In the credit world, the version of the “Trump trade” is step by step taking shape: people buy American high-yield bonds and avoid anything that has to do with inflation.
Investors in corporate bonds all over the world have already begun positioning themselves to cash in on a possible post-assassination election victory for Donald Trump. The Republican convention has strengthened Trump’s position within the polls. Spreads on US high-yield bonds have widened against their euro counterparts up to now week, and junk funds worldwide have seen a rise in inflows.
“US high-yield bonds are the instrument in demand,” says Al Cattermole, portfolio manager at Mirabaud Asset Management. “They are more domestically focused and dependent on US economic activity.”
end of June interview Trump told Bloomberg Businessweek that he wants to cut back the company tax rate to as much as 15%. These lower costs could improve the creditworthiness of weaker corporations. US corporations could also profit from protectionist measures that will result in high import tariffs if the Republican candidate were to win.
U.S. junk bonds are attractive to asset managers because, in line with a Bloomberg News evaluation, greater than half of the highest-rated junk bonds, excluding financials, have only domestic revenues, in comparison with just one-fifth of highly rated bonds. The data excludes corporations that don’t make the data public.
Domestic manufacturers could also profit from tariffs and looser regulation.
“We have added U.S. industrials that would benefit from a pro-business stance from a new administration,” said Catherine Braganza, senior high yield portfolio manager at Insight Investment. “Companies that benefit from industrial manufacturing, especially those that trade spare parts,” are attractive, she said.
Yield curve
Some fund managers are as an alternative specializing in the form of the yield curve, especially as corporate bond spreads appear to have little room to say no further after approaching their lowest levels in greater than two years.
“We have reduced duration through shorter bonds, the use of futures and also through the use of steepener trades,” said Gabriele Foa, portfolio manager in the worldwide credit team at Algebris Investments, referring to bets that may repay because the gap between short-term and long-term bond yields widens.
While that spread has widened this 12 months, it continues to be well below the extent seen before major central banks began raising rates of interest to combat runaway inflation. Currently, bondholders receive a measly 30 basis points extra yield by holding global corporate bonds with seven- to 10-year maturities reasonably than shorter-dated corporate bonds, in line with Bloomberg indexes. It was 110 basis points just before Trump left office in 2021.
This gives the curve room to rise further, especially if the previous president’s policies – that are expected to be inflationary and result in higher national debt – are accompanied by rate of interest cuts by the Federal Reserve.
Certainly not all asset managers are switching to a Trump portfolio yet. His victory isn’t yet certain, and even whether it is, it isn’t yet entirely clear what he’ll do in office.
“It is too early to adjust your portfolio based on ‘what ifs’ when Donald Trump is in office,” said Joost de Graaf, co-head of the credit team at Van Lanschot Kempen Investment Management. “We still expect spreads to tighten somewhat in the summer.”
If Trump does win, markets, that are sensitive to higher rates of interest, inflation and tariffs, are more likely to be more unpredictable.
“Longer-term higher prices are bad for emerging markets and tariffs will lead to weaker economic growth,” said Mirabaud’s Cattermole. “We expect European high yield bonds to underperform over the next nine months.”
