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Henry Kaufman: Trump will kill 30-year bond rally

The election of Donald Trump represents a “tectonic shift” for global economics and politics, and will help kill the three-decade bond market rally, according to Henry Kaufman, the original “Dr Doom”.

The former Salomon Brothers chief economist gained his gloomy moniker by correctly calling the last bond bear market in the 1970s, and is now predicting another one, as Mr Trump will probably fire a massive slug of inflationary government spending and reshape the Federal Reserve in a hawkish way in the coming years.

“We have already seen a burst higher in long-term interest rates … I would say the secular trend is going to be upwards now,” he told the FT. “Secular swings are hard to forecast, but the secular sweep downwards in interest rates is over, and we are about to have a gentle swing upwards.”

He doubted that the Fed would allow bond yields to rise quickly or too high, given that global indebtedness remained elevated, but did not see much chance of them falling. “To get a move downwards would require a significant downshift in the economy, a recession, and I cannot see one coming,” he said.

The Fed’s main policymaking board is also likely to see a radical overhaul under president Trump, who has in the past claimed that the US central bank has kept interest rates low to bolster the outgoing Obama administration.

Judy Shelton, a member of Mr Trump’s advisory team, recently told the FT that the Fed had created a “false economy” and indicated that the president-elect would seek a change at the top of the central bank.

Mr Kaufman points out that there are likely to be several vacancies opening on the Federal Open Market Committee — the main rate-setting body — in the coming years, and Janet Yellen, the chair, was very unlikely to have her mandate renewed when it ended in February 2018.

“I think there will be a dramatic change in the composition of the Federal Reserve,” Mr Kaufman said. “This is going to mean a major redirection of monetary policy.”

Mr Kaufman’s family fled Nazi Germany in 1937, when he was nine, and settled in Washington Heights in New York. He argued that together with the emergence of strongmen such as Vladimir Putin and the UK’s vote to exit the EU, Mr Trump’s election victory was part of a new “nationalistic” trend that “will cause many changes”.

“I would hope that he [Mr Trump] will recognise the extraordinary responsibility and opportunity he has. And that he will also recognise that what is at stake is not just the wellbeing of the US but the rest of the world,” Mr Kaufman said.

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