Regardless of which side of the aisle is triumphant in November, the U.S. bond market is likely to suffer either way.
A democratic congress is likely to push through a GOP style trillion dollar infrastructure package. A Republican legislature will likely advocate for tax cuts part 2. Both of which spell one word loud and clear: debt. While the Fed garners much of the attention in the financial press, it is the fiscal side of the equation that will also put the pressure on bonds. According to the Congressional Budget Office, the U.S. budget deficit is primed to swell to roughly $1 trillion by fiscal 2019 and past that in subsequent years, and the interest owed by the government is also forecast to triple in the coming decade to nearly a trillion dollars a year.
The games have begun. Today the U.S. Treasury will issue $230 billion of debt in various amounts from bills to bonds. There is a culmination of issues facing the price of debt currently. A strong economy, a hawkish Federal Reserve and worries about the deficit and inflation have all conspired to sour investors on Treasuries. This isn’t Capitol Hill’s first time at this fiscal financial rodeo. Other than the Trump tax cuts, the issues compounding interest growth are not new. Increased spending for Social Security and Medicare as the baby boomer generation retires are already set to boost the public debt burden by $10 trillion over the next decade, CBO estimates show. Nothing new here. While relatively low by historical measures, the CBO already sees 10-year yields at nearly 4 percent by 2020. They’re currently at 3.23 percent. This will not knock the typical American household off its borrowing habits for mortgages, autos, etc. for the time being.
The drunken spending sailors known to you as Presidents Clinton, Bush and Obama had no stomach for cutting spending, which increased the deficit and its interest owed across party lines. After all, it is you and I who pay the piper for these fiscal insanities. One can only imagine the boondoggling that will be built into any trillion dollar infrastructure plan that will be done soon. Contractors will benefit, we the people will get a modicum of what we were promised, and the debt will have increased for our children by another trillion dollars. How wonderful. The Democrats will push for public funding, while Trump is calling for a mix of public and private. It doesn’t really matter. The outcome will be the same. Am I laying the cynicism on thick enough yet?
If the GOP does win both the house and senate, it may feel emboldened to take on a massive infrastructure project, while in tandem declaring the Trump tax cuts, which are to end for individuals in 2025, to be permanent. Thomas Simons, an economist at Jefferies, states “Here’s a certainty: It doesn’t matter who wins, we’re going to be issuing debt forever. There will be a push toward more expansionary fiscal policy. Be ready.” How true.