Debt-Ceiling Angst Risks Ginning Up Treasuries’ Haven Appeal
(Bloomberg) -- The U.S. debt-ceiling battle should continue unnerving global investors even after a respite brought by the possibility of a short-term deal. While a dire outcome of a default could send shockwaves throughout markets, the irony is that Treasuries might actually do well in this case.
Concerns cooled Wednesday after Senate GOP leader Mitch McConnell offered Democrats an agreement on raising the debt ceiling through November. Yet the move is seen by traders as just a temporary reprieve, pushing back the partisan confrontation over the nation’s borrowing limit -- but not really resolving it.
“Could you see a safe-haven flight into the very thing that’s causing the issue? Yes, I definitely think it could play out that way,” said Margaret Kerins, head of fixed-income strategy at BMO Capital Markets. “It would be about what are the implications for other markets, with global risk markets not liking it if we got into a technical default situation. You’d have a run to the Japanese yen as well.”
A flight into the safety of Treasuries would be similar to what happened back in 2011, when S&P downgraded the U.S. from AAA, slamming the nation’s political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget-deficits. The decision hit global investor confidence -- erasing about $2.5 trillion in the value of global equities, lifting gold to a record and spurring a rally in Treasuries.
A JPMorgan Chase & Co. study last month showed that for particularly contentious debt-ceiling debates -- such as in 2011, 2013, and 2015 -- when legislation was passed only days before a potential technical default, 10-year Treasury yields actually fell.
Investors have been shunning bills -- the shortest maturity of the U.S. debt curve -- that come due around the time Treasury Secretary Janet Yellen said the government is poised to run out of money. Yet if a deal doesn’t come until the final hours, Treasury notes and bonds -- which have been underwater in 2021 -- may rally. The benchmark 10-year yield is hovering around 1.52%.
Kerins’s base-case scenario, though, is that policy makers won’t let the “unimaginable” happen of going over the cliff and allowing the U.S. to default.
Fitch Ratings recently warned that its U.S.’s AAA sovereign rating could be at risk if Congress fails to raise the federal debt limit.
“Long-term Treasuries rallied in a huge way in 2011, and we suspect you’d have a similar move this time to a lesser degree if things get down to the wire,” said Zachary Griffiths, strategist at Wells Fargo & Co. “Further out the yield curve, in most notes and bonds, nobody would be concerned about the actual solvency of the U.S. government.”
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