I’ve been going on and on about the rising deficits in the years to come. That in mind, I present the charts below indicating where we are and where the CBO thinks we’re going, and that’s before scoring any of the proposed tax changes at hand.
There’s going to be more Treasury issuance, a lot more. Certainly, in the months while the tax reform debate goes on, treasurys will be on alert. And if we could test 2.65 percent in 10s on Trump’s election hopes, revival of this particular element can readily take us back there. Something will probably get done here.
That something is likely to be the corporate tax relief, which most politicians agree upon and on the surface offers the best chance to spur investment with productivity as a result. While stocks have performed admirably and discounted a lot, they can hold out for this and continue to do okay despite my misgivings about growth and valuations; P/Es will look better with lower taxes.
(Debt held by the public as a percentage of the GDP is expected to rise to 91 percent by 2027.)
The Financial Times had a good piece on this, “A Trump Tax Would Reshape US Stock Markets.” The writer notes that the 50 S&P companies with the highest effective tax rates have underperformed since December, but seems to be responding. Meanwhile, tech companies pay a notoriously low rate—23 percent—and so have little room to benefit from lower taxes (though they do have a lot of cash overseas that could be repatriated).
As a side note, I suspect that if corporate tax rates fall, the incentive to issue debt for buybacks will be eroded. That could mean ongoing tight spreads, for a while longer anyway, due to less issuance and the upwards yield edge to treasurys. I don’t think the latter lasts, but for a few months here we may have a chance to seek out a dip-buying opportunity.
David Ader is Chief Macro Strategist for Informa Financial Intelligence.
