Inflationary pressure: How US politics impacts bond markets

Last week saw unprecedented – although not entirely unexpected – scenes take place in Washington DC, as disenfranchised pro-Trump supporters breached the US Capitol.

The riot marked another flashpoint in what has been a turbulent four years in US politics, with more unrest forecast in the final days of Donald Trump’s presidency.

An FBI bulletin warns that Trumpists are planning ‘armed protests’ at all 50 state capitols and Washington DC in the days leading up to Joe Biden’s inauguration on January 20. 

Biden is presented with an uphill struggle – both in terms of uniting a divided population and repairing the economic damage caused by the Covid-19 pandemic. 

The country’s debt surpassed $26 trillion (€21.9 trillion) in 2020, and the president-elect pledged to deliver $2 trillion of extra stimulus aimed at promoting the adoption of electric vehicles, better insulation of buildings and increased use of renewable energy in the power generation sector. 

Even before the US election result was confirmed officially, credit markets had been responding well. Positive news on the Covid-19 vaccine front toward the end of last year also aided the post-election rally seen across many sectors, from commercial to real estate.

However, according to Howard Cunningham, fixed income portfolio manager at Newton Investment Management, “more rate-sensitive sectors may struggle if government bond yields continue to rise”.

Inflation is an increasing concern for global institutional investors – as is the ongoing issue of liquidity. 

US inflation forecasts vary widely, and the predicted incoming fiscal stimulus is likely to increase inflationary pressure. 

The US Federal Reserve has allowed inflation to run ahead of its historic 2% target, while the incoming administration is likely to be more supportive of accommodative monetary policy. 

According to fixed income specialist Tabula Investment Management, Biden’s appointment of ex-Fed chair Janet Yellen to the role of Treasury Secretary suggests “a close tie-up between fiscal and monetary authorities”.

The fund manager warned that these factors, combined with the demand/supply fallout from Covid-19, mean that inflation is back on the agenda.

Taken from our 2020 Global Industry report: Bidenomics: A sustainable status quo?

© 2021 funds europe

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