The US budget that has sneaked through Upper House and has now been sent down to the Lower House. It is likely to be passed. The President has described the bill as both Big and Beautiful. It is definitely big. But beauty is in the eyes of the beholder.
It is not for any of us outside of the US to either criticise or praise the budget. The American people are the ones that have put the GOP in the driving seat. So, they are the ones that will have to live with their decision.
But we as outside observers can and should consider the consequences of the bill. There will be consequences. Importantly, the budget is unfunded, which means that the US Treasury will need to borrow to finance the budget deficit. That could raise the national debt by US$3.2 trillion over the next decade.
The question is who will fund the debt? For now, US Treasuries have been relatively calm. The yield on the 10-year Treasury has been steady at around 4.2%. But can the calmness prevail when large swathes of Treasuries eventually hit the market?
Will there be sufficient appetite for more Treasuries? Probably. But lenders are likely to want to be adequately compensated with higher interest rates. The problem with that is the US 10-Treasury is seen as the risk-free rate of return against which other investments are measured.
If the yield on 10-year Treasury rises, then it could affect investments elsewhere including Singapore. After all, if investors can conceivably get a better rate of return from 10-year Treasuries, then why bother investing in anything else, including equities?
The upshot is that whilst the bill impacts Americans directly, it could cause ripples outside of the US. Over the past few months, money has already been leaving America. It has caused the US dollar to slide to a five-decade low over concerns about tariffs.
But it won’t take much for the greenback to reverse course. That could be a worry for emerging markets that have been enjoying their day in the Sun, as their currencies climb against the greenback.
Markets everywhere could be in for bouts of volatility when the tax-cutting bill comes into effect. The impact could be big. But it is unlikely to be beautiful. It could even turn out to be quite ugly.
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Disclosure: David Kuo does not own any of the shares mentioned.