Donald Trump's electoral victory has electrified Europe's anti-establishment political parties, who see the US President-elect's policies as a vindication of their own hostility to free trade and immigration
Politicians – ranging from France's Marine Le Pen, to Italy's Beppe Grillo to Hungary's Viktor Orban – have hailed both Trump's electoral triumph and Britain's shock referendum vote in June to leave the European Union – as evidence of a seismic shift in political ideology.
Le Pen, who heads France's far-right eurosceptic anti-immigration National Front party, claimed that Trump's victory had "made possible what had previously been presented as impossible".
Meanwhile, Grillo, the comedian who heads Italy's anti-establishment Five Star Movement, wrote on his blog that Trump's victory showed that "it is those who dare, the stubborn, the barbarians who will carry the world forward – and we are the barbarians".
According to some analysts, the violent sell-off in global bond markets in the past few days, which has sent US, German, Italian and Japanese bond yields climbing in sync, largely reflects investors' fear that these self-described "barbarians" could soon be holding the levers of global power.
Since Trump's surprise victory in last week's presidential election, the yield on benchmark US 10-year bonds has climbed close to 2.3 per cent – the highest level since January and almost a full percentage point above the record low of 1.37 per cent which they reached in early July. (Yields climb as bond prices fall.)
Investor concerns
Investors fear that the power shift now under way will result in a much reduced role for the world's major central banks – the representatives, par excellence, of the technocratic elite so derided by populist movements – and a resurgence in the popularity of politicians who are prepared to thumb their nose at economic orthodoxy by running large budget deficits.
And they're also concerned that the shift is being accompanied by a rejection of the globalisation that has been in the ascendancy since the 1970s.
Investors are worried that the next year could prove a major test for the European project, particularly if national elections in France and Germany sweep populist anti-eurozone candidates into office, threatening the future of the entire European project.
In the meantime, there's a risk that Italian Prime Minister Matteo Renzi could suffer a humiliating setback if his plans to reform Italy's constitution are defeated in a referendum on December 4.
Renzi has vowed to resign if his proposed changes to Italy's political system are rejected, making him another casualty of the populist groundswell of Western democracies.
But other analysts argue that the sell-off in bond markets is more a reflection of Trump's plans for a major fiscal boost, with large tax cuts and a significant lift in infrastructure spending.
They claim that Trump's surprise victory has forced investors to question their belief that global economic activity would remain weak – and inflation feeble – for the foreseeable future, and that politicians would continue to rely on central banks to come up with new forms of monetary stimulus to encourage sluggish growth.
Budgetary boost
Instead, the prospect of a major US budgetary boost – which will fuel economic growth and spur inflation – has already sapped demand for bonds and sent yields climbing.
What's more, investors worry that the Trump administration will be forced to issue more bonds to cover the widening budget deficit, and that an increase in the supply of bonds at a time when demand is shrinking will push bond yields even higher.
There is a risk, however, that higher bond yields will reduce the extent to which Trump's budgetary boost translates into a strong rebound in US economic activity.
That's because rising US bond yields will push up home loan rates, threatening the recovery in US housing prices. Some analysts warn that US households are likely to cut their spending if the value of their primary asset – the family home – starts to fall in value, which would offset the boost to US domestic demand from tax cuts and bigger infrastructure spending.
What's more, analysts point out that higher bond yields mean higher borrowing costs for US companies that have loaded up with cheap debt in order to fund massive share buybacks and generous dividend schemes. A hefty rise in debt repayments will quickly cause a strain on corporate balance sheets, particularly if the Trump fiscal stimulus fails to translate into a strong recovery in their earnings.
The problem is that global asset prices, as well as the debt levels on individual and corporate balance sheets, reflect the ultra-low interest rates that have prevailed for close to a decade. A sharp rise in interest rates will put downward pressure on asset prices, and increase debt servicing costs.
As a result, fiscal stimulus might not be as effective in boosting economic activity as some, including the International Monetary Fund, have suggested.
