M&G: Jim Leaviss und Eric Lonergan zur US-Wahl

Bond market reaction to Trump’s election victory

Jim Leaviss, Head of M&G Retail Fixed Interest team 

As Donald Trump delivers his victory speech, and is set to become America’s 45th President, here’s a quick update on what we’re seeing in bond and currency markets since you went to bed.  For bonds, the impact has so far been relatively modest; it’s been equity markets where moves have been stronger (the Nikkei is down 5%).  Last night the Mexican peso was the barometer of the likely outcome, at first rallying but then rapidly retreating.  It’s now 10% lower against the US$, which itself is weaker on expectations of fewer Fed hikes.  The DXY USD index is 0.8% lower overnight, with the yen – a traditional winner in “risk off” episodes – two percent better. 

As expectations of a Trump win grew last night, the US Treasury market rallied aggressively.  You might think this perverse given that Trump has openly discussed “haircutting” Treasury investors, but this is a flight to quality response.  The Fed was seen as nailed on for a 25 bps hike in December, but the uncertainty impact of a Trump win makes this much less likely (and will Janet Yellen still be head of the Fed under a Trump regime?).  The implied probability of a rate increase has fallen from over 80% to 50%.  Rate expectations have fallen for 2017 too.  10 year US Treasury yields plummeted by 14 bps from 1.88% to 1.74% as the election outcome became clearer, but have subsequently risen back to 1.81%.  Overall, we have seen a relatively modest 5 bps fall in the US 10yr yield.  

There’s been more impact in the shape of the US yield curve.  Longer dated USTs have sold off, with the 30 year yield 5 bps higher.  We know very little about Trump’s economic policies, but a fiscal stimulus through tax cuts and infrastructure spending seems likely (we could compare his likely policies to those of Ronald Reagan in his first term of office).  Government borrowing is likely to rise in the medium term, and that often results in yield curve steepening.  We should also remember that the US bond market is heavily owned by foreigners, including nations like China where Trump has made unfriendly comments.  50% of the US Treasury market is owned by overseas investors (China owns 19%, Japan 18%), and 30% of America’s corporate bond market is foreign owned.  Foreigners – and especially China – have already turned heavy net sellers of USTs over the past six months.  Bunds have rallied by 5 bps too.  

Elsewhere in fixed income markets, we have seen little response in credit markets compared to equity markets.  There’s been an initial widening in the CDX IG US$ credit index of maybe 5 bps to 80 bps, and the European iTraxx high yield index is 17 bps wider.  These are very modest moves, although as you’d expect there’s been little traded in the physical credit markets yet, and liquidity will be poor today.  We saw a price in Cemex, the high yield Mexican cement manufacturer,  that was about 1 point lower than yesterday.  This doesn’t seem much and who knows if you could sell your bonds there.  US bank names are around 12 bps wider in spread, peripheral European banks 20 bps wider.  CoCos are marked down 2 to 3 points.  

The big implication for investors of what happened last night is this: with no income growth for most populations in developed world economies since the Great Financial Crisis (with the exception of the 1%), the established parties and candidates are being heavily punished in elections.  It doesn’t stop here – we have a referendum on the Italian constitution next month, and many more European elections in 2017 (could Marine Le Pen be elected President in France?).   I saw a statistic this morning where across the G7, 65% of parents believe their children will be worse off than they are.  Having seen the electoral shifts in the UK with Brexit and now the US, do established political parties react by promising significant fiscal expansions?  Could last night’s vote trigger the end of global austerity?    

A Trump presidency

Eric Lonergan, fund manager at M&G’s Multi-Asset team  

It's Brexit all over again. The surge in anti-establishment sentiment is definitively global. Brexit can no longer be dismissed as a freak event. It is a trend. Donald Trump has won, by defying his party, the media, and conventional politics. Populism is coming to power. The critical issue now is what this mean in practice.

The immediate market reaction is predictable. Risk assets have fallen sharply, safe assets are rallying, and the dollar is falling. It's deja vu all over again. Like Brexit, will we see a reversal in asset prices in the next weeks or months?

Although at this stage it looks likely that the Republicans will retain the House and the Senate, a President Trump will be far more constrained in practice than he has sounded campaigning. Even though both houses are likely to controlled by Republicans, this is no guarantee of agreement on his more outlandish policies (building walls and initiating trade wars). He will be pushing on an open door repealing Obamacare and cutting taxes, which are arguably market-friendly, although both are likely harder in practice.

The critical unknown is whether a Trump presidency pursues the policies of Trump the candidate, in particular his anti-trade, anti-China and anti-Mexico policies. Reason suggests that Congress and financial markets will regulate his ability to act. It is equally possible that these campaign rally cries are abandoned with the responsibility of power. But the real concern is that he will do what he says.

The initial market reaction is consistent with the behaviour we have seen in responses to poll trends. Over subsequent weeks and months, these moves may well reverse. On domestic economic policy, the only policies where Trump is likely to secure Congressional support would be on tax-cutting and deregulation - which are likely capital-friendly. We might also witness pro-cyclical fiscal policy for the first time since Reagan, which would profoundly undermine bond markets. I would discount Trump's anti-Fed rhetoric. Ironically, looser fiscal policy suits the Fed, because they want to normalise interest rates. The greatest irony of this latest outpouring of populism may well be a set of policies which favour capital over labour, and look more Keynesian than neo-liberal.

Bitte beachten Sie, dass es sich hierbei um Archivinformationen handelt. Sie sind nicht als aktuelle Ansichten oder Einschätzungen, sondern nur als historische Angaben zu verstehen.