A Key Trump-Rally Indicator Starts to Crack

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The so-called Trump reflation trade - which anticipates increased inflation and rising interest rates - is showing signs of breaking down as many bond investors anticipate that actual inflation, rates, and economic growth won't rise nearly as fast under Trump as originally expected, according to How Investors Can Prepare for a Bond Bear Market.)
Bloomberg. One key indicator suggesting this less than optimistic outlook is on the 10-year Treasury note, which rallied earlier this week in its longest bull streak since last summer. This price action signals to some investors that the long-anticipated end to the three-decade rally in bond markets may not have yet turned a corner. (See also:

10-Year Note's Big Advance

"The wager against Treasuries, among the most resilient trades in the wake of Donald Trump’s election, is showing signs of crumbling," according to Bloomberg in a February 8 article. "The benchmark 10-year note gained for a fourth straight day, the longest streak since June, amid fading hopes that the administration would hammer out comprehensive fiscal stimulus any time soon," the article said. The 10-year yield has been a key indicator of mid- to long-term inflation, a sign of economic growth and rising wages to come. Trump's proposals to de-regulate, lower corporate taxes, create jobs, and impose protectionist measures all point to growth and inflation. However, many are now doubting that these proposals can proceed as laid out. Investors also fear that even if they do play out, the market rally in stocks and the bear market in bonds, is overdone, having already priced in a best-case scenario.



Investors are also concerned that other "Trump rally" trades are beginning to show signs of weakness. Even as the stock market continues its climb into record high territory, the strength of the dollar against foreign currencies has attenuated, and odds that the Fed will hike rates throughout the year, as measured by derivatives markets, are also lower. In January, the dollar lost 10% of its value, erasing nearly all the gains achieved after Trump's election in November. (See also: How Trumponomics Might Boost the Stock Market.)
Some Wall Street analysts are also cautious that a growing economy may not translate into short- or medium-term inflation since they believe there is still a lot of slack in the economy, despite headline unemployment hovering below 5%. A reason for this includes near record low labor force participation meaning the labor market has more room to grow.

The Bottom Line

The Trump rally, which has sent stocks to all-time highs along with soaring bond yields may be losing some steam. The 10-year note has rallied, sending its yield lower. This comes as the dollar also retreats and the odds of Fed rate hikes diminish. Taken together, the signal is that traders are losing optimism that Trumpenomics will play out as optimistically as they might have originally thought.

Source : www.investopedia.com

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