Is the US still the land of the ‘risk-free’?

4 min read 19 Oct 20

Summary: While a chaotic 2020 election adds to short-term uncertainty for US bond investors, both candidates’ promises point to more long-term government borrowing.

The risks of a contested election?

One scenario potentially playing out is if the outcome of the election is contested by Trump. If the result is very close, will Trump refuse to leave the White House? “We’ll have to see what happens,” the president told a news conference recently. Postal voting has also been expanded across states, to encourage social distancing, and this has also worried Trump and his supporters, because it traditionally favours the Democrats.

But as trust in the government and democratic process is the fundamental thing that stands behind currencies and bond markets, this could make things uncomfortable. As a result, the price of assets could also swing dramatically as an aversion to the US dollar and US Treasuries potentially filters through to the US credit markets too.

During 2020 we have generally run a comfortable level of ‘risk-free’ exposure, made up of government bonds and cash, to use should assets become mispriced, providing investment opportunities along the way. Yet we prefer our risk-free to come mainly from German bunds. In this context, we think that the pandemic has added impetus to Europe’s co-ordination of monetary stimulus – yet ironically increased the friction at the state versus federal level in the US.

Both candidates have pledged to spend at a huge rate, although how this will be funded and where it will go set them apart. Trump will probably renew his pledge from his 2016 election campaign and maintain tax cuts for companies and individuals. This would mean more government bond issuance to pay for these tax cuts.

Biden, on the other hand, could take up where Trump hasn’t delivered to the scale he wanted – heavy spending on infrastructure projects – but this time with a focus on clean energy projects. Biden has also said he would re-establish Obamacare in all its glory. So far, Trump has been only partially successful at dismantling his predecessor’s attempt for wider healthcare for the population. It is likely Biden will also raise taxes to help pay for his party’s spending plans, while also turning to the bond markets for some funding, similar to Trump.

Opportunities in the election turbulence

Whoever wins the race for White House and survives this very noisy and often chaotic election campaign (the first TV debate, Trump getting Covid-19 etc), the markets will likely react in typical emotional fashion – and that, in our view, is the moment when things will get really interesting.

The views expressed in this document should not be taken as a recommendation, advice or forecast.

M&G are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

The value of a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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