(September 7 – 10:00 ET) – CIBC chief economist Jeff Rubin says that the outcome of the U.S. election will be critical to the U.S. bond market.
Rubin argues that neither political party necessarily favours the market. “All the same, the outcome may end up being one of the most decisive for the bond market.” Rubin says that expectations of a debt-free future has bent the Treasuries curve backwards, as it does in anticipation of a recession. Projections by the Congressional Budget Office show that all of Washington’s US$3.4 trillion debt will be eliminated within a decade.
However, he suggests that U.S. budgetary surpluses may disappear if one party grabs both the presidency and Congress. Rubin argues that existing surpluses have only been created by inertia in Washington, “mounting surpluses have effectively become the default option of a protracted budgetary stalemate.” If one party gets a free ride to implement its plans the surplus would likely disappear.
Rubin points out that if the Republicans sweep both the White House and the Congress, planned personal income tax cuts would cut US$80 billion from the expected surplus over the next two years. The Republican promise to return one-sixth of social security payroll taxes to private savings would knock it down even further.
CIBC estimates that over the next 10 years federal debt reduction would be less than half of current CBO projections. “After its first four budgets, the Bush plan would pare what is currently projected to grow to a US$400 billion 2005 surplus back to something closer to US$160 billion, leaving the Treasuries market with a whole lot more bonds to chew on than it yet suspects.”
-IE Staff