The Priority Pyramid

by Ashok Bhatia, CFA, Deputy Chief Investment Officer—Fixed Income, Neuberger Berman

Tuesday's election matters—but it is the top of a pyramid whose base is, in our view, supportive of fixed income and credit whatever the outcome.

With the U.S. gearing up for election day, the investment community is still debating just how consequential the result could be for markets.

A blizzard of commentary and analysis has been generated from both the sell and buy sides. A potential change of leadership in the world’s biggest economy tends to attract scrutiny, and this year’s contest puts particularly stark choices in front of voters.

But skeptics point to the prospect of a vaccine overcoming the coronavirus pandemic, the extremely low bases from which economies stand to grow next year, and near-zero interest rates as far as the eye can see. Surely these take precedence over mere changes to U.S. fiscal, tax and regulatory policy?

From a fixed income investor’s perspective, we regard all of these as relevant factors. Thinking about them as a pyramid can help us prioritize them.

Immovable and Solid

At the base of our pyramid—and, in our view, foursquare, immovable and solid—we have near-zero interest rates and accommodative monetary policy from the Federal Reserve and other major central banks. It’s difficult to see this changing regardless of who sits in the White House come February, how big next year’s fiscal stimulus is or how long it takes to get an effective coronavirus vaccine. In our view, that base is supportive of all fixed income assets.

The next level up in our pyramid is the coronavirus. How serious could the current resurgence in Europe and North America get, and how confident are we that a vaccine will be proven effective in the next couple of months?

If the news here is bad, investors may look harder at the election outcome because the need for substantial renewed fiscal support will likely be urgent. But if the news is positive, as we anticipate, markets will be able to refocus on economic and business fundamentals and look forward to re-opening and recovery. Stimulus and policy questions would likely take a back seat—after all, the 2020 stimulus packages were originally meant to support the economy only until the appearance of a vaccine or effective treatments for the virus.

The first two levels of our pyramid are supportive of credit, then, with a small risk of a very negative outcome if the vaccine and infection news is bad. Supply-and-demand dynamics currently add support: in October there was negative net issuance of investment grade credit, the first time we have ever seen that outside the sleepy month of December.


At the top of our pyramid is the election result.

We believe it is important, not so much to determine whether to take credit risk, but rather how and where to take it.

Should the voters return a “Blue Wave,” with Joe Biden leading a Democratic majority in both Houses of Congress, we are more likely to see a substantial fiscal stimulus, regardless of virus developments.

Markets would probably welcome that as pro-growth and negative for the U.S. dollar. Under that scenario, non-U.S. credit and emerging markets debt may be the place to be, and local-currency emerging markets debt, in particular.

Should the voters return a divided government, expectations for fiscal stimulus are likely to be tempered, but we would still have the supportive foundations of accommodative monetary policy and, most likely, some positive news on a coronavirus vaccine.

Under that scenario, it may be better to stay with U.S. credit, both investment grade and high yield.

Tuesday's vote is important for investors, then. But we think it makes sense to think of it as the top of a pyramid whose foundations in our view provide support for fixed income and credit markets whatever the result.


Copyright © Neuberger Berman

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