Infographic on Trump's "Big Beautiful" Bill: How Much Impact Does It Have on Fiscal Stimulus, Clause 899 "Capital Tax," U.S. Bonds, and the Dollar?

Morgan Stanley interprets the "Big Beautiful" Act, a $2.8 trillion fiscal shock is coming, and the dollar bear market and "discriminatory tax" risks are rising.

According to the news from the Wind Trading Desk, on June 9th, Morgan Stanley's research report conducted an in-depth analysis of the impact of the U.S. "Big Beautiful" Act. The report points out:

• First, although the act will add up to $2.8 trillion in deficits over the next decade, its short-term stimulus effect on the economy is minimal (expected to boost growth by only 0.2 percentage points in 2026) and will turn negative by 2028.

• Second, the report warns of a "discriminatory tax" provision called "Section 899," which will bring significant uncertainty to foreign investors holding U.S. assets and may increase their investment costs.
• Finally, and most crucially for investment insights: against the backdrop of the end of the "exceptionalism" of U.S. growth and risks to capital inflows, Morgan Stanley is clearly bearish on the dollar, expecting the dollar index to decline by 4-5% by the end of 2025, and the dollar's status as a reserve currency may also be affected.

Front-loaded deficits, but moderate fiscal stimulus effect

The report points out that the deficit growth of the act shows a clear front-loading characteristic.

• Of the total $2.8 trillion deficit, two-thirds will occur in the first five years from 2025 to 2029.

• Additional tax relief measures are concentrated in the early stages and will expire in 2028.

• Spending cuts will not begin until 2027, and cuts to Medicaid will not peak until 2032.

However, due to the poor multiplier effects of many provisions, the actual fiscal stimulus effect is quite limited. Morgan Stanley expects the bill to raise the growth rate by about 0.2 percentage points in 2026, but it will turn into a contractionary effect by 2028. This slight stimulus effect is unlikely to offset the negative impact of trade and immigration policies on economic growth.

Clause 899 - A "Discriminatory Tax" with Broad Potential Impact

The report specifically highlights the "Clause 899" included in the bill, characterizing it as a form of "discriminatory" taxation. This clause stipulates that taxes on foreign entities will increase under certain conditions.

The biggest issue lies in its "uncertainty."

Currently, the definition of "financial assets" covered by this clause is unclear, which could impose additional potential costs on foreign investors holding U.S. fixed-income assets, thereby causing unexpected widespread impacts on the fixed-income market.

Although the Senate may clarify the relevant definitions, this clause is likely to be retained and will have profound effects on foreign direct investment (FDI).

Impact on the U.S. Treasury Market

The report provides a more nuanced view regarding the U.S. Treasury market.

On one hand, the combined effect of tariff revenues and spending cuts actually lowers Morgan Stanley's deficit expectations. This means that the scale of the deficit in the near future will be more moderate than previously thought, which should alleviate investors' concerns about an oversupply of U.S. Treasuries.

On the other hand, the report notes that the U.S. Treasury has considerable flexibility in financing. Due to the low issuance levels of short-term Treasury bills this year, coupled with the growing market demand for short-term debt, the Treasury is fully capable of relying on the issuance of short-term Treasury bills to finance the increased deficit next year.

However, Morgan Stanley points out that risks still exist regarding the behavior of foreign investors.

Data shows that foreign official investors (such as central banks) tend to hold short-term Treasuries, while foreign private investors prefer long-term Treasuries. Therefore, the implementation of Clause 899 may have differentiated impacts on Treasuries of different maturities, particularly requiring attention to the dynamics of foreign private investors holding long-term U.S. Treasuries.

Deteriorating Risks in the U.S. Investment Environment, Dollar May Weaken

Based on the above analysis, Morgan Stanley is firmly bearish on the dollar.

The report predicts that by the end of 2025, the dollar index will decline by 4-5%, with the euro rising to 1.20 against the dollar, and the dollar falling to 140 against the yen, and it is expected that the dollar will weaken further in 2026:

• The End of the "American Growth Exception": The report suggests that the period of U.S. economic growth outperforming the rest of the world (RoW) may be coming to an end. Morgan Stanley predicts that future U.S. growth will be roughly on par with the rest of the world. The loss of growth advantage will make financing the massive deficit more challenging.

• Vulnerability of Capital Inflows: The U.S. heavily relies on foreign capital to cover its current account deficit. Data shows that in 2024, the scale of portfolio capital inflows will be 125% of the current account deficit, with long-term bond investments making up the bulk. However, Clause 899 threatens these capital inflows, particularly from Europe, which is the largest holder of U.S. securities.

• Deteriorating Investment Environment: Clause 899 not only affects foreign direct investment (FDI) but also impacts portfolio flows. This policy, which increases costs for foreign investors, may undermine the attractiveness of the dollar as a reserve asset, especially if U.S. Treasury bonds held by foreign governments lose their withholding tax exemption