Andrzej Skiba, Head of US Fixed Income, shares his views on how the upcoming US election may impact fixed income investors and the differences between a Trump and Harris win.

Key points

• A Harris win should favour fixed income, but a Trump win will likely not due to inflationary pressures.
• A Trump win would not necessarily be bad for all risk assets and while it may increase the risk of a US recession, we don’t think it would be deep.
• We expect money to continue flowing further out the curve if Harris wins and move aggressively towards short-duration securities if Trump wins and trade wars ensue.

At the time of writing, polling in battleground states suggests a very close race between Kamala Harris and Donald Trump. In our opinion, a Harris win scenario should be favourable for fixed income assets as policy continuity, coupled with Fed easing into a US economic slowdown, should entice investors to move further out the curve, supporting a robust total-return outlook over the coming year.

We believe the exact opposite scenario to occur should Trump reclaim the US presidency. Our view is predicated on the expectation that Trump would follow through on his promise to implement a wide set of tariff increases in the new administration. This could be highly inflationary and our analysis suggests that headline inflation could increase by up to 1% in the event 10% tariffs are implemented across a wide range of goods and trade partners.

Such a spike in inflation would likely prevent the Fed from being able to cut rates in a meaningful way in 2025. Slower growth and higher inflation are not conducive to a fixed income rally ahead. We’d expect hundreds of billions in assets that have already moved further out the curve in anticipation of rate cuts to move back to cash and short duration assets, something that could be disruptive to our asset class.

Below, we address some common questions that we’ve received from clients in response to our view:

Would a Trump win be bad for all risk assets?

Not necessarily. We could easily foresee a scenario where equity investors focus on the perceived benefits of lower taxes, less regulation, and more mergers and acquisitions (M&A) activity ahead. This way, you could see a broad rally immediately following the election. Our point though is that from a fixed income perspective, a major shift in the US inflation outlook would eventually have much more bearing on forward valuations and flows in this asset class.

Could Trump tariffs end up being smaller than 10% and/or targeting fewer goods and countries?

Of course, it’s possible. Having said that, experience from the previous Trump administration suggests that whether you like it or not, Trump rarely dilutes his proposals and “reading the lines” was always more useful than trying to second-guess his intentions. Trump has been mentioning 10% tariffs on most trade partners for some time now and it features heavily in his stump speeches. He also passionately believes that tariffs will bring billions of dollars into US coffers, which reduces the likelihood of a smaller tariff package. At an event in Michigan last week, Trump said "Tariffs are the greatest thing ever invented."1

Are we sure inflation will pick up when that wasn’t the case during the previous trade war with China?

Last time, tariffs impacted a relatively small cohort of goods and only one trade partner. This time, we expect a much larger set of goods and a global set of trade partners, friends and foes alike. It’s difficult to imagine that a broad tariff escalation would not be inflationary, especially when many importers have diversified sourcing to reduce their reliance on China, but these strategies would be of little help in this potential new trade war era. We do not see a scenario where tariffs are not passed onto US consumers. Our modelling work suggests up to a 1% increase in headline inflation is possible.

Does a Trump win increase a risk of a recession?

Yes, but we don’t believe the US should brace for a deep recession as a result. The US consumer remains in comparatively decent shape, as do corporate balance sheets. While tariffs are not welcome, there will be some offset from lower taxes and reduced business red tape.

How will you position fixed income portfolios in either of the scenarios?

In a Harris win scenario, we expect money to continue flowing further out the curve, betting on multiple rate cuts ahead and aiming to boost total returns by increasing duration of the portfolios. A bias towards steeper government bond yield curves and a focus on compression trades in credit would be our preferred strategies.

In a Trump win scenario, we would aim to move positioning aggressively towards short-duration securities and reduce exposure to lower-rated, long-duration assets as markets brace for stagflation and with the Fed unable to cut rates. A focus on higher-quality, shorter-duration assets could be sufficient to shield portfolios from negative total returns; however, it’s plausible we see negative total returns at the benchmark level. Eventually, we’d expect investors to reengage with the asset class further out the curve, but this might happen at a different valuation point to where we stand today.

1 https://www.axios.com/2024/09/25/trump-tariffs-economic-policies-harris