Cantor Defeat Puts Markets on Guard for Debt Limit Gridlock

June 11 (Bloomberg) -- Bloomberg's Mark Halperin discusses the upset of House Majority Leader Eric Cantor in a Virginia Congressional primary election and what it means for immigration reform and the midterm elections. He speaks with Trish Regan on Bloomberg Television's "Street Smart." (Source: Bloomberg)

The primary election loss of U.S. House Majority Leader Eric Cantor, who helped broker deals to end standoffs on the federal debt ceiling in October and February, has investors concerned that policy makers may find future agreements more difficult to reach.

Cantor was defeated by Tea Party-backed challenger David Brat, an economics professor at Randolph Macon College in Ashland, Virginia, who had been critical of Cantor’s willingness to compromise on issues ranging from the debt limit to the Obama administration’s signature health-care law.

“In terms of getting anything done from a fiscal standpoint, it’s going to be difficult,” said Cathy Roy, the chief investment officer for fixed-income at Calvert Investments in Bethesda, Maryland, which oversees more than $13 billion in assets. “I don’t think there’s any scenario where things can get better between the two camps.”

The defeat of Cantor, who had been viewed as the leading contender to succeed Rep. John Boehner as House Speaker, opens the door for candidates to Republican leadership roles with more partisan profiles, such as House Financial Services Committee Chairman Jeb Hensarling of Texas. Prices for U.S. Treasury debt rose while the Standard & Poor’s 500 stock index declined 0.4 percent and the dollar was mixed against most major currencies tracked by Bloomberg News.

Photographer: Jin Lee/Bloomberg

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Photographer: Jin Lee/Bloomberg

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Abandoned Principles

“I hope it doesn’t mean that it will be impossible from this point forward to compromise on issues like the budget, immigration policy,” Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said in a television interview on CNBC. “This is not necessarily a good signal, but we’ll have to see how this plays out.”

The debt cap won’t loom over financial markets until the middle of 2015, following the February vote to extend U.S. borrowing authority. Even so, small-government groups saw the unwillingness of Republican leaders to block an expansion of U.S. borrowing authority as an abandonment of Republican principles and vowed to extract a political price in this year’s congressional elections.

“The House leadership has given up any pretense of fighting for fiscal responsibility,” Matt Kibbe, president of Washington-based FreedomWorks, a Tea Party-backed group, said Feb. 11. “We need to add more members of Congress in 2014 that want to come here and tackle the budget and tackle the national debt.”

Spending Reductions

Cantor’s loss “is rippling through the stock market,” Howard Ward, chief investment officer for growth equities at Rye, New York-based Gamco, which oversees about $47 billion, wrote in an e-mail. “It raises big questions about the future leadership of the Republican Party and the party’s direction.”

Tea Party supporters and more conservative members of the House had hoped to use the debt ceiling talks in October and February to extract concessions on spending and other issues from President Barack Obama and Democrats, as happened at their first debt ceiling battle.

In months-long talks, Republicans negotiated for $2.4 trillion in spending reductions over 10 years in debt ceiling talks that culminated with an agreement signed in August 2011 by President Barack Obama.

The political brinkmanship contributed to the decision by Standard & Poor’s in August 2011 to lower the U.S. credit rating to AA+, the ratings company said at the time. The S&P 500 plunged and U.S. government debt rallied after the agreement and the S&P downgrade.

Fed Critic

“Cantor was good at finding compromises relative to the rest of the party,” Michael Block, chief strategist at New York-based Rhino Trading Partners LLC, said in an interview.

While taking a conciliatory stance on some issues, Cantor had been a critic of the Federal Reserve and its accommodative policy, joining Republican leaders including Boehner of Ohio and Senate Minority Leader Mitch McConnell of Kentucky, in signing a letter to then-Fed Chairman Ben S. Bernanke in September 2012, at the start of the central bank’s third round of bond purchases, asking him not to do “further harm” to the economy by adding more monetary stimulus.

Last week, Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut, surveyed clients to assess whether they thought Republicans would take over the Senate and what effect that would have on 10-year yields.

Meaningful Shift

“The vast majority of respondents expect the Republicans to actually take the Senate,” Lyngen said. “They thought it was worth zero basis points in 10-year yields. No one thought it mattered. If a shift in control of the Senate is worth zero basis points, I can comfortably extrapolate that Cantor’s defeat in the primary was not a meaningful event for the Treasury market.”

Cantor plans to step aside from his leadership post on July 31, according to a person familiar with his plans. There are still five months before midterm elections are held and “it will become more interesting if, as we near the midterm election, it becomes clear there’s a more meaningful shift afoot,” Lyngen said.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Paul Cox

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