The credit world’s version of a “Trump trade” is starting to take shape: buy U.S. high-yield bonds and avoid anything inflation-sensitive.
Corporate bond investors around the world have begun positioning themselves to benefit from a potential election victory for Donald Trump after an assassination attempt and the Republican National Convention boosted Trump’s standing in the polls. Global junk funds have seen a surge in inflows over the past week as spreads on U.S. high-yield bonds strengthened relative to euro bonds.
“U.S. high-yield bonds are the trade,” said Al Cattermole, portfolio manager at Mirabaud Asset Management. “It’s more domestically focused and influenced by U.S. economic activity.”
In an interview with Bloomberg Businessweek at the end of June, Trump said he wanted to lower the corporate tax rate to 15%. Lower fees can improve the credibility of weaker companies. If the Republican candidate wins, U.S. companies could also benefit from protectionist policies that would impose steep tariffs on imported products.
U.S. junk-rated bonds are attractive to fund managers because when financial stocks are excluded, more than half of top junk-rated borrowers have only domestic income, according to a Bloomberg News analysis. In comparison, the proportion of high-end space is only one-fifth. The data excludes companies that do not disclose information publicly.
Domestic manufacturers also benefit from tariffs and looser regulations.
“We have been adding to U.S. industrial stocks that will benefit from the new administration’s pro-business stance,” said Catherine Braganza, senior high-yield portfolio manager at Insight Investment. “Companies that benefit from industrial manufacturing, particularly those engaged in Companies in the spare parts business are very attractive.
yield curve
Some fund managers are instead focusing on the shape of the yield curve, especially as corporate bond spreads appear to have no room to fall further after approaching their tightest levels in more than two years.
“We reduce duration by holding shorter maturities, using futures and using steep trades,” said Gabriele Foa, portfolio manager in Algebris Investments’ global credit team. Past maturity yields expanded.
While the spread has widened this year, it remains well below where it was before major central banks began raising rates to combat runaway inflation. Currently, bondholders receive only an additional 30 basis points of yield by holding global corporate bonds with maturities between 7 and 10 years instead of short-term corporate paper, compared with just 30 basis points before Trump leaves office in 2021, according to Bloomberg Indexes. The number is 110 basis points.
That gives room for the curve to steepen further, especially if the former president’s policies – which are expected to fuel inflation and lead to an increase in the national debt – are matched by the Fed’s rate cuts.
To be sure, not all fund managers are switching to Trump portfolios. It’s unclear whether he will win, and even if he does, it’s not entirely clear what he will do in office.
“It would be premature to adjust portfolios based on ‘what ifs’ during the Donald Trump administration,” said Joost de Graaf, co-head of the credit team at Van Lanschot Kempen Investment Management. “We still expect spreads to tighten in the summer.”
If Trump does win, markets sensitive to rising interest rates, inflation and tariffs are expected to become more unpredictable.
“A longer-term move higher would be bad for emerging markets, and tariffs would lead to slower economic growth,” Mirabeau’s Cattermole said. “We expect European high-yield bonds to underperform over the next nine months.”
