Global credit rating agency Moody's downgraded the United States' national credit rating by one notch, and concerns have been raised that the tax cut being discussed in the U.S. House of Representatives may further stimulate government bond rates, potentially leading to a recurrence of 'rate shock.' However, Park Sang-hyun, a researcher at iM Securities, noted that while the likelihood is not high in the short term, it is important to watch for measures to reduce expenditure and trade negotiations.
The yield on 10-year U.S. government bonds stood at 4.596% at 5:05 p.m. (local time) on the 21st. At the same time, the 30-year U.S. government bond yield was also 5.085%. Both surpassed the critical thresholds of 4.5% and 5%. The primary reason is the low demand for 20-year U.S. government bonds.
In addition, Moody's downgrade of the U.S. credit rating and the House's discussions on the tax cut have heightened market concerns. The 'rate shock' phenomenon could repeat in the U.S. during the tenure of Prime Minister Liz Truss, who bore the dishonor of being the shortest-serving prime minister in British history.
The so-called 'Truss shock' was triggered when Prime Minister Truss announced a large scale energy subsidy plan on Sept. 8, 2022, shortly after taking office, while also unveiling plans for substantial tax cuts and government bond issuance to promote a 'growth plan' on Sept. 23. As the British government pushed for significant expenditure and tax cuts amid poor fiscal conditions, the value of British government bonds and the pound plummeted.
Researcher Park stated that there are many similarities between the economic situation in the U.S. now and during the Truss shock, but the likelihood of a recurrence in the short term is low. Unlike the Truss government, the Donald Trump administration in the U.S. is implementing policies to accompany tax cuts and reduce fiscal deficits. Additionally, while the consumer price inflation rate in the U.K. was around 10% during the Truss shock, the rate in the U.S. remains in the mid-2% range.
Researcher Park remarked, "As the tax cut controversy arises in the U.S. House of Representatives, even if it passes, a phenomenon of a sudden spike in government bond rates will not occur."
However, it is also true that the U.S. economy is not free from fiscal crisis, and without measures to reduce fiscal expenditure being implemented alongside the tax cut, a second Truss shock could occur at any time, according to Researcher Park.
Researcher Park added, "If the tariff negotiations with major countries, including China, are delayed or break down, leading to a resurgence of price instability, there is a strong possibility of heightened unrest in the U.S. government bond market," and noted that "the sell-off seen last April could become more severe."