BANKS are gearing up for late-night US credit trades as results trickle in from presidential and legislative elections that could impact company profits.
JPMorgan’s derivatives trading desk will be staffed all night for CDX trading, according to a notice to investors seen by Bloomberg. Citigroup, Royal Bank of Canada and BNP Paribas have also informed investors that their derivatives desks will be open, according to sources familiar with the matter. All four banks declined to comment.
Last month, Barclays recommended that investors buy credit derivative protection ahead of the election to hedge against possible spread widening. The bank suggested buying investment-grade or junk CDX outright or using pay ladders as hedges against near-term volatility.
“For credit spreads it is important to remember that they have been very stable for the past four weeks even with the big swings in the polls and in rates,” JPMorgan strategists led by Eric Beinstein wrote in a Tuesday (Nov 5) note. “Strong technicals are driving credit spreads and these are unlikely to change with either election outcome tonight.”
JPMorgan expects sectors such as banks, industrials and transportation to benefit from a Republican sweep, while those exposed to global trade and tariffs, such as technology, would be vulnerable to a shift in trade policy. There could also be significant volatility in US Treasury rates whichever party wins, according to the bank.
Pricing in US fixed-income markets more closely resembles the lead-in to Donald Trump’s 2016 victory with a red sweep, UBS Group strategists led by Matthew Mish wrote in a Sunday note. The average US investment-grade bond traded at 83 basis points over Treasuries on Monday, the same as level as Friday, while average risk premiums on junk bonds widened four basis points to trade at 279 basis points.
A Republican sweep would be the most beneficial immediate outcome for US credit spreads as it signals likely deregulation and lower corporate tax rates, according to UBS. The bank had previously noted that a democratic victory would be supportive for basic industry, capital goods and utilities sectors, but a negative for telecoms, technology, banks, and autos. BLOOMBERG
