global investors have rendered their verdict on donald j. trump as president: sell government bonds and pile into stocks that will benefit the most from a resurgent united states economy. from indonesia to the united states, government bonds are undergoing a sharp sell-off as investors <u+2014> large sovereign wealth funds and hedge funds, as well as the accounts of american retirees <u+2014> restructure investment portfolios to try to capture the fruits of what they expect will be a free-spending trump presidency. across the board, the yields of these bonds, which move up as their prices decline, are pushing higher. the yield on the 10-year united states treasury note <u+2014> a benchmark for mortgages and other lending rates <u+2014> has risen to 2.2 percent from 1.5 percent in less than two months. for such a widely held and traded security, that is an unusually abrupt move. other safe-haven bonds have had similar reactions. the yield on germany<u+2019>s 10-year notes has gone to positive. in just a week, it has gone to 0.35 percent from negative 0.15 percent. and the swiss 10-year is now on the cusp of paying investors to borrow money after close to two years of trading in negative interest rate territory. if the trend continues, it will signify a jarring philosophical shift from the view put forward by many prominent economists, like the former treasury secretary lawrence h. summers, that the global economy is destined to stagnate for some time under a regime of low growth, zero interest rates and deflation. a series of earlier signals pointed to a move away from bonds in the weeks before the election, including higher wages in the united states and signs of increased inflation in europe. but what has resonated deeply with countless risk-averse investors who have been camping out in government bonds for years now is mr. trump<u+2019>s promise to have the federal government take responsibility for stimulating the economy <u+2014> in the form of infrastructure investments and tax cuts <u+2014> away from global central banks. <u+201c>it does not surprise me that the markets have reacted this way,<u+201d> said luciano siracusano, chief investment strategist for wisdomtree asset management in new york. <u+201c>this is a very pro-growth agenda, and we have not had that in a while.<u+201d> after the financial crisis unleashed an unprecedented wave of activism on the part of global central banks, investors the world over followed the lead of central bankers and loaded up on long-term government bonds. until recently, it has been a no-fault trade, with global growth stagnant, governments divided and political risk omnipresent. the numbers tell the story. according to j. p. morgan, central banks and financial institutions in developed markets are sitting on $26 trillion in bonds, or 49 percent of the tradable market for these securities. that figure is up from 40 percent in 2002, and it highlights the extent to which worries about deflation and stagnation (political and economic) have resulted in a nonstop bull market for government bonds. most investors, and many policy makers as well, have become fed up with this so-called stagnation trade and they have been calling for lower taxes and more government spending not just in the united states but also in europe and japan. <u+201c>investors have been frustrated with the limits of monetary policy,<u+201d> said michael zezas, a bond strategist with morgan stanley. <u+201c>there has been a presumption of the necessity of fiscal stimulus. with a trump presidency, the political rationale aligns with the economic rationale.<u+201d> soaring bond yields are not the only way that this new <u+201c>reflation trade<u+201d> is playing out. investors are betting that a pickup in government spending will push up the price of basic building commodities like copper, the price of which was up 20 percent in the last month. bank stocks have also gotten a lift because investors believe they will face less regulatory pressures and cash in on higher interest rates, which help their lending margins. even the long-suffering stock price of deutsche bank, for example, has bounced back by nearly 20 percent in the last week. more broadly, the standard & poor<u+2019>s 500-stock index gained 3.8 percent last week, while on monday, the major market measures ended largely flat. of course, such an investment trend carries with it serious risks. if bond yields shoot up too starkly, investors in the stock market will get jittery and all the fast money that has recently piled into stocks could turn tail, leaving chaos in its wake. for example, $22 billion has poured into exchange-traded funds that invest in the united states stock market in the last three days alone. moreover, a sharp increase in bond market rates will put pressure on emerging markets, which have enjoyed a renaissance in recent months. stock markets ranging from brazil, india and taiwan have been down sharply over the last week. the exchange-traded fund that invests in these and similar countries and is the market<u+2019>s truest gauge of sentiment toward developing markets is off more than 7 percent since mr. trump was elected. it is worth recalling that the so-called taper tantrum in 2013, when panicky global investors escaped en masse from most of the major developing economies, was driven by an expectation of higher interest rates and a strong dollar <u+2014> which is exactly what the markets are factoring in right now. a trump-inspired inflationary surge could also force the federal reserve to be overly aggressive in raising rates, a dynamic that no investor wants to see. the trick, of course, for a trump administration will be to ensure that fiscal stimulus proponents do not get a totally free hand and, in addition to pushing for a building boom, cut taxes radically and increase military expenditures. that could result in a yawning budget deficit and inflation spiraling out of control. for now, such a dire situation is far from the minds of investors who prefer to see in mr. trump an antidote to nearly a decade of low growth, low interest rates and intense regulatory scrutiny, all of which pushed them into the safety and security of low-yielding government bonds. some even suggest that a president trump will not be unlike president reagan in showing a devotion to bedrock laissez-faire principles, even if many of those philosophies were called into question when american investment banks nearly torpedoed the global economy. <u+201c>the global impact of this stuff is that once you start it, you can<u+2019>t stop it,<u+201d> said arthur laffer, a supply-side evangelist who advised ronald reagan and was among a core group of economists who cobbled together mr. trump<u+2019>s own tax-slashing program. <u+201c>that is the way it was with reagan.<u+201d> a version of this article appears in print on november 15, 2016, on page b1 of the new york edition with the headline: a bond sell-off, and a rush on stocks, as investors anticipate trump<u+2019>s presidency. order reprints | today's paper | subscribe
ahead of trump presidency, global investors sell bonds and grab stocks
landon thomas jr.