Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 16 November 2016 at 11:30 GMT

Weekly Bond Update: Trump election ignites surprise bond yield surge

Fixed Income trader / Saxo Bank
  • The president-elect has struck a far more conciliatory tone than expected
  • Government bond yields have risen across the curve
  • The Fed is now priced at an almost definitive 92% chance to hike rates in December
  • These markets may present a compelling opportunity for investors in the near future

Huge surge ... bond yields soared following the US election result. Photo: iStock

By Michael Boye

Following the initial shock reaction and contrary to the preceding message from various doomsayers, the new Trump administration has been received overwhelmingly positively by financial markets so far. 

The president-elect has introduced a far more conciliatory tone, which began from the very first acceptance speech and which has replaced the irreconcilable rhetoric from the campaign trail. As a result, investors are seemingly now already discounting his promises of a growth agenda, including tax cuts, new infrastructure investments and financial deregulation, at near face value.

This combination of stronger growth confidence and rising inflation expectations on the back of debt-financed fiscal stimulus has seen developed markets' government bond yields surge dramatically in response.

In the US, Treasury yields are traded close to the year-high levels, which was last seen back in January. Government yields have risen across the curve with 10-year yields now at 2.22% and 30-year yields traded briefly above the 3% mark. 

In the shorter end of the yield curve, 2-year yields, which is a better indication of the short-term policy direction of the Federal Reserve, broke above the 1% mark – a milestone that it hasn't traded at or above consistently for several years. 

As for the Federal Reserve, it is now priced at an almost definitive 92% chance to hike its benchmark interest rate at the December policy meeting, a stunning comeback from from the sub-40% chance traders were giving this scenario during the early hours right after the upset election result.

US government yields have surged after the election of Donald Trump as the next president
 Source: Bloomberg

Even though a case could be made for higher interest rates in the longer term under a Trump administration, this recent and rapid development is quite remarkable even given the current argument justifying the move. 

As the fiscal expansion is likely to be financed by bigger budget deficits, the Federal Reserve might still want to pursue a financial repression policy, in which interest rates are kept artificially low in order to keep borrowing costs down. This would especially be the case if it becomes less independent – as has been the widespread concern under the new president. 

As we have argued, while Trump, the candidate, might have good reason to claim that the US is a "bubble economy", Trump, the president, would have very little incentive to be the triggering factor. What's more, while the prospect of debt-fuelled inflation is a looming threat to the US economy (and a very well known one), it has arguably so far in the post-financial crisis era been a very small factor for US interest rates – if at all.

Furthermore, the suggested policies on trade barriers and immigration can hardly be said to be growth spurring, which was a major part of the reason that investors were concerned in the first place. To be fair though, we are yet to find out if these policies will be victims of the conciliatory stance as well.

Credit spreads in Brazil and Russia has widened as investors worry over USD debt exposure

Source: Bloomberg. Create your own charts with SaxoTraderGO; click here to learn more 

Emerging markets, though, haven't been invited to the party, as the dramatic rise in interest rates and the USD has led to renewed concern about foreign debt in countries such as Russia and Brazil. As a result, the Brazil 5-year USD CDS, the price to insure 5-year USD denominated sovereign debt in Brazil, has jumped to 312 basis points from a low of 245 basis points earlier this year. 

For Russia, which is probably looking forward to a more accommodating relationship with the White House that could potentially ease the year-long sanctions against the country, there has been no relief either. The USD denominated sovereign bond with maturity in 2042 has plunged from a price of 119 to a current price level of 106. 

If history is any guidance, and if for the reasons stated above the yield rally in the US eventually reverses, these markets could present a compelling opportunity for bond investors in the near future.

– Edited by Gayle Bryant

Michael Boye is a fixed income trader at Saxo Bank


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail