As investors grapple with the implications of a second Trump term, we believe the outlook for fixed income markets may present one with a complex and evolving picture.

A market reacts

The markets' reactions to Trump's re-election have been mainly as anticipated. Equity markets have rallied, buoyed by optimism around the prospects for economic growth under the Trump administration. US Treasury yields have ticked higher, with the yield curve steepening as investors price in the potential impact of the president's policy agenda.

While the exact shape and size of tariffs and tax cuts are still unknown, markets have already moved to reflect that they will be enacted. Expectations of a more relaxed regulatory environment have supported the banks and energy names so far.

Another notable trend in the aftermath of the election is the weakening of emerging markets' (EM) foreign exchange, which reflects the potential impact of increased trade protectionism and a stronger US dollar.

A potentially favorable environment

Under a second Trump administration, macroeconomic policy would likely reshape fixed-income markets through aggressive fiscal approaches. Anticipated strategies include tax cuts, tariffs on certain imports, immigration policy changes, and potential deficit expansion. These policies could generate increased market volatility, particularly in yield curve dynamics and monetary policy interactions.

Policy predictability and a unified agenda

However, comprehensive Republican control of the House of Representatives, Senate, and Presidency should enable more streamlined legislative processes, potentially reducing political gridlock. This political alignment can create more predictable economic policy frameworks, stabilizing credit markets and providing clearer investment signals.

Furthermore, on the tax and regulatory landscape, Republican control has historically signaled potential corporate tax reductions and deregulation, which could mean more aggressive business-friendly initiatives and legislative environments.

Valuation dynamics

Valuations may be stretched across much of developed markets and EMs; however, for yield buyers, we still believe the asset class remains attractive over the longer term, with yields trading at the higher end of the recent range and interest rates still set to fall.

Republicans unified control in Washington, DC, could pave the way for a more ambitious policy agenda under the Trump administration. While trade and immigration policy are primarily within the control of the Executive Branch, this red sweep may put corporate and individual tax proposals that had been voiced on the campaign trail firmly on the agenda in the important first 100 days of Trump’s second term in office.

The interplay between trade tariffs and tax cuts will be crucial in determining the overall impact on the economy and, by extension, the fixed income markets. Tariffs can act as a headwind to growth, while tax cuts are more supportive. Further, we believe the outcome will depend on how well both policies are enacted.

Yield curve steepening a lasting trend?

One notable market reaction to the election outcome has been the steepening of the yield curve (Chart 1), a trend that we believe is likely to continue into the long term, particularly for longer-dated maturities.

Curves steepened in the first hours during and after the vote count and have continued to do so in the days after.¹ We believe this should continue into the medium term, particularly for very long-dated maturities where there will be upward yield pressure. In contrast, the front end continues to come down. This could potentially create opportunities for investors seeking income and yield enhancement.

Navigating the changing landscape

As the fixed income markets navigate the shifting landscape following the 2024 US presidential election, investors must carefully assess the evolving risks and opportunities. We believe in maintaining cautious optimism in the credit market, the need for selectivity, and a diversified approach.

Trade policy will play a critical role, potentially introducing market volatility through currency exchange fluctuations and international investment recalibration. Reduced financial sector regulations might offer enhanced corporate financial flexibility but require careful risk assessment.

EM debt will face unique challenges, including potential US dollar strengthening and increased borrowing costs. Successful strategies will prioritize countries with robust economic fundamentals and implement comprehensive currency hedging approaches.

¹ "US yields post sharp gains as Trump victory triggers caution about deficits." Reuters, November 2024. https://www.reuters.com/markets/us/yields-soar-trump-win-stirs-bond-vigilantes-2024-11-06/.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

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