We have often referred to the fact that the bond market (in gold on the above chart) leads all other financial markets (it was one of our themes for 2016).
10 year US government bond yields spiked following the Trump election reaching 2.6% in late December, more than 0.75% increase from pre-election levels (stocks, S&P 500 in white,
followed bond yields higher).
This was a reflection of an expectation of significant fiscal stimulus (from the new administrations promises) and the potential for higher inflation (known as the "reflation trade") as well as an increase in potential bond issuance (more supply of bonds driving prices lower and yields higher).
Bond investors want to ensure that they are protected from potential increases in inflation which erode the real return on their fixed income stream of bond coupon interest (see last Friday's blog about Canadian CPI data for more on "real returns").
So with inflation fears in their psyche, they sold bonds in November, hoping to replace them at lower prices and higher yields.
Lately, however, bond investors have been picking away at replacing some of what they sold back in November pushing yields down toward 2.3% (as we explained to our clients in our Webinar last Tuesday, we were also doing a little buying) .
They / we are not fearing inflation quite so much.
Politics aside, we are all waiting on more detail from the Trump Administration on what fiscal policy will look like. That may come tomorrow when the president addresses congress. However, the lack of any of that detail to date (markets are not known for patiently waiting) has been slowly and gradually impacting the outlook and bond yields have slipped.
Will stocks follow?
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist