If the Republicans are going to sweep in November (and even if they don’t), we are likely in for a long regime of fiscal expansion (i.e., sustained large deficits), at a time when the Fed and other central banks are no longer swooping in to buy debt. That that could well change if we are headed for a regime of fiscal dominance (in which the central bank is subordinated to fiscal policy), but so far that’s not the path we are on. For now, the dynamic of fiscal expansion without monetary easing suggests higher real rates and a positive term premium for long bonds. Bonds are great for coupon clipping, but perhaps not much more.
Future Debt Dynamics