Yesterday marked a historical milestone in the international stage – four years of Trump policies end with the lowest ever support for a leaving President. During his term, Trump reversed many of the policies implemented by his predecessor (i.e., Obama) in the previous eight years. 

Biden served as vice-president under the Obama years, so one can assume that the new policies would be similar to the Obama years. Financial markets focused yesterday on an interesting topic – Janet Yellen, the newly-appointed U.S. Treasury Secretary, testified in front of the Senate. The focus was to see what priorities the new Biden’s administration and the possible implications for the U.S. dollar and the fixed-income market.

U.S. Treasuries Under a Democratic or Blue Wave Control

In the financial world, the risk-free asset is the U.S. 10yr Treasury. It represents the benchmark for every investment manager.

What do the U.S. Treasuries and the Democratic control of Congress have in common? Because the Democrats won the majority of both houses of Congress, there is an increased possibility that the Biden administration will have no problems delivering new fiscal help.

The additional fiscal package, estimated at $750-$1000 billion, is expected to be released in the upcoming months. Effectively, it means that the U.S. The Treasury will be busy with more issues this year. Last year the U.S. Treasury issued $2.5 trillion, and the expectations for the new year is that the amount will increase to over $4 trillion. To cover for the difference in the fiscal deficit, the Fed will likely step in with even more quantitative easing.

However this is not all. While it looks bearish for the dollar, it is actually a slight tightening process if we look at it from a percentage point of view. Last year, the Fed purchased 60% of the U.S. Treasuries, and in 2021 it will buy “only” about 40%, albeit from a bigger number. All in all, it shows the complexity of the financial system and explains why inflation is nowhere to be seen at this point in time. In other words, money printed exits one pocket and enters another.

To support the economy, Yellen vowed for more fiscal aid despite the growing deficits. It goes against everything Yellen stood for when she ran the Fed, but, as she acknowledged on Tuesday, these are unprecedented times that need unprecedented measures.