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

“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”.