Tim Leary, Senior Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses the upcoming election and the potential impact on fixed income markets.
Watch time: 2 minutes, 27 seconds
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Hello & welcome back to The Weekly Fix. My name is Tim Leary & I’m a Senior Portfolio Manager on RBC’s BlueBay Leveraged Finance Team.
The 3rd quarter and the Fed’s first rate cut are in the books and it was just what the doctor ordered for risk assets. As we look forward to the rest of the year---and at the risk of stating the obvious---US elections on Tuesday November 5th will be key. It’s worth highlighting that we expect the narrative to shift, as the main macro catalyst will change from inflation data to jobs data. The Fed remains consistent on their pledge to be data dependent, but in 4Q, we think there will be more weight on Non-Farm Payrolls and less focus on the disinflation story. With the ten year around three point seven five percent & three more 25 basis point cuts priced in for 2024, the rate market appears to be priced for a harder landing than we expect.
So what is the magic number? What is the goldilocks scenario? That depends on what asset you’re in. We believe 100k or more jobs per month and a steady unemployment rate will be enough to keep the Fed at 25bps cuts per meeting. And we’re in that camp. That is likely to disappoint longer duration buyers as the curve shape continues to normalize. If Trump wins & republicans take the senate, we expect the market narrative to switch from rate cuts and hard landings, to tariffs, trade wars and tax cuts. If Harris wins & the republicans take the Senate, then you’ve got more gridlock, but it’s DC politics so what else is new? If Harris wins and the democrats take the house & senate, then November 6th will be a good day for tax accountants.
Regardless of who wins in November, the government will continue to be accommodative since neither party has any intention of cutting the deficit or dramatically reducing spending. That accommodation likely means defaults remain low and credit spreads will compress. As long as the market continues to expect more cuts than the dot plots suggest, it’s hard to get overly excited about the longest duration assets in fixed income. That said, we still see value in shorter duration assets like high yield and structured credit.
As always, thanks for your time & good luck trading.
Summary points
The Fed remains consistent in their pledge to be data dependent, but the main macro catalyst will shift to jobs data.
A Republican victory changes the narrative from rate cuts and hard landings, to tariffs, trade wars and tax cuts.
A victory by the Democrats likely brings a continuation of existing policies and more gridlock.
Fiscal responsibility isn’t a term you’ll see referenced, since neither party has any intention of cutting the deficit or dramatically reducing spending.