FICC Focus Fiscal Policy vs. the Bond Market - Who Breaks?: Macro Matters
May 22, 2025
Mike Medeiros, a macro strategist at Wellington Management, dives into the intricate relationship between fiscal policy and the bond market. He reveals how the bond market acts as a disciplinarian for policymakers. The discussion touches on the recent downgrade of the U.S. credit rating and its ripple effects on bond auctions. Medeiros also examines the tug-of-war between fiscal and monetary strategies, as well as the unique economic challenges facing Canada compared to the U.S. A captivating analysis of how these forces shape global yield curves unfolds!
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Fiscal Policy Raises Term Premium
- Expansionary fiscal policy and higher debt levels increase term premium in the bond market.
- This fiscal stimulus combined with supply shocks leads to sustained inflationary pressure.
Fiscal Stimulus and Growth Risks
- The current fiscal stimulus likely causes a short-term growth boost of about 0.5% GDP.
- However, high debt levels increase risk of tighter financial conditions, potentially crowding out growth.
Term Premium Risks and Fiscal Reform
- Risks to term premium include loose Fed policy, negative supply shocks, and expanding fiscal deficits.
- Pressure on term premium will persist without fiscal reform and may threaten Fed independence.