How Donald Trump blew up the bond market and changed everyone’s view on interest rates

In a flash, the world has changed for bond investors, savers and borrowers.

President-elect Donald Trump’s White House victory was a surprise, and so is the ripping sell-off in global bond markets, which has quickly driven U.S. interest rates to the highest levels in a year. The rout has wiped out an estimated $1 trillion from global bond markets and has Wall Street scrambling to retool its forecasts.

The sell-off comes on the expectation that Trump’s promised infrastructure spending and tax cuts will result in higher growth — but also higher inflation and higher amounts of U.S. government debt.

“I think there’s a fundamental rethink in the near-term outlook, as it relates to expectations for growth and also (Federal Reserve) policy. All of this has to do with increased optimism that there will be some fiscal stimulus in the near term and some type of deregulation, both of which will underpin growth,” said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch.

Since last week’s election, the benchmark 10-year Treasury (U.S.:US10Y) has gone from a yield of 1.80 to 2.30 percent. It has moved higher with the dollar, which is up about 2.5 percent against a basket of currencies. The 30-year bond yield crossed the psychological 3 percent level Monday.

Mortgages and other financing are based on the 10-year, and fixed-rate and other mortgages are already on the rise. The 30-year fixed rate mortgage is also up a half percent since Trump was elected. It jumped an eighth of a point Monday, to the psychologically important 4 percent level.

So far, the stock market has taken the rise in yields in stride and is rallying. But the move in interest rates will create ripples across the economy.

“If you’re going to buy a house and your mortgage payment went up by $200 or $300, you may buy a smaller house. There’s impact on interest rate sensitive sectors, like autos and housing, and also corporate bonds themselves, where financial engineering has helped juice up the equity market,” said George Goncalves, head of rate strategy at Nomura. With extreme low interest rates, U.S. corporations had been loading up on debt and using proceeds to pay for stock buybacks and dividends, among other things.

For financial institutions, it’s a major positive to have rates rise, and their stocks have been flying since Trump’s election. The S&P financial sector was up 2 percent Monday, after an 11 percent gain last week. Savers will also be helped, as interest rates on Treasurys and money markets edge higher.

“Before the fair value was closer to 1.50 on the 10-year and now the fair value is 2.50 and we basically got to 2.30 overnight. We went from a world starving for yield and people chasing bond markets to very low rates, which was wrong,” said Goncalves. “Now you could get upside of 25 basis points and you could get 25 basis points downside.”

U.S. interest rates have been held down by Fed policy and sluggish U.S. growth, but they have also been distorted by super-low and negative yields, courtesy of central banks in Europe and Japan. Now, the U.S. Treasury market, like a once sleeping giant, is dragging world rates higher with it. Bond yields move inversely to bond prices.

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