Donald Trump’s U.S. election victory has ratcheted up concerns about higher prices, prompting strategists to rethink the outlook for global bond yields and currencies.
It is widely thought that the president-elect’s pledge to introduce tax cuts and steep tariffs could boost economic growth — but widen the fiscal deficit and refuel inflation.
Trump’s return to the White House is seen as likely to throw a wrench in the Federal Reserve’s rate-cutting cycle, potentially keeping an upward bias on Treasury yields. Bond yields tend to rise when market participants expect higher prices or a growing budget deficit.
Alim Remtulla, chief foreign exchange strategist at EFG International, said it would be “untenable” for the Fed to continue with its easing plans while yields rise.
“Eventually, either the Fed has to pause rate cuts as the economy is no longer at risk of recession or the economy turns and yields implode as recession looms,” Remtulla told CNBC via email.
“Trump’s election advances both possibilities as a trade war and increased fiscal spending work at cross purposes,” he added.
The benchmark U.S. 10-year Treasury yield has risen sharply since Trump’s election victory over Democratic nominee Kamala Harris in early November, before paring gains in recent days.
The 10-year Treasury yield traded more than 3 basis points higher at 4.4158% on Wednesday morning. Yields and prices move in opposite directions. One basis point equals 0.01%.
European bond market offers ‘more compelling value’
“In Europe, there’s been a slight reprieve on not-as-bad-as-expected data but also on the realization that Trump policies will take a quarter or two to enact,” EFG International’s Remtulla said.
“There’s also a possibility that rhetoric out of the Trump campaign was for election purposes and that he’ll govern closer to the status quo. This would also help the euro zone avoid recession and lift [the euro],” he added.
Germany’s 10-year bond yield, the benchmark for the euro zone, stood at 2.337% on Wednesday, marginally lower for the session. The yield on 2-year bunds, meanwhile, was up by around 1 basis point at 2.151%.
Pedestrians walk in front of the New York Stock Exchange (NYSE) decorated with a giant national flag of the United States on November 6, 2024 in New York City.
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Shannon Kirwin, associate director of fixed income ratings at Morningstar, said a significant chunk of investors were hoping for European bonds to hold up “fairly well” in the coming years, while the euro is expected to weaken.
“Even before the U.S. election, the consensus among the bond fund managers I have spoken with was that the European bond market offered more compelling value than the U.S. market,” Kirwin told CNBC via email.
“As a result, many managers had already positioned their portfolios to be slightly tilted towards European credit and away from US corporate bonds,” she added.
