When the yield on the 10-year Treasury bonds moved from 1.80% to 2.30% in mid-November, it signaled a shift to an inflationary mindset among investors.
What might have happened to cause such a dramatic change in bond yields?
There’s a new sheriff in town and his name is Donald Trump. Next year, both houses of Congress will also be controlled by the Republicans, though minority Senate Democrats will be able to filibuster.
Big Spending
There’s the anticipation of a more inflationary environment with tax cuts and a big infrastructure spending program.
That, in turn, has caused investors to shift out of bonds and into equities.
Looking at historical data, bond bulls believe the move is too far too fast.
Oil Prices
They point to overcapacity in many industries and a vast labor pool, suggesting that inflation will remain muted. That’s a plus for bonds.
Oil prices are also bouncing along the bottom of a historically low trading range, mostly because of a glut of foreign supply thanks to aggressive production levels by OPEC, especially Iran.
Equity bulls, on the other hand, see a dramatic, pro-business swing in policy under a Trump administration.
Regulatory Easing
That could mean a surge in risk-taking, which would be good for stocks.
At the very least, a profit seeking enterprise won’t be demonized for attempting to maximize profits.
In my opinion, regulations always affect the mindset of those who are regulated, both suppliers and consumers.
Animal Spirits
When you have fewer rules, or less stringent enforcement, or lower tax rates, a business is more apt to reinvest capital in search of higher profits in the future.
If Trump lowers tax rates on corporate profits parked overseas, the attitude towards risk becomes more aggressive.
Of course, a key factor is going to be the change in policy towards trading partners, possible tariff retaliations, and the impact on currencies.
100 Days
All are totally dependant on president-elect Trump, who made fair trade a central theme of his campaign platform.
In sum, it remains to be seen what the new administration gets accomplished in the critical first 100 days and the resulting economic effects.
Still, ask any business person to compare Mr. Trump to Mr. Obama and see what kind of reaction you get.
Photo Credit: Mokenco via Flickr Creative Commons
