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Nov 18, 2016 8:13AM EST – Bonds continue to get hit as President-elect Donald Trump sends inflation expectations surging | published: Nov 18, 2016 8:10AM EST

by November 18, 2016 General

Bonds around the world headed for their steepest two-week loss in at least 26 years as President-elect Donald Trump sends inflation expectations surging.

The Bloomberg Barclays Global Aggregate Index has fallen 4 per cent in the period through Thursday. It’s the biggest two-week rout in the data, which go back to 1990. Federal Reserve Chair Janet Yellen fueled the decline by saying Thursday an interest-rate hike could come relatively soon.

“We maintain our short position in Treasuries,” said Mohit Kumar, head of rates strategy at Credit Agricole SA’s corporate and investment banking unit in London, referring to bets an asset’s price will decline. “That said, we don’t expect a sustained selloff from here. Valuation is not rich any more and is close to fair.”

Treasury 10-year note yields increased one basis point, or 0.01 percentage point, to 2.32 per cent as of 6:44 a.m. in New York, according to Bloomberg Bond Trader data. The 2 per cent security due in November 2026 fell 1/8, or $1.25 per $1,000 face amount, to 97 6/32. The yield climbed earlier to 2.34 per cent, the highest since Dec. 3.

“Trump is a game changer,” Park Sung-jin, the Seoul-based head of investment at Mirae Asset Securities Co., which oversees $7.61-billion. “I was bearish, but the current level is more than I expected. It was harsh.”

The selloff has gone fast enough that it’ll probably pause before yields press higher in 2017, Park said.

Read more: Don’t fight the Trump tidal wave Yellen signaled the U.S. central bank is close to lifting interest rates as the economy continues to create jobs at a healthy clip and inflation inches higher, addressing U.S. lawmakers Thursday.

The president-elect’s pledges include tax cuts and spending $500-billion or more over a decade on infrastructure, a combination that’s seen as spurring quicker growth and inflation in the world’s biggest economy. Trump has also blamed China and Mexico for American job losses and threatened punitive tariffs on imports.

The difference between yields on U.S. 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, rose to as much as 1.97 percentage points this week, the highest level since April 2015.

Trump Impact

Ten-year Treasury yields will be 2.5 per cent to 2.75 per cent a year from now if Trump pushes through his proposed tax cuts and fiscal-spending policies, said Michael Kushma, chief investment officer for global fixed income at Morgan Stanley Investment Management.

A strengthening dollar and Trump policies that curb trade may hurt growth and limit the increase in yields, Kushma, who helps oversee $406-billion, said in an interview in Singapore Thursday.

“We’re still worried about rising U.S. yields,” he said. “In the short term, we think they’ve peaked. They could easily go up again.”

Alternatives include high-yield bonds and non-agency mortgage-backed securities, Kushma said.

“High yield is a good place to hide because it’s more cyclically sensitive than interest-rate sensitive,” he said.

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