Junk bonds are in high demand as Wall Street bets on another Trump presidency

Corporate bond investors around the world have begun positioning themselves to benefit from a potential election victory for Donald Trump after an assassination attempt and the Republican National Convention boosted his standing in the polls. Spreads on US high-yield bonds have widened relative to their euro counterparts over the past week, and global junk funds have seen a surge in inflows.

“U.S. high yields are a trade,” said Al Cattermole, a portfolio manager at Mirabaud Asset Management. “It’s more domestically focused and exposed to U.S. economic activity.”

At the end of June interview Trump told Bloomberg Businessweek he wants to cut corporate taxes to as low as 15%. That lower cost could improve the creditworthiness of weaker companies. U.S. companies could also benefit from protectionist policies that would impose high tariffs on imports if the Republican candidate wins.

U.S. junk is attractive to money managers because when financials are excluded, more than half of top junk-rated borrowers have only domestic revenue, according to a Bloomberg News analysis. That’s just a fifth in the high-end space. The data excludes companies that don’t disclose information.

Domestic producers can also benefit from looser tariffs and regulations.

“We added U.S. industrial companies that would benefit from the new administration’s pro-business stance,” said Catherine Braganza, senior portfolio manager at Insight Investment. “Companies that benefit from industrial manufacturing, especially those in the spare parts business, 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 fall further after hitting their narrowest in more than two years.

“We have been shortening duration by using shorter-dated bonds, using futures and also using higher spreads,” said Gabriele Foa, a portfolio manager at Algebris Investments’ global credit team, referring to bets that benefit when the gap between short- and long-term yields widens.

While that spread has widened this year, it remains well below levels before major central banks began raising interest rates to combat runaway inflation. Bondholders now get just 30 basis points of additional yield by holding global corporate bonds with maturities of seven to 10 years instead of shorter-dated corporate bonds, according to Bloomberg indexes, compared with 110 basis points just before Trump leaves office in 2021.

This creates more room for a steeper curve, especially if the former president’s policies — which were expected to be inflationary and lead to higher national debt — are implemented alongside interest rate cuts by the Federal Reserve.

To be sure, not all money managers are moving into Trump portfolios right now. It’s not yet certain that he will win, and even if he does, it’s unclear what he will do once in office.

“It’s still too early to adjust your portfolio based on the ‘what ifs’ of Donald Trump remaining in office,” said Joost de Graaf, co-head of the credit team at Van Lanschot Kempen Investment Management. “We still expect to see some narrowing in spreads in the summer.”

If Trump wins, markets sensitive to high interest rates, inflation and tariffs are expected to become more volatile.

“Higher for longer is not good for emerging markets and you will have weaker economic growth due to tariffs,” said Mirabaud’s Cattermole. “We expect European high yields to underperform over the next nine months.”