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Bonds plunge by $1-trillion on prospective Trump policies

A woman walks past an advertisement featuring a cartoon of U.S. President-elect Donald Trump at a currency exchange store in the central business district in Sydney, Australia, on Thursday, Nov. 10, 2016.

David Moir/Bloomberg

More than $1-trillion was wiped off the value of bonds around the world this week as U.S. President-elect Donald Trump's policies are seen boosting spending and quickening inflation.

The capitalization of a global bond-market index slid by $450-billion Thursday, a fourth day of declines that pushed the week's total above $1-trillion for only the second time in two decades, Bank of America Merrill Lynch data show. Global stocks gained $1.3-trillion in the same period. Yields on U.S. 30-year bonds, which are more sensitive than shorter maturities to the outlook for inflation, jumped the most this week since January 2009.

European government bonds extended their selloff Friday, with the yield on Italian 10-year securities climbing above 2 per cent for the first time since September 2015, while benchmark German 10-year bunds declined for a fifth day, pushing the yield to the highest since February.

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"We do view the election of Donald Trump as a game changer," said Adam Donaldson, head of debt research at Sydney-based Commonwealth Bank of Australia. "The strong bias toward fiscal expansion and inflationary policy represents a stark change to the malaise of recent years. This opens the door for the Fed to hike in December, but also more quickly in 2017 and 2018 than previously expected."

The market value of Bank of America's Global Broad Market Index, which tracks more than 24,000 bonds around the world, has slumped by $1.14-trillion this week to $48.1-trillion. The only previous week it fell by more than $1-trillion was in June 2013, when the Federal Reserve under Chairman Ben Bernanke was threatening to reduce debt purchases, leading to a bond selloff that became known as the "Taper Tantrum."

The benchmark U.S. 10-year note yield has jumped 37 basis points this week through Thursday. Treasuries are closed worldwide Friday for U.S. Veterans Day holiday. The yield on 30-year securities climbed 39 basis points. The 10-year yield will rise to 2.50 per cent in the first half of 2017, Commonwealth Bank predicts, compared with the close on Thursday of 2.15 per cent.

What promised to be a bumper years for bonds is in danger of evaporating. U.S. government securities handed investors a loss of 2.9 per cent this week, paring this year's gain to 6.3 per cent, according to the Bloomberg Barclays Global Aggregate Treasuries Total Return Index. There's an 80 per cent chance the Fed will increase rates at its Dec. 13-14 meeting, up from 76 per cent odds at the end of last week, according to data compiled by Bloomberg based on futures.

Global bonds tumbled after Trump's triumph boosted the view that he will ramp up spending and potentially widen the budget deficit, stoking inflation. Rising yields in Europe also reflect waning prospects for the European Central Bank to boost its stimulus as consumer-price growth accelerates.

"Inflation is rising worldwide, and we see the Fed hiking interest rates next month," said Birgit Figge, a fixed-income strategist at DZ Bank AG in Frankfurt. "The election has just added to that."

Demand for U.S debt is waning. A $15-billion auction of 30-year bonds Thursday drew bids for 2.11 the amount available, the lowest since February. A sale of 10-year notes on Wednesday had a bid-to-cover ratio of 2.22, the least since 2009.

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"There are many risks with Trump still somewhat of an unknown," said Alex Stanley, a senior interest-rate strategist in Sydney at National Australia Bank Ltd. "The risk is that U.S. long-end yields will rise further and the curve will continue to steepen as the market grapples with the prospect of increased fiscal spending."

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