Fears about the inflationary potential of Donald Trump’s planned tax cuts and infrastructure spending have sent shock waves through the world’s bond markets, as investors take fright at the prospect of higher than expected interest rates in the years ahead.

Central banks are braced to suffer fresh losses on their vast holdings of government debt after the sell-off that saw $1tn wiped off the value of bonds last week intensified on Monday.

Bond prices fell for a sixth day running in the UK, pushing the yield on government gilts to their highest level since the weeks leading up to the EU referendum, and US bond yields reached levels last seen in December 2015. Bond yields, the rate of interest an investor gets, rise when bond prices go down.

The sell-off has been triggered by concerns about the impact of Trump’s economic policies when he arrives in the White House in January.

Share prices have risen since the US election on optimism that stronger growth will result in higher corporate profits. At one stage on Monday, the Dow Jones Industrial Average – which measures the value of the top 30 US companies – was up nearly 90 points at a new intra-day high of 18934 points.

Dow hits record high after Trump win but investors warn of volatility Read more

The president-elect is promising tax cuts for both companies and individuals together with a $550bn boost to infrastructure spending in order to raise the US growth rate from 2.5% to 3.5% a year.

Financial markets, however, think the reflationary package will also push up the cost of living and force the Federal Reserve, the US central bank, to raise interest rates more rapidly than had been expected.

Adam Slater of Oxford Economics said: “The US election has prompted a sharp re-pricing of many financial assets, based on expectations of a significant shift in US fiscal policy. Markets now expect medium-term inflation and interest rates, consistent with a hefty fiscal stimulus.”

Slater said that the decline in bond prices evident since the summer had been intensified by Trump’s win. The total return on a 10-year US Treasury bond was down 7% in the past four months, comparable to the so-called “taper tantrum” of 2013, when global bond prices slumped on fears of higher interest rates from the Fed.



For the past eight years, central banks have held borrowing costs at record-low levels and used vast bond-buying programmes known as quantitative easing to pump money into struggling economies. Central bank buying has limited the supply of bonds and pushed up their price.



Since Trump’s victory over Hillary Clinton, bond prices have gone into reverse as investors contemplate a period of political uncertainty, a possible trade war between the US and China, and the risk that the world’s biggest economy will overheat.

David Marsh, the managing director of the thinktank Omfif, said: “Central bankers have worried for some time that an otherwise welcome international growth revival would depress inflated bond prices and confront central banks with substantial losses on government securities acquired during bond-buying sprees since 2009.

“Europe is particularly exposed, since the ECB started buying only relatively late, in March 2015, at a time when bond prices were already very high.

“A sharp rise in sovereign yields in Europe since Trump’s win last Tuesday, together with an increase in euro area inflation expectations to an eight-month high, will buttress opposition on the ECB’s governing council to an extension in ECB quantitative easing beyond March 2017.”

The yield on 10-year US Treasury bills has hit its highest level since January, rising to 2.23% from 2.1% last week. Shorter-dated two-year debt and long-dated 30-year bonds also hit their weakest points since the start of the year.



Yields on 10-year gilts Yields on 10-year gilts

The knock-on effects from lower bond prices in the US have been felt in the UK and other European markets. Bond prices rose strongly in the UK after the Brexit vote as nervous investors looked for safe havens and anticipated that interest rates would be cut to boost activity. But the yield on 10-year gilts has tripled since the trough of 0.5% in early August.



Simon MacAdam, an economist at Capital Economics, said: “Treasury yields have risen sharply since the US elections, reflecting anticipation of a major fiscal stimulus under President Trump. But while we are nudging up our forecasts for government bond yields in Europe, we still don’t expect that they will rise as fast as in the US.”