The credit world’s version of the “Trump trade” is starting to take shape: buy high-yield US bonds and stay away from anything inflation-sensitive.
Institutional bond investors around the world have already begun positioning themselves for a potential election win for Donald Trump after the attempted assassination of his father, and the Republican National Convention has boosted his poll numbers. Spreads between high-yield US bonds and their euro-denominated counterparts have widened in the past week, and junk bond funds around the world have seen a surge in inflows.
“High yields in the US are a trade,” said Al Cattermole, portfolio manager at Mirabaud Asset Management. “They are more local market focused and more exposed to economic activity in the US.”
In late June interview In an interview with Bloomberg Businessweek, Trump said he wants to cut the corporate tax rate to 15%. That cut in spending would improve the creditworthiness of weaker companies. U.S. companies could also benefit from protectionist policies that would result in higher tariffs on imports if the Republican candidate wins.
U.S. junk bonds are attractive to money managers because when you exclude financial institutions, more than half of the highest-rated junk-rated borrowers have only domestic yields, according to a Bloomberg News analysis. That compares with just one-fifth of borrowers in the high-grade category. The data excludes companies that don’t disclose the information publicly.
Local manufacturers can also benefit from tariffs and more flexible regulation.
“We added U.S. industries that could benefit from a pro-business stance from the new government,” said Catherine Braganza, high-yield portfolio manager at Insight Investments. “Companies that benefit from industrial manufacturing, especially those that deal with parts,” she added, are attractive.
yield curve
Instead, some fund managers are focusing on the shape of the yield curve, especially as corporate bond spreads appear to have little room to fall further after nearing their narrowest levels in more than two years.
“We’ve reduced duration by taking shorter-term bonds, using futures, using steeper trades,” said Gabriel Foa, portfolio manager on the global credit team at Algebra Investments, referring to bets that profit when the gap between short- and long-term yields widens.
While that spread has widened this year, it remains well below levels seen before major central banks began raising interest rates to tackle runaway inflation. Bondholders currently earn an extra 30 basis points by holding seven- to 10-year global corporate bonds instead of shorter-dated corporate bonds, according to Bloomberg indexes, compared with about 110 before Trump left office in 2021.
This gives the curve more room to steepen, especially if the former president’s policies — which are expected to be inflationary and lead to higher national debt — are accompanied by interest rate cuts by the Federal Reserve.
Not all money managers have turned to Trump’s wallet yet. It’s not certain that he will win, and even if he does, it’s not entirely clear what he will do in office.
“It’s too early to adjust your portfolio based on ‘what if’ when Donald Trump takes office,” said Joost de Graaf, co-head of the credit team at Van Lanschot Kempen Investment Management. “We still expect to see some spread contraction over the summer.”
If Trump wins, markets sensitive to rising interest rates, inflation and tariffs are expected to become less predictable.
“Higher rates for longer are bad for emerging markets and will dampen economic growth due to tariffs,” said Cattermole of Mirabaud. “We expect European high-yield bonds to underperform in the next nine months.”