The credit world’s version of the “Trump trade” is beginning to take shape: Buy American high-yield bonds and steer clear of anything inflation-sensitive.
Corporate bond investors around the world have already started positioning to benefit from a potential Donald Trump election victory after an assassination attempt and the Republican National Convention boosted his position in polls. Spreads on US high-yield bonds strengthened compared with their euro counterparts in the past week and junk funds globally saw a surge in inflows.
“US high yield is the trade,” said Al Cattermole, a portfolio manager at Mirabaud Asset Management. “It is more domestic-focused and exposed to US economic activity.”
In a late June interview with Bloomberg Businessweek, Trump said he wants to bring the corporate tax rate down to as low as 15%. That lower expense could improve the creditworthiness of weaker firms. US companies could also benefit from protectionist policies that will see high tariffs slapped on imports if the Republican nominee is victorious.
US junk is attractive to money managers because, when financials are excluded, more than half of top junk-rated borrowers only have domestic revenues, according to a Bloomberg News analysis. That compares with just a fifth in the high-grade space. The data excludes companies that don’t publicly disclose the information.
Domestic manufacturers could also benefit from tariffs and looser regulation.
“We have been adding US industrials that would benefit from a pro-business stance from a new government,” said Catherine Braganza, senior high yield portfolio manager at Insight Investment. “Companies that benefit from industrial manufacturing, in particular, those that deal with spare parts” are attractive, she said.
Yield Curve
Some fund managers are instead focusing on the shape of the yield curve, particularly as corporate bond spreads seem to have little room to fall further after nearing their tightest level in more than two years.
“We have reduced duration by having shorter-dated bonds, using futures and also using steepener trades,” said Gabriele Foa, a portfolio manager at Algebris Investments’ global credit team, referring to wagers that benefit when the gap between short- and long-dated yields widens.
Even though this spread has widened this year, it remains far below levels seen before major central banks started raising interest rates to tackle runaway inflation. At the moment, bondholders receive a measly 30 basis points in extra yield by holding seven- to 10-year global corporate bonds instead of shorter-term company notes, according to Bloomberg indexes, compared with 110 just before Trump left office in 2021.
His gives the curve further room to steepen, particularly if the former President’s policies — which are expected to be inflationary and lead to higher national debt — are matched by interest-rate cuts by the Federal Reserve.
To be sure, not all money managers are switching to a Trump portfolio just yet. It’s not yet a sure thing that he will win, and even if he does, it’s not completely clear what he will do in office.
“It’s a bit 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 to see a bit of summer grind tighter in spreads.”
If Trump does win, markets sensitive to higher interest rates, inflation and tariffs are expected to be more unpredictable.
“Higher for longer is bad for emerging markets, and you’ll get weaker economic growth due to tariffs,” said Mirabaud’s Cattermole. “We would expect that European high yield underperforms in the next nine months.”