Bond market implications from Trump - Westpac

Research Team at Westpac, lists down the implications on the bond markets from the Donald Trump’s victory in US elections.

Key Quotes

“US bonds: So just how far can US 10yr yields fall? Should they re-test the lows (1.32%) sparked by the Brexit decision? For now, we stick with our view (as expressed in the weekly on Monday) that the initial safe haven response could push the yield back down to 1.6% or so, but post-Brexit lows will not be threatened. Eventually, the market should instead move to focusing on the potential for increased fiscal stimulus and supply consequences of the new president's policy platform - although this is likely to be reflected in a steeper curve rather than providing a handbrake to lower yields in the near term.

Australian bonds: For Australian yields, we suspect that an extended US safe haven rally should widen the AU-US 10yr spread slightly, but the initial reaction has in fact been quite the opposite; AU/US 10yr spread outperforming by 4bp on the day. Our preferred stance is to use "risk-off" widening as an opportunity to enter narrowers, but markets are not presently providing the window. Some of that is being driven by the front end, where the market has revised the chances of another RBA rate cut from <50% chance to around 15bp of easing now priced into the curve by August next year. As a result, further down the curve, 3yr bonds futures have raced through recent resistance levels with implied yields falling 20bp from high to low so far today. We expect further rallies will not be equally shared across the term structure, but rather will have the effect of flattening the curve (which is presently unchanged on the day).

NZ bonds: NZ interest rates have also followed the global lead, the 10yr swap rate falling from 3.03% to 2.89%, flattening the curve from 75bp to 69bp. However further flattening is not assured. As noted above, fiscal implications may limit the extent of US treasury yield declines. In addition, the RBNZ will almost surely cut the OCR by 25bp tomorrow, but markets had earlier priced in that as the end to the easing cycle (partially pricing in tightening from 2017). Now, markets may price in some chance of further easing, after the RBNZ’s statement tomorrow, which would push the 2yr lower.”