By Mike Dolan

LONDON (Reuters) – Post-election U.S. reflation trades have quietly subsided, and the world's sovereign bond markets have roared back to life, dragging government borrowing rates down over the past fortnight.

It's not at all obvious why. This may reflect trade war anxiety, world growth concerns, fears of another geopolitical shock with a new government due in Washington, or thoughts of sliding oil prices if U.S. drilling increases. Or maybe it's all three.

What this is not is a market overly anxious about a go-go world economy, re-aggravated inflation, or excessive government debt.

In some respects, it's the flipside of the market consensus on what another four years of Donald Trump in the White House might do to prices, which riffs on yield curves steepening on new stimulus, a tariff-induced inflation resurgence, and stalled central bank easing.

However, the reversal of the immediate post-election jolt in bond markets has been substantial across the developed world. Europe and China stand out.

Since Nov. 7, the 10-year German bund yield has plummeted almost 50 bps, nearly breaking 2% for the first time since January. This may seem peculiar for a country facing elections in two months, but likely reflects the additional pall Trump's trade tariffs would cast over an already hobbled German and euro zone economy and increased European Central Bank easing.

Jitters about the broader impact on the euro zone may give bunds something of a regional safety bid. Even French 10-year yields have plunged as much as 40 bps since Nov. 7, as Paris faces a government crisis that risks creating political and budgetary paralysis.

China, confronted with investment curbs and significant tariff threats from both outgoing and incoming U.S. administrations, saw its 10-year sovereign borrowing rates drop below 2% levels for the first time on record this week, a decline of almost 15 bps over the same period.

Despite persistent evidence of exceptional U.S. growth, sticky inflation, and widening budget deficits, long-dated U.S. Treasury yields have also dropped about 30 bps since the day after the election. The Bloomberg Multiverse index, which tracks global sovereign and corporate debt, saw implied yields decrease by 15 bps during this period as the index rose by 1.5%.

INCOME IN UNCERTAINTY

What gives? One prosaic explanation is that overly extreme positioning against sovereign debt before the U.S. election is being squared off into year-end, especially with final central bank rate cuts of 2024 due this month.

"Safe" sovereign debt allocations are priced in lockstep, often seen in large multi-country buckets. However, it's not entirely clear. The latest CFTC data shows speculative short positions on Treasury futures rose in the last week, although these typically reflect asset manager demand.

The latest Bank of America global funds survey shows an outstanding underweight position in bonds worldwide last month, but it was significantly less than the previous month, even though respondents identified "short 30-year Treasury bond" as the fourth most crowded trade.

Underweight bond allocations are not especially extreme, actually sitting about 1.3 standard deviations above long-term averages. Thus, markets may be starting to price the global growth impact of a trade war, which Trump seems keen to initiate with tariff warnings to Mexico, Canada, China, and the broader BRICS grouping of developing economies.

If countries offset those tariff hikes by allowing their currencies to weaken, the U.S. dollar's value could be supercharged globally, draining global financial conditions and liquidity.

Even if U.S. growth continues to outperform, it may not remain unscathed by a large global demand hit.

Another factor could make 2025 kinder to bonds than assumed: a return to income investing. Swiss house Julius Baer suggested this week that income investing may regain popularity, making bonds no longer "priced for confiscation." They stated there was "insufficient evidence" to support the thesis of structurally higher interest rates, given that private sectors remain net savers in many countries.

Julius Baer noted, "A steady income stream is even more valuable in times of macroeconomic uncertainty." If global macroeconomic uncertainty benefits world bonds, the recent rally is unsurprising.

The opinions expressed here are those of the author, a columnist for Reuters.

(by Mike Dolan X: @reutersMikeD)