US $1 Trillion Infrastructure Investment and Tapering Effects... Emerging Markets Financial Markets Clouded with Tension

US Treasury Bonds and Dollar Strength
Potential for Accelerated Capital Return to the US with Added Tapering
Concerns Over Impact Exceeding 2013 Tightening Shock

U.S. President Joe Biden is smiling brightly while giving a speech at the White House after the $1 trillion infrastructure investment bill passed the Senate.
[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. Senate's passage of a $1 trillion infrastructure investment budget bill is also impacting the capital markets. When combined with the Federal Reserve's asset purchase tapering, significant effects on the economies and capital markets of various countries, especially emerging markets, are inevitable.

On the 10th (local time), the U.S. Senate voted on the $1 trillion infrastructure budget bill prepared by bipartisan lawmakers, passing it with 69 votes in favor and 30 against. The bill will take effect once it passes the House of Representatives and is signed by President Biden.

President Biden, who was enjoying his vacation, returned to the White House after the vote and said in a speech, "We have reached the pinnacle of a decade of infrastructure investment that will transform America."

Janet Yellen, Secretary of the Treasury, also expressed expectations, saying, "The infrastructure investment bill will play a major role in building a strong and structurally sound economy."

The infrastructure investment bill is expected to lead to rising U.S. Treasury yields and a stronger dollar. The Congressional Budget Office (CBO) projected that the bill will add $256 billion to the fiscal deficit over the next 10 years, indicating that the U.S. government is expected to issue more Treasury bonds.

It is also necessary to consider the situation where the Democratic Party is expected to unilaterally pass a $3.5 trillion human infrastructure investment bill. The Democrats are expected to use budget reconciliation to overcome Republican opposition in the Senate and pass both bills together in the House.

This situation was immediately reflected in the market. According to MarketWatch, the dollar index, which shows the value of the dollar against major currencies, reached 93.14, the highest level in four months.

Tom Nakamura, AG Investment Fund Manager, predicted, "The U.S. can continue its economic stimulus through infrastructure investment. If the COVID-19 situation worsens and uncertainty increases, investment in the safe-haven dollar may also rise."

The rising U.S. Treasury yields are also pushing up the dollar's value. On this day, the 10-year U.S. Treasury yield rose to 1.349%.

With inflation rising, employment recovering, and infrastructure investment accelerating, there is also growing speculation that the Federal Reserve may hasten its asset purchase tapering.

Ed Moya, Senior Market Analyst at OANDA, said, "Expectations have clearly shifted that Fed Chair Jerome Powell will signal the need for tapering at the Jackson Hole meeting and officially announce it at the September FOMC meeting."

One day earlier, Raphael Bostic, President of the Atlanta Fed, and Eric Rosengren, President of the Boston Fed, had called for early tapering.

If tapering proceeds alongside rising U.S. Treasury yields and a stronger dollar, the possibility of capital outflows from emerging market capital markets could increase further.

The foreign affairs media outlet Foreign Policy reported that as U.S. Treasury yields rise, the funds that had flowed into emerging markets seeking high yields are likely to return. There is a strong analysis that a tightening shock in emerging market capital markets, similar to the one in 2013, could be repeated.