The closer the date when the Federal government runs out of funds to pay all of its debts, October 17th according to Treasury Secretary Jack Lew, by the end of the month according to others, the less the credit markets seem to be concerned.
I exaggerate, but not by much.
On the morning of September 18th, the day of the last FOMC meeting, the yield on the generic 10-year Treasury opened at 2.84 percent and traded as high as 2.90 percent. After the announcement of the Fed decision sustaining its quantitative easing purchases, to everyone’s amazement, at $85 billing a month, the return dropped as low as 2.67percent and closed at 2.68 percent.
From there until the end of September the yield went as high at 2.77 percent and as low as 2.59 percent and closed on the 30th at 2.61 percent.
Since the partial government shutdown began on October 1st the range has been from 2.66 percent on the 1st to 2.58 on the 3rd. As of writing it is in the middle of its October range at 2.62 percent.
Over the weekend the rhetorical warfare has only increased.
House Republican Speaker John Boehner insisted that the House would not vote to increase the debt limit or reopen the government without concessions from President Obama. For his part President Obama has said that he will not negotiate on either point. Treasury Secretary Lew and other administration officials have been warning of the dire consequences of a U.S. default and they are seconded by almost universal market opinion.
If the credit markets were truly worried that the Federal government would miss an interest payment or bond redemption it is inconceivable that the yield would not be higher than 2.62 percent which is well below the 3.53 percent average of the last decade.
If the currency markets thought a U.S. default was more than the remotest possibility the dollar would not be trading at the mid-point of its 1.3505-1.3646 October range against the euro.
But despite the looming $417 billion-according to Bloomberg-in Treasury interest payments and redemptions between October 17th and November 7th, the risk premiums on US Treasuries have not budged and the dollar is acting like it is still unreservedly the world’s reserve currency. .
Last week Speaker Boehner said that he would not permit the U.S. to default even if he had to depend on Democratic votes to raise the debt limit.
Perhaps a U.S. default is beyond contemplation, but more likely markets are simply taking him at his word.
Chief Market Strategist
WorldWideMarkets Online Trading