the short-term there are some factors that should at least contain the
rise in Treasury yields, including: i) limits to how steep the US yield
curve will get before carry constrains the long-end backup in yields.
Example: US T.Note 10s minus 2s rarely trade above 250bps for any length
ii) care of a global
negative output gap, the world likely still has a disinflationary bias,
although protectionism is bound to challenge this;
and, here is the big wildcard,
iii) Trump's election and Brexit have underscored the rise in global political risk.
Most immediately pressing is the French Presidential election that has
enormous ramifications for the EUR's future, and global risk.
Ironically, this could still lead to a desperate flight to US (and
One broad point about
Trump's election, is there is scope for an over-reaction, but there is
even more potential for a failure of the collective imagination to
understand the forces unleashed.
some markets the impact of a probable change in fiscal policy (bond
bearish, risk appetite positive) and a shift in political risk (T.bond
bullish, but risk negative) will be in conflict. One trade where the economic and political risks align perfectly, in our view, is the short EUR/USD currency trade.