Bond market volatility takes centre stage;  Is the Great bond market rotation finally upon us?;  The Trump Factor: An ‘Orange Swan’ for Emerging Markets?;  Japan’s prospects continue to improve while Chinese growth moderates;  UK housing market update: Housebuilders remain stable

Bond market volatility takes centre stage

After 35 years of gradual decline in government bond yields and thereby rise in bond valuations there have been many points over the past 6 years when market experts called the final inflection point or announced the onset of the ‘Great Rotation’. It didn’t happen then and I am not convinced it is happening now. There are too many structural reasons for the heightened demand for low risk government bond type assets and continued QE-driven bond purchases by central banks for yields to move back up to the long term averages over the shorter term.

Great bond market rotation finally upon us?

We observe that yields for longer maturity bonds have risen more than we originally expected, equalising some of the considerable gains in bonds over the summer months. Much of the current rise in inflation expectations has been fuelled by expectations that the President-Elect Trump will succeed in implementing an aggressive fiscal stimulus program through broad corporate and income tax cuts. On this basis, we suspect that financial markets have overreacted as much on the yield upside this time as they did on the yield downside in the summer.

The Trump Factor: An ‘Orange Swan’ for Emerging Markets?

The move down in emerging markets is predicated partly on the assumption that the Trump administration will embark on a protectionist route, curtailing global trade. However, we have already seen from Trump’s comments since the election that he is perfectly happy to renege on his pre-election promises – such as repealing Obamacare and marriage equality. In our view, then, it seems unlikely that Trump will see the US overcome by a wave of protectionism, as has been feared, even if he is unlikely to become a protagonist of breaking down further trade barriers. As such, we believe the downtrend in emerging markets to be somewhat overdone.

Japan’s prospects continue to improve while Chinese growth moderates

Overseas investors in Japan appeared to essentially move out of Japanese bonds in particular and back into the now ‘cheaper’ (and thereby higher yielding) US Treasuries. This seems to have had a direct knock-on impact on the currency, the Yen. As foreign JGB buyers sold, they needed to sell Yen and buy US dollars to purchase ‘cheap’ US bonds. As a result of these movements in fixed income markets, the single largest move of any asset in the wake of the Trump Presidency is that of the Yen. Since last Wednesday morning’s panic move, where the Yen strengthened (as a safe haven) to ¥101.21 against the dollar, it rapidly reversed course and has since fallen a stunning 8% in less than a week.

UK housing market update: Housebuilders remain stable

 Given the relatively healthy state of the residential property market, we do not think that the government is likely to introduce further stimulative measures. We note that, during George Osborne’s tenure as chancellor, nearly every budget announcement contained new housing policies.

Housebuilding firms appeared to have taken precautionary steps ahead of the Brexit vote and companies remain in a net cash position, while generating a Return on Capital Employed (ROCE) of 25%, according to JP Morgan.

Click here to read the full commmentary