A ‘Trumped’ Bond Market

With Trump’s protectionism, isolationism and inward focus intentions, the bond market is anticipating a chaotic mystery.

Republican candidate Donald Trump winning the US presidential election has rippled the US bond market, its size valued at about $32 trillion. With Trump’s promise to increase spending in infrastructure, to cut taxes and facilitate deregulation, bond yields have climbed unprecedented levels, rarely seen in the last three years. The ten year US treasury bonds jumped to 2.2% on 9th November from 1.6% in October 2016, indicating a massive sell-off rally assuming higher economic growth, but not without higher inflation. Investors are shifting toward equity investments to immediately ward off the end of fixed income bond instruments. The bond market represents fixed income investors, and with anticipation of rising government debts in the coming years following infrastructure investments, Trump’s influence has wiped off almost $1 trillion across global bond markets. The impact on bonds, although beyond perception, will not reverse previous positions anytime soon, indeed until Trump announces major investment decisions.

Trump is intending to focus all energy inward to build America with investments spanning across infrastructure, military, power, economic progress, deregulating multiple sectors, and leaving dormant Obama’s regime change and nation building policy. Protectionism is sensed in clear terms, and this would mean a larger domestic business push, backed by debt funds and equity investments. Though bond prices have fallen, subsequent and sustained domestic investments will boost the debt market to new highs expecting a good investible bond market. Trump will have to grandfather the inflation weapon that can strike badly if bond prices keep falling. Fixed income bond investors will benefit irrespective of the inflation impact, making such investments superfluous. With interest rates expected to move higher, controlling it with inflation will be a mountainous challenge for Trump, as his policies indicate a sub-welfare program revival clubbed with deregulation.

Global markets are assessing the impacts of Trump’s protectionism, especially China for whom Trump is voicing heavy import tariffs, thanks to millions of dumped counterfeit goods. Openly expressing his disinterest to be a part of the Paris climate agreement, of which Obama is an earnest supporter, Trump is giving glim intimation about the future of international climate change policies. Though every party to the Paris agreement is hailing Trump win and anticipating his subsequent change of opinion, US can only withdraw at the end of four years, intercepting with the next presidential election. With large investments being planned to be held back for domestic use, global markets may assume lesser US investments, as Trump plans to make America the center of investment attraction. His aversion to be a part of the TPP infers his dislike toward China, who, though not a part TPP, is expected to import millions of jobs.

Global bond and equity markets are bracing for the Trump-impact, and are getting ready for eventualities. Europe, especially, is worried about the NATO agreement and the pressure that it faces over increased military investments. Trump’s policies of protectionism and isolating the US to mind its own business may or may not have a permanent and significant international impact, depending on the trade values and trade deficits of countries in business with America. All these will have a slow yet irreversible impact on global stock and bond markets, in some cases may even leave its allies clueless. Is Trump trying to make a serious attempt to establish a workers’ state, the welfare state? Or is it a mask for something unusual? Time will tell.

 

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