For investors wondering when the angst about a U.S.
government shutdown or debt default will seep into broader financial
markets, they might want to look back at 2013 as a blueprint.
The situation today is eerily familiar to that four years
ago. Like in 2013, lawmakers will have little more than two weeks to
both pass a budget deal and increase America’s borrowing capacity when
they return from their August recess. Not only that, but just like four
years ago, Federal Reserve officials are wrestling with the decision of
whether to scale back monetary policy accommodation.
While investors have already started shunning short-term
securities vulnerable to government gridlock, the rest of the market
tends to wait much later before it starts to pay attention, according
to Thomas Simons, an economist at Jefferies LLC in New York.
Here’s how various U.S. markets reacted during the 2013
saga:
The yield on 10-year Treasuries peaked around 3 percent on
Sept. 5 and then plunged by 30 basis points as investors discounted the
chance that the Fed would announce a tapering of asset purchases and
risks of a government shutdown intensified. Then-Treasury Secretary
Jacob Lew said investor confidence that a debt-limit deal could be
struck was greater than it should be.
Stocks started slumping after the Fed meeting in
anticipation of a shutdown, which continued through Oct. 8. The
benchmark S&P 500 Index started rallying on reports that lawmakers
were moving toward an agreement to raise the debt ceiling and avoid
a default.
The Bloomberg U.S. Dollar Spot Index closed at an
eight-month low even after Congress struck a deal to extend funding
and debt-limit deadlines as investors started to anticipate that the
Fed wouldn’t be able to start reducing stimulus in 2013.
The rate on overnight repurchase agreements, a metric of
funding stress, suggests cracks may not appear until right before
the deadline as investors worry about receiving October securities
vulnerable to a technical default.
“It is possible we see a bit of a more consistent
risk-off moves across equities or the U.S. Treasury curve,” Blake
Gwinn, a strategist at NatWest Markets in Stamford, Connecticut,
said in a note published Aug. 15. “The heightened sensitivity of
markets to political dysfunction means that the process around the
debt ceiling could be viewed as a litmus test for the rest of the
president’s legislative agenda, including tax reform.”
© Copyright 2017 Bloomberg News. All rights
reserved.
