It all starts with expectations for the economy. For this explainer, let's assume the economy does see some pressure as a result of a Biden presidency.
Treasury bond prices would basically see a tailwind, as investors would be more compelled to buy safer assets to protect against a downswing in stocks. Investors recently have been buying treasuries, sending the yield down considerably (remember yields fall when prices rise). Still, treasury yields may be pressured a bit. The lower yield reflects lower expectations for inflation. Inflation is pressured when economic demand is weak.
With or without Biden in the White House, many bond investors expect treasury yields to remain pressured, as the economic recovery may be slowing and may be completely interrupted by more virus flare-ups. Plus, the Federal Reserve may increase the size of its already-large treasury purchasing program if yields rise too much.
If treasury yields keep falling, this would make corporate and mortgage bonds more attractive. Investors demand a premium yield on riskier bonds — those with less likelihood of being repaid — as compensation for that risk. So if treasury yields fall, investors can pay up for riskier bonds. The spread is the percent yield on riskier bonds over that of treasuries and often, corporate bonds yield about 3% or 4% higher than treasuries do.
So high yield bond prices would rise, right? Well, the big pressure on high yield bond prices is that a Biden economy is, in theory, credit negative. So the spread could widen, as investors demand an even higher premium return on the even riskier corporate bond market. That’s price negative.
So two opposing forces would work against each other on prices of riskier bonds.
Currently, the spread on high yield corporates is 5%. Let’s say investors demand a 6% spread if Biden wins and treasury yields fall. There just would not be much working in favor of high yield bond prices.
But always remember, many market forces are at play all the time, so don’t ignore forces outside of the election.
More on the 2020 Election and Your Money:
- Worried About Election Volatility? 5 Rules to Protect Your Portfolio
- What Election Outcome Means for Apple Stock
- Are These 3 Stocks Election Stocks?
- Avoid Oil Stocks Before, After Election: Expert Says
- What to Expect From Federal Reserve Under Trump or Biden Presidencies