Why Trump is a blow to bonds

Why Trump is a blow to bonds

Donald Trump has no government office experience and investment experts are widely expecting him to approach the presidency as a businessman.

As a result, many investment experts FTAdviser spoke to about the prospects for markets in the coming months tipped equities as likely to outperform bonds as Mr Trump takes up the title of 45th President of the United States.

Following his defeat of Democrat Hillary Clinton in the race to the White House he will govern with a Republican-dominated Congress for the first time since Bush’s administration in 2003 to 2007. 

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Mr Trump’s espoused fiscal policies are pro-growth. 

He is looking to:

1) Reduce corporate tax rates from 35 per cent to 15 per cent and simplify the tax code.

2) Allow repatriation of offshore cash through a one-off amnesty tax of 10 per cent to fund increases in fiscal spending. Cash abroad is estimated at $2.6trillion, which at 50 to 60 per cent repatriation could bring more than $150bn into the Treasury.

3) Spend $1 trillion over five to 10 years (a 17 per cent increase in US construction spend) in various infrastructure projects “rebuilding America”.

4) Increase defence spending by $55bn to $60bn per annum (around a 10 per cent increase) and force others (NATO members) to do the same by “picking up their share”.

5) Repeal Obamacare and increase cross-state competition for health care insurance, possibly positive for health care stocks but negative for managed care and insurers.

6) Roll back regulation. On the record, Mr Trump has said that he will repeal Dodd-Frank regulation which he believes is putting too many onerous restrictions on the banks. He has also said that he would like to re-instate the Glass-Steagall Act, separating Investment from Commercial banking, which could be a negative for certain institutions.

While Mr Trump has not been a fan of easy money policy, respect for the independence of the Fed and Janet Yellen’s leadership will be critical to investors. 

Ms Yellen’s term lasts until the end of January 2018 and Mr Trump said in a recent interview: “When her time is up, I would most likely replace her because of the fact that I think it would be appropriate.”

Nancy Curtin, chief investment officer of Close Brothers Asset Management, said Mr Trump’s policies - at least in the short term - are therefore likely to be viewed as bond negative.

She said yields might move higher on increased fiscal deficit spending and fears that this, and less immigration, might spark inflation. 

More growth and a steeper yield curve, however, would generally be positive for bank shares and higher yields should support the US dollar.

Jim Cielinski, global head of fixed income at Columbia Threadneedle Investments, agreed that although markets initially responded to Mr Trump’s victory in a classic “risk-off” manner, with safe-havens such as government bonds rallying and equities and credit moving lower, the response was very short-lived.