The Rearview Mirror – December 2016

Grafico US 10Y, United States, NYSE. Fonte:

Christian Zorico (150)



rearview mirrorOnly one word to describe November: Trumpeffect. Mr Trump won the 2016 election by stealing traditional Democrats’ votes away from the “blue” states of Michigan, Pennsylvania and Wisconsin. Focusing on those votes, much more than the Ohio or Florida ones, helps us better understand what of Trump campaign has made the difference. Apparently looking as a mix of an outsider and anti-establishment, surely an unorthodox Republican, the new President has spoken to the blue-collar white voter by accusing globalization for their critical job situation, specifically low wages pressure and positions losses.  Hence, we can explain the recent equity rally as a clear consequence of Trump promises to outspend Clinton. On the other hand, by refusing to adopt a Republican orthodoxy in perceiving a fiscal austerity, the bond market collapsed.

On Sunday 4 December, the new US President tweeted “The U.S. is going to substantially reduce taxes and regulations on businesses, but any business that leaves our country for another country”. By using Twitter, Donald Trump promised a 35% tax on products sold inside the U.S. by any business that fired American workers and built a new factory or plant in another country.

The big movement that nominal yields experienced in last month, due to a reprising of BEI (Break-Even Inflation), is in line with a reflationary trade. In fact, 10yr US Treasury yield surged more than 50bps since election’s outcome. Moreover the sell-off has been driven by the O.P.E.C. decision to cut its production by 1.2 mb/d bringing its ceiling to 32.5 mb/d, by the 1st of January 2017. On top of it, the long term has been hammered since the new nominee Treasury secretary indicated that he is open to the issuance of longer-term debt. The 30yr Treasury yield reached 3.05 per cent area after Steven Mnuchin, the former Goldman Sachs trader and hedge fund manager nominated by Mr Trump has declared that they are also considering ultra-long bond sales.

Grafico US 10Y, United States, NYSE. Fonte:
Grafico US 10Y, United States, NYSE. Fonte:

To sum up, governments bonds have been selling off in anticipation of new fiscal measures. After having benefited from a positioning on the short-end of the curve and a preference versus floaters, I believe it is the right time to investigate whether this reprising could be considered as a buy opportunity. Even if it is clear that rates have bottomed, we should take into consideration the internal and external effects of this new environment. Internally, a 100bp climb would add on an additional $200 billion to the US budget. The US debt weight of $20 trillion is not a negligible issue. Moreover I can not believe that Mr Trump will be in love with a strong dollar.

On the other hand, Emerging Markets will suffer as well on the hard currency debt issued during last years, reflecting into a poorer balance conditions and in a sluggish growth. For all these reasons, I will seriously monitor the indication from the December FOMC. We are going to approach to a new year characterized by several political tests that can be considered as a catalyst for a renewed interest in safe haven.


Christian Zorico: LinkedIn Profile



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