In his economic piece, "High Expectations for the Trump Economy as Bond Blow-Up Continues," Andrew Soergel explores the impact of the recent US election on financial markets. Stocks rose following Trump's victory in the US presidential election, according to Andrew.
Investors shunned assets, causing international bond markets to swing. Almost $1 trillion was lost in the global bond markets in just a few days. The 10-year Treasury note, a key bond benchmark, increased by more than 20%. The yield on 30-year Treasury notes has also risen to about 15%. Bond yields, according to Andrew, are inversely related to prices.
The US election changed the expectation of a change in the US fiscal policy which in return prompted a sharp re-pricing of financial assets.
Andrew noted that investors invest in stocks when trading conditions and expectations are healthy, but when the environment soars, they move to safer assets like bonds. There was an expectation that the bond market or stock market would waver after the election. The political transition was expected to bring uncertainty into the economy.
Treasury yields and interest rates increased, and higher interest rates were embodied into investors.
Andrew noted that higher inflation expectations resulted in a sell-off in bonds. The US mortgage rates are often pegged to Treasury yields. The bond sell-off, therefore, would hit the pockets of homebuyers. The mortgage rates can go higher by 20 percent to 25 percent than they were at lower bond yield levels.
Andrew noted that the expectation was that the wave of the election aftermath would later unwind after policy proposals resume to take shape.
However, the investors were keen on the speculation that Trump would dismantle the critical principles of the 2010 Dodd-Frank Act that promoted the government regulation and oversight of the financial sector (Soergel, 2016).
Evaluation and Critique
This article relates to readings on interest rates, bonds, and expectations theory. The section also covers a significant topic of interest on the impact of political events on financial markets, interest rates, and bonds. Political events may have positive or negative impacts on the overall economic status of a country. The political uncertainties also lead to fiscal uncertainty.
For instance, the election of Trump caused economic uncertainty which affected the interest rates and bond prices.
Investors felt that the economic uncertainty created would harm economic growth and corporate profits. According to economics theory, bond prices fall and may fall over an extended period when the interest rates rise. The political uncertainty, therefore, led to higher Treasury yields and interest rates. The rising interest rates led to lower bond prices and higher bond yields consistent with the rates. Bond investors sold-off their investments in bonds to avoid falling values (Besley, 2015).
I believe that the article successfully points out the impact of the US political transition on economic progress.
The expectation that the fiscal policy could be adjusted made investors reassess their trading in financial assets. Investors move to safer assets when the trading conditions are expected to be healthy. The bond prices wobbled, and markets sought insurance against risk. However, US investors respond differently to political constraints depending on different institutional backgrounds. The investors hold that nothing can be safe if the treasuries are not safe. Treasury yields are said to be the benchmark of all the rates. The uncertainty in the treasury affects the global economy. High treasury yields have an impact on the mortgage rates. Higher mortgage rates make mortgages less affordable. The high-interest rate risk makes investors keep away from investments that are likely to result in a loss (George, 2015).
References
Besley, S., & Brigham, E. F. (2015). Principles of finance. Australia: Cengage Learning.
George, W. (2015). Part I Financial Markets, 1 Financial Markets and Exchanges. Financial Markets and Exchanges Law.
Soergel, A. (2016). High Expectations for the Trump Economy as Bond Blow-Up Continues. Retrieved November 07, 2017, from https://www.usnews.com/news/economy/articles/2016-11-14/high-expectations-for-the-trump-economy-as-bond-blow-up-continues
