US Election - Bond markets showing Trump risk
9 November 2016
Royal London Asset Management (RLAM) discusses the outlook for bond markets following the election of Donald Trump as the 45th president of the United States of America, including:
- The impact for government and corporate bonds – Jonathan Platt, Head of Fixed Income
- The impact for high yield markets – Azhar Hussain, Head of Global High Yield
Royal London currently manages over £60bn in fixed interest assets, including cash.
Commenting on the impact for government and corporate bonds, Jonathan Platt, Head of Fixed Income, said:
“Having initially sold off sharply, the yield on US government bonds has already risen back. However steeper yield curves and the implied level of future inflation have both risen, indicating longer term uncertainty.
“In Europe and the UK, government bond markets have actually changed little, while corporate bonds are a little weaker, but not significantly, although again yields on longer dated debt has risen.
“The main implications of this election are likely to be higher inflation as a result of fiscal policies such as tax cuts and infrastructure spending. In the medium term this will raise US and global interest rates, but there may be a short term hit to consumer and business confidence. However, a comparison with Brexit would suggest that this could be overstated.
“The Republican’s potential dominance of executive, legislative and judicial branches of US government suggests that there could be meaningful changes to social, economic and foreign policies, although given the animosity felt towards Trump from within his own party, this is no certainty. Trade policy remains the biggest unknown, but Trump’s initial acceptance speech was conciliatory on relations with other countries.
“As bond investors, we are maintaining our short duration positions, our overweight allocations to, and positions within, credit markets and a preference for inflation protected securities as we continue to see expectations of inflation rising.”
Commenting on the impact for the high yield, Azhar Hussain, Head of Global High Yield, said:
“Once again this year politics has sprung a surprise adding uncertainty, which is bad for risk assets. There are now more questions than answers, as we don't actually know what policies will be enacted. Domestic focused US companies could benefit from the likely cut in taxes with a Republican congress, but without clarity on the path for economic growth these will be tough to invest in. The losers are likely to be large corporates with operations in emerging markets, as protectionism seems to have won. Obamacare will likely be repealed, hitting parts of the high yield healthcare sector.
“The likely nixing of the Iran deal could well mean that the oil price is buoyed, supporting the US’s energy sector, a big issuer of high yield bonds. Political risks will rise globally and the focus will be on remaining short in duration to navigate the future uncertainties. Fed chair Yellen is unlikely to be in place when her term ends in January 2018, with a Trump appointee replacing her, so the knee jerk reaction of buying the dip in credit becomes more uncertain without a steady hand on the monetary tiller.”
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About Royal London Asset Management (RLAM):
Established in 1988, Royal London Asset Management (RLAM) is one of the UK's leading fund management companies, providing investment management solutions to both wholesale and institutional clients such as not-for-profit organisations, local authorities and the insurance sector.
RLAM manages over £101 billion of assets and employs 76 investment professionals. It invests in all major asset classes including UK and overseas equities, government bonds, investment grade and high yield corporate bonds, property and cash.
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with Group funds under management of £101 billion. Group businesses provide around 9.1 million policies and employ 3,179 people. (Figures quoted are as at 30 September 2016)