THE death of the long bull market in bonds has been called many times in recent years. Such a consummation is devoutly wished for by those who think the global economy will never get back to health until short- and long-term interest rates return to more normal levels.
Following the election of Donald Trump as American president, the funeral rites are being read again. The yield on the ten-year Treasury bond jumped from 1.73% (while the votes were being counted) to 2.36% at one stage; the yield on the two-year bond rose from 0.78% to 1.12%. (Bond prices fall as yields rise.)
The rationale for the shift is the belief that Mr Trump will push through a fiscal stimulus, in the form of tax cuts and infrastructure spending. Not only will that boost the American economy but it will allow the Federal Reserve to return monetary policy to more “normal” levels by pushing up rates from the current 0.5%. It could also lead to higher inflation in the medium term. Forecasts for American inflation in the early 2020s can be derived from the bond market. In July, they pointed to 1.4%; now they imply 2.1%. All three factors—faster…Continue reading