About That “Trump Bump” In The Bond Market…

Is this market getting way too exuberant? This week, the Prudential Group Investment Management team (PGIM) raised their 2017 global GDP growth outlook from 3.3% to 3.4%. Their current growth forecast for emerging markets now stands at 4.4% instead of last year’s 3.6%.

Some fixed income investors are saying that the fourth quarter  “Trump Bump” in bond yields is winding down and are recommending growth stocks. Last year, total return on U.S. High Yield Bonds was 17.5% up from -4.5% in 2015. U.S. Investment Grade Corporate Bonds saw a total return of 6.1%, up from -0.7% in 2015. Even boring Treasuries were up 1%, better than the 0.8% in 2015, based on Bloomberg and Merrill Lynch data.

Three events contributed to the rise in yields since mid-year: central banks acknowledging the adverse effects of negative interest rates with the Bank of Japan basically denouncing it and trimming its bond buying operation. The European Central Bank took similar moves, reduced its buying spree. As a result, the markets pushed longer dated bond yields higher to adjust the new purchase schemes by those central banks that have basically supported the bond market now for nearly a decade.  PGIM says that another reason for increased appetite for bonds was the U.S. election resulted scaring investors into cash-like instruments, as investors took a wait-and-see approach before making riskier bets. After the initial lapse in confidence, the markets have seemingly come to the firm conclusion that the prevailing outcome of the new political landscape will be a stronger U.S. economy as evidenced by the rise in Treasury yields, stock prices, and the dollar, as well as by the narrowing of credit spreads, PGIM analysts said in their first quarter report published on Monday.

So about that Trump Bump…for PGIM, 2017 will bring more surprises for bond lords. “In our view, yields and spreads offer value at their current levels, suggesting the bull market—hiccups notwithstanding—will continue, with the higher yielding sectors likely to post the best returns,” PGIM says. (For full report, see here)