The much-feared year of worldwide elections has failed to dent the appetite for European high grade corporate bonds so far. But the circus around Donald Trump’s conviction last week suggests that is about to change.
By the end of this year, more than half of the world’s adult population will have been asked to vote in elections. But the market outlook has been unexpectedly benign.
Many in the European high grade corporate bond market in January expected spreads to widen significantly because of political risk. But spreads have ground tighter all year. On Tuesday, the iTraxx Europe Main opened at 52bp, or 10bp tighter than where it closed on the first day of business of 2024.
But the biggest election of them all is still to come, when the US heads to the polls to pick a president in November and it is a poll that really does carry the power to tilt market sentiment.
It begins
Donald Trump, the likely Republican candidate for the presidency, was convicted of 34 federal charges last week, the result of a grimy scandal and its attempted cover-up. True to form, he immediately called the result a sham and a disgrace. He plans to appeal the charges but in any case, the conviction is no barrier, legally speaking, to his attempt to move back to the White House.
So far, so constitutional. But in its wake comes further evidence that the US's fractured and polarised society and politics are only growing more so. Pro-Trump commentators and some Republican politicians have called into question the legitimacy of the US legal system. It is a return to the sort of debate, dominated by extreme positions, that characterised Trump's first spell as president from 2016 to 2020.
This heaps instability on to an already uncertain race. Incumbent Joe Biden is hardly a market darling, and privately some bankers and investors in Europe have said that a Trump win would be a better outcome, professionally speaking, thanks to his general disregard for anything that could stymie the US economy in the short term, most notably addressing climate change.
But Trump brings with him an uncanny ability to steal headlines and roil markets. He has threatened trade wars with China over social media and once temporarily banned people from six Muslim countries from entering the US.
But what does all this mean for borrowers in the run-up to November? Timing issuance windows is tricky enough as it is. They will likely become narrower and less predictable as the political action heats up in the US.
And if Trump wins, although it may feel like a case of the devil you know, this time round, there is no central bank bond buying to ease the markets, which will make things altogether more unpredictable - exactly what market participants hate the most.
Last week's court verdict may not have made a direct impact on European corporate bond spreads, but they are the starting gun to November’s vote and a warning sign that volatility and difficult primary markets could follow.
For 2024, risk just got real.