Market reaction since the election has been right on the money. What we didn’t expect was the speed and the magnitude of the so-called “Trump Trade."
With the Fed’s December hike priced in, we maintain a Favorable view toward spread products within fixed income.
The reflation theme got an extra kick after the election. Companies with stronger credit profiles continued to benefit from tighter credit spreads.
· One bright spot in last month’s lackluster market action was that inflation sensitive assets saw impressive relative returns.
Regardless of whether the reflation theme continues, high quality spread products should continue to do well.
The upcoming election is likely to have wide-ranging impacts on both monetary and fiscal policies and we expect election risk to overshadow the Fed policy risk for the time being.
We maintain our favorable view towards spread products within fixed income, but given the election and the Fed hike risk, caution is warranted.
Although the spread cushion is thinner than it was a couple years ago, these bonds still offer the attractive combination of quality and spread.
Whether rates hike in September or December, we know the Fed will be very supportive of the market and the biggest beneficiaries will likely be EM and higher-yielding assets.