The 2024 Election's Impact on Fixed Income Markets

Perspectives from Oppenheimer Investment Advisors (OIA)

OIA manages fixed income portfolios on behalf of high-net-worth individuals and institutional clients.

The 2024 election has brought an amplified focus to fiscal and economic challenges, with new implications for both public policy and financial markets. As the next administration begins its term, it faces limited options for addressing rising deficits and national debt, while investors, policymakers, and the Federal Reserve assess potential shifts in fiscal strategy. In this environment, the fixed income market is adjusting to new expectations about interest rates, inflation, and government spending. Below, we highlight key insights and our strategic approach to navigating these uncertain times.

Key Insights:

Fiscal Limitations:

The incoming administration will have fewer tools to address increasing fiscal deficits and debt, limiting options for meaningful change.

Policy Priorities:

With the Republican victory, we may see renewed focus on revenue generation through tariffs, which could fund potential tax cuts. However, the broad path to managing the deficit remains challenging, with many proposed solutions affecting nearly all citizens.

Federal Reserve’s Role:

The Fed remains committed to its dual mandate of price stability and full employment. Rather than preempting policy impacts, they will closely model potential economic effects as new legislative bills progress, maintaining a reactive stance.

With Election Day and the Fed’s decision in the books, the bond market is shifting its focus to a new set of uncertainties.

However, the red sweep has mostly been priced into the bond market and the big question becomes the extent to which a Trump White House will deliver on its promises for tax cuts, tariffs, lower immigration, and deregulation. The answers to this, we estimate, will emerge over the next six months.

Market Response:

Already, the bond market is suggesting a higher terminal fed funds rate in the wake of the elections. Fed funds futures are priced for the Fed’s policy rate to fall no further than the 3.50%-3.75% range, a meaningful difference from the last SEP’s median estimate of closer to 3%. Regardless, many factors that feed into estimates for the terminal rate are thought to have upside risk over the next four years.

These factors are:

• Deglobalization, which we believe will be inflationary for goods prices.
• Increasing baby boomer retirements and slower immigration, which can be inflationary due to scarcer labor.
• Higher borrowing costs, which will be needed to neutralize expansionary fiscal policy.

Our Fixed Income Investment Strategy in a Shifting Market

Yield Curve Focus:

We will remain focused on the 5–7-year segment of the yield curve, as we feel going longer in duration to “reach for yield” could be very punitive for investors as pressure on long-term rates to rise will be unrelenting given the US demand to fund its debts.

Credit Vigilance:

We are intensifying our assessment of creditworthiness, ensuring our holdings can withstand not only a traditional recession but also event-driven downturns.

Negative Correlation:

Particularly during periods of sharply declining equity markets, the prices of high-quality fixed income securities tend to move in the opposite direction from those of equity securities, a tendency commonly referred to as negative correlation. Therefore, including a fixed income component along with equities seeks to help stabilize portfolio returns and reduce volatility during periods when the stock market is substantially depressed. We believe the more traditional negative correlation between stocks and bonds will return, offering investors greater stability in their investment portfolios.

Customized Portfolios:

We construct customized portfolios for each client based on their specific investment requirements and risk tolerance. A well-diversified portfolio of both tax exempt and taxable bonds seeks to offer reliable and inflation-beating income in the long-term.

As economic policies and the market adapt to post-election dynamics, our investment strategy focuses on mitigating risks and seizing opportunities within the fixed income space. By targeting medium-term durations, prioritizing credit quality, and preserving portfolio diversification, we, along with your Oppenheimer financial advisor, are prepared to help clients navigate evolving market conditions and achieve long-term growth and stability.