Global bond sell-off intensifies as market mulls Trump’s fiscal plans

donald-trump-3-700x450Investors have continued to retreat from global bonds as the prospects for global growth and higher inflation were seen to have improved on the expectation President-elect Donald Trump will put plans for a fiscal boost into action when he comes to office.

The yield on the 10-year Treasury reached its highest level for a year today, up 0.09 per cent to 2.24 per cent, while the European benchmark German 10-year bund climbed 0.03 per cent to 0.18 per cent. 10-year UK gilt yields have continued to rise reaching pre-Brexit levels.

Tanguy Le Saout, head of European fixed income at Pioneer investments, says Trump’s protectionist stance could also boost US inflation.

“Bond markets are reacting to the increased likelihood that, having achieved a clean sweep of the Presidency, the Senate and the House of Representatives, Donald Trump can enact a fiscal stimulus package. This should boost growth and in turn inflation. Protectionist trade policies and tariff impositions could also boost US inflation.

“Last week the markets began to price in more inflation risk premium, especially in longer-dated bond yields. A fiscal package suggests increased spending, potentially bigger deficits and perhaps more bond issuance, which is another upward force on bond yields.”

Le Saout says historically US yields have had a contagion effect on European bond yields.

“If 10-year US bond yields rise by 40 basis points compared to European bond yields, that makes them more attractive to investors. Therefore, we historically have seen European bond yields rising in sympathy with rising US yields, although perhaps not by as much. But European investors may also start to factor in higher inflation in Europe as well, especially if the Euro weakens, [as it did last week].”