2020 U.S. Election: Implications for Fixed Income | Lord Abbett
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Fixed-Income Insights

Lord Abbett portfolio managers discuss how the 2020 U.S. vote could potentially affect key asset classes.

Read time: 2 minutes

As many suspected, the U.S. presidential race between Donald Trump and Joe Biden appears headed down to the wire, with no clear winner as of the morning of November 4. Meanwhile, the voting on Election Day pointed to a continuation of a divided U.S. Congress, with Democrats holding the House and Republicans maintaining control of the Senate. What might this mean for investors?

In August, we surveyed Lord Abbett investment professionals in our fixed-income groups for their thoughts on what the 2020 contest might mean for the asset classes they follow. Here, we present an update of those views through November 4.

Once again, our roster of fixed-income experts included Partners and Portfolio Managers Kewjin Yuoh and Jeffrey Lapin; Managing Directors and Portfolio Managers Adam CastleChristopher Gizzo, and Kearney Posner; and Portfolio Manager Eric Kang.

Leveraged Credit

For leveraged credit, our views remain largely unchanged from August. As we stated last time, we think the largest macroeconomic factor driving positioning within the leveraged credit market continues to be the effects of COVID-19; we expect comparatively less impact from election-related factors.

Where have differences emerged? For the healthcare sector, the market has significantly reduced fears of legislative headwinds in the absence of a Democratic sweep of the White House and Congress. That’s also a modest positive for energy in the near term, in our view, although the longer-term ESG (environment, social, and governance) headwinds there will persist regardless. Leveraged credit markets as a whole are following risk assets higher, as the worst case of significant election unrest so far hasn’t played out, and market participants unwind bearish hedges.

Investment-Grade Fixed Income

In our view, elections are a lesser factor with regard to portfolio positioning in fixed income. Historically, elections have not had a material influence on market performance, though there could be some short-term volatility. The 2016 U.S. election is a classic example; given the surprise result (a victory by Donald Trump), we saw significant volatility in U.S. Treasury yields (lower) and risk assets (wider), but volatility was short-lived before yields normalized, and risk assets reverted to pre-election spreads and continued tighter on positive economic fundamentals. 

There is always uncertainty around event risk, so there is a pricing-in of that uncertainty in the volatility market, which is very difficult to separate out, but some of that uncertainty has begun to be removed over the last few days. Risk asset performance was positive on Election Day (November 3) and continued to be positive the day after. We believe there is room for this positive momentum to continue as we move to a final result in the presidential contest; however, the scenario for higher uncertainty and potential negative risk sentiment remains one of a contested election and a dragged-out process through the courts.

Corporate Bonds

We believe the potential loss of a “blue wave” election result (Democratic sweep of the presidency and both houses of Congress) reduces the chances of wholesale changes to regulatory and tax policy. While the presidential election is still undecided, our core pre-election views are unchanged, and we look more to COVID-related healthcare events as more relevant drivers of risk repositioning. With a likely Republican majority in the Senate and Democrat majority in the House, either presidential candidate will have to work with the other party.

Liquid and Securitized Products

Regulatory risk has been reduced given the potential for a continuation of a divided U.S. Congress. This would provide lower headline risk for consumer and education finance. The chance of robust fiscal stimulus has also been reduced, and current tax policy is likely to remain in place, which is likely better for consumers in the prime credit category versus those in subprime. A lower amount of fiscal relief suggests more action by the U.S. Federal Reserve (Fed) and low rates plus low regulatory risk, which is probably a positive for risk assets. Should the anticipated election outcome play out, we expect a “more of the same” environment with our primary focus being on valuations, healthcare outcomes, real economic data, and the Fed.

 

 

A Note about Risk: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk. Credit risk is the risk that debt issuers will become unable to make timely interest payments, and at worst will fail to repay the principal amount. Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes. Although U.S. government securities are guaranteed as to payments of interest and principal, their market prices are not guaranteed and will fluctuate in response to market movements. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. All investments involve risks, including the loss of principal invested.

This material is provided for general and educational purposes only. The examples provided are for illustra­tive purposes only and are not indicative of any particular investor situation.

This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

ESG, or Environment, Social, and Governance, refers to a set of investment principles as defined in the Principles for Responsible Investment (PRI) Reporting Framework under the United Nations Global Compact. Environmental issues relate to the quality and functioning of the natural environment and natural systems; social issues relate to the rights, well-being and interests of people and communities; and governance issues relate to relating to the governance of companies and other investee entities.

Fed refers to the U.S. Federal Reserve.

A prime borrower is considered a below-average credit risk. This type of borrower is considered likely to make loan payments on time and likely to repay the loan in full. Borrowers with credit problems, who are classified as subprime or near-prime borrowers, almost always must pay higher rates.

Risk asset describes any financial security or instrument that is not a risk-free asset (i.e. a high-quality government bond). Risk assets generally encompass equities, commodities, property, and all areas of fixed income apart from high-quality sovereign bonds.

yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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