What Light Through Yonder Window Breaks?

The Week Ahead

February 20, 2018

Bond investors now seem in the throes of a true bear market, but looking way over yonder, beyond 2019, there could be some light shining through. That reflects a potent economic breaking force that could hit the US economy beyond this decade, in addition to the slowing that will be induced by our expectation for 150 bps of Fed rate hikes in 2018/19.

That drag could come from a significant fiscal contraction. Congress recently approved spending levels well above previous caps. CBO estimates for the resulting outlays show a lift of $161 bn in fiscal 2019, but that shrinks to only an additional $58 bn for fiscal 2020 and almost nothing beyond that.