Navigating Credit Markets Amid the US Presidential Election

As the US presidential election approaches, credit portfolio managers face the challenge of navigating potential impacts on both macro and micro credit markets.

Analysts at UBS suggest that while the broader macro credit environment is expected to experience minimal disruption from the election, the micro-level impacts—particularly within specific sectors—could be more significant depending on the election’s outcome.

The overall US credit market is positioned for what UBS describes as a “softish landing.” This optimistic outlook stems from a strong technical backdrop and a stable fundamental mosaic.

The possibility of Federal Reserve rate cuts could pull money off the sidelines and push investors further out along the credit curve, creating a supportive environment for credit portfolios.

At the same time, the resilience of the US credit cycle, evidenced by the recent spike in the VIX not leading to a significant widening of credit spreads, suggests that the market is well-prepared to endure the election period without major disruptions.

Analysts at UBS state, “We see election-related developments having a limited impact on macro credit, but a greater one on micro credit- particularly if polling starts to separate a clearer presidential winner.”

Sector Performance Expectations

In the investment-grade (IG) credit space, a victory for Kamala Harris or a significant rise in her polling numbers could benefit sectors such as basic industry, capital goods, and utilities. This anticipated outperformance is due to expectations of continued support for policies like the Inflation Reduction Act (IRA) and other Biden-era stimulus measures.

Conversely, sectors such as telecoms, tech, banks, and autos may face challenges under a Harris administration, primarily due to increased regulatory scrutiny and potential shifts in industry dynamics such as the accelerated adoption of electric vehicles (EVs).

In the high-yield credit sector, the impact of a Harris victory is expected to vary across industries. Analysts predict that under a Harris administration, sectors like autos, aerospace/defense, and energy may underperform due to concerns over a less favorable policy environment for defense spending and stricter regulations on energy production.

Historical Context and Market Reactions

Historically, previous elections have impacted credit markets, though the sample size is limited. Analysts found that median Baa spreads have tended to tighten in the three months leading up to an election, with gridlock outcomes—where no single party controls both the executive and legislative branches—often coinciding with greater tightening.

Median Baa yields typically fall during this period, with Democratic presidential victories historically providing a slight advantage for spread markets compared to Republican ones.

Using market-implied analysis, analysts at UBS distinguished potential credit winners and losers based on polling swings. They observed that market reactions to changes in the probabilities of a Trump or Harris victory offered valuable insights into sector performance.

During periods of improved polling for Harris, sectors like basic industry, capital goods, and utilities outperformed, likely due to expectations of continued support for green initiatives and infrastructure spending. Conversely, sectors like autos, aerospace/defense, and energy were seen as potential underperformers under a Harris victory, reflecting concerns about regulatory pressures and policy shifts.

Tax and Regulatory Implications

Analysts at UBS also highlighted the potential implications of corporate tax rate changes and the regulatory environment. A Harris victory could lead to higher corporate taxes, negatively impacting sectors with low effective tax rates such as utilities, tech, financials, and energy. Additionally, the regulatory environment for mergers and acquisitions might become more stringent under a Democratic administration, particularly in leveraged finance.