What does Trump's US election win mean for bond investors?

Paul Skinner, discusses the US election results and the implications for the bond market with Fixed income Portfolio Manager Connor Fitzgerald. Below is a transcript of the interview. 

Paul Skinner: It's the day after the US election and we have the result. Fortunately, I have Connor Fitzgerald here with me who is from Boston, and he hopefully can shed a little bit of light on what has gone on. Connor, were you surprised by the Trump result?

Connor Fitzgerald: I would say we're a little bit surprised in terms of the margin of victory, for sure. I think our view going into the election, it was going to be really tight, looking like a toss-up. Happy to talk about some of the market implications and how we’re positioning.

Paul Skinner: That's key. How were you positioned going in, if you were 50-50? And what do you think you’re going to do as you go forth?

Connor Fitzgerald: Sure, going in, we've had this view that on a longer-term structural basis, the fiscal deficits in the US are definitely a concern. We didn't think that was going to change regardless of who won the presidency, or the House or the Senate. If anything, we think there is a risk that a Trump administration — depending on how much of a win they have in the Republican Senate or in the House – we think it does pull forward those fiscal issues, and we think that's important for the bond market.

Going into this week, we've been favoring positioning in on the Treasury curve. Owning shorter maturity securities and trying to keep our duration down, thinking that a Trump victory would lead to a steepening of the Treasury curve. We've definitely seen that play out in the past couple of weeks as his odds move higher and have continued to see it this morning. But we still think on a longer-term structural horizon, there's still scope for the yield curve to steepen and that's driven by a couple of things. Regardless of how they do in the House and the Senate, we think he can make moves on immigration, which we think is inflationary, make moves on tariffs which is also inflationary, deregulation, pro-growth... Most of his policies, we think, are pro-growth and pro-inflation for the immediate investable time horizon. That's what we are focused on and why we're keeping the duration down.

Paul Skinner: Ok, so duration down. What about your position in risk assets? How are you looking at credit as we go through?

Connor Fitzgerald: Credit spreads have run a lot this year, and even just in the past month, have moved tighter by a pretty significant amount. We still think it's a pretty good time to be invested in credit, but we do want to acknowledge the valuation equation is not as good as it was at the beginning of the year. Frankly, I would say there's probably more upside in equities at this point, as we're sort of later in the spread cycle. But I think there are still some good, idiosyncratic opportunities in different sectors, high yield, and sectors in emerging markets. The overall yield equation still looks pretty good in fixed income to earn some income without taking a ton of credit risk, or a ton of duration.

Paul Skinner: So, that duration credit all looks sensible, but we got a Trump presidency. What could go wrong? What are the risks in both those areas?

Connor Fitzgerald: I think a lot of his policies are kind of challenge-the-status-quo. He could get really aggressive on tariffs. He's talked about having his administration be involved with the Federal Reserve decision-making process. He's obviously pro-American business and onshoring, which is going to potentially accelerate the deglobalization theme, fragmented supply chains, etc.

I would say the biggest risk is the back end of the Treasury curve. I don't want to say it becomes unanchored, but it just becomes more volatile. So that's definitely something we're focused on as we get an idea of what he plans to do in his first 60 to 90 days.

Paul Skinner: Okay, and do you think there's going to be a lot of activity in that early stage? Or will you wait for them to do a calculated move on these various things, like tariffs? 

Connor Fitzgerald: I think it will be calculated, but I think he's been pretty clear on what he wants to do. So, I think he'll get going pretty quickly.

Paul Skinner: Excellent, all right. We'll look forward to the market implications, and we'll definitely be talking to you again. Thank you, Connor.