The Democratic Party and its supporters have indicated a willingness to enact legislation that will reduce demand for bonds, while increasing supply: a recipe for lower bond prices and higher yields.

There are few signs that the weakened Republican Party, now in the minority, will put up effective resistance.

Here are some signs, portents, and expectations:

• Increased Minimum Wage: No matter how you cut it, increasing minimum wages is inflationary and Federal Reserve Chairman Bernanke seems to be genetically programmed to increase short term interest rates at any sign of inflation. This would put negative pressure on short-term bond prices.

• Protectionist Trade Measures: Labor unions may seek payback for supporting the Democratic Party with protectionist legislation that will tend to cut back imports. This could decrease the supply of foreign dollars that support the bond market. Decreasing the supply of less expensive foreign goods also contributes to inflation — another signal to Chairman Bernanke to raise short-term interest rates.

• Support for Fannie Mae: With Democrats in control, Fannie Mae should be out of regulatory limbo, able to increase issues of mortgage-backed bonds, now competing with asset-backed securities from commercial banks that moved to take over the market while Fannie Mae was repairing its balance sheet.

• Support for Stock Buybacks: Democratics have long-favored reducing corporate income taxes, since large companies are their favorite tax collectors. Democrats have avid supporters on Wall Street, including corporate executives, speculators like George Soros, fund managers, and investment banks, all of whom stand to benefit from stock buybacks. Reducing corporate income tax gives executives money to spend on buybacks to jack up the value of their options, as seen with the Jobs Creation Act. Recent increases in stock buybacks have been financed by bond issues, putting pressure on long term debt markets.

• Support for Defined Benefit Pension Plans of Unionized Civil Servants: The real payoff for trade unions will come in increased benefits for unionized civil servants, which means higher costs for states and municipalities, higher local taxes, and new bond issues. See: “Municipal Bonds and the Democratic Takeover of Congress“.

The Trade Deficit Still Rules

The key to the bond market, of course, is the trade deficit.

It seems unlikely that the Democrats will reverse long-term policies that favor the trade deficit, at least not immediately, so this powerful source of demand for bonds should continue.

It’s too soon to expect retiring Baby Boomers to move into bonds, especially while the stock market is bolstered by buybacks. The Democratic Party supports tort lawyers (who have begun to show interest in class action suits involving buybacks), but this is unlikely to impact the buyback trend in the short term.

All in all, it would seem that the outlook for bonds is less positive with a Democratic Congress, but not to a degree that suggests an immediate change in long-established trends.

On November 15, 2020, in the back pages of the Wall Street Journal, an article, “San Diego Settles SEC Charges Over Pension Funds”, starts out:

San Diego agreed to settle Securities and Exchange Commission charges that it failed to tell municipal bond investors about the city’s mounting pension-fund obligations and its increasing inability to pay for those benefits.

The article goes on to say that municipal pension fund liabilities were $6 billion, while pension fund assets were only $4.5 billion. This represents a shortfall of $1.5 billion, or about $1,300 per homeowner in San Diego.

Municipal pension fund problems are primarily the fruit of unionization of public employees. Over the last generation, trade unions have turned from their traditional base of industrial workers (eroded by factory closings due to excessive labor demands) and have fixed on the juicy target of tax-supported government workers.

Now, an extra tax burden of $1,300 per San Diego homeowner doesn’t seem like a big deal — it’s less than 3% of median household income in the municipality — but Democrats now control Congress. We can expect unions to demand higher pay and benefits for ‘public servants’ which should lead to augmented defined-benefit pension burdens on residents of larger, older cities like San Diego.

This could result in higher interest on municipal bonds of cities with powerful government service unions, along with increased taxes, and downward pressure on real estate values. At the same time, there could be a tendency to further increase emigration from unionized locations to cities largely free of such exploitation, especially smaller, newer municipalities in US southern and central states.

According to a US Bureau of Economic Analysis release of July 12, 2020, the US trade deficit leveled off during 2006, with a difference between imports and exports of goods and services of $63.8 billion in May 2006.

Since the trade deficit is a major source of funds for the US bond market, a slowing of the rate of growth of the deficit will effect interest rates.

	Rate of Growth of US Trade Deficit Slows

The above graph shows how the increase in the US trade was halted in 2006.

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