Markets have seen a busy start to the year, with no signs of respite on the horizon. Sarah Harrison, senior portfolio manager (PM) at Allspring Global Investments, discusses how markets have reacted to Donald Trump’s return to the White House last week (Jan 20 -24) and how it has impacted fixed-income liquidity.
In this episode, Harrison discusses the conflict between fiscal and monetary policies in the US, as the Trump administration introduces potentially inflationary policies such global trade tariffs, and central banks, such as the US Federal Reserve and the European Central Bank, will have to decide whether to cut interest rates this week. The senior PM unpacks her views on rates for this year and how desks should be thinking about this.
Harrison also discusses her outlook on the growing levels of global debt, the high cost refinancing for corporates and how this spells the need for a disciplined market strategy and risk appetite.
Interview
Jo Gallagher Welcome to Trader TV This Week your insight into your trading desks can prepare for the week ahead. I’m Jo Gallagher. Today I’m joined by Sarah Harrison at Allspring Global Investors to discuss the main topics and events leading this week. Sarah, welcome to the show.
Sarah Harrison Thank you.
Jo Gallagher So we’ve had the first week of Trump back in the White House. What have you seen in terms of market reaction and liquidity across fixed income? And have you seen any surprises?
Sarah Harrison We’ve had a bit of a volatile start to the year. Treasury yields have been moving higher since about mid-December. But actually, we’ve now seen a bit of a respite in the days leading up to the inauguration and since the inauguration. The high-yield market has been healthy. Bonds have been trading up. The new issue pipeline is there, but not overwhelming. So things are chugging along quite nicely now. That being said, in our view, a lot of the pro-U.S. growth trade is already priced in and has been priced in since last year, leading into the election result and then post the election result. So now we’re in a bit of a wait and see mode to get the detail of what’s going to happen over the next four years. There’s no playbook for this presidency. There is the potential for significant deviation from the status quo if you take the rhetoric at face value. As a result, we are positioned quite defensively, really focused on maximizing income due to a combination of the potential for volatility, high income on offer, and some fair distressed valuations across asset prices.
Jo Gallagher There’s this tug-of-war between fiscal and monetary policy, particularly in the US. What is your take on how central banks will decide on interest rates going forward and how should trading desks be thinking about that?
Sarah Harrison So our view going into 2025 is that there is a high likelihood of central bank policy divergence. What is currently being priced into the market is 1 to 2 cuts in the US and then 3 to 4 cuts in Europe. Front loaded for Europe. There is the potential for the Fed to undershoot if some of the inflationary policies the new administration has discussed come to fruition, which not necessarily but potentially constrains what the ECB will do. We see that as a second half of the 2025 story and possibly a non-event if the ECB is aggressive in the first half of 2025. As for the impact on high yield, these are all just risks that we’re thinking about. The trajectory for interest rates is still very likely lower from here, which is broadly supportive of levered credits.
Jo Gallagher We have global debt levels ticking up coupled with the high cost of borrowing. How are you seeing that hit the high yield market?
Sarah Harrison So we’re not far off local tights in high yield and for good reason. Corporate fundamentals are strong and the technical has been supportive. That being said, given the view that there is the potential for a resurgence of inflation in the US and subsequent limit to how easy monetary policy will be this year, not a base case, but a possibility. Our view is that you aren’t really being paid appropriately for risk way down the credit spectrum. So we continue to be underweight triple C’s. It’s still a good time for quality income. What do you think about the total return potential, the asset class, as long as you demonstrate discipline in a time of exuberance.
Jo Gallagher Many corporates will also have to think about the high cost of refinancing, as well as the dreaded maturity wall this year. How are you strategizing and planning for that?
Sarah Harrison So something we have been paying close attention to and didn’t think would be a major issue in 2024 was the maturity wall. We still don’t see it being a major issue in 2025. But we do see it being a bigger issue than last year. We hold the view that the build-up of the maturity wall is simply corporate treasurers being savvy about hanging onto lower coupon debt for longer. Rates have come down and they are continuing to come down. So, you know, they made the right call. But rates perhaps have not come down as much as some treasurers had hoped. And this means that there will be some situations where capital structures have become unsustainable and will need to be dealt with. This is another plug for staying disciplined in a time of exuberance, being underweight triple C’s and employing a heavily fundamentals driven research process like ours.
Jo Gallagher Thank you, Sarah, for your insight, and of course, you for watching this has been Trader TV This Week.
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