Bond Market Seen on Edge for the Election

Wednesday, 17 Oct 2012 07:48 AM

By John Morgan

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The November presidential election might be a pivotal event for the U.S. bond market, especially because it could impact who replaces Federal Reserve Chairman Ben Bernanke.

Who wins the election will be helpful to some kinds of bonds, and detrimental to others, according to MarketWatch.

“What the Fed is doing is overwhelming what the candidates can do, because it’s such a big presence in the bond market,” said Anthony Valeri, fixed income investment strategist for LPL Financial. “If [GOP presidential nominee Mitt] Romney got one of his own people who said the stimulus isn’t helping and we don’t need it, all bets are off on keeping rates low.”

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

Bernanke’s current term ends in January 2014, and many believe he will step down at that time regardless of who wins, MarketWatch reported. However, Romney has said he would ask for Bernanke’s immediate resignation if he wins, according to Investing Daily.

“Romney would appoint a new Fed chairman who is more hawkish than Bernanke, which puts into question their pledge to keep rates low until mid-2015,” John Briggs, a Treasury bond strategist at RBS Securities, told MarketWatch.

Tax increases under a re-elected President Barack Obama could make municipal bonds more attractive.

“Obama has suggested increasing taxes on upper earners, so municipal bonds are a potential beneficiary because that makes the tax exemption more valuable,” said Valeri, according to MarketWatch.

Meanwhile, corporate bonds might benefit from a Romney victory.

“If Romney wins, defense, aerospace, financials, coal, rails, mining and metals are all sectors that should do well, because he’d make those industries more secure and profitable, which is good for their bonds,” Mark MacQueen, co-founder of Sage Advisory Services, told MarketWatch.

With an Obama win, MacQueen predicted the bonds of infrastructure and alternative-energy companies would benefit.

A Romney-appointed Fed chairman would be likely to oppose economic stimulus measures such as quantitative easing, and ease the greater regulatory role the Fed now plays in oversight of the U.S. financial system, Investing Daily reported.

Although the presidential election is important, Congress is also bound to play a crucial role in the direction of the bond market.

“How long does the U.S. have before the bond market demands much higher interest rates on Treasurys, forcing a sudden and painful belt-tightening on every American? For a sense of the answer, tune in a week or so after the presidential election,” Bloomberg reported.

“That’s when Congress reconvenes to decide what to do about the expiring tax breaks and across-the-board spending cuts that take effect in January. Combined, they equal about 5 percent of the economy,” said Bloomberg.

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

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