Daily Management Review

Trump Seen as Game Changer, Bonds Plunge by $1 Trillion This Week


Trump Seen as Game Changer, Bonds Plunge by $1 Trillion This Week
As U.S. President-elect Donald Trump’s policies are seen boosting spending and quickening inflation, more than $1 trillion was wiped off the value of bonds around the world this week.
Bank of America Merrill Lynch data show that pushing the week’s total above $1 trillion for only the second time in two decades, the capitalization of a global bond-market index slid by $450 billion Thursday, a fourth day of declines. In the same period, Global stocks gained $1.3 trillion. Jumping the most this week since January of 2009 were yields on U.S. 30-year bonds, which are more sensitive than shorter maturities to the outlook for inflation.
While benchmark German 10-year bunds declined for a fifth day, pushing the yield to the highest since February, with the yield on Italian 10-year securities climbing above 2 percent for the first time since September 2015, European government bonds extended their selloff Friday.
“We do view the election of Donald Trump as a game changer. The strong bias toward fiscal expansion and inflationary policy represents a stark change to the malaise of recent years. This opens the door for the Fed to hike in December, but also more quickly in 2017 and 2018 than previously expected,” said Adam Donaldson, head of debt research at Sydney-based Commonwealth Bank of Australia.
Slumping by $1.14 trillion this week to $48.1 trillion was the market value of Bank of America’s Global Broad Market Index, which tracks more than 24,000 bonds around the world. In June 2013, when the Federal Reserve under Chairman Ben Bernanke was threatening to reduce debt purchases, leading to a bond selloff that became known as the “Taper Tantrum” was the only previous week it fell by more than $1 trillion.

What promised to be a bumper years for bonds is in danger of evaporating. According to the Bloomberg Barclays Global Aggregate Treasuries Total Return Index, paring this year’s gain to 6.3 percent, U.S. government securities handed investors a loss of 2.9 percent this week. According to data compiled by Bloomberg based on futures, up from 76 percent odds at the end of last week, there’s an 80 percent chance the Fed will increase rates at its Dec. 13-14 meeting.
After Trump’s triumph boosted the view that he will ramp up spending and potentially widen the budget deficit, stoking inflation, global bonds tumbled. Waning prospects for the European Central Bank to boost its stimulus as consumer-price growth accelerates were reflected by rising yields in Europe.
“Inflation is rising worldwide, and we see the Fed hiking interest rates next month. The election has just added to that,” said Birgit Figge, a fixed-income strategist at DZ Bank AG in Frankfurt.
Demand for U.S debt is waning. Noting the lowest bid since February this year, a $15 billion auction of 30-year bonds Thursday drew bids for 2.11 the amount available. And noting the least since 2009 was a sale of 10-year notes on Wednesday had a bid-to-cover ratio of 2.22.
“There are many risks with Trump still somewhat of an unknown. The risk is that U.S. long-end yields will rise further and the curve will continue to steepen as the market grapples with the prospect of increased fiscal spending,” said Alex Stanley, a senior interest-rate strategist in Sydney at National Australia Bank Ltd.