We discuss how bond markets have responded to the US election.

  • The market reaction to the US election outcome has been favorable, so far.
  • Highly leveraged emerging-market sovereign and high-yield bonds have outperformed.
  • Markets have rallied on the expectation that an economic-support package is on the way.

The market reaction to the US election outcome has been broadly positive so far, as it usually is following an election. The best-performing markets have been the more highly leveraged emerging-market sovereigns and high-yield bonds.

Bonds have rallied on the belief that, initially, the onus will be on the US Federal Reserve (Fed) to provide support for the economy in the medium term as the government will be constrained on the fiscal side once again by a lack of consensus in the legislature. Although it seems unlikely we will know the final outcome of the Senate elections for some time, it appears that both sides have a desire to start working together, and we may see an economic-support package put together before year end. This package will probably not be as big as the Democrats would have liked, but we believe the renewed surge in coronavirus cases in the US will probably galvanize both sides into doing a deal. In any event, the possibility of another lockdown is also likely to keep the Fed focused on providing more liquidity.

The Focus Shifts to 2021

Now the election is out of the way, we expect market attention to turn to 2021 and the potential for continued economic recovery. With the pandemic still wreaking havoc around the world, this recovery will take time, and will be hampered by periodic lockdowns. That being said, there has been an immense amount of firepower applied through continued use of loose monetary policy and increasing use of fiscal policy. This combination is new, and represents a different sort of regime change.

Loose Monetary Policy and Potential for Fiscal Stimulus Helping Risk Assets

For now, government bond yields are being held in check because of central-bank activity but also owing to the fragmented economic recovery caused by the legacy of the pandemic. Loose monetary policy and the potential for fiscal stimulus are also helping risk assets.

A Huge Deflationary Shock

The pandemic has been a huge deflationary shock for some parts of the economy which will take time to adjust. The unification of both monetary policy and fiscal policy will be slow to unwind and could still be in place long after economies have recovered. Central banks tend to be faster to put on and take off policy than governments.

De-Globalization Alters the Inflation Outlook

As we have said before, there are a number of other longer-term factors that have started the process of changing the inflation outlook. We expect the move towards de-globalization, for example, to gradually push up domestic prices over the next couple of years.

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