Daily Management Review

Bond Market Wacked for $1 trillion Loss by ‘Trump Thump’


Bond Market Wacked for $1 trillion Loss by ‘Trump Thump’
As bets on faster U.S. growth and inflation lead investors to favor stocks over bonds, the long-awaited end to the more than 30-year-old bull run in bonds could be marked by Donald Trump's stunning victory for the White House.
Noting the worst rout in nearly 1-1/2 years, on bets that plans under a Trump administration would boost business investments and spending while firing up inflation, a two-day thumping wiped out more than $1 trillion across global bond markets worldwide.
"We’ve had a sentiment shift in the bond market. We’ve seen it, too. People have already started reallocating out of bonds and into stocks,” said Jeffrey Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital, which has more than $106 billion in assets.
"The cracks have been forming for five years – we’re in this slow-grinding higher phase in yields,” he said.
With the 30-year yield posting its biggest weekly increase since January 2009, the stampede from bonds propelled longer-dated U.S. yields to their highest levels since January.
In the stock exchange, as the blue chip Dow Jones industrial average marked a record high close, it finished out its best week in five years on Friday.

While the 10-year British gilt yield climbed to its highest level prior to Britain's decision to leave the European Union on June 23, known as Brexit, the 10-year German Bund yield rose to its highest level in eight months.
Noting the steepest percentage drop since June 2015, which is equivalent to more than $1 trillion, the Bank of America Merrill Lynch's Global Broad Market Index fell 1.18 percent this week. Its U.S. Treasury index suffered a 1.91 percent decline on a total return basis, the biggest weekly drop since June 2009.
However not ready to throw in the towel are many investors who have loaded up on bonds on the belief of protracted easy monetary polices worldwide due to sluggish global economy.
To preserve the bull run for bonds, together with European and Japanese investors who are struggling with negative yields at home, they are counting on insurers and pension plans.
"Are we going to see a dramatic backup in yields? It's too soon to make a conclusion about that," said Mihir Worah, chief investment officer in asset allocation and real assets at PIMCO in Newport Beach, California, which manages $1.55 trillion in assets.
Compared with 2.11 percent at Thursday's close, Goldman Sachs and BAML forecast the 10-year U.S. yield could climb to 2.50 percent. The U.S. bond market was closed on Friday for Veterans Day.
Questions about whether the impact of Trump's win on financial markets will be similar to Brexit are being weighed by fund managers at top bond firms and analysts on Wall Street. Before recovering all the losses by mid August, European stocks sold off violently after the Brexit vote. Not unlike the waiting game on what Trump will actually do as president, there is a great deal of uneasiness as investors wait for details on how Britain will exit the EU.
"We need more of a cushion given the uncertainties. That's exactly what is being played out in the global debt market," said Mark Lindbloom, portfolio manager at Western Asset Management in Pasadena, California, which oversees $445 billion.
Tax cuts, trade restrictions and fiscal spending on infrastructure were among the important issues that Trump, who beat Democratic rival Hillary Clinton, campaigned on. The degree to which these promises would affect the economy and how these promises translate into policy still remains unclear.
Jumping to its highest level since July 2015 was the U.S. bond market's gauge on investors' 10-year inflation outlook since Election Day. A lift to the U.S. economy, which is growing at about 2 percent this year, would be provided as suggested by the bond and stock markets about whatever Trump may do with the help of a Republican-controlled Congress.
"It is a bit early to be calling the Big Rotation," said Art Hogan, chief market strategist at Wunderlich Securities in New York, referring to the idea that the three-decade-old rally in bonds is ending.
"We’ve been declaring that rotation for years. ... I’m afraid it’s hard to think about that happening in the current demographics we have. Baby boomers have more investable assets than millennials do."