The US presidential debate on 27 June and subsequent events led to a temporary rise in the odds of a second Trump presidency and initiated a market reaction known as the “Trump trade” that was longer-lasting.
On the rates side, markets increasingly bet on higher long-term US bond yields. Investors bought shorter maturity notes and sold longer-term ones (so-called curve steepener trade). In terms of EUR credit spreads, we note the significant volatility both in investment-grade (IG) and high yield (HY) until the beginning of July, given French election headlines. Regarding USD credit spreads, IG was stable in July. Nevertheless, US HY bonds profited from the Trump trade and outperformed European HY. The creditworthiness of weaker US companies is seen to profit from tax cuts, tariffs and looser regulations. Moreover, US HY bond issuers have a high share of domestic revenues. This contrasts with US IG, where the share of US revenues is usually lower. We take a neutral view on EUR IG and HY credit but expect wider spreads for USD IG and HY credit. Regarding duration, we expect lower 10-year bond yields in the US and Germany in August as the ECB and Fed are likely to cut interest rates in the autumn. After the strong rally in Swiss government bonds, we take a neutral view regarding 10-year bond yields. Forecast risks include sticky inflation, a continuously stronger-than-expected US economy and potential US policy changes after the 2024 US presidential election.
