What's going on?
The Trump administration spelled out its plans to make American public infrastructure great again on Monday, but a big increase in government spending amid falls in revenue due to tax cuts spells trouble for the bond market… (tweet this)
What does this mean?
The White House says its plans would spur as much as $1.5 trillion of investment in America’s aging roads, airports and other public works although, as always with politics, it’s not quite that straightforward.
In any case, the hope is that the US economy will benefit from the jobs and business activity created by the infrastructure spending – as well as from the enhanced infrastructure itself, which can facilitate more efficient trade and generally encourage more commerce (e.g. goods arrive more quickly).
Why should I care?
The bigger picture: There’s controversy regarding how the US government can afford the program.
The Trump administration says it might cut funding from other federal programs to come up with the $200 billion it wants to spend on infrastructure, but if it can’t, then the necessary conclusion is that the government will have to borrow more (i.e. sell more government bonds) to pay for it.
For markets: This could contribute to further pressure in bond markets.
The US economy is already growing at or close to its fastest rate since the 2008 financial crisis. Lots of new infrastructure spending would likely help boost it further – but it would also put upward pressure on inflation. Bonds tend to be worth less when the economy is growing quickly (since a relatively low fixed return becomes less attractive than, say, stocks). Rising inflation, meanwhile, means the interest that bonds pay is worth less – which also depresses bond prices. Finally, if the US government has to sell many more bonds to finance higher spending, then the supply of bonds will increase, thus putting further downward pressure on bond prices (due to supply and demand).