Markets Haven’t Priced In The End of Fiscal Tailwinds | Andy Constan

Episode Summary

Executive Summary: The episode argues that US macro policy is more contractionary than markets imply: the Fed will likely cut slowly, Treasury QRA is mostly neutral-to-hawkish, and tariffs plus the Big Beautiful Bill create a net fiscal drag rather than a stimulus. Andy Constant expects continued dollar strength, weakness in gold/Bitcoin, lower front-end rates, and only limited upside for stablecoins as T-bill buyers.

Main Topics: Fed policy, dissents, and leadership uncertainty (Priority: 5/5): The July FOMC held rates steady, with two dissents signaling internal debate but not an imminent policy pivot. The discussion also focused on Kugler’s early resignation and the likely implications of a new governor/possible future chair nominee. Treasury QRA and the supply of duration (Priority: 5/5): The QRA was viewed as colder than feared: no dramatic shift to all-bills funding, only modest buyback expansion, and no major move to alter Treasury’s issuance mix. The result was seen as mildly supportive of rates, but not transformative. Fiscal impulse: Big Beautiful Bill vs tariffs (Priority: 5/5): The speakers argued that baseline fiscal scoring understates tariffs and overstates stimulus narratives. Once tariff drag is included, the net impulse looks contractionary, offsetting some of the bill’s mild expansion. Rates, curve shape, and bond positioning (Priority: 4/5): Constant distinguished between the short end and long end: he favors front-end duration as cuts come gradually, but remains structurally bearish long Treasuries because of persistent supply and poor term premium. Market pricing, debasement trade, and asset performance (Priority: 4/5): The market has already reflected a lot of ‘run it hot’ and debasement rhetoric through strong performance in gold, Bitcoin, equities, and a weaker bond market. Constant thinks some of that move is overextended and may reverse. Stablecoins and T-bill demand (Priority: 4/5): Stablecoins were framed as a limited marginal buyer of bills. Constant argued they may grow meaningfully, but most demand is displaced from other dollar holdings rather than creating new savings demand at scale.

Key Arguments: The Fed meeting matched expectations on no cut, but Powell’s tone was somewhat hawkish and the dissents reflected real debate rather than a policy rupture. Kugler’s early resignation matters mainly because it speeds up the appointment process for a possible future chair, but market pricing does not assume an immediate loss of Fed independence. Trump’s desire for lower rates is driven more by fiscal dominance than macro weakness; Constant argues the savings from lower bill yields are far smaller than the rhetoric suggests. The QRA did not become a ‘gasoline’ outcome; instead, modest buyback changes and more bill issuance relative to coupons were only mildly supportive of long rates. Treasury buybacks and QT are roughly offsetting, with a slight bias toward QT; the scale of buybacks was too small to materially change market structure. The TGA refill is proceeding on a manageable but somewhat slow path; reserves will likely fall, but current abundant reserves make this non-disruptive for now. The Fed’s reinvestment policy is a hidden but important lever because it extends duration to the private sector; ending or reducing long-duration reinvestments would be less supportive of the long end. The Big Beautiful Bill is only mildly expansionary in 2025-2026, while tariffs create a meaningful contractionary impulse that may dominate the fiscal picture. Short-run data are too noisy to drive the thesis; the correct lens is historical pattern recognition and financial conditions, not daily macro prints. Markets may be pricing a debasement trade too aggressively; Constant is bullish the dollar and bearish gold, while viewing long Treasuries as structurally unattractive. Stablecoins create new T-bill demand mainly when physical cash is converted into them; otherwise, they largely reshuffle existing dollar liquidity and do not create net new savings demand.

Data Points: Fed dissent count: 2 dissents - July FOMC had two dissents, the first in 30 years, from Bowman and Waller. Treasury buyback increase: $8 billion per quarter - QRA increased buybacks modestly; speaker said this was too small to be transformative. Mortgage QT run-off: ~$20 billion per month - Constant cited mortgage runoff as a duration drain on markets. Traditional QT run-off: $5 billion per month - Fed balance-sheet runoff remained slow under current QT settings. Total duration drain vs buybacks: ~$25 billion per month vs ~10-13 billion buybacks - He described buybacks as roughly offsetting QT, with a slight leaning toward tightening. TGA target: $850 billion - Treasury’s target cash balance that still needed rebuilding after the debt ceiling. Current TGA level: ~$400 billion - He said the TGA was still well below target during the refill process. RRP balance: ~$120-125 billion - The reverse repo facility was described as another source to help refill TGA before reserves are hit. Fed reserves threshold: ~2.7 trillion - He referenced a ‘lowest comfortable level of reserves’ concept in the current reserve system. Fiscal deficit: ~7% of GDP - Used as the baseline deficit level under the Big Beautiful Bill and related scoring. Potential deficit with weaker offsets: ~7.5%-8% of GDP - He suggested the deficit could be even larger absent tariff revenue consideration. Tariff revenue: ~$400 billion annually - Rough annualized tariff take discussed as an offset not included in some scores. Tariff drag: ~1.5% of GDP - He described tariffs as a meaningful contractionary impulse if passed through to US buyers. 10-year Treasury yield move: 4.50% to 4.18% - He cited the 10-year rally as part of the current bond-market backdrop. 2-year Treasury target view: just over 4% to ~3.45% - He expects the front end to come down as cuts eventually proceed. 10-year Treasury target view: ~4.0% - He sees the long end rallying only modestly if slowdown continues. Stablecoin market growth view: Double or triple over 5-10 years - He expects meaningful adoption growth, but not massive new T-bill demand.

Pivotal Quotes: "Those who agree that the deficit will always grow are going to say nothing stops this train. Based on the numbers, the train has long since stopped, right?" — Andy Constant: On the combined fiscal effect of tariffs and the Big Beautiful Bill. "For now, my fiscal impulse is clearly, it's clearly contractionary. There's no way around it." — Andy Constant: His overall view of current fiscal policy once tariffs are included. "It's not like there's going to be a hundred basis points of cuts made, or the market doesn't expect at least, a hundred basis points of cuts made the moment Powell leaves the room." — Andy Constant: On market skepticism that a new Fed chair could force an immediate dramatic easing cycle.

Implications: Listeners should expect slower easing, a less supportive fiscal backdrop than headline politics suggest, and continued pressure on long bonds. The dollar may outperform while debasement trades cool; stablecoins likely grow, but not enough to radically change Treasury demand.