FXStreet reports that strategists at Morgan Stanley think a major fiscal package isn't in the price and that progress towards a substantial pickup in approved government spending could push yields higher.

“Bond investors should be attuned to the Democrats' deliberations on budget reconciliation. Remember, Democratic leadership in Congress is committed to not moving the smaller $600 billion bipartisan infrastructure bill without the larger reconciliation-driven infrastructure package. And last night, the Democrats announced the size of their reconciliation bill: $3.5 trillion. That means the US is gearing up to approve $4 trillion in new spending over the next 10 years, matching our base case.”

“In our view this would translate to about $250 to $500 billion in federal budget deficit expansion next year. Our estimates based on the assumption that Congress may only be able to agree to about $2 trillion in new revenues to offset the planned spending. That would mean that the US would effectively be embarking on another round of fiscal expansion next year. That should have a positive impact on GDP growth, and a positive impact on Treasury bond supply. In short, it should push bond yields higher”