With a potential $2.3 trillion infrastructure bill looming over Washington, bondholders might be forgiven for fearing another Treasury market selloff.
But few are panicking in the way bond traders had done earlier this year, when bond investors dumped government bonds during the run-up to the passage of the $1.9 trillion pandemic relief package in March as they reassessed their inflation and deficit forecasts.
Analysts say the lack of reaction this time around is in part because the spending would be spread out over a number of years, unlike the front-loaded outlays in this year’s pandemic relief package. In addition, the recent haggling among lawmakers shows the lack of clarity on how the infrastructure bill will eventually be financed, and obscuring how much debt issuance will be needed.
Like the $1.9 trillion relief package signed in March, Republicans and Democrats are expected to scrap over the contents of the legislation even as analysts expect an infrastructure bill to ultimately become law.
“In some form, trillions are going to get spent,” said Eric Merlis, head of global markets trading at Citizens Bank, in an interview.
For many debt investors, the question around the infrastructure plan is not how much will be passed, but how Washington will come up with the funds for the multitrillion dollar bill.
“What matters to rates traders is how are we going to pay for it?” Gregory Faranello, head of U.S. rates at AmeriVet Securities, told MarketWatch.
He noted much of the emergency spending passed by Congress so far had been financed through new debt issuance, but the Biden administration’s interest in funding infrastructure through higher corporate taxes could influence how investors work out the longer-term impact on the Treasury’s deficits.
Though both parties have issued calls for more infrastructure spending, the scale of the package and the use of tax increases to finance it may scuttle prospects for Republican support.
In that event, Democrats would need to go it alone and work out among themselves how to pay for the infrastructure package, said Nancy Vanden Houten, lead economist at Oxford Economics.
That still leaves plenty of uncertainty as it would hand centrist Democrats like West Virginia Sen. Joe Manchin significant influence in the bill’s final appearance.
Indeed, Manchin said he could support an increase to a corporate tax rate to 25% from the current 21%, instead of an increase to 28% proposed by the Biden administration.
Another issue is that the ultimate economic benefits from the bill are longer-term in nature as the infrastructure funds would increase over time and be spread over several years, said Vanden Houten.
This could add to the difficulties of analysts and traders trying to estimate the growth and inflation boost from the trillions of federal funds already coursing through U.S. banks, businesses and households after Washington deployed an unprecedented level of fiscal support to see the economy through the devastating COVID-19 pandemic.
The uncertain risk of inflationary pressures has put pressure on the bond market this year, sending long-term debt yields toward pre-pandemic levels.
The 10-year Treasury note yield TMUBMUSD10Y,
On the other hand, the rosy economic outlook has given equities a lift. The S&P 500 SPX,