What could a re-elected Donald Trump mean for bond markets, in the US and Asia?
Days after Trump’s surprise victory in the 2016 US presidential election, 10-year Treasury yields rose above 2.5% over concerns his adminstration would increase fiscal spending. Yields then continued to widen to reach a peak of 3.25% in November 2018 before they started to fall to a record low of 0.318% in March this year.
However, yields have been on the rise once more since August, indicating a shift in appetite for risk assets. The Federal Reserve does not expect inflation to pick up for several years, and it has signalled that it is willing to keep interest rates at zero until the end of 2023.
“A Republican administration would not significantly impact the bond market over the first six months as (Fed chairman) Jerome Powell would not be replaced at the Fed until 2022,” Stéphane Monier, chief investment officer of Swiss-based asset manager Lombard Odier, said in a house insight. In contrast, he said a Joe Biden administration and divided Congress may weaken economic recovery and translate into lower sovereign yields, he said.
Meanwhile, China is tweaking its foreign exchange rules to make it easier for overseas institutional investors to buy onshore bonds, according to a draft regulation issued by the People's Bank of China and State Administration of Foreign Exchange earlier this month. China hopes to attract overseas investment in its domestic securities to offset financial decoupling from the US.
Separately, FTSE, which publishes the World Government Bond Index (WGBI), is expected to announce that China will be added to the benchmark in its annual review scheduled for September 24. A positive outcome could result in large flows of US dollars being used to buy China bonds.
As global investors adjust their portfolios ahead of November’s elections, AsianInvestor asked four experts how a Trump win could impact Asian countries’ bond markets.
The following contributions have been edited for clarity and brevity.
Daniel Morris, senior investment strategist
BNP Paribas Asset Management
The impact on the US Treasury market of a Trump victory will depend on two things: Firstly, whether the win is declared and accepted on the night of the election or whether it is contested when mail-in votes are counted, and secondly, whether control of either houses of Congress changes hands (either Republicans losing control of the Senate or gaining control of the House).
A contested election result would likely lead to a rally in US treasuries. The main drivers of bond yields will be the recovery of the economy from the pandemic and US Federal Reserve policy.
We expect the recovery to be halting, and the Fed has already signalled it will keep policy rates low for a very long time, as they aim for higher inflation, which suggests 10-year yields will probably not move much outside of the 60-80 basis points range we’ve seen for the last six months.
If a Trump victory leads to escalating tensions with China, China’s equity markets could suffer and hence the Chinese treasury markets could benefit from this. Our emerging market debt team prefers China high yield as it is very cheap compared to other emerging market countries, and the probability of default is mispriced.
Ariel Bezalel, head of strategy for fixed Income
Jupiter Asset Management
A Trump win would likely mean a continuation of the economic policies, both monetary and fiscal, we have seen in his first term. This has been generally been positive for risk assets.
We believe that the underlying fundamentals of the US economy remain challenged and that US Treasury yields will remain low for an extended period of time. As we approach a ‘fiscal cliff’ in the US and other major developed economies, we anticipate that the rebound in economic activity, observed over the last few months, will moderate.
We believe that a ‘contested result’ at the US election is a distinct possibility and this will drive volatility and uncertainty higher. We would expect investors to reduce risk and increase allocations to safer government bonds, in this scenario.
The Covid-19 crisis continues to be a bigger driver for the US and Asian bond markets than the US election. We believe that the US election outcome will only have a temporary impact on US and Asian bond markets unless there is confidence in the ability to contain another global outbreak and certainty relating to the path of economic recovery.
The pressure on the Federal Reserve to continue with non-traditional monetary policy expansion, however, may result in longer maturity bond yields rising, as investors start demanding a higher inflation premium.
Institutional investors are in the early days of increasing their allocation to fixed income.
We have been positive and continue to prefer Asian bonds, as the yields present attractive pick up over developed market bonds. As the virus containment has been more effective in Asia versus the rest of the world, the economic outlook will be stronger and more resilient.
The upcoming US elections remain highly contested, with political tensions exacerbated by the Covid-19 crisis and a sharp economic contraction in the US.
While the name of the next President is of course important, the margin of victory is also likely to be an important factor. For example, a scenario where the election result is extremely close, and consequently causes confusion regarding the outcome, would in all likelihood be negative for risk assets and positive for US Treasuries.
In the run-up to the election there has been pressure on certain financial assets, such as the US Dollar.
Looking at the long-term picture, we remain optimistic for emerging market debt because investors will increasingly avoid the depressed yield levels prevalent for both government and corporate bonds in developed economies, prefering higher yielding assets such as emerging market fixed income securities. The strong inflows we have seen into emerging market debt mutual funds since the sell-off in March are clear indicators of this phenomenon.
We also believe that a democrat victory could be supportive for Chinese bond and equity markets in the short term.