Beware the bond market mirror

Last year, we saw government bonds rally and then fall, while high-yield bonds struggled and then rallied. It looks like this year we could see a similar pattern but in reverse.

The stronger economic growth momentum and rising inflation statistics are the driving force for higher government bond yields. In addition, a number of President Trump’s pledges such as pro-business policies and infrastructure spending could be positive for the economy, leading to higher growth and inflation – a bearish environment for bonds.

However, his more controversial campaign promises, including protectionist trade policies and an immigration clampdown, could lead to a flight to safety – a boost for bonds perceived as ‘safe-havens’. We are concerned that risk markets are currently complacent about this uncertainty, with investors seemingly buying into the good news rather than taking account of any potential problems.

Paul Brain – Newton, a BNY Mellon company

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