Trump win may herald end of 35-year bond rally

ANZ economist Cameron Bagrie pictured in Hastings outside of the Queen Street bank. Photo / File

Bond markets in New Zealand and around the world have been heavily sold in the aftermath of Donald Trump's win in the US presidential election, raising the possibility that the market's 35-year bull run may finally be reaching its end.

The events over the 48 hours, when added to the Reserve Bank's latest monetary policy statement, have added more weight to the argument that says the days of low interest rates are numbered, analysts said.

"That's the core view at the moment," ANZ chief economist Cameron Bagrie said.

Along with Trump's surprise election, markets have been driven by a number of factors, among them being a perception that there is now less deflation risk.

Markets have also increased the odds that the US Federal Reserve will raise its official rate at its next opportunity in December.

When election results were rolling in, US 10-year treasury yields went from 1.85 per cent to 1.72 per cent, then shot to 2.07 per cent - the first time in eight months - on the back of the final outcome.

At the same time, the New Zealand government 10 year bond yield went from 1.72 per cent to 2.95 per cent - a huge move considering the market generally moves by only a few basis points on an average day.

Bond prices - which are sensitive to inflation - have an inverse relationship to bond yields; when bond prices rally, yields go down and when bond prices fall, yields go up.

In 1981, when US inflation was running at 10 per cent, the 10-year U.S. bond yielded nearly 16 per cent.

Since then, bond investors around the world have done well because inflation has been tamed; forcing bond prices up and driving yields lower and lower.

Loose monetary policy around the world in the aftermath of the Global Financial Crisis has driven interest rates to near zero or in some cases into negative territory.

Inflation is now so low that most central banks - including our own Reserve Bank - would like to see it go higher.

They may be about to get their own way.

Trump, in his acceptance speech, said his administration was going to spend big on rebuilding America's infrastructure and would employ millions of people to do it.

The president elect has also campaigned heavily on anti-free trade themes and these, together with the fiscal stimulus, look to be inflationary, analysts said.

"The big thematic globally is the potential for monetary policy stimulus to give way to fiscal policy support, and that takes central banks away from being a buyer of bonds and turns central governments into issuers of bonds," ANZ's Bagrie said.

"If you get that those two together, you get higher rates," he said.

Mark Brown, fixed interest portfolio manager at Harbour Asset Management, said the bond markets had been nervous about a Trump win in the lead up to the election.

"People have started to think more deeply about the policies that are likely to be implemented under his regime, and they are stimulative ones," he said.

The Reserve Bank's statement this morning delivered - as expected - a 25 basis point rate cut, but it was seen as being the last one in the current easing cycle.

"In New Zealand we have got strength in the economy and I think that the Reserve Bank is going to gain confidence that inflation can get back up to with in the middle of the band at 2 per cent (from 0.4 per cent the September year)," Brown said.

"I think that we are in a process of global bond rates moving higher. In the absence of another significant global financial crisis - risks all lie in that direction," Brown said.

"In the medium term, the risk is that rates go higher."