* Bonds set for biggest two-week loss in decades
* Questions over whether 30-year rally in debt at an end
* Banks up forecasts, negative yield universe shrinks
* Contrarian bond funds rack up huge gains in market rout (Updates market action, add contrarian bond funds’ move)
By John Geddie and Dhara Ranasinghe
LONDON, Nov 18 (Reuters) - Global bonds were set for their biggest two-week loss in decades on Friday, the latest signal that a 30-year rally in debt markets may be choked off by rising inflation expectations with more investors deserting them.
Donald Trump’s victory in the U.S. presidential election has firmed bets that an era of austerity is ending, offering the possibility that fiscal stimulus in some of the world’s biggest economies will lead to faster growth and higher inflation.
Consumer price growth erodes the value of bonds that carry fixed rates of interest, while equities offer more attractive returns to investors as economies expand.
Barclays Global Aggregate Bond Index is poised to record a 4 percent loss over the last fortnight, its steepest fall since at least 1990, while Bank of America Merrill Lynch’s Global Bond Index is set to shed 1.75 percent over the same period, its worst run since at least 1997.
“Turning point is a big phrase ... but it feels like we are heading back to normal levels,” Florian Hense, an economist at Berenberg said.
“We haven’t seen moves like this in a long time ... there has been a massive shift from bond to equity markets.”
Trump’s plans to boost spending have been the catalyst for the latest rout in bond markets, but they followed a rebound in commodity prices and expectations Britain may inject its own fiscal stimulus. Meanwhile, the European Commission has called on the 19-country euro zone to loosen budget policy next year.
Expectations for long-term inflation in the U.S. have surged to their highest levels in two-years, while euro equivalents are at 10-month peaks.
Those have hauled up U.S. bond yields, which move inversely to prices. On Friday, 10-year yields were set for their biggest two-week rise since November 2001.
The difference between short-dated and long-dated yields, another key gauge of inflation expectations known as the curve, is at its steepest in nearly a year.
“Trump is a huge booster, an amplifier, of an idea that started before. I think we are past this inflexion point in terms of inflation,” Pictet economist Frederik Ducrozet said.
“The shift towards less monetary, more fiscal stimulus started before, Trump is just pushing this idea to the extreme.”
The yield gap between 10-year U.S. Treasuries and their German counterparts grew to a record-wide 207 basis points on Friday, Tradeweb data showed.
Investors pulled $14.3 billion from U.S. bond funds over the last three weeks including nearly $6 billion in the latest week, according to Lipper, a Thomson Reuters unit.
Contrarian bond funds that bet on bond prices to fall, on the other hand, have enjoyed a boon during the current bond rout.
ProShares UltraShort 20-plus Year Treasury exchange-traded fund, whose prices correspond with twice the move of a bond index it tracks, rose 17.9 percent in two weeks, the ETF’s second-biggest such gain ever.
The bond market rout stands in marked contrast to a rally in June. Fears then about the fall-out from Britain’s decision to leave the European Union rattled investors and drove them into safe-haven debt.
A number of banks at that time forecast deeply negative bond yields in the euro area. But in recent weeks they have revised those estimates higher, in another sign that the tide may have turned for bonds.
With bond yields soaring, the pool of government bonds with a negative yield, which means investors effectively pay for the privilege of lending money, is in decline.
According Fitch Ratings, $10.4 trillion of sovereign bonds had a negative yield at the start of November, down from $11.7 trillion in June.
The selloff has bought relief to the European Central Bank, which has been struggling to source eligible bonds for its asset purchase programme.
Tradeweb data shows that around 23 percent of euro zone government bonds now yield less than the ECB’s deposit rate of minus 0.4 percent, which marks the lower limit for asset purchases. That is down from 25 percent last month and 28 percent in September.
In Germany, Europe’s biggest economy, the average yield of bonds in circulation has returned to positive territory after falling below zero percent for the first time in June.
Some of the sharpest selling in euro zone bond markets has come in countries considered vulnerable to political risk, such as France and Italy.
In Italy, where a Dec. 4 referendum on constitutional reform could unseat Prime Minister Matteo Renzi, 10-year yields are close to their highest levels in more than a year.
The gap between 10-year bond yields in France, which goes to the polls in 2017, and top-rated German peers is close to its widest level since July 2015.
And with the U.S. election results putting a focus on the prospects for higher growth and inflation under a new government, market rate expectations have started to shift.
Money markets are starting to price in one or more U.S. rate hikes next year, a sea change from before the election when they priced in a less than 50 percent chance of a 2017 rate hike.
In the euro zone, investors are starting to price in a slim chance that the ECB will raise rates next year for the first time since 2011.
Editing by Larry King and Meredith Mazzilli