Risk off, Vaccine delay and concept of PAYGO

The US equity markets were down yesterday. The Asian stocks have opened today in almost flat territory. Although moves are not so pronounced that they merit the concoction of a causal reasoning, we will still provide some. The slightly risk off tone is because the US stimulus package in both its size and in its delivery mechanism has not yet been finalized. The other reason for the gloom could be the bad news on the vaccine front where two major players announced some complications during their trials. This basically elongates the waiting period for the silver bullet.

In the above reasonings the stimulus one is a puzzling one. Now with both the Republicans and Democrats convinced that the US needs the stimulus, it is not a question of “if” but only the question of “when” the stimulus would come. The Senate Republicans are pressing for a standalone bill which extends the payroll protection program. House speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin also continue to negotiate. The numbers range from $ 1.8 trillion to $ 3 trillion depending on which report one is reading. The moot point is that discussion is not on how the deficit figure will be funded but primarily on who are the most eligible recipients and how they can be targeted most effectively.

Therein lies the interesting query which the readers would do well to ponder. In normal times any social security proposal in the US which looked to increase the public spending had to be matched with a proposal of funding side by side. The rule which was introduced a few years back is called the “pay as you go” or simple “PAYGO”, and  was put in place to restrain the law makers from adding to federal deficits with their fancy social spending proposals. The funding for a new program can only happen if you get more in taxes or shift funding from some other program. In the current scenario obviously no one is talking about tax increases to the tune of $ 3 trillion. It will add directly to deficit. But wait a minute - the US yields have hardly moved. Something is queasy somewhere.

Let us give one other example which is often quoted by Nobel laureate Joseph Stiglitz in his 2015 book “The Euro”. Post the 2008 crisis the Greek economy suffered a severe downturn. Jobs disappeared and tax revenues fell. The Greek government had to borrow to support the economy. The yields on the Greek bonds went through the roof and multiple obituaries were written about the Greek debt. We will continue this discussion on why one sovereign teetered on a default whereas another can continue to borrow with gay abandon in a later note.

Domestically, as the city of Mumbai experiences an orange alert, the trading volumes in both the currency and the bond segments are low. The benchmark 10 year bond trades around 5.90 level. With the 20 Cr INR OMO due tomorrow bond yields are ably supported for some time now through ample liquidity. The rupee opened around 73.39 levels in line with slight risk off mood and US dollar strength.