Limited Upside To Yields – Until Funding Competition Resumes
(3 min read)
Despite the extraordinary US budget deficit, a very dovish Fed and depressed private investment suggest the Treasury could term out some of its recent issuance with only a limited impact on yields. But, once competition for funding resumes, upside risks to yields could be substantial, especially if accelerating inflation limits the scope for Fed purchases.
The Extraordinary US Budget Deficit
Based on CBO estimates of the COVID-19 relief bills’ deficit impact, as well as on my own estimates of the impact of the pandemic on automatic stabilizers and of the forthcoming relief bill, the FY2020 budget deficit could reach about $4tn or 20% of GDP (Chart 1).
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