US 10 Year Bonds + 1/2% Will Be Tough On The Global Economy Until Tax Reductions And Infrastructure Spending Kick In
US government 10 year bond yields (gold line) have jumped by about 1/2% since the US presidential election results were announced. Canadian 10 years are higher by about .35% (white line). This will impact borrowing costs on a global scale and with record debt levels, debt servicing just got about 30% more expensive. If you have a renewing mortgage this will be impactful. Business borrowing for investment or share buy-backs also just got more expensive.
This is all happening because it is anticipated that US GDP will rise on the back of expected tax reductions and infrastructure spending in the US and will, as a result be inflationary and bond investors will demand higher yields to protect them from future inflation:
However, there is going to be a gap between when higher interest rates (from the bond market) occur (immediately) and when all this positive economic impact will occur, likely in late 2017 or early 2018.
Between now and then, there is a decidedly tricky time period when expectations will be rising without any real action having taken place and the costs of debt are rising with no real economic stimulus to offset it.
As we always say, a great deal will be in the hands of the consumer because they are about 2/3 of the US economy. Their debt servicing costs are going up, so are they going to feel so inclined to ratchet up their spending?
Maybe the 25.5% who voted for Trump. Less likely that the 25.6% who voted for Clinton will be as confident. What about the 46.9% who didn't vote? What about the folks who are all of a sudden expecting to get jobs? Will they re-enter the labour-force now, or will they wait until late 2017, early 2018?
In the meantime, what of a more protectionist trade agenda that could place the global economy in further jeopardy?
There are many questions still to be answered.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist