The impact of federal stimulus on bond portfolios


Brian Erickson, Vice President, Fixed Income – Ameriprise Financial

White House in the winter

We view the $900 billion pandemic relief package signed into law Dec. 27 as a positive, given it supports fundamentals for the economy, businesses and consumers. It helps shore up fixed income valuations and the core of portfolio allocations.

Increasing money available to consumers and businesses helps reduce damage that could delay a return to full employment. It also enables a return to previous levels of economic activity in the United States. Specifically, the stimulus:

  • Directs forgivable loans to help small businesses endure disruptions and retain employees without the long-term burden of debt
  • Provides extended unemployment benefits for workers
  • Offers direct payments to qualifying individuals, couples and families to help sustain consumer purchasing, protecting families and the companies upon which they rely

 

Low yields and low returns

In addition to Congressional efforts, U.S. Federal Reserve policy designed to support economy concerns persists. Beyond the extraordinary stimulus it delivered in the first half of 2020, the Fed continues to purchase $120 billion of government bonds each month to keep yields low.

Bar chart of securities in the Fed balance sheet

Source: Bloomberg L.P., U.S. Federal Reserve

 

Increased federal spending, however, requires more borrowing, higher debt levels and potentially higher financing costs. Part of the intention behind the Fed’s bond purchases is to counter supply dynamics and ensure borrowers maintain access to cheap funding.

As a result of spending for stimulus packages and the deficit, the outstanding U.S. government debt increased by $4.2 trillion in 2020, according to the U.S. Department of the Treasury. Stimulus spending also led to a spike in indebtedness around the globe. After pandemic impacts eventually pass in the future, companies will likely pay down debt and governments may set a course for managing elevated debt levels lower over time.

Line chart showing COVID-19's impact on global debt

Source: S&P Global Ratings

p = projection

 

More stimulus on tap

There is a time and place for large spending programs, and we believe now is the time. President Biden has proposed an additional $1.9 trillion stimulus package as Congress forms its priorities for the year. In our view, further stimulus aid could steel the U.S. economy, safeguarding it against potential vaccine delays or the impacts of new virus strains that could be present well into 2021.

Over the intermediate term, it will remain critical for the U.S. government to pragmatically manage toward a balanced budget and lower debt levels. Fortunately for federal budgeting, bond yields remain low, guided by the Fed. Low yields, however, hurt individual savers and constrain bond portfolio total returns.

Amid the current low-yield, low-return fixed income environment, we encourage you to continue working with your Ameriprise financial advisor. They will help determine an approach to fixed income investing that meets your specific financial goals, time horizon and risk tolerance.