Focus on Italy: Bonds and Banks after Trump and before the referendum
The Italian referendum is scheduled for this Sunday 4th December. Since the US elections rates have risen across the globe.
US bonds were very expensive with unprecedented sharply negative term premiums (-70bps at the year low on 10y bonds) before the US elections. The low volatility through the summer was evidence of complacency. On the monetary side, Janet Yellen argued in her Boston speech that the Fed could let the economy ‘run hot’ temporarily. These comments only added to speculation that the Fed is already behind the curve. The upset election of Donald Trump as US President rocked markets. A political risk premium is now priced in US bonds, considering the uncertainty surrounding the messy nomination process of the new Administration and future fiscal and foreign policy. Deficits may increase significantly which would put additional pressure on long-term bond yields. It is very difficult to gauge bond issuance risk at present. Protectionism would be inflationary and detrimental to growth. This bodes well for US TIPS and steepeners. Spot CPI inflation will likely rise to 2.5% by March, which should raise the floor under US yields in the coming months.