Trump trade sees investors snap up junk debt, industries

(Bloomberg) — The credit world’s version of a “Trump trade” is starting to take shape: Buy high-yield U.S. bonds and stay away from anything sensitive to inflation.

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Corporate bond investors around the world are already positioning themselves to capitalize on Donald Trump’s likely election win after the attempted assassination and the Republican National Convention boosted his poll standing. Spreads on high-yielding U.S. bonds versus their euro counterparts have widened in the past week, and junk funds around the world have seen a surge in inflows.

“The high yield in the US is a trade,” said Al Cattermole, portfolio manager at Mirabaud Asset Management. “It’s more inward-looking and more exposed to US economic activity.”

In a late June interview with Bloomberg Businessweek, Trump said he wanted to cut the corporate tax rate to 15%. Lower spending could improve the creditworthiness of weaker companies. U.S. companies could also benefit from protectionist policies that would see higher tariffs on imports if the Republican candidate wins.

Junk loans in the U.S. are attractive to money managers because when financial data is stripped out, more than half of the top-rated borrowers have only domestic revenue, according to a Bloomberg News analysis. That compares with just one-fifth in the high-grade space. The data excludes companies that don’t disclose the information publicly.

Local manufacturers can also benefit from more flexible tariffs and regulations.

“We’ve added U.S. industries that will benefit from the new government’s pro-business stance,” said Catherine Braganza, a high-yield portfolio manager at Insight Investments. “Companies that benefit from industrial manufacturing, especially those dealing in parts,” are attractive, she added.

yield curve

Some fund managers are instead focusing on the shape of the yield curve, especially since corporate bond spreads have little room to fall further after nearing their lowest level in more than two years.

“We’ve reduced duration by having shorter-dated bonds, using futures, and also using steeper spreads,” said Gabriel Foa, portfolio manager on Algebris Investments’ global credit team, referring to bets that profit when the gap between short and long loans widens.

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While that spread has widened this year, it’s still well below levels seen before major central banks began raising interest rates to tackle runaway inflation. Bondholders currently get an extra 30 basis points in yield by holding seven- to 10-year global corporate bonds instead of shorter-dated corporate bonds, according to Bloomberg indexes, compared with 110 before Trump left office in 2021.

This gives the curve more room to steepen, especially if the previous president’s policies – which are expected to be inflationary and lead to higher national debt – are offset by interest rate cuts by the Federal Reserve.

Not all money managers are turning to Trump’s wallet just yet. It’s not certain he’ll win, and even if he does, it’s not entirely clear what he’ll do in office.

“It’s too early to adjust your portfolio based on ‘what if’ 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 a slowdown in spreads in the summer.”

If Trump wins, markets sensitive to rising interest rates, inflation and tariffs are expected to become more unpredictable.

“A longer rally is bad for emerging markets, and you’ll get weaker economic growth because of the tariffs,” said Cattermole of Mirabaud. “We expect European high yields to underperform in the next nine months.”

Week in Review

• JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley all sold investment-grade U.S. securities this week, after reporting earnings. Financials largely dominated the issuance, with about 76% of newly issued high-quality securities trading more tightly in the secondary market, according to Trace.

• Virtual construction company Sino-Ocean Group Holding Ltd. is working to drum up enough support to help secure approval for its debt restructuring plan, but it remains far short of the required support amid opposition from a key group of bondholders.

• Yield-hungry insurance companies are adopting an unconventional strategy: They are bypassing mortgage-backed securities and buying the entire underlying loans outright.

• The push for private credit to raise money from retail customers is starting to put pressure on their profits.

• Lenders led by Ares Management Corp. are set to provide a roughly $1.8 billion debt package to back Genstar Capital’s purchase of a stake in payments processor AffiniPay.

• The German debt market is opening up again to companies outside Germany, with more French and Italian borrowers raising financing in 2024 than in the whole of last year.

• Banks and private equity funds are competing to provide up to £1.75 billion ($2.3 billion) to back a potential takeover of Hargreaves Lansdown.

• Private equity fund managers are arranging a debt package of around €1 billion for French software company Orisha, after Francisco Partners secured exclusive rights to buy a stake in the company.

• Leveraged loan issuers are taking advantage of strong demand from investors to push for provisions that will lower future borrowing costs and give them a cushion if the Fed keeps interest rates high.

• Oaktree Capital Management is teaming up with Lloyds Banking Group Plc to provide the banking giant’s private equity clients with loans to fund their acquisitions, the latest sign that traditional lenders are finding innovative ways to access private credit.

• Lombard Odier Investment Managers will expand exposure to high-yield Indian dollar credit in its $2 billion Asian bond strategy, after helping the sector become the best performer, beating 96% of its peers this year.

Moves

• Elliott Investment Management has hired Jordan Brick from Marathon Asset Management to help bolster the firm’s credit efforts.

• Murad Khalid, who heads Bank of America Corp.’s capital markets business in Europe, the Middle East and Africa, has left the company.

• Deutsche Bank AG has appointed Daniel Rossi from UBS Group AG as a Director in its investment grade credit trading unit.

• Siebert Williams Shank & Co. hires Roberto De Leon and Paul Shapiro as it continues to grow its taxable fixed income team.

• Chorus Capital Management Ltd. has hired Benny Tan from hedge fund ArrowMark Partners as demand for experts on the hot topic of large-scale risk transfers continues to rise.

• Bank of Montreal has promoted Mark Spadasini to head of investment grade origination in North America and appointed Sean Hayes as global head of syndication, among other organizational changes to its debt capital markets business.

• Aptior Capital, an investment firm specializing in distressed debt and rescue financing, has appointed Taos Huskey, who was most recently a senior director at Glendon Capital Management.

–With assistance from Abhinav Ramnarayan, Andrew Kostic, and Dan Wilchins.

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