Welcome to thoughts on the market. I'm Michael Zizas, head of Public Policy Research and Municipal

Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives,

I'll be talking about the intersection between U.S. public policy and financial markets.

It's Wednesday, December 23rd at 11 a.m. in New York.

As the year winds down, we want to think a bit further ahead, not just to early next year, but beyond.

What are the policy debates that might be influencing investors in the back half of

2021, when our expectation is that the COVID caseload will be under control due to

vaccinations and the economy will have demonstrated resiliency.

At the moment we've got our eye on two events that could change the trajectory of fiscal policy,

the need to raise the debt ceiling and the coming expiry of key corporate tax breaks.

These events could introduce volatility into markets generally,

but for bond investors they may be an opportunity.

On the debt ceiling, you might recall how the need to approve an increase in the

U.S. self-imposed Treasury issuance cap has been a flashpoint for budget negotiations in the past,

most notably in the summer of 2011, when it was used by members of Congress to demand future spending cuts.

We're watching for something of a repeat of that phenomenon if Republicans maintain control of the Senate.

If they do, negotiations over the debt ceiling, which may need to be raised in August,

could become a vehicle to demand cuts in government spending.

Fiscal contractions like these, depending on the economic context, could decrease future economic growth expectations, putting downward pressure on bond yields.

On corporate tax breaks, starting in 2025, expectations putting downward pressure on bond yields.

On corporate tax breaks, starting in 2022, the deductibility of interest becomes more constrained.

Businesses will also have to deduct research and development and software costs over five years.

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