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Trump dump: Bond prices lose $1T as investors fear higher debt and inflation

It's been barely a week since Donald Trump won the U.S. presidential election, and while the U.S. stock market has so far reacted positively to the news, the much larger bond market has taken the opposite view, blowing up more than $1 trillion US worth of value.

More than $1 trillion has fled bond market as investor worry about interest rates under Trump presidency

While stocks have risen, the bond market has been hammered since Donald Trump won the election, due to fears he will issue huge amounts of debt and drive up inflation. (Evan Vucci/Associated Press)

To borrow a phrase from the president-elect, there's an apt word to describe the bond market's reaction to the prospect of a Donald Trump presidency.

Huge.

It's been barely a week since Donald Trump won the U.S. presidential election, and while the U.S. stock market has so far reacted positively to the news, the much larger bond market has taken the opposite view. 

On the campaign trail, the Republican nominee made waves with his talk of trade wars, higher tariffs and deficit spending. That's prompted fears of higher debt, higher inflation and higher interest rates — three things that are bad news for bond prices.

Unlike other asset classes, the price of the bond goes in the opposite direction to what's known as its yield — the amount, in percentage terms, that it will pay out.

If investors think America is about to borrow huge amounts of additional debt, they are demanding higher interest rates to loan the government money.

"Consider this," Bank of Montreal economist Benjamin Reitzes said Monday: "The price on 30-year Treasury bonds fell nearly five per cent on Wednesday, erasing two full years of coupon payments."

The 30-year has since lost another 10 basis points since Reitzes said that.

Business Council of Canada CEO John Manley on the tough job of wooing public and private investors 10:11

And Canada isn't immune. The Canadian government's 10-year bond saw its yield surge by 27 basis points to 1.43 per cent, Reitzes noted. On the Friday before the election, that bond was priced at 103.10. On Monday, it had slumped to 99.60.

Between Friday and Monday, more than $1 trillion US of value has been wiped out of the world's bond market.

In the stodgy world of bonds, a fall that dramatic over such a short time period is astounding.

"The bond market is supposed to be a dull, boring, stable place," said Colin Lundgren, head of U.S. fixed income at Columbia Threadneedle Investments. "Instead, it's been at the centre of the storm."

Trump says his deficit spending won't be a problem because he espouses the classic small-government view that tax cuts will be quickly be recouped — and then some — by how much they grow the economy.

Michael Lewitt, a bond fund manager who says he voted for Trump, isn't buying it.

"Cutting taxes and spending more money and not reforming entitlements, that's going to send debt through the roof," said Lewitt of the Credit Strategist Group. "The market is saying he is not going to worry about this, and that's going to be bad for bonds — really bad for bonds."

There are other signs that higher rates are coming soon. The U.S. central bank has been telegraphing for months that it planned to hike interest rates at least one more time this year. December was seen as the likeliest time to do so, and that's even more likely since Trump got elected.

According to data compiled by Bloomberg, economists who monitor the Federal Reserve now think there's a 92 per cent chance the central bank will hike its benchmark interest rate by a quarter of a point when it meets in early December.

That's another development that would send bond prices tumbling, and that's exactly what's happened to U.S. government debt in recent days. Investors have dumped 10-year U.S. government bonds, sending their yields soaring from 1.75 per cent to 2.15 per cent in just 36 hours. It typically takes many months for yields to move that much.

Analysts think there's a 92 per cent chance that Janet Yellen and the Fed will hike interest rates next month. (Cliff Owen/Associated Press)

"The yield on the 10-year Treasury note bottomed out at just below 1.4 per cent this past June," Kroll bond rating agency said in a research note Monday, "but now appears to be headed towards yields almost twice that level as 2016 draws to a close."

"The Fed must raise benchmark rates in December merely in order to catch up with [these] bond market moves," Kroll said.

Tom Simons, money market economist at Jefferies and Co., says his take is that Trump's fiscal plan adds up to higher inflation, which will put pressure on bonds.

"I think we've topped out as far as the value of bonds," he said, "[and] a pretty high inflation environment in the future."

Beyond his plans while in government, others note that the best reason to expect more bond-killing debt under a Trump administration is to look at his track record in the private sector. James Abate, chief investment officer of Centre Asset Management, says Trump made his fortune as a real estate developer by putting up buildings — and borrowing a lot of money to do it.

"Project what he's done his entire lifetime, and think of that on government level," said Abate. "He's going to issue debt, and that is what the bond market is spooked about."

With files from The Associated Press and Reuters

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