Global Bond Selloff Deepens On Trump Spending Plans

Global bonds selloff intensified on Monday as investors expected that President-elect Donald Trump’s fiscal plan will lead to faster U.S. growth and higher inflation.  The Yield on 10-year Treasury note rose 18 basis point to 2.3 percent in the early trading, its highest level since January. Treasury yields surged 37 basis points last week, marking its largest one-week gain in more than three years.

 “Trump has introduced so much uncertainty — around the fiscal outlook, the outlook for foreign demand for Treasuries given his protectionism and his views on China, uncertainty around the outlook for the Fed,” said John Davies, an interest-rate strategist at Standard Chartered Plc in London, which adjusted its forecast for 10-year Treasuries yields to 3 percent in the end of 2017 from below 2 percent previously. “There’s an uncertainty premium, rather than just expectations of much more Fed tightening,” being priced into Treasuries, he said. “We think there’s room for this to continue.”

 Trump prefer to use fiscal stimulus to boost economic growth. His policy is to increase infrastructure spending and tax cuts in order to boost growth and inflation. He also favors a higher interest rates. A higher inflation and growth may push the Federal Reserve to trigger faster hikes in the borrowing cost.  “Trump’s election has been viewed as a game changer, with the potential for fiscal stimulus, pro-business reforms and protectionist measures all being priced in to markets,” said Mitul Patel, head of interest rates at Henderson Global Investors.

Trump election victory make more investors favor stocks over bonds. The selloff wiped out about $1.2 trillion value in the global bond markets, while the equity market add $1 trillion and Dow Jones Industrial Average reached record high last week.  “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.

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