US Fixed Income: How much Fed in response to fiscal stimulus? – Deutsche Bank
|Research Team at Deutsche Bank, suggests that the first order impact of the Trump electoral surprise was a partial normalization of the term premium via a lower ratio of G3 QE asset purchases to G3 net supply.
Key Quotes
“The Trump campaign budget plan, as scored by the CRFB, would add $5.3 trillion to the stock of federal debt over 10y, implying an average monthly increase in net supply of $44 billion. This lowered the QE/net supply percentage from 160% to 120% and implied an upward move in 10y yields of 40 bp relative to the status quo.”
“The latest leg of the selloff has been driven almost in equal parts by a higher term premium and higher Fed expectations. Our model attribution suggests that higher 2sfunds has contributed 17 bp to the sell-off since November 7th, while higher term premium has contributed 18 bp.”
“We see the Fed response to fiscal stimulus as a key risk to the rate outlook. We examine two stylized paths for funds and model their implications for the trajectory of 10y yields. The more dovish path suggests that the selloff has moved into overshoot territory. The more hawkish Fed path results in 10s peaking at 2.60% in H2 2017.”
“Other risks include the forthcoming Italian referendum, French elections, and of course the possibility that the Trump stimulus will be whittled down substantially, and anyway might have less impact on growth than hoped given the tendency of the private sector to save what the public sector spends in so called "Ricardian equivalence".”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.