Andrzej Skiba, Head of BlueBay U.S. Fixed Income, discusses potential outcomes of the US Presidential election and what the results may mean for investors in 2025.
Watch time: 4 minutes, 59 seconds
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Welcome to the latest edition of The Weekly Fix. My name is Andrzej Skiba.
2024 is coming to an end with US spreads at multi-year tights. Despite record levels of primary issuance and plenty of rate volatility throughout the year, spreads did remarkably well, helped by broad inflows into various manifestations of US fixed income. US intermediate core strategies were clear winners, with investors moving further out the curve to capitalize on rate cut expectations. A risk flush in late summer was quickly bought and the Trump election win turbo-charged the rally in the latter part of the year.
Heading towards 2025, we believe caution is warranted, especially early in the year. We see a pretty binary outcome ahead, largely driven by the Trump administration policy choices.
If US pursues an aggressive trade agenda with 10% tariffs imposed on a variety of goods and on most trade partners, inflation is likely to increase. Our analysis indicates that the trade war Consumer Price Index (CPI) impact could be up to 1%. That doesn’t sound like much, but for the Fed could make all the difference between being able to cut rates and not. With 2-3 rate cuts priced in for 2025, some or all of that might have to be unwound putting pressure on front-end Treasury yields. Add to that loose fiscal policy causing heavy Treasury supply and no wonder we continue to see pressure on longer maturity Treasury yields as well. We see a good chance 30y Treasuries hit 5% in the months ahead and note that swap spread markets indicate investors demand extra compensation to move further out the curve and absorb issuance.
There is, however, a more benign scenario, where trade war risks diminish and only selective tariff hikes are implemented, while government cost cutting measures yield positive results, helping to limit the US fiscal deficit. In that world, rate cuts would continue, and Treasury yields remain well supported, however until policy clarity is gained, it’s tough to see this outcome as our base case.
In credit, generic valuations are hardly attractive, and we see fewer pockets of value than before. This is the reason why across our US Investment Grade and High Yield strategies we have decided to book profits on longer maturity holdings and rotate into shorter duration alternatives. We see plenty of 2-3 year bonds in both corporate credit and in securitized markets at valuations that allow us to enjoy healthy carry income until we gain clarity on US policy front. This approach also enables us to take advantage of periods of dislocation, were these to materialize, with plenty of firepower at our disposal.
Eventually, we expect the dust to settle once investors process incoming details of the Trump administration agenda and the Fed articulates its response to the new policy mix. At that point, demand for longer duration fixed income assets should return. Despite tariff-induced pressure on the consumer, we expect growth outlook to remain positive, helped by lower taxes and de-regulation. We also note that corporate balance sheets are in a good shape, default outlook is benign and maturity walls have been largely addressed. These are the reasons why we don’t advocate for an exit from US fixed income, favoring short duration bias and re-engaging with assets further out the curve as the year progresses.
We wish you a peaceful holiday season and a prosperous 2025.
Thank you for your attention.
Summary points
2024 saw an abundance of rate volatility, however spreads did remarkably well, helped by broad inflows into US fixed income.
Looking into 2025, we believe caution is warranted, as in our view, there is a lack of clarity concerning Trump administration policy choices.
If US pursues an aggressive trade agenda, inflation is likely to increase, limiting the Fed’s ability to cut rates as expected.
In credit, valuations are unattractive, and we see fewer pockets of opportunity. This partially explains our decision to rotate into shorter duration alternatives.