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‘Trump Thump’ Whacks Bond Market For $1 Trillion Loss

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‘Trump Thump’ Whacks Bond Market For $1 Trillion Loss

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NEW YORK (Reuters) – Donald Trump’s stunning victory for the White House may mark the long-awaited end to the more than 30-year-old bull run in bonds, as bets on faster U.S. growth and inflation lead investors to favor stocks over bonds.

A two-day thumping wiped out more than $1 trillion across global bond markets worldwide, the worst rout in nearly 1-1/2 years, on bets that plans under a Trump administration would boost business investments and spending while firing up inflation.

“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, which has more than $106 billion in assets.

“The cracks have been forming for five years – we’re in this slow-grinding higher phase in yields,” he said.

The stampede from bonds propelled longer-dated U.S. yields to their highest levels since January with the 30-year yield posting its biggest weekly increase since January 2009, Reuters data showed.

In the stock market, the blue chip Dow Jones industrial average finished out its best week in five years on Friday as it marked a record high close.

The 10-year German Bund yield rose to its highest level in eight months, while the 10-year British gilt yield climbed to its highest level prior to Britain’s decision to leave the European Union on June 23, known as Brexit.

Bank of America Merrill Lynch’s Global Broad Market Index fell 1.18 percent this week, the steepest percentage drop since June 2015, which is equivalent to more than $1 trillion. Its U.S. Treasury index suffered a 1.91 percent decline on a total return basis, the biggest weekly drop since June 2009.

Many investors, who have loaded up on bonds on the belief of protracted easy monetary polices worldwide due to sluggish global economy, are not ready to throw in the towel.

They are counting on insurers and pension plans, together with European and Japanese investors who are struggling with negative yields at home, to preserve the bull run for bonds.

“Are we going to see a dramatic backup in yields? It’s too soon to make a conclusion about that,” said Mihir Worah, chief investment officer in asset allocation and real assets at PIMCO in Newport Beach, California, which manages $1.55 trillion in assets.

Goldman Sachs and BAML forecast the 10-year U.S. yield could climb to 2.50 percent, compared with 2.11 percent at Thursday’s close. The U.S. bond market was closed on Friday for Veterans Day.

BREXIT TWO?

Fund managers at top bond firms and analysts on Wall Street are weighing whether the impact of Trump’s win on financial markets will be similar to Brexit. European stocks sold off violently after the Brexit vote, but by mid-August had recovered all the losses. Even so, there is a great deal of uneasiness as investors wait for details on how Britain will exit the EU – not unlike the waiting game on what Trump will actually do as president.

“We need more of a cushion given the uncertainties. That’s exactly what is being played out in the global debt market,” said Mark Lindbloom, portfolio manager at Western Asset Management in Pasadena, California, which oversees $445 billion.

Trump, who beat Democratic rival Hillary Clinton, campaigned on tax cuts, trade restrictions and fiscal spending on infrastructure. It remains unclear how these promises translate into policy and the degree to which they would affect the economy.

Since Election Day, the U.S. bond market’s gauge on investors’ 10-year inflation outlook jumped to its highest level since July 2015.

Bond and stock markets suggest whatever Trump may do with the help of a Republican-controlled Congress would give a lift to the U.S. economy, which is growing at about 2 percent this year.

“It is a bit early to be calling the Big Rotation,” said Art Hogan, chief market strategist at Wunderlich Securities in New York, referring to the idea that the three-decade-old rally in bonds is ending.

“We’ve been declaring that rotation for years. … I’m afraid it’s hard to think about that happening in the current demographics we have. Baby boomers have more investable assets than millennials do.”

Betting the U.S. economy may fare better on possible tax cuts and more federal spending, investors scooped up financial and biotech stocks, driving the S&P 500 to its best week since 2014 on Friday.

For a rotation into equities from bonds to materialize, it would require “a pick-up in the global economy, and for central banks globally at the very least to halt accommodation -and in our case remove some,” Hogan said.

TIPS APPEAL

While investors dumped most types of bonds after Trump’s victory, they piled into Treasury inflation-protected securities as a hedge against a pick-up in inflation.

“You are seeing interest in TIPS right now from a widening investors base,” said Brian Smith, portfolio manager at TCW in Los Angeles, which has $197 billion in assets.

Investors poured $1 billion into TIPS in the week ended Nov. 9, the second-biggest inflows since records began in October 2002, data from Thomson Reuters’ Lipper service showed on Thursday.

Trump’s win dovetailed with a rise in U.S. yields, reversing the safe-haven trade that stemmed from fears over the fallout of Britain’s vote to leave the EU.

Yields have also risen as some Federal Reserve officials reasserted calls for a rate increase by year-end, a move that is increasingly seen as likely by the market.

Inflation concerns have also been stoked by a recovery in U.S. oil prices, which tumbled to a 12-year low in February due to concerns over a supply glut. That is seen as another factor behind the rise in bond yields.

“The trend was already in play and it has accelerated,” Pimco’s Worah said, adding there is more room for yields to rise but not much further from current levels.

(Additional reporting by Sam Forgione and Rodrigo Campo in New York, Jamie McGeever in London; Editing by Daniel Bases)

IMAGE: Morning commuters pass by the New York Stock Exchange (NYSE) in New York City, U.S., November 10, 2016.  REUTERS/Brendan McDermid

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11 Comments

  1. TZToronto November 14, 2016

    Interesting . . . “Betting the U.S. economy may fare better on possible tax cuts and more federal spending . . . ” Tax cuts = less revenue for the federal government + more federal spending = bigger deficit. If the economy is going to improve, since the biggest tax cuts will go to the wealthiest people and to corporations, I guess everyone else will have to wait for the prosperity to trickle down to them. That worked well before, right?

    Reply
    1. srgm November 14, 2016

      yup, we better get out our umbrellas for the yellow rain. trickle down… jeez

    2. dpaano November 22, 2016

      Didn’t work well in Kansas, toto!!!

  2. TheSkepticalCynic November 14, 2016

    If Samantha B., Trevor Noah, Jonathan Oliver,and Craig Ferguson are so disappointed in Donald Trump as President-Elect why don’t they take the “carpet bags” and “get the phook oout” and shouldn’t let the door hit them in the ass on the way.

    Reply
    1. FireBaron November 15, 2016

      Ah, a typical Conservative. Let someone with a “foreign-sounding” voice mention their displeasure with a politician, and you immediately assume that those individuals are NOT US Citizens by birth or naturalization. Well, maybe they are and maybe they aren’t. However, what about all the H1B visa holders who work for Teflon Donnie’s properties in the US because he refuses to pay enough to entice US Citizens and Permanent Residents to work for him?

      1. TheSkepticalCynic November 15, 2016

        You wouldn’t believe political predilections! If you knew, your hair would burst into flames.

  3. FireBaron November 15, 2016

    All I want to know is now that he is President-Elect, will Teflon Donnie reduce the trade deficit by finding domestic US producers for the over-priced schlock he foists off on the public?

    Reply
    1. dpaano November 22, 2016

      You mean his clothing line….the one that is manufactured in China???

  4. ivory69690@yahoo.com November 15, 2016

    this was DONNY DUMP’S next mild stone heck he has buryed $ millions 100 of million up to nearly a $ BILLION in losses so his next biggest loser streak would be the loss of the big old $TRILLION mark . that’s the DUNPSTERS patton

    Reply
  5. ivory69690@yahoo.com November 15, 2016

    the patton of Donny dump losing the country’s money and making the people of the country pay for it just like his 4 to 7 bankrupt’s his $915 million dollar lose ALL COMES OUT OF THE PEOPLE’S POCKET . you the people pay for the DUMPSTER’S B/S and how will his brain dead followers like it ? who knows and thy don’t care for thy are brain dead anyways

    Reply
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    Reply

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