Bonds’ Trump Thump

Nov 21, 2016 by

donald trumpAmidst the post-election celebrating/head-banging, you may have missed a very dramatic impact of Trump’s election on financial markets. Nope, I’m not talking about the stock market’s Trump rally (which you may have noticed was confined to the U.S.). The Treasury bond market crashed violently after the election, and the carnage may not be over. Check out this chart of 10-year Treasury bond rates:

Treasury bond chart

On November 4th the 10-year bond rate was 1.738%. On Friday, November 18 the same bond closed with a rate of 2.335%. I’ll save you the trouble of reaching for your calculator: that’s a 31% increase in the 10-year T-bond’s rate over just 10 business days.

On November 9th alone—the day after Election Day—the rate jumped 11% from 1.862% to 2.072%.

This isn’t how T-bond sales and interest payments work, but just to illustrate the impact of the rate increase that’s occurred since November 4th:

Let’s say you bought for $1,000 a 10-year Treasury bond on November 4th, and that the bond’s rate was 1.738%—the rate at which T-bonds closed that day. That means your bond pays $17.38 interest annually.

Now let’s say it’s Friday, November 18, ten business days later. Your bond still pays $17.38 interest annually. But if you wanted to sell your bond on Friday, no one’s going to buy unless unless the buyer can earn 2.335% on her investment—the rate at which 10-year T-bonds closed on Friday. That means a buyer would be willing to pay only $744 for the bond that cost you $1,000 ten business days prior.

$17.38 interest / $744 investment = 2.335% return

In ten business days, on paper you’ve taken a $256 hit on your $1,000 investment.

Now multiply that times a gillion bondholders and you get a sense of the financial magnitude of this meltdown.

As you know from reading How Bonds Work, bond values and rates are inversely related. That means when one goes up, the other goes down. “Tanked” understates the election’s impact on bond values. Over $1 trillion in bond value was wiped out on November 9th and 10th. And as the chart shows, the crash has continued uninterrupted through last Friday.

How Did Trump Make Bond Rates Jump?

Again as you know from How Bonds Work, bond rates/prices are linked primarily to two factors: bond investors’ collection evaluation of 1) future inflation, and 2) the likelihood of default. Evidently bond investors’ believe Trump’s policies to be inflationary, at least relative to Clinton’s. Investors may also believe the likelihood of default has increased given that Trump said during his campaign that defaulting on Treasury debt could be an option. (Opinion: I doubt enough people believed him to impact the Treasury bond market.) Also, Trump’s $1 trillion infrastructure plan and tax cuts for the wealthy will be debt-financed, potentially putting pressure on the Treasury bond market. Supply outstripping demand for any product translates to lower prices (which means higher rates in the case of bonds).

What Does the “Trump Thump” Bond Market Crash Mean for You?

You may be thinking, “Big deal—I don’t own any bonds.” You might be right, but you might not.

If you own any “balanced” funds or ETFs in your investment portfolio, then you own bonds.

If you own a so-called “target fund” attached to your projected retirement year—such as Vanguard’s Target Retirement 2020—then you own bonds, possibly a lot of bonds. For example, 40% of the assets in the Target Retirement 2020 fund are invested in bonds.

Relief for Savers, At Last?

Selfishly—but I’m sure I’m not alone—I’m pleased that bond rates are at last rising from the historic lows that have prevailed since the 2008 meltdown. We own individual junk bonds, all of which will mature in one year or less. (See How I Invest Our IRAs to learn more.) The value of these bonds has dropped dramatically over the past week, but I don’t care because I have no plan to sell them. I’ll let them mature, as planned when I made the investment.

We also maintain a long-standing, significant investment in Treasury Inflation-Protected Securities, or TIPs, through Vanguard’s TIPs fund (VIPSX). The shares of this investment have dropped $0.21 per share (1.3%) since the election. But longer term, if indeed inflation does pick up, we’ll benefit through TIPs’ adjustment of principal tied to the Consumer Price Index.

With the Federal Reserve apparently finally poised to raise interest rates, albeit haltingly, more upward pressure on interest rates generally may be expected.

This is all good news for those of us with cash hoards. We’ve earned little on these deposits for nearly a decade. I look forward to once again earning a respectable interest rate on our liquid cash in money market accounts.

And for the longest time I’ve had my eye on two Vanguard funds for our cash: its Short-Term Bond Index (VBIRX) and its GNMA Fund (VFIIX). The share price of each of these has declined quite a lot over the past week, a trend that (again, selfishly) I hope continues so that I can gradually invest over the next months and years and earn a decent yield for a change with less principal risk, thanks to the Trump Thump.

How Has Trump’s Election Affected Your Portfloio?

The S&P 500 is up 2% since November 8th while bond values have crashed. How has your portfolio fared since Trump’s surprise victory? Have you been afraid to look?

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