Earlier this week, we discussed what the next president might mean for your portfolio. Today, I want to look at what the two candidates might mean for your bond holdings.
There are some very significant differences — and surprising similarities — between Hillary Clinton and Donald Trump. Whatever is going to occur, Congress is a key player in this. However, potential changes – in debt level, in financing and ultimately in interest rates and the dollar — could be significant.
First, a disclosure: I am terribly amused by Donald Trump. Despite his lack of political experience or grasp of policy, I have found his run for president very entertaining. Even more intriguing, he is potentially good for the country and better for the Republican Party.
What I mean by “good” is that a two-party system only functions properly when you have two functional parties. At present, America lacks that. Trump could very well help achieve that worthy goal by burning the Republican Party to the ground, forcing the next generation of conservatives to rebuild it from scratch, into a rational and logically coherent organization, as opposed to whatever indescribable mess it is now.
This would be a long-term positive.
Despite Trump’s tendency to speak off the cuff, he has on occasion said things that are constructive and thoughtful. Maybe their relative rarity makes them stand out. Regardless, the impact on the fixed income portion of your portfolio could be significant. The item that stood out to me most recently was his comment on America’s obligations, saying, “I would refinance debt. I think we should refinance longer-term debt.”
This of course is music to my ears. I have been asking for a long time why the U.S. isn’t taking advantage of low rates. A 50-year bond would match the U.S obligations at the proper duration and an ability to fund inexpensively. This would also allow long overdue infrastructure rehab.
Trump has had lots of experience restructuring the debt of numerous businesses. However, as my colleague Josh Brown points out, the U.S. is not a failed Atlantic City casino.
At her campaign website, Hillary Clinton details spending on infrastructure, and the economy, all of which presumably will require more debt. But there is not a lot on what that financing will look like.
At Trump’s site, the closest he comes to discussing this is his tax policy. He declares it to be “revenue neutral,” but every independent analysis of it suggests it will cost trillions of dollars. (Any time it is suggested that tax cuts can be paid for by “eliminating most deductions and loopholes,” nobody believes it — and with good reason).
Regardless, whether we get Trump’s tax cuts and higher spending or Clinton’s tax increases and higher spending, they each will require fairly substantial issuance of Treasuries. And as we have noted previously, there is a significant shortage of a triple A rated sovereign paper.
What might the impact of this be for fixed income portfolios?
There are so many possible variations that it is foolish to pretend we can assess this with any degree of confidence. The cooperation of Congress — you know, that branch of the government that controls the purse strings — will be crucial to any substantial changes to financing federal debt. But in the broadest strokes possible, regardless of who wins in November, you should expect to see spending, and possibly deficits, going up.
Perhaps even enough to make a dent in that shortage of triple-A rated sovereign paper.