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Prices fall as Trump election win fuels inflation bets

Published 11/09/2016, 09:15 AM
Updated 11/09/2016, 09:20 AM
© Reuters. U.S. dollar notes are seen in this picture illustration
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By Karen Brettell

NEW YORK (Reuters) - U.S. 30-year Treasury yields rose to more than nine-month highs on Wednesday as investors bet that U.S. President-elect Donald Trump will enact protectionist trade policies that will weaken the U.S. dollar and increase inflation, eroding the value of U.S. bonds.

Republican Trump stunned the world by defeating heavily favored rival Hillary Clinton in Tuesday's presidential election, ending eight years of Democratic rule and sending the United States on a new, uncertain path.

Treasuries initially rallied before sharply reversing course, with long-dated bonds, which are most vulnerable to inflation, performing the worst.

“The Republican success points to a period of protectionism and retaliatory tariffs, which will, of course, lead to higher inflation and weaken the dollar,” Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York, said in a note.

“The obvious implications point toward higher yields and a steeper curve,” he said.

Trump has also indicated that he would spend more on developing U.S. infrastructure, which could increase the U.S. deficit and Treasury supply.

Benchmark 10-year notes (US10YT=RR) were last down 24/32 in price to yield 1.95 percent, up from 1.86 percent late Tuesday. The yields rose as high as 1.97 percent, the highest since March 16.

Thirty-year bonds (US30YT=RR) dropped 2-21/32 in price to yield 2.76 percent, up from 2.63 percent on Tuesday, after earlier rising to 2.81 percent, the highest since Jan. 28.

The yield curve between five-year notes and 30-year bonds steepened to as much as 146 basis points, the steepest since Feb. 5.

The dramatic jump in yields could reduce demand at this week's auctions of longer-dated debt. The U.S. Treasury Department will sell $23 billion in 10-year notes on Wednesday and $15 billion in 30-year bonds on Thursday.

"I think people are going to bid those auctions very cautiously and they could be very difficult sales," said Lou Brien, a market strategist at DRW Trading in Chicago.

The Federal Reserve may also be less likely to raise interest rates at its December meeting if market volatility persists, even if employment continues to improve.

© Reuters. U.S. dollar notes are seen in this picture illustration

"If stocks have a real problem between now and the middle of December, then that makes it less likely," said Brien.

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