Treasuries Take Massive Hit
In the late-night hours between November 8 and November 9, 2016, Donald Trump was elected the next president of the United States. Less than 12 hours later, bond yields had crumbled as markets looked for an extension of low interest rates.
But, over the days that followed, Trump’s economic plans started filtering through the media and optimism swept back into the market.
Advertisement
Investors resumed their previous assumption of a U.S. Federal Reserve interest rate hike next month, which in turn caused a sharp drop in government bond prices. Since bond prices and yields move in opposite directions, the return on Treasuries has skyrocketed in recent days.
A 10-year note now yields 2.205%, compared with the 2.12% from last Tuesday night’s closing price. Many analysts think these gains are only the start of downward spiral for U.S. Treasuries.
For instance, HSBC Holdings plc (ADR) (NYSE:HSBC) analysts hiked their forecast for the 10-year yield to 2.5% for the first quarter of 2017. This reflects a 100-basis-point increase from what they predicted before Trump was elected, which is why they are calling it the “Trump Premium.”
A research note from HSBC was written by its global head of fixed income research: Steven Major. Although he staunchly believes that Treasury yields will surge during the first 100 days of Trump’s administration, he is equally adamant that they will fall thereafter. Major says the 10-year yield will fall to 1.35% by the end of 2017 as Trump’s policies “fail to deliver.” (Source: “HSBC’s Major Says the ‘Trump Premium’ Will Push 10-Year Treasury Yields to 2.5%,” Bloomberg, November 14, 2016.)
“President-elect Donald Trump made plenty of promises during the U.S. election campaign but gave very little detail,” wrote Major in his HSBC note published late last week. “We cannot afford to wait for more detail before changing our bond yield forecasts.”
According to Major and other analysts, the surge in yields reflects investor expectations of higher inflation. If Trump’s economic wishlist of infrastructure, defense spending, and tax cuts goes into effect, markets predict they will spur economic growth and ultimately price growth.
“We believe that if yields increase too much in the short-term then financial conditions will tighten, resulting in less growth and a constrained Fed[eral Reserve],” wrote Major. “Historically, shifts in supply have not changed the relationship between longer-run economic growth and interest rates.”
