By Yale BockWhen the yield on the 10-year Treasury bonds moved from 1.80% to 2.30% in mid-November, it signaled a shift to an inflationary mindset among investors.What might have happened to cause such a dramatic change in bond yields? There's a new sheriff in town and his name is Donald Trump. Next year, both houses of Congress will also be controlled by the Republicans, though minority Senate Democrats will be able to filibuster.
There's the anticipation of a more inflationary environment with tax cuts and a big infrastructure spending program.That, in turn, has caused investors to shift out of bonds and into equities. Looking at historical data, bond bulls believe the move is too far too fast.
They point to overcapacity in many industries and a vast labor pool, suggesting that inflation will remain muted. That's a plus for bonds.Oil prices are also bouncing along the bottom of a historically low trading range, mostly because of a glut of foreign supply thanks to aggressive production levels by OPEC, especially Iran.Equity bulls, on the other hand, see a dramatic, pro-business swing in policy under a Trump administration.
That could mean a surge in risk-taking, which would be good for stocks.