Monday 14 November 2016 7:41 pm

Donald Trump's $1 trillion spending plan spurs global bonds sell-off as Dow reaches record highs

The global bond market is undergoing a massive sell-off as investors weigh the implications of US President-elect Donald Trump’s unorthodox policy proposals.

Today the yield on 30-year US Treasury bonds rose above three per cent for the first time since the start of January, owing to fears that inflation will rise once Trump’s policies take effect.

Meanwhile, German 30-year bond yields rose above one per cent for the first time since the end of April, while UK 10-year gilt yields rose to levels not seen since before June’s vote to leave the European Union.

The rise in bond yields, which move inversely to prices, continues the trend seen since Trump’s surprise victory last week wiped $1 trillion from the global bond market. Investors are betting on an uptick in growth, at least in the short run, boosting risk appetite.

During the election campaign Trump touted an unusual mixture of “America first” protectionism and massive fiscal stimulus in the form of $1 trillion in unfunded public infrastructure investment. The prospect of a growing stock market provides an incentive for investors to move money from bonds to equities.

"We’ve had a sentiment shift in the bond market. We’ve seen it, too. People have already started reallocating out of bonds and into stocks,” said Jeffrey Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital, an investment management firm.

The Dow Jones Industrial average hit a record high today, continuing the upward trend that has emerged after initial post-election turmoil.

Markets are also being spurred by an expectation that inflation will rise. Inflation causes investors to move money out of bonds because coupon payments lose real value as the currency involved depreciates.

However, much uncertainty still remains with regards to the specifics of Trump’s policy platform and its effect on markets, particularly with regard to international trade. The make-up of Trump’s circle of advisers “will signpost whether the notable sector rotation that began in the wake of the election result actually makes sense,” according to Jasper Lawler, markets analyst at CMC Markets.

Emerging market currencies have also been hit heavily owing to the renewed expectation of higher US interest rates and Trump's strong rhetoric on international trade. The Mexican peso leads the falls, after the currency slumped to a record low of 21.39 against the dollar, before recovering slightly to 20.81.

The US Federal Reserve has given an indication that it will likely raise interest rates in the near future, despite uncertainty over Trump's stance towards the central bank. Fed vice chairman Stanley Fischer pointed to the likelihood of a “gradual removal of accommodation” in the near future in a speech given in Chile on Friday.

"The Fed may be forced to increase rates if it wants to get a head-start on the potential ‘Trumpflation’ the market has been so keen to price in during the last few sessions," said Connor Campbell, an analyst at Spreadex, a spread betting firm.

Trump’s plans could “partially reverse the prior post-financial-crisis policy framework of ultra-loose monetary policy combined with a relatively tight orthodox fiscal policy,” according to Mihir Kapadia, chief executive of Sun Global Investments, a London-based investment manager.