U.S. Fiscal Spending Expected to Rise Following Elections
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
US presidential and congressional election-related uncertainties are running high. What’s certain, however, is that: 1) the US economy needs additional stimulus; and 2) the US government has sufficient cash. US TB yields are to rise moderately towards end month in anticipation of greater government spending.
Uncertainties are high, but key to be fiscal expansion
October’s major topics include the US presidential and congressional elections (Nov 3). Regardless of the various possible outcomes, it is true that: 1) the US economy needs additional financial support; and 2) the US Treasury’s general account balance is at a record high of US$1.7tn. We expect to see a boost in fiscal spending following the elections. Of note, after the 2016 presidential election, 94% of the Treasury’s general account, which had accumulated to an at that time record high of US$420bn, was exhausted within four months, plunging to US$23.4bn. Market focus is to move from election uncertainties to fiscal expansion expectations. TB yields should rise modestly towards yearend.
Eurozone budget expansions vs risk of UK-EU FTA failure
Major eurozone countries have submitted fiscally aggressive budgets, which are to be reviewed by the European Commission up until December. Although Covid-19 has been accelerating, it is unlikely another national lockdown will be imposed. Rather, the major risk is the possibility of FTA negotiations between UK and EU breaking down during October. The conference call between UK’s prime minister and EC president was not able to create a breakthrough. Despite aggressive spending efforts by European countries, Brexit worries should keep a lid on European sovereign yields for now.
KTB market to remain in policy vacuum state
Unlike major countries, the KTB market will likely be in a policy vacuum state through yearend. At the October Monetary Policy Committee meeting, BOK will likely unanimously freeze the key rate and not mention additional KTB purchases. On market’s interest over dip-buying, we expect higher fiscal momentum from US and Europe by yearend. Accordingly, there should be a chance to buy at a higher level of yield at year-end or early-2020. We continue to recommend strategically investing in short-term KTBs.