As the US presidential election approaches, credit portfolio managers face the delicate challenge of dealing with potential impacts on both macro and micro credit markets.
According to analysts at UBS, while the broader macro credit environment is expected to see minimal disruption from the election, the micro-level impacts, particularly within specific sectors, could be more significant depending on the outcome of the election.
The U.S. credit market as a whole appears to be positioned for what UBS describes as a “slow-motion decline.” This bullish outlook is based on a strong technical backdrop and stable fundamentals.
The possibility of a rate cut by the US Federal Reserve could pull money out of the margin and push investors further along the credit curve, creating a supportive environment for credit portfolios.
Meanwhile, the resilience of the US credit cycle, as evidenced by the recent rise in US Treasury interest rates, suggests that the market is well prepared to weather the election period without major disruptions.
“We see election-related developments having a limited impact on macro credit, but a greater impact on micro credit – especially if opinion polls start to separate a clear presidential winner,” UBS analysts said.
In investment-grade credit, a Kamala Harris win or a big jump in her poll numbers could benefit sectors like basic industrials, capital goods, and utilities.
This expected outperformance is largely due to the expectation of continued policy support such as the Inflation Reduction Act and other stimulus measures under Biden.
On the other hand, sectors such as telecom, technology, banking, and automotive could face headwinds under Harris, primarily due to increased regulatory scrutiny and potential shifts in industry dynamics, such as the accelerated adoption of electric vehicles.
In the high-yield credit sector, the impact of a Harris win is expected to be less consistent across industries.
“In our Harris win, we see autos underperforming again, as do aerospace and defense on a less supportive defense spending agenda, and energy on a more restrictive agenda around production and regulation,” UBS analysts said.
This weak performance may stem from concerns about a less favorable political environment for defense spending and stricter regulations on energy production.
Looking at historical data, analysts at UBS found that previous elections have had an impact on credit markets, although the sample size is limited.
Historically, average interest rate spreads have tended to narrow in the three months leading up to an election, with the outcome of a deadlock—where no single party controls the executive and legislative branches—often coinciding with greater tightening.
Similarly, medium-term US Treasury bond (Baa) yields typically decline during this period, as Democratic presidential victories historically provide a slight advantage to spreads markets over Republican ones.
UBS analysts also used implied market analysis to differentiate potential winners and losers in credit based on poll swings. They noted that market reactions to changes in the odds of a Trump or Harris win provided valuable insights into sector performance.
During periods when Harris’s prospects improved, sectors such as basic industrials, capital goods, and utilities outperformed expectations, likely due to expectations of continued support for green initiatives and infrastructure spending.
In contrast, in the high-yield space, sectors such as autos, aerospace/defense, and energy were seen as likely to underperform under a Harris win, reflecting concerns about regulatory pressures and policy shifts away from traditional energy and defense priorities.
Finally, analysts at UBS pointed to the potential impact of changes in corporate tax rates and the regulatory environment. A Harris win could lead to higher corporate taxes, hurting sectors with low effective tax rates, such as utilities, technology, financial services, and energy.
Moreover, the regulatory environment for mergers and acquisitions may become more stringent under a democratic administration, especially in the area of debt financing.
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