Global Bonds Plunge As "Trumpflation" Rally Returns, Dollar Jumps

After taking a one day breather, the "Trumpflation" Rally returned with a vengeance as global government bonds tumbled and the dollar rose on renewed speculation the economic outlook is strong enough to allow the Federal Reserve to hike in December (odds are now 94%). Asian shares rose, industrial metals and crude oil fell, European shares and US equity futures were pressured.

As reported last night, the latest bond selloff started in Japan where JGB futures slid after a BOJ buying operation was poorly received, and yields on both the 2Y and 5Y rose to or above the BOJ's -0.1% interest rate. 10 year Japanese yields have edged back above zero intra-day for the first time since September 21st and the market will at some stage focus on whether the BoJ will defend the zero level, especially if the global yield sell-off gathers pace over the coming weeks and months. It would be a strange decision to abandon the new policy so soon after announcing it so assuming global yields remain elevated they may be forced to buy more JGBs than they thought when the new scheme was announced.

As DB's Jim Reid observes, if the BoJ sticks to defending zero in a world where the US is likely to increase fiscal spending then you could make an argument that there is full blown helicopter money except that the BoJ is flying the copter over the US and may be about to become the new US government’s best friend. Without them, and without the ECB, it might be that Trump would be less able to spend freely on the fiscal side as yields would be less supported globally. Certainly one way to think of in our opinion.

Read the entire article