Why Transurban Group and Sydney Airport Holdings Ltd are getting slammed today

Although many predicted a Trump victory in the US election would be a disaster for the American economy, so far these fears look to be off the mark with financial markets appearing optimistic. So much so US markets surged higher overnight and bond yields lifted.

Another key metric that climbed higher was the probability that the Federal Reserve will raise interest rates in December. According to CME Group’s FedWatch tool the probability of a rise in December has grown to 81.1%.

Although this is still by no means a certainty and there will be key economic data released in the weeks ahead that could impact the outcome, I feel confident that we will see a rise in December.

This is something which I expect Donald Trump will endorse. The president-elect has been very critical of Fed Chair Janet Yellen’s reluctance to raise rates previously. At one stage he accused her of playing politics with interest rates.

In light of this and Trump’s plans for economic growth, I expect we will soon see a rise in inflation and an end to low interest rates. This would explain the sharp rise in bond yields overnight, which are likely to rise further as rates increase.

This is bad news for so-called “bond proxies”. Shares such as Sydney Airport Holdings Ltd (ASX: SYD) and Transurban Group (ASX: TCL) are considered to be bond proxies because they resemble bonds by providing investors with low-risk income, but with higher yields.

But as yields on actual bonds rise, shares like Sydney Airport become less attractive to those in search of income.

Because of this I wouldn’t be surprised to see their respective share prices fall further over the next 12 months. Especially Transurban’s shares which are changing hands at 82x full year earnings.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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