Markets Seen Following This Blueprint as Debt Ceiling Approaches

  • Treasury bills show first signs of rising investor concern
  • Focus likely to intensify after Federal Reserve meeting

For investors wondering when the angst about a U.S. government shutdown or debt default will seep into broader financial markets, they might want to look back at 2013 as a blueprint.

The situation today is eerily familiar to that four years ago. Like in 2013, lawmakers will have little more than two weeks to both pass a budget deal and increase America’s borrowing capacity when they return from their August recess. Not only that, but just like four years ago, Federal Reserve officials are wrestling with the decision of whether to scale back monetary policy accommodation.

While investors have already started shunning short-term securities vulnerable to government gridlock, the rest of the market tends to wait much later before it starts to pay attention, according to Thomas Simons, an economist at Jefferies LLC in New York.

Here’s how various U.S. markets reacted during the 2013 saga:

The yield on 10-year Treasuries peaked around 3 percent on Sept. 5 and then plunged by 30 basis points as investors discounted the chance that the Fed would announce a tapering of asset purchases and risks of a government shutdown intensified. Then-Treasury Secretary Jacob Lew said investor confidence that a debt-limit deal could be struck was greater than it should be. 

Stocks started slumping after the Fed meeting in anticipation of a shutdown, which continued through Oct. 8. The benchmark S&P 500 Index started rallying on reports that lawmakers were moving toward an agreement to raise the debt ceiling and avoid a default. 

The Bloomberg U.S. Dollar Spot Index closed at an eight-month low even after Congress struck a deal to extend funding and debt-limit deadlines as investors started to anticipate that the Fed wouldn’t be able to start reducing stimulus in 2013. 

The rate on overnight repurchase agreements, a metric of funding stress, suggests cracks may not appear until right before the deadline as investors worry about receiving October securities vulnerable to a technical default.

“It is possible we see a bit of a more consistent risk-off moves across equities or the U.S. Treasury curve,” Blake Gwinn, a strategist at NatWest Markets in Stamford, Connecticut, said in a note published Aug. 15. “The heightened sensitivity of markets to political dysfunction means that the process around the debt ceiling could be viewed as a litmus test for the rest of the president’s legislative agenda, including tax reform.”

    Before it's here, it's on the Bloomberg Terminal.