The newly passed US budget package contains a little-noticed but significant clause that could have far-reaching implications. The focus of this discussion is Section 899.
Risks for Foreign Investors
This clause could significantly reduce the attractiveness of US assets, particularly for European investors with passive income in the US. Financial experts from Morgan Stanley warn that this new tax regulation could weaken foreign investors’ interest in American assets. A decline in capital inflows would be the logical consequence.
Impact on the US Dollar and Bonds
A decreasing demand for US assets by international investors could weaken the US Dollar and jeopardize the stability of the market for US Treasury bonds. As many states and institutions hold significant amounts of US bonds in their portfolios, the consequences could be severe.
Political Context
The political will to retain Section 899 in the final budget law is strong, especially due to the support from the Republican majority in the Senate. This increases the likelihood that this regulation will actually be implemented.
In summary, the new budget law with its hidden clause poses significant risks. It could not only reduce the attractiveness of US investments but also have negative effects on the Dollar and the bond markets – a topic of global relevance for investors.