President Biden signed into law a $1.9 trillion Coronavirus aid package last week. New spending of $1.1 trillion is expected this year, with the remaining $0.8 trillion spread out over the coming years. The spending is on top of last year’s $3 trillion fiscal support program, sets up 15% annual deficits for 2020 and 2021, and increases debt to 110% of GDP.  

Why should we care about such spending, especially when the economy is hobbled by COVID-19?

Indeed, the package will indeed help many. There are $670 billion in checks and enhanced unemployment benefit checks on the way to individuals and families. States will receive about $570 billion to add to their coffers and ease some burdens. $200 billion in child tax credits are popular. And $170 billion will be available for advancing healthcare programs.

But there are real and important questions about the necessity and timing of the stimulus. In the past, borrowing gets ramped up when the economy is weakening, and nervous investors are happy to buy newly-issued U.S. government Treasury bonds. In that situation, the strong demand for perceived safe-haven U.S. Treasuries usually more than offsets government bonds’ surging supply, leaving rates unchanged or lower. Today, the economy is not on the downswing, with Q1 GDP estimated to be near 8% annualized. Investors are also not eager to buy U.S. Treasuries, evidenced by weak showings at U.S. Treasury auctions. Thus, interest rates are not behaving as desired, they are rising.

Deficits: All About Spending

We think it is important to point out that spending is the driver of deficits today, not a lack of revenue. For example, a great deal has been made about the dire condition of state finances, but projected revenue shortfalls have not materialized as imagined a few months ago. A recent Bloomberg study showed total average state tax revenue down a meager -0.4% in 2020, for example. Similarly, Federal tax receipts are estimated to be just about the same level in 2020 as a year earlier. Thus, today’s deficits should rightly be seen as coming from the spending, not revenue (tax), side of government ledgers.

This brings us to the crux of the matter of why this should matter to you. Deficits must be financed through a combination of borrowing or taxation, both of which can affect your wallet and portfolio.

Borrow the Money?

In 2020, about $1.7 trillion in U.S. Treasury issuance took place to help finance the first round of COVID-19 stimulus. Last year, the Federal Reserve took onto its balance sheet $2.3 trillion of U.S. Treasury bonds through asset purchases, far more than the $1.7 trillion issuance. This year, according to Bank of America, a massive $2.8 trillion of new U.S. Treasury issuance is likely as the result of continued fiscal support measures. Yet, the Federal Reserve is on course to buy only $960 billion, leaving a sizable gap — a gap needing others to fill.

To fill the gap, private investors need to step up and buy U.S. Treasuries, but demand for “safe” U.S. Treasuries is lessened by prospects for improving growth. The fears and concerns that usually arise during a crisis or recession — and create robust U.S. Treasury demand — are simply not here now. This may be why recent U.S. Treasury auctions have gone off so poorly and may partly explain why rates have been on the rise. Fiscal stimulus, typically used counter-cyclically, is now being used pro-cyclically, creating new risks and uncertainties. Rising inflation, interest costs, and currency issues are a few of the risk factors produced under such practice.

Raise Taxes?

Another way to pay for spending is through taxes. President Biden’s tax plan has remained in the background recently, owing to ongoing worries over the pandemic. At some point, we expect the plan, which features higher taxes, to feature prominently as a means for funding spending. Since taxes are always less easy to sell than spending, the plan may be revised or offered piecemeal. At some point, expect elements of the plan to work their way to the House and Senate floors. For now, taxes will take a back seat to other more pleasant priorities.

More to Come?

The last reason why this new package is vital to think about is that it just might not be the last one. Recent talk about another big fiscal push later this year, potentially focused on infrastructure, climate change, and healthcare is being vetted. Any additional legislative push’s size and shape will depend on the path of recovery and intra-party politics. Democrats control Congress with the narrowest of majorities and face mid-term elections in 2022. Different opinions exist within the party on how/when/why to proceed with other spending bills. Time will tell whether such a plan is feasible or can gain enough support in the months ahead.

What to Do Now

Remember that credit cycles tend to dictate sustained periods of prosperity (boom) and contraction (bust). The last cycle, which culminated in the Great Financial Crisis of 2007-2009, exemplifies what can happen when borrowing becomes excessive, expectations exceed reality, and reality finally takes hold. Asset prices come under pressure, deflationary pressures mount, and the economy endures a slump. It is in this process, however, when the best opportunities are created, too! We are also reminded that the credit cycle which began after the financial crisis is still underway today, having not been interrupted by the pandemic. The addition of large amounts of new borrowings by governments extended the cycle, suspended foreclosures and repricing, and may now be creating distortions in some areas.


Newly enacted policy choices, whose timing and magnitude veer far from standard or conventional macroeconomics applications, may also create unintended risks alongside the intended benefits. Should policy choices create uncertainty, we should continue to seek out the highest quality companies at the best possible prices as a way to navigate whatever waters lie ahead. Dependable cash flow, low debt burden, and profitable assets are all features we find especially desirable — especially in a world of higher debt burdens, higher inflation, and/or higher interest rates.

Kevin R. Caron, CFA
Senior Portfolio Manager

Chad Morganlander
Senior Portfolio Manager

Matthew Battipaglia
Portfolio Manager

Steve Lerit, CFA
Senior Risk Manager

Paul Clark, CFA
Senior Portfolio Manager
Municipal Fixed Income

Rick Marrone
Senior Portfolio Manager
Municipal Fixed Income

Daniel Urbanowicz
Senior Portfolio Manager
Municipal Fixed Income

Suzanne Ashley
Internal Relationship Manager

Eric Needham
Director, External Sales and Marketing

Jeffrey Battipaglia
External Sales and Marketing


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