Our Global Head of Fixed Income and Public Policy Research,
Michael Zezas, and Global Head of Macro Strategy, Matt Hornbach,
discuss how the Trump administration’s fiscal policies could
impact Treasuries markets.
----- Transcript -----
Michael Zezas: Welcome to Thoughts on the
Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed
Income and Public Policy Research.
Matthew Hornbach: And I'm Matthew Hornbach,
Global Head of Macro Strategy.
Michael Zezas: Today, we'll talk about U.S.
fiscal policy expectations under the new Trump administration and
the path for U.S. Treasury yields.
It's Thursday, January 30th at 10am in New York.
Fiscal policy is one of the four key channels that have a major
impact on markets. And I want to get into the outlook for the
broader path for fiscal policy under the new administration. But
Matt, let's start with your initial take on this week's FOMC
meeting.
Matthew Hornbach: So, investors came into the
FOMC meeting this week with a view that they were going to hear a
message from Chair Powell that sounded very similar to the
message they heard from him in December. And I think that was
largely the outcome. In other words, investors got what they
expected out of this FOMC meeting. What did it say about the
chance the Fed would lower interest rates again as soon as the
March FOMC meeting? I think in that respect investors walked away
with the message that the Fed’s baseline view for the path of
monetary policy probably did not include a reduction of the
policy rate at the March FOMC meeting. But that there was a lot
of data to take on board between now and that meeting. And, of
course, the Fed as ever remains data dependent.
All of that said, the year ahead for markets will rely on more
than just Fed policy. Fiscal policy may feature just as
prominently. But during the first week of Trump's presidency, we
didn't get much signaling around the president's fiscal policy
intentions. There are plenty of key issues to discuss as we
anticipate more details from the new administration.
So, Mike, to set the scene here. What is the government's budget
baseline at the start of Trump's second term? And what are the
president's priorities in terms of fiscal policies?
Michael Zezas: You know, I think the real
big variable here is the set of tax cuts that expire at the end
of 2025. These were tax cuts originally passed in President
Trump's first term. And if they're allowed to expire, then the
budget baseline would show that the deficit would be about $100
billion smaller next year.
If instead the tax cuts are extended and then President Trump
were able to get a couple more items on top of that – say, for
example, lifting the cap on state and local tax deduction and
creating a domestic manufacturing tax credit; two things that we
think are well within the consensus of Republicans, even with
their slim majority – then the deficit impact swings from a
contraction to something like a couple hundred billion dollars of
deficit expansion next year. So, there's meaningful variance
there.
And Matt, we've got 10-year Treasury yields hovering near highs
that we haven't seen since before the global financial crisis
around 10 years ago. And yields are up around a full percentage
point since September. So, what's going on here and to what
extent is the debate on the deficit influential?
Matthew Hornbach: Well, I think we have to
consider a couple of factors. The deficit certainly being one of
them, but people have been discussing deficits for a long time
now. It's certainly news to no one that the deficit has grown
quite substantially over the past several years. And most
investors expect that the deficit will continue to grow. So,
concerns around the deficit are definitely a factor and in
particular how those deficits create more government bonds
supply. The U.S. Treasury, of course, is in charge of determining
exactly how much government bond supply ends up hitting the
marketplace.
But it's important to note that the incoming U.S. Treasury
secretary has been on the record as suggesting that lower
deficits relative to the size of the economy are desired. Taking
the deficit to GDP ratio from its current 7 per cent to 3 per
cent over the next four years is desirable, according to the
incoming Treasury secretary. So, I think it is far from
conclusive that deficits are only heading in one direction. They
may very well stabilize, and investors will eventually need to
come to terms with that possibility.
The other factor I think that's going on in the Treasury market
today relates to the calendar. Effectively we have just gone
through the end of the year. It's typically a time when investors
pull back from active investment, but not every investor pulls
back from actively investing in the market. And in particular,
there is a consortium of investors that trade with more of a
momentum bias that saw yields moving higher and invested in that
direction; that, of course, exacerbated the move.
And of course, this was all occurring ahead of a very important
event, which was the inauguration of President Trump. There was a
lot of concern amongst investors about exactly what the executive
orders would entail for key issues like trade policy. And so
there was, I think, a buyer's strike in the government bond
market really until we got past the inauguration.
So, Mike, with that background, can you help investors understand
the process by which legislation and its deficit impact will be
decided? Are there signposts to pay attention to? Perhaps people
and processes to watch?
Michael Zezas: Yeah, so the starting point
here is Republicans have very slim majorities in the House of
Representatives and the Senate. And extending these tax cuts in
the way Republicans want to do it probably means they won't get
enough Democratic votes to cross the aisle in the Senate to avoid
a filibuster.
So, you have to use this process called budget reconciliation to
pass things with a simple majority. That's important because the
first step here is determining how much of an expected deficit
expansion that Republicans are willing to accept. So,
procedurally then, what you can expect from here, is the House of
Representatives take the first step – probably by the end of May.
And then the Senate will decide what level of deficit expansion
they're comfortable with – which then means really in the fall
we'll find out what tax provisions are in, which ones are out,
and then ultimately what the budget impact would be in 2026.
But because of that, it means that between here and the fall,
many different fiscal outcomes will seem very likely, even if
ultimately our base case, which is an extension of the TCJA with
a couple of extra provisions, is what actually comes true.
And given that, Matt, would you say that this type of confusion
in the near term might also translate into some variance in
Treasury yields along the way to ultimately what you think the
end point for the year is, which is lower yields from here?
Matthew Hornbach: Absolutely. There's such
a focus amongst investors on the fiscal policy outlook that any
volatility in the negotiation process will almost certainly show
up in Treasury yields over time.
Michael Zezas: Got it.
Matthew Hornbach: On that note, Mike, one more
question, if I may. Could you walk me through the important
upcoming dates for Congress that could shed light on the
willingness or ability to expand the deficit further?
Michael Zezas: Yeah, so I'd pay attention
to this March 14th deadline for extending stopgap appropriations
because there will likely be a lot of chatter amongst
Congressional Republicans about fiscal expectations. And it's the
type of thing that could feed into some of the volatility and
perception that you talked about, which might move markets in the
meantime.
I still think most of the signal we have to wait for here is
around the reconciliation process, around what the Senate might
say over the summer. And then probably most importantly, the
negotiation in the fall about ultimately what taxes will be
passed, what that deficit impact will be. And then there's this
other variable around tariffs, which can also create an
offsetting impact on any deficit expansion.
So still a lot to play for despite that near term deadline, which
might give us a little bit of information and might influence
markets on a near term basis.
Matthew Hornbach: Great. Well Mike, thanks
for taking the time to talk.
Michael Zezas: Matt, great speaking with
you. And as a reminder, if you enjoy Thoughts on the Market,
please take a moment to rate and review us wherever you listen
and share Thoughts on the Market with a friend or colleague
today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.