USNov 11 2016

Why Trump is a blow to bonds

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Why Trump is a blow to bonds

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.  

Mr Cielinski said: “Risk assets rebounded and closed the day higher in most cases.

“Government bonds, on the other hand, reversed course and US yields moved materially higher.  

“The direction of travel in bonds was not surprising, but the ferocity of the reversal in some rates markets was noteworthy.”

After spending most of the last month trading in a range around 1.75 per cent, 10-year US Treasuries rocketed to 2.05 per cent on Wednesday (9 November).  

Gilts and bunds were better behaved on the day, ending only one to two basis points higher. 

In terms of the long-term prospects for bonds, Mr Cielinski said the result of Mr Trump taking charge is higher rates, especially for longer maturities and the yield curve steepened dramatically on Wednesday (9 November).  

While two-year Treasury yields were little changed it is worth noting that 30-year bonds were approximately 20 basis points higher.  

Mr Cielinski said: “This is a material steepening and reflects a belief that longer term rate and inflation expectations are too low.  

“Bond markets will exhibit correlation but greater divergence will be a key theme.”

Luca Paolini, chief strategist at Pictet Asset Management, said his view was a Trump-led administration is likely to have a negative effect on bond markets.

He said: “Emerging market (EM) debt looks particularly vulnerable. Higher US bond yields would be a negative, as would any further decline in world trade.

“But not all EM bond markets would suffer. Debt issued by commodity exporters may gain if raw materials prices rally in response to higher US infrastructure spending.”