While much investor attention has been devoted to equity markets and currency fluctuations in the wake of the US election results, bond managers have noted an upward shift in yields for longer-dated debt, causing the yield curve to steepen.
Such a steepening suggests markets believe the new president could make the US long-dated debt a riskier asset. This is potentially due to expectations of fiscal policy increasing borrowing or a sharp rise in inflation due to protectionist trade policies touted by Mr Trump during the campaign.
Mr Trump has spoken both about funding infrastructure plans, which could boost growth and inflation, and also of wide-spread tax cuts, leading to a sharp rise in US government borrowing.
Jim Leaviss, head of retail fixed interest at M&G, said: “We have seen a relatively modest five basis points fall in the US 10-year yield. There has been more impact in the shape of the US yield curve. Longer-dated US Treasuries have sold off, with the 30-year yield five basis points higher.
“We know very little about Trump’s economic policies, but a fiscal stimulus through tax cuts and infrastructure spending seems likely. Government borrowing is likely to rise in the medium term, and that often results in yield curve steepening.”
Others, such as Lombard Odier global chief investment officer Jan Straatman, noted that the “high likelihood” of tax cuts at a time of full employment under the incoming president could prompt the curve to steepen further, but cautioned unfunded tax cuts would cause issues for the government and economy later down the line.
T Rowe Price portfolio manager Quentin Fitzsimmons said given the mix of Mr Trump's policies, the US could could end up with slower growth and marginally higher inflation. He said the upward pressure on long-term yields would be seen in the US, but also afar, given lower global growth from higher trade barriers.
"Bond markets globally are likely to see upward pressure on yields over the long term, a steepening of the yield curve. US protectionism would be very disruptive to investment flows and planning. We also should be really concerned about the risks to emerging markets and how they will behave, starting with Mexico," he added.
The rise in long-term yields, however, comes at a delicate moment for the Federal Reserve, which raised rates in December 2015 but has failed to enact any of the four rate rises originally anticipated by markets this year.
While the central bank was widely expected to raise rates in its meeting next month, investors have now downgraded their expectations, with the market-implied chance of a December rate hike falling from 82 per cent on Tuesday to less than 50 per cent at one point today.
Neil Williams, group chief economist at Hermes, noted that markets had been put on the “back foot” by the surprise election outcome, with any volatility likely to confuse central bank policy.
“Renewed volatility will now blur the path for US interest rates – but it still doesn’t point to an aggressive Fed,” he said.
Joe Amato, chief investment officer, equities, at Neuberger Berman, added: “Regardless of what the longer-term impact of his policies will be on the economy, risk assets are likely to respond with high levels of volatility in the shorter term as we try to figure out what those policies are and how many of them are realistic. A December rate hike from the Federal Reserve, priced as almost a certainty the day before yesterday, may now be off the cards.”
