Given recent improvements in global growth and breakouts in global bourses post-Brexit, the low bond yields represent a conundrum. Could Trump really be an answer to the puzzle?
The 10-year nominal rate is inversely correlated with the probability of Donald Trump winning the U.S. election. So why buy Treasurys as a hedge against a Trump presidency? Generally speaking, Trump is a reason to own safe-haven assets for two reasons:
Trade: Trump could start a trade war with China in 2017. The consequences of a mercantilist America would be profound, potenitally throwing the world economy into a 1930s-like “beggar-thy-neighbor” spiral at a time when global trade is already weak.
Geopolitics: Trump is right when he says that the world is a mess because America is weak. The rest of the world has become a lot more powerful in the last two decades of relative peace and prosperity. The end result is global multipolarity, where numerous countries can pursue their interests independent of one another. We know from political science theory, formal modeling, empirical analysis, as well as the last five years of conflagrations that such a distribution of power is the most likely to create the sort of “messy world” that Trump claims he will “fix”.
Our U.S. bond strategists are not too surprised by the above relationship. They have pointed out that economic factors alone cannot explain the most recent downleg in bond yields. Rising “policy uncertainty”, which includes U.S. politics, has also been depressing bond yields.