Bond Investors Adopt 72-Hour Rule to Avoid Trump Policy Reversals

In response to the frequent policy announcements made by Donald Trump through social media, bond market investors have developed a strategic guideline known as the "72-hour trading rule." This rule advises investors to wait 72 hours after Trump makes a policy announcement before taking any trading actions. The rationale behind this rule is to avoid potential losses that could arise from sudden policy reversals.

Investors have learned from past experiences where immediate reactions to Trump's tweets led to significant financial losses. For instance, when Trump threatened to impose a 200% tariff on European wine, several investment banks quickly engaged in off-market transactions, betting on the decline in bond prices of related companies. However, when the final tariff list was released without including wine, bond prices quickly rebounded, catching those who had acted prematurely off guard. Similar incidents, such as the threat to impose a 50% tariff on Canadian steel, which was later abandoned, have made bond investors wary of Trump's tweets.

The "72-hour trading rule" has emerged as a response to these frequent policy reversals. Market participants, including banks and investors, have adopted this rule to avoid the risks associated with sudden policy changes. According to three senior bond market experts, after Trump releases any significant policy information, they refrain from taking immediate action and wait for three days. If Trump's stance remains unchanged or is not withdrawn within this period, the market tends to believe that the policy is likely to be implemented, and trading decisions are made accordingly.

Catherine Braganza, a fund manager at Insight Investment, noted, "We no longer act immediately because there is always a risk of policy reversal. Investors are gradually becoming immune to such information." This cautious approach reflects the market's adaptation to the volatile political environment, prioritizing stability and long-term gains over immediate reactions to policy announcements.

In addition to the "72-hour trading rule," market participants are also exploring proactive measures to mitigate risks. European bankers, for example, have discovered that leveraging time zone differences can provide valuable time. They accelerate the bond issuance process to complete pricing and secure investors before Trump's tweets, which often occur during U.S. market hours, can cause potential disruptions. Matteo Benedetto, co-head of EMEA investment-grade syndicate at morgan stanley, acknowledged, "Everyone is highly alert to the 24-hour headline risk, especially during U.S. market hours. Completing transactions before the New York market opens is absolutely better." This urgency has led to changes in operational practices, with companies like Eircom Finance DAC completing junk bond issuance, roadshows, and pricing in a single day, and even blue-chip giants like LVMH finalizing the terms of their 19 billion euro bond issuance before the European market closes to avoid U.S. market risks.

The persistent policy uncertainty, coupled with economists' estimates that the probability of a Trump-induced recession in the coming year is 45%, has prompted credit investors to reassess risks. Companies like general motors, Mercedes-Benz, mcdonald's, and procter & gamble have either withdrawn their performance guidance or reported declining sales, further reinforcing the market's risk-averse sentiment. In this context, investors are increasingly favoring non-cyclical industries that are less affected by trade frictions and have stable demand. Braganza highlighted that her company is focusing on sectors such as canned tomato production and mobile service providers, noting that people will not stop cooking or using their phones due to tariffs. However, some investors advocate for a return to fundamental analysis, focusing on the core value of enterprises, although this is challenging given the interwoven global supply chains. Fabiana Fedeli of M&G Investments suggested that dealing with the risks posed by Trump's tweets is more of an art than a science.