Ballooning US federal deficits will heighten investors’ concerns about the sustainability of US fiscal policy, pushing them to look for opportunities arising in other areas.
- The bill will increase the federal deficit and push debt to around 135% of GDP by 2035 (Moody’s estimate).
- Markets may demand higher yields on long-term Treasuries to offset uncertainty over the US debt path.
- A weaker US dollar and uncertainty on US fixed income may boost appeal for other regions such as Europe and EM assets.
The US tax bill – known as OBBB, One Big Beautiful Bill –was passed by the House of Representatives on 3 July and landed on the President’s desk on Independence Day. The $3.4 trillion bill extends Trump’s tax cuts from his first term and implements campaign promises such as removing income taxes on tips and enforcing immigration controls. It also includes a $5 trillion rise in the debt ceiling and will be partially funded by cuts to Medicaid and other health programmes. However, most of the bill will be financed through additional debt. This is raising concerns over US debt sustainability and the fiscal deficit trajectory and could result in higher volatility in both bonds and the dollar. While US assets remain core for global investors, demand for diversification* into other regions may persist.
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