The huge fiscal costs required to limit losses from the COVID-19 epidemic do not frighten bond investors.
Even as the mountain pile of government debt continues, borrowing costs for Washington are projected to fall to their lowest levels in nearly 75 years and the Federal Reserve’s pledge to keep interest rates near zero Is likely to remain this way.
SeeThe CBO says the US budget deficit this year was a record $ 3.3 trillion
“The debt cost to the Treasury will remain extremely low for the next decade. We are entering a new phase for public debt, in general, ”Bastian Drut, a senior strategist at CPR Asset Management, said in an interview.
He said that the same CBO report estimated that the cost to the US federal government would be 1.1% by 2025, representing the lowest level since World War II.
This comes as Washington continues to occupy the federal government’s ability to run an additional deficit amid discussions in Congress for a more significant fiscal stimulus package.
ReadRepublicans say fiscal stimulus prospects in dead end after Senate vote
Some market participants have called on the government to take advantage of indifferent interest rates to loosen fiscal fronts, especially in a Wall Street low-interest world with monetary policy limits.
“It is too expensive for the Treasury to run into very small losses. In my view, governments have to use this opportunity to fight the new threats we face, ”said Drut, citing the cost of insurance against the risk of rapid climate change.
One overlooked thing, Drut said, is that the Fed will transfer proceeds earned from the agency’s mortgage-backed bonds and government paper proceeds of $ 6.35 billion to the US Treasury Department. This will help compensate for the heavy bills borne by Washington.
Investors have also been more than ready to absorb the issued issuance. A large portion of global savings was flowing into America’s highly liquid debt markets, with fewer avenues for earning income.
“There is a lot of demand for safe assets from the US Treasury and from prominent sovereign people,” PGIM Fixed Income Chief Economist Nathan Sheets said in an interview. “It seems more sustainable for higher debt levels.”
Sheets said the depressed levels of 10-year yields were a sign that investors were not experiencing much indigestion as they absorb the federal government’s balloon debt issuance.
The 10-year Treasury note yield BX: TMUBMUSD10Y has hovered around 0.70% for the previous week. When a long journey from its peak of more than 15% has been marked, when a generation ago there was a fear of uncontrolled inflation.
Sheets says the current fiscal backdrop was a far cry from the days of the Clinton administration during the ascent of bond vigilantes, market participants who would punish any perceived fiscal negligence and higher interest rates to compensate against the potential risk of inflation. Will demand
“There is no indication that we are having trouble approving the auction at this point,” said Marvin Loh, senior global strategist at Marketwatch.
Yet if the US is far beyond the threshold where the level of public debt begins to pose a risk, Sheets suggested that due diligence would be better.
“With every percentage increase in public debt to GDP, there is a small risk that the market pinches on it,” he said.
The high interest rate can complicate the task of the Treasury Department to finance large budget deficits as market compliance will be necessary to roll over each coming maturity each year.
But investors say the Fed has made it clear that it will remain organized for a long time.
And even in the distant future when the Fed chooses to normalize monetary policy, interest rates will remain as low as the natural long-term interest rate or the neutral rate, much lower than before as the US old and slowing productivity growth is.
This will limit the amount of room that the central bank can strengthen monetary policy when the economy recovers from the recession caused by the epidemic.
In other markets, the S&P 500 SPX,
And the Dow Jones Industrial Average DJIA,
There were slightly higher trades on Friday, but US equity benchmarks were still on the low end pace this week.
Read: US Treasury Record Auction Auctions Can Reduce Market Hunger Without More Support From The Federal Reserve