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Capital Markets

Fading Trump frenzy slows decline of government bond prices

Market rethinks inflation hopes on worries over protectionism, oil prices

TOKYO -- Closer scrutiny of President-elect Donald Trump's policies has contributed to fading expectations for inflation, which in turn have slowed the global decline in government bond prices that had accelerated after his election victory.

Citi's World Government Bond Index began shifting downward after peaking in July, when the world was reeling from Britain's vote to leave the European Union. This drop gained speed after the U.S. election Nov. 8.

The index, which tracks the prices of government bonds from 28 countries, stood at 718.55 as of Friday, down 4% from July. Though the index figure has fallen 2% since just before the U.S. election, it has risen 0.5% since immediately after the U.S. Federal Reserve raised interest rates in December.

Doubts are forming over factors supporting the inflation expectations that drove bond prices down.

The market initially focused on potentially positive aspects of Trump's proposed policies, such as aggressive fiscal spending and massive tax cuts. U.S. employment data released Friday were strong. But since the new year, Trump's "protectionist side, which had been a cause of concern, appears stronger," said Shuichi Ohsaki at Merrill Lynch Japan Securities. Trump's attack on Toyota Motor over its plans to build a plant in Mexico alarmed investors in Japan.

Oil price trends are another factor. OPEC's efforts to reduce output are seen as having only limited success in raising prices due to moves by the U.S. to boost shale oil production. Any lift to inflation hopes sparked by higher oil prices is seen as short-lived.

The recent decline in bond prices worldwide has provided tailwinds for Japan's government and the Bank of Japan. A rise in global interest rates while Japan maintains its low-rate policy would widen the rate spread, resulting in a weaker yen. A softer yen would help Japan achieve its long-standing goal of ending deflation through larger corporate profits, a stock market rally and higher costs for imported goods.

Global bond prices could sink again once Trump's policies become clear. But some market players doubt such trends would last. Kiichi Murashima at Citigroup predicts that "the U.S. draft budget will be scaled down through congressional deliberations."

(Nikkei)

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