Don't Be Fooled by Bond Market Calm

In the hours after Donald Trump's startling upset in the U.S. presidential election, the reaction in the bond market was surprisingly muted.

While traders initially piled into benchmark U.S. Treasuries to hide out from turmoil, they were already reversing that bet by the New York morning. Even riskier credit markets that were initially punished were starting to bounce back. Markets seemed slightly rattled but taking a Trump presidency in stride.

So does that mean that investors with billions of dollars on the line believe that Trump will at least preserve the status quo when he takes office if not ignite some long-desired, productive inflation?

Unfortunately, it's not so simple to get a clear message from bond markets that once provided deep insight into the broader economic outlook. After years of unprecedented monetary policies that have pushed benchmark borrowing costs to record lows, it's hard to determine what's safe and what's risky in debt markets, let alone how an untested, unconventional president will influence the new balance.

The knee-jerk response in the face of uncertainty is to pile into benchmark government debt, but in this case, that may be exactly the wrong move. Trump is widely expected to borrow more money to build things, which may spur growth, or at least inflation. That could be good for stocks and riskier debt but bad for Treasuries.