US bonds hit as election result and sales data drive bets on inflation

The US government bond market ­suffered a fierce, renewed sell-off and the dollar powered to a 13-year high ­yesterday, as stronger economic data bolstered the case for an interest-rate increase and reinforced the view that the multi-decade bond bull market has reached a turning point.

The Republican sweep of the White House and Congress, coupled with president-elect Donald Trump’s promise to unleash a $1tn economic stimulus package of tax cuts and infrastructure investment, has caused a seismic shift in ­global bond markets, with prices tumbling and borrowing costs rising as investors bet that inflation will finally reappear.

European bond yields had already jumped on the back of reports that the European Central Bank was considering changes to its securities lending programme, which would ease a bond shortage. The moves were reinforced by strong US durable goods data, and exacerbated by thin trading in bond markets ahead of the US Thanksgiving holiday.

“In what was supposed to be a quiet day, bond vigilantes are putting it to the Treasury market,” said Andrew Brenner, head of international fixed income at National Alliance Capital Markets.

The 10-year Treasury yield shot up by as much as 10 basis points, its biggest move since the presidential election, to over 2.4 per cent, for the first time since the summer of 2015. The two-year note yield – the most acutely sensitive to interest rate expectations – climbed to a six-year high of 1.14 per cent.

The moves came after the US Commerce Department said that orders for durable goods rose 4.8 per cent in October, smashing economists’ expectations and reinforcing the sense that any stimulus package will come at a time when the economy is already in reasonable shape, and therefore fuel inflation.

“Donald Trump’s surprise election victory should be viewed as a new global shock, mixing positive demand and negative supply elements. There remains considerable uncertainty about the actual mix of policies to be enacted but the bias of risk reinforces the tilt toward reflation,” JPMorgan’s analysts said.

As a result, mounting expectations of more aggressive US interest rate increases in the coming year have reawakened the slumbering dollar rally, sending the DXY index of the currency’s strength against its leading peers to a 13-year high yesterday. Only two of the world’s top currencies managed to hold their ground against the dollar.

The yen led a retreat, while the gap between US and Japanese yields widened, opening the prospect of the Bank of Japan having to intervene in the bond market to retain credibility.

With yields in other bond markets rising in tandem with Treasuries, analysts believe it is getting tougher for the BoJ to maintain its policy of keeping the yield on 10-year Japanese bonds at zero.