Donald Trump’s policies could lead to an increase in interest rates on Croatia’s government bonds.
The unexpected victory of US President-elect Donald Trump has led to some volatility in the financial markets. After the initial weakening, the US dollar moved in the opposite direction, posting strong growth. At the same time, bond prices after a brief growth found themselves on a downward trend, which is bad news for Croatia, since its debt repayments could increase, reports tportal.hr on November 16, 2016.
The first psychological reaction to the shocking outcome of the US presidential election was a sharp decline in the US currency, but soon after the dollar recovered and in a few days rose more than 4 percent against the euro. On the other hand, prices of bonds and gold after the initial growth began to fall sharply.
Josip Kokanović, analyst of Admiral Markets, cites several reasons for this sudden change in investor expectations. The main reason is a change in Trump’s rhetoric after the election. Instead of radical and inapplicable economic ideas, he issued a call for unity. Investors hope that President Trump will not be the Trump from the election campaign. Additional optimism was caused by some of Trump’s proposed moves which could boost US economic growth. In fact, some of his main economic promises included tax cuts, massive investment in infrastructure, and the reduction of US trade deficit. If there is at least a partial fulfilment of those promises, that would probably mean the acceleration of economic growth in the United States, which would have a positive effect on the value of the dollar. For all these reasons, the analyst of Admiral Markets believes that in the coming weeks dollar could strengthened further.
Similar opinion has been expressed by analysts of Raiffeisen Bank, who believe that the financial markets have relatively quickly recovered from the “shock” about the outcome of presidential election in the United States.
An unexpected outcome of the US presidential election has stirred the world’s bond markets as well, where there has been a sharp fall in prices, with increasing yields for the leading international bonds. The yield on US government 10-year bonds exceeded 2.28 percent, while the German government bond followed the trend, reaching 0.39 percent, the highest level since February this year.
Yields on Croatian government bonds traded abroad have increased even more than their German and US counterparts. At the end of last week, the yield on the Croatian bonds maturing in 2025 reached above 3 percent, while at the beginning of this week it reached 3.30 percent. This means that in just three workdays, the yield increased by more than half a percentage point!
This is bad news for Finance Minister Zdravko Marić, since the continuation of these trends would mean higher interest rates on future borrowings. And, next year, Croatia will have substantial financing needs, since it will need to find as much as 27 billion kuna to repay previously issued bonds which will mature during the year.
