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The Trump trade is the dog that will bark and bark

The Trump trade — sell government bonds because his policies might cause inflation and require huge new borrowing — has already produced a common counter reaction: do not get carried away, this is an opportunity to buy Treasuries before yields collapse again.

What it shows is a conditioned response. The first time your dog barks in the night, you leap out of bed with a head full of terrible possibilities. The 21st time, however, the reflex is to roll over and curse a mutt that should know better.

For three decades bond yields have mostly headed downwards, and in the last of those the Treasury market has defied every dire prediction of inflation, hyperinflation, or even movement back towards interest rates long considered normal. The risk of rising yields has been ever present, familiar and toothless.

Yet it seems very odd to assume the full extent of the change to the politics of America has been digested in a market where a benchmark Treasury bond offers an income of 2.2 per cent a year for the next decade, well within the range of recent experience while inflation was dormant.

The fixed coupon on such bonds means their value drops as bond yields rise. And more inflation tends to mean rising yields.

Bond investors might take comfort that Mr Trump has said many things, and proposes a variety of awful policies which may not come to pass, but a recurrent theme among them was tax cuts. His party will shortly control the White House and both houses of congress, a position it only achieved in the last 80 years under Dwight Eisenhower and George W Bush — who enacted the largest programme of tax cuts in US history in 2001 and 2003.

Remember gridlock in Washington was a result of partisan disagreement. Passing a military budget or bill to overturn Obamacare in the knowledge they would be vetoed by the president may have appeared an exercise in futility at the time, but now looks more like practice for the tactics required to produce legislation.

Consider, too, the starting point for negotiations. The Committee for a Responsible Budget has estimated Mr Trump’s tax plans as laid out so far would add $4.5tn to US debt over a decade, about three times the size of estimates for the effect of the Bush tax cuts. Chop most of it away and there is still plenty of room to enter the record books.

Do pro-tax groups really have large constituencies and muscle for opposition, like those of the insurance and medical industries which made the passage of healthcare reform such a challenge? Will fiscally conservative opposition to higher deficits win out in the party which nominated Mr Trump?

So assume at least some significant tax changes. It can be easy to then get distracted by interesting questions about good and bad forms of stimulus, income distribution and the size of the deficit. They could be colossally wasteful and regressive, but giveaways that do not impact an economy which was already doing OK seems a stretch of the imagination, before we even get to questions about infrastructure.

In 2001 the US was reeling from the collapse of the dotcom boom and the attacks of 9/11, whereas this year Wall Street economists expect output to expand 2.6 per cent. Unemployment is already low.

Core measures of inflation have been ticking back towards the 2 per cent target of the Federal Reserve. If the oil price remains stable, it is possible headline inflation — which includes energy prices — could register a number with a three on the front of it next year.

Maybe chaos in the rest of the world will prove this prediction of higher yields premature, like all the rest. Global stagnation and demand for the safety of US government could prevent a bigger jump in yields.

Yet the bond market lesson, to always buy bonds, has been learned in a world where central banks were the only institution that mattered. Very few were trading in 1994, when 10-year bond yields jumped 200 basis points in the space of five months.

One day you do wake up to find the door open, the drive empty and the dog with an I told you so look in his eye.

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