From Charlie Morris – The Fleet Street Letter (Great Britain) –
n the immediate aftermath of Donald Trump’s victory, the race is on to try to understand the shape of the new world order. There will be change, and so far that has been felt through the bond market which has taken a turn for the worse. The Fleet Street Letter has long argued that the bond market was overvalued due to excessive and unsustainable intervention from the central banks.
The US ten-year Treasury had a yield below 1.4% in the aftermath of the Brexit vote. That has turned sharply higher and now sits at 2.2% – a one-year high. The shorter-dated two-year bond now trades at 1%. With interest rates still at 0.5%, the US bond market is sending a strong signal that a rate hike at the next meeting of the Federal Open Market Committee on 14 December is now inevitable. If inflation starts to rise, which is expected in an era of higher wages and fiscal spending, expect tightening to continue into 2017.
Yet, much of this has little to do with Trump. US inflation briefly fell below 0% in 2015, has subsequently
risen to 1.5% and is on a rising trajectory. The decline in bond prices has been in motion since
July. The change in policy was going to happen anyway. The Trump victory has merely brought forward
the timetable. The only difference is that Trump’s policies, particularly tax cuts, are likely to see the US
economy enjoy higher growth – and that will happen quickly. It may not be a sustainable policy, but it
will certainly work for a while. At least, that is a clear signal from the yield curve.