Morning Bid: The Debt Deal and the Damage Done
(The author is a Reuters editor. The views expressed are his own.)
By David Gaffen
All those various brokerage strategists who suggested that this debt-ceiling fight would turn into a big gigantic nothing, and to buy the dips?
In the end, the CBOE Volatility Index briefly touched 20 at one point, the S&P 500 put together a massive four percent decline for a while there, and we end with the U.S. stock market sitting just a touch away from all-time highs. And that’s after a deal that opens the government for a few months and raises the debt ceiling until February, giving the government all of about 60 days to solve all of the world’s problems or else we start thinking about drinking ourselves into a coma come Christmas.
As the fog clears from this and markets continue to get bid up, it’s worth it to survey the damage around here. Ratings agencies haven’t done it yet, but it’s not hard to imagine another downgrade – likely from Fitch – in the offing before long. Credit default swaps that measure the cost of insuring against default are trading higher now, although that’s the way things go in an insurance market. Certainly equity valuations haven’t been hurt by this. But the short-term Treasury bill market has been rattled, and leaving the possibility of another round of this nonsense in February means those auctions won’t be all that easy to digest as they have been in the past. Bill yields have receded from the peaks hit early Wednesday, but the bill curve is still somewhat elevated in terms of rate levels – from near-zero in February to 7 or 8 basis points. Foreign investors might be more inclined to shift funds to short-term markets elsewhere, be it Japan, Germany or the UK.
Investors leapt off a cliff out of the money markets – with three straight big weeks of redemptions from those funds, including a $44 billion outflow this past week, which for a $2.6 trillion market ain’t that much, but it’s not nothing, either. The Federal Reserve’s trajectory for its monetary policy has been shifted dramatically; those clamoring for an end to the extraordinary stimulus that has the Fed now owning 35 percent or so of the Treasury market won’t be seeing it this year – in fact, it may not come for several months into 2014 either. Chances of an interest rate hike have been pushed all the way out to April 2015.
We don’t know – because the economy isn’t expected to have improved by a measurable amount by that time, thus introducing another round of stress when this fight begins anew. The assumption that this fight will pick up as it did this past time, with everyone digging in their same positions, however, is not necessarily a sure thing. The GOP got nothing. It lost, badly, and wasted a lot of time in a two-week span. That’s not something one willingly repeats. Sure, one could do worse than bet on intransigence in Washington, but still, there are degrees of such bets.