Tim Leary, Senior Portfolio Manager on the BlueBay Fixed Income team, discusses how markets have played out post-election and how future policy may potentially impact markets.
Watch time: 3 minutes, 11 seconds
View transcript
Hello & welcome back to The Weekly Fix. My name is Tim Leary & I’m a Senior Portfolio Manager on RBC’s BlueBay Leveraged Finance Team.
Last week, equities gave back their post Republican sweep rally---as Chair Powell reminded the market that yes, the Fed will continue to be data dependent & yes, the US economy is strong. Bond buyers also pumped the breaks last week as the 2yr and 10yr both are both about 10bps wider since the election. I get the sense that most of the risk rally post the election had more to do with positioning than anything else. As the polls narrowed, the fear of a contested election mounted and naturally, sellers emerged. Once that risk was bought back & squared away, the market moved on to the next.
Of course, lower corporate taxes & deregulation will be supportive for corporate America. And it’s safe to assume that Lina Kahn’s role as Chair of the Federal Trade commission will end as soon as a replacement is named & confirmed. Those are three very real, very material tailwinds for corporate America. But how should the market really react to Trump 2.0? We think he’ll be more effective in executing his policies this time around. Tariffs are here to stay & remember, tariffs are just a type of tax. Yes, you heard it correctly, the republicans are now the pro tax party…though to be fair the Biden administration increased the use of tariffs as well. It’s more politically palatable to tax a foreign company sending goods to the US than to raise taxes on anyone working here. And as long as the US government continues to spend money like drunken sailors, we need all the tax revenue we can get. Investors should be considerate of what that means, not only for trade, but for inflation. It’s possible that Trump goes ballistic on tariffs & China’s economy slows to the point where commodity prices decline ---and we actually see deflation--- as opposed to disinflation. Lower inflation & higher job growth in the US is certainly what Trump voters hoped for, and it’s possible they’ll be proven right. Though the road to that result will be paved by interest rate, currency & commodity volatility. That means that there will be earnings volatility as well, for better & for worse. Sequencing & valuation matter. For now, rates are trending higher & credit spreads are tighter.
Against that backdrop, we favor shorter dated High Yield and floating rate assets like higher quality, broadly syndicated loans & CLO liabilities. These will benefit from the elevated rate environment over the near term. We are focused on the loans that have strong enough balance sheets to survive the higher float in their floating rate debt. We’re steering clear of the lower quality loans trading close to par with low interest coverage ratios. Now is not the time to be hero, there just isn’t enough juice in valuations for error. There will be a better entry point for those types of trades. We’ve moved into more defensive positioning in bonds as well--letting carry do its job while we avoid credits whose supply chain will be negatively impacted by the Trump Tariff Tax.
As always, thanks for your time, good luck trading & have a Happy and Healthy Thanksgiving.
Summary points
The post-election market movement may have been a relief rally, and now investors have retrenched.
Lower corporate taxes & deregulation will be supportive for corporate earnings and equity markets, though the road promises to be paved by volatility.
For the time being, we favor shorter dated, high-quality assets.
