Divyang Shah
IFR Senior Strategist
Once again we have an eleventh-hour agreement from the US on the debt ceiling.
While risk markets were priced for an eventual deal, the real concerns were expressed in defensive positioning in the money markets. In the week ending Oct 15, money market assets were down by a whopping US$44.8bn, according to iMoneyNet, highlighting the degree to which safety was sought.
The liquidity risk embedded in the Treasury bill market and curve inversion also came with a lot of intraday volatility. The inability of the bill curve to settle down despite the shutdown/debt ceiling deal highlights how things have yet to return to normality.
With the shutdown averted, but only through Jan 15 and the debt ceiling through Feb 7, it is unlikely that we will see the bill curve return to normal as players will remain cautious.
Bills maturing around the Feb 7 date are still trading below 10bp.
Given the lessons learnt, players will stay away from these bills, suggesting that we won’t see a repeat of the extreme inversion that saw Oct bills bear the brunt of the liquidity risk being priced in. The deal did not touch the Treasury’s powers to use emergency measures in order to delay a default, so once again the default risk will likely run past Feb 7.
The next round of budget talks could be less destabilising, especially as Democrats/Republicans are aware of the political costs.
Risk markets have learnt to look past the rhetoric and focus on an eventual agreement, even if it’s at the last minute.