It all starts with expectations for the economy from a Trump presidency.
So let’s say the economy does indeed get some boost as a result of a Trump victory.
Treasury bonds would fall in price, especially because they’ve risen so much of late, as investors have bought safe assets during the current economic uncertainty. Remember, when bond prices fall, the yield rises. The higher yield reflects higher expectations for inflation, which occurs when economic demand rises.
Importantly, bond fund managers TheStreet has spoken with expect treasury yields to remain pressured, even if they do rise incrementally on a Trump election. The Federal Reserve is buying treasuries to keep interest rates low and it may increase the size of its purchasing program if yields rise. Plus, many investors are cautious on the current economic recovery.
If treasury yields rise just a touch, riskier bonds would have to fall in price and rise in yield a bit, too. Investors want extra yield on riskier corporate and mortgage bonds. The government will pay the bond holder back. But riskier bonds have some probability of not being repaid in full, which the investor wants to be compensated for.
High yield corporate bonds usually yield about 3% or 4% more than treasuries do. If the bond market were structured this way now, high yield bond prices could fall enough to reflect that spread. But since a stronger economy is a positive for corporate credit, spreads may tighten. Investors will pay a premium and accept slightly less yield. So prices may fall a bit, but not substantially.
Currently, high yield corporates have a bit more than a 5% spread over treasury yields. So it’s possible that a Trump victory would put very minimal pressure on prices of these bonds.
Now to see one of the most important investing lessons posed by these dynamics, watch the quick video above.
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