Bond bubble could burst with explosive impact

It remains early days for assessing Donald Trump’s economic plans, not least because of the difficulty in separating the serious policies from the wilder campaigning rhetoric, but the bond market seems clear on the central point: the president-elect intends to cut tax taxes, increase spending and deregulate.

Investors know what that cocktail produces. It boosts growth, at least for a while, and it generates inflation. Even famed liberal economist Paul Krugman has switched from predicting an imminent global recession. “Don’t be surprised if economic growth actually accelerates for a couple of years,” he says, because the “dire effects of Trumpism” will take time to become manifest.

In the bond market, a mini-rout is under way as yields on government debt climb across the board. US 1o-year Treasuries were yielding 1.35% in the summer and 1.85% on the eve of Trump’s victory; now they are 2.19%, a huge move in such a short space of time. In the UK, the 10-year gilt yield, which fell as low as 0.5% in the same summer lull, is now 1.4%.

A return of more normal yields, encouraged by the prospect of fiscal stimulus and higher rates of growth, is just what the world has been crying out for, many at both ends of the political spectrum would agree. Years of near-zero interest rates and quantitative easing haven’t rebooted the global economy, so try something different.

Well, yes, but let’s not pretend that such fiscal medicine is risk-free, especially when taken in the dosage Trump intends. A cut in the business tax rate from 35% to 15%, and $550bn to be spent on new infrastructure, represent crisis-style responses.

But, as JP Morgan’s chief global strategist David Kelly argues, the idea that the US is massively underperforming its potential for growth and requires a big fiscal stimulus is wrong. The US economy is at virtual full employment and the federal budget deficit is already rising.

Indeed, the US Committee for a Responsible Federal Budget estimated in September that Trump’s plans for massive personal and corporate tax cuts plus more defence spending would push the US national debt to 105% of GDP by 2026, against 77% currently and 86% assumed for 2026 under current laws. “The truth is, boosting the federal debt to these levels is fiscally reckless,” argues Kelly.

The inflationary impact of a spending spree looks likely to be even more severe if the US is simultaneously blocking skilled immigration and imposing 1930s-style trade tariffs around the world. A big boom followed by an almighty bust? That script seems very plausible.

Nor should we surprised if there are accidents on the way. In the early days of quantitative easing, central banks used to warn us that the exit from the bond bubble they created would have to be managed carefully because of its capacity to destabilise the financial system. You can understand why they worried: if government debt, supposedly the safest form of asset, is suddenly imposing double-digit losses on holders, there will be consequences. Prepare to see them soon: the bond bubble has been 30 years in the making and it won’t deflate painlessly.

It should not be news that a gambling company is appointing to its board some non-executives with experience of the gambling industry. It is at William Hill, where the boardroom is currently populated by non-specialists, a shortcoming that was cruelly exposed when shareholders shot down the board’s half-baked idea of exploring a £4.6bn merger with Amaya, a Canadian online poker company.

John O’Reilly, formerly of Ladbrokes and Coral, and Mark Brooker, former chief operating officer at Betfair, will improve the board’s gambling quota from zero to two. Robin Terrell, a former digital wizard for Tesco, also looks a sensible hire. Gareth Davis, chairman for the past six years, did not explain why the obvious gap in expertise had not been filled previously but he has heard the criticisms and responded, which may quell the calls for his own departure.

Full rehabilitation will depend on the two other factors. First, the company needs to avoid further trading upsets while Davis completes his search for a chief executive to relieve Philip Bowman, whose own lack of a gambling background makes him an imperfect candidate. On that front, news that full-year operating profits are still expected to arrive towards the top of a £260m to £280m range gets a tick.

The other factor will be evidence that William Hill won’t have its head turned by the next flashy Amaya-style proposal. The new boardroom appointments suggest self-help is indeed the priority again. Good, but the path to this point should not have been so roundabout.