Although the focus is on the race for the White House, the makeup of Congress after the U.S. election in November will also affect investors.Elena Sunagatova/iStockPhoto / Getty Images
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The world will see more than 75 federal elections in 2024, with some – such as France’s July snap election – affecting global markets with their results.
However, the most impactful to the U.S. and Canadian bond markets is yet to come with the U.S. election, because a win for former President Donald Trump “would lead to higher bond yields,” says David Rosenberg, founder and president of Rosenberg Research.
The bond market reaction would come from what investors already know about Mr. Trump’s policy, says Mr. Rosenberg, which would once again be aimed at tax cuts, deregulation and promoting the stock market at the “expense of the bond market.”
“On top of that, there’s his overall policy prescriptions,” he says. “We threw this into a model and found that if he were to get everything that he wants out of his 16-page blueprint … his policies, for at least a short period, would probably take the inflation rate from 3 per cent today up temporarily to roughly 6 per cent.”
Mr. Rosenberg says he remains concerned that as president, Mr. Trump could meddle in central bank policy, leading to worries about the independence of the U.S. Federal Reserve Board.
“If he’s successful in pressuring the Fed to cut short-term rates when it shouldn’t, or to leave short-term rates where they are when it shouldn’t, there will be a backlash at the back end of the Treasury curve,” he says.
The recent upheaval on the Democratic ticket, with Vice-President Kamala Harris replacing President Joe Biden as the party’s candidate, has bond investors paying especially close attention to what happens on Nov. 5.
Before Mr. Biden was taken off the ballot in July, the bond market was reacting like it was going to be a clean sweep by Republicans and investors were anxious about the likely jump in inflation, Mr. Rosenberg says. But the market saw the change in candidate as a positive for the Democrats, giving them a fighting chance of winning, with U.S. Treasury yields falling slightly after the announcement that Ms. Harris would lead the ticket.
Earl Davis, head of fixed income and money markets at BMO Global Asset Management, says there are likely to be ebbs and flows in the market leading up to the election, affecting bond yields.
“As you see the polls go from one party to the other, it impacts volatility,” he says, which affects bond markets.
Bond yields may move up and down, and credit spreads may also be affected as the funding costs corporations have to pay when issuing new bonds fluctuate.
“The more uncertainty there is in the market, the higher the yield investors demand for that risk,” Mr. Davis says.
Dustin Reid, vice-president and chief strategist of fixed income at Mackenzie Investments, says while it’s important to pay attention to who’s in the White House, the makeup of Congress – or which party controls the House of Representatives and the Senate – is where investor attention should be, as that’s where fiscal policy, including taxation, is born.
“What happens in Congress is probably equally as important for bond markets as what happens to the White House. That’s something investors, particularly people outside the U.S., don’t necessarily comprehend,” Mr. Reid says.
“It’s more of an unknown outcome now – not only the White House, but also the makeup of Congress,” he adds.
Markets, in general, don’t like uncertainty, but there are things investors can do to prepare for the election results.
“If you think there’s going to be a fair bit of uncertainty around the election and market reaction, then what you can do is start to hedge your portfolio. You’re not necessarily making alpha trades – you’re tail-risking your portfolio,” Mr. Reid says.
Buying downside protection or selling some positions that have done very well this year – “just taking some chips off the table” – may be a good idea for some investors, he says. “There are things to be done if you think there’s going to be volatility, even if you’re not sure of the outcome.”
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