Trump’s ‘big, beautiful bill’ has made its way through the House and will now move onto the Senate. The eventual passage of this bill would mark an unprecedented act of fiscal profligacy, and the bond market is pricing accordingly. Soft 20-year auctions in Japan and the US added to bond market nerves this week.
The most effective way to cap the rise in long-dated bond yields, would be to tighten fiscal policy materially, to achieve a more sustainable fiscal footing. To support bonds further, lawmakers would have to enact a plan that seriously deals with the long-term threats to the US fiscal position. Neither is likely to happen anytime soon.
The tax bill front-loads tax cuts, and back-loads savings. This could support equities in the short run. However, juicing the equity market through deficits of 7%+ in perpetuity will eventually falter as a strategy.
Japan is also pushing back its long-held target of achieving a primary budget surplus this fiscal year, and Ishiba’s administration is currently drafting an economic stimulus plan to ease the cost-of-living burden on households.
In the absence of tighter fiscal policies, and the necessary structural investments required to improve the supply side, inflation targets will be breached with more regularity and real yields will have to be higher. The more central bankers keep ‘looking through’ negative supply shocks and excessively loose fiscal policies, the more intense will be the steepening of yield curves and the larger the rise in term premia.
