(Bloomberg) -- Credit markets rallied around the world after Donald Trump’s US presidential win, as money managers readied for tax cuts and lighter regulation to potentially boost companies’ bottom lines.
The Markit CDX North American High Yield Index, which rises as perceived credit risk declines, reached nearly 108 on Wednesday, its highest level since January 2022. Measures of credit risk in Europe and Asia also fell, as a question mark that had loomed over markets all year was resolved even if a second Trump administration brings the potential for trade wars.
“We now have permanency, and likely some further easing, of the Trump corporate-tax policy passed during his first administration,” said Scott Kimball, chief investment officer at Loop Capital Asset Management. “That’s good for the top and bottom line. It should stimulate investment, which is good for revenues, and it is a positive for cash flows — which is king for credit investors.”
Trump’s victory brought gains across riskier markets. US equities hit all-time highs and Bitcoin hit a record on bets that Trump’s pro-business stance will boost the US economy.
But lower corporate tax rates could also boost US government deficits, potentially forcing the US to borrow more. That weighed on Treasury prices.
That risk is part of why some investors think the credit rally could fade over time. Bill Zox, a portfolio manager at Brandywine Global Investment Management, sees bond yields rising because of a strong economy, high government spending and “animal spirits,” potentially creating pressure on corporate debt and other risk assets.
Sectors with exposure to global trade and tariffs — such as technology — could be vulnerable to a shift in trade policy.
“A Trump win was always going to be good for risk initially, but not all of his likely policies — such as global trade wars — are going to be credit friendly over the intermediate term,” according to Loop Capital’s Kimball.
Winners and Losers
In the near term, many money managers and strategists are looking at the potential positives. Noel Hebert, a Bloomberg Intelligence credit analyst, sees spreads remaining tight as long as there’s no renewed possibility of the Federal Reserve starting to increase rates again. The US central bank’s next policy statement, which is expected to include the second rate cut of this cycle, will be released on Thursday.
Banks and other companies in the financial sector are likely to get a boost from a second Trump administration, as regulations are expected to be loosened. Shares of major US banks soared Wednesday morning. Spreads on financial company bonds narrowed about 0.09 percentage point on Wednesday. The optimism could help bring about bond sales from the industry next week.
“Trump’s win is likely to lead to deregulations within banking, which should benefit the sector in terms of lowering operating costs in the near-term,” said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors.
The energy sector is also anticipated to benefit from deregulation. Traditional energy stocks rallied on Wednesday, while spreads on the bonds broadly narrowed by about 0.07 percentage point.
Global Rally
Despite a potential surge in borrowing costs and supply chain disruptions caused by tariffs, the cost of protection against corporate defaults in Europe and Asia dropped the most since early September.
The move in European CDS indexes is “a bit surprising at first glance because in the mid-to-long term, the election result is negative news for Europe and especially Germany,” said Michael Koehler, credit strategist at Landesbank Baden-Wuerttemberg. “Trump stands for tariffs — he made that crystal clear. We expect further trade wars and at least arguments about tariffs. Europe is a very open economy, Germany is even more open. We would be hurt by any barriers.”
Strategists including Michael Teig at UniCredit SpA favor US banks, which account for a large share of euro-denominated credit indexes due to “US economic growth-friendly policies, fewer interest rate cuts and potentially less strict banking regulation.” But they see carmakers being sensitive to protectionism.
Investors in dollar bonds in China — the nation that’s typically at the heart of most tariff-related disputes — can take comfort from the state support or strong balance sheets of most investment-grade issuers there, according to Mark Reade, head of credit strategy at Mizuho Securities Asia.
--With assistance from Caleb Mutua.
(Updates with financial companies bond spreads in paragraph 10)
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