Bond Bulletin

Bond Bulletin: The art of the fiscal deal

Bond Bulletin
Bond Bulletin
GFICC Investors

Published: 4 days ago

The FQT research framework

Functional factors

Include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings, and leverage metrics).

Quantitative valuations

Is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors).

Technical factors

Are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum.

While investors have been fixated on the latest round of tariffs, they may be underestimating the fiscal tightrope the US is currently walking. In this week’s Bond Bulletin, we explore the Trump administration’s tax and spending proposals and their potential impact on markets.

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Fundamentals

The Federal Reserve (Fed) held rates steady at 4.25–4.50% in March, while the Summary of Economic Projections reflected dampening sentiment. 2025 GDP growth was downgraded to 1.7% (from 2.1%) and core PCE (personal consumption expenditure) inflation was revised up to 2.8% (from 2.5%), signalling rising stagflation risks. This uncomfortable mix of economic data underscores the challenging balancing act ahead for the Fed. Looking forward, eventual tariff outcomes will of course be an important driver but discussions around potential fiscal policies should not take a total backseat. At the heart of the administration’s fiscal agenda is extending the 2017 Tax Cuts and Jobs Act (TCJA), expiring in 2025. Making these cuts permanent could reduce federal revenues by ~$4 trillion over the next decade. The budgetary treatment of this extension is a subject of hot debate. A current-law baseline assumes that existing laws will expire as scheduled, so extending the TCJA would be viewed as new legislation with significant fiscal costs, necessitating offsets to prevent an increase in the deficit. A current-policy baseline assumes that current policies will continue and are already accounted for, thereby not recognising additional fiscal costs. Traditionally, the current-law baseline is employed. Shifting to a current-policy baseline for the TCJA extension would see a larger fiscal impulse because funds are freed up to be deployed elsewhere (e.g. to reduce the extent of Medicaid cuts required or eliminate income tax on tips and overtime). Until this week, this shift seemed to lack bipartisan support. However, there are tentative reports that Senate Republicans are now exploring the current-policy baseline more intently.

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Quantitative valuations

Spreads in US investment grade credit widened modestly last week, and yields across the Treasury curve fell, with the long-end outperforming. Amid heightened policy uncertainty, the market is pricing in three cuts from the Fed this year, and one cut next year. The policy mix of the Trump administration hasn’t been as accommodating as most had expected, with the more challenging elements of the agenda being front-loaded. The uncertainty of economic policy has weighed materially on sentiment, which makes sub-trend growth much more likely. If expectations around fiscal policy were to take a sharp and unexpected U-turn, the Fed trajectory, especially for 2026, will need to be repriced.

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Technicals

Treasury issuance will rise if fiscal policy becomes net expansionary, putting upward pressure on long-end yields. Recent 10-year and 30-year auctions have already shown signs of more tepid end-user demand. Investment-grade credit supply reached $190bn in March, led by financials and large-cap industrials. While dealer inventories remain manageable, investors are demanding higher concessions for duration and lower-rated paper.

Source: Guide to the Markets, slide 19. BEA, CBO, CFRB, US Treasury, J.P. Morgan Asset Management. Data as of 31 March 2025.

What does this mean for fixed income investors?

US government bonds remain one of our top picks, as the probability of above-trend growth in the US has fallen significantly, while prospects of sub-trend growth and contraction have risen. This shift comes as the administration navigates front-loading the painful parts of Trump agenda. The timing, sequencing and magnitude of further fiscal actions are paramount and should be monitored closely.

About the Bond Bulletin

Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.

Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.



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935940f3-b719-11ef-b028-a33e9214ecc9
GFICC Investors

Published: 4 days ago

The FQT research framework

Functional factors

Include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings, and leverage metrics).

Quantitative valuations

Is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors).

Technical factors

Are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum.