What do Bond fund managers think of President Elect Trump?

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The bull run of the bond market came to its end as soon as Donald Trump was elected the 45th President of America.  It has been a stupendous bull run for three decades that came to an end once the results were out. It is interesting to look at some figures that would illustrate the impact. How quickly the market reacted to the election of the new President is also noteworthy. While the counting of votes was still in progress, the yield of the ten year Treasury bond made a massive jump from 1.73% to 2.36% at a certain point in time. The two year bonds were also identically affected as yields headed to 1.12% from its earlier position of 0.78%. As yield moved upwards, bonds prices started dipping thereby signalling the end of the extended Bull Run that it had enjoyed.

The reason behind

Trump has been able to make people believe in the measures that he is likely to take for stimulating the finances. His promise of infrastructure development and tax cuts; no matter how concerning it may be for conservative economists, has been accepted by the market as a positive sign of financial stimulus that can make the economy grow. The eventual results are to be seen in three areas –

  • Faster fiscal growth.
  • The monetary policy will regain normalcy as interest rates are seen to rise above the present 0.5%.
  • Inflation is likely to increase in the mid-term.

Taken together, all these contribute to higher yields of bonds. And this is what has been seen to happen.

Bonds are out of favour in America

During 2016 amid the Chinese slowdown, there were fears of deflation that have gradually faded away giving a boost to the markets. Investors are now ready to reap the benefits of an inflationary market and there is no reason why they should be attracted to government bonds. This aversion is further accentuated by negative yields of several trillion dollars in bonds.

Its better elsewhere

What has been discussed till now is the scenario in the U.S. where the bond market has been severely affected by the election of Donald Trump as President. However, the picture is somewhat different in other bond markets. In Germany, yields are still as low as 0.2% for 10 year bonds and out from the negative zone where it was earlier. The gap between the bond markets in Germany and America is now at it’s widest ever since the eighties. The bond yields for 10 year bond in Japan is close to zero and in Britain it is hovering at the levels where it was at the time of Brexit. The yields in Britain and Japan are likely to remain steady at these levels as the central banks continue with bond purchases.

Bond investors can learn a lesson from the market reaction that has happened. Political risk has to be factored in investment decisions, something that the investors in the developed countries had not been used to. Donald Trump has set new norms for investment that investors have to adapt quickly.

 


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