Credit risk falls as markets react to Trump win

by Ameya Karve, Finbarr Flynn and Tasos Vossos

International credit markets’ immediate reaction to the prospect of Donald Trump winning the US presidential election is to rally. 

The cost of protection against corporate defaults in Europe and Asia fell the most since early September, with the iTraxx Europe index of high-grade names about 2.5 basis points tighter to 55.6 basis points. The insurance costs for European junk-rated companies also slumped, while an index of Asian high-grade dollar debt was as much as 3.3 basis points tighter earlier, based on CBBT pricing data.

The positive reaction in the credit-default swaps market reflects “the market-friendly environment, but is likely to be mixed and to vary by sector,” wrote strategists including Michael Teig at UniCredit SpA after results from some key states were released. 

So-called Trump trades prevailed across asset classes, pushing up equities, Treasury yields and the dollar. The Republican is on the cusp of recapturing the White House, though several major battleground states remain to be called.

Moves in the actual corporate bonds that the CDS protects are more mixed. Euro investment-grade notes are on average 0.6 basis points tighter on Wednesday, with subordinated financial bonds among the main winners and the energy sector widening.

UniCredit’s Teig favors US banks, which account for a large share of euro-denominated credit indexes due to “US-economic-growth-friendly policies, fewer interest-rate cuts and potentially less strict banking regulation,” but sees carmakers being sensitive to protectionism.

Furthermore, analysts expect a much bigger jump in the US budget deficit under the tax cuts proposed by Trump — likely meaning higher interest rates and borrowing costs for both households and businesses.

“If the market does price higher rates due to higher deficits, that might cheapen dollar bonds on an outright basis, so that may also attract all-in yield buyers,” said Pauline Chrystal, a fund manager at Kapstream Capital in Sydney.

Markets outside the US also need to consider the impact of possible tariffs. That’s particularly the case in Asia, after the former president threatened during the election campaign to impose extreme tariffs on Chinese goods.

“With a Trump presidency looking increasingly likely, we suspect the resultant surge higher in Treasury yields and US stocks will squeeze dollar credit spreads even tighter,” said Mark Reade, head of credit strategy at Mizuho Securities Asia. 

Investors in Chinese dollar bonds can take comfort from the state support or strong balance sheets of most investment-grade issuers there, he added.

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