The election of Donald Trump as US President is undoubtedly a huge shock to global financial markets. Even though it is highly uncertain what policies he will ultimately adopt and can get passed by Congress, it is highly probable he will blow out the US budget deficit and that this will increase interest rates globally, a prospect which has prompted a bond market rout (noting that the price of a bond and its yield vary inversely), as the Financial Times reports:
“A global bond market rout intensified on Monday while the dollar strengthened as investors bet that US president-elect Donald Trump’s commitment to economic stimulus will herald faster growth and the return of inflation.
Since Mr Trump’s surprise win in last week’s election, investors have begun to question their long-held consensus forecasts for subdued inflation and mediocre growth that underpinned a rally in bonds over the summer…
…The 30-year US Treasury yield jumped on Monday above 3 per cent for the first time since January before paring its losses while 10-year yields rose 4 basis points to 2.19 per cent, the highest level since January. Ten-year UK gilt yields regained pre-Brexit vote levels, while the yield on the German 30-year bond briefly moved above 1 per cent for the first time since early May. Yields rise as bond prices fall.”
Bond yields in Australia are also rising, with the Australian Government ten year bond rate now at 2.65% (see data reported by Bloomberg) compared with 2.31% the day before the US election.
Hence, even though Trump arguably represents a threat to global political and economic stability, his election, ironically, may help end the extraordinary new age of depression economics that advanced western economies have been living in since the 2008 financial crisis. The ultra-low interest rates we have seen have been a reflection of both extraordinary actions by central banks such as quantitative easing and the prevailing level of anxiety among financial market players. They are incompatible with any sensible long-run model of the economy and with historical experience. I have long been expecting a return to normality, as my question to the RBA Governor Glenn Stevens last year suggested (see this QEW post), but so far it has eluded us. It is extraordinary that President Trump may bring it about.