JMAC’s brokers have seen the election shake up financial markets. While stocks have rallied our brokers know that 2016’s wonderful rate environment has vanished. Clearly, the election was a catalyst, but why, exactly, are rates responding like this and what are the chances they can come back? Bond markets (which dictate rates) are worried about the uncertainty that has been created.
The Trump victory has left investors guessing what his actual policy path might look like and what the effects would be on the financial markets. Certainly, a Fed rate hike has become a 100% certainty at its meeting next week. This has pushed mortgage rates higher.
But there are other reasons for rates to move higher. Together with a unified GOP congress, Trump is expected to create inflation through increased infrastructure spending, protectionist trade policies, and lower taxes. (Lower taxes + higher spending = the need to print more Treasury debt, or plain old growth. Both would push rates higher. Protectionist policies could raise the cost of imports, which could add to inflation).
The infrastructure spending possibilities and potential tax cuts have boosted equities markets. Some investors think this is an opportunity to shift some funds out of bonds and into stocks. And many investors think the domestic situation makes December a perfect opportunity for Europe to announce that it will taper its asset purchases (thus decreasing overall demand in bond markets, which is bad for rates).
Trump did mention the possibility of "renegotiating" with America's creditors, which as our brokers know is never good for interest rates, and hopefully a hollow campaign promise. If Trump were to follow-through on mass-deportation goals, that could have an inflationary effect, as it implies an increase in the cost of labor.
JMAC’s brokers know that the theme of all this is more inflation, and inflation expectations have increased based on the potential changes in fiscal and monetary policy. And this rate spike is made worse by the level of uncertainty over the ultimate policy path: bond markets must account for a wider range of risks, and it's much safer for bond traders to be overly defensive of the worst-case scenarios until they can be ruled out.