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January 2020

Election Insights: How Bond Markets May React

  • John Lloyd John Lloyd
    Co-Head of Global Credit Research | Portfolio Manager

How will the 2020 U.S. presidential election impact bond markets? Portfolio Manager John Lloyd anticipates more risk should a left-leaning candidate win the Democratic nomination, with increased volatility possible in sectors such as banking, health care, energy and technology.

Key Takeaways

  • Bond markets have not had a strong reaction to election risk so far this year, given that a more moderate candidate (former Vice President Joe Biden) is currently a frontrunner in polls.
  • Should a more left-leaning candidate win the Democratic nomination, we would expect to see increased volatility in certain sectors.
  • With Elizabeth Warren and Bernie Sanders both running on a Medicare-for-All platform, health care could face significant ramifications while the banking, energy and technology sectors could also be impacted by some of Warren’s proposed regulations.
View Transcript

John Lloyd: Year-to-date, the bond market has been actually very sanguine with political election risk. And I think that partly goes to, you know, Biden is the frontrunner in most of the polls right now. As long as he comes out as the Democratic frontrunner against Trump, I don’t think we will see much uncertainty priced into the market.

However, there is, I think, some more tail risk if you have a left-leaning candidate such as [Sen. Bernie] Sanders or [Sen. Elizabeth] Warren that win the Democratic nomination. And I think if that happens, you could get some risk premium priced into the market, just based on their policies that they have announced already, that they would want to try to implement if they were elected.

Globally, we have seen elections and just different referendums go against what the polling has said before the elections took place, whether that is Brexit or even Donald Trump winning the last election. It is very different than having a typical election whether you go back to Clinton or Bush or Obama. You know, I think Trump ushered in this new era of an outsider can win or somebody who is not as centrist can win a presidential election.

If we do see Elizabeth Warren or Bernie Sanders win the nomination – and eventually win the presidency – depending on that outcome in Congress as well, as long as we have some checks and balances some of that gridlock, I think, in Congress, is good for the markets in general, because it will keep a very centrist policy.

I would expect to see more volatility in health care. Both of them are running on a Medicare-for-All platform and that would have pretty significant ramifications for the health care industry. There are some parts within technology that I think could be affected, because they have talked about breaking up the big tech firms. Banking, especially with Elizabeth Warren, she has been very anti big banks, and I think you would see more regulation come through the pipelines.

Another sector specific to corporate credit, especially within high yield, is the energy sector. Thirteen percent, 14% of the index is energy companies; a lot of those are U.S.-based fracking companies. Elizabeth Warren has come out with a policy that she would actually want to ban fracking on all public land and also try to limit it on private land, as well. So that is an example, I think, that could have pretty large ramifications in the fixed-income markets.

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