In the credit world, the version of the “Trump trade” is gradually taking shape: people buy American high-yield bonds and avoid anything that has to do with inflation.
Investors in corporate bonds around the world have already begun positioning themselves to profit from a possible post-assassination election victory for Donald Trump. The Republican convention has strengthened Trump’s position in the polls. Spreads on US high-yield bonds have widened against their euro counterparts in the past week, and junk funds worldwide have seen an increase in inflows.
“US high-yield bonds are the instrument in demand,” says Al Cattermole, portfolio manager at Mirabaud Asset Management. “They are more domestically focused and dependent on US economic activity.”
end of June interview Trump told Bloomberg Businessweek that he wants to reduce the corporate tax rate to as much as 15%. These lower costs could improve the creditworthiness of weaker companies. US companies could also benefit from protectionist measures that would lead to high import tariffs if the Republican candidate were to win.
U.S. junk bonds are attractive to asset managers because, according to a Bloomberg News analysis, more than half of the highest-rated junk bonds, excluding financials, have only domestic revenues, compared to just one-fifth of highly rated bonds. The data excludes companies that do not make the information public.
Domestic manufacturers could also benefit from tariffs and looser regulation.
“We have added U.S. industrials that would benefit from a pro-business stance from a new administration,” said Catherine Braganza, senior high yield portfolio manager at Insight Investment. “Companies that benefit from industrial manufacturing, especially those that trade spare parts,” are attractive, she said.
Yield curve
Some fund managers are instead focusing on the shape of the yield curve, especially as corporate bond spreads appear to have little room to decline further after approaching their lowest levels in more than two years.
“We have reduced duration through shorter bonds, the use of futures and also through the use of steepener trades,” said Gabriele Foa, portfolio manager in the global credit team at Algebris Investments, referring to bets that will pay off as the gap between short-term and long-term bond yields widens.
While that spread has widened this year, it is still well below the level seen before major central banks began raising interest rates to combat runaway inflation. Currently, bondholders receive a measly 30 basis points extra yield by holding global corporate bonds with seven- to 10-year maturities rather than shorter-dated corporate bonds, according to Bloomberg indexes. It was 110 basis points just before Trump left office in 2021.
This gives the curve room to rise further, 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.
Certainly not all asset managers are switching to a Trump portfolio yet. His victory is not yet certain, and even if it is, it is not yet entirely clear what he will do in office.
“It is too early to adjust your portfolio based on ‘what ifs’ when Donald Trump is in office,” said Joost de Graaf, co-head of the credit team at Van Lanschot Kempen Investment Management. “We still expect spreads to tighten somewhat in the summer.”
If Trump does win, markets, which are sensitive to higher interest rates, inflation and tariffs, are likely to be more unpredictable.
“Longer-term higher prices are bad for emerging markets and tariffs will lead to weaker economic growth,” said Mirabaud’s Cattermole. “We expect European high yield bonds to underperform over the next nine months.”