Around The World in 100 Words - November 2016 - Week 47

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Well, it's been a week since US election night and the chatter about Donald Trump's odds-defying win over Hillary Clinton continues to dominate social media. Fears about President-elect Trump's political agenda have drowned out the reality that bond prices have fallen sharply since then. Investors seem more fearful of inflation then anything Trump campaigned on, where stimulus spending on infrastructure and massive across-the-board tax cuts are seen as catalysts to inflationary pressures. I've attached an article on this topic from Fortune for your reference: http://fortune.com/2016/11/14/donald-trump-election-bond-market-thump/
Bonds are negatively correlated with interest rates and interest rates are positively correlated with inflation. In simple terms, if inflation picks up, interest rates will follow. This in turn causes bonds to fall in value, as investors see inflation eroding their total return. The longer the bond duration, the more a bond will fall in response to higher interest rates. So what does an investor with a low-medium risk profile whose portfolio includes a significant bond weighting supposed to do? Well, for starters, keep perspective. Interest rates haven't started to rise yet, and any increases are expected to be modest. Further, in anticipation of rising rates, we have positioned our client portfolios with fund positions holding shorter-term duration bonds, floating rate bonds and investment grade corporate bonds. This further limits the negative impact of rising rates on bond positions within our client portfolios.
1993 was the year of the great bond rout, with interest rates increasing 350 bps. Nothing like that is expected here, as the global economy is still struggling to gain traction. Bonds remain an important component of a well-diversified, defensively positioned portfolio, and we are confident our bond fund managers will navigate the current waters just fine. We remain committed to our current portfolio allocations for the time being, but are watching for inflationary pressures closely. In the interim, the conversation will continue about how the most seasoned politician in living memory could have lost to a political neophyte in one of the most remarkable elector victories in history. We've got an ear to that conversation, but both our eyes squarely focused on delivering solid, risk-adjusted returns for our clients over time.