"Vote Here" sign in Las Vegas.
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Wall Street is betting on a return on risky corporate bonds regardless of who occupies the White House.
Investors piled into the riskiest part of the US corporate bond market on election day, rated roughly $ 10.5 trillion, with the aim that the sector will benefit from a quick resolution to the presidential race.
"I think there are a lot of misdirected fears in the market," said John McClain, a high-yield portfolio manager at Diamond Hill Capital Management. "It's not about inserting all of your chips or getting 100% or less long, but we think we'll find a solution relatively quickly," he said of the presidential contest.
"Regardless of who wins, the market will be happy with a result," he told MarketWatch.
The uptrend was evident in rising stocks in the sector's largest exchange-traded funds (ETFs) on Tuesday.
Shares in the iShares iBoxx $ High Yield Corporate Bond ETF valued at $ 39.7 billion
rose 0.9% on Tuesday, posting the largest daily advance since June 30, according to FactSet data. The USD 12.3 billion SPDR Bloomberg Barclays High Yield Bond ETF
rose 1%, the biggest daily gain since July 14th.
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U.S. stocks also rose sharply Tuesday, with the Dow Jones Industrial Average DJIA rising 554 points, or 2.1%, after a difficult patch for riskier assets in late October that saw investors pull billions of speculative corporate bond funds as bond spreads widening.
U.S. junk bond spreads, or the amount of compensation bonds pay investors above a risk-free benchmark, were last seen at around 525 basis points versus Treasuries
after a troubled month of October.
Spreads dive and climb
St. Louis Federal Reserve
About two weeks ago, junk bond spreads rose to a pandemic low of 487 basis points versus Treasuries, but rose to 532 basis points last week, according to the Federal Reserve.
"Directionally, it's positive," said Ken Monaghan, co-director, high-yield at Amundi Pioneer. "Once levels were within 500 basis points, which was the lower end of this year after the COVID crisis, we saw money leak and flow out of ETFs as the risks to people were lower."
Monaghan said the new rally points to market participants who have begun to expect an election decision within a relatively short period of time, rather than a controversial period of weeks or longer.
"That would worry the risk markets across the board, not just the high returns," he said.
See: What the choice means for the markets when investors are looking for a "clear win"
What else could trigger volatility?
Investors pointed to a possible return to March business closings in the US as a negative for speculative corporate debt, especially after Massachusetts Governor Charlie Baker announced on Monday a new advice and curfew on most US companies offering to contain it increasing Covid-19 cases and hospital stays.
However, participants in the debt market continue to expect Congress to pass another pandemic spending package, regardless of whether Republican President Donald Trump prevails or his challenger and former Vice President Joe Biden wins the White House for Democrats, which would likely boost markets .
If election uncertainty drags on for a while, or if the pandemic's impact on the US worsens and threatens economic recovery, the ace in the hole for junk bonds would still be the Federal Reserve.
The central bank has bought corporate debt for the first time in history and has kept credit flowing since the virus chaos erupted in March. However, without a second extension of their schedule, lending through the Fed facilities will expire on December 31st.
"The establishment of the credit facility prevents a real tightening of the financial conditions," said Steven Friedman, chief macroeconomist at MacKay Shields, in an interview.
"It makes sense to just renew it as an insurance policy and a major setback for the credit markets."