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The reaction of bond markets to Donald Trump’s surprise victory was not as bad as the aftermath of the Brexit, and could eventually benefit fixed income investors, say Robeco’s fund managers.
“The surprise win by Trump feels like Brexit revisited,” says Sander Bus, head of the High Yield bonds team. “Initially the polls pointed in the direction of a Clinton win, but as the evening progressed Trump beat the odds, by winning large states. Interestingly enough, Brexit spooked the markets more than Trump’s surprise win: credit markets were much more volatile in June 2016.”
“The impact of a new Republican president could be beneficial for the US economy in the longer term – or at least that is what he claims. There will be more infrastructure spending and fiscal stimulus. However, Trump’s win does not mean he can do whatever he wants. He will have to negotiate with the House of Representatives and the Senate, and within the Republican Party, not everyone agrees with Trump’s intended policies. This uncertainty should be reflected in credit spreads, but this does not seem to be the case at the moment.”
While equity markets in Asia opened down more than 4% down and US and European stock futures were 2-4% lower on news of the Republican landslide, the reaction in credit markets was more muted, Bus says. European CDS indices Itraxx Main and Crossover opened respectively 5 and 25 basis points higher, before coming back. CDS indices in the US, the CDX Investment Grade and CDX High Yield indices, widened by 5 and 15-20 basis points respectively.
The European financial senior and sub-CDS indices moved in line with corporates, widening by 5 and 15 basis points. US banks responded in a similar way to the mild risk-off sentiment in markets. Underlying interest rates reacted strongly at the market opening but quickly gave up their gains, with 10- and 30-year US Treasury up and curves steepening. The front end of the curve in Europe and US initially fell, which will have a positive impact on total return numbers for credit markets, especially if the widening in credit spreads is contained.
“The impact on our Robeco High Yield Bonds fund, which has a large weight in the US, will be muted,” says Bus. “The beta of the fund is currently around 1, which should help to keep the performance in line with that of the benchmark.”
“The fund has an overweight in Europe versus the US. Our positioning in Europe could be beneficial for the fund, given that the uncertainty of Trump’s policy is largely US-related. The positioning within both regions is more tilted towards higher quality, consumer-oriented sectors. There is a risk that ‘rust-belt’ sectors could rally, since Trump is a supporter of capital-intensive industries, such as steel, coal, energy and utilities. More profoundly, Obamacare is at risk. We have an overweight in US hospitals, so this could have a negative impact on the fund.”
For government bonds, the Trump victory provided mixed reactions. After an initial rally, US government bonds sold off, while German Bund yields remained flat. Emerging local bond yields rose and emerging currencies declined as the Trump victory will likely have negative repercussions on foreign trade.
“We expect a Trump victory to have little short-term implications for monetary policy,” says Kommer van Trigt, head of the Global Fixed Income Macro team. “A Fed hike in December is still the most likely scenario. With Congress and the Presidency in the same hands, it is more likely that some of the fiscal plans that were announced during the campaign will indeed be implemented.”
“These plans include a reduction in personal and corporate tax rates and a substantial increase in infrastructure spending. How substantial the actual stimulus will be remains to be seen, but the direction is towards more fiscal stimulus.
This can have an upward effect on yields via an increase in government debt and a reduced need for monetary stimulus.” “The positive argument for government bonds is that the Trump victory underlines event risk in politics (as did the Brexit vote), and his confrontational style could increase political risk going forward. On balance we view the Trump Presidency as being negative for bonds and we have reduced duration.” Going into the elections, the Robeco Global Total Return Bond Fund had an outright short position in Italian government bonds. This position has been closed as spreads have widened to the highest levels pre-Brexit. The Robeco Euro Government Bonds fund and Robeco All Strategy Euro Bonds have bought back Italian bonds, reducing the underweight positions in Italian government bonds in these funds.