a selloff in government bonds picked up more momentum thursday, spreading across the world as investors reacted to the prospect of increased u.s. fiscal stimulus under a donald trump presidency. investors are now asking whether mr. trump<u+2019>s victory marks a turning point for fixed-income markets that have been on a lengthy bull run. the yield on the benchmark 10-year u.s. treasury note climbed to 2.118% from 2.070% wednesday. that came on the back of the biggest one-day jump in the 10-year yield in over three years wednesday. yields rise when bond prices fall. the yield on 10-year german government bonds rose to 0.275% from 0.177%, its highest closing level since may, according to tradeweb. yields on british and french government bonds were also higher, following steep overnight falls in the price of bonds in developed asian economies. government bond yields fell to record lows in the summer following britain<u+2019>s vote to leave the european union , as investors bet on central banks keeping rates lower for longer. but yields had been edging higher in recent weeks amid better-than-expected growth and inflation data, concerns over less accommodative central-bank policy and signs that some governments are open to boosting fiscal stimulus. while much of mr. trump<u+2019>s policy agenda remains unclear, the president-elect has promised infrastructure spending and tax cuts . political gridlock is likely to ease with republicans controlling the white house and both chambers of congress, and reshaping the federal budget could be especially achievable thanks to a senate rule that allows tax and spending changes without the need for a 60-vote majority. many analysts say that increased spending and tax cuts would boost bond supply, economic growth and inflation, potentially hurting fixed-income assets. investors are particularly concerned that an increase in signs of inflation and growth could push the federal reserve to raise interest rates at a faster clip than previously expected. if broadly adopted by governments, fiscal stimulus also could make it easier for central banks to scale back bond-buying programs, creating less demand for bonds and providing another reason for their yields to rise. already, the u.k. government has signaled that it intends to boost infrastructure spending, while some european governments have eased off on their austerity policies. a 10-year treasury yield below the fed<u+2019>s annual inflation target of 2% <u+201c>only seems sustainable in the environment that we were in<u+201d> with central banks <u+201c>pumping in quantitative easing ad infinitum,<u+201d> said gene tannuzzo, senior fixed-income portfolio manager at columbia threadneedle investments. <u+201c>you needed a political regime shift to change that and we<u+2019>ve kind of had that.<u+201d> moves in the $13 trillion u.s. treasury market echo throughout global debt markets. treasurys are used as a benchmark to price the foreign-currency sovereign debt of emerging-market economies and for a lot of corporate debt. a rise in u.s. yields should mean higher funding costs for these borrowers. investors also look at rate differentials across developed markets, so a rise in treasury yields naturally has a knock-on effect on german bunds. higher u.s. interest rates typically would strengthen the dollar and weaken other currencies, easing financial conditions in those countries and reducing the need for central bank support. investors are already concerned over the future of the european central bank<u+2019>s massive bond-buying program, currently slated to end in march 2017, which officials are expected to clarify at the bank<u+2019>s december meeting. <u+201c>generally you<u+2019>re going to see central banks spending 2017 either dialing down the accommodation they have in place now or talking about it, and that<u+2019>s going to reprice bond yields higher,<u+201d> said bob michele, global head of fixed income at j.p. morgan asset management. still, some investors and analysts caution that bond yields could stabilize or decline as markets have more time to digest the implications of the u.s. election. there have been other times recently when investors predicted a lasting turn in bond yields that never quite happened. yields moved sharply higher in the spring of 2015, led by the 10-year german bond yield, only to resume their descent later in the year. a major theme of mr. trump<u+2019>s candidacy was skepticism toward trade and immigration. since his victory, mr. trump has struck a moderate tone. but a return of his more populist campaign rhetoric or signs that the career businessman is having trouble navigating washington or working with foreign leaders could cause a shift in sentiment. before abruptly reversing course, government bond yields initially fell tuesday evening as a victory by mr. trump became more likely, reflecting concerns about his potential impact on the economy. <u+201c>our call for lower bond yields was based on the structural drivers, which include the debt overhang, demographics, productivity and wealth inequality,<u+201d> said steven major, global head of fixed-income research at hsbc. <u+201c>president-elect trump will not be able to fix all of these in one go. indeed, based on the campaign rhetoric he might well make some of these worse.<u+201d> the fallout for bonds of more restrictive trade and immigration policies wouldn<u+2019>t be straightforward, analysts say. both policies have the potential to increase inflation, with higher tariffs leading to higher import prices and a smaller workforce putting some upward pressure on wages. that could lead to lower bond prices because inflation erodes the real returns on bonds. but the same policies also could damage growth, causing investors to flee riskier assets and seek the safety of government debt. foreign investors, concerned about changes in trade policy among other issues, may be especially sensitive to the risks posed by a trump presidency. though demand was decent overall, an auction of 30-year u.s. treasury bonds thursday attracted relatively light interest from indirect bidders, seen as a proxy of demand from abroad. that followed a tepid reception for a 10-year note auction wednesday. as prices decline, treasury yields are starting to look attractive to traders, but <u+201c>there<u+2019>s a hesitancy until they get clarity on the political scene before investing,<u+201d> said john briggs, head of strategy for americas at rbs securities. write to christopher whittall at christopher.whittall@wsj.com and sam goldfarb at sam.goldfarb@wsj.com
the all-powerful bond market is getting rocked by trump - wsj
christopher whittall sam goldfarb