The bond market’s reaction to Donald Trump’s unexpected victory was less significant than after Brexit, and may eventually benefit fixed income.
“The surprise win by Trump feels like Brexit revisited,” says Sander Bus, head of the High Yield bonds team. “Initially the polls pointed in the direction of a Clinton win, but as the evening progressed Trump beat the odds, by winning large states. Interestingly enough, Brexit spooked the markets more than Trump’s surprise win: credit markets were much more volatile in June 2016.”
The impact of a new Republican president could be beneficial for the US economy in the longer term – or at least that is what he claims.
“There will be more infrastructure spending and fiscal stimulus. However, Trump’s win does not mean he can do whatever he wants. He will have to negotiate with the House of Representatives and the Senate, and within the Republican Party, not everyone agrees with Trump’s intended policies. This uncertainty should be reflected in credit spreads, but this does not seem to be the case at the moment.”
While equity markets in Asia opened down more than 4% down and US and European stock futures were 2-4% lower on news of the Republican landslide, the reaction in credit markets was more muted, Bus says. European CDS indices Itraxx Main and Crossover opened respectively 5 and 25 basis points higher, before coming back. CDS indices in the US, the CDX Investment Grade and CDX High Yield indices, widened by 5 and 15-20 basis points respectively.
The European financial senior and sub-CDS indices moved in line with corporates, widening by 5 and 15 basis points. US banks responded in a similar way to the mild risk-off sentiment in markets. Underlying interest rates reacted strongly at the market opening but quickly gave up their gains, with 10- and 30-year US Treasury up and curves steepening.
The front end of the curve in Europe and US initially fell, which will have a positive impact on total return numbers for credit markets, especially if the widening in credit spreads is contained. “The impact on our Robeco High Yield Bonds fund, which has a large weight in the US, will be muted,” says Bus. “The beta of the fund is currently around 1, which should help to keep the performance in line with that of the benchmark.”
“The fund has an overweight in Europe versus the US. Our positioning in Europe could be beneficial for the fund, given that the uncertainty of Trump’s policy is largely US-related. The positioning within both regions is more tilted towards higher quality, consumer-oriented sectors. There is a risk that ‘rust-belt’ sectors could rally, since Trump is a supporter of capital-intensive industries, such as steel, coal, energy and utilities. More profoundly, Obamacare is at risk. We have an overweight in US hospitals, so this could have a negative impact on the fund.”
Financial Institutions Bonds
The initial impact on Robeco’s Financial Institutions Bonds fund could be slightly negative, predominately due to the fund’s higher beta of 1.3. Spread widening was muted, however, and risk-free rates went down, which could limit the underperformance. “The positioning of the fund is exclusively in European banks and insurance companies, and in the longer term, we expect the deleveraging trend in the sector to continue, and not to be impacted by Trump’s win,” says portfolio manager Jan Willem de Moor.
Credit funds impact muted
The impact of the US elections on Robeco Global Credits and Robeco Euro Credit Bonds is muted, their managers say. The funds’ betas are close to 1, and initial market reactions triggers buyer interest from Asia. Bid-offers are relatively large and spread moves not significant enough to compensate for transaction costs. “The US election outcome does mean that we could see more populist policies across the world,” warns portfolio manager
Victor Verberk. “This will put pressure on yields in the medium term, which could be beneficial for financials relative to corporates. Both funds are overweight financials versus corporates and long Europe versus the US.”
Robeco Emerging Credits fund is conservatively positioned with an underweight beta of 0.91, a stance that was taken mainly on the back of anticipated rate hikes in the US. The fund has an overweight in Mexico which could hurt in the short term, but this should be mitigated by an overall beta of below 1.
The impact on Robeco Global Multi-Factor Credits will be muted. The fund has a beta of around 1, is neutral on interest rate duration and has an underweight in US dollar denominated bonds, which could be beneficial for performance in the short term. The underweight in energy could be somewhat negative, although it remains unclear how Trump’s policy will play out.
Government bonds see mixed reactions
For government bonds, the Trump victory provided mixed reactions. After an initial rally, US government bonds sold off, while German Bund yields remained flat. Emerging local bond yields rose and emerging currencies declined as the Trump victory will likely have negative repercussions on foreign trade.
“We expect a Trump victory to have little short-term implications for monetary policy,” says Kommer van Trigt, head of the Global Fixed Income Macro team. “A Fed hike in December is still the most likely scenario. With Congress and the Presidency in the same hands, it is more likely that some of the fiscal plans that were announced during the campaign will indeed be implemented.”
“These plans include a reduction in personal and corporate tax rates and a substantial increase in infrastructure spending. How substantial the actual stimulus will be remains to be seen, but the direction is towards more fiscal stimulus. This can have an upward effect on yields via an increase in government debt and a reduced need for monetary stimulus.”
“The positive argument for government bonds is that the Trump victory underlines event risk in politics (as did the Brexit vote), and his confrontational style could increase political risk going forward. On balance we view the Trump Presidency as being negative for bonds and we have reduced duration.”
Going into the elections, the Robeco Global Total Return Bond Fund had an outright short position in Italian government bonds. This position has been closed as spreads have widened to the highest levels pre-Brexit. The Robeco Euro Government Bonds fund and Robeco All Strategy Euro Bonds have bought back Italian bonds, reducing the underweight positions in Italian government bonds in these funds.
Emerging debt may be impacted
Emerging currencies were hit by the expectation of hardened international trade relations under a Trump Presidency and emerging local bond yields also rose. “Looking forward, especially countries with a strong trade surplus vis-à-vis the US are likely to be impacted,” says Paul Murray-John, portfolio manager of the Robeco Emerging Debt fund.
“We have reduced exposure to the Mexican peso in the run-up to the elections. The uncertainties around President Trump’s policies will be challenging for several emerging countries. However, the Emerging Debt fund has its overweight bond exposures focused in countries that either have significant value, such as Brazil and Argentina, or are relatively insulated from President Trump’s trade policies.”
Will Self-Driving Cars Be Better for the Environment?
Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?
But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?
The Big Picture
The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.
That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.
One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.
There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.
As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.
Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.
Make and Model of Car
Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.
On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.
The Bottom Line
Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?
Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.
New Zealand to Switch to Fully Renewable Energy by 2035
New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.
New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.
Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.
Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”
The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.
Zero net emissions by 2050
Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.
Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.
She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.
Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”
A worldwide shift to renewable energy
Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.
Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.
Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.
Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.
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