Understanding the One Big Beautiful Bill
The One Big Beautiful Bill
James Carville, former US president Clinton’s chief strategist, famously said: “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.” Including the current US administration, it seems.
The shock waves sent across the global economy and financial markets in the wake of the announcement of so-called “retaliatory tariffs” by the new US administration at the time of the self-styled “Liberation Day” on the 2nd of April, forced a pause in the application of increased trade tariffs until July.
The reason being that not only equity markets were selling off worldwide, but particularly because US government debt securities were dumped en masse by both institutional, including foreign central banks, and private investors, causing their yield to rise sharply and their price to fall at a rapid and worrying pace.
The spike in yields, causing a steep surge in the cost of US government borrowing, signaled a lack of confidence in the announced economic strategy based on the imposition of high international trade tariffs, as these were perceived to be inflationary, by raising the cost of imports for both households and companies buying production inputs abroad, and detrimental to global economic growth.
The US administration got the message and a pause in the application of stiff tariff measures ensued.
What's In the One Big Beautiful Bill
Narrowly passed by the US House of Representative with a 215-214 vote on 22nd of May, the One Big Beautiful Bill Act extends the tax cuts originally introduced in 2017 as well as, inter alia, allocating increased spending to defence and border security.
Albeit the Bill also includes some spending cuts, its fiscal impact is forecast to be substantial, with the US Congressional Budget Office estimating the approved fiscal measures would add approximately $3.8 trillion to the national debt over the next decade.
What is the Expected Impact of the One Big Beautiful Bill
Will the expected wide budget deficit cause the bond vigilantes, i.e. investors who sell government bonds in reaction to policies they view as irresponsible from the point of view of financial sustainability or as highly inflationary, to spring into action once again and force a political U-turn?
No sign of that happening so far.
In fact, the recent movements in the US bond market have been positive, with yields on US government debt securities falling somewhat and prices rising, relieving the pressure on US government finances and pleasing investors holding US Treasuries.
This is after the credit rating agency Moody’s downgraded US government debt on May 16th to Aa1, its second highest rating, after similar assessments by other credit rating agencies such as Fitch and S&P in the past.
The prospect of the US Federal Reserve (the “FED”) cutting interest rates a couple of times in the second part of the year might also have played a role in releasing some pressure in the bond market.
At the same time, recent surveys are showing increased optimism on the part of US households, feeling more confident about the state of their personal finances and the prospect for the US economy overall, after the US administration has considerably eased its more extreme tariff threats.
It is not farfetched to expect the expansionary fiscal stimulus of the “One Big Beautiful Bill” to be a catalyst for the US equity market to rise at least over the short term, thanks to tax cuts and increased spending stimulating the growth of the US economy. This barring any unexpected “coup de theatre” by President Trump, of course, particularly in the international trade arena, which might affect investors’ perceptions, and unless bond vigilantes negatively reassess the prospect for the long-term sustainability of US government finances.
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Disclaimer
Any research is for information purposes only and does not constitute financial advice. The value of investments and any income from them may go down as well as up, so you may get back less than you invested.
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