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Trump Trade Sees Investors Buying Up Junk Debt and Industrial Companies

Trump Trade Sees Investors Buying Up Junk Debt and Industrial Companies

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

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Corporate bond investors around the world have already begun positioning themselves to profit from a potential election victory for Donald Trump after an assassination attempt, and the Republican National Convention has bolstered their position in polls. Spreads on U.S. high-yield bonds have widened versus their euro counterparts in the past week, and junk funds have seen a surge in inflows globally.

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

In a late June interview with Bloomberg Businessweek, Trump said he wants to cut corporate taxes by as much as 15%. Those lower costs could improve the creditworthiness of weaker companies. U.S. companies could also benefit from protectionist measures that would trigger high tariffs if the Republican nominee wins.

U.S. junk is attractive to asset managers because, when financial institutions are excluded, more than half of borrowers with the highest junk ratings have only domestic revenues, according to a Bloomberg News analysis. That compares with just a fifth in the high-grade sector. The data excludes companies that don’t make the information public.

Domestic manufacturers can also benefit from tariffs and more relaxed regulations.

“We have added U.S. industrial companies that would benefit from a pro-business stance from a new administration,” said Catherine Braganza, senior high yield portfolio manager at Insight Investment. “Companies that benefit from industrial production, particularly those that deal in spare parts,” are attractive, she said.

Yield curve

Some fund managers are instead focusing on the shape of the yield curve, especially as corporate bond spreads appear to have little room to narrow further after hitting near their lowest levels in more than two years.

“We have shortened the duration by having shorter-dated bonds, using futures and also using steepener trades,” said Gabriele Foa, a portfolio manager in the global credit team at Algebris Investments, referring to bets that pay off when the gap between short- and long-term yields widens.

While that spread has widened this year, it’s still far below levels seen before major central banks began raising interest rates to tackle runaway inflation. Right now, bondholders are getting a paltry 30 basis points of extra yield by holding global corporate bonds with maturities of seven to 10 years rather than shorter-term corporates, according to Bloomberg indices, up from 110 just before Trump took office in 2021.

This could push the curve even higher, especially if the former president’s policies — expected to fuel inflation and increase the national debt — are coupled with rate cuts by the Federal Reserve.

To be sure, not all wealth managers are moving to a Trump portfolio. It’s not a given that he’ll win, and even if he does, it’s not entirely clear what he’ll do in office.

“It is still a bit too early to adjust your portfolio based on the ‘what if’ of Donald Trump in power,” says Joost de Graaf, co-head of the credit team at Van Lanschot Kempen Investment Management. “We still expect spreads to tighten somewhat in the summer.”

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

“A longer rise is bad for emerging markets, and you get weaker economic growth from tariffs,” Mirabaud’s Cattermole said. “We expect European high yield to underperform over the next nine months.”

weekly overview

  • JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley sold U.S. investment-grade securities this week after reporting earnings. Financial companies generally dominated the issuance, with about 76% of newly issued high-grade notes subsequently trading more tightly in the secondary market, Trace said.

  • Defaulting contractor Sino-Ocean Group Holding Ltd. is trying to drum up enough support to get approval for its debt restructuring plan, but has so far fallen far short of the needed backing due to opposition from a key group of bondholders.

  • Insurance companies looking for returns are using an unconventional strategy: they ignore mortgage bonds and buy up all the underlying loans at once.

  • Private lenders’ efforts to raise money from retail customers are beginning to put pressure on their profits.

  • Lenders led by Ares Management Corp. will provide a debt package of approximately $1.8 billion to support Genstar Capital’s purchase of a stake in payments processor AffiniPay.

  • The German debt market is reopening to companies outside Germany as more French and Italian borrowers raise financing in 2024 than in the whole of last year.

  • Banks and private credit funds are competing to provide as much as £1.75 billion ($2.3 billion) to support a potential privatisation of Hargreaves Lansdown.

  • Private credit fund managers are jointly arranging a debt package worth around €1 billion for French software company Orisha, after Francisco Partners obtained exclusivity to buy a stake in the company.

  • Leveraged finance providers are taking advantage of strong investor demand to take steps to lower their future borrowing costs and create a buffer if the Federal Reserve keeps interest rates high.

  • Oaktree Capital Management is teaming up with Lloyds Banking Group Plc to provide loans to the banking giant’s private equity clients to help finance their acquisitions, the latest sign that traditional lenders are looking for creative ways to raise private debt.

  • Lombard Odier Investment Managers is to increase exposure to Indian high-yield dollar credits in its $2 billion Asian bond strategy, after the sector helped the product deliver a top performance by outperforming 96% of its peers this year.

En route

  • Elliott Investment Management has hired Jordan Bryk from Marathon Asset Management to strengthen the firm’s private credit business.

  • Murad Khaled, head of Bank of America Corp.’s leveraged finance capital markets division in Europe, the Middle East and Africa, has left the company.

  • Deutsche Bank AG has appointed Daniel Rossi from UBS Group AG as head of its investment-grade credit trading unit.

  • Siebert Williams Shank & Co. hires Roberto De Leon and Paul Shapiro to further expand its taxable fixed income team.

  • Chorus Capital Management Ltd. has hired Penny Tan from hedge fund ArrowMark Partners as demand for significant risk transfer experts continues to grow.

  • Bank of Montreal has promoted Mark Spadaccini to head of investment-grade origination in North America and hired Sean Hayes as global head of syndicate, amid other organizational changes to its debt capital markets business.

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

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

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