US election impact for government and corporate bonds


Jonathan Platt, Head of Fixed Income

 9 November 2016

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 have 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.

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 have 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.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.