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Did Congress end the Treasury rally today?
09/26/2013 6:18 pm EST
Maybe that was just a reaction to lower than expected initial claims for unemployment for the week that ended on September 21. Fewer people filing their first claims for unemployment means fewer firings and could mean an uptick in employment and economic growth. Faster growth reads right now as bad for bonds since it brings the end of the Fed’s $85 billion in asset purchases nearer.
But since 10-year yields have dropped from 3.05% in early September to just 2.64% yesterday, September 25, we might be due for a turn in the trend. And if you’ve looking for a reason to take your gains in Treasuries—which would result in falling prices and climbing yields—today’s moves in Washington are all the reason that you need. (Adding to my sense that the trend has changed in the Treasury market is today’s weak auction for $29 billion in seven-year Treasuries.)
Attention is starting to shift—correctly or not (I say correctly)—from the budget “shut down the government” battle—to the struggle over raising the debt ceiling. It now looks like the Senate will strip out the defund Obamacare language in the continuing resolution the House sent to over and send back a clean continuing resolution to the House that would fund the government through November 15. The House, pundits now say (and I’m finding the Washington Post’s Wonkblog http://www.washingtonpost.com/blogs/wonkblog/?wpisrc=nl_wonk a great resource in following the ins and outs of this mess) may attach a few symbolic measures to the continuing resolution, but is likely to pass something like a relatively clean continuing resolution in the early days of next week. That would turn the government shutdown into an annoyance of a few days.
The main reason to believe this scenario is that the House Republican leadership including House Speaker John Boehner looks like it’s pivoting from the budget fight to the debt ceiling battle. It’s that likelihood and evidence that House Republicans are digging for that fight that could easily reverse the post-Fed-meeting bond rally.
The National Review got a hold of a copy of the House Republicans’ debt ceiling bill and as evidence of dig-in-your heels strategy, it’s pretty chilling to bond holders who don’t think a default on U.S. government debt is a good thing.
Here are the main provisions at the moment. In return for a one-year suspension of the debt ceiling, the bill demands, just to hit some of the highlights, a year’s delay in Obamacare, the enactment of Rep. Paul Ryan’s tax reform plan, approval of the Keystone pipeline, an expansion of offshore oil drilling and the opening of more federal lands to drilling, a suspension of the Environmental Protection Agency’s efforts to regulate carbon emissions, reform of the federal employee retirement program, an overhaul of Dodd-Frank, more Congressional control of the budget for the Consumer Financial Protection Bureau, more means-testing in Medicare, and repeal of the Public Health trust fund.
This isn’t a serious opening bid in negotiations. It’s a my-way-or-the-highway statement. And, if it truly measures the influence of the most conservative members of the Republican caucus in the House, this initial plan suggests a very bitter and long fight over the debt ceiling.
Treasury Secretary Jack Lew has told Congress that the Treasury Department would exhaust emergency measures to pay government obligations no later than October 17. That’s a more pessimistic estimate than that of the Congressional Budget Office, which predicted that the Treasury would use up funds between October 22 and October 31. That would make it difficult for the government to pay the roughly $55 billion in Social Security, Medicare, and military pay due on November 1. After October 17, the Bipartisan Policy Center has concluded, government revenue—without borrowing—will cover 68% of its bills for the rest of October.
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