We discuss how bond markets have responded to the US election.
- The market reaction to the US election outcome has been favorable, so far.
- Highly leveraged emerging-market sovereign and high-yield bonds have outperformed.
- Markets have rallied on the expectation that an economic-support package is on the way.
The market reaction to the US election outcome has been broadly positive so far, as it usually is following an election. The best-performing markets have been the more highly leveraged emerging-market sovereigns and high-yield bonds.
Bonds have rallied on the belief that, initially, the onus will be on the US Federal Reserve (Fed) to provide support for the economy in the medium term as the government will be constrained on the fiscal side once again by a lack of consensus in the legislature. Although it seems unlikely we will know the final outcome of the Senate elections for some time, it appears that both sides have a desire to start working together, and we may see an economic-support package put together before year end. This package will probably not be as big as the Democrats would have liked, but we believe the renewed surge in coronavirus cases in the US will probably galvanize both sides into doing a deal. In any event, the possibility of another lockdown is also likely to keep the Fed focused on providing more liquidity.
The Focus Shifts to 2021
Now the election is out of the way, we expect market attention to turn to 2021 and the potential for continued economic recovery. With the pandemic still wreaking havoc around the world, this recovery will take time, and will be hampered by periodic lockdowns. That being said, there has been an immense amount of firepower applied through continued use of loose monetary policy and increasing use of fiscal policy. This combination is new, and represents a different sort of regime change.
Loose Monetary Policy and Potential for Fiscal Stimulus Helping Risk Assets
For now, government bond yields are being held in check because of central-bank activity but also owing to the fragmented economic recovery caused by the legacy of the pandemic. Loose monetary policy and the potential for fiscal stimulus are also helping risk assets.
A Huge Deflationary Shock
The pandemic has been a huge deflationary shock for some parts of the economy which will take time to adjust. The unification of both monetary policy and fiscal policy will be slow to unwind and could still be in place long after economies have recovered. Central banks tend to be faster to put on and take off policy than governments.
De-Globalization Alters the Inflation Outlook
As we have said before, there are a number of other longer-term factors that have started the process of changing the inflation outlook. We expect the move towards de-globalization, for example, to gradually push up domestic prices over the next couple of years.
Authors
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.
Important information
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
Personnel of certain of our BNY Mellon affiliates may act as: (i) registered representatives of BNY Mellon Securities Corporation (in its capacity as a registered broker-dealer) to offer securities, (ii) officers of the Bank of New York Mellon (a New York chartered bank) to offer bank-maintained collective investment funds, and (iii) Associated Persons of BNY Mellon Securities Corporation (in its capacity as a registered investment adviser) to offer separately managed accounts managed by BNY Mellon Investment Management firms, including Newton and (iv) representatives of Newton Americas, a Division of BNY Mellon Securities Corporation, U.S. Distributor of Newton Investment Management Limited.
Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2020 The Bank of New York Company, Inc. All rights reserved.
In Canada, Newton Investment Management Limited is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Ontario and Quebec and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Comments