By Christopher Whittall
Government bonds fell globally Thursday following a sharp selloff in U.S. Treasurys, as investors reacted to the prospect of increased fiscal stimulus under a Donald Trump presidency.
Investors are now asking whether Mr. Trump's victory marks a turning point for fixed-income markets that have been on lengthy bull run.
The yield on the 10-year U.S. Treasury note rose to as high as 2.101% Thursday from 2.070% Wednesday.
The yield on 10-year German government bonds rose 0.1 percentage point to 0.27%, on track to close at its highest level since early May, as investors sold and prices fell. Yields on British and French government bonds were also higher, following steep overnight falls in the price of bonds in developed Asian economies.
Government bond yields fell to record lows in the summer following Britain's vote to leave the European Union, as investors bet on central banks keeping rates lower for longer. But yields have been edging higher in recent weeks amid better-than-expected growth and inflation data, concerns over less accommodative central-bank policy and signs that some governments are open to boosting fiscal stimulus.
To be sure, there have been other times recently when investors predicted a lasting turn in bond yields that never quite happened. Yields moved sharply higher in the spring of 2015, led by the 10-year German bond yield, only to resume their descent later in the year.
But Mr. Trump's win surprised markets and investors are once again talking of a turning point.
While much of Mr. Trump's policy agenda remains unclear, the president-elect has promised infrastructure spending and tax cuts. Many analysts say that such spending should boost bond supply, economic growth and inflation, potentially hurting fixed-income assets. Elsewhere, the U.K. government has signaled that it also intends to boost infrastructure spending, and some European governments have eased off on their austerity policies.
Investors are particularly concerned that an increase in signs of inflation and growth could push the Federal Reserve to raise interest rates at a faster clip than currently expected.
Swiss bank Julius Baer has adjusted its forecast for U.S. growth to 2.4% in 2017 from 1.9% previously, and its inflation projection to 2.2% from 1.8% following the elections.
"The economic impact of Trump's victory in the U.S. will lead to higher inflation, higher growth," said David Kohl, chief currency strategist at the firm, in a note Thursday. "Interest-rate hikes by the Fed are hence more likely to happen."
Lower interest rates tend to support bond markets.
Moves in the $13 trillion U.S. Treasury market typically echo through global debt markets. Treasurys are used as a benchmark to price the foreign-currency sovereign debt of emerging-market economies and some corporate debt. A rise in U.S. yields would mean higher funding costs for many of these borrowers.
The moves also rippled through developed government debt. The yield on 10-year Australian and New Zealand bonds rose steeply Thursday following Wednesday's Treasury market move. In Europe, government bond yields moved higher across the board.
Around the world, bond investors are on Fed alert. A rise in U.S. interest rates could encourage other central banks to tighten monetary policy sooner than expected. Higher U.S. rates would typically strengthen the dollar against other currencies, easing financial conditions in those countries and reducing the need for central bank support.
Investors are already concerned that the ECB's massive bond-buying program won't be extended.
"Generally you're going to see central banks spending 2017 either dialing down the accommodation they have in place now or talking about it, and that's going to reprice bond yields higher," said Bob Michele, global head of fixed income at J.P. Morgan Asset Management.
Still, some investors caution against reading too much into the market's reaction to Mr. Trump's victory.
Bond yields have scope to move higher in the near term, but "we just don't know how Trump's presidential agenda will differ from the rhetoric of the campaign trail," said Adrian Hilton, a portfolio manager at Columbia Threadneedle Investments. "And neither do we know how much of that agenda can be passed through the legislature."
Write to Christopher Whittall at email@example.com
(END) Dow Jones Newswires
November 10, 2016 09:33 ET (14:33 GMT)
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