The US president-elect Donald Trump is widely expected to introduce policies that could slow down the rate-cutting pace by the Federal Reserve in 2025.
The tariffs he has promised to impose on day-one of his next term, would bring short-term inflation to the domestic economy, as imports will become more expensive. On the other hand, if mass deportations are to happen, the labour supply would become tighter, resulting in higher wages and challenges for companies’ profitability.
There is uncertainty how many of the proposed policies could be implemented practically, and how large or wide-ranging retaliatory tariffs might be.
Long-end bond yields, for example, 30-year US dollar bonds, have stayed at elevated levels since the Fed’s initial rate cut decision in mid-September and Trump’s election win last month.
“Investors are concerned about solid US growth, the inflationary impacts of [Trump administration’s] policies, but also the potential for an even wider fiscal deficit,” wrote Mark Nash, James Novotny and Huw Davies, fixed income investment managers at Jupiter Asset Management.
They also point out that corporate and household balance sheets are far healthier in the US, compared to the post-global financial crisis period. This helped put the country at a head start of the post-Covid recovery compared to other major economies, such as China.
Analysts from Schroders shared that the impact of the Trump administration 2.0 on economic growth is ‘less clear-cut’, given that the US economy is starting from a high base, demonstrating strong growth prospects, which could be hampered by policy promises made during the election campaign.
The valuation of bonds has improved to offer a cushion against potential growth risks from any inflationary impetus and immigration policies. 10-year US Treasury nominal yields are likely to stay above 4% in early-2025, providing an attractive level of income.
The market is also anticipating an additional 25 basis-point cut during the upcoming December 13-14 Fed policy meeting.
Emerging markets
A divergence in performance between hard currency debt and local currency debt in emerging markets has been a key characteristic of local fixed income markets, according to experts.
“Hard currency debt, both sovereign and corporate, delivered reasonably attractive total returns. This was thanks to the high income generated by high yield issuers,” said Abdallah Guezour, head of emerging market debt and commodities at Schroders.
“These are issuers that generally have a lower credit rating, implying a higher risk of default, compared to investment-grade bonds,” he added.
Meanwhile, emerging market sovereign and corporate bond spreads have become tighter, and this trend is to stay in 2025.
Alaa Bushehri, head of emerging markets debt at BNP Paribas Asset Management, shared that investors in emerging markets have benefited from active management to drive returns, providing a source of diversification given encouraging signs in their respective local economies.
Additionally, she said that a pause in the central bank easing cycle is widely expected in emerging markets across Asia, and the decisions would largely rely on the US Fed’s moves in the new year.
The dollar has strengthened post-election, and the US dollar index (DXY) now records around 106 by time of publication.
Chi Lo, senior market strategist, Asia Pacific (Apac), at BNP Paribas Asset Management (AM), said that Asian markets could see a ‘currency war’ if tariffs were put in place and the dollar further strengthened. It would be ‘the right way to go’ for Asian central banks to have their local currencies go down, he shared.
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