Donald Trump’s surprising US election victory saw bond markets sustain a $1trn (£800 billion) loss as investors scrambled to reallocate out of fixed income and into shares.
The mass sell-off of bonds was sparked by investor expectations that Mr Trump’s plans to dedicate $500bn to infrastructure spending, and cut taxes, will lead to higher inflation and more growth in the short-term.
Although equity indices moved higher as a result of these expectations, bond markets moved in the other direction. In the days following the election result, 10-year US Treasury bond yields rose from 1.8 per cent to 2.2 per cent – a major hit to prices. Other countries’ government bonds followed suit, with 10-year UK gilt yields rising from 1.2 per cent to 1.4 per cent.
Hugh Grieves, co-manager of the Miton US Opportunities equity fund, believes the bond market “turned a corner” following Mr Trump’s election.
Mr Grieves said: “I think it is likely that bonds will probably continue to sell off from here, as it becomes clear that Trump will adopt a reflationary economic policy by borrowing and spending Reagan-style.”
He added: “The combination of the upward movement of US dollar and higher interest rates will not be great for indebted emerging markets.”
But much remains unknown about the exact nature of Mr Trump’s plans. Some believe he will alter or backtrack on promises that helped to build his base of supporters, including a protectionist stance on trade.
“[Trump] has talked about the 45 per cent tariff on Chinese goods; that is not going to happen.” said Mr Grieves.
“If [he] then puts this tariff on a country that supplies a huge part of [the US’] imports, that is also incredibly inflationary, and I’m not sure that this is what he wants to achieve.”
However, given the tenor of Mr Trump’s campaign, Mr Grieves notes that Trump is likely to stick to policies that put “America First”.
He continued: “I think people who are hopeful that he will put other people before America are deluded.”
kuba.shandbaptiste@ft.com
