New US fiscal package does not lead to rise in yields on US Treasuries

Policymakers in the United States have agreed on a $900 billion fiscal package. Financing requirements will therefore remain high in the coming year. The aid measure will undoubtedly be financed largely by new debt. This will inevitably be accompanied by an increase in US government bond issuance. The more government bonds are issued, the greater the risk of rising yields for US government bonds. We believe this risk to be limited for the United States though. There are several reasons for this expectation. On the one hand, the inflation rate remains at a low level for the coming year. On the other, many global investors consider US government bonds to be extremely safe and liquid, so they are likely to invest accordingly. Strong demand for U.S. government securities, especially in these uncertain times in the wake of corona, should help prevent a sharp rise in yields. The main reason for persistently low yields in the United States though is the Fed's bond purchases. The question as to who is going to finance the enormous budget deficit and the associated huge emission needs of the United States can be answered, at least as regards the next one or two years. Given the fragile economic situation, the Fed should prevent US yields from rising due to the high budget deficit. There are good reasons for this: Higher yields would weigh too heavily on economic performance. By holding the federal funds rate low for a long time and the purchase of securities, the Fed has extremely effective instruments to limit a possible rise in yields. Due to the sharply rising budget deficit, yields could rise over the next few years, but not to the extent that the soaring US debt would lead one to fear.

-- Birgit Henseler


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