Trump Has Bond Investors Rethinking What’s Normal

Back when he was the chief executive officer of bond-fund giant Pacific Investment Management Co., better known as Pimco, Mohamed El-Erian popularized the term “new normal” to describe the long period of slow growth the world faced in the wake of the 2008 financial crisis. Others called it “secular stagnation.” By any name it was an idea that powered a bond bull market: Since low growth implied low inflation and low interest rates, investors were willing to accept razor-thin yields on bonds. For example, yields on the 10-year Treasury closed at a record low 1.36 percent on July 8. Bond prices rise as yields fall, and vice versa.

If there’s one thing that’s clear about Donald Trump, it’s that he’s not the status quo. For now, markets are taking an optimistic view about the effects of Trump’s calls for deregulation, tax reform, and infrastructure spending. In the U.S. stock market, that’s translated into a rally. Bond investors, on the other hand, began selling in anticipation of higher inflation and interest rates. Their bet was confirmed on Dec. 14 when the Federal Reserve raised short-term rates a quarter point.