The Trump effect when it comes to savings and pensions

Sudden upheaval in the bond markets will leave savers with mixed feelings

Global bond prices fell sharply and yields – interest rates – rose as financial markets adjusted to Donald Trump’s plans to boost US growth by cutting taxes and raising spending. Bond prices and yields are inversely correlated: as bond prices fall, yields rise and debt becomes more expensive.

Investors are fearful that Mr Trump’s proposals for a large fiscal stimulus will result in higher inflation in the US and higher interest rates worldwide. Since the financial crisis, deflation and record low interest rates have contributed to a sluggish recovery in the global economy. But with Mr Trump set to take a major gamble on growth, the spectre of inflation has prompted a huge sell-off in global bond markets.

Higher bond yields mean debt becomes more expensive for sovereign or corporate borrowers or for those taking out bank loans or mortgage finance. Recent years of declining interest rates and soaring bond prices have enabled the Government – via the National Treasury Management Agency – to finance its annual borrowing requirement at minimal cost. That is now showing signs of change, at least in the short-term. The interest rate or yield on the benchmark 10-year Irish bond – 0.7 per cent before Mr Trump's election last week – rose above one per cent for a time this week, its highest level in nine months.

The sudden upheaval in the bond markets will leave savers with mixed feelings. The sharp fall in bond prices means those saving for a pension and close to retirement will worry about the extent of their investment exposure to a volatile bond market. At the same time, those at retirement age and looking for a secure income for their retirement years will hope that as interest rates rise, annuities – once the default means of providing a fixed income until death – can again become an attractive option after a period in which they have become prohibitively expensive.

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For ordinary savers with money on deposit, the prospect of higher rates will be seen as long overdue after a period in which the value of savings has been eroded. With interest rates at record lows, however, real gains are some way off.