April 7 (Bloomberg) -- Senator Jeff Sessions of Alabama, the senior Republican on the Senate Budget Committee, talks about negotiations over a federal spending plan to avert a government shutdown and the House Budget Committee Chairman Paul Ryan's proposed 2012 budget plan.
Current government spending authority is scheduled to expire at the end of the day tomorrow. Sessions speaks with Peter Cook on Bloomberg Television's "In the Loop with Betty Liu." (Source: Bloomberg)
As the political debate over budget
cuts in Washington threatens to bring the government to a
partial shutdown, bond markets are showing little concern about
the nation’s fiscal health.
Yields on two-year Treasury securities fell one basis point
to 0.82 percent at 9:07 a.m. in New York, below the average
yield of 2.59 percent in the last decade, according to Bloomberg
Bond Trader prices. Bond prices reflect expectations that
lawmakers will resolve differences over the budget and avoid a
crisis of confidence in U.S. assets, said John Lonski, chief
economist at Moody’s Capital Markets Group.
“I just don’t see where that is exerting much influence
over the pricing of financial assets,” Lonski said in a
telephone interview from his New York office. Investors foresee
that “when you come to the edge of the precipice, a more
rational approach should prevail,” he said.
The difference between yields on two-year notes and
Treasury Inflation Protected Securities, a gauge of expectations
for consumer prices over the life of the debt, was 2.56
percentage points today, lower than its average of 2.62 percent
in 2005 and 2006, the two years before the financial crisis
erupted in 2007.
Budget Debate
Investors are unconcerned because “it isn’t a genuine
fiscal crisis,” said Wayne Abernathy, executive vice president
of the American Bankers Association, who served as assistant
Treasury secretary for financial institutions in the
administration of President George W. Bush. “We’re talking
about debate over finishing up the last pieces of this year’s
budget. I think if we were talking about a fiscal crisis that
affected the debt limit, that’s a very different issue.”
Calm in financial markets contrasts with the drama in
Washington as Republicans and Democrats blame each other for an
impasse over proposed cuts intended to narrow a deficit that’s
projected to rise to a record $1.6 trillion this year. Current
spending authority for government operations is set to expire
tomorrow.
“The Republican leadership has the Tea Party screaming so
loudly in its right ear that it can’t hear what the vast
majority of the country demands,” Senate Majority Leader Harry Reid of Nevada said two days ago.
‘Reckless’
“We urge you to reconsider your reckless, partisan
strategy of shutting down the government,” a group of 90 House
Republicans wrote to Reid.
The administration of President Barack Obama is preparing
for a partial shutdown of operations if Congress doesn’t act,
which would suspend Internal Revenue Service audits and federal
small-business loan processing, as well as government guarantees
of some mortgages, according to an official who briefed
reporters on the condition of anonymity.
The Treasury Department will conduct its regular schedule
of securities auctions in the event of a shutdown, another
government official said this week. The Treasury borrows money
through the weekly sales of bills, monthly sales of longer-term
notes as well as 30-year bonds to fund government operations.
Obama said a meeting last night with Congress’s top two
leaders advanced efforts to reach an agreement. “We should be
able to complete a deal and get it passed and avert a shutdown,”
Obama said in brief remarks to reporters after he conducted the
White House session with House Speaker John Boehner, an Ohio
Republican, and Reid.
Larger Battle
The showdown over this year’s budget is a prelude to a
larger battle over spending in the coming fiscal year and
beyond. A blueprint unveiled by House Budget Chairman Paul Ryan,
Republican of Wisconsin, would cut more than $6 trillion over
the next decade from Medicare, Medicaid, food stamps and scores
of other programs.
“We are on a path of economic ruin,” Ryan said yesterday
at a congressional hearing. “Let’s get on to the business of
saving this country and getting this debt paid off while we can
still do it on our terms.”
By contrast, interest-rate swaps are showing confidence in
the nation’s fiscal future. Swap spreads are used as a gauge of
investor perceptions of credit risk.
The difference between the rate to exchange floating for
fixed-interest payments for two years and the comparable
Treasury yield, known as the swap spread, was 17 basis points
today, down from 21.5 basis points at year-end and below its
average of about 45 basis points in the last decade.
‘False Optimism’
The market may have “a little bit of false optimism,”
said Michael Barr, who left in December as the Treasury’s
assistant secretary for financial institutions to return to his
academic career at the University of Michigan in Ann Arbor.
“I think there’s a mispricing of the risk involved if the
impasse does occur,” Barr said. “The crisis over a government
shutdown is consequential. The crisis over the debt ceiling
would be devastating.”
Treasury Secretary Timothy F. Geithner this week told
lawmakers that the U.S. will reach the $14.29 trillion limit on
its ability to borrow on May 16 unless Congress raises the
ceiling.
“At some point the madness has to stop,” said Mitchell Stapley, chief fixed-income officer for Fifth Third Asset
Management, which oversees $22 billion.
“For the first time we’re getting to the point where
people are saying we’re going to start talking about” a
credible budget-reduction plan, said Stapley, who is based in
Grand Rapids, Michigan. “That’s why the market’s not freaking
out about this.”
Business Confidence
Chief executive officers’ confidence in business conditions
over the next year is also improving, as measured in a monthly
survey by Chief Executive Magazine. The measure rose above a
level indicating “good” in January for the first time since
July 2007 and climbed again in February.
The Standard & Poor’s 500 Index rose 0.2 percent to
1,335.54 yesterday, bringing its gains for the year to 6.2
percent.
Should the markets start tumbling in response to concerns
about a U.S. fiscal crisis and a government shutdown, Congress
would be forced to act, Lonski said.
“There would be too many people calling their Congressmen,
complaining about the drop in their 401Ks,” he said.
To contact the reporters on this story:
Caroline Salas in New York at
csalas1@bloomberg.net;
Ian Katz in Washington at
ikatz2@bloomberg.net
To contact the editor responsible for this story:
Christopher Wellisz at cwellisz@bloomberg.net