The tax and spend plans of the two main presidential candidates in the coming US elections are causi...
The tax and spend plans of the two main presidential candidates in the coming US elections are causing mild disquiet to some fund managers.
Both George Bush and Al Gore are committed to reducing taxation and increasing government spending, with Bush showing greater emphasis on tax cuts and Gore on spending.
Ken Robertson, overseas fixed income manager at Abbey National, says: "The US economy does not need additional fiscal impetus, the bond market could be unnerved and it would spell either a fresh inflation impulse or the Fed would have to be more aggressive with monetary policy.
"Bush's tax proposals carry a greater threat to the bond market if looked at in isolation. They seem much higher and more comprehensive though the proposals are not yet fully articulated.
"Bond investors will be taking an early view. Given the current state of the economy with overheating pressures and very strong consumer confidence the bond market is beginning to ask whether tax cuts are desirable."
Robertson says the bond market is relatively well insulated from the fiscal threat of both candidates and believes whatever threats there are remain on the margins.
The future direction of the Treasury market could be uncertain because of the possibility of government gridlock between President and Senate or Congress which will prevent any early policy implementation.
"Longer term, Gore's fiscal plans will be a negative for the long end of the bonds market but that is a 2002 story," says Dave Hooker, fund manager at Royal & Sun Alliance. Hooker adds Bush is placed to cut taxes and is seen as more willing to eliminate the fiscal surplus. This will remove an important support to the bond market as issuance will have to increase and the Fed may act on interest rates.
He says: "In the long term, Bush's plans should improve the supply side of the US economy and should lead to a higher trend rate of growth than would be seen under Gore.
"This should not be seen as a negative for the bond market in the longer term as it will improve the growth/inflation trade-off in the US economy.
"The market wants Gore to win because he says he'll use part of the surplus to maintain the solvency of the social security fund and there will be less debt issuance. In the long term the market should be more comfortable with Bush's proposals. The market is looking at the end of its nose when it should be looking at whose policies are better for growth and inflation in the future."
Joe McKenna, head of fixed interests at Britannic agrees that whatever the outcome of the presidential election, it will not have a big impact on bond yields or interest rates in the short term.
He believes the fiscal surplus will be sustained for the next three to five years. The fundamental picture for bond yields is quite positive due to the lack of supply and in the medium term Britannic is bullish on US Treasury bond yields.
Royal & SunAlliance Investments believes US interest rates have peaked and that sustainable growth of the US economy is in excess of 3.5% over the long term. The group is positive on US bonds, especially short dated maturities.
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