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LEGAL & General Investment Management (LGIM) is bailing on a bet that the Treasury curve will steepen, saying President Joe Biden’s exit from the US election race reduces the chance of a Republican clean sweep.
Christopher Jeffery, head of macro asset allocation at the UK’s biggest asset manager, said the probability that Donald Trump wins and his party gains full control of the House of Representatives and the Senate is now lower. Investors had been wagering such outcome would reignite inflation and worsen US finances, driving longer-dated yields higher.
Markets are reassessing the so-called “Trump trades” – centreed around his plans for tax cuts and higher tariffs – as Vice-President Kamala Harris gathers support among Democrats. Still, the Treasury curve steepened again on Wednesday, as commentary from Federal Reserve officials and weak economic data fuelled speculation on interest-rate cuts.
“We took off our steepening exposure because we thought Biden dropping out would stop the momentum that has been building behind a Republican clean sweep,” said Jeffery. LGIM has around US$1.5 trillion in assets under management.
Harris’s ascension potentially creates a closer contest in November and a divided government would make it more difficult to push through dramatic policy changes.
“It’s unclear to what extent it effects the presidential outcome but it does change the prospect for voter turnout on the Democrat side,” he added. “The market places a lot of emphasis on a divided versus united government, as well as who’s in the White House.” BLOOMBERG
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