Sunday, March 18, 2018

FOR WHOM AND WHY U.S INTEREST RATES WILL GO UP



Donald Trump tax cut down and massive expenditure plan for infrastructure leads to an significant growth of fiscal deficit for the US economy over the next decade. The things might be good for the short term for the US equity markets to dance on these tunes but the music will soon get into a dumb silence when the aftershocks of this massive announcement come into play. The tax law is estimated to add more than $1 trillion to deficits over the next 10 years.

Congressional Budget Office's (CBO) readings the after the tax bill, we projected that the deficit would reach $983 billion in FY 2019 and $1.05 trillion in FY 2020. Now the CR will increase the deficit further to $1 trillion in 2019 and $1.06 trillion in 2020. In between the Treasury, Borrowing Advisory Committee expects the federal government will need to borrow $955 billion in the fiscal year 2018, which ends on September 30. The story does not end here. The US Congress then delayed three taxes under Obamacare, which would have raised revenue to the tune of $31 billion. Further, there are several times Hurricanes which keeps attacking the US states which is a significant cost to the US economy. According to CBO estimation, sequester relief will lift the discretionary caps by $240 billion over the next two years disaster relief totals $81 billion, and tax extenders are revived through 2018, the deficit would reach $1.12 trillion in 2019 and $1.13 trillion in 2020. It is quite possible that there will be other costs on top of that from larger sequester or disaster relief and/or other policies that are lumped into a budget deal.

How this massive deficits and borrowing plans would be financed? Only through Bonds which will be sold by the US government. Now when these bonds will be sold the buyers will demand more interest rates as other financial products and other countries bonds are more attractive than the US. Hence more interest rates will attract these buyers. Now trade war has already begun and China has reacted well by dumping the US treasuries. China's holdings of U.S. Treasuries fell to 1.1682 trillion U.S. dollars in January, down from 1.1849 trillion dollars in December, reaching the lowest level since July, at the end of 2017, foreign governments owned $4.03 trillion or nearly 29 percent of the $14.47 trillion in Treasury securities outstanding. China and Japan, two major U.S. trading partners, are also the top two foreign holders of Treasuries with combined holdings of $2.25 trillion in December.

Now with trade war, foreign buyers may not be interested to buy these bonds.  The truth as it seems is that the US doesn’t want foreign buyers of its treasuries. The US do not want some other country to control its treasuries and dollar. Then who will buy them? US have reduced the tax on repatriation of profits from overseas countries to back home (US).  The US wants its own people to buy the bonds and hold them.   The reason behind such an action is that the US want complete freedom of its financial products from foreign hands so that if there is another financial crisis its assets are protected at home.

US stocks will be facing hard times as increased borrowing cost followed with increased inflation will eat up the profits within the US, whereas the tax breaks will not be so much benefit to the corporate.  Individuals will be more under-more saving zone rather going ahead for consumption. A decade the US preached borrow and spend and now its teaching saves tax and spend but don’t save.  The recession has taught US people to save now. It’s a behavioral finance getting changed.

US markets will be flooded with bonds and too many bonds will make the segment less attractive. Quality of papers and depth of bailout in case of default needs to be analyzed before investing. The next collapse of the world market might come from Bond and Debt Market segment.


The interesting factor to watch out will be who will be buyers of the Bonds based on the trade war created by Donald Trump. The US cannot fund anymore its own expenses hence borrowing is must and hence higher interest rates are the only way to getting bond buyers attracted. Inflation driven interest rate decision is just a hoax to fool the world. Get ready for some interest rate ride by the US 

0 comments:

  © Blogger template 'Minimalist H' by Ourblogtemplates.com 2008

Back to TOP