Market Shock Due to U.S. Fiscal Worries, Not Fed: Evercore ISI
(Bloomberg) -- The jump up in bond yields that tripped up stocks this month ultimately came from concerns over the U.S. fiscal outlook, rather than a realization that the Federal Reserve’s monetary tightening would restrict liquidity, according to Evercore ISI analysis.
"The shock is mostly U.S. fiscal overkill, not quantitative tightening," Krishna Guha and Ernie Tedeschi, strategists at Evercore ISI in Washington, wrote in a note Monday. "The abrupt rise in yields since the start of the year that has shaken global markets is largely comprised of a move higher in the term premium on bonds," in turn led by fiscal worries, they wrote.
Tax cuts and higher spending, in wake of last week’s budget deal to boost spending caps, are likely to add $4 trillion to public debt holdings over the coming decade if current policies are made permanent, according to Evercore ISI calculations. That’s more than double the estimated cumulative effect of Fed balance-sheet contraction, they wrote.
"Over the next couple of years, the flow effects from the changes in fiscal policy are roughly as large as those" from the Fed rolling off its debt holdings, Guha and Tedeschi wrote. "The numbers would be still larger if the administration were to secure support for its infrastructure plan."
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