Slide in global bond prices a warning for equity bulls

London

THE implosion of the gigantic US and global bond bubble since Donald Trump's election victory is a warning for equity markets.

Domestic and foreign holders of US bonds have been selling because they fear that the Trump administration will embark on massive borrowing to finance its expected Keynesian policies of infrastructure and defence spending combined with tax cuts. Moreover, after years of monetary easing, there are worries that US inflation will accelerate next year. Federal Reserve Board chair Janet Yellen cautioned on Thursday that the central bank would raise interest rates "relatively soon" and the immediate impact was a further spike in bond yields while the US dollar appreciated in tandem. Following Mr Trump's victory, the knee jerk reaction of US and global markets was to dump high priced bonds and push up already inflated share prices and certain commodities. Such was the decline, that the yield on US 10-year treasury bonds, jumped from 1.39 per cent, early August 2016 to 2.28 per cent, on Friday. When bond yields rise, prices fall and the longer the life of the bond, the greater the fall. Thus 10-year bond prices have fallen by 8 per cent since their peak, but the 30-year bond's rise in yield from 2.14 per cent to 3.03 per cent, resulted in a price decline of 18 per cent for the 30-year bond.