US president-elect Donald Trump’s second term could be reflationary for the US economy, say fixed income experts at Schroders, citing the pro-growth policies he put forth during his campaign.
Still, given the time it will take to enact these policies, their full impact may not be felt until 2026, reads a Nov 25 note by the British asset manager.
The Republican sweep, after the party took the White House, Senate and House of Representatives in the recent US elections, could potentially lead to faster US economic growth, but also higher government debt and deficits, increased trade tensions and tariffs, and, most likely, a stronger US dollar, says John Mensack, Schroders’ senior investment director of fixed income.
Mensack moderated a recent discussion on the potential impacts of the US election on fixed income markets, featuring US-based members of Schroders’ fixed income team.
US fixed income markets currently look “very attractive” from a yield perspective, says Lisa Hornby, Schroders’ head of US fixed income. “For most sectors of the market, today’s yields rank, relative to their history over the past 20 years, in the 60th and 70th percentiles.”
Tariffs enacted during the previous Trump administration had only a modest effect on inflation, Hornby adds. “The current warnings of very high tariffs could prove to be more of a negotiating tactic than a significant policy shift.”
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Naturally, the Schroders’ US fixed income team prefers high-quality credit. But they also “recognise the current attractiveness” of the agency mortgage-backed market.
Looking ahead, elevated yields and the likelihood of steeper yield curves could increase demand in fixed income markets, adds Hornby.
‘Favourable’ climate
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The macroeconomic backdrop for credit markets remains favourable, says Martha Metcalf, head of credit, North America, at Schroders. “Corporate fundamentals are stronger than usual for this late stage in the cycle.”
Global players within the investment-grade sector may face headwinds from a stronger US dollar, notes Metcalf, but many companies in the high-yield sector “may be more insulated” from some of the trade-related challenges because they tend to have more domestic businesses focused on the US consumer. “Still, companies overall have a lot of flexibility now because they have had strong pricing power and profits.”
Double-edged sword for emerging markets
As the world’s two economic superpowers decouple, emerging markets that “play their geopolitical cards correctly” stand to benefit, particularly countries like Mexico and Brazil, which are not adversaries of the US, says Fernando Grisales, senior portfolio manager, emerging market debt at Schroders.
“The challenge is emerging market currencies, which may be weaker against the US dollar, at least in the short term,” he adds.
Latin America has “much to gain” from the new trade dynamics in a variety of industries, including those benefiting from the global energy transition like lithium mining and electric vehicles, says Grisales. “Almost across the board, emerging markets are experiencing falling inflation and solid growth, and fundamentals are strong for many sovereign and corporate bonds.”
Much of the world’s growth — both in terms of GDP and population — is coming from the world’s emerging, not developed, markets. Fernando says protectionism could hinder companies’ profit margins and competitiveness.
“If heightened protectionism causes US companies and their products to lose their competitive edge globally, China will become an even more dominant exporter to all these markets,” he adds.
