Higher Inflation Predicted as Trump Plans Massive Spending
The inflation beast, which was in the cage for so many years, is out and roaring loudly. This is what we’re seeing in the global bond markets, where more than a trillion dollars have been wiped out since Donald Trump beat Hillary Clinton in a stunning contest to become U.S. president.
The rout in the global bond market deepened as a growing number of investors deserted safe-haven securities, reflecting a belief that the U.S. economy is entering a new era of stronger growth and accelerating inflation following the U.S. presidential election.
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President-elect Trump has been advocating higher infrastructure spending, more tax cuts, and lighter banking regulation, aiming to promote jobs and boost the U.S. economy.
Earlier on Monday, the yield on the benchmark 10-year Treasury note touched 2.301%, which is the highest level since December 30, 2015, and higher than the 2.273% at the end of 2015, according to Tradeweb Markets LLC. Yields rise as bond prices fall.
The sell-off in the bond market shows shifting expectations for the U.S. interest-rate environment, which should change as the Trump government borrows massively to pay for large-ticket infrastructure projects to boost growth.
Donald Trump, during his presidential campaign, strongly favored a massive spending program to counter a lackluster performance in the world’s largest economy. Trump also criticized the U.S. Federal Reserve Chair Janet Yellen for artificially keeping interest rates low to appease the Barack Obama administration.
Even before the Trump shock in the bond market, there was an increasing willingness by the Fed to raise interest rates after a strong performance in the job market, strengthening expectations that wage pressure was increasing.
The prospect of a fiscal boost is encouraging investors to buy stocks that can benefit from higher government spending, such as banks, pharmaceutical firms, and Real Estate Income Trusts (REITs).
Another factor creating jitters in the bond market is the fact that huge infrastructure spending by the government means more issuance of government bonds. At a time when the demand for government bonds is weakening, more debt issuance would add to selling pressure and send bond yields higher.
