Why the bond market hasn’t blinked, until now, at Biden’s plan to spend trillions on infrastructure

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With a potential $ 2.3 trillion infrastructure bill looming over Washington, bondholders could be forgiven for fearing another selloff in the Treasury market. But few are panicking the way bond traders had earlier this year, when bond investors ditched government bonds in the run-up to the approval of the $ 1.9 trillion pandemic aid package. dollars in March, as they reassessed their inflation and deficit forecasts.

Analysts say the lack of reaction this time is partly because the spending would be spread over several years, as opposed to the anticipated disbursements in this year’s pandemic aid package. Furthermore, recent haggling among lawmakers shows the lack of clarity on how the infrastructure bill will eventually be financed and obscures the amount of debt that will be needed. Like the $ 1.9 trillion aid package signed in March, Republicans and Democrats are expected to scrap the contents of the legislation even as analysts hope an infrastructure bill will eventually become law. “In some ways, billions will be spent,” said Eric Merlis, director of global markets operations at Citizens Bank, in an interview. See: Wall Street is valuing $ 4 trillion of infrastructure spending. Here are the stocks that could benefit, according to Bank of America. For many debt investors, the question surrounding the infrastructure plan is not how much will be approved, but how Washington will get the funding for the multi-million dollar bill. “What matters to the rate operators is how we are going to pay for it.” Gregory Faranello, AmeriVet Securities head of US rates, told MarketWatch. He noted that much of the emergency spending approved by Congress so far had been financed through the issuance of new debt, but the Biden administration’s interest in financing infrastructure through higher corporate taxes could influence how the Investors solve the longer-term impact on Treasury deficits. Although both sides have called for more spending on infrastructure, the scale of the package and the use of tax increases to fund it may ruin prospects for Republican support. In that case, Democrats would have to go it alone and decide among themselves how to pay for the infrastructure package, said Nancy Vanden Houten, senior economist at Oxford Economics. That still leaves a lot of uncertainty, as it would give centrist Democrats like West Virginia Sen. Joe Manchin significant influence on the bill’s final presentation. In fact, Manchin said he could support an increase in the corporate tax rate to 25% from the current 21%, rather than an increase to 28% proposed by the Biden administration. Read: Biden Says “There Is No Evidence” That Higher Corporate Tax Will Drive Businesses Off As Key Democrats Demand Change. Another issue is that the bill’s ultimate economic benefits are longer in nature. term, as infrastructure funds would grow over time and spread over several years, Vanden Houten said. This could add to the difficulties for analysts and traders trying to estimate the growth and momentum of inflation from the trillions of federal funds already flowing through American banks, businesses and households after Washington deployed an unprecedented level of support. fiscal to see the economy through the devastating COVID. -19 pandemic. Read: Biden Says His $ 2.3 Billion Infrastructure Plan Will Create 19 Million Jobs; most would not require a college degree The uncertain risk of inflationary pressures has put pressure on the bond market this year, sending long-term debt yields to pre-pandemic levels. The yield on the 10-year Treasury note TMUBMUSD10Y, 1.712% stood at around 1.71%, a few basis points from its 14-month high of 1.77%. Bond prices move in the opposite direction to yields. On the other hand, the optimistic economic outlook has given equities a boost. The S&P 500 SPX, + 1.45% and the Dow Jones Industrial Average DJIA, + 1.18% reached new all-time highs on Monday, both rising more than 1%.