$1.9 trillion to pour out of Biden… is it a boom or an interest rate attack?

Market calculations are becoming more complex. This is because the “Mammoth Stimulation Plan” of $1.9 trillion (about 2140 trillion won) promoted by the Joe Biden administration is approaching. The large-scale economic stimulus plan is a’double-edged sword’. It is an urgent prescription that powers the economy as a whole, and it can also be a new cut of money flowing into the stock market. The rise in interest rates is inevitable as there is no choice but to issue deficit government bonds to raise funds. It means that you can have an’interest rate seizure’ at any time.

Biden’s government’s massive stimulus package crossed the 9th ridge after the revised bill was passed in the US Senate on the 6th (local time). It will take effect when President Biden signs the executive order after passing through a re-decision of the House of Representatives on the 9th.

In this plan, which is worth $1.9 trillion in mammoth stimulus, cash payments of $1,400 per adult (approximately 1.58 million won), unemployment benefits by September, an additional $300 per week, vaccine supply, vaccination and testing Contents such as expansion of cost support and support for school normalization were included.

The stimulus package is expected to revitalize the market. It could be an emergency prescription for the job market collapsed by Corona 19. US Treasury Secretary Janet Yellen said, “The stimulus package will lead us to’full employment’ next year.”

There is also a view that it can be the pick of economic growth. “An additional $1,400 in cash payments for millions of Americans will help sustain (economic) growth,” said Stephen Stanley, chief economist at the US securities firm Firephone.

There is also a prospect that a government subsidy feast could be held in the stock market. It is said that 1,400 dollars of cash, which is inserted directly into the people’s pocket, can flow into the stock market and raise the stock price.

Bloomberg cited data from Deutsche Bank last month and reported that “37% of Americans will be investing in stocks with government subsidies.” Deutsche Bank estimates that out of $1.9 trillion in subsidies, $466 billion (about 525 trillion won), 37% of which, or 170 billion dollars (about 192 trillion won), could flow into the stock market.

However, the rise in government bond yields, which the market fears the most, is an inevitable scenario. It is predicted that it will only be a matter of time before large-scale stimulus measures are passed and government bond yields rise. There are also concerns that the uptrend could be steeper.

The plan for financing the stimulus package was not specifically announced, but a significant portion of the $1.9 trillion was financed by the Treasury Department issuing government bonds. When the amount of goods pours into the market, the price of bonds will inevitably fall (increase in bond interest rates). The rise in bond yields is a negative factor for the stock market.

Treasury yields have been on the rise this year. The US 10-year Treasury bond rate, which was less than 1% per year after the outbreak of Corona 19, exceeded 1% at the end of January. On the 5th, it soared to 1.61% of the market and recorded 1.54%. In addition, if the government releases money to boost the economy and the economic recovery accelerates thanks to that, inflationary pressure will increase and interest rates may rise further.

Michael Aaron, senior investment strategist at State Street Global Advisors, said, “Even if the government bond rates and inflation rise together, it’s okay if the market can handle it. “The market is concerned that more will be poured into overheating the US economy and causing inflation.”

The market’s mood for inflation and interest rates can be measured by bidding for US Treasury bonds on the 10th-11th (local time). The U.S. Treasury Department will bid for 10-year Treasury bonds worth $38 billion on the 10th and 30-year Treasury bonds worth $24 billion on the 11th. This is because the market fluctuated as the 10-year Treasury bond rate soared when the 7-year Treasury bond yield was sluggish on the 25th of last month.

Even if government bond yields rise, the Fed is expected to be patient for the time being. It is not expected that cards such as a standard interest rate hike will be taken out immediately. Fed chairman Jerome Powell said on the 4th, “We still have a long way to go to achieve our 2.0% average inflation target with maximum employment.” This is because the rise in interest rates could put cold water on the economic recovery.

The Fed has already declared an average price target (AIT) and has expressed its willingness to tolerate inflation overshooting (rising above the appropriate level) for the time being. If the market’s short-term interest rates fluctuate, it is expected that other measures will be used. The US CNBC recently reported, “The Fed is talking to the market to see if it has introduced an operation twist (selling short-term bonds and buying long-term bonds to flatten bond yields).

Reporter Seungho Lee [email protected]