What, exactly, is happening in the markets?

The unexpected election of Donald Trump on Nov. 8 has sent shockwaves through the financial markets as investors begin to assess the full impact of his economic platform. 

Focusing on fixed income yields as one indicator, check out how these yields increased from Nov 8th to Nov 14th.



Nov. 8

Nov. 14


5-Year Treasury




5-Year TIPS




5-Year Break-Even Inflation




10-Year Treasury




10-Year TIPS




10-Year Break-Even Inflation




Not impressed? 

Trust me. Both 5-year and 10-year U.S. Treasury bonds made astonishing moves for such a short period of time. We have also seen a sharp rise in inflation expectations as indicated by the 'Break-Even Inflation' yields.

Why have we seen such a dramatic rise in interest rates?

The Trump economic plan includes increased fiscal spending, reduced regulation, a significant change to rules governing financial-services institutions, a potential change of leadership at the Fed and increased trade protectionism. If he's able to push these changes through, it might invite unexpected inflation and trigger faster interest rate hikes from the Federal Reserve. 

Higher inflation eats away at investors' returns, so the markets are demanding a higher yield to compensate them for this risk. Additionally, the potential specter of faster Federal Reserve tightening is big factor. Investors again are demanding a higher yield now that they anticipate interest rates rising more quickly in the future.

Should we change how we buy fixed income?

No, not clients of Mindful Wealth. Definitely not. If you own fixed income, there are 3 main risk factors to consider:

  1. interest rate risk - as rates increase, bonds of longer maturities will go down in value
  2. reinvestment risk - when a security matures and the prevailing interest rate is lower than when the security was originally purchased
  3. credit risk - when bonds default and you lose the investment

We already buy high-credit quality bonds that greatly reduce credit risk. So now we're left with interest rate and reinvestment risks. If you try to eliminate interest rate risk by buying only very short maturities, you are introducing more reinvestment risk and vice versa.

Our approach of building short- to intermediate-term ladders seems like the best balance. For example, over the past several years as rates have fallen steadily, longer-maturity bonds have appreciated greatly. This offsets the fact that maturing bonds are being reinvested at lower yields. Now, the opposite is happening. As rates rise, the longer-maturity bonds drop in value, but they can now be offset by reinvesting maturing bond proceeds at higher yields. By staying in short- to intermediate-term maturities, we have also significantly reduced our interest rate risk compared to longer term portfolios and with only small sacrifices in yield.

Also note that, despite the recent selloff, yields are still below where we started the year, and many fixed income funds are still holding on to positive returns. Even if we continue to see rates move higher and fixed income returns turn negative, investors should not fret over this short-term pain. In general, higher fixed income rates are better in the long run for investors. This is especially true for clients in or near retirement because higher interest rates mean more interest income, which can allow them to potentially take less equity market risk in their portfolios.

What about in equity markets?

For our clients, your plan is designed to weather the ups and downs that inevitably follow significant happenings like this. It's informed by decades of academic evidence and financial theory—evidence that has incorporated the outcome of dozens of political, financial and world events. That said, markets all over the world are up significantly. We'll continue to monitor your plan as always and rebalance when things drift away from our intended allocation. Any further questions?