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Capital Markets

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Categorized | Equities

Global investors dump bonds as post-Trump sovereign debt sell-off quickens

Posted on November 14, 2016

Global investors are dumping sovereign bonds, cutting their exposure to one of the best-performing asset classes of 2016, as the conviction that a Donald Trump presidency will deliver higher inflation dominates markets.

Yields on Treasuries shot higher in Asian trading, a move that has been sustained in early London trading on Monday and rippled out across the eurozone bond market. In Europe, yields on Germany’s 10-year debt are back at levels not seen since the summer, with those on Spanish, Portuguese and Italian bonds also higher. Yields move in the opposite direction to prices, writes Michael Hunter.

With Mr Trump pledging a major infrastrucure programme, tax cuts and protectionist policies, investors have rapidly concluded that will mean higher growth — and inflation — for the US economy over the next couple of years. The absence of inflation in the US since the financial crisis has helped fuel the great rally in bonds, allowing the Federal Reserve to keep interest rates near record lows.

“The prospect of US fiscal stimulus under the new government has increased our conviction that the US 10-year yield will reach 2.5 per cent in 2017, possibly faster than we earlier assumed,” said Francesco Garzarelli, co-head of European macro research at Goldman Sachs. “Whether Mr Trump’s presidency brings fiscal spending or protectionism, we think either scenario would boost inflation.”

In early London trading on Monday, the yield on the benchmark 10-year Treasury bond rose 12 basis points to 2.24 per cent, its highest level since January. The yield on 30-year government paper also jumped 12 basis points to 3.03 per cent, while five-year notes were yielding 1.66 per cent, up 13 basis points.

That, in turn, sent the dollar index up 0.5 per cent to 99.52, moving nearer the 100-point mark it last hit in December.

European bond yields also rose, with the yield on 10-year Bunds up 5 basis points to 0.35 per cent, the highest since early May. Spain’s 10-year debt yield is up 6 basis points at 1.55 per cent, with Portugal’s up 3 basis points at 3.53 per cent.

The post-US election equities rally is holding in Europe, even after a mixed showing in Asia. London’s FTSE 100 is up 1 per cent, with the Xetra Dax 30 up 0.8 per cent. The region-wide Euro Stoxx 600 is up 1 per cent.

Wall Street finished a strong week on a mixed note on Friday, as the S&P 500 slipped but the Dow Jones Industrial Average closed at a record high.