Corporate bond spreads tighten slightly after Trump victory

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High-grade and junk bond spreads tighten slightly post-election
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Investors expect pro-growth policies, including tax cuts and higher spending
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Some investors see Trump’s trade policy potentially affecting future rate cuts
By Matt Tracy
WASHINGTON, – Corporate bond market spreads tightened slightly on Wednesday after Donald Trump’s presidential election victory, as the market weighs the pros and cons of his return to the White House. The former president’s victory in several highly contested states pushed him over the 270 Electoral College votes needed to win the presidency. As of Wednesday afternoon, Republican Trump had won 292 electoral votes to Vice President Kamala Harris’ 224 for the Democrats. High-grade bond spreads closed Tuesday at 84 basis points, just one point tighter than their tightest levels for the year, according to the ICE BofA Corporate Bond Index. Junk bond spreads ended on Tuesday, before election results, at 286 bps, just six bps away from their tightest levels for the year, according to the ICE BofA High Yield Index. These spreads tightened another one to three bps on Wednesday, said investors, with credit markets pricing in pro-growth policies such as an extension of 2017 tax cuts, higher government spending and a potential watering down of an expected increase in bank regulation when the president-elect takes office in January.
“Credit spreads were tight coming in, and have only tightened because the perception coming in, which has now taken more certainty, is that Trump will be positive for the economy,” said George Catrambone, head of fixed income, Americas, at DWS Group.
The Fed is expected to cut interest rates another 25 bps at its next meeting on Thursday. But some investors see Trump’s stated trade policy – including higher tariffs on China and other countries – as a potential threat to further rate cuts next year.
“Trump keeps openly telling people that he will increase tariffs not just on China but with every trade partner,” said Andrzej Skiba, head of BlueBay U.S. fixed income at RBC Global Asset Management.
“This is a big deal because this could add 1% to inflation. If you add 1% to next year’s inflation numbers, we should say bye to rate cuts,” Skiba said. A pause in rate cuts could increase financing costs for corporate borrowers and offset the incentive for greater acquisition-related debt issuance, which would otherwise stem from a friendlier merger-and-acquisition environment under Trump, said Guy LeBas, chief fixed income strategist at investment manager Janney Capital Management.
But corporate spreads should remain tight in the coming weeks, and potentially the rest of 2024, before Trump’s inauguration on Jan. 20.
No investment-grade corporate bond issuance was announced on Wednesday after Trump’s victory. Only one junk bond deal was announced: a $500-million seven-year note offering by yearbook-maker Champ Acquisition to refinance existing debt and pay dividends, which is set to price next week.
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