Yet these types of views are far from universal. Standard Chartered Bank’s head of research, Eric Robertsen, believes the opposite could happen: He says a victory by Biden, plus full Democratic control of Congress, would produce concerns about their tax agenda that weigh on risky assets and drive Treasury yields lower on safe-haven flows.
Ultimately it will be the policy mix from the next president and Congress, rather than possible delayed election results, that has an impact on financial markets, according to Mark Heppenstall, chief investment officer of Penn Mutual Asset Management, which manages $29 billion of mostly fixed income.
“A sweep by either side could lead to an increase in long-end rates, which are more susceptible to greater fiscal stimulus and a lack of gridlock, similar to what occurred after Trump’s victory in 2016,” said Heppenstall.
For now, many investors are focused on the prospect of a messy election fight that produces market turbulence -- especially among riskier assets. President Trump has repeatedly railed against the expected surge in mail-in voting amid the Covid-19 pandemic, alleging it will produce unprecedented voter fraud.
With Treasury yields lingering near record lows and the Fed vowing to pin its interest rate near zero until at least 2023, volatility in rates could remain subdued even if it surges in the stock market. Traders of swaptions, the options market on interest rate swaps, remained unperturbed even after Trump refused last week to commit to a peaceful transfer of power if defeated -- with volatility drifting lower after a brief spike in the three-month tenor that captures Election Day.
‘The Whole Royal Family’
Maroutsos isn’t taking any chances. He’s buying shorter-duration debt from the U.S., Australia and Canada, where he thinks central banks are on hold with rates and the bar for hiking is “out of reach.” Janus may also look into buying puts on 10- and 30-year Treasuries in the next month or so, as a form of cheap protection from a positive shock that produces higher long-end rates, he says. The firm currently has no exposure to 30-year Treasuries and a “mild steepener in play” in the 10-year, he said.
Meanwhile, Maroutsos says he is keeping cash reserves high at around 20%-30% in absolute terms for a variety of reasons, one of which is to “keep powder dry should good investment opportunities present themselves.” Janus manages a total of $350.4 billion in assets, $13 billion of which is in Absolute Return strategies Maroutsos helps oversee.
“They say cash is king,” Maroutsos says. But in an environment with low interest rates that may not move as much as in previous cycles, “cash is not king. It is king, queen, the whole royal family.”
--With assistance from John Ainger.
This article was provided by Bloomberg News.