf­fer and im­ports to jump – bad news for his blue-col­lar sup­port­ers. “The stage is set, in other words, for a clash be­tween the Fed and the new pres­i­dent.” If the re­sult is that the Fed looks “soft on in­fla­tion”, ex­pec­ta­tions could feed upon them­selves. “An­tic­i­pat­ing price rises, workers would de­mand more pay; an­tic­i­pat­ing pay rises, com­pa­nies would force up prices.” It is “too dark a prospect” to be­lieve that the US econ­omy could “spi­ral back to the stagfla­tion­ary 1970s”. But “the logic that takes us from here to there is chill­ingly straight­for­ward”.

Trump’s win prompted a bond mar­ket “rout”

Newspapers in English

Newspapers from UAE

© PressReader. All rights reserved.