(Bloomberg) — The credit world’s version of the “Trump trade” is beginning to take shape: Buy American high-yield bonds and steer clear of anything inflation-sensitive.
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Corporate bond investors around the world have already started positioning to benefit from a potential Donald Trump election victory after an assassination attempt and the Republican National Convention boosted his position in polls. Spreads on US high-yield bonds strengthened compared with their euro counterparts in the past week and junk funds globally saw a surge in inflows.
“US high yield is the trade,” said Al Cattermole, a portfolio manager at Mirabaud Asset Management. “It is more domestic-focused and exposed to US economic activity.”
In a late June interview with Bloomberg Businessweek, Trump said he wants to bring the corporate tax rate down to as low as 15%. That lower expense could improve the creditworthiness of weaker firms. US companies could also benefit from protectionist policies that will see high tariffs slapped on imports if the Republican nominee is victorious.
US junk is attractive to money managers because, when financials are excluded, more than half of top junk-rated borrowers only have domestic revenues, according to a Bloomberg News analysis. That compares with just a fifth in the high-grade space. The data excludes companies that don’t publicly disclose the information.
Domestic manufacturers could also benefit from tariffs and looser regulation.
“We have been adding US industrials that would benefit from a pro-business stance from a new government,” said Catherine Braganza, senior high yield portfolio manager at Insight Investment. “Companies that benefit from industrial manufacturing, in particular, those that deal with spare parts” are attractive, she said.
Yield Curve
Some fund managers are instead focusing on the shape of the yield curve, particularly as corporate bond spreads seem to have little room to fall further after nearing their tightest level in more than two years.
“We have reduced duration by having shorter-dated bonds, using futures and also using steepener trades,” said Gabriele Foa, a portfolio manager at Algebris Investments’ global credit team, referring to wagers that benefit when the gap between short- and long-dated yields widens.
Even though this spread has widened this year, it remains far below levels seen before major central banks started raising interest rates to tackle runaway inflation. At the moment, bondholders receive a measly 30 basis points in extra yield by holding seven- to 10-year global corporate bonds instead of shorter-term company notes, according to Bloomberg indexes, compared with 110 just before Trump left office in 2021.
This gives the curve further room to steepen, particularly if the former President’s policies — which are expected to be inflationary and lead to higher national debt — are matched by interest-rate cuts by the Federal Reserve.
To be sure, not all money managers are switching to a Trump portfolio just yet. It’s not yet a sure thing that he will win, and even if he does, it’s not completely clear what he will do in office.
“It’s a bit 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 to see a bit of summer grind tighter in spreads.”
If Trump does win, markets sensitive to higher interest rates, inflation and tariffs are expected to be more unpredictable.
“Higher for longer is bad for emerging markets, and you’ll get weaker economic growth due to tariffs,” said Mirabaud’s Cattermole. “We would expect that European high yield underperforms in the next nine months.”
Week in Review
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JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley sold US investment-grade securities this week, after posting earnings. Financial companies broadly dominated issuance, and about 76% of the newly issued high-grade notes subsequently traded tighter in the secondary market, according to Trace.
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Defaulted builder Sino-Ocean Group Holding Ltd. is working to garner enough support to help secure approval for its debt restructuring plan, but remains far short of the needed backing amid opposition from a key bondholder group.
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Yield-hungry insurance firms are adopting an unconventional strategy: they’re skipping mortgage-backed bonds and buying the underlying whole loans outright.
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Private credit’s push to raise funds from retail clients is starting to put pressure on their profits.
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Lenders led by Ares Management Corp. are set to provide a roughly $1.8 billion debt package to support Genstar Capital’s purchase of a stake in payments processor AffiniPay.
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A German debt market is opening back up for companies beyond Germany, with more French and Italian borrowers raising financing in 2024 than over the whole of last year.
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Banks and private credit funds are competing to provide as much as £1.75 billion ($2.3 billion) to back a possible take-private of Hargreaves Lansdown.
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Private credit fund managers are jointly arranging a debt package of around €1 billion for French software company Orisha, after Francisco Partners obtained exclusivity to buy a stake in the business.
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Leveraged loan issuers are capitalizing on strong investor demand to push for provisions that would lower their future borrowing costs and give them a buffer if the Federal Reserve keeps interest rates elevated.
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Oaktree Capital Management is partnering with Lloyds Banking Group Plc to provide the banking giant’s private equity clients with loans to fund their buyouts, the latest sign that traditional lenders are trying to find creative ways to get into private credit.
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Lombard Odier Investment Managers will expand exposure to Indian high-yield dollar credit in its $2 billion Asian bond strategy, after the sector helped the product become a top performer by beating 96% of its peers this year.
On the Move
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Elliott Investment Management has hired Jordan Bryk from Marathon Asset Management to help bolster the firm’s private credit efforts.
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Murad Khaled, who heads Bank of America Corp.’s leveraged finance capital markets business in Europe, Middle East and Africa, has left the firm.
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Deutsche Bank AG has hired Daniel Rossi from UBS Group AG as a director in its investment-grade credit trading unit.
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Siebert Williams Shank & Co. is recruiting Roberto De Leon and Paul Shapiro as it continues to grow its taxable fixed-income team.
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Chorus Capital Management Ltd. hired Penny Tan from hedge fund ArrowMark Partners as the demand for experts on the hot topic of significant risk transfers continues to rise.
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Bank of Montreal promoted Mark Spadaccini to head of North American investment-grade origination and tapped Sean Hayes as global head of syndicate, amid other organizational changes in its debt capital markets business.
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Aptior Capital, an investment firm that specializes in distressed debt and rescue finance, has recruited Taos Huskey, who was most recently a principal at Glendon Capital Management.
–With assistance from Abhinav Ramnarayan, Andrew Kostic and Dan Wilchins.
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