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 / 09 November 2016 at 7:34 GMT

Weekly Bond Update: Yellen future in doubt after surprise Trump win

Fixed Income trader / Saxo Bank
  • Future direction of interest rates are very uncertain
  • December rate hike chances now down below 50% from 86%
  • Initially though, government bonds are jumping on the safe haven bid
  • German bund future opened more than a full point higher at 162.80
  • How agressively Trump will pursue stated policies remains to be seen

By Michael Boye

As the bond markets react in-line with the risk-off sentiment in global markets following the surprise election of Donald Trump as the next US president, the future direction of interest rates are much more uncertain - and might be more likely to move strongly in the opposite direction.

Initially though, government bonds are jumping on the safe haven bid. The German bund future opened more than a full point higher at 162.80, which took the German 10-year yield back to 0.15%, and while not nearly as significant as earlier indications, a similar move has seen the 2 year US government yield drop more than 10 bps to 0.75% so far.

German government bonds surge in price and yields drop as Trump pulls out surprise win
 Source: Bloomberg

The result now leaves serious question marks on the future policy direction of the Federal Reserve - both in the short and long term - not to mention the job security of Chair Janet Yellen, who is up for renomination in 2018.

Short term the expected rate hike in December, which was priced at an 86% chance 24 hours ago, is now seen at less than a 50% chance, a fair reaction though as it is indeed very difficult to see Janet Yellen hiking interest rates into this unprecedented uncertainty and market turmoil, which might stay with us for a while.

Longer term though, a case could be made for interest rates moving higher and even beyond the now outdated forecasts of yesterday's world. Trump has wasted no time in his attacks of Janet Yellen's policies, accusing her of keeping interest rates too low for too long and thus maintaining the "bubble economy".  So while a replacement of Janet Yellen with a(n even) more hawkish profile could be a very real possibility, we also know Donald Trump as a very pragmatic person, who might not be too interested in carrying responsibility for the economic stress that would most likely accompany an aggressive interest rate hike agenda.

 Indeed, as is true for more or less all of his other policies and statements recently, some decisively more controversial than others, it now remains to be seen how determined President Trump will be in actually realising all of these, now that he actually has won the keys to the oval office.

– Edited by Clare MacCarthy


Michael Boye is a fixed income trader at Saxo Bank


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