Henderson: The US election: bad for bonds?

Much has been written about the impact of a Trump or Clinton presidency on global equity markets. Indeed, share price movements in some sectors (eg, pharmaceuticals) have developed a material correlation to national opinion polls, as investors attempt to define the winners or losers under each regime. However, despite the sector rotation, for equity markets in aggregate, the net effect of either candidate is relatively ambiguous over the medium term. In our view, the outlook for bond markets is more interesting and arguably skewed to the downside.  

A Clinton victory would provide continuity and reduce policy uncertainty. Such an environment would be beneficial for US macro momentum and likely provides sufficient stability for the Federal Reserve to raise interest rates. Furthermore, the net effect of Clinton’s policy platform appears growth and inflation positive.  

A Trump victory would be unexpected and the surprise would likely damage investor risk appetite in the short-term. Nevertheless, upwards pressure on bond yields could emerge over time. If Trump was able to implement his fiscal proposals the US could see substantial inflationary pressure. Moreover, the required deficit expansion would likely necessitate an increase in risk premia for US government assets.  

In our view, US nominal yields are likely to grind higher following the election, regardless of the victor. However, the timing and nature of the move remains unclear. In this environment, we prefer to hold inflation-linked TIPS (Treasury Inflation Protected Securities)* over nominal treasuries with the potential expansion in breakeven inflation rates** providing a cushion against movements in nominal yields.  *The coupon and principal portion of this security increases with inflation and decreases with deflation in accordance with the consumer price index (CPI). At maturity, the adjusted or original principal is paid; whichever amount is higher.  

**The breakeven inflation rate is a market-based measure of expected inflation. It is the difference between the yield of a nominal fixed rate bond and an inflation-linked bond of the same maturity.

Die Wertentwicklung in der Vergangenheit ist kein zuverlässiger Indikator für die künftige Wertentwicklung. Alle Performance-Angaben beinhalten Erträge und Kapitalgewinne bzw. -verluste, aber keine wiederkehrenden Gebühren oder sonstigen Ausgaben des Fond.

Die Informationen in diesem Artikel stellen keine Anlageberatung dar.