The Macro Trading Floor Another $5 Trillion of US Deficits in 10 Years: Now What?
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May 16, 2025 Alf and Brent dive into the potential impact of a new Republican bill that could add $5 trillion to U.S. deficits. They discuss whether the market will ignore this looming deficit or if bond vigilantes will finally react. The duo also examines the complexities in bond markets amid low unemployment and emerging market fluctuations. They unpack strategies for navigating investments during uncertain times and highlight the Federal Reserve's cautious approach in responding to economic data.
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US Deficits to Rise Sharply
- The proposed "big beautiful bill" will add about $500 billion to the US primary deficit annually for a decade.
- Markets might face turbulence as persistent high deficits push bond yields higher and caution returns.
High Yields Attract Pension Funds
- Higher yields on US bonds could make long-term corporate and treasury bonds attractive for pension funds.
- Such yields provide strong duration hedging and return prospects securing liabilities for these institutional investors.
Yield Controls Trigger After Spikes
- Yield interventions like excluding treasuries from leverage ratios will only occur after yields spike significantly.
- This means the path to yield stabilization could involve sudden and volatile price jumps before calming down.