The economic policies being proposed by President -Elect Trump are not what we would traditionally expect from a Republican heading to the White House. Mr. Trump’s proposals, if enacted, would rely on increased borrowing to fund economic expansion, most notably on infrastructure and defense spending. Markets have quickly priced in the rising probability of this type of deficit spending by adjusting expectations for future growth in GDP and inflation. As such, bond prices have fallen and interest rates have risen rapidly over the past week.
This week’s recommended reading is a refresher on how rising interest rates impact bond prices. While rising rates can cause large short term losses for some types of bonds, specifically those with longer maturity dates, they also allow new money to be invested at higher rates of return. As Ben Carlson points out in this Business Insider article, “…investors should welcome this development, not fear it. The only path to eventual higher fixed income returns is through higher interest rates.” Our philosophy here at CCM has been to invest our client’s portfolios in shorter term bonds in order to provide stability, which fortunately has allowed us to avoid the larger losses experienced in bond markets since election day.