Biden infrastructure package, bond market dynamics and spreads

Biden is expected to explain the details of the new infrastructure and aid plan in his speech that will take place tomorrow.

Biden is expected to explain the details of the new infrastructure and aid plan in his speech that will take place tomorrow. According to the plans; The White House's new infrastructure spending program will be massive - $ 3 trillion - but funding will come in part from tax increases. Higher corporate tax rates for companies, an increase in the tax on capital market earnings, and an increase of the tax on income over USD 400K to 39.6% are also the main lines of the additional tax plan.

 

Although its visible name is the infrastructure plan, it will spread to areas such as infrastructure improvement, employment supports, innovation and technological progress, climate change, transition to green economy and health within the new spending plan that Biden is considering to implement. Expectations for higher debt issuance triggered the bond sales as companies would pay more corporate income tax. Considering the weak demand and the selling tendency in the bonds recently, it might be normal. This situation may also be the subject of the sale of stocks, so it will be necessary to look at the reflection of the effect of increasing bond interest on the stock market side. The US yield curve is steeping, the 2-year to 10-year difference is the highest since 2015. 10-year bond yield increased to 1.75%. As Biden prepares to introduce its spending plan, US returns are rising, and the USD is rising against the EUR of Europe, mostly devastated by the virus.

 

The slowness of vaccination and high Covid cases are seen as the main problems of Europe. While vaccination in the USA is approaching 50 percent, it has just reached 30% in the UK and 15% in Europe. As can be seen, other regions are closer to herd immunity in terms of vaccination. In Germany, the Merkel administration wants to impose a strict 5-day quarantine after Easter, but local governments and the party are against it. Variant viruses are also a nuisance across the continent. There are currently UK, Brazil and South African variants of the virus. Experts also say that the current status of the virus is not related to the original Wuhan version. A mutation that exceeds the strength of existing vaccines will make it difficult for the EU economy to get out of the crisis.

 

The EU's response to the crisis was to increase the pace of asset purchases in monetary policy. But, European Central Bank's bond purchases did not change compared to last week. The ECB purchased $ 2.3 trillion in public sector bonds on Monday, while buying corporate bonds worth $ 266.5 billion. Since the Fed does not have such an approach, interest rates increase rapidly there and the US - German interest spread is also opened. This is against the majors, in favor of the USD.

 

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