Trump Presidency Could Mean a "Material Repricing" of Bonds, George Magnus Warns

(Bloomberg) -- With recent polls suggesting Donald Trump's electoral prospects are back in play, market participants are getting anxious about the vote next Tuesday.

Owing to his anti-trade and anti-globalization rhetoric as much as the fact that he represents a break from the status quo that has served investors well for several decades, markets have tended to react negatively to evidence of Trump's improving odds, and are bracing for Brexit-style turbulence. 

The flipside of this concern is that the volatility caused by Brexit proved ultimately to be short-lived — at least outside the U.K. — with the initial jolt to markets fading quickly. However, according to George Magnus, senior independent economic adviser at UBS Group AG, a Trump win could augur more sustained damage to fixed-income markets.  

Acknowledging, "it does all feel very Brexit-y," Magnus, in an interview with Bloomberg TV on Thursday, nevertheless said that the comparison falls short. While the U.K. still awaits the details of its fate, "The U.S. election is quite different because you're looking at a political regime-change."

Particularly vulnerable to Trump's rise is the fixed-income market that has been enjoying a smooth ride for so many years. "We could see a material repricing of bond markets," he said.

While Magnus isn't the first strategist to argue that turning on the fiscal taps could change the trajectory of fixed-income, he spoke of a fundamental shift; a "huge impact on financial markets" if the U.S. government dramatically boosts fiscal spending in response to a rising tide of populism. While the candidates' economic plans haven't occupied a majority of recent headlines, the momentum is toward a situation in which "bigger deficits are permitted and the trajectory of federal debt over the next ten years looks bigger — and it looks bigger under Trump's plan than it does under Hillary's," he said.

"I am not saying using the federal balance sheet or federal budget addresses the problem of populism, but if you don't do it things will get a lot worse and social cohesion is too dangerous to risk," the economist said. That could validate a shift by the U.S. Federal Reserve to higher interest rates.

To contact the author of this story: Narae Kim in Hong Kong at nkim132@bloomberg.net.

To contact the editor responsible for this story: Joe Weisenthal at jweisenthal@bloomberg.net, Isobel Finkel