Conspiracy theories of the type that US president Donald Trump’s inner circle have short positions on equities and are raking in money from his berserker raid on world trade are now beginning to ricochet even among the Trump-friendly elite.
Hedge fund billionaire Bill Ackman has accused commerce secretary Howard Lutnick of being “indifferent to the stock market and economy crashing” due to the searing US import tariffs he has loudly championed.
This has nothing to do with Lutnick being chosen, unlike Ackman, to join Trump’s government. Ackman fumed that Lutnick’s nonchalance stemmed from he and his investment bank Cantor Fitzgerald being “long fixed income”.
“He profits when our economy implodes,” Ackman stormed. He soon rowed back, saying he had been “unfair” to Lutnick, who was “doing the best he can” — although Ackman repeated his criticism of the tariffs as “a major policy error”.
But the hedge fund boss’s gut reaction was telling. If there is any winner from the chaos of trade disruption, it’s fixed income. Or at least, it stands to be the least wounded victim — assuming Trump does not touch the nuclear button of defaulting on US debt.
Every which way
So far, government bond markets have been jerked in both directions by the tariff storm. The 10 year US Treasury yield initially rallied from 4.18% to 3.99% after Trump’s ‘liberation day’, as investors bet that tariffs would impede growth. On Monday hedge funds and other traders dumped Treasuries as a quick way to raise cash to meet margin calls, pushing them right back to 4.18%.
The 10 year Bund yield has done a similar U-turn, but although it is now rising, at 2.66% it is only 16bp wider than before Germany’s political deal to release the debt brake, instead of 40bp wider.
Yields are going to keep being barged around by the economic bullies in the White House.
Spreads will probably go wider. Already the S&P iTraxx Europe Main index of investment grade credit default swaps is around 80bp, having never closed above 65bp in the year before Trump’s Rose Garden speech. At 400bp, the Crossover index is 100bp higher than its average for the past year.
But whatever happens, the investment case for bonds, especially investment grade non-sovereign bonds, is going to be compelling this year — and for investment banks, it will be a good market to be active in.
Risk very off
Until the tariff hurricane blows away, equities are going to stink. As things stand, investors are still seduced by Trump’s pro-growth bullishness, so will not look away, and for now they remain eager to buy on dips and hints of good news, especially in the US. But fundamentally, corporate earnings are going to be a lot harder to predict until trade rules stabilise and their effects become clear. That argues for stocks to cheapen.
If economists are right and Trump’s policies are damaging to the global and US economies, high yield and riskier emerging market debt will suffer — they always do in a downturn. The brave will still make money, but there will be fewer of them.
Cash will be attractive, with short rates still decent in the eurozone and sky high in dollars.
But investors will be reluctant to park money in a lay-by for too long. There has to be something positive to do, right?
If the trade mayhem proves recessionary, rate cuts become a solid bet, even for those who are hesitating now. That argues for bonds, even with some duration, and preferably with spread. Oh look! There’s a thicker slice of fat available.
If bonds sell off, as they are bound to for short bursts, investors will wail and issuance will be disrupted, but what else are they going to buy? Investment grade bonds become a riskier bet, but a more rewarding one.
Get the money in
As for issuers, this year is not going to be a vintage one for corporate empire building, or even empire dismembering. Big M&A financings, whether investment grade or leveraged, are likely to be rare — bad news for all those heads of corporate and investment banks who have sold impressive growth plans to management.
But the engine of investment grade bond issuance is refinancing. On average over the past six years, the outstandings in bond markets GlobalCapital covers have grown about 5% a year. That means about 95% of any year’s deals are refinancing, which is inescapable.
And what happens when there’s a crisis — as in 2009 after Lehman Brothers’ fall, or 2020-21 during Covid? Organisations rush to the bond market to stock up on cash, effectively bringing forward issuance that would otherwise have happened in the next few years.
Base case for investment grade bonds this year is therefore plenty of demand and plenty of supply — but plenty of nasty days and bewildering weeks along the way.