Policy: Budgets & Deficits

Some signs of creeping worries about debt ceiling showdown

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Treasury,Debt Ceiling,PennAve,Joseph Lawler,Economy,Federal Reserve,Budgets and Deficits,Jack Lew

Although Congress is still working to avoid a government shutdown on Oct. 1, the far bigger obstacle of the debt ceiling looms shortly after.

After operating under the debt ceiling since May, Treasury Secretary Jack Lew has indicated that he will run out of resources with which to pay the government's bills as soon as Oct. 17. Any delay by Congress in raising the limit after that would have “dire economic consequences,” Moody's Analytics chief economist Mark Zandi testified this week.

Yet so far, the evidence that the fast-approaching deadline is bothering investors and consumers is mixed.

In 2011, when President Obama signed a bill to raise the debt ceiling on the last day the Treasury was sure it could pay all of its obligations on time, the close call could clearly be seen in short-term Treasury bill yields.

This chart shows yields for one-, two-, and three-month Treasurys in 2011. Treasury bonds were falling throughout 2011, because the Federal Reserve was in the process of buying $600 billion in Treasury bonds in what is now known as QE2. Nevertheless, the temporary spike at the end of July marks the effect of the debt ceiling battle coming down to the wire and spooking investors.


Although the government is mere weeks away from the X-Date now, there’s no sign of any concern in Treasurys:

Some economists, such as the New York Times' Paul Krugman, have suggested that, counterintuitively, a default could actually raise the price of Treasuries and lower yields. If a debt ceiling delay causes a global panic, it could lead investors to buy the asset considered the safest in the world — U.S. Treasurys.

For that reason, a better indicator might be the value of the dollar relative to other currencies. As this index of the dollar against a basket of currencies shows, the dollar bottomed out this year in early February just before President Obama and Republicans struck a deal to suspend the debt ceiling. And it’s slowing trending down now again:

And there’s also no sign of creeping panic in stock markets. Here’s the S&P 500:

It appears that consumers, however, are a little more worried than investors are.

One consequence of the 2011 debt ceiling showdown that the White House has said it regrets was the damage the episode caused to consumer and business confidence. As the debt ceiling crisis peaked in late July, economic confidence tanked. And after gradually improving over the course of the past year, Americans’ economic outlook is starting to darken again. This can be seen in Gallup’s Economic Confidence Index:


And in the University of Michigan’s Consumer Sentiment Index, updated Friday morning:



Lastly, one key place to look for signs of a possible U.S. debt crisis would be in the price of insurance on U.S. government bonds. Although the U.S. market for such insurance contracts, called credit-default swaps (CDS), is not very big or liquid, prices have been slowly declining over the course of the year, but show a fairly steep but small uptick in the price required to insure U.S. debt over the past few days. Courtesy of the financial data firm Markit:


In the past week, yields on U.S. sovereign CDS have risen to about 30 basis points. For comparison, Portugal’s sovereign CDS is priced at 500 basis points right now, according to CNBC. Greece’s spiked to above 25,000 just before it defaulted in early 2012. In other words, although it appears some shadow of a doubt about the creditworthiness of U.S. debt has crept into the CDS market, it’s nothing more than that — at least so far.

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