- Washington’s latest pandemic rescue bill is moving slowly
- U.S. existing home sales expected to partially recover
- U.S. house prices expected to continue rising
- 20-year T-bond auction to yield near 1.08%
Washington’s latest pandemic rescue bill is moving slowly — Washington was in disarray on Tuesday as politicians scurried around trying to come up with a new pandemic rescue plan to keep the economy afloat as various stimulus measures start to expire.
Treasury Secretary Mnuchin Tuesday afternoon met with House Speaker Pelosi and Senate Minority Leader Schumer, but he said that he was in a listening mode and that negotiations had not yet begun. Earlier in the day, Mr. Mnuchin and White House chief of staff Meadows met with Senate Republicans at lunch in an attempt to agree on a unified Republican stimulus bill that could act as the starting point for negotiations with Democrats.
Congress would like to pass a bill before the end of next week so that the unemployment bonus doesn’t expire. However, yesterday’s disarray suggested that Congress will be lucky to get a bill passed before leaving for their recess, currently scheduled for August 7. Senate Majority Leader McConnell told reporters that he did not believe a deal was possible by the end of next week.
If a deal spills into August, then there will be a lapse lasting one or more weeks of the $600 per week bonus unemployment benefit, which would remove some stimulus from the economy and negatively impact consumer spending. Democrats are pushing for that $600 per week bonus unemployment benefit to be extended through year-end, but Republicans are looking to reduce the bonus payment or cap unemployment benefits at 70-75% of the person’s previous wages.
President Trump’s demand for a payroll tax cut has injected uncertainty into the negotiations because few Senate Republicans and no Democrats support the measure. A payroll tax cut would reduce incoming revenues for Social Security and Medicare, hurting their solvency. Senate Finance Committee Chairman Grassley (R-Iowa) said he opposes a payroll tax cut since voters wouldn’t notice it anyway, and the cut probably couldn’t be implemented before October.
Measures with some bipartisan support that seem likely to make it into a final agreement include (1) some type of extension of enhanced unemployment payments, (2) a second stimulus check for lower-income persons, (3) a second round of PPP payments to encourage businesses not to lay off employees, (4) support for schools, (5) support for child care, (6) funding to boost Covid testing/tracing and vaccines, (7) funding to help businesses establish safety measures, and (8) some aid for state and local governments.
Republicans have been trying to keep the package near $1 trillion, but the price was going up fast on Tuesday as Republicans mulled measures to include in the bill. House Democrats have already passed a bill totaling over $3 trillion. That suggests that a final bill might be somewhere around $2 trillion if they split the difference.
The U.S. national debt has now soared by $3.1 trillion (+13%) from the pre-pandemic level in February, reaching a record high of $26.5 trillion. The only good news is that the debt limit has been suspended until next July, which is six months into the new presidential administration. Congress therefore isn’t presently being forced to grapple with a debt ceiling hike, which in the past has led to the threat of Treasury sovereign debt default.
U.S. existing home sales expected to partially recover — The consensus is for today’s June existing home sales report to rise sharply by +21.5% to 4.75 million, which would reverse part of the 3-month plunge totaling -32% seen in March-May. Today’s expected increase to 4.75 million units would still leave the series 21% below Feb’s 13-year high of 5.76 million units.
Home sales plunged in March-May due to shelter-in-place orders and the reluctance of potential buyers to venture out to view houses available for sale. However, sales are expected to improve as states open back up, and as safer procedures are developed for visiting homes available for sale. There is anecdotal information suggesting there is pent-up demand to buy homes, either from people looking for a bigger home so they can work from home or because they want to escape from cities and apartment/condo living. New home sales in May rose by +12.7% for those reasons.
U.S. house prices expected to continue rising — The consensus is for today’s May FHFA house price index to show an increase of +0.3% m/m, adding to April’s +0.2% increase. House prices are expected to continue rising in May, even in the face of the pandemic, mainly because of the tight supply of houses on the market. While house prices have held up so far, prices are likely to start dropping in the coming months as a wave of foreclosures starts to hit the market.
20-year T-bond auction to yield near 1.08% — The Treasury today will sell $17 billion of 20-year T-bonds in the second reopening of the 1-1/8% 20-year bond of May 2040 that the Treasury first sold in May. Today’s 20-year T-bond issue was trading at 1.08% in when-issued trading late yesterday afternoon. The Treasury just started selling 20-year T-bonds again in May for the first time since 1986.
The averages of the two 20-year bond auctions held thus far are as follows: 2.58 bid cover ratio, $4 million in non-competitive bids, 5.8 bp tail to the median yield, 38.7 bp tail to the low yield, and 31% taken at the high yield. The 20-year T-bond has so far seen decent support from foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, purchased an average of 61.2% of the last two 20-year auctions, which is just mildly below the median of 62.1% for all recent Treasury coupon auctions.
