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President-elect Joe Biden’s fiscal plan, announced in Delaware yesterday, is large at $1.9 trillion and triggered a jump in the UST bond 10-year yield of about 4bps but much of that move has already been reversed. Biden’s fiscal plan is large but the market scepticism is justified, according to eceonomists at MUFG Bank who expect the US dollar to continue the downtrend despite a short-term strength.

Key quotes

“The reality is that while the Democrats now have increased power having won the run-off elections in Georgia last week, that power still has its limits and the details of the fiscal package suggest the overall size will be whittled down before it gets the support required to get through the Senate.”

“The drop in the UST bond 10-year yield indicates expectations of a paring back of this plan, which to us looks understandable. However, Biden has a long history of achieving compromise and there are certainly risks of surprise and this fiscal plan could still end up larger than the markets currently assume.”

“So we doubt 10-year yields will drop notably from here and hence the Fed will continue to play an important role in curtailing the upward pressure on long-term rates.”

“While short-term, the US dollar could extend further, the big picture backdrop for the dollar remains negative. Fed rhetoric and even a watered-down Biden fiscal plan underline the negative backdrop that lies ahead.”