Former US President Donald Trump arrives during a “Get Out The Vote” rally in Greensboro, North Carolina, US, on Saturday, March 2, 2024.
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Donald Trump’s U.S. election victory has ratcheted up concerns about higher prices, prompting strategists to rethink the outlook for global bond yields and currencies.
It is widely thought that the president-elect’s pledge to introduce tax cuts and steep tariffs could boost economic growth — but widen the fiscal deficit and refuel inflation.
Trump’s return to the White House is seen as likely to throw a wrench in the Federal Reserve’s rate-cutting cycle, potentially keeping an upward bias on Treasury yields. Bond yields tend to rise when market participants expect higher prices or a growing budget deficit.
Alim Remtulla, chief foreign exchange strategist at EFG International, said it would be “untenable” for the Fed to continue with its easing plans while yields rise.
“Eventually, either the Fed has to pause rate cuts as the economy is no longer at risk of recession or the economy turns and yields implode as recession looms,” Remtulla told CNBC via email.
“Trump’s election advances both possibilities as a trade war and increased fiscal spending work at cross purposes,” he added.
The benchmark U.S. 10-year Treasury yield has risen sharply since Trump’s election victory over Democratic nominee Kamala Harris in early November, before paring gains in recent days.
The 10-year Treasury yield traded more than 3 basis points higher at 4.4158% on Wednesday morning. Yields and prices move in opposite directions. One basis point equals 0.01%.
European bond market offers ‘more compelling value’
“In Europe, there’s been a slight reprieve on not-as-bad-as-expected data but also on the realization that Trump policies will take a quarter or two to enact,” EFG International’s Remtulla said.
“There’s also a possibility that rhetoric out of the Trump campaign was for election purposes and that he’ll govern closer to the status quo. This would also help the euro zone avoid recession and lift [the euro],” he added.
Germany’s 10-year bond yield, the benchmark for the euro zone, stood at 2.337% on Wednesday, marginally lower for the session. The yield on 2-year bunds, meanwhile, was up by around 1 basis point at 2.151%.
Pedestrians walk in front of the New York Stock Exchange (NYSE) decorated with a giant national flag of the United States on November 6, 2024 in New York City.
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Shannon Kirwin, associate director of fixed income ratings at Morningstar, said a significant chunk of investors were hoping for European bonds to hold up “fairly well” in the coming years, while the euro is expected to weaken.
“Even before the U.S. election, the consensus among the bond fund managers I have spoken with was that the European bond market offered more compelling value than the U.S. market,” Kirwin told CNBC via email.
“As a result, many managers had already positioned their portfolios to be slightly tilted towards European credit and away from US corporate bonds,” she added.
In an effort to raise U.S. revenues, Trump has suggested he could impose a blanket 20% tariff on all goods imported into the country, with a tariff of up to 60% for Chinese products and one as high as 2,000% on vehicles built in Mexico.
For the European Union, meanwhile, Trump has said the 27-nation bloc will pay a “big price” for not buying enough American exports.
“We’re hearing managers in both markets say they prefer to keep a bit of powder dry — for example by going up in quality or choosing to own a bit more cash than usual — in order to be able to take advantage of potential volatility down the road,” Kirwin added.
What about Asia?
Sameer Goel, global head of emerging markets research at Deutsche Bank, told CNBC’s “Street Signs Asia” on Tuesday that the escalating risk of higher U.S. inflation under a second Trump presidency doesn’t appear to have been priced in just yet.
Asked how Trump 2.0 could impact Asian economies and regional currencies, Goel said it was likely to lead to widening inflation gaps between the U.S. and Asia, which could then trigger further currency weakness.
“I guess, as always, different strokes as far as individual central banks and countries are concerned but I think there are more crosscurrents than offsetting here because tariffs could well end up being a lot more disruptive and damaging on growth,” Goel said.
“On the other hand, it could be inflationary depending upon where energy prices go or alternative issues like currency weakness, which could feed back in for some countries more than it would be for elsewhere,” he added.
For Asian currencies, analysts at MUFG said investors were yet to fully price in the potential scale of U.S. tariffs on China and elsewhere.
A 60% tariff on Chinese products, for instance, would require a 10% to 12% depreciation of the Chinese yuan against the U.S. dollar, analysts at MUFG said in a research note published on Nov. 7. They warned the potential for tariff retaliation could make matters worse and there’s also a risk of other countries raising tariffs on China products.
Asian currencies with higher exposure to China were thought to be more vulnerable to Trump tariffs, analysts at MUFG said, citing the Singapore dollar, Malaysian ringgit and South Korean won.
Currency outlook
Strategists at Dutch bank ING said in a research note published earlier this month that there is a tendency in financial markets to do “a lot of second-guessing” over possible outcomes.
“Our advice is not to overthink it and instead take the firm view that the new administration’s plans for looser fiscal and tighter immigration policy, when combined with relatively higher US rates and protectionism, all make a strong case for a dollar rally,” strategists at ING said in a note published Nov. 13.
“Yes, the US economy may end up overheating — but 2025 should be the year when more air gets pumped into any potential dollar bubble,” they added.
Euro-dollar year-to-date.
European currencies, meanwhile, are expected to underperform.
Strategists at ING said they estimate a peak of risk premium from late next year, which will mean that even if the euro can hold above parity with the U.S. dollar before then, “we see all the conditions for a structural shift from a 1.05-1.10 range to a 1.00-1.05 range” next year.
Scandinavian currencies such as Sweden’s krona and Norway’s kroner were likely to be vulnerable to downside risk, ING said, while Britain’s pound sterling and the Swiss franc were poised to “marginally outperform” the euro.