Wall Street wary of bonds

Trump’s policies could drive growth and increase inflation

The post- election sell- off in the bond market and spike in borrowing costs have caught the attention of a wary Wall Street.

The rise in the yield on the 10- year Treasury note from 1.86% on Election Day to an intraday high of 2.31% Monday — its highest level of the year — is being eyed with caution.

The reason: Low interest rates have been a key driver of the nearly 8- year- old bull market in stocks.

Despite yields moving lower to 2.22% Tuesday, the latest spike in rates comes as the U. S. stock market is pricey by historical standards, making it vulnerable.

The recent surge in bond yields has been driven in large part by President- elect Donald Trump’s pro- growth fiscal plans, which include tax cuts and government spending on infrastructure.

Though these policy moves could lead to stronger economic growth, they could also result in higher inflation.

Bond investors fret over a possible interest rate hike next month from the Federal Reserve, which would mark the U. S. central bank’s first rate increase since December 2015. Stock investors who remained upbeat on equities, anticipating that the Fed would keep rates “lower for longer,” now grapple with the likelihood of less Fed stimulus.

“Since the regime change in Washington,” says Trip Miller, founder and managing partner at Gullane Capital, “there’s definitely a push for lower taxes and to prime the pump” as Trump looks to bolster the economy.

The trade- off is that pushes interest rates up.

“Equities can advance, but higher rates will be a challenge,” says Jack Ablin, chief investment officer at BMO Private Bank.

There’s “no need ( for stock investors) to panic,” Julian Jessop, chief global economist at Capital Economics, says.

He says the 10- year note yield “remains near historic lows” and back to where it was at the start of the year when investors feared China’s economy was imploding and oil prices were hitting fresh lows.

Another reason not to give up on stocks is the reason why bond yields are rising — “hopes that additional fiscal stimulus will boost economic activity,” Jessop says, adding that higher inflation might prove to be a positive as it “could be seen as a welcome shift away from the fears of deflation that have overshadowed the eurozone and Japan.”

Stocks could benefit from a continued sell- off in the bond market if investors shift cash from bonds to stocks, says Bill Hornbarger, chief investment officer at Moneta Group.

The mix of better growth and a slight uptick in inflation, he says, means stocks might not feel a stiff headwind from bonds until the 10- year Treasury hits 4% or 5%.