US Election: How Bond Investors Can Prepare

Doug Peebles

We’re sitting here [and] we have a situation where the markets seem, at the moment, quite complacent because they’re pricing in an 85% chance that Clinton is going to win. What should investors do, first of all, if she wins and, second of all, if she doesn’t win?

Paul DeNoon

I’d say if Clinton wins, it’s kind of stay the course. We wouldn’t even advocate having lots and lots of risk in a portfolio given the significant rally and the fairly strong performance we’ve had. So being at the lower end of your risk budget probably makes sense, but remain more calm, realize there’s not going to be a radical shift. Kind of address issues as they come out and understand how policy evolves underneath Clinton.

Certainly if Trump wins, we’re going to have to reevaluate risk globally and what it means. Is his rhetoric actually followed up by policies? I think some of the interesting things there then will be his cabinet choices. Does he go radical? It’s going to be a point of uncertainty. But in that environment I would see taking a little bit more risk off the table. Probably makes sense just because of the high degree of uncertainty.

Doug Peebles

So 2016 for fixed income investors around the world has been a great year. We came into the year with a fear that the Fed was going to raise four times. Here we are in the third week of October; they haven’t raised rates at all. Interest-rate markets have rallied nicely. And, at the same time, credit spreads have narrowed. So we’ve had the best of both worlds, lower rates and tighter credit spreads.

When we sit here today with the portfolio, with an 85% chance priced in the markets that Clinton’s going to win and we’ve already seen a big rally in these markets, we’ve now moved the portfolios to a lower risk profile. Not thinking that the markets are wrong on the 85% probability, but if they’re right you’re just not going to make a lot of money, at least in the near-term reaction. Whereas if they’re wrong and we get the other situation, that’s when there’s going to be opportunities and we want to have some dry powder to make sure that we can take advantage of those opportunities. As you say, however, we’re going to have to be prudent in that risk taking. We don’t want to just [say] okay, Trump wins on November 8th, [and on] November 9th we’re going to see the markets react to that and we push in with all of our [strength]—that’s not how we’re going to play this situation. Is that correct?

Paul DeNoon

Yeah, I think right after a Trump victory I think one of the more important things is what do foreign investors do? What do fund flows do? How much confidence have people lost in the United States as a place for long-term investment? And that will be the tale of the tape. Those investor flows are really going to determine over the short run what’s going on. The day after I don’t think we’re going to jump into the market either way. We’ve taken risk off only because it’s been a great year for both duration and for credit, and [we’re] kind of standing back waiting to see what happens.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.