Global bond markets rebound as euro-dollar parity bets soar

Bonds rallied globally on Tuesday as concerns eased that Donald Trump will fuel inflation with a massive spending plan, though mounting trader bets that the dollar will hit euro parity signalled markets remain on edge after the US vote. The market interest rate – yield – on US 10-year treasuries, which had surged in the past week from 1.85 per cent to a high of 2.3 on Monday, fell back to 2.22 per cent by the time European trading ended. Investors now anticipate the US president-elect will face resistance from Congress in getting his $550 billion (€512 billion) infrastructure spending plan over the line.

The yield on Irish 10-year bonds fell back to 0.91 per cent from a nine-month high of 1.09 per cent on Monday. The trend was similar across most European government securities.

However, the dollar held onto its 2.7 per cent advance against the euro since the US election, ending European trading at $1.072, around levels last seen in December last year.

The dollar’s surge has been driven by its perceived safe-haven status at a time of uncertainty and speculation that Mr Trump’s stimulus plan will fuel US economic growth and speed interest rate hikes. Currency traders are pricing in a 45 per cent chance the euro will fall to $1 by the end of next year, double the probability assigned a week ago, according to Bloomberg data.

Hyun-Song Shin, the head of research at the Bank for International Settlements, a forum for central banks, said in London on Tuesday the dollar is now the best gauge of global investor sentiment.

“When the dollar is strong, risk appetite is weak,” Mr Shin said. “The dollar as a barometer of leverage and risk-taking capacity has implications for both financial stability and the real economy. There may be no winners from a stronger dollar.”

However, Mark Haefele, global chief investment officer at world's biggest wealth manager, UBS Wealth Management, said at another event the growing consensus that the dollar is headed towards euro parity for the first time since 2002 "seems a little bit stretched".

Too simplistic

Mr Haefele said the market was pricing too much action from the US Federal Reserve to raise interest rates. He also said it was too simplistic to assess the Brexit vote and US election result, and then predict that populists would win a rash of European elections next year, including in France, which would be negative for the euro.

“You need to be a little careful in drawing these comparisons,” Mr Haefele said. “Remember, after the Brexit vote, the Spanish vote was for more European integration.”

Meanwhile, European shares edged higher on Tuesday, with the pan-European Stoxx 600 index adding 0.3 per cent. However, the Iseq ended the session down 0.27 per cent.

Market uncertainty is seen continuing for some time as investors continue to debate the impact of the US election.

Economists at Wall Street investment banking giant Goldman Sachs concluded this week that while Mr Trump’s spending proposals could boost the US economy in the future, his other plans may raise the spectre of “stagflation”, a scenario of high inflation, unemployment and stagnant demand, in the long run.

"The positive fiscal impulse from his tax reform and infrastructure proposals could provide a near-term boost to growth and, depending on the specifics, could have positive longer-run supply side effects," Goldman Sachs economists including Alec Phillips and Sven Jari Stehn said in a report. "However, other proposals could lead to new restrictions on foreign trade and immigration, which could have negative implications for growth, particularly over the longer term."

(Additional reporting: Bloomberg)