Opinion: The great bondcano of 2016

US President-Elect Donald Trump. Copyright Gage Skidmore.

For the convenience of subscribers, here's my weekend column about how long term bond yields have risen sharply since Donald Trump's election, which is pushing up mortgage rates and the Government's borrowing costs just as it may have to start borrowing again and just as housing markets are cooling.

It's been called the "Bondcano" and the "Trumpocalypse of the bond markets" to impress upon regular savers and borrowers just how important the events of the last fortnight have been.

Since November 4 the US 10 year Treasury bond yield has risen from 1.77% to almost a one-year high of 2.26%. That doesn't sound dramatic, but it represents the fastest increase in the most important interest rate in the world in more than seven and a half years. It means investors holding US Government debt and other bonds that are priced off this benchmark just lost more than US$1 trillion.

It means all sorts of longer term interest rates have risen sharply since the election of Donald Trump as US President as investors start to worry the host of The Apprentice would cut taxes, increase the cost of imports and spend money willy nilly in a way that will push up inflation globally.

New Zealanders can't ignore these events either. The closer observers of mortgage rates can see how it has already started to roll through into our own housing markets. In recent days ASB, BNZ and Kiwibank have all increased their longer term fixed mortgage rates by between 10 to 30 basis points.

More importantly the sharp jump in US bond yields has unnerved investors with over US$150 trillion in bonds and loans to Governments and companies globally who had assumed that interest rates would stay low and that a 30-year-long trend of ever-falling interest rates would just keep on going.

They're now asking themselves if they should all try to get out the exit door at the same time. The rout is threatening to turn into a stampede that could destabilise global financial markets, particularly in Europe where banks are seen as vulnerable and economies can't easily handle higher interest rates.

Some are describing this jump in bond yields as the 'Trump Thump' and it is a shock that will reverberate well beyond his wall and the shores of America. Many emerging economies such as China and Latin America have become dependent on borrowing in US dollars at US interest rates. If Trump does something to reduce imports from China and Latin America, these economies face the double whammy of slowing export revenues just as their borrowing costs rise sharply.

There's actually a triple whammy for many of those emerging market borrowers because they often borrow in US dollars and therefore have to repay and service their debts in US dollars. The rise in US interest rates and expectations Donald Trump could unleash a spending and tax-cutting spree has made the US dollar more attractive and pushed it up 4% since his election. That has crystallised at least two legs of the triple whammy.

All this pressure has also forced the Chinese yuan down to a six-year low and into the territory where Donald Trump could accuse the Chinese Government of artificially weakening the currency in way that hurts US workers and triggers the 35% tariff he has threatened.

All bets are off on China remaining the engine room of growth for the New Zealand and Australian economies if this triple whammy of the bondcano, a currency crisis and a trade war eventuated.

Meanwhile, the rise in market interest rates add pressure to a New Zealand housing market that has come off the boil since the Reserve Bank announced new restrictions on lending to rental property investors in July in tandem with banks such as ANZ and Westpac starting to tighten their lending policies for landlords and apartment developers.

The rise in interest rates will also make life slightly more expensive for the Government, which now faces billions in extra borrowing over the next couple of years to pay to rebuild the main trunk route through Kaikoura. New Zealand's 10 year government bond yield has risen from 2.8% to 3.2% since Trump's election and is up from a record-low 2.13% in August. To be fair, longer term interest rates have been bottoming out since August and short term interest rates have also risen for different reasons. US regulators forced fund managers to sell their bank debt to buy Government debt, which pushed up short term money market rates, and many expect the US Federal Reserve to hike next month.

Trump has barely started to select his cabinet Apprentice-style, and he has already delivered a multi-billion dollar thump to bond and property values globally and here. As much as we'd like his wall to block off the Trump-effect from the rest of the world, no-one is immune in the still globalised world of free floating interest rates and exchange rates.