Goodhart Says U.S. Yields May Fall as Safety Overrides Shutdown

The U.S. federal government’s partial shutdown may increase demand for the nation’s bonds if investors seek sanctuary from any volatility it causes in markets, said former Bank of England policy maker Charles Goodhart.

“I don’t think it’s going to affect the dollar,” Goodhart said in an interview with Bloomberg Television’s Guy Johnson in London today. “Yields could actually fall -- when there’s a crisis, go for safety. I still think the U.S. bond market is the safest market around despite this.”

U.S. lawmakers are in a standoff on spending legislation that has led to the first partial government shutdown in 17 years and are battling over raising the federal government’s borrowing ceiling, required by later this month. Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein met with President Barack Obama yesterday and said he and other bank leaders discussed the potential economic consequences of a default.

“You’ve got political risk, but no one believes the U.S. won’t pay in the longer run,” Goodhart said. “It could easily pay. It’s just going to effectively have to defer payments, and that’s not such a bad thing when you know that you will get paid in the longer run.”

He said “it isn’t that the money isn’t going to be there at some stage; it’s simply that it’s not going to be there immediately.”

Budget Deadlock

President Barack Obama and congressional leaders failed to break the budget gridlock in face-to-face talks late yesterday. The impasse has placed as many as 800,000 federal employees on unpaid leave, and closed national parks, museums and Internal Revenue Service call centers.

Treasuries declined today, pushing 10-year yields up from the lowest level in seven weeks. Investors are weighing whether the continuation of the budget deadlock will merge with the debate over raising the nation’s $16.7 trillion debt limit by Oct. 17.

The benchmark 10-year yield rose two basis points to 2.64 percent as of 10:58 a.m. London time, according to Bloomberg Bond Trader prices.

On the U.K., Goodhart said there had been “a very good run of figures” economic figures recently.

“But we’re a long, long, long way from getting back to the kind of the growth rates, let alone the level, that we used to be at,” he said. “Monetary policy is going to remain on hold for quite a long time.”

Goodhart, a professor at the London School of Economics, was on the BOE’s Monetary Policy Committee from 1997 to 2000.

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