NEW YORK, September 29 The weak-but-growing possibility of a fiscal crisis if Congress doesn't act on the debt ceiling is attracting statewide investors and is filtering into certain asset prices, though few believe the nation will default.
Policymakers and Wall Street bankers have received warnings on the danger of a wire meeting, pointing to the risk that the talks are going down. Jamie Dimon, chief executive of JPMorgan Chase & Co (JPM.N), stated the bank is prepared for what could be a "potentially catastrophic event," while New York Federal Reserve Bank President John Williams warned of potential negative market reaction if no solution to the debt-ceiling issue is found. read more
"There's a very busy legislative calendar over the coming weeks, and there are significant tail risks in the short term," said Jon Adams, senior investment strategist for BMO Global Asset Management. "Our opinion is that cooler heads will prevail in the end."
Some signs of panic are showing in U.S. markets as the US Congress faces a pair of approaching deadlines to finance the government and address the nation's $28.4 trillion debt ceiling. It has a deadline for Sept. 30 to prevent the start of savagery of government services. Secretary Janet Yellen has told Congress to act before Oct. 18 to prevent "serious harm" to the economy. read more about the legislation.
"If the government shuts down, that's not a big deal, but if they continue to play games with the debt ceiling that may cause big problems" and lead to ominous selloff across financial markets," said Randy Frederick, managing director of trading and derivatives for the Schwab Center for Financial Research.
Some have described the rising risks that Congress may fail to act in time to prevent a shutdown or debt default as contributing to equity weakness in recent days. Some analysts believe the debt ceiling has helped boost the United States dollar despite worries over the deficit ceiling in currency markets.
The situation remains in a state of defiance. Democrats in Congress on Wednesday indicated they would vote to delay a planned government shutdown before funding expires on Thursday at midnight. The House and Senate may vote on a separate bill that temporarily raises the debt limit, but Senate Republicans refuse to vote for it. read more
Despite this, investors have expressed their unquestionably optimistic views on the issue since the United States has been down to the wire on this topic before.
Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, stated, "It's difficult to see if the market really cares about the debt ceiling." "If you're kind of rational, you don't, since it gets resolved in some way. On the other hand, it's a danger you can't ignore."
The benchmark S&P 500 climbed 0.2 percent higher on Wednesday, indicating a lack of urgency on Wall Street.
Investors have "so far responded with a shrug" to the looming deadline, with complacency "rooted in previous compromises that prevented defaults and other payment issues," Wells Fargo analyst Michelle Wan stated on Tuesday.
On the Treasury bills market, however, a surge in debt ceiling-related nervousness has surfaced. Michael Purves, CEO of Tallbacken Capital Advisors in New York, stated in a statement on Monday that tension was seen in the pricing of three-month bills, which "will presumably not be burdened by default risk," compared to one-monger payments. Nonetheless, the increase in 2011, 2013 and 2015 has yet to reflect the most dramatic increases, according to Purves.
One-month bills currently generate 0.07%, much higher than three-term bills that generate 0.04 percent. At the start of the year, both yielded about 0.08%.
Even if the probability of a failed payment is very low, portfolio managers typically avoid bill issues at the risk of default. This may result in yields on certain things higher than those on longer-dated debt, an unusual occurrence in the yield curve, which is typically upward-sloping. read more
Analysts at BMO said that "as investors' attention remains trained on Washington, the distortions "in the front end of the yield curve "are likely to persist until an agreement is reached," according to BCO analysts.
Analysts at TD noted a sharp increase in diluted US credit default swaps, another source of anxiety.
Past crises have shaken the market, but only temporarily. A technical failure and subsequent downgrade of U.S. debt in 2011 pushed the S&P 500 about 20% off its high before it resurfaced.
Another prolonged debt-ceiling negotiation in 2013 pushed the S&P 500 down 5.8%, but there was little market reaction to similar deadlines in 2016 or 2018 as Wall Street began to see the threat of crisis as manufactured, according to Sam Stovall, chief investment strategist at CFRA Research.
According to Peter Crane, head of Cranie Data, which concentrates on the money market industry, "sensitive markets such as money markets have not shown rising levels of panic."
"They might pull up to the last minute, but everyone knows both sides are blowing," said Crane.