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Days ahead of the inauguration of Donald Trump, bond yields come under the spotlight. In this podcast, George Goncalves, Head of Fixed Income Strategy in the Americas, speaks with our Senior Global Economist, Charles St. Arnaud to uncover the drivers of the bond market.

After yields hit a multi-decade low where there was a reach for safety and yield, there has been a change in the direction of leadership in the Americas with markets now focusing on fiscal policy rather than monetary policy - a trend that can be seen in markets outside the United States. This combination has led to higher rates and with the economy starting our last year on a weaker footing, we've seen a back up in rates. Interestingly, there is still an expectation in the consumer side of inflation staying at a higher level.

When we look at demand of US treasuries and the ongoing QE programs in the US and Japan, the displacement effect is still absorbing some of the treasury supply.  Markets are trying to discount the impact of additional supply from fiscal spending, tax reform and infrastructure spending that has been mentioned by Donald Trump's transition team. 

There has always been a dichotomy between US and global investors in the US bond market.  In the last cycle with low rates from the Fed and QE, it felt as if a capitulation was taking place and treasuries may be more of a feature for some of these investors.

With Trump's inauguration on 20 January, we will be closely watching his announcements on tax reform, infrastructure spending, trade and the repeal of Obamacare.  Speed is of the essence for markets and President Trump's plans and the timing of these plans will play a major role in the way markets respond.  In addition to some of the tax reform policies, if there is a disincentive to issue more credit bonds and companies issue more equities or change the funding models, there might be less corporate bonds in the system.

Markets globally have begun to accept the rise of populism and while, most people are waiting for the timing on Brexit, it is in the top 5 of things US investors are watching.  Brexit will be a big driver globally and with the Dutch, French and German elections this year, US investors are increasingly adopting an 'anything is possible' view and how may these changes the ECB and impact monetary policy makers.

Explore more on our cross-asset views for 2017 on our Themes and Trades page.

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