Corporate bonds and the related exchange traded funds have traded lower over the past month. Some market observers pinpoint culprits in the form of President-elect Trump’s tariff talk, and the possibility that the incoming administration will employ economic policy that’s inflationary.
Should inflation suddenly reverse higher, the Federal Reserve would likely have no choice but to halt interest rate cuts. With that in mind, some experts believe the best course of action for Trump as it relates to the corporate bond market and ETFs such as the WisdomTree U.S. Corporate Bond Fund (QIG ) is for talk to be just that: talk.
That is to say that, Trump is apt to talk a big game on certain policy matters. However, if he leaves it at rhetoric, QIG and related ETFs could deliver upside for income investors in 2025.
QIG Merits a Query
While Trump employed some tariffs in his first term, with President Biden doing the same, many experts believe the most punitive of Trump’s proposed tariffs are likely to remain in the “proposed” stage and not see the light of day.
“The bull case could be that we see more talk but less ultimate action. Scenarios where tariffs are more of a negotiating tool than a sustained policy would likely mean less change to the current (credit friendly) status quo, and also increase the likelihood that the Federal Reserve will be able to lower interest rates even as growth holds up,” noted Andrew Sheets, head of corporate credit research at Morgan Stanley.
In what can be an ideal scenario for assets such as QIG, Sheets points out that corporate bonds could thrive in 2025 if economic growth accelerates while interest rates decline, though that’s historically been a rare combination.
Another potential catalyst for ETFs such as QIG is the possibility that the income administration will be hospitable on the regulatory. If banks are subject to looser capital requirements, that could be a boon for corporate bonds.
“Some loosening of bank capital requirements or stronger demand for collateralized loan obligations could both flow through to tighter spreads for the assets that these fund, especially things like leveraged loans. If we think back to periods where credit spreads were tighter than today, easier funding was often a part of the story,” added Sheets.
QIG turns nine years old in April and has a 30-day SEC yield of 4.98%.
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