Fed cuts may ease bond jitters from rising US deficit: StanChart strategist

Even as concerns over the United States’ fiscal deficit grow, potential rate cuts from the Federal Reserve may help cushion the impact on bond markets and support equities, said Foo Ken Yap, Senior Investment Strategist at Standard Chartered Bank.“Yields have been climbing,” Yap said, noting that the shift in market expectations has been significant over the past month. “The market was looking at more than three rate cuts by the end of the year, and now… a lot of things have changed.”

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Standard Chartered expects the yield on the US 10-year bond to fall to 4-4.25% over a 12-month horizon from around 4.59% now, driven by slowing growth and eventual Fed action. “We do expect rate cuts to come in later on to support growth as it slows down,” Yap said.While the fiscal deficit remains a risk, with ongoing debates in the US Congress about spending and tax proposals, he added, “We do believe [Donald Trump] is sensitive to what the bond market tells him… so they will be able to come to some kind of agreement.”
Ratings agency Moody’s recently warned that the proposed extension of the 2017 Trump-era tax cuts, a current legislative priority for the Republican-led Congress would add an estimated $4 trillion to the federal primary deficit over the next decade. The US currently has over $36 trillion in debt.Also Read: Here’s what Bajaj Finserv AMC is buying now

Yap is constructive on the US equity market over the next 12 months, and hopes the Fed will eventually step in to support economic growth, leading to a decline in yields.

“US exceptionalism… took a pause, but we don’t see that going away. Growth is still there. AI is still there,” he said, pointing to strong corporate investment and resilient earnings expectations.

He also reiterated a positive long-term view on gold, calling it a useful hedge amid inflation and recession risks. “We have a 12-month target of $3,500 on gold,” Yap said.

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