Photo by Karen Arnold
After interest rates spiked upward post-Trump election, where 10 Year Treasury rates jumped from 1.60% to 2.60%, they’ve recently started to level-off around 2.40%. The juggernaut that is the Trump trade (long-stocks and short-bonds) has taken major US indexes to new heights. This week, White House announcements reminded everyone that tax cuts are coming very soon, which provided fresh fuel for stock market enthusiasm.
Meanwhile, across the Pond, something’s stirring in European sovereign bonds. French 10 Year bond yields have been much higher. New polling data suggests that the French version of Trump – Marine Le Pen – has gained ground. Her rhetoric has loosely modeled Trump’s. Pro-France, new trade deals, quitting the Euro monetary unit and Frexit have been campaign hallmarks.
To get a better visual on what impact this Trump-esque messaging has on their local interest rate markets, we can look at yield spreads on the most stalwart of Eurozone countries, Germany. Since the beginning of this year, the French yield spread has grown more than 40% over German debt. The Italian 10 Year yield spread, though directionally similar, is less dramatic – only 21% higher (chart above). The significance is that increasing yield spreads in these countries denotes a built-in market fait accompli of Frexit and Italeave. Now, when Trump’s words are used by politicians in European countries, their markets don’t even bother to wait for an election result to react. This assumptive movement bakes in extra volatility for our global markets.
Between now and the French Presidential election on April 23rd (and possible earlier-than-expected Italian parliamentary elections in June), Trump’s first 100 days will be watched closely. If there’s a turn for the worse or failure to keep up inertia, I’d expect to see these Eurozone yield spreads collapse. In reality, without a Trump stumble, it’s unlikely. We’ve already witnessed the power that a nationalist campaign brings, winning the hearts and votes of citizens globally.