bond investors just can<u+2019>t afford to relax. last week<u+2019>s rally in bonds , caused by risk aversion in the face of a volatile u.s. presidential election campaign, reversed early monday. whatever the result of tuesday<u+2019>s vote, global bonds face a considerable challenge. in truth, even last week<u+2019>s gains for bonds were relatively modest. at 1.82% in the u.s. and 0.15% in germany, 10-year yields are close to the highest they have been since the brexit vote in june. the only exception to the steady grind higher is japan, where yields have been flatlining. but that is because the bank of japan has taken control of the yield curve, making the market largely irrelevant. the u.s. is now in the driver<u+2019>s seat. monday<u+2019>s relapse for bonds came after the u.s. federal bureau of investigation said that there was no change to its recommendation that hillary clinton not face charges related to her email practices while secretary of state. risk appetite bounced back, with stocks rallying. the brexit vote and moves in u.k. bonds may be instructive. the june 23 vote initially led to a big rally in global bonds, driven by both risk aversion and the idea that more global central-bank stimulus might result. but u.k. yields have since risen due to expectations of higher inflation caused by the steep fall in sterling and increased political uncertainty about how brexit will occur. moreover, despite the relatively small size of the gilt market, statistical analysis shows that changes in u.k. yields since the vote have tended to lead movements in other bond markets, bluebay asset management notes. a similar pattern could emerge for u.s. treasurys. a victory for donald trump would likely initially spur further risk aversion, because uncertainty about u.s. policy would be high. hard-wired responses in financial markets would kick in and treasurys would probably rally. but investors might not want to rush in. political uncertainty and concerns over protectionism and fiscal policy could mean investors demand a higher risk premium for u.s. bonds. a victory for mrs. clinton, on the other hand, would be more likely to push investors back into risky assets such as stocks, also hurting bonds. the focus could move swiftly back to the federal reserve<u+2019>s efforts to raise rates. whether it is populism, the shift away from disinflation, or concerns about central-bank policy, the forces arrayed against bonds still look to have the upper hand. write to richard barley at richard.barley@wsj.com
u.s. election: bonds face pain no matter who wins  - wsj
richard barley