The U.S. stock market decided to take the optimistic view of the election of Donald Trump. But the story was different for U.S. Treasury bonds. The day after the election, they took their biggest plunge in five years. The Bloomberg Barclays Treasury Total Return index fell 2 percent from the election through Nov. 15.
That kind of loss hurts when it comes to an asset many investors hold for safety. But for some top money managers, including those at DoubleLine Capital and Loomis Sayles, the drop was a vindication of a contrarian view that bonds had gotten too expensive. Until the market closed on Election Day, Treasuries had gained 3.8 percent for the year. These investors contend that Treasuries will remain a losing bet as Trump ramps up spending in an effort to boost the economy. That could stoke inflation, push the Federal Reserve to raise short-term interest rates faster, and add to the supply of government debt in the process.
In that environment, investors may demand higher yields to buy Treasuries. Bond prices fall as yields rise. The benchmark 10-year Treasury bond yielded 2.2 percent on Nov. 15, up from a record low of 1.3 percent this summer. Economists and strategists hadn’t been expecting a yield that high until 2018, according to a recent survey.
“The election results may be a paradigm shift in terms of the direction yields take,” says Matt Eagan, a portfolio manager at Loomis Sayles. In February he said Treasury yields, then at 1.7 percent, weren’t adequately compensating investors for the risk that consumer prices could begin to rise more quickly.
For a long time the bond market has assumed that a protracted slump in growth and inflation would conspire to keep interest rates low. Jeffrey Gundlach, chief executive officer of DoubleLine, who’s been bearish since summer, believes rates could climb a lot. “I wouldn’t be surprised if the next presidential election or a year after that—so four or five years from now—the 10-year Treasury is at 6 percent,” he said on a Nov. 8 webcast from Los Angeles before the polls closed. He’d been predicting a Trump win.
Yields of 2.2 percent are still very low by historical standards, so the bond market is far from assuming either scorching growth or raging inflation with Trump in the White House. “We are in a consolidation phase as we wait for further details on what the actual numbers are,” says John Briggs, head of strategy for the Americas at RBS Securities, adding that investors will want to know “the timing, the efficacy, not just about his fiscal spending plan but his other plans.” For now, Trump has given the markets a lot to digest. He’s pledged to cut taxes while launching a massive program building roads, bridges, and airports. His proposals would boost the nation’s debt by $5.3 trillion, according to the nonpartisan Committee for a Responsible Federal Budget.
The ups and downs of the bond market are felt directly by people throughout the economy. Higher yields raise the income savers can earn, but for many that comes at the cost of seeing any bond investments they’ve previously made fall in value. Yields also affect the rates banks charge to lend. The average 30-year-mortgage rate ticked up to 3.73 percent on Nov. 9, from 3.69 percent the previous week, according to Bankrate.com.
Some market observers see the election as a trigger for market worries that had been already building. “The bond bull run which has lasted for more than two decades will have to come to an end at one point,” says Massimiliano Castelli, head of global strategy at UBS Asset Management. “But the victory of Trump probably brings this on earlier than previously thought.”
—With Yun Li and Anchalee Worrachate
The bottom line: Trump’s promises of big tax cuts and big spending aren’t what holders of low-yielding U.S. debt want to hear.