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$64 Billion Norway Manager Bets Trump Fiscal Boom May Never Come

  • U.S. 10-year yields likely won’t rise above 3%, DNB says
  • DNB is neutral on stocks, says 2017 will be good year

The bond market may have overplayed its hand in anticipating a fiscal push from U.S. President-elect Donald Trump, according to the head of asset management at DNB ASA, Norway’s biggest bank.

The recent surge in bond yields was driven by positive economic developments before the election, as well as in anticipation of fiscal stimulus, said Torkild Varran, chief executive officer of DNB Asset Management.

But that trade “may not have fully taken into account what may come of various initiatives from Trump,” Varran, who oversees about 61 billion euros ($64 billion) in assets, said in an interview in Oslo on Tuesday. “We’re a bit concerned that people are thinking that fiscal stimulus is coming faster than it de facto can come. Or, that it never comes at all.”

Read more: Trump Thin on Stimulus Details at Press Conference

Late Wednesday, the benchmark 10-year Treasury yield touched the lowest since November and the dollar sank after Trump’s first press conference since the election offered little new information about his economic-stimulus proposals. The yield reached a high of 2.6 percent last month, up from below 2 percent before the election. With Trump promising new spending and tax cuts, and the Republicans in control of Congress, investors initially responded to the election by dumping Treasuries in anticipation of a fiscal bonanza and a spike in inflation.

The World Bank this week said that, while Trump’s fiscal policies could jump-start the global economy, it would be unwise to ignore the risks posed by his declared preference for trade barriers. It kept its forecast for U.S. growth this year and next unchanged, at 2.2 percent and 2.1 percent, respectively, without incorporating the expected effect of Trump’s policy proposals.

Yield Recoil

According to DNB, interest rates may still go up, but the gains will be limited.

“We think yields are going to rise, but expect a bit of a recoil if long yields rise a lot,” Varran said. “We don’t believe that growth will be ultra-fast or that we will see a situation where the Fed will have to tighten significantly.”

The U.S. 10-year yield probably won’t rise much above 3 percent, he said.

“Some of the forces toward lower rates will continue to be in play,” he said. “We don’t have any big belief that inflation will rise much more from here.”

That also means the asset manager is overall neutral on stocks, with a “tilting” toward “high-beta” sectors and geography. More specifically, DNB is keeping funds in banking, energy and consumer stocks and is weighted toward Norway and the Nordic markets.

“We think 2017 will also be a good year for stocks, but not necessarily very good,” Varran said. “But enough to get the risk premium out of the stock market.”

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