Bond Market Observations: The Times They Are A Changin'

Yes, elections matter, especially one packing such a surprise and bringing into office a team with distinctly unsettled policy plans. The financial market reaction to the policy inclinations thus far expressed by the Trump team confirms our core thesis—that governing differs from campaigning and the new administration will gravitate toward more conventional Republican policies—but moved more quickly and with apparent assurance that we do not at yet share. We would rather risk appearing stubborn than leap to a conclusion and find, mid-air, that there was no safe place to stick the landing.

The case for an upward inflection in the US economy is not yet proven, a conventional policy agenda is still likely to be conveyed in unconventional terms by the new president, and even a fully transformative government—if that happens—only gets policy traction over time. True, spending and corporate tax changes are likely to be legislated early on, but their imprint on economic activity is far from instantaneous. Other reforms will take time to maneuver through the legislative and regulatory thicket, and the personal tax code is among the toughest nuts to crack.

Now is not the time to jump feet first because the bullet-eyed safety net is held by politicians who are unsure where to place the landing zone. Times of transition are times to lean forward to add risk, selectively. There is value to be had, selectively, in a rising rate environment, especially in this transitional window in which current market prices have not correctly factored in all the implications of changing policy directions.

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