Analysis-Debt ceiling worries start to rattle Wall Street

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NEW YORK (Businesshala) – The slim-but-increasing prospect of a fiscal crisis if Congress doesn’t act on debt limits is pouring in from growing U.S. investors and filtering into asset prices, though some believe That nation would eventually default.

FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, US, September 29, 2021. Businesshala/Brendan McDermid/File photo

Policymakers to Wall Street bankers have been warned about the risk that talks go down the wire. JPMorgan Chase & Co chief executive Jamie Dimon said the bank was preparing for a “potentially catastrophic event”, while New York Federal Reserve Bank President John Williams warned of a possible negative market reaction if no resolution to the loan is found. Is. Roof issue.

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“The next few weeks are a very packed legislative calendar and there are significant tail risks in the short term,” said John Adams, senior investment strategist at BMO Global Asset Management. “Our view is that eventually cooler heads will prevail.”

US markets are showing some signs of panic as the US Congress faces deadlines to fund the government and address the country’s $28.4 trillion debt limit. It has a September 30 deadline to prevent the start of shutting down government services. Secretary Janet Yellen has urged Congress to take action before October 18 to avoid “serious damage” to the economy.

“It’s not a big deal if the government shuts down, but if they continue to play the game with debt limits that could cause big problems,” said Randy Frederick, managing director of Trading & Derivatives and the entire financial system. Causes a significant sell-off in the markets. Schwab Center for Financial Research.

The rising prospects of Congress failing to act in time to prevent shutdowns or loan defaults were cited as contributing to the weakness of equities in recent days. Some analysts in the money market believe that concerns over debt limits have strengthened the US dollar.

The situation remains as it is. Democrats in Congress said Wednesday they would vote to call off an impending government shutdown before funding ends at midnight on Thursday. The House and Senate may vote on a separate bill that temporarily removes the debt limit, but Senate Republicans refuse to vote for it.

Nevertheless, since the United States has been vexed about this before, investors have taken a firm stand on the issue.

“It’s hard to know whether the market really cares about debt limits,” said Cathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “If you’re rational you probably don’t, because somehow it’s solved. On the other hand, it’s a risk you can’t ignore.”

In a sign of a lack of urgency on Wall Street, the benchmark S&P 500 rose 0.2% on Wednesday.

Wells Fargo analyst Michelle Wan wrote Tuesday that investors have “so far given a shrunken response” to the impending deadline, with the complacency “implied in previous agreements that avoided defaults and other payment disruptions.”

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However, panic related to debt limits is visible in the treasury bill market. Michael Purves, CEO of Tollbacken Capital Advisors in New York, wrote in a note on Monday that stress was seen in the pricing of three-month bills, which would “likely not be burdened by default risk” compared to one-month bills. Still, the more dramatic spikes in 2011, 2013 and 2015 are yet to reflect, Purvey said.

One month bills currently fetch 0.07%, which is higher than three month bills which generate 0.04%. Both gave returns of around 0.08% at the beginning of the year.

Portfolio managers typically avoid the risk of default to avoid bill issues, even though the chances of a failed payment are very small. This can send yields higher than long-term debt on some issues, an unusual phenomenon in the yield curve, which is usually sloping upward.

(Graphic: Debt Limit Stress, )

BMO analysts said that “as investors’ attention remains trained on Washington” the front end of the yield curve “is likely to continue until an agreement is reached.”

In another sign of worry, analysts at TD saw a sharp jump in low-traded US credit default swaps.

Past crises have rocked the market – but only temporarily. A technical default in 2011 and a subsequent downgrade of US debt helped push the S&P 500 from its highs to nearly 20%.

(Graphic: The debilitating effects of the credit limit deadlock,)

Another protracted debt-ceiling talks in 2013 pushed the S&P 500 down 5.8%, but the market reaction to a similar time frame in 2016 or 2018 was scant as Wall Street viewed the threat of the crisis as built up. began, said Sam Stovall, chief investment strategist at CFRA Research.

Sensitive markets such as currency markets have not shown increasing levels of panic, according to Peter Crane, head of Crane Data, which focuses on the currency market industry.

“They can pull until the last minute but everyone knows both sides are bluffing,” Crane said.

Reporting by David Randall, Additional reporting by Karen Piog, Editing by Megan Davis, Nick Ziminsky and Richard Pullin

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