"This Year’s Earnings Looked Promising... Global Bond Market Shakes Over Trump"

Bond Market Expected to Benefit from Interest Rate Cuts
Both US and Emerging Markets Return This Year's Gains
Investor Sell-Offs Continue Amid Trump Risk

This year, the global bond market, which had been revived by pivots (pivot·monetary policy shifts) in various countries around the world, is facing a crisis again. As a result of investors rushing to sell bonds indiscriminately?whether in the United States, the world's largest bond market, or in emerging markets, which are relatively classified as riskier bond investment markets?due to economic policy risks associated with the election of Donald Trump as U.S. president.

According to Bloomberg on the 17th (local time), concerns about the outbreak of a trade war due to tariff hikes by President-elect Trump and the sharp rise of the dollar have rapidly worsened the outlook for emerging market local currency bonds. The Bloomberg Emerging Markets (EM) Bond Index has fallen 3.5% since early October, giving up a significant portion of this year's gains. Bloomberg noted, “The 'America First' policy of President-elect Trump is seen as harmful to emerging markets, accelerating the downturn in emerging market bond markets.”

Bond investors expect emerging market central banks to maintain high interest rates for a longer period due to the strength of the U.S. dollar. In a strong dollar environment, if emerging markets lower interest rates recklessly, it would further weaken their currencies and inevitably deepen the trade recession. The U.S. Dollar Index, which measures the value of the dollar against six major currencies, reached 106.73 on the day, marking its highest level in six months.

The rise in U.S. Treasury yields could further fuel the sell-off of emerging market bonds. Phoenix Kallen, strategist at Soci?t? G?n?rale SA, said, “If the upward trend in U.S. bond yields continues, it will be a burden on inflows into emerging market bonds.”

As a result, emerging market bond yields are expected to remain high for the time being (bond prices falling). John Harrison, Managing Director and Emerging Markets Macro Strategist at TS Lombard, analyzed, “Probably the biggest fear among emerging market investors is the imposition of high tariffs,” adding, “Due to the uncertainty of Trump’s policies, the risk premium on all emerging market assets will increase.” Tan Min Lan, Chief Investment Officer for Asia Pacific at UBS AG in Singapore, explained, “Over the next 12 months, yields on Asian local currency bonds could range from negative to low single digits.”

The U.S. bond market is also losing momentum. The U.S. Treasury Index compiled by Bloomberg showed a record high annual return of 4.6% on September 17, when the Federal Reserve (Fed) cut the benchmark interest rate for the first time in four and a half years, but has since dropped to 0.7%. This is because U.S. economic strength and concerns over a sharp increase in fiscal deficits due to President-elect Trump’s election pledges have pushed Treasury yields higher. According to Bloomberg, since the Fed’s first rate cut in September, the 10-year U.S. Treasury yield has risen by 71 basis points (1bp = 0.01 percentage points) over two months. Bloomberg reported, “Since 1989, there has never been such a large increase in Treasury yields just two months into a rate-cutting cycle.”

Many analysts also expect U.S. Treasury prices to continue their downward trend for the time being. Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, said, “The 30-year U.S. Treasury yield, currently at 4.6%, could rise to 5%,” pointing out, “This is because the second Trump administration is expected to expand the fiscal deficit through tax cuts.” He added, “The fiscal aspect and risks from bond issuance mean that investors will demand a higher risk premium.”

This content was produced with the assistance of AI translation services.